Attached files
file | filename |
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EX-5.1 - Oriental Dragon Corp | v200392_ex5-1.htm |
EX-23.5 - Oriental Dragon Corp | v200392_ex23-5.htm |
EX-23.7 - Oriental Dragon Corp | v200392_ex23-7.htm |
EX-23.4 - Oriental Dragon Corp | v200392_ex23-4.htm |
EX-23.6 - Oriental Dragon Corp | v200392_ex23-6.htm |
EX-23.3 - Oriental Dragon Corp | v200392_ex23-3.htm |
EX-99.2 - Oriental Dragon Corp | v200392_ex99-2.htm |
EX-23.1 - Oriental Dragon Corp | v200392_ex23-1.htm |
As
filed with the Securities and Exchange Commission on November 2,
2010
Registration
No. 333-163278
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 6 TO FORM S-1/A
REGISTRATION
STATEMENT UNDER
THE
SECURITIES ACT OF 1933
ORIENTAL
DRAGON CORPORATION
(Exact
name of registrant as specified in its charter)
Cayman Islands
|
2033
|
N/A
|
(State or other jurisdiction of
incorporation)
|
(Primary Standard Industrial
Classification Code Number)
|
(I.R.S. Employer Identification No.)
|
No. 48 South Qingshui
Road
Laiyang
City,
Shandong
265200
People’s Republic of
China
Tel:
+86 (535) 729-6152
(Address,
Including Zip Code, and Telephone Number,
Including
Area Code, of Registrant’s Principal Executive Offices)
Vcorp
Services, LLC
1811
Silverside Road
Wilmington,
DE 19810
Tel:
(888) 528 2677
(Name, address,
including zip code, and telephone number,
including
area code, of agent for service)
Copies
to:
Richard
I. Anslow, Esq.
Kristina
L. Trauger, Esq.
Yarona
Y. Liang, Esq.
Anslow
+ Jaclin, LLP
195
Route 9 South, Suite 204
Manalapan,
New Jersey 07726
Tel:
(732) 409-1212
Fax:
(732) 577-1188
|
Mitchell
S. Nussbaum, Esq.
Loeb
& Loeb, LLP
345
Park Avenue
New
York, New York 10154
Tel:
(212) 407-4159
Fax:
(212) 504-3013
|
Approximate date of commencement of
proposed sale to public: As soon as practicable after this Registration
Statement becomes effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box: x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
|
¨
|
Accelerated
filer
|
¨
|
Non-accelerated
filer
|
¨
|
Smaller
reporting company
|
x
|
(Do
not check if a smaller reporting company)
|
CALCULATION
OF REGISTRATION FEE
Title of Class of Securities to
be Registered
|
Amount to be
Registered
(1)
|
Proposed
Maximum
Offering Price
Per Unit
|
Proposed
Maximum
Aggregate
Offering Price
|
Amount of
Registration
Fee
|
||||||||||||
Ordinary
shares, par value $0.001 per share
|
2,875,000
|
$
|
8.00
|
(2)
|
23,000,000
|
$
|
1,639.90
|
|||||||||
Ordinary
shares, par value $0.001 per share
|
5,670,339
|
(3)
|
$
|
8.00
|
(4)
|
$
|
45,362,712
|
$
|
3,234.36
|
|||||||
Ordinary
shares, par value $0.001 per share, issuable upon the exercise of warrants
at a fixed price of $6.00 per share
|
2,920,232
|
(5)
|
$
|
8.00
|
(4)
|
$
|
23,361,856
|
$
|
1,665.70
|
|||||||
Total
Registration Fee
|
$
|
6,539.96
|
|
(1)
|
In accordance with Rule 416,
promulgated under the Securities Act of 1933, as amended (the “Securities
Act”), the Registrant is also registering hereunder an indeterminate
number of shares that may be issued and resold resulting from stock
splits, stock dividends or similar
transactions.
|
|
(2)
|
The registration fee for
securities to be offered by the Registrant is based on an estimate of the
Proposed Maximum Aggregate Offering Price of the securities, and such
estimate is solely for the purpose of calculating the registration fee
pursuant to Rule 457(o). Includes shares which the underwriters have the
option to purchase to cover over-allotments, if
any.
|
|
(3)
|
This amended Registration
Statement also covers the resale under a separate resale prospectus (the
“Resale Prospectus”) by selling shareholders of the Registrant of up to
5,670,339 ordinary shares previously issued to the selling shareholders as
named in the Resale
Prospectus.
|
|
(4)
|
The offering price has been
estimated solely for the purpose of computing the amount of the
registration fee in accordance with Rule 457(o), promulgated under the
Securities Act.
|
|
(5)
|
Represents shares of the
Registrant’s ordinary shares being registered for resale that have been or
may be acquired upon the exercise of warrants that have been previously
issued to selling shareholders named in the Resale
Prospectus.
|
The
Registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended or until the registration statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
EXPLANATORY
NOTE
This
Registration Statement contains two prospectuses, as set forth
below.
