Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
___________
FORM
8-K
___________
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
DATE OF
REPORT (Date of Earliest Event Reported): April 27,
2010
ECO
BUILDING INTERNATIONAL, INC.
(Exact
name of registrant as specified in Charter)
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Nevada
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5080
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80-0329825
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(State
or other jurisdiction of
incorporation
or organization)
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(Commission
File No.)
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(IRS
Employee Identification No.)
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Tower B
Jinshang International Building, 7th
Floor, Room 701, Yinbing West Street
Jinzhong
City, Shanxi Province, China
(Address
of Principal Executive Offices)
086-13828824414
(Issuer
Telephone number)
1 Matthew
Place, Ballintemple, Cork Ireland
Tel:
353-863-51-6838
Former
fiscal year May 31
(Former
name, former address and former fiscal year,
if
changed since last report)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2. below):
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¨
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Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
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¨
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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¨
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
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¨
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
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1
Cautionary
Note Regarding Forward-Looking Statements
This Form
8-K and other reports filed by Registrant from time to time with the Securities
and Exchange Commission (collectively the “Filings”) contain or may contain
forward looking statements and information that are based upon beliefs of, and
information currently available to, Registrant’s management as well as estimates
and assumptions made by Registrant’s management. When used in the filings the
words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”
or the negative of these terms and similar expressions as they relate to
Registrant or Registrant’s management identify forward looking statements. Such
statements reflect the current view of Registrant with respect to future events
and are subject to risks, uncertainties, assumptions and other factors relating
to Registrant’s industry, Registrant’s operations and results of operations and
any businesses that may be acquired by Registrant. Should one or more of these
risks or uncertainties materialize, or should the underlying assumptions prove
incorrect, actual results may differ significantly from those anticipated,
believed, estimated, expected, intended or planned.
Although
Registrant believes that the expectations reflected in the forward looking
statements are reasonable, Registrant cannot guarantee future results, levels of
activity, performance or achievements. Except as required by applicable law,
including the securities laws of the United States, Registrant does not intend
to update any of the forward-looking statements to conform these statements to
actual results. The following discussion should be read in conjunction with
Registrant's pro forma financial statements and the related notes that will be
filed herein.
2
Item 1.01 Entry Into A Material Definitive
Agreement
On April
27, 2010, Eco Building International, Inc. (the “Company” or “ECBI”) completed
the acquisition of City Zone Holdings Limited, an emerging organic and
non-organic agricultural products distributor in the Shanxi Province of the
Peoples Republic of China engaged in procuring, processing, marketing and
distributing various grain and corn products (“City Zone”), by means of a share
exchange. Simultaneously with the acquisition, the Company completed
a USD $8,211,165.60 private placement of its securities to accredited investors
at $4.40 per unit, with each “Unit” consisting of one share of Series A
Convertible Preferred Stock, and a warrant to purchase 0.4 shares of common
stock with an exercise price of $5.06 per share.
On April
27, 2010, the (“Closing Date”), the Company entered into a Share Exchange
Agreement (“Exchange Agreement”) by and among (i) City Zone, (ii) City Zone’s
shareholders, (iii) the Company, and (iv) the principal stockholders of the
Company. Pursuant to the terms of the Exchange Agreement, Expert Venture
Limited, a company organized under the laws of the British Virgin Islands
(“Expert”) and the other City Zone shareholders will transfer to the Company all
of the shares of City Zone in exchange for the issuance of 8,736,932 shares of
the common stock of the Company as set forth in the Exchange Agreement, so that
Expert and other minority shareholders of City Zone shall own at least a
majority of ECBI’s outstanding shares (the “Share Exchange”). As a result of the
Share Exchange, City Zone became a wholly-owned subsidiary of ECBI and ECBI is a
holding company.
In
connection with the closing of the Share Exchange, Christopher Kidney cancelled
3,000,000 shares of the Common Stock that he owned in the Company, and resigned
from our board of directors (the “Board”) and all office positions that he held
in the Company. Accordingly, we appointed Jianming Hao as the Chairman of the
Board and Wenjun Tian as a member of the Board, and we also appointed Jianming
Hao as our Chief Executive Officer. Following the expiration of the ten (10) day
time period following the mailing of an Information Statement complying with
rule 14F-1 under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), Mr. Kidney’s resignation as a director shall become effective, and
Jianming Hao and Wenjun Tian shall serve as directors of the
Company.
The directors of the Company approved the Exchange Agreement and the transactions contemplated thereby. The directors of City Zone also approved the Exchange Agreement and the transactions contemplated thereby.
As a
result of the Exchange Agreement, the Company acquired 100% of the processing
and production operations of City Zone and its subsidiaries, the business
and operations of which now constitutes the primary business and operations of
the Company. Specifically, as a result of the Exchange
Agreement on April 27, 2010:
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The
Company acquired and now owns 100% of the issued and outstanding shares of
capital stock of City Zone, the British Virgin Islands holding company
which owns and controls the Deyu agricultural business, making City Zone a
wholly-owned subsidiary of the
Company;
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The
Company issued 8,736,932 shares of its common stock to the City Zone
Shareholders;
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City
Zone Shareholders were issued common stock of the Company constituting
approximately 87.36% of the fully diluted outstanding shares of the
Company prior to the Private
Placement.
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Immediately
after the Share Exchange, the Company entered into a securities
purchase agreement (the “Purchase Agreement”) with certain accredited investors
(the “Investors”) for the issuance and sale in a private placement of Units
consisting of 1,866,174 shares of the Company’s Series A Convertible Preferred
Stock, par value $0.001 per share (the “Investor Shares”) and Series A warrants
to purchase up to 746,479 shares of the Company’s Common Stock (the “Warrants”),
for aggregate gross proceeds of $8,211,165.60 (the “Private
Placement”). In connection with the Private Placement, the Company
also entered into a registration rights agreement (the “Registration Rights
Agreement”) with the Investors, in which the Company agreed to file a
registration statement (the “Registration Statement”) with the Securities and
Exchange Commission (the “SEC”) to register for resale the Investor Shares,
within 60 calendar days of the Closing Date of the Private Placement, and use
the Company’s best efforts to have the registration statement declared effective
within 150 calendar days of the Closing Date of the Private Placement. The
Company will pay monthly liquidated damages in cash to each Investor of 0.5% of
the dollar amount of the purchase price of the Investor Shares, on a pro rata
basis, for each 30 day period the Registration Statement is not declared
effective, up to a maximum of 8% of the purchase price. However, no liquidated
damages shall be paid with respect to any shares that the Company is not
permitted to include in the Registration Statement due to the SEC’s application
of Rule 415.
3
The
holders of the Series A Convertible Preferred Shares will receive cumulative
dividends at an annual rate of 5% of the applicable Series A Preferred Share
original purchase price. Upon any liquidation, dissolution or winding up of the
Company, the holders of Series A Convertible Preferred Shares will be entitled
to receive, out of the assets of the Company available for distribution to its
stockholders, an amount equal to $4.40 per share (the amount, the “Liquidation
Preference Amount”), before any payment shall be made or any assets distributed
to the holders of the Common Stock (the “Liquidation Preference”). Each holder
of Series A Preferred Shares will have the right, at the option of the holder at
any time on or after the issuance of the Series A Preferred Shares, without the
payment of additional consideration, to convert the Series A Preferred Shares
into a number of fully paid and nonassessable shares of Common Stock equal to:
(i) the Liquidation Preference Amount of such shares divided by (ii) the
conversion price in effect as of the date of the conversion. For a period of two
(2) years following the issuance of the Series A Preferred Shares, the
conversion price of Series A Preferred Shares will be subject to adjustment for
issuances of Common Stock (or securities convertible or exchangeable into shares
of Common Stock) at a purchase price less than the conversion price of the
Series A Preferred Shares.
The
Series A Warrants:
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(a)
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entitle
the holder to purchase 0.4 shares of Common
Stock;
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(b)
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are
exercisable any time after the Closing Date and expire on the date that is
five years following the original issuance date of the Series A
Warrants;
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(c)
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are
exercisable, in whole or in part, at an exercise price of $5.06 per share
of Common Stock (the “Warrant Price”);
and
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(d)
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are
exercisable only for cash (except that there will be a cashless exercise
option if, after twelve months from the Issue Date, (i) the Per Share
Market Value of one share of Common Stock is greater than the Warrant
Price (at the date of calculation) and (ii) a registration statement under
the Securities Act providing for the resale of the Common Stock issuable
upon exercise of Warrant Shares is not in effect, in lieu of exercising
this Warrant by payment of
cash).
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The
Company also entered into a make good escrow agreement with the Investors (the
“Securities Escrow Agreement”), pursuant to which the City Zone Shareholders
placed a number of shares of Common Stock equal to 100% of the number of shares
of Common Stock underlying the Investor Shares, which are initially equal to
1,866,174 shares of Common Stock (the “Escrow Shares”) in an escrow account. The
Escrow Shares are being held as security in the event the Company does not
achieve $11 million in audited net income for the fiscal year 2010 (the “2010
Performance Threshold”) and $15 million in audited net income for the fiscal
year 2011 (the “2011 Performance Threshold”). If the Company achieves the 2010
Performance Threshold and the 2011 Performance Threshold, the Escrow Shares will
be released back to the City Zone Shareholders. If either the 2010 Performance
Threshold or 2011 Performance Threshold is not achieved, an aggregate number of
Escrow Shares (such number to be determined by the formula set forth in the
Securities Escrow Agreement) will be distributed to the Investors, based upon
the number of Investor Shares (on an as converted basis) purchased in the
Private Placement and still beneficially owned by such Investor, or such
successor, assign or transferee, at such time. If any Investor
transfers Investor Shares purchased pursuant to the Purchase Agreement, the
rights to the Escrow Shares shall similarly transfer to such transferee, with no
further action required by the Investor, the transferee or the
Company.
The
Company also entered into a lock-up agreement with the Investors (the “Lock-Up
Agreement”), pursuant to which the Common Stock owned by the management of City
Zone Holdings Limited will be locked-up until twelve (12) months after the
Closing Date.
Copies of
the Exchange Agreement, Purchase Agreement, Registration Rights Agreement, Securities Escrow Agreement,
the Lock-Up Agreement and the Series A Warrant are filed as Exhibits 2.1, 10.1,
10.2, 10.3, 10.4 and 10.5 respectively, to this Form 8-K. The description of the
transactions contemplated by these documents does not purport to be complete and
is qualified in its entirety by reference to the full text of the documents
filed as exhibits hereto and incorporated herein by reference.
4
This transaction is discussed more fully in Section 2.01 of this Current Report. The information therein is hereby incorporated into this Section 1.01 by reference.
Item
2.01 Completion of Acquisition or Disposition of Assets
As
described in Item 1.01 above, on April 27, 2010, City Zone entered
into an Exchange Agreement pursuant to which, Expert and the other City Zone
shareholders transferred to the Company all of the shares of City Zone in
exchange for the issuance by the Company of 8,736,932 shares of its common
stock, which resulted in Expert owning at least a majority of the Company’s
outstanding shares. As a result of the Share Exchange, City Zone became a
wholly-owned subsidiary of ECBI and ECBI is a holding company. In
connection with the Share Exchange, our principal shareholder, Christopher
Kidney, cancelled 3,000,000 shares of the Common Stock that he owned in the
Company.
BUSINESS
Overview
Prior to
the Share Exchange, the Company was a development stage company intending to
commence business operations by purchasing eco-friendly building supplies for
sale throughout Europe and North America. The Company was incorporated in the
State of Nevada on December 23, 2008, with the intent to focus on both retail
and wholesale businesses. The Company’s common stock is thinly traded on the
over-the-counter market under the symbol ECBI. Prior to the Share Exchange, the
Company had not generated any revenue and accumulated losses of $17,760 for the
period from inception through November 30, 2009.
References
to “we,” “our,” “ours” and “us” refer to ECBI and its wholly owned subsidiary
City Zone, unless otherwise indicated.
Operating
through our wholly-owned subsidiaries, Jinzhong Deyu Agriculture Trading Co.
Limited (“Deyu Agriculture”), Jinzhong Yongcheng Agriculture Trading Co. Limited
(“Yongcheng”), and Jinzhong Yuliang Agriculture Trading Co. Limited (“Yuliang”),
we are currently an emerging organic and non-organic agricultural products
distributor in Shanxi province engaged in procuring, processing, marketing and
distributing various grain and corn products. Deyu Agriculture focuses on
processing and distributing grain products. Yongcheng and Yuliang focus on the
distribution of corn and corn byproducts.
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Grain
Products –Deyu Agriculture procures and distributes grain products
including millet, green beans, soy beans, black rice, and whole wheat
flour. Deyu Agriculture acquires unprocessed grains and performs
value-added processes to the grains such as peeling, cleaning, grinding
and packaging. The majority of our finished products are then sold
directly to supermarkets and grain wholesalers. Deyu Agriculture is the
only company in the Shanxi province to have a portion its products
certified as “Organic” by the China Organic Food Certification Center. The
certification is effective from December 31, 2009 to December 20,
2010.
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Corn
–Yongcheng and Yuliang process and distribute corn and corn byproducts.
Yongcheng and Yuliang acquire unprocessed corn and perform value-added
processes such as cleaning, drying, and
packaging.
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Operating
revenue for the year ended December 31, 2009 was $40,732,447, representing a
135.86% increase from the year ended December 31, 2008. Our net income for the
year ended December 31, 2009 was $7,181,132, representing a 107.24% increase
from $3,465,115 for the year ended December 31, 2008.
City
Zone’s current corporate structure is set forth below:
5
Products
Our
products include (i) corn products, and (ii) grain products. Our corn products
are principally sold to large food and oil processing companies, and feed
material production companies. Our grain products have been packaged under our
registered trademarks Deyu and Shitie for retail
distribution in supermarkets. We plan to increase the number of grain food
product offerings by developing processed grain foods and higher value-added
products. Our current grain products include the following:
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Item
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Weight
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Unit
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Fine
millet
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400g
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bag
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Fine
millet
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2,400g
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bag
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Fine
millet
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5kg
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bag
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Gift
box millet
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400g
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bag
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Green
bean
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400g
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bag
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Green
bean noodle
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800g
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bag
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6
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Green
bean
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800g
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bag
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Corn
grits
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400g
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bag
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Corn
flour
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800g
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bag
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Soybean
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400g
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bag
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Whole
wheat flour
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5kg
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bag
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Whole
wheat flour
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25kg
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bag
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Black
rice
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400kg
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bag
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Buckwheat
noodle
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800g
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bag
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Sorghum
flour
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800g
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bag
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Gift
box grains
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2,400g
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bag
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Combo
bean flour
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2,400g
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bag
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Combo
red flour
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2,400g
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bag
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Health
congee
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936g
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bag
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(Fine Millet 400g) (Fine Millet
1800g) (Soybean
400g)
Product
Characteristics
Our
farmland is located in the center of Shanxi province which has a relatively dry
climate which is ideal for grain cultivation. Grain crop growth relies
principally on the climate and rainfall, and is not dependent on the application
of chemical fertilizers or pesticides. Our simple value-added processing of
grains maintains the grain’s original nutritional components. A
portion of Deyu Agriculture’s grain products are certified as “Organic” by the
Beijing Zhonglu Huaxia Organic Food Certification Centre, the chief organic food
certification organization accredited and approved by the Certification and
Accreditation Administration of the PRC (CNCA).
We
provide technological guidance and support to our farmers regarding (1) seed
dissemination, (2) cultivation methods, (3) ecological fertilizer, (4)
irrigation, (5) cultivation, (6) weeding and (7) harvesting. Working closely
with our farmers helps ensure that we receive high quality raw materials for
production. We also utilize an advanced product control system to help ensure
high-quality finished products.
Market
Opportunity
Grain
products contain high levels of vitamin B1, dietary fiber and trace elements.
Coarse grains are beneficial to people with diabetes or high blood pressure. The
Chinese Nutrition Society, commissioned by the Ministry of Health in 2007 to
formulate Dietary Guidelines, recommends consumption of 250-400 grams per day of
processed grain foods for adults. They also recommended that adults consume
50-100 grams per day of coarse grains and whole grain foods. 72% of adults in
China, amounting to 607 million people, are urban residents. Based on these
guidelines, the demand of people in urban cities could reach 7.66 million
tons.