·
|
Public
Offering Prospectus. A prospectus to be
used for the public offering by the Registrant of up to 2,500,000 ordinary
shares of the Registrant (in addition to 375,000 shares that may be sold
upon exercise of the underwriter’s over-allotment option) (the “Public
Offering Prospectus”) through the underwriter named on the cover page of
the Public Offering
Prospectus.
|
·
|
Resale
Prospectus. A prospectus to be
used for the resale by selling shareholders of up to 8,590,571 ordinary
shares of the Registrant (including 2,920,232 ordinary shares that have
been or may be acquired upon the exercise of warrants that have been
previously issued to selling shareholders named in the Resale Prospectus)
(the “Resale Prospectus”).
|
The
Resale Prospectus is substantively identical to the Public Offering Prospectus,
except for the following principal points:
·
|
they contain different outside
and inside front covers;
|
·
|
they contain different Offering
sections in the Prospectus Summary section beginning on page
1;
|
·
|
they contain different Use of
Proceeds sections on page
64;
|
·
|
the Capitalization and Dilution
sections are deleted from the Resale Prospectus on page 20 and page
21, respectively;
|
·
|
a Selling Shareholder section is
included in the Resale Prospectus beginning on page
65;
|
·
|
references in the Public Offering
Prospectus to the Resale Prospectus will be deleted from the Resale
Prospectus;
|
·
|
the Underwriting section from the
Public Offering Prospectus on page 53 is deleted from the Resale
Prospectus and a Plan of Distribution is inserted in its
place;
|
·
|
the Legal Matters section in the
Resale Prospectus on page 70 deletes the reference to counsel for the
underwriters; and
|
·
|
the outside back cover of the
Public Offering Prospectus is deleted from the Resale
Prospectus.
|
The
Registrant has included in this Registration Statement, after the financial
statements, a set of alternate pages to reflect the foregoing differences of the
Resale Prospectus as compared to the Public Offering
Prospectus.
The
information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission becomes effective. This prospectus is
not an offer to sell these securities and we are not soliciting offers to
buy these securities in any state where the offer or sale is
not permitted.
|
PRELIMINARY PROSPECTUS
|
Subject to Completion
|
November 2,
2010
|
ORIENTAL
DRAGON CORPORATION
2,500,000
ORDINARY SHARES
This is
the initial public offering of our ordinary shares. Our ordinary
shares are not currently listed or quoted for trading on any national securities
exchange or national quotation system. We have applied to list our ordinary
shares on the NASDAQ Global Market under the symbol “ODH.” There is no assurance
that such application will be approved.
We are
offering all of the 2,500,000 ordinary shares offered by this
prospectus. We expect that the public offering price of our ordinary
shares will be approximately $8.00 per share.
Investing
in our ordinary shares involves a high degree of risk. Before buying
any shares, you should carefully read the discussion of material risks of
investing in our ordinary shares in “Risk Factors” beginning on page 8 of
this prospectus.
Neither
the U.S. Securities and Exchange Commission nor any state securities commission
has approved or disapproved of anyone’s investment in these securities or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
Per Share
|
Total
|
|||||
Public
offering price
|
$ | [___ ] | $ | [___ ] | ||
Underwriting
discounts and commissions (1)
|
$ | [___ ] | $ | [___ ] | ||
Proceeds,
before expenses, to us
|
$ | [___ ] | $ | [___ ] |
(1) The
underwriter will receive compensation in addition to the discounts and
commissions as set forth under “Underwriting.”
The
underwriter has a 45-day option to purchase up to 375,000 additional ordinary
shares from us solely to cover over-allotments, if any. If the underwriter
exercises this option in full, the total underwriting discounts and
commissions will be $[______], and the total proceeds, before expenses to us,
will be $[______].
The
underwriter is offering the ordinary shares as set forth under “Underwriting.”
Delivery of the shares will be made on or about [__________], 2010.
Roth
Capital Partners
The Date
of this Prospectus is: ____________________, 2010
2
TABLE
OF CONTENTS
PROSPECTUS
SUMMARY
|
4
|
RISK
FACTORS
|
12
|
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
|
24
|
USE
OF PROCEEDS
|
25
|
DIVIDEND
POLICY
|
25
|
CAPITALIZATION
|
26
|
MARKET
FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
|
26
|
DILUTION
|
27
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
29
|
CORPORATE
STRUCTURE AND HISTORY
|
44
|
OUR
BUSINESS
|
48
|
MANAGEMENT
|
56
|
EXECUTIVE
COMPENSATION
|
58
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
59
|
CHANGE
IN ACCOUNTANTS
|
61
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
62
|
DESCRIPTION
OF SECURITIES
|
63
|
SHARES
ELIGIBLE FOR FUTURE SALE
|
64
|
UNDERWRITING
|
65
|
LEGAL
MATTERS
|
70
|
EXPERTS
|
70
|
ADDITIONAL
INFORMATION
|
70
|
INDEX
TO FINANCIAL STATEMENTS
|
F-1
|
PART
II INFORMATION NOT REQUIRED IN THE PROSPECTUS
|
84
|
SIGNATURES
|
89
|
Please
read this prospectus carefully. It describes our business, our financial
condition and results of operations. We have prepared this prospectus so that
you will have the information necessary to make an informed investment
decision.
You
should rely only on information contained in this prospectus. We have
not, and the underwriter has not, authorized any other person to provide you
with different information. This prospectus is not an offer to sell,
nor is it seeking an offer to buy, these securities in any state where the offer
or sale is not permitted. The information in this prospectus is
complete and accurate as of the date on the front cover, but the information may
have changed since that date.
3
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus. This
summary does not contain all of the information you should consider before
investing in our securities. You should read the entire prospectus, including
“Risk Factors” and the consolidated financial statements and the related notes
before making an investment decision.
“We,”
“us,” “our company,” “our,” “Oriental Dragon” and the “Company” refer to the
combined business of Oriental Dragon Corporation and its consolidated
subsidiaries and affiliates, but do not include the shareholders of Oriental
Dragon Corporation.
Business
Overview
We are
the producer and supplier of Laiyang Pear juice concentrate and the licensee of
the “Laiyang Pear” trademark. The Laiyang Pear trademark is owned by an entity
affiliated with the Laiyang city government in Shandong province, People’s
Republic of China, which we refer to as China or the PRC. As compared to other
pear juice concentrate products made in China, our product holds a special
distinction not shared by the others—the reputation of the Laiyang
Pear. This distinction has its roots in a long, historical public
perception in China that pears produced in the Laiyang region are a premium
product due to their nutritional and medical benefits, including under the
tenets of Traditional Chinese Medicine (TCM).
Our
products are mainly used as the functional ingredient in many pharmaceutical and
health supplement products, representing a combined 89% of sales for the year
ended December 31, 2009. The State Science and Technology Commission
of China has recently certified that Laiyang Pear contains 46 kinds of organic
acids, nicotinic acid, heteropolysaccharides, protocatechuic acid, polyphenols,
carotene, vitamin B1, vitamin B2, vitamin C and varied minerals such as calcium,
phosphorus and iron. Some of the popular applications of our pear concentrate by
pharmaceutical and health supplement companies include Laiyang Pear linctus,
Laiyang Pear cough lozenge, Laiyang Pear cough syrup, Laiyang Pear soup and
Laiyang Pear paste. Our products are sold primarily in Shandong,
Guangdong, Liaoning and Jiangsu provinces via seven key distributors with the
requisite transportation and cold-storage logistics ability.
We
generate revenues primarily from the sale of Laiyang Pear juice
concentrate. We also generate revenues from the sale of apple juice concentrate
and strawberry juice concentrate. Our revenues for the fiscal year ended
December 31, 2009 were $82.6 million representing an 11% growth from the fiscal
year ended December 31, 2008 with revenues of $74.2 million. Our fiscal year
2009 net income was $15.1 million, representing an increase of 30% compared with
our fiscal year 2008 net income of $11.6 million. Our revenue for the six months
ended June 30, 2010 were $49.6 million, representing an increase of 7.0% from
the six months ended June 30, 2009 with revenues of $46.4 million. Our net
income for the six months ended June 30, 2010 was $10.6 million, representing an
increase of 14.2% compared with our net income of $9.2 for the six months ended
June 30, 2009.
Recent
Development
On May 6,
2010, our Board of Directors (1) approved the change of Emerald Acquisition
Corporation’s name to Oriental Dragon Corporation to better reflect our current
business, and (2) approved the filing of an amendment to the Articles of
Association of the Company to reduce the required quorum to one-third of the
shares entitled to vote for future shareholder meetings. A special shareholder
meeting was held on June 7, 2010 and both actions were approved. The name change
was filed with the Registrar of Companies of the Cayman Islands and became
effective on August 27, 2010.