7
As a
result of the economic growth and improved living standards in China, the
dietary components of the Chinese population have changed dramatically. In
general, the population pays more attention to diet and nutrition. Management
believes that the increased awareness of the value and benefits of grain
products has resulted in an increased demand for our organic grain
products.
Corn and Corn
Byproducts
The
demand for corn has increased significantly, with annual growth of 3.26% for
2006 through 2009 and growth of 2.88% expected for 2010 through 2015. According
to estimates by United States Department of Agriculture (“USDA”), the global demand for
corn has substantially exceeded supply from 2007 through 2009:
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Year
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Beginning
Balance
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Supply
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Demand
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Supply
Demand Gap
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Closing
Balance
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2006/2007
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125,110
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713,130
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728,080
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-14,950
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110,160
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2007/2008
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110,160
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789,810
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778,880
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10,930
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121,090
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2008/2009
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130,350
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787,830
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778,600
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9,230
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1,395.8
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2009/2010
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139,580
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785,140
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796,520
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-11,380
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1,281.9
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(Units:
‘000 tons)
(Source:
USDA)
Corn as Feed
Materials
Since
1997, feed production has maintained steady growth. China is now the second
largest feed producer, second only to the United States. Corn is the main raw
feed material for pigs, cattle, chickens and other livestock. Corn byproducts,
including corn stalks, are also used as an important source of
feed.
Corn Food
Products
The
development of corn processing has led to a revolution in corn consumption
habits. In many developed countries, corn is regarded as a “health food” and a
“golden food.” In the United States, over one tenth of health foods are made
with corn or corn byproducts. In recent years, demand for corn in international
markets has grown. Corn oil squeezed from corn germs contains over 10 types of
fatty acids, more than 50% of which are acids rich in vitamins A and E. Corn oil
is healthy, low in cholesterol and has positive effects on high blood pressure
and heart disease. Corn oil is also widely used in the pharmaceutical and
chemical industries.
Sales
Network
8
Grain Products
We
established a marketing center in Beijing focused on promoting our products
throughout China. In addition, we plan to expand our sales network to include
offices in Shenzhen, Hangzhou, Chengdu, Tianjin and Congqing. Our main sales
channels are as follows:
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Supermarkets:
Hualian, RT-Mart Supermarket, Wal-Mart, Tiankelong, Yung-hui, China
Resources Vanguard, Aoshi Kai, Sinopec Convenience Stores, Supermarkets,
Tian Jia, Tianhe supermarket chains, Sen Tian supermarket , etc. At
present, our sales network covers about 400 supermarkets in
Shanxi Province, and 500 in Beijing. We plan to expand to another 500
supermarkets in the first half of 2010 and another 1,000 in the latter
half of the year.
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Wholesale
markets: We plan to develop several wholesalers in Beijing and other
cities.
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Corn
Corn is
used extensively in feeds, edible food and highly processed products. Global
energy shortages make corn an attractive alternative energy source.
We have
strategic partnerships with large customers such as Yihai Group, New Hope Group,
Zhenda Feeds and provincial Grain Reserves. We have entered into a two year
master agreement with Yihai Group for the sale of corn products. According to
the master agreement, Yihai will purchase from us 250,000 tons of corn in 2010
and 500,000 tons in 2011.
Product
Development
At
present, our grain products are pre-packaged products (preliminary products and
simple processed products). We plan to develop highly processed foods such as
instant foods and other high value-added grain foods, and to develop more
products based on consumer demand.
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Focus On Preliminary
and Simple Processed Grain Food
Products
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Over the
next two to three years, we will focus on the development of simple processed
grain food products, with the goal of becoming the top producer of these
products. Our existing grain products are naturally healthy foods that maintain
their original nutritious properties and we believe will meet the demand of
consumers seeking healthy diets.
In 2010,
the Company launched healthy congee (cooked by electric cooker) and colored
grain products (cooked by a soybean milk machine) which target white collar
families in urban cities.
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Deep Processed Grain
Products to be Developed
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We plan
to introduce deep processed grain products gradually and plan to develop instant
foods. These types of food products are easy to store, convenient to prepare,
and maintain their healthy nutritional characteristics. This is especially
suitable for consumer groups who have little time to prepare meals, but are
concerned with maintaining a healthy diet.
9
Processing
and Warehousing Capacities
Our
facilities have site coverage of 11,667 square meters and constructed area of
6,752 square meters. The plant also includes a 3,000 square meter drying area
surrounded by villages and farmlands in Shanzhuang Tou Village of Shitie County.
We passed an environmental assessment conducted by the Environmental Protection
Bureau of Jinzhong City and obtained a sewage discharge permit.
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Production
Capacity
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We are
equipped with three fully automatic production lines for millet, grains and
flour. The lines include various kinds of rice milling machines, filtering
machines, elevators, color selection machines, exhaust fans, automatic packing
machines and other equipment.
10
Grains
production flow chart:
Raw
products 
Stone
cleaning
Husking
Grinding Classification
Stone
cleaning
Husking
Grinding Classification Color
selection
Polishing
Packaging
Storage
Polishing
Packaging
StorageFlour
(corn flour, millet flour) production flow chart:
Raw
grains
Peeling
Flour mill
Packaging Storage
Peeling
Flour mill
Packaging StorageTo ensure
high quality we installed fully automated production equipment in our
facilities.
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Production
equipment is fully automated. Raw materials are moved through the
production process via the elevator. The production process is fully
enclosed for protection against any pollution or
contamination.
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We
installed equipment with advanced color selection technology for grains.
The device is stable and reliable, and features automatic temperature
control, automatic removal of dust and impurities, automatic air pressure
detection, self injection and light
testing.
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The
cooling system helps millet maintain its nutritious components, color and
appearance.
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Selective
application of the polishing process helps maintain nutritional
components.
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Our
modern equipment and technology, combined with advanced processing techniques,
helps ensure that grain production is high-quality, natural, green and
ecological. Additionally, a portion of our grains can be categorized
as organic. The careful management of breeding, cultivation, production,
packaging and storage also leads to high quality products.
11
We
implemented strict quality control on each process in purchasing, storage,
processing, packaging, and distribution. We keep any items that are examined in
the course of quality control inspections for one year in accordance with
National Technology Quality Supervision Bureau requirements. We cooperate fully
with the Bureau during their random testing and examination of our
products.
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Packaging
Capacity
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Our 400
square-meter packaging facility is dust proof, moisture proof, anti-static,
anti-rodent and air ventilated and is isolated from the rest of the plant.
Products are transported by hoisting machine to the packaging facility, which
has four production lines: automated vacuum packaging, automated granular
packaging, automated Hatta hybrid packaging and automated powder packaging. All
processes in the packaging facility are enclosed to avoid
contamination.
The
vacuum packaging line automates measuring, bag making, filling, cutting, bag
shaping, vacuum sealing, coding, counting and transmission. It accommodates 70
to 500 grams of product and packages at the speed 100 to 120 bags per minute.
The granular packaging line also automates measuring, bag making, filling,
cutting, bag shaping, coding, counting and transmission. It accommodates 75 to
1,000 grams of product at the speed of 90 to 120 bags per minute. The Hatta
hybrid packaging line is used for packing the healthy congee and colored grains.
It automates measuring, bag making, filling, cutting, bag shaping, coding,
counting and transmission, and accommodates 50 to 500 grams of product at the
speed of 120 to 150 bags per minute. The powder packing line is used for
packaging grain flour products and automates measuring, bag making, filling,
cutting, bag shaping, coding, counting and transmission, and accommodates 5 to
5,000 grams of product at the speed of 80 to 90 bags per minute.
Our
product labeling complies with the Interim Measures for Labeling of Food
Products of Enterprises in the Shanxi Province and the GB7718-1994 Standards for
Food Products Labeling. The Company has obtained the registration certificate
(Record number SB/1407000-009-01).
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Warehousing
and Logistics Capacity
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We rent
many large warehouses for storage of raw materials (mainly corn). Total capacity
is greater than 50,000 tons and annual turnover is about 250,000 tons. We are
also constructing a new storage center situated on 70 mu (approximately 46,690
square meters) of land for storage of more than 70,000 tons of food products and
annual turnover of greater than 350,000 tons. The new
storage center is scheduled for completion by the end of June,
2010.
12
The cave
type warehouses that we use are fully enclosed and have thermostatic and
moisture proof characteristics. Each of the cave type warehouses is built with
1.5 meter thick walls and moisture proof layers. They maintain a temperature of
10 degrees Celsius throughout the year, perfectly suited for food storage. Since
no air conditioning is required, the operating costs of the warehouses are low.
The warehouses are equipped with infrared sensors that can accurately detect
temperature changes and the presence of rodents, insects, and other
pests.
Before
corn can be stored in warehouses, it must undergo drying and water removal
treatments. We have three sets of drying equipment allowing us to process up to
350,000 tons annually. The new storage center will be equipped with the most
advanced equipment for corn drying allowing it to process 500,000 tons annually.
After the drying process, the corn is packaged in bags and moved to warehouses.
There, the products undergo insecticide and anti-bacterial treatments. After
being sealed for 15 days and air ventilated for another 7 days, the products are
then be stored in enclosed warehouses.
We have
exclusive lease agreement with three railway lines for freight transportation to
ensure speedy delivery of our products at a low cost (compared to truck
transportation).
Research
and Development
The
Company hires a number of agricultural experts as the consultants in sectors
including food processing, breeding, cultivation, nutrition and disease
prevention. The Company, together with Shanxi Agricultural Sciences Institute,
Shanxi Agricultural University and their Institute of Seeds and Planting,
established a joint laboratory for research breeding and cultivation. This
laboratory also provides quality testing of our products and provides
suggestions for the improvement of our products. The Company also established an
agricultural product research center in Beijing.
13
The
Company’s R&D team and laboratory uses a hybridization technique for
breeding rather than a genetically modified approach. At present, seeds produced
by the Company are 50% larger than ordinary seeds. They have special
characteristics such as strong drought resistance and resistance to pests. None
of the seeds are cultivated using pesticides or chemical fertilizers. This not
only reduces costs, but also increases the output and, most importantly, allows
us to ensure that a portion of our crops are organic.
Target
Market
We focus
on promoting the concept of “healthy and green.” Target customers include urban
city residents who pursue healthy diets. Management believes health-oriented
food products are also important to families in first and second tier
cities.
Operating
Mode
We have
established a large scale plantation adopting the mode of “Company + Farmers +
Base.” Shanxi offers high quality land that supports organic growing of grains
and corn. Our operating model is illustrated by the chart below:
14
15
Government
Regulation
|
·
|
Grain Production and
Sales Business
|
Our
production, purchases and sales of grain food products are subject to the
following rules and regulations in the People’s Republic of China:
|
1.
|
“The
Food Safety Law of the People’s Republic of China” (the “Food Safety
Law”)
|
|
2.
|
“Regulations
on the Implementation of the Food Safety Law of the People’s Republic of
China” (the “Regulations”)
|
|
3.
|
“Law
of the People’s Republic of China on Quality and Safety of Agricultural
Products” and the Food Distribution Management
Ordinance.
|
We are
engaged in the sale of packaged grain products. The supervising
authority for such products is the Beijing Bureau of the Industry and
Commerce. Pursuant to Regulation 29 of the Food Safety Laws, entities engaging
in food production, food distribution and food service, must obtain a Food
Production Permit, Food Distribution Permit and Food Service Permit. Those who
have obtained the Food Production Permit are authorized to operate a food
production business and are not required to apply for a Food Distribution
Permit. However we have also obtained the Food Distribution Permit from the
Beijing Bureau of Industry and Commerce.
We are
also engaged in the production and sale of grain foods. The supervising
authority for such production is the Technology Quality Supervision Bureau
of Shanxi Province. Pursuant to Food Safety Laws and ancillary regulations, the
nation’s Head Office of the Technology Quality Supervision Bureau supervises
technology quality of enterprises which are engaged in food production. The
Bureau issues Food Production Permits, undertakes mandatory examinations of
technology quality for entry into the industry and is responsible for
investigation of incidents regarding food safety. Pursuant to Regulation 29 of
the Food Safety Laws, entities engaging in food production, food distribution
and food service, must obtain the Food Production Permit, Food Distribution
Permit and Food Service Permit. Those who have obtained the Food Production
Permit are authorized to operate food production businesses and are not required
to apply for a Food Distribution Permit. Deyu has also obtained the nation’s
Industrial Production Permit from the Technology Quality Supervision Bureau
(Cereals: QS140701040051 and Flour: QS140701016210). Our food labeling complies
with the Interim Measures for Labeling of Food Products of Enterprises in Shanxi
Province and GB7718-1994 Standards for Food Products Labeling and has obtained
the relevant registration certificate (Record number
SB/1407000-009-01).
|
·
|
Corn Purchase and Sale
Business
|
Yuliang
is engaged in the purchase and sale of raw corn products. The supervising
authority for the purchase and sale of raw corn products is the State
Administration of Grain. Pursuant to Regulation 6 of the Food Distribution
Management Regulations announced by the State Council of PRC, the State Council
Development and Reform Department (NDRC) and the National Food Administration
Departments (the commissions National Food Authority) are responsible for the
mid and long-term planning of the nation’s overall balance of foods, regulation,
restructuring of important food species and food distribution. The National Food
Administration Department is responsible for food distribution, guidance to the
industry, oversight of the food distribution laws, regulations, policies and
implementation of rules and regulations. Pursuant to Regulation 9, food
operators must obtain permits and register pursuant to relevant registration
regulations. The Company has obtained the necessary Food Products Purchase
Permit and operates in compliance with the relevant standards of food quality,
storage, logistics and facilities.
Competitive
Advantage
|
·
|
Unique Cultivation
Environment
|
16
Shanxi is
located on Loess Plateau in the western part of China. Jinzhong is located in
the center of Shanxi. The topography of the regions creates optimal conditions
for growing grains. Favorable weather conditions, combined with our unique and
advantageous geographical conditions leads to high-quality products. There has
been no serious flood or drought in the region in the past 100 years. The
temperature difference between day and night is greater than 10 degrees Celsius.
The weather is dry and cold. There are about 158 days without frost during the
year and the growing period is longer than 135 days. The weather conditions are
especially favorable for growing corn and grains. Grains are highly drought
resistant. Growing grains is reliant on natural rainfall, no irrigation is
required throughout the year, and no application of chemical fertilizer or
pesticides is needed. Irrigation by underground water is only required in
exceptional circumstances.
The
northern and southern parts of Shanxi are rich in coal mines. There are no large
coal mines or other large polluting industries in the central part of Shanxi,
where Jinzhong is located. Jinzhong’s economy relies heavily on agriculture.
Jinzhong’s cultivation lands are located in Jinzhong City.
|
·
|
Scale Production
Advantage
|
Agricultural
lands for the large scale farming of grains are becoming rare in China. With the
support of our local government, we have adopted the operation mode of Company +
Farmers + Base on a large scale. In the past three years, we signed agricultural
co-operative agreements with governments of the counties and villages of
Jinzhong for exclusive farming rights to 550,000 mu (approximately 367 square
kilometers) of farmland for 20 years. Local governments arrange for farmers to
grow crops on the farming land and we place orders with the farmers via farmer
agents each year. The farmers plant according to the size of the orders. We
acquire the crops after harvest. We do not own title to the land nor do we own
the right to use the land.
|
·
|
Technical
Support
|
To
improve the technology in farming, breeding and cultivation, and processing, we
hired 6 professors as consultants. With Shanxi Agricultural Sciences Institute
and Shanxi Agriculture University and their breeding and cultivation center, we
established joint laboratories for the research and development of corn and
grain breeding and cultivation. Research and development expenses for each of
the last two years were USD $43,364 and USD $98,087 respectively. We will
continue to allocate more resources to research and development in the
future.
Legal Proceedings
We are
currently not involved in any litigation that we believe could have a material
adverse effect on our financial condition or results of operations. To our
knowledge, there is no action, suit, proceeding, inquiry or investigation before
or by any court, public board, government agency, self-regulatory organization
or body pending or, to the knowledge of our executive officers or any of our
subsidiaries, threatened against or affecting our company, our common stock, any
of our subsidiaries or any of our companies or our companies’ subsidiaries’
officers or directors in their capacities as such, in which an adverse decision
could have a material adverse effect.
Employees
We
currently have approximately 100 full time employees and approximately 600
part-time employees working on a seasonal basis.
RISK
FACTORS
You
should carefully consider the risks described below together with all of the
other information included in this Current Report before making an investment
decision with regard to our securities. The statements contained in or
incorporated into this Current Report that are not historic facts are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth in or
implied by forward-looking statements. If any of the following risks actually
occurs, our business, financial condition or results of operations could be
harmed. In that case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
17
Risks
Relating to Our Business
|
Substantially
all of our business, assets and operations are located in
PRC.
|
Substantially
all of our business, assets and operations are located in China. The economy of
China differs from the economies of most developed countries in many respects.
The economy of China has been transitioning from a planned economy to a
market-oriented economy. Although in recent years the PRC government has
implemented measures emphasizing the utilization of market forces for economic
reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a
substantial portion of productive assets in China is still owned by the PRC
government. In addition, the PRC government continues to play a significant role
in regulating industry by imposing industrial policies. It also exercises
significant control over China's economic growth through the allocation of
resources, controlling payment of foreign currency-denominated obligations,
setting monetary policy and providing preferential treatment to particular
industries or companies. Some of these measures benefit the overall economy of
China, but may have a negative effect on us.
|
Our
success depends on our management team and other key personnel, the loss
of any of whom could disrupt our business
operations.
|
Our
future success will depend in substantial part on the continued services of our
senior management. The loss of the services of one or more of our key personnel
could impede implementation of our business plan and result in reduced
profitability. Our future success will also depend on the continued ability to
attract, retain and motivate highly qualified technical sales and marketing
customer support. Because of the rapid growth of the economy in the PRC,
competition for qualified personnel is intense. We cannot guarantee that we will
be able to retain our key personnel or that we will be able to attract,
assimilate or retain qualified personnel in the future. If we are unsuccessful
in our efforts in this regard, it could have an adverse effect on our business,
financial condition and results of operations.
|
Any
disruption of the operations in our factories would damage our
business.
|
Our
operations could be interrupted by fire, flood, earthquake and other events
beyond our control for which we may not carry adequate insurance. Any disruption
of the operations in our factories would have a significant negative impact on
our ability to store, package, manufacture, and deliver products which would
cause a potential diminution in sales, the cancellation of orders, damage to our
reputation and potential lawsuits.
|
Adverse
weather conditions could reduce supply and/or demand for our products.
|
The
supply of and demand for our corn and grain products fluctuate significantly
with weather conditions, which could have either a positive or negative effect
on production. If any natural disasters, such as flood, drought, hail, tornadoes
or earthquakes, occur, supply for our products would likely be
reduced.
|
We
may encounter substantial competition in our business and our failure to
compete effectively may adversely affect our ability to generate
revenue.
|
We
believe that existing and new competitors will continue to improve their
products and to introduce new products with competitive price and performance
characteristics. We expect that we will be required to continue to invest in
product development and productivity improvements to compete effectively in our
markets. Our competitors could develop a more efficient product or undertake
more aggressive and costly marketing campaigns than ours, which may adversely
affect our marketing strategies and could have a material adverse effect on our
business, results of operations and financial condition.
Our major
competitors may be better able than we to successfully endure downturns in our
sector. In periods of reduced demand for our products, we can either choose to
maintain market share by reducing our selling prices to meet competition or
maintain selling prices, which would likely sacrifice market share. Sales and
overall profitability would be reduced in either case. In addition, we cannot
assure you that additional competitors will not enter our existing markets, or
that we will be able to compete successfully against existing or new
competition.
18
|
We
may not be able to obtain regulatory or governmental approvals for our
products.
|
The
manufacture and sale of our agricultural products in the PRC is regulated by the
PRC and the local Provincial Government. The legal and regulatory regime
governing our industry is evolving, and we may become subject to different,
including more stringent, requirements than those currently applicable to us. We
may be vulnerable to local and national government agencies or other parties who
wish to renegotiate the terms and conditions of, or terminate their agreements
or other understandings with us, or implement new or more stringent
requirements, which may require us to suspend or delay production of their
products. Our many
permits and licenses related to the agricultural and food industries may expire
and there is not guarantee the government or certifying agency will renew our
licenses and/or certifications.
|
Potential
environmental liability could have a material adverse effect on our
operations and financial condition.
|
To the
knowledge of our management team, neither the production nor the sale of our
products constitutes activities, or generates materials that create any
environmental hazards or violates PRC environmental laws. Although it has not
been alleged by PRC government officials that we have violated any current
environmental regulations, we cannot assure you that the PRC government will not
amend the current PRC environmental protection laws and regulations. Our
business and operating results may be materially and adversely affected if we
were to be held liable for violating existing environmental regulations or if we
were to increase expenditures to comply with environmental regulations affecting
our operations.
|
We
do not have key man insurance on our Chairman and CEO, on whom we rely for
the management of our business.
|
We
depend, to a large extent, on the abilities and participation of our current
management team, but have a particular reliance upon Mr. Jianming Hao, our CEO
and Chairman of the Board. The loss of the services of Mr. Hao, for any reason,
may have a material adverse effect on our business and prospects. We cannot
assure you that the services of Mr. Hao will continue to be available to us, or
that we will be able to find a suitable replacement for him. We do not carry key
man life insurance for any key personnel.
|
Any
significant fluctuation in price of our raw materials may have a material
adverse effect on the manufacturing cost of our products.
|
The
prices for the raw materials that we use in the manufacture of our fertilizer
products are subject to market forces largely beyond our control, including the
price of coal, our energy costs, organic chemical feedstock costs, market
demand, and freight costs. The prices for these raw materials may fluctuate
significantly based upon changes in these forces. If we are unable to pass any
raw material price increases through to our customers, we could incur
significant losses and a diminution of the market price of our common
stock.
|
Our
plans to build additional plants and to improve and upgrade our internal
control and management system will require capital expenditures in
2010.
|
Our plans
to build additional plants and to improve and upgrade our internal control and
management system will require capital expenditures in 2010. We may also need
further funding for working capital, investments, potential acquisitions and
joint ventures and other corporate requirements. We cannot assure you that cash
generated from our operations will be sufficient to fund these development
plans, or that our actual capital expenditures and investments will not
significantly exceed our current planned amounts. If either of these conditions
arises, we may have to seek external financing to satisfy our capital needs. Our
ability to obtain external financing at reasonable costs is subject to a variety
of uncertainties. Failure to obtain sufficient external funds for our
development plans could adversely affect our business, financial condition and
operating performance.
19
|
We
may experience major accidents in the course of our operations, which may
cause significant property damage and personal
injuries.
|
We may
experience major accidents in the course of our operations, which may cause
significant property damage and personal injuries. Significant industry-related
accidents and natural disasters may cause interruptions to various parts of our
operations, or could result in property or environmental damage, increase in
operating expenses or loss of revenue. The occurrence of such accidents and the
resulting consequences may not be covered adequately, or at all, by the
insurance policies we carry. In accordance with customary practice in China, we
do not carry any business interruption insurance or third party liability
insurance for personal injury or environmental damage arising from accidents on
our property or relating to our operations other than our automobiles. Losses or
payments incurred may have a material adverse effect on our operating
performance if such losses or payments are not fully insured.
|
Our
planned expansion and technical improvement projects could be delayed or
adversely affected by, among other things, failures to receive regulatory
approvals, difficulties in obtaining sufficient financing, technical
difficulties, or human or other resource
constraints.
|
Our
planned expansion and technical improvement projects could be delayed or
adversely affected by, among other things, failures to receive regulatory
approvals, difficulties in obtaining sufficient financing, technical
difficulties, or human or other resource constraints. Moreover, the costs
involved in these projects may exceed those originally contemplated. Costs
savings and other economic benefits expected from these projects may not
materialize as a result of any such project delays, cost overruns or changes in
market circumstances. Failure to obtain intended economic benefits from these
projects could adversely affect our business, financial condition and operating
performances.
|
We
could face increased competition.
|
Our
principal market, Beijing, has enjoyed stronger economic growth and a higher
demand for construction than other regions of China. As a result, we believe
that competitors will try to expand their sales and build up their distribution
networks in our principal market. We believe this trend will continue and
probably accelerate. Increased competition may have a material adverse effect on
our financial condition and results of operations.
|
We
need to manage growth in operations to maximize our potential growth and
achieve our expected revenues and our failure to manage growth will cause
a disruption of our operations resulting in the failure to generate
revenue at levels we expect.
|
In order
to maximize potential growth in our current and potential markets, we believe
that we must expand our manufacturing and marketing operations. This expansion
will place a significant strain on our management and our operational,
accounting, and information systems. We expect that we will need to continue to
improve our financial controls, operating procedures, and management information
systems. We will also need to effectively train, motivate, and manage our
employees. Our failure to manage our growth could disrupt our operations and
ultimately prevent us from generating the revenues we expect.
|
We
cannot assure you that our organic growth strategy will be successful
which may result in a negative impact on our growth, financial condition,
results of operations and cash
flow.
|
One of
our strategies is to grow organically through increasing the distribution and
sales of our products by penetrating existing markets in PRC and entering new
geographic markets in PRC. However, many obstacles to entering such new markets
exist including, but not limited to, established companies in such existing
markets in the PRC. We cannot, therefore, assure you that we will be able to
successfully overcome such obstacles and establish our products in any
additional markets. Our inability to implement this organic growth strategy
successfully may have a negative impact on our growth, future financial
condition, results of operations or cash flows.
20
|
If
we need additional capital to fund our growing operations, we may not be
able to obtain sufficient capital and may be forced to limit the scope of
our operations.
|
If
adequate additional financing is not available on reasonable terms, we may not
be able to undertake plant expansion, purchase additional machinery and purchase
equipment for our operations and we would have to modify our business plans
accordingly. There is no assurance that additional financing will be available
to us.
In
connection with our growth strategies, we may experience increased capital needs
and accordingly, we may not have sufficient capital to fund our future
operations without additional capital investments. Our capital needs will depend
on numerous factors, including (i) our profitability; (ii) the release of
competitive products by our competition; (iii) the level of our investment in
research and development; and (iv) the amount of our capital expenditures. We
cannot assure you that we will be able to obtain capital in the future to meet
our needs.
In recent
years, the securities markets in the United States have experienced a high level
of price and volume volatility, and the market price of securities of many
companies have experienced wide fluctuations that have not necessarily been
related to the operations, performances, underlying asset values or prospects of
such companies. For these reasons, our shares of common stock can also be
expected to be subject to volatility resulting from purely market forces over
which we will have no control. If we need additional funding we will, most
likely, seek such funding in the United States (although we may be able to
obtain funding in the PRC) and the market fluctuations affect on our stock price
could limit our ability to obtain equity
financing.
If we
cannot obtain additional funding, we may be required to: (i) limit our plant
expansion; (ii) limit our marketing efforts; and (iii) decrease or eliminate
capital expenditures.
Such
reductions could materially adversely affect our business and our ability to
compete.
Even if
we do find a source of additional capital, we may not be able to negotiate terms
and conditions for receiving the additional capital that are acceptable to us.
Any future capital investments could dilute or otherwise materially and
adversely affect the holdings or rights of our existing shareholders. In
addition, new equity or convertible debt securities issued by us to obtain
financing could have rights, preferences and privileges senior to the units. We
cannot give you any assurance that any additional financing will be available to
us, or if available, will be on terms favorable to us.
|
We
may need to hire additional
employees.
|
Our
future success also depends upon our continuing ability to attract and retain
highly qualified personnel. Expansion of our business and our management and
operations will require additional managers and employees with industry
experience, and our success will be highly dependent on our ability to attract
and retain skilled management personnel and other employees. There can be no
assurance that we will be able to attract or retain highly qualified personnel.
Competition for skilled personnel in the agriculture industry is significant.
This competition may make it more difficult and expensive to attract, hire and
retain qualified managers and employees.
We
may not be able to meet the accelerated filing and internal control reporting
requirements imposed by the Securities and Exchange Commission resulting in a
possible decline in the price of our common stock and our inability to obtain
future financing.
As
directed by Section 404 of the Sarbanes-Oxley Act, as amended by SEC Release No.
33-8934 on June 26, 2008, the Securities and Exchange Commission adopted rules
requiring each public company to include a report of management on the company’s
internal controls over financial reporting in its annual reports. In
addition, the independent registered public accounting firm auditing a company’s
financial statements must also attest to and report on management’s assessment
of the effectiveness of the company’s internal controls over financial reporting
as well as the operating effectiveness of the company’s internal controls.
Commencing with our annual report for fiscal year 2010, we will be required to
include a report of management on its internal control over financial
reporting. The internal control report must include a
statement
21
|
·
|
of
management’s responsibility for establishing and maintaining adequate
internal control over its financial
reporting;
|
|
·
|
of
management’s assessment of the effectiveness of its internal control over
financial reporting as of year end;
and
|
|
·
|
of
the framework used by management to evaluate the effectiveness of our
internal control over financial
reporting.
|
Furthermore,
in the following year, our independent registered public accounting
firm is required to file a separate attestation report regarding our
internal financial reporting controls stating whether it believes that we have
maintained, in all material respects, effective internal controls over financial
reporting.
While we
expect to expend significant resources in developing the necessary documentation
and testing procedures required by Section 404 of the Sarbanes-Oxley Act, there
is a risk that we may not be able to comply timely with all of the requirements
imposed by this rule. In the event that we are unable to receive a
positive attestation from our independent registered public accounting firm with
respect to our internal controls, investors and others may lose confidence in
the reliability of our financial statements and our stock price and ability to
obtain equity or debt financing as needed could suffer.
In
addition, in the event that our independent registered public accounting firm is
unable to rely on our internal controls in connection with its audit of our
financial statements, and in the further event that it is unable to devise
alternative procedures in order to satisfy itself as to the material accuracy of
our financial statements and related disclosures, it is possible that we would
be unable to file our Annual Report on Form 10-K with the Securities and
Exchange Commission, which could also adversely affect the market price of our
securities and our ability to secure additional financing as
needed.
|
The
transaction involves a reverse merger of a foreign company into a United
States shell company, so there is no history of compliance with United
States securities laws and accounting
rules.
|
In order
to be able to comply with United States securities laws, our operating
subsidiary prepared its financial statements for the first time under U.S.
generally accepted accounting principles and recently had the initial audit of
its financial statements in accordance with Public Company Accounting
Oversight Board (United States) rules. Because our operating
subsidiary does not have significant experience with U.S. generally
accepted accounting principles, it may be more burdensome for it to comply on a
timely basis with SEC reporting requirements.
|
Our
operations are currently focused in China, and any adverse change to the
economy or business environment in china could significantly affect our
operations, which would lead to lower revenues and reduced
profitability.
|
Our
operations are currently concentrated in China. Because of this concentration in
a specific geographic location, we are susceptible to fluctuations in our
business caused by adverse economic or other conditions in this region,
including natural or other disasters. A stagnant or depressed economy in China,
or in any of the other markets that we serve, could adversely affect our
business, results of operations and financial condition.
22
Labor disputes could significantly
affect our operations.
Labor
disputes with our employees or labor disputes, work stoppages or slowdowns at
any of its subcontractors or suppliers could significantly disrupt operations or
expansion plans. Delays caused by any such disruptions could materially affect
projections for increased capacity, production and revenues, which could have a
material adverse effect on our business, financial condition, results of
operations and prospects.
Risks
Relating to the People's Republic of China
|
Certain
political, geographic and economic factors relating to operating in the
PRC could adversely affect our
company.
|
The PRC
is transitioning from a planned economy to a market economy. While the PRC
government has pursued economic reforms since its adoption of the open-door
policy in 1978, a large portion of the PRC economy is still operating under
five-year plans and annual state plans. Through these plans and other economic
measures, such as control on foreign exchange, taxation and restrictions on
foreign participation in the domestic market of various industries, the PRC
government exerts considerable direct and indirect influence on the economy.
Many of the economic reforms carried out by the PRC government are unprecedented
or experimental, and are expected to be refined and improved. Other political,
economic and social factors can also lead to further readjustment of such
reforms. This refining and readjustment process may not necessarily have a
positive effect on our operations or future business development. Our operating
results may be adversely affected by changes in the PRC's economic and social
conditions as well as by changes in the policies of the PRC government, such as
changes in laws and regulations (or the official interpretation thereof),
measures which may be introduced to control inflation, changes in the interest
rate or method of taxation, and the imposition of restrictions on currency
conversion in addition to those described below.
|
The
uncertain application of many relatively new PRC laws that may apply to us
create an unpredictable environment for our business operations and could
have a material adverse effect on
us.
|
The PRC
legal system is a civil law system. Unlike the common law system, the civil law
system is based on written statutes in which decided legal cases have little
value. In 1979, the PRC began to promulgate a comprehensive system of laws and
has since introduced many laws and regulations to provide general guidance on
economic and business practices in the PRC and to regulate foreign investment.
Progress has been made in the promulgation of laws and regulations dealing with
economic matters such as corporate organization and governance, foreign
investment, commerce, taxation and trade. The promulgation of new laws, changes
of existing laws and the abrogation of local regulations by national laws could
have a negative impact on our business and business prospects.
Labor
costs may be increased due to the implementation of the new PRC Labor Contract
Law.
The PRC
Labor Contract Law was adopted by the Standing Committee of the National
People’s Congress of PRC on June 29, 2007 and became effective on January 1,
2008. The implementation of the new law, especially the following provisions,
may increase our labor costs: (a) an employer shall make monetary compensation,
which shall be based on the number of an employee’s working years with the
employer at the rate of one month’s wage for each year, to the employee upon
termination of the employment contract with certain exceptions (for example, in
the circumstances where the term of a fixed-term employment contract expires and
the employee does not agree to renew the contract even though the conditions
offered by the employer are the same as or better than those stipulated in the
current contract); (b) the wages of an employee on probation may not be less
than the lowest wage level for the same job with the employer or less than 80%
of the wage agreed upon in the employment contract, and may not be less than the
local minimum wage rate; (c) if an employee has been working for the employer
for a consecutive period of not less than 10 years, or if a fixed-term
employment contract with an employee was entered into on two consecutive
occasions, generally the employer should enter into an open-ended employment
with such employee, unless the employee requests for a fixed-term employment
contract; (d) if an employer fails, in violation of the related provisions, to
enter into an open-ended contract with an employee, it shall each month pay to
the employee twice his wage, starting from the date on which an open-ended
employment contract should have been entered into; (e) if an employer fails to
enter into a written employment contract with an employee more than one month
but less than one year after the date on which the employer started using him,
the employer shall each month pay to the employee twice his wage; and (f) if an
employer hires an employee whose employment contract with another employer has
not yet been terminated or ended, causing the other employer to suffer a loss,
it shall be jointly and severally liable with the employee for the compensation
of such loss. Our labor costs may increase due to the implementation of the new
PRC Labor Contract Law and our business and results of operations may be
materially and adversely affected.
23
|
Currency
conversion could adversely affect our financial
condition.
|
The PRC
government imposes control over the conversion of Renminbi into foreign
currencies. Under the current unified floating exchange rate system, the
People's Bank of China publishes an exchange rate, which we refer to as the PBOC
exchange rate, based on the previous day's dealings in the inter-bank foreign
exchange market. Financial institutions authorized to deal in foreign currency
may enter into foreign exchange transactions at exchange rates within an
authorized range above or below the PBOC exchange rate according to market
conditions.
Pursuant
to the Foreign Exchange Control Regulations of the PRC issued by the State
Council which came into effect on April 1, 1996, and the Regulations on the
Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which
came into effect on July 1, 1996, regarding foreign exchange control, conversion
of Renminbi into foreign exchange by Foreign Investment Enterprises, or FIEs,
for use on current account items, including the distribution of dividends and
profits to foreign investors, is permissible. FIEs are permitted to convert
their after-tax dividends and profits to foreign exchange and remit such foreign
exchange to their foreign exchange bank accounts in the PRC. Conversion of
Renminbi into foreign currencies for capital account items, including direct
investment, loans, and security investment, is still under certain restrictions.
On January 14, 1997, the State Council amended the Foreign Exchange Control
Regulations and added, among other things, an important provision, which
provides that the PRC government shall not impose restrictions on recurring
international payments and transfers under current account items.
Enterprises
in the PRC (including FIEs) which require foreign exchange for transactions
relating to current account items, may, without approval of the State
Administration of Foreign Exchange, or “SAFE,” effect payment from their foreign
exchange account or convert and pay at the designated foreign exchange banks by
providing valid receipts and proofs.
Convertibility
of foreign exchange in respect of capital account items, such as direct
investment and capital contribution, is still subject to certain restrictions,
and prior approval from the SAFE and its relevant branches must be
sought.
Furthermore,
the Renminbi is not freely convertible into foreign currencies nor can it be
freely remitted abroad. Under the PRC’s Foreign Exchange Control Regulations and
the Administration of Settlement, Sales and Payment of Foreign Exchange
Regulations, Foreign Invested Enterprises are permitted either to repatriate or
distribute its profits or dividends in foreign currencies out of its foreign
exchange accounts, or exchange Renminbi for foreign currencies through banks
authorized to conduct foreign exchange business. The conversion of Renminbi into
foreign exchange by Foreign Invested Enterprises for recurring items, including
the distribution of dividends to foreign investors, is permissible. The
conversion of Renminbi into foreign currencies for capital items, such as direct
investment, loans and security investment, is subject, however, to more
stringent controls.
|
Exchange
rate volatility could adversely affect our financial
condition.
|
Since
1994, the exchange rate for Renminbi against the United States dollar has
remained relatively stable. However, in 2005, the Chinese government announced
that it would begin pegging the exchange rate of the Chinese Renminbi against a
number of currencies, rather than just the U.S. dollar and, the exchange rate
for the Renminbi against the U.S. dollar became RMB8.02 to $1.00. If we decide
to convert Chinese Renminbi into United States dollars for other business
purposes and the United States dollar appreciates against this currency, the
United States dollar equivalent of the Chinese Renminbi we convert would be
reduced. There can be no assurance that future movements in the exchange rate of
Renminbi and other currencies will not have an adverse effect on our financial
condition.
24
The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities.
We are
dependent on our relationship with the local government in the province in which
we operate our business. Chinese 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, 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 these jurisdictions 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.
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
high rates of inflation. Rapid economic growth can lead to growth in the money
supply and rising inflation. If prices for our products rise at a rate that is
insufficient to compensate for the rise in the costs of supplies, it may have an
adverse effect on profitability. These factors have led to the adoption by
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 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.
|
Since
most of our assets are located in the PRC, any dividends of proceeds from
liquidation is subject to the approval of the relevant Chinese government
agencies.
|
Our
assets are predominantly located inside PRC. Under the laws governing Foreign
Invested Enterprises in PRC, dividend distribution and liquidation are allowed
but subject to special procedures under the relevant laws and rules. Any
dividend payment will be subject to the decision of the board of directors and
subject to foreign exchange rules governing such repatriation. Any liquidation
is subject to the relevant government agency's approval and supervision as well
as the foreign exchange control. This may generate additional risk for our
investors in case of dividend payment and liquidation.
Risks
Associated with our Securities
|
Our
securities are restricted securities with limited
transferability.
|
Our
securities should be considered a long-term, illiquid investment. Our Common
Stock has not been registered under the Act, and cannot be sold without
registration under the Act or any exemption from registration. In addition, our
Common Stock is not registered under any state securities laws that would permit
their transfer. Because of these restrictions and the absence of an active
trading market for the securities, a shareholder will likely find it difficult
to liquidate an investment.
25
We
may be subject to penny stock rules which will make the shares of our common
stock more difficult to sell.
We may be
subject now and in the future to the SEC’s “penny stock” rules if our shares of
common stock sell below $5.00 per share. Penny stocks generally are equity
securities with a per share price of less than $5.00. The penny stock rules
require broker-dealers to deliver a standardized risk disclosure document
prepared by the SEC which provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer must also
provide the customer with current bid and offer quotations for the penny
stock, the compensation of the broker-dealer and its salesperson, and monthly
account statements showing the market value of each penny stock held in the
customer’s account. The bid and offer quotations, and the broker-dealer and
salesperson compensation information must be given to the customer orally or in
writing prior to completing the transaction and must be given to the customer in
writing before or with the customer’s
confirmation.
In
addition, the penny stock rules require that prior to a transaction the broker
dealer must make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. The penny stock rules are burdensome and may
reduce purchases of any offerings and reduce the trading activity for shares of
our common stock. As long as our shares of common stock are subject to the penny
stock rules, the holders of such shares of common stock may find it more
difficult to sell their securities.
|
Our
shares of common stock are very thinly traded, and the price may not
reflect our value and there can be no assurance that there will be an
active market for our shares of common stock either now or in the
future.
|
Our
shares of common stock are thinly traded. Due to the illiquidity, the market
price may not accurately reflect the relative value of the Company. There can be
no assurance that there will be an active market for our shares of common stock
either now or in the future. Investors may not be able to liquidate their
investment or liquidate it at a price that reflects the value of the business.
If a more active market should develop, the price may be highly volatile.
Because there may be a low price for our shares of common stock, many brokerage
firms may not be willing to effect transactions in the securities. Even if an
investor finds a broker willing to effect a transaction in the shares of our
common stock, the combination of brokerage commissions, transfer fees, taxes, if
any, and any other selling costs may exceed the selling price. Further, many
lending institutions will not permit the use of such shares of common stock as
collateral for a loans.
Special
Note Regarding Forward-Looking Statements
This
Current Report contains certain forward-looking statements. When used in this
Report or in any other presentation, statements which are not historical in
nature, including the words “anticipate,” “estimate,” “should,” “expect,”
“believe,” “intend,” “may,” “project,” “plan” or “continue,” and similar
expressions are intended to identify forward-looking statements. They also
include statements containing a projection of revenues, earnings or losses,
capital expenditures, dividends, capital structure or other financial
terms.
The
forward-looking statements in this Current Report are based upon our
management’s beliefs, assumptions and expectations of our future operations and
economic performance, taking into account the information currently available to
them. These statements are not statements of historical fact. Forward-looking
statements involve risks and uncertainties, some of which are not currently
known to us, that may cause our actual results, performance or financial
condition to be materially different from the expectations of future results,
performance or financial condition we express or imply in any forward-looking
statements. These forward-looking statements are based on our current plans and
expectations and are subject to a number of uncertainties and risks that could
significantly affect current plans and expectations and our future financial
condition and results.
We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this Current Report might not occur. We qualify any and all
of our forward-looking statements entirely by these cautionary factors. As a
consequence, current plans, anticipated actions and future financial conditions
and results may differ from those expressed in any forward-looking statements
made by or on our behalf. You are cautioned not to unduly rely on such
forward-looking statements when evaluating the information presented
herein.
26
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis of the results of operations and financial
condition of City Zone for the years ended December 31, 2008 and 2009, should be
read in conjunction with the Selected Consolidated Financial Data, City Zone’s
financial statements, and the notes to those financial statements that are
included elsewhere in this Current Report on Form 8-K. Our discussion includes
forward-looking statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations and intentions.
Actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under the Risk Factors, Cautionary Notice
Regarding Forward Looking Statements and Business sections in this Form 8-K. We
use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and
similar expressions to identify forward-looking statements.
Business
Overview
Operating
through our wholly-owned subsidiaries, Jinzhong Deyu Agriculture Trading Co.
Limited (“Deyu Agriculture”), Jinzhong Yongcheng Agriculture Trading Co. Limited
(“Yongcheng”), and Jinzhong Yuliang Agriculture Trading Co. Limited (“Yuliang”),
we are an emerging organic and non-organic agricultural products distributor in
the Shanxi province of the People’s Republic of China engaged in procuring,
processing, marketing and distributing various grain and corn products. Deyu
Agriculture focuses on processing and distributing grain products. Yongcheng and
Yuliang focus on distributing corn and corn
byproducts.
|
·
|
Grain
Products –Deyu Agriculture procures and distributes grain products
including millet, green beans, soy beans, black rice, and whole wheat
flour. Deyu Agriculture acquires unprocessed grains and performs
value-added processes to the grains such as peeling, cleaning, grinding
and packaging. The majority of our finished products are then sold
directly to supermarkets and grain wholesalers. Deyu Agriculture is the
only company in the Shanxi province to have a portion of its products
certified as “Organic” by the China Organic Food Certification Center. The
certification is effective from December 31, 2009 to December 20,
2010.
|
|
·
|
Corn
–Yongcheng and Yuliang process and distribute corn and corn byproducts.
Yongcheng and Yuliang acquire unprocessed corn and perform value-added
processes such as cleaning, drying, and
packaging.
|
Operating
revenue for the fiscal year ended December 31, 2009 was $40,732,447,
representing a 135.86% increase from the fiscal year ended December 31, 2008.
Our net income for the fiscal year ended December 31, 2009 was $7,181,132,
representing a 107.24% increase from $3,465,115 for the fiscal year ended
December 31, 2008.
City
Zone’s current corporate structure is set forth below:
27
City Zone
is a holding company incorporated under the laws of the British Virgin Islands
and is the sole shareholder of Most Smart International Limited (“Most Smart”).
Most Smart was incorporated under the laws of Hong Kong on March 11, 2009 and
owns 100% of the issued and outstanding capital stock of Redsun Technology
(Shenzhen) Co. Limited (“Red Sun”), a wholly foreign owned enterprise (“WFOE”)
with limited liability incorporated under the PRC laws on August 20, 2009. Red
Sun is the sole shareholder of Shenzhen JiRuHai Technology Co. Limited
(“Jiruhai”) which was incorporated in the PRC on August 20, 2009. Jiruhai is the
100% owner of the issued and outstanding capital stock of Detian Yu. Detian Yu
was incorporated under the PRC laws on November 30, 2006 and is the sole
shareholder of Jinzhong Deyu Agriculture Trading Co. Limited (“Jinzhong Deyu”),
Jinzhong Yongcheng Agriculture Trading Co. Limited (“Yongcheng”) and Jinzhong
Yuliang Agriculture Trading Co. Limited (“Yuliang”), all of which were also
incorporated under the PRC laws on April 22, 2004, May 30, 2006, and March 17,
2008, respectively.
28
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations is
based upon our financial statements which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets and liabilities. On an on-going basis, we
evaluate our estimates including the allowance for doubtful accounts, the
salability and recoverability of inventory, income taxes and contingencies. We
base our estimates on historical experience and on other assumptions that we
believes to be reasonable under the circumstances, the results of which form our
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We cannot
predict what future laws and regulations might be passed that could have a
material effect on our results of operations. We assess the impact of
significant changes in laws and regulations on a regular basis and update the
assumptions and estimates used to prepare our financial statements when we deem
it necessary.
Inventories
Our
inventories are stated at lower of cost or market. Cost is determined
on moving-average basis. Costs of inventories include purchase and
related costs incurred in delivering the products to their present location and
condition. Market value is determined by reference to selling prices
after the balance sheet date or to management’s estimates based on prevailing
market conditions. Management periodically evaluates the composition
of its inventories at least quarterly to identify slow-moving and obsolete
inventories to determine if valuation allowance is required.
Property, plant, and
equipment
Property,
plant, and equipment are stated at cost less accumulated
depreciation. Expenditures for maintenance and repairs are charged to
earnings as incurred; additions, renewals and betterments are
capitalized. When property, plant, and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in
operations.
Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets as follows:
|
Useful
Life
(in
years)
|
|
|
Automobiles
|
5
|
|
Buildings
|
30
|
|
Office
equipment
|
5
|
|
Machinery
and equipment
|
10
|
Construction-in-progress
Construction-in-progress
consists of amounts expended for warehouse construction.
Construction-in-progress
is not depreciated until such time as the assets are completed and put into
service. Once warehouse construction is completed, the cost
accumulated in construction-in-progress is transferred to property, plant, and
equipment.
29
Long-lived Assets
We apply
the provisions of FASB ASC Topic 360 (ASC 360), "Property, Plant, and Equipment"
which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. We periodically evaluate the carrying value of
long-lived assets to be held and used in accordance with ASC 360, at least on an
annual basis. ASC 360 requires the impairment losses to be recorded
on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amounts. In that event, a
loss is recognized based on the amount by which the carrying amount exceeds the
fair market value of the long-lived assets. Loss on long-lived assets
to be disposed of is determined in a similar manner, except that fair market
values are reduced for the cost of disposal.
Revenue
Recognition
Our
revenue recognition policies are in compliance with the SEC Staff Accounting
Bulletin No. 104 (“SAB 104”). We recognize product revenue when the
following fundamental criteria are met: (i) persuasive evidence of an
arrangement exists, (ii) delivery has occurred, (iii) our price to the customer
is fixed or determinable and (iv) collection of the resulting accounts
receivable is reasonably assured. We recognize revenue for product
sales upon transfer of title to the customer. Customer purchase
orders and/or contracts are generally used to determine the existence of an
arrangement. Shipping documents and the completion of any customer
acceptance requirements, when applicable, are used to verify product delivery or
that services have been rendered. We assess whether a price is fixed
or determinable based upon the payment terms associated with the transaction and
whether the sales price is subject to refund or adjustment.
Our
revenue is recognized net of value-added tax (VAT), reductions to revenue for
estimated product returns, and sales discounts based on volume achieved in the
same period that the related revenue is recorded. The estimates are
based on historical sales returns, analysis of credit memo data, and other
factors known at the time. For the years ended December 31, 2009 and
2008, sales discounts were $847,849 and $455,633, respectively.
Research and
Development
We
expense our research and development costs as incurred. Research and
development costs for the years ended December 31, 2009 and 2008 were $98,087
and $43,364, respectively.
Recently
Issued Accounting Pronouncements
In June
2009, the FASB issued ASC Topic 105, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles (“GAAP”) - a
replacement of FASB Statement No. 162”, which has become the source of
authoritative accounting principles generally accepted in the United States
recognized by the FASB to be applied to nongovernmental entities. The
Codification is effective in the third quarter of 2009, and accordingly, all
subsequent reporting will reference the Codification as the sole source of
authoritative literature. We do not believe that this will have a
material effect on our financial statements.
In June
2009, the FASB issued ASC Topic 855, “Subsequent Events”, which establishes
general standards of accounting for and disclosures of events that occur after
the balance sheet date but before the financial statements are issued or
available to be issued. It is effective for interim and annual
periods ending after June 15, 2009. There was no material impact upon
the adoption of this standard on our financial statements.
In June
2009, the FASB issued ASC 810, “Consolidation”, for determining whether to
consolidate a variable interest entity. These amended standards
eliminate a mandatory quantitative approach to determine whether a variable
interest gives the entity a controlling financial interest in a variable
interest entity in favor of a qualitatively focused analysis, and require an
ongoing reassessment of whether an entity is the primary
beneficiary. We do not believe this pronouncement will impact our
financial statements.
30
In August
2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which amends
ASC Topic 820, “Measuring Liabilities at Fair Value”, which provides additional
guidance on the measurement of liabilities at fair value. These
amended standards clarify that in circumstances in which a quoted price in an
active market for the identical liability is not available, we are required to
use the quoted price of the identical liability when traded as an asset, quoted
prices for similar liabilities, or quoted prices for similar liabilities when
traded as assets. If these quoted prices are not available, we are
required to use another valuation technique, such as an income approach or a
market approach. These amended standards are effective for us
beginning in the fourth quarter of fiscal year 2009 and did not have a
significant impact on our financial statements.
In
October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition – Multiple
Deliverable Revenue Arrangements” (“ASU 2009-13”). ASU 2009-13
updates the existing multiple-element revenue arrangements guidance currently
included in FASB ASC 605-25. The revised guidance provides for two
significant changes to the existing multiple-element revenue arrangements
guidance. The first change relates to the determination of when the
individual deliverables included in a multiple-element arrangement may be
treated as separate units of accounting. This change will result in
the requirement to separate more deliverables within an arrangement, ultimately
leading to less revenue deferral. The second change modifies the
manner in which the transaction consideration is allocated across the separately
identified deliverables. Together, these changes will result in
earlier recognition of revenue and related costs for multiple-element
arrangements than under previous guidance. This guidance also expands
the disclosures required for multiple-element revenue
arrangements. We do not believe that this will have a material effect
on our financial statements.
In
January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements”. This ASU requires new disclosures and clarifies
certain existing disclosure requirements about fair value measurement as set
forth in Codification Subtopic 820-10. The FASB’s objective is to
improve these disclosures and, thus, increase the transparency in financial
reporting. The adoption of this ASU will not have a material impact
on the Company’s consolidated financial statements.
31
RESULTS OF OPERATIONS
The
following table sets forth information from our statements of operations for the
years ended December 31, 2009, and 2008:
|
For
the Years Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
Revenue
|
$ | 40,732,447 | $ | 17,269,937 | ||||
|
Cost
of Goods Sold
|
(30,136,581 | ) | (12,673,361 | ) | ||||
|
Gross
profit
|
10,595,866 | 4,596,576 | ||||||
|
Operating
expenses
|
||||||||
|
Selling expenses
|
(1,947,613 | ) | (770,157 | ) | ||||
|
General and administrative
expenses
|
(719,910 | ) | (272,091 | ) | ||||
|
Other expenses
|
(556,312 | ) | - | |||||
|
Research and development
expenses
|
(98,087 | ) | (43,364 | ) | ||||
|
Total operating
expenses
|
(3,321,922 | ) | (1,085,612 | ) | ||||
|
Operating
Income
|
7,273,944 | 3,510,964 | ||||||
|
Other
income (expenses):
|
||||||||
|
Interest Income
|
10,081 | 1,440 | ||||||
|
Interest Expense
|
(102,893 | ) | (47,289 | ) | ||||
|
Total other expenses
|
(92,812 | ) | 45,849 | |||||
|
Income
before income tax
|
7,181,132 | 3,465,115 | ||||||
|
Provision(benefit)
for income tax
|
- | - | ||||||
|
Net
Income
|
$ | 7,181,132 | $ | 3,465,115 | ||||
For
the years ended December 31, 2009 and 2008
Net Revenue: Our sales for
the year ended December 31, 2009 were $40,732,447, compared to sales of
$17,269,937 for the year ended December 31, 2008.
Cost of Goods Sold: Cost of
goods sold was $30,136,581 for the year ended December 31, 2009, compared to
cost of sales of $12,673,361 for the year ended December 31, 2008.
Gross Profit: Gross profits
for the year ended December 31, 2009 was $10,595,866 compared to gross profits
of $4,596,576 for the comparable period in 2008.
Operating Expenses: Operating
expenses, including selling expenses, general and administrative expenses, other
expenses and research and development expenses were $3,321,922 for the year
ended December 31, 2009 as compared to $1,085,612 for the comparable period in
2008, an increase of $2,236,310.
Interest Expense: Interest
expense for the year ended December 31, 2009 was $102,893 compared to interest
expense of $47,289 for the comparable period in 2008.
Net Income: Net Income for
the year ended December 31, 2009 was approximately $7,181,132 compared to
$3,465,115 for the year ended December 31, 2008, an increase of
$3,716,017.
Foreign Currency Translation
Adjustment: Our reporting currency is the U.S. dollar. Our local
currency, Renminbi (RMB), is our functional currency. Results of operations and
cash flow are translated at average exchange rates during the period, and assets
and liabilities are translated at the unified exchange rate as quoted by the
People’s Bank of China at the end of the period. Translation adjustments
resulting from this process are included in accumulated other comprehensive
income in the statement of shareholders’ equity. Transaction gains and losses
that arise from exchange rate fluctuations on transactions denominated in a
currency other than the functional currency are included in the results of
operations as incurred.
32
Liquidity
and Capital Resources
As of
December 31, 2009, we had net income of $7,181,132 and working capital of
approximately $13,997,163. At December 31, 2009, we had cash and cash
equivalents of $2,562,501 as compared to $332,409 as of December 31,
2008.
The
following table sets forth a summary of our cash flows for the periods
indicated:
|
For
the Years Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
cash provided by (used in) operating activities
|
1,622,346 | (241,347 | ) | |||||
|
Net
cash used in investing activities
|
(22,976,589 | ) | (2,842,474 | ) | ||||
|
Net
cash provided by financing activities
|
23,582,934 | 3,286,171 | ||||||
Net cash
provided by operating activities was $1,622,346 for the year ended December 31,
2009, compared to net cash used in operations of $241,347 for the year ended
December 31, 2008.
Net cash
used in investing activities was $22,976,589 for the year ended December 31,
2009, compared to net cash used in investing activities of $2,842,474 for the
year ended December 31, 2008.
Net cash
provided by financing activities amounted to $23,582,934 for the year ended
December 31, 2009, compared to net cash provided by financing activities of
$3,286,171 for the year ended December 31, 2008.
DESCRIPTION
OF PROPERTY
Storage
Facilities
We rented
several large standardized warehouses for the storage and turnover of raw
products (mainly corn). The capacity exceeds 50,000 tons with annual turnover of
250,000 tons. We are constructing a new and modern storage center on 70 mu
(approximately 46,690 square meters) of land for storage capacity exceeding
70,000 tons of food products and the annual turnover is expected to exceed
350,000 tons. Completion
of the new storage facility is scheduled for the end June,
2010.
The cave
type warehouses are natural warehouses with enclosed, thermostatic and moisture
proof characteristics. Each of the cave type warehouses is built with a 1.5
meter thick covering and moisture proof layers and maintains a temperature of 10
degree Celsius throughout the year, ideal for food storage. Because no air
conditioning is required, the operating costs of the warehouses are low. The
warehouses are equipped with infrared detective and temperature sensing devices
which are able to accurately detect rodents, insects and temperature
changes.
Production
Facilities and Equipment
We are
equipped with three fully automated production lines for millet, grains and
flour which include various rice milling machines, filtering machines,
elevators, color selection machines, exhaust fans, automatic packaging machines
and other equipment.
33
DIRECTORS
AND OFFICERS
Set forth
below is information regarding our directors, executive officers and director
nominees. Pursuant to the terms of the Share Exchange, ECBI’s officers and
directors shall resigned, with such director resignations to become effective on
the tenth day after the mailing of a Schedule 14F-1 Information Statement to our
stockholders (the “14F Effective Date”) regarding the change in our board of
directors pursuant to the Share Exchange. Prior to the Share Exchange, our board
of directors appointed Mr. Jianming Hao as the Chairman of our Board, with such
appointment to be effective on the 14F Effective Date. The officers and
directors to take effect after the Share Exchange were not affiliated with us
prior to the Share Exchange. The Board is comprised of only one class. All of
the directors will serve until the next annual meeting of shareholders and until
their successors are elected and qualified, or until their earlier death,
retirement, resignation or removal.
Provided
below is a brief description of our directors’ business experience and an
indication of directorships he/she has held in other companies, if any, subject
to the reporting requirements under the federal securities laws.
|
Name
|
Age
|
Position
|
|
Jianming
Hao
|
35
|
Chief Executive Officer, Chairman of the Board of Directors |
| Wenjun Tian |
36
|
Executive Director |
Mr.
Jianming Hao, Chief Executive Officer and Chairman of the Board of
Directors
Mr. Hao
is the CEO and Chairman of the Company. Between December 2001 to May 2004, Mr.
Hao served as the Finance Manager of China Merchants Dichain (Asia) Ltd., a Hong
Kong listed company. Between May 2004 and November 2007, Mr. Hao served as a
director and Vice President of Shenzhen Litong Investments Ltd. Mr. Hao is well
experienced in corporate management.
Mr. Hao
received a Master’s degree in Finance from Nankai University. He is also a
certified public accountant in China.
Mr.
Wenjun Tian, Executive Director
Mr. Tian
is the Executive Director of the Company. Between September 2003 and December
2007, Mr. Tian served as the Chairman of Shanxi Dongsheng Auction Co., Ltd.
Between January 2008 and November 2009, Mr. Tian served as the
Chairman of Dongsheng International Investment Inc. He has been a director of
Detian Yu since December 2009.
Mr. Tian
is the holder of an undergraduate degree and has over 10 years experience in
corporate management. Mr. Tian is particularly experienced in investment in
agricultural enterprises.
Executive
Compensation
The
following table sets forth the compensation paid or accrued by us to
our President, Chief Executive Officer, Chief Financial Officer and
each of our other officers for the year ended December 31, 2009 and
2008.
|
Name
|
Title
|
12/31/2009 Fiscal Year
Annual Salary (US$)
|
12/31/2008 Fiscal Year
Annual Salary (US$)
|
|||||||
|
Jianming
Hao
|
Chairman and
Chief Executive Officer
|
$
2,200
|
$ 0
|
|||||||
34
Involvement
in Certain Legal Proceedings
There
have been no events under any bankruptcy act, no criminal proceedings and no
judgments, injunctions, orders or decrees material to the evaluation of the
ability and integrity of any director, executive officer, promoter or control
person of our Company during the past five years.
Family
Relationships
There are
no family relationships between any of our directors or executive
officers.
Employment
Agreements
We have
not entered into employment agreements with any of our employees, officers and
directors.
Board
of Directors
All
directors hold office until the next annual meeting of shareholders and until
their successors have been duly elected and qualified. Officers are elected by
and serve at the discretion of the Board.
Our
directors are reimbursed for expenses incurred by them in connection with
attending Board meetings, but they do not receive any other compensation for
serving on the Board.
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Due
from related parties
Total due
from related parties amounted to $0 and $5,716,380 as of December 31, 2009 and
2008, respectively.
The
balance of $5,716,380 mainly consisted of loans to the original shareholders of
Beijing Detian Yu. Those loans were unsecured, bearing no interest, and no due
date was specified.
Due
to related parties
|
As
of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Advances
from -
|
||||||||
|
Mr.
Jianming Hao
|
$ | 84,120 | - | |||||
|
Mr.
Junde Zhang
|
$ | 61,530 | $ | 556,981 | ||||
|
Mr.
Yongqing Ren
|
- | $ | 3,358,814 | |||||
|
Total
|
$ | 116,968 | $ | 3,915,795 | ||||
Mr.
Jianming Hao is the Chief Executive Officer and Managing Director of the
Company. Mr. Junde Zhang and Mr. Yongqing Ren are Vice Presidents and Directors
of the Company. Those advances as of December 31, 2009 and 2008 were unsecured,
bearing no interest, and no due date was specified.
Guarantees
As of
December 31, 2009 and 2008, Jinzhong Yuliang provided guarantees on short-term
loans obtained by Jinzhong Yongcheng.
Director
Independence and Board Committees
We do not
have any independent directors and our board of directors is in the process of
searching for suitable candidates. Our board of directors does not have any
committees, as companies whose securities are traded on the OTC Bulletin Board
are not required to have board committees. However, at such time in the future
that we appoint independent directors on our board we expect to form the
appropriate board committees.
35
Lock
Up Agreements
All of
the shares of Common Stock to be owned by the management of City Zone Holdings
Limited will be restricted from public or private sale for a period of twelve
(12) months following the closing of the Offering.
Code of Ethics
We
currently do not have a code of ethics that applies to our officers, employees
and directors, including our Chief Executive Officer and senior
executives.
Conflicts
of Interest
Certain
potential conflicts of interest are inherent in the relationships between our
officers and directors, and the Company.
From time
to time, one or more of our affiliates may form or hold an ownership interest in
and/or manage other businesses both related and unrelated to the type of
business that we own and operate. These persons expect to continue to form, hold
an ownership interest in and/or manage additional other businesses which may
compete with ours with respect to operations, including financing and marketing,
management time and services and potential customers. These activities may give
rise to conflicts between or among the interests of us and other businesses with
which our affiliates are associated. Our affiliates are in no way prohibited
from undertaking such activities, and neither we nor our shareholders will have
any right to require participation in such other activities.
Further,
because we intend to transact business with some of our officers, directors and
affiliates, as well as with firms in which some of our officers, directors or
affiliates have a material interest, potential conflicts may arise between the
respective interests of us and these related persons or entities. We believe
that such transactions will be effected on terms at least as favorable to us as
those available from unrelated third parties.
With
respect to transactions involving real or apparent conflicts of interest, we
have adopted policies and procedures which require that: (i) the fact of the
relationship or interest giving rise to the potential conflict be disclosed or
known to the directors who authorize or approve the transaction prior to such
authorization or approval, (ii) the transaction be approved by a majority of our
disinterested outside directors, and (iii) the transaction be fair and
reasonable to us at the time it is authorized or approved by our
directors.
Corporation
Information
Our
principal executive offices are located at Tower B Jinshang International
Building, 7th
Floor, Room 701,Yinbing West Street Jinzhong City, Shanxi Province, China and
the correspondence address of the Company is located at Unit 106, Tern Centre,
Tower II, 251 Queen’s Road, Central Hong Kong, Attention: Jianming Hao,
Telephone No: (86) 138-2882-4414, Fax No: (852) 2857 6826.
36
CHINA
REGULATIONS
This
section sets forth a summary of the most significant Chinese regulations or
requirements that may affect our business activities operated in China or our
shareholders’ right to receive dividends and other distributions of profits from
the PRC subsidiaries.
Foreign
Investment in PRC Operating Companies
The Foreign Investment Industrial
Catalogue jointly issued by the MOFCOM and the National Development and
Reform Commission or the NDRC in 2007 classified various industries/business
into three different categories: (i) encouraged for foreign investment; (ii)
restricted to foreign investment; and (iii) prohibited from foreign investment.
For any industry/business not covered by any of these three categories, they
will be deemed industries/business permitted to have foreign investment. Except
for those expressly provided restrictions, encouraged and permitted
industries/business are usually 100% open to foreign investment and ownership.
With regard to those industries/business restricted to or prohibited from
foreign investment, there is always a limitation on foreign investment and
ownership. The PRC Subsidiary’s business does not fall under the industry
categories that are restricted to, or prohibited from foreign investment and is
not subject to limitation on foreign investment and ownership.
Regulation
of Foreign Currency Exchange
Foreign
currency exchange in the PRC is governed by a series of regulations, including
the Foreign Currency
Administrative Rules (1996), as amended, and the Administrative Regulations Regarding
Settlement, Sale and Payment of Foreign Exchange (1996), as amended.
Under these regulations, the Renminbi is freely convertible for trade and
service-related foreign exchange transactions, but not for direct investment,
loans or investments in securities outside the PRC without the prior approval of
SAFE. Pursuant to the Administrative Regulations Regarding
Settlement, Sale and Payment of Foreign Exchange (1996), FIEs may
purchase foreign exchange 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. However, the relevant Chinese 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 the PRC are still subject to limitations
and require approvals from SAFE.
Regulation
of FIEs’ Dividend Distribution
The
principal laws and regulations in the PRC governing distribution of dividends by
FIEs include:
|
(i)
|
The
Sino-foreign Equity
Joint Venture Law (1979), as amended, and the Regulations for the
Implementation of the Sino-foreign Equity Joint Venture Law (1983),
as amended;
|
|
(ii)
|
The
Sino-foreign Cooperative
Enterprise Law (1988), as amended, and the Detailed Rules for the
Implementation of the Sino-foreign Cooperative Enterprise Law
(1995), as amended;
|
|
(iii)
|
The
Foreign Investment
Enterprise Law (1986), as amended, and the Regulations of Implementation
of the Foreign Investment Enterprise Law (1990), as
amended.
|
Under
these regulations, FIEs in the PRC may pay dividends only out of their
accumulated profits, if any, determined in accordance with Chinese accounting
standards and regulations. In addition, foreign-invested enterprises in the PRC
are required to set aside at least 10% of their respective accumulated profits
each year, if any, to fund certain reserve funds unless such reserve funds have
reached 50% of their respective 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.
37
Regulation of a Foreign Currency’s Conversion into RMB and Investment by FIEs
On August
29, 2008, SAFE issued a Notice
of the General Affairs Department of the State Administration of Foreign
Exchange on the Relevant Operating Issues concerning the Improvement of the
Administration of Payment and Settlement of Foreign Currency Capital of
Foreign-Invested Enterprises or Notice 142, to further regulate the
foreign exchange of FIEs. According to the Notice 142, FIEs shall obtain
verification report from a local accounting firm before converting its
registered capital of foreign currency into Renminbi, and the converted Renminbi
shall be used for the business within its permitted business scope. The Notice
142 explicitly prohibits FIEs from using RMB converted from foreign capital to
make equity investments in the PRC, unless the domestic equity investment is
within the approved business scope of the FIE and has been approved by SAFE in
advance.
Regulation
of Foreign Exchange in Certain Onshore and Offshore Transactions
In October 2005, SAFE issued the Notice on Issues Relating to the Administration of Foreign Exchange in Fund-raising and Return Investment Activities of Domestic Residents Conducted via Offshore Special Purpose Companies, or SAFE Notice 75, which became effective as of November 1, 2005, and was further supplemented by two implementation notices issued by SAFE on November 24, 2005 and May 29, 2007, respectively. SAFE Notice 75 states that PRC residents, whether natural or legal persons, must register with the relevant local SAFE branch prior to establishing or taking control of an offshore entity established for the purpose of overseas equity financing involving onshore assets or equity interests held by them. The term “PRC legal person residents” as used in SAFE Notice 75 refers to those entities with legal person status or other economic organizations established within the territory of the PRC. The term “PRC natural person residents” as used in SAFE Notice 75 includes all PRC citizens and all other natural persons, including foreigners, who habitually reside in the PRC for economic benefit. SAFE implementation notice of November 24, 2005 further clarifies that the term “PRC natural person residents” as used under SAFE Notice 75 refers to those “PRC natural person residents” defined under the relevant PRC tax laws and those natural persons who hold any interests in domestic entities that are classified as “domestic-funding” interests.
PRC
residents are required to complete amended registrations with the local SAFE
branch upon: (i) injection of equity interests or assets of an onshore
enterprise to the offshore entity, or (ii) subsequent overseas equity financing
by such offshore entity. PRC residents are also required to complete amended
registrations or filing with the local SAFE branch within 30 days of any
material change in the shareholding or capital of the offshore entity, such as
changes in share capital, share transfers and long-term equity or debt
investments and these changes do not relate to return investment activities. PRC
residents who have already organized or gained control of offshore entities that
have made onshore investments in the PRC before SAFE Notice 75 was promulgated
must register their shareholdings in the offshore entities with the local SAFE
branch on or before March 31, 2006.
Under SAFE Notice 75, PRC residents are further required to repatriate into the PRC all of their dividends, profits or capital gains obtained from their shareholdings in the offshore entity within 180 days of their receipt of such dividends, profits or capital gains. The registration and filing procedures under SAFE Notice 75 are prerequisites for other approval and registration procedures necessary for capital inflow from the offshore entity, such as inbound investments or shareholders loans, or capital outflow to the offshore entity, such as the payment of profits or dividends, liquidating distributions, equity sale proceeds, or the return of funds upon a capital reduction.
Government
Regulations Relating to Taxation
On March
16, 2007, the National People’s Congress or NPC, approved and promulgated the
PRC Enterprise Income Tax
Law, which we refer to as the New EIT Law. The New EIT Law took effect on
January 1, 2008. Under the New EIT Law, FIEs and domestic companies are subject
to a uniform tax rate of 25%. The New EIT Law provides a five-year transition
period starting from its effective date for those enterprises which were
established before the promulgation date of the New EIT Law and which were
entitled to a preferential lower tax rate under the then-effective tax laws or
regulations.
38
On December 26, 2007, the State Council issued a Notice on Implementing Transitional Measures for Enterprise Income Tax, or the Notice, providing that the enterprises that have been approved to enjoy a low tax rate prior to the promulgation of the New EIT Law will be eligible for a five-year transition period since 1 January, 2008, during which time the tax rate will be increased step by step to the 25% unified tax rate set out in the New EIT Law. From 1 January, 2008, for the enterprises whose applicable tax rate was 15% before the promulgation of the New EIT Law , the tax rate will be increased to 18% for year 2008, 20% for year 2009, 22% for year 2010, 24% for year 2011, 25% for year 2012. For the enterprises whose applicable tax rate was 24%, the tax rate will be changed to 25% from January 1, 2008.
The New
EIT Law provides that an income tax rate of 20% may be applicable to dividends
payable to non-PRC investors that are “non-resident enterprises”. Non-resident
enterprises refer to enterprises which do not have an establishment or place of
business in the PRC, or which have such establishment or place of business in
the PRC but the relevant income is not effectively connected with the
establishment or place of business, to the extent such dividends are derived
from sources within the PRC. The income tax for non-resident enterprises shall
be subject to withholding at the income source, with the payor acting as the
obligatory withholder under the New EIT Law, and therefor such income taxes
generally called withholding tax in practice. The State Council of the PRC has
reduced the withholding tax rate from 20% to 10% through the Implementation
Rules of the New EIT Law. It is currently unclear in what circumstances a source
will be considered as located within the PRC. We are a U.S. holding company and
substantially all of our income is derived from dividends we receive from our
subsidiaries located in the PRC. Thus, if we are considered as a “non-resident
enterprise” under the New EIT Law and the dividends paid to us by our subsidiary
in the PRC are considered income sourced within the PRC, such dividends may be
subject to a 10% withholding tax.
Such
income tax may be exempted or reduced by the State Council of the PRC or
pursuant to a tax treaty between the PRC and the jurisdictions in which our
non-PRC shareholders reside. For example, the 10% withholding tax is reduced to
5% pursuant to the Double Tax
Avoidance Agreement Between Hong Kong and Mainland China if the
beneficial owner in Hong Kong owns more than 25% of the registered capital in a
company in the PRC.
The new
tax law provides only a framework of the enterprise tax provisions, leaving many
details on the definitions of numerous terms as well as the interpretation and
specific applications of various provisions unclear and unspecified. Any
increase in the combined company’s tax rate in the future could have a material
adverse effect on its financial conditions and results of
operations.
Regulations
of Overseas Investments and Listings
On August 8, 2006, six PRC regulatory agencies, including MOFCOM, CSRC, SASAC, SAT, SAIC and SAFE, jointly amended and released the M&A Rules, which became effective on September 8, 2006. This regulation, among other things, includes provisions that purport to require that an offshore SPV formed for purposes of overseas listing of equity interest in PRC companies and controlled directly or indirectly by PRC companies or individuals obtain the approval of CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange.
On September 21, 2006, CSRC published on its official website procedures regarding its approval of overseas listings by SPVs. CSRC approval procedures require the filing of a number of documents with CSRC and it would take several months to complete the approval process. The application of the M&A Rules with respect to overseas listings of SPVs remains unclear with no consensus currently existing among the leading PRC law firms regarding the scope of the applicability of CSRC approval requirement.
39
Regulations on Work
Safety
On June 29, 2002, the Work Safety Law (“WSL”) of the PRC was adopted by the Standing Committee of the 9th National People’s Congress and came into effect on November 1, 2002, as amended on August 27, 2009. The WSL provides general work safety requirements for entities engaging in manufacturing and business activities within the PRC. Additionally, Regulation on Work Safety Licenses (“RWSL”), as adopted by the State Council on January 7, 2004 effective on January 13, 2004, requires enterprises engaging in the manufacture of dangerous chemicals to obtain a work safety license with a term of three years. If a work safety license needs to be extended, the enterprise must go through extension procedures with authorities three months prior to its expiration. In addition, on May 17, 2004, the Measures for Implementation of Work Safety Licenses of Dangerous Chemicals Production was promulgated as implementing measures to the Regulation on Work Safety Licenses which provides that entities producing dangerous chemicals are required to obtain work safety licenses pursuant to specific requirements. Without work safety licenses, no entity may engage in the formal manufacture of dangerous chemicals.
The
Regulations on the Safety Administration of Dangerous Chemicals (“RSADC”) was
promulgated by the State Council on January 26, 2002, effective as of March 15,
2002. It sets forth general requirements for manufacturing and the storage of
dangerous chemicals in China. The RSADC requires that companies manufacturing
dangerous chemicals establish and strengthen their internal regulations and
rules on safety control and fulfill the national standards and other relevant
provisions of the State. In addition, according to the RSADC, companies that
manufacture, store, transport or use dangerous chemicals shall be required to
obtain corresponding approvals or licenses with the State Administration of Work
Safety and its local branches and other proper authorities. Companies that
manufacture or store dangerous chemicals without approval or registration with
the proper authorities can be shut down, ordered to stop manufacturing or
ordered to destroy the dangerous chemicals. Such companies can also be subject
to fines. If criminal law is violated, the persons chiefly liable, along with
other personnel directly responsible for such impropriety, shall be subject to
relevant criminal liability.
Regulations
on Environmental Protection
According
to the Prevention and Control of Water Pollution Law, as adopted by the Standing
Committee of the 10th
National People’s Congress on February 28, 2008 and effective on June 1, 2008,
China adopted a licensing system for pollutant discharge. Companies directly or
indirectly responsible for discharge of industrial waste water or medical sewage
to waters shall be required to obtain a pollutant discharge license. All
companies are prohibited from discharging wastewater and sewage to waters
without or in violation of the terms of the pollutant discharge
license.
The
Regulations on the Administration of Construction Projects Environmental
Protection (“RACPEP”), as adopted by the State Council on November 18, 1998 and
effective on November 29, 1998, governs construction projects and the impact
such projects will have on the environment. Pursuant to the RACPEP, the
governing body is responsible for supervising the implementation of a three
tiered system that includes (i) reviewing and approving a construction project,
(ii) overseeing the construction project and (iii) to inspect the finished
construction project and ensure that all harmful pollutants are disposed of
correctly. Manufacturing companies are required to apply for inspection with
environment protection authorities upon completion of a construction
project.
Food
Safety Law of the People’s Republic of China
The Food
Safety Law of the People’s Republic of China (the “Food Safety Law”) as adopted
at the 7th Session of the Standing Committee of the 11th National People’s
Congress of the People’s Republic of China and effective on June 1, 2009,
governs the food safety in food production and business operation activities.
Pursuant to the Food Safety Law, food producers must establish an internal
inspection and record system for raw materials and predelivery products, and
food distributors must also establish internal systems to record and inspect
food products procured from suppliers. In addition, any food addictives that are
not in the approved government catalog must not be used and no food products can
be sold inspection-free.
40
Regulations on the Implementation of the Food Safety Law of the People’s Republic of China
The
Regulations on the Implementation of the Food Safety Law of the People’s
Republic of China (the “Regulations”) as adopted at the 73rd Standing Committee
Meeting of the State Council on July 8, 2009 and effective on July 20, 2009, are
promulgated in accordance with the Food Safety Law. The Regulations require that
the local People’s Government at or above the country level shall perform the
responsibility specified in the Food Safety Law, improve the ability for
supervision and administration of food safety, ensure supervision and
administration of food safety; establish and improve the coordination mechanism
between food safety regulatory authorities, integrate and improve the food
safety information network, and realize the sharing of food safety and food
inspection information and other technical resources.
Law
of the People’s Republic of China on Quality and Safety of Agricultural
Products
The Law
of the People’s Republic of China on Quality and Safety of Agricultural Products
was adopted at the 21st Meeting of the Standing Committee of the Tenth National
People’s Congress on April 29, 2006. This Law was enacted in order to ensure the
quality and safety of agricultural products, maintain the health of the general
public, and promote the development agriculture and rural economy. Pursuant to
this Law, agricultural products distribution enterprises shall establish a sound
system of inspection and acceptance for their purchases. In addition,
agricultural products that fail to pass the inspection based on the quality and
safety standards of agricultural products cannot be marketed.
PRINCIPAL
SHAREHOLDERS
The
following table sets forth certain information regarding beneficial ownership of
our Common Stock as of the date of closing by (i) each person (or group of
affiliated persons) who is known by us to own more than five (5) percent of the
outstanding shares of our Common Stock, (ii) each director, executive officer
and director nominee, and (iii) all of our directors, executive officers and
director nominees as a group. Following the Share Exchange we have 11,866,174
shares of Common Stock issued and outstanding (on a fully diluted basis,
including the shares of Series A Preferred Stock issued in the
financing).
Beneficial
ownership is determined in accordance with SEC rules and generally includes
voting or investment power with respect to securities. All share ownership
figures include shares of our Common Stock issuable upon securities convertible
or exchangeable into shares of our Common Stock within sixty (60) days of the
Share Exchange, which are deemed outstanding and beneficially owned by such
person for purposes of computing his or her percentage ownership, but not for
purposes of computing the percentage ownership of any other person.
|
Name
of Beneficial Owner
|
Amount
(number
of shares)
|
Fully
Diluted Percentage of
Outstanding
Shares of Common Stock
|
|
Expert
Venture Limited (1)
|
6,238,205
|
52.57%
|
|
Sure
Glory Holdings Limited
|
748,636
|
6.31%
|
|
Charming
Action Management Limited
|
736,364
|
6.21%
|
|
Jianming
Hao (2)
|
0
|
0%
|
|
Wenjun
Tian
(3)
|
0
|
0%
|
|
Yongqing
Ren (4)
|
0
|
0%
|
|
Junde
Zhang (5)
|
0
|
0%
|
|
Hong
Wang (6)
|
0
|
0%
|
|
(1)
|
Mr.
Yam Sheung KWOK is the sole and controlling person of Expert Venture
Limited (referred to herein as “Expert”), owning all 1,000 shares of
Expert (subject to the share transfer agreements discussed
below).
|
|
(2)
|
Pursuant
to a share transfer agreement, Mr. Jianming Hao, our Chairman and Chief
Executive Officer, will have an option, subject to certain performance
targets, to purchase from Mr. Yam Sheung KWOK, the current sole
shareholder of Expert, up to 101 shares of Expert. Accordingly, upon
exercise of such option, Mr. Hao will indirectly (through his ownership of
Expert own and control 630,059
shares.
|
|
(3)
|
Pursuant
to a share transfer agreement, Mr. Wenjun Tian, our Executive Director,
will have an option, subject to certain performance targets (discussed in
more detail below), to purchase from Mr. Yam Sheung KWOK, the current sole
shareholder of Expert, up to 300 shares of Expert, which constitutes 30%
of Expert. Accordingly, upon exercise of such option, Mr. Tian will
indirectly (through his ownership of Expert) own and control 1,871,461
shares.
|
41
|
(4)
|
Pursuant
to a share transfer agreement, Mr. Yongqing Ren will have an option,
subject to certain performance targets (discussed in more detail below),
to purchase from Mr. Yam Sheung KWOK, the current sole shareholder of
Expert, up to 200 shares of Expert. Accordingly, upon exercise of such
option, Mr. Ren will indirectly (through his ownership of Expert) own and
control 1,247,641 shares.
|
|
(5)
|
Pursuant
to a share transfer agreement, Mr. Junde Zhang will have an option,
subject to certain performance targets (discussed in more detail below),
to purchase from Mr. Yam Sheung KWOK, the current sole shareholder of
Expert, up to 200 shares of Expert. Accordingly, upon exercise of such
option, Mr. Zhang will indirectly (through his ownership of Expert) own
and control 1,247,641 shares.
|
|
(6)
|
Pursuant
to a share transfer agreement, Mr. Hong Wang will have an option, subject
to certain performance targets (discussed in more detail below), to
purchase from Mr. Yam Sheung KWOK, the current sole shareholder of Expert,
up to 120 shares of Expert Venture Limited. Accordingly, upon exercise of
such option, Mr. Wang will indirectly (through his ownership of Expert)
own and control 748,585
shares
|
Share Transfer
Agreements
The
controlling person of Expert, Yam Sheung Kwok, entered into a certain Share
Transfer Agreement whereby the controlling persons each agreed to transfer their
interests to another beneficiary, subject to certain performance targets being
met.
Jianming
Hao
Mr. Yam
Sheung Kwok, the sole shareholder of Expert, entered into a Share Transfer
Agreement with Jianming Hao. Pursuant to the Share Transfer Agreement, Mr. Kwok
granted to Mr. Hao an option to acquire 101 ordinary shares of Expert if certain
performance targets are met. Specifically, the performance targets
are:
|
-
|
the
Company, including City Zone and its subsidiaries, realizes an increase of
twenty percent (20%) for the consolidated net income for fiscal year ended
December 31, 2010 as compared to consolidated net income for fiscal year
ended December 31, 2009; and
|
|
-
|
the
Company, including City Zone and its subsidiaries, realizes an increase of
twenty percent (20%) for the consolidated net income for fiscal year ended
December 31, 2011 as compared to its consolidated net income for fiscal
year ended December 31, 2010.
|
Wenjun
Tian
Mr. Yam
Sheung Kwok, the sole shareholder of Expert, entered into a Share Transfer
Agreement with Wenjun Tan. Pursuant to the Share Transfer Agreement, Mr. Kwok
granted to Mr. Tian an option to acquire 300 ordinary shares of Expert if
certain performance targets are met. Specifically, the performance targets
are:
|
-
|
the
Company, including City Zone and its subsidiaries, realizes an increase of
twenty percent (20%) for the consolidated net income for fiscal year ended
December 31, 2010 as compared to consolidated net income for fiscal year
ended December 31, 2009; and
|
|
-
|
the
Company, including City Zone and its subsidiaries, realizes an increase of
twenty percent (20%) for the consolidated net income for fiscal year ended
December 31, 2011 as compared to its consolidated net income for fiscal
year ended December 31, 2010.
|
42
Yongqing Ren
Mr. Yam
Sheung Kwok, the sole shareholder of Expert, entered into a Share Transfer
Agreement with Yongqing Ren. Pursuant to the Share Transfer Agreement, Mr. Kwok
granted to Mr. Ren an option to acquire 200 ordinary shares of Expert if certain
performance targets are met. Specifically, the performance targets
are:
|
-
|
the
Company, including City Zone and its subsidiaries, realizes an increase of
twenty percent (20%) for the consolidated net income for fiscal year ended
December 31, 2010 as compared to consolidated net income for fiscal year
ended December 31, 2009; and
|
|
-
|
the
Company, including City Zone and its subsidiaries, realizes an increase of
twenty percent (20%) for the consolidated net income for fiscal year ended
December 31, 2011 as compared to its consolidated net income for fiscal
year ended December 31, 2010.
|
Junde
Zhang
Mr. Yam
Sheung Kwok, the sole shareholder of Expert, entered into a Share Transfer
Agreement with Junde Zhang. Pursuant to the Share Transfer Agreement, Mr. Kwok
granted to Mr. Zhang an option to acquire 200 ordinary shares of Expert if
certain performance targets are met. Specifically, the performance targets
are:
|
-
|
the
Company, including City Zone and its subsidiaries, realizes an increase of
twenty percent (20%) for the consolidated net income for fiscal year ended
December 31, 2010 as compared to consolidated net income for fiscal year
ended December 31, 2009; and
|
|
-
|
the
Company, including City Zone and its subsidiaries, realizes an increase of
twenty percent (20%) for the consolidated net income for fiscal year ended
December 31, 2011 as compared to its consolidated net income for fiscal
year ended December 31, 2010.
|
Hong
Wang
Mr. Yam
Sheung Kwok, the sole shareholder of Expert, entered into a Share Transfer
Agreement with Hong Wang. Pursuant to the Share Transfer Agreement, Mr. Kwok
granted to Mr. Wang an option to acquire 120 ordinary shares of Expert if
certain performance targets are met. Specifically, the performance targets
are:
|
-
|
the
Company, including City Zone and its subsidiaries, realizes an increase of
twenty percent (20%) for the consolidated net income for fiscal year ended
December 31, 2010 as compared to consolidated net income for fiscal year
ended December 31, 2009; and
|
|
-
|
the
Company, including City Zone and its subsidiaries, realizes an increase of
twenty percent (20%) for the consolidated net income for fiscal year ended
December 31, 2011 as compared to its consolidated net income for fiscal
year ended December 31, 2010.
|
DESCRIPTION
OF SECURITIES
Authorized
Capital Stock
Our
authorized stock consists of 85,000,000 shares: 75,000,000 shares of Common
Stock, par value $0.001 per share, and 10,000,000 shares of Preferred Stock, par
value $0.001 per share. The following summary description relating to our
capital stock does not purport to be complete.
Common
Stock
Holders
of Common Stock are entitled to cast one vote for each share on all matters
submitted to a vote of shareholders, including the election of directors. The
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board out of funds legally available therefore. See
“Dividend Policy” below. Such holders do not have any preemptive or other rights
to subscribe for additional shares. All holders of Common Stock are entitled to
share ratably in any assets for distribution to shareholders upon the
liquidation, dissolution or winding up of the Company. There are no conversion,
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and
nonassessable.
43
Series
A Convertible Preferred Stock
The
holders of Series A Convertible Preferred Shares will be entitled to receive,
cumulative dividends in preference to the holders of Common Stock at an annual
rate of 5% of the applicable per Series A Preferred Share original purchase
price (the “Dividend Preference” and the “Dividends”). If, after the Dividend
Preference has been fully paid or declared and set apart, the Company shall make
any additional distributions, then the holders of Series A Preferred Shares
shall participate with the holders of Common Stock on an as-converted basis with
respect to such distributions. Dividends will be payable in cash or stock, at
the Company’s option.
Upon any
liquidation, dissolution or winding up of the Company, the holders of Series A
Preferred Shares will be entitled to receive, out of the assets of the Company
available for distribution to its stockholders, an amount equal to $4.40 per
share (the amount, the “Liquidation Preference Amount”), before any payment
shall be made or any assets distributed to the holders of the Common Stock (the
“Liquidation Preference”).
Each
holder of Series A Preferred Shares will have the right, at the option of the
holder at any time on or after the issuance of the Series A Preferred Shares,
without the payment of additional consideration, to convert Series A Preferred
Shares into a number of fully paid and nonassessable shares of Common Stock
equal to: (i) the Liquidation Preference Amount of such share divided by (ii)
the Conversion Price in effect as of the date of the conversion.
For a
period of two (2) years following the issuance of the Series A Preferred Shares,
the Conversion Price of Series A Preferred Shares will be subject to adjustment
for issuances of Common Stock (or securities convertible or exchangeable into
shares of Common Stock) at a purchase price less than the Conversion Price of
the Series A Preferred Shares
The
Series A Warrants
There are
746,479 Series A Warrants outstanding which were sold together with the Series A
Convertible Preferred Shares, which:
|
|
(a)
|
entitle
the holder to purchase 0.4 shares of Common
Stock;
|
|
|
(b)
|
are
exercisable at any time after consummation of the transactions
contemplated by the Securities Purchase Agreement and shall expire on the
date that is five years following the original issuance date of the Series
A Warrants;
|
|
|
(c)
|
are
exercisable, in whole or in part, at an exercise price of $5.06 per share
of Common Stock; and
|
|
|
(d)
|
are
exercisable only for cash (except that there will be a cashless exercise
option if, after twelve months from the Issue Date, (i) the Per Share
Market Value of one share of Common Stock is greater than the Warrant
Price (at the date of calculation) and (ii) a registration statement under
the Securities Act providing for the resale of the Common Stock issuable
upon exercise of Warrant Shares is not in effect, in lieu of exercising
this Warrant by payment of
cash).
|
The
summary of the Series A Warrants is qualified in its entirety by reference to
the form of Series A
Warrant attached hereto as Exhibit 10.5.
Dividend
Policy
We have
not paid cash dividends on any class of common equity since formation and we do
not anticipate paying any dividends on our outstanding Common Stock in the
foreseeable future. We plan to retain any earnings to finance the development of
the business and for general corporate purposes
DESCRIPTION
OF THE INVESTMENT SHARES
General
The private placement of the
Investment Shares consisted of 1,866,174
Units. Each Unit consists of:
44
(a) One
(1) Series A Convertible Preferred Share; and
(b) One
(1) five year Series A Warrant to purchase 0.4 shares of Common Stock, at an
exercise price of $5.06 per share.
Registration
Rights
The
Company will cause the Registrable Shares to be registered for resale under the
Securities Act pursuant to the Registration Rights Agreement. The Registration
Rights Agreement provides, among other things:
• that the Company shall file a
registration statement for the Registrable Shares within 60 days after the
Closing of the Offering; and
• cause the registration statement to
become effective no later than 150 days after the Closing of the Offering,
provided, however, that in the event of a “full review” by the SEC, the required
effective date will be 180 days following the Closing of the
Offering.
If the
Company does not comply with the foregoing obligations under the Registration
Rights Agreement, it will be required to pay cash liquidated damages to
investors, at the rate of 0.5% of the subscription amount in the Offering for
each 30 day period after the Registration Date that such Registrable Shares have
not been registered for resale under the Securities Act; provided, that such
liquidated damages shall not exceed 8% of the subscription amount in the
Offering; provided, however, that such liquidated damages shall not apply to any
Registrable Shares that may be sold pursuant to Rule 144 under the Securities
Act, or are subject to an SEC comment with respect to Rule 415 promulgated under
the Securities Act.
The above
summary of Registration Rights is qualified in its entirety by reference to the
Registration Rights Agreement attached hereto as Exhibit
10.2.
The
Placement Agent
On
January 27, 2010, Detian Yu Biotechnology (Beijing) Co. Ltd. entered into the
Original Placement Agreement with a placement agent (the “Original Placement
Agreement”). The Company intends to assume the rights and obligations
under the Original Placement Agreement. Under the Original Placement Agreement,
the Company is engaging the placement agent as the exclusive agent to sell the
Units in this Offering on a “commercially reasonable efforts basis.” The
placement agent will receive cash commissions equal to 7% of the gross proceeds
received by the Company in connection with an equity financing and a cash
corporate finance fee equally to 1% of the gross proceeds raised by the Company
in the Offering, payable at the time of each Closing; five (5) year warrants to
purchase that number of Series A Preferred Shares and Shares equal to 5% of the
aggregate number of Series A Preferred Shares and Shares underlying the Units
issued pursuant to this Offering; and a non-refundable cash retainer (or
restricted shares) of $25,000 payable upon the execution of the retainer
agreement. The Company also agreed to pay for all of the reasonable expenses the
Placement Agent incurs in connection with the
Offering.
FULLY-DILUTED
CAPITALIZATION
Pro
Forma Capitalization
As of the
consummation of the Offering and the conversion into Common Stock of all Series
A Preferred Stock, Class A Warrants and placement agent warrants, the following
table sets forth the pro-forma capitalization of the Company, by stockholder
group.
45
|
Stockholder
Group
|
No.
of
Shares
of
Common
Stock
|
Percentage
|
No.
of
Fully-Diluted
Shares
of
Common
Stock
|
Percentage
|
||||||||||||
|
City
Zone Shareholders
|
8,736,932
|
73.63
|
%
|
8,736,932
|
68.76
|
%
|
||||||||||
|
U.S.
Advisors
|
731,249
|
6.16
|
%
|
731,249
|
5.76
|
%
|
||||||||||
|
Public
Float
|
531,818
|
4.48
|
%
|
531,818
|
4.19
|
%
|
||||||||||
|
Investors
(fully converted)
|
1,866,174
|
15.73
|
%
|
1,866,174
|
14.69
|
%
|
||||||||||
|
Investor
Series A Warrants
|
-(1)
|
0.0
|
%
|
746,479
|
5.87
|
%
|
||||||||||
|
Placement
Agent Warrants
|
-(2)
|
0.0
|
%
|
93,309
|
0.73
|
%
|
||||||||||
|
Total
|
11,866,173
|
100.0
|
%
|
12,705,961
|
100.0
|
%
|
||||||||||
(1) There are
746,479 Series A Warrants issued and outstanding that are not deemed exercised
for the purpose of this table.
(2) There are
93,309 Placement Agent Warrants issued and outstanding that are not deemed
exercised for the purpose of this table.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The
Company’s common stock is thinly traded on the over-the-counter market under the
symbol ECBI. Prior to the Share Exchange, the Company had not generated any
revenue and accumulated losses of $17,760 for the period from inception through
November 30, 2009. There can be no assurance that a liquid market for our
securities will ever develop. Transfer of our common stock may also be
restricted under the securities or blue sky laws of various states and foreign
jurisdictions. Consequently, investors may not be able to liquidate their
investments and should be prepared to hold the common stock for an indefinite
period of time.
Transfer Agent and Registrar
West
Coast Stock Transfer is currently the transfer agent and registrar for our
Common Stock. Its address is 2010 Hancock Street, Suite A, San Diego, CA 92110.
Its phone number is (619) 664-4780.
LEGAL
PROCEEDINGS
Currently
there are no legal proceedings pending or threatened against us. However, from
time to time, we may become involved in various lawsuits and legal proceedings
which arise in the ordinary course of business. 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.
RECENT
SALES OF UNREGISTERED SECURITIES
Reference
is made to Item 3.02 of this Current Report on Form 8-K for a description
of recent sales of unregistered securities, which is hereby incorporated by
reference.
INDEMNIFICATION
OF OFFICERS AND DIRECTORS
Nevada
Revised Statute 78.037 permits a corporation to eliminate or limit the personal
liability of a director or officer to the corporation or its stockholders for
damages relating to breach of fiduciary duty as a director or officer, but such
a provision must not eliminate or limit the liability of a director or officer
for (a) acts or omissions which involve intentional misconduct, fraud or a
knowing violation of law or (b) the payment of distributions in violation of
Nevada Revised Statute 78.300.
Nevada
Revised Statutes 78.7502 provides as follows with respect to indemnification of
directors, officers, employees and agents:
|
(a)
|
We
may indemnify any person who was or is a party or is threatened to be made
a party to any action, except an action by us, by reason of the fact that
he is or was our director, officer, employee or agent, or is or was
serving as a director, officer, employee or agent of any other person at
our request, against expenses actually and reasonably incurred by him in
connection with the action, suit or proceeding if he: (i) is not liable
for breach of his fiduciary duties as a director or officer pursuant to
Nevada Revised Statutes 78.138; and (ii) acted in good faith and in a
manner which he reasonably believed to be in or not opposed to our best
interests and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was
unlawful.
|
46
|
(b)
|
We
may indemnify any person who was or is a party or is threatened to be made
a party to any action by us, by reason of the fact that he is or was our
director, officer, employee or agent, or is or was serving as a director,
officer, employee or agent of any other person at our request, against
expenses actually and reasonably incurred by him in connection with the
defense or settlement of the action or suit if he: (i) is not liable for
breach of his fiduciary duties pursuant to Nevada Revised Statutes 78.138;
and (ii) acted in good faith and in a manner which he reasonably believed
to be in or not opposed to our best interest. We may not
indemnify him for any claim, issue or matter as to which he has been
adjudged by a court of competent jurisdiction, after exhaustion of all
appeals therefrom, to be liable to us or for amounts paid in settlement to
us, unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, he is
fairly and reasonably entitled to indemnity for such expenses as the court
deems proper.
|
|
(c)
|
To
the extent that our director, officer, employee or agent has been
successful on the merits or otherwise in defense of any action, suit or
proceeding, or in defense of any claim, issue or matter therein, we are
required to indemnify him against expenses, including attorneys’ fees
actually and reasonably incurred by him in connection with the
defense.
|
Our
Articles of Incorporation and Bylaws provide for elimination of any liability of
our directors and officers and indemnity of our directors and officers to the
fullest extent permitted by Nevada law.
The
above-described provisions relating to the exclusion of liability and
indemnification of directors and officers are sufficiently broad to permit the
indemnification of such persons in certain circumstances against liabilities
arising under the Securities Act of 1933. Insofar as indemnification
for liabilities arising under the Securities Act of 1933 may be permitted to our
directors and officers and to persons controlling us pursuant to the foregoing
provisions, we have been informed that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable.
CHANGES
AND DISAGREEMENTS WITH ACCOUNTANTS
Please
see Item 4.01 of this Current Report on Form 8-K for a description of changes
and disagreements with accountants, which is hereby incorporated by
reference.
Item 3.02 Unregistered Sales of Equity
Securities
In
connection with the Exchange Agreement, on April 27, 2010, the Company issued an
aggregate of 8,736,932 shares of Common Stock to the City Zone
Shareholders. We received in exchange from the City Zone Shareholders
100% of the shares of City Zone, which exchange resulted in City Zone becoming
our wholly owned subsidiary. The issuance of such securities was exempt from
registration pursuant to Section 4(2) of, and Regulation D and/or Regulation S
promulgated under the Securities Act of 1933, as amended (the “Securities
Act”).
As
described in Item 1.01 above, on April 27, 2010, immediately after
the Share Exchange, the Company entered into a securities purchase
agreement (the “Purchase Agreement”) with certain accredited investors (the
“Investors”) for the issuance and sale in a private placement of units,
consisting of, 1,866,174 shares of the Company’s Series A Convertible Preferred
Stock, par value $0.001 per share (the “Investor Shares”) and Series A warrants
to purchase up to 746,479 shares of the Company’s Common Stock (the “Warrants”),
for aggregate gross proceeds of approximately USD $8,211,165.60 (“the Private
Placement”).
47
The
issuance of the Investor Shares, the Warrant Shares and the Warrants were exempt
from registration pursuant to Section 4(2) of, and Regulation D and/or
Regulation S promulgated under the Securities Act of 1933, as amended (the
“Securities Act”).
Item
4.01 Change in Registrant’s Certifying Accountant
On April
27, 2010, our board of directors (the “Board of Directors”) terminated George
Stewart, CPA (“Stewart”) as our independent registered public accounting firm,
and engaged a new independent registered public accounting firm, KCCW
Accountancy Corp., Certified Public Accountants, (“KCCW”), to serve as the
Company’s independent auditor. Pursuant to Item 304(a) of Regulation S-K under
the Securities Act of 1933, as amended, and under the Securities Exchange Act of
1934, as amended, the Company reports as follows:
|
(a)
|
(i)
|
Steward
was terminated as our independent registered public accounting firm
effective on April 27, 2010;
|
|
(ii)
|
for
the two most recent fiscal years ended May 31, 2009, Stewart’s report on
the financial statements did not contain any adverse opinions or
disclaimers of opinion, and were not qualified or modified as to
uncertainty, audit scope, or accounting principles, other than for a going
concern;
|
|
|
|
(iii)
|
the
termination of Stewart and engagement of KCCW were approved by our
Company’s Board of Directors;
|
|
(iv)
|
we
did not have any disagreements with Stewart relating to any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure for the audited financials for the fiscal
years ended May 31, 2009 and 2008, and subsequent interim periods ended
August 30, 2009, November 30, 2009 and February 28, 2010 and through the
date of dismissal, which disagreements, if not resolved to the
satisfaction of Stewart, would have caused it to make reference to the
subject matter of the disagreements in connection with its reports;
and
|
|
|
(v)
|
during
our fiscal years ended May 31, 2009 and 2008, and subsequent interim
periods ended August 30, 2009, November 30, 2009 and February 28, 2010 and
through the date of dismissal, the Company did not experience any
reportable events.
|
|
(b)
|
(i)
|
On
April 27, 2010, we engaged KCCW to serve as our independent
registered public accounting firm.
|
|
(ii)
|
prior
to engaging KCCW, we had not consulted KCCW regarding the
application of accounting principles to a specified transaction, completed
or proposed, the type of audit opinion that might be rendered on its
financial statements or a reportable event, nor did we consult with KCCW
regarding any disagreements with its prior auditor on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of the prior auditor, would have caused it to make a
reference to the subject matter of the disagreements in connection with
its reports; and
|
|
|
(iii)
|
we
did not have any disagreements with KCCW, and therefore did not
discuss any past disagreements with KCCW.
|
|
|
(c)
|
We
requested that Stewart furnish us with a letter addressed to the SEC
stating whether it agrees with the statements made by us regarding
Stewart. That letter is attached hereto as Exhibit
16.1.
|
48
Item 5.01 Changes in Control of
Registrant.
As
described in Item 2.01, in connection with the Exchange Agreement, on April 27,
2010, we issued 8,736,932 shares of our Common Stock to the City Zone
Shareholders, their affiliates or assigns in exchange for the transfer of 100%
of the outstanding shares of City Zone. Reference is made to the disclosures set
forth under Item 2.01 of this Current Report on Form 8-K, which disclosure is
incorporated herein by reference.
In
connection with the Closing of the Exchange, and as described in Item 5.02 of
this Current Report dated April 27, 2010, Christopher Kidney, our former
Director, President, Chief Executive Officer and Chief Financial Officer
resigned from his positions and cancelled the 3,000,000 shares that he
previously held.
Other
than the transactions and agreements disclosed in this Form 8-k, we know of no
arrangements which may result in a change of control at a subsequent
date.
Item 5.02 Departure of Directors or Certain
Officers; Election of Directors; Appointment of Certain Officers; Compensatory
Arrangements for Certain Officers.
On the
Closing Date, Christopher Kidney resigned from the Board and all of the officer
positions that he held at the Company, and Jianming Hao was appointed as
Chairman of the Board and Wenjun Tian was appointed as a member of the Board. In
addition, on the Closing Date, Jianming Hao was appointed to serve as the Chief
Executive Officer. Following the expiration of the ten (10) day time period
following the mailing of an Information Statement complying with rule 14F-1
under the Exchange Act, Mr. Kidney’s resignation as a director shall become
effective and Jianming Hao and Wenjun Tian shall serve as directors of the
Company.
Set forth
below is information regarding our directors, executive officers and director
nominees. Pursuant to the terms of the Share Exchange, ECBI’s officers and
directors shall resigned, with such director resignations to become effective on
the tenth day after the mailing of a Schedule 14F-1 Information Statement to our
stockholders (the “14F Effective Date”) regarding the change in our board of
directors pursuant to the Share Exchange. Prior to the Share Exchange, our board
of directors appointed Mr. Jianming Hao as the Chairman of our Board, with such
appointment to be effective on the 14F Effective Date. The officers and
directors to take effect after the Share Exchange were not affiliated with us
prior to the Share Exchange. The Board is comprised of only one class. All of
the directors will serve until the next annual meeting of shareholders and until
their successors are elected and qualified, or until their earlier death,
retirement, resignation or removal.
Provided
below is a brief description of our directors’ business experience and an
indication of directorships he/she has held in other companies, if any, subject
to the reporting requirements under the federal securities laws.
| Name | Age | Position |
|
Jianming
Hao
Wenjun
Tian
|
35
36
|
Chief
Executive Officer, Chairman of the Board of Directors
Executive
Director
|
Mr.
Jianming Hao, Chief Executive Officer and Chairman of the Board of
Directors
Mr. Hao
is the CEO and Chairman of the Company. Between December 2001 to May 2004, Mr.
Hao served as the Finance Manager of China Merchants Dichain (Asia) Ltd., a Hong
Kong listed company. Between May 2004 and November 2007, Mr. Hao served as a
director and Vice President of Shenzhen Litong Investments Ltd. Mr. Hao is well
experienced in corporate management.
Mr. Hao
received a Master’s degree in Finance from Nankai University. He is also a
certified public accountant in China.
Mr.
Wenjun Tian, Executive Director
Mr. Tian
is the Executive Director of the Company. Between
September 2003 and December 2007, Mr. Tian served as the Chairman of Shanxi
Dongsheng Auction Co., Ltd. Between January 2008 and November 2009, Mr.
Tian served as the Chairman of Dongsheng International Investment Inc.
He has been a director of Detian Yu since December 2009.
Mr. Tian
is the holder of an undergraduate degree and has over 10 years experience in
corporate management. Mr. Tian is particularly experienced in investment in
agricultural enterprises.
49
Involvement
in Certain Legal Proceedings
There
have been no events under any bankruptcy act, no criminal proceedings and no
judgments, injunctions, orders or decrees material to the evaluation of the
ability and integrity of any director, executive officer, promoter or control
person of our Company during the past five years.
Family
Relationships
There are
no family relationships between any of our directors or executive
officers.
Employment
Agreements
We have
not entered into employment agreements with any of our employees, officers and
directors.
Board
of Directors
All
directors hold office until the next annual meeting of shareholders and until
their successors have been duly elected and qualified. Officers are elected by
and serve at the discretion of the Board.
Our
directors are reimbursed for expenses incurred by them in connection with
attending Board meetings, but they do not receive any other compensation for
serving on the Board.
Director
Independence and Board Committees
We do not
have any independent directors and our board of directors is in the process of
searching for suitable candidates. Our board of directors does not have any
committees, as companies whose securities are traded on the OTC Bulletin Board
are not required to have board committees. However, at such time in the future
that we appoint independent directors on our board we expect to form the
appropriate board committees.
Item 5.03 Amendments to Articles of
Incorporation or Bylaws; Change in Fiscal Year.
On April
27, 2010, as a result of the consummation of the Share Exchange, we changed our
fiscal year end from May 31 to December 31 to conform to the fiscal year end of
City Zone.
On
April13, 2010, we amended our articles of incorporation to authorize the
issuance of 10,000,000 shares of blank check preferred stock, par value $0.001
per share. The Board of Directors was also given the authority to designate the
rights and preferences of the preferred stock without seeking shareholder
approval. The amendment to the Articles of Incorporation is annexed hereto as
Exhibit 3.1.
Item 5.06 Change In Shell Company
Status.
As
described in Item 2.01 above, we were a “shell company” (as such term is defined
in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) immediately
before the Closing of the Share Exchange. As a result of the Share Exchange,
City Zone became our wholly owned subsidiary and our main operating business.
Consequently, we believe that the Share Exchange has caused us to cease to be a
shell company. For more information about the Share Exchange, please see the
information set forth above under Item 2.01 of this Current Report on Form 8-K
which information is incorporated herein by
reference.
Item 8.01 Other Events.
On April
30, 2010, we issued a press release announcing the consummation of the
transactions contemplated by the Share Exchange Agreement. The press release is
annexed hereto as Exhibit 99.1.
50
Item 9.01 Financial Statements and
Exhibits.
|
(a)
|
FINANCIAL
STATEMENTS OF BUSINESS ACQUIRED.
|
|
|
Audited
consolidated financial statements of Keyuan International Group Limited as
of and for the years ended December 31, 2009 and 2008, and related notes
thereto.
|
|
(b)
|
PRO
FORMA FINANCIAL INFORMATION.
|
|
|
Unaudited
pro forma financial statements and related notes
thereto.
|
|
(c)
|
SHELL
COMPANY TRANSACTIONS
None
|
Reference
is made to Items 9.01(a) and 9.01(b) and the exhibits referred to therein,
which are incorporated herein by reference.
|
(d)
|
EXHIBITS
|
EXHIBIT
INDEX
|
Exhibit
Number
|
Description
|
|
|
2.1
|
Share
Exchange Agreement dated April 27, 2010
|
|
|
3.1
|
Amendment
to Article of Incorporation to Increase Authorized
Shares
|
|
|
4.1
|
Certificate
of Designation of Rights and Preferences of Series A Preferred
Stock
|
|
|
10.1
|
Securities
Purchase Agreement dated April 27, 2010
|
|
|
10.2
|
Registration
Rights Agreement dated April 27, 2010
|
|
|
10.3
|
Securities
Escrow Agreement dated April 27, 2010
|
|
|
10.4
|
Lock-up
Agreement dated April 27, 2010
|
|
|
10.5
|
Form
of Series A Warrant
|
|
16.1
|
Letter
from George Stewart, CPA
|
|
|
99.1
|
|
Audited
consolidated balance sheets of City Zone Holdings Limited and its
subsidiaries as of December 31, 2009 and 2008 and the related consolidated
statements of income, stockholders’ equity and cash flows for each of the
two years ended December 31, 2009
|
|
99.2
|
Unaudited
pro forma financial statements and related notes
thereto
|
|
51
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this Report on Form 8-K to be signed on its behalf by the
undersigned hereunto duly authorized.
| ECO BUILDING INTERNATIONAL, INC. | |||
|
Date:
May 3, 2010
|
By:
|
/s/ Jianming Hao | |
| Jianming Hao | |||
| Chief Executive Officer | |||
52