4
In
September 2010, we substantially completed two new production lines; one for
juice concentrate and puree and one for bio animal feed. We started the
production of test and sample batches of bio animal feed in September 2010 and
expect to distribute such products to the market in November
2010.
Our
Industry
With
approximately one-quarter of the world’s population, the PRC represents a key
growth driver for the global fruit market. However, the per capita fruit juice
consumption in the PRC is currently below that of most major developed
countries, indicating that there is a great potential market for the purchase
and consumption of fruit-based products, like those made with our concentrate,
in the PRC. In the PRC, the fast-growing economy and increasing per capita
income enable more consumers to buy more expensive healthy foods and drinks, as
evidenced by the high demand for our products. According to a report on the
PRC’s fruit processing industry issued by Beijing Business & Intelligence
Consulting Co. Ltd. (“BBIC,” and such report is hereinafter referred to as the
“BBIC Report”), an independent market research firm, China’s fruit processing
industry has grown significantly in the past several years. The total output of
fruit processed products in China grew from $16.8 billion in 2005 to $35.8
billion in 2009, representing a CAGR of 20.8%. The sales income of fruit
processed products in China grew from $16.0 billion in 2005 to $32.9 billion in
2009, representing a CAGR of 19.7%. “Total output” as used herein is the
monetary value equals to the total value of the goods and services produced by
an industry in a period of time. “Sales income” as used herein is the gross
income in sales in the fruit deep processing industry in China. It includes
income that businesses receive from sales to the customers.
Due to
increased consumer health consciousness, we believe health- oriented products
like our Laiyang Pear juice concentrate will continue to experience strong
growth in the PRC in the pharmaceutical and health- supplement
industry. In reports issued in early 2010 by China Economy
Research Associates (“CERA report”) and the Industry Analysis Report of China
Laiyang Pear Related Products (“Industry Analysis Report”) noted current
pharmaceutical and health supplement manufacturing alternatives to Laiyang Pear
juice concentrate include herbal mixes and some western medicines, such as
Codeine, which are addictive and have adverse side effects to
health. The herbal mixes deployed as alternatives to Laiyang Pear
juice concentrate usually are comprised of lotus leaves, semen sterculiae
lychnophorae, honeysuckle and lily, which cost 2-3 times as much as Laiyang Pear
juice concentrate and can be purchased from open market or herbal
wholesalers. The Industry Analysis Report was published by Beijing
Zongheng Economy Research Institute, a private organization specializing in
providing market and industrial research services to government, international
organizations, colleges and universities, scientific academies and institutes
and mid-to-large sized enterprises.
Our
Competitive Strengths
We
believe that our success to date and potential for future growth can be
attributed to a combination of our strengths, including the
following:
·
|
Natural health
benefits of Laiyang Pears. Laiyang Pears enjoy a reputation
in China rooted in long history for their deemed nutritional benefits,
including under the tenets of TCM, and are used in many health-supplement
products. Laiyang Pears have been described in publications going back as
long as the Compendium of Materia Medica, the first comprehensive
pharmacopoeia of China, written 400 years ago. TCM is still widely
respected and followed in China, as well as in other parts of the
world. Laiyang Pear has a high content of composite
heteropolysaccharides, protocatechuic acid and polyphenols. Laiyang Pear
juice concentrate contains 46 kinds of organic acids, vitamin B1, vitamin
B2, vitamin C, nicotinic acid, heteropolysaccharides, protocatechuic acid,
polyphenols, carotene, and varied minerals such as calcium, phosphorus and
iron. Laiyang Pear’s value has been recognized and applied in
TCM for hundreds of years.
|
·
|
Sole Laiyang
Pear juice concentrate producer in PRC. We are currently the only
producer of Laiyang Pear juice concentrate in the PRC, and we enjoy a
strong geographic advantage due to our proximity to the Laiyang Pear
orchards. The use of premium quality raw materials provides products made
with our concentrate with the nutritional benefits of the Laiyang Pear.
“Laiyang Pear” is a trademark that has been registered by an entity
affiliated with the Laiyang city government, and we have been granted a
license to use this trademark through 2038. The “Laiyang Pear” trademark
was registered with the Trademark Office of the State Administration
of Industry and Commerce of the PRC on October 28, 1998
(Registration No. #1219975. Registrant: Laiyang Fruit Cultivation
Technology and Instructing Station) and was approved as
Famous Geographical Mark Product on September 23, 2009. In
January 2008, the Laiyang government issued a government letter, which
indicated that we can enjoy the status as the sole producer of Laiyang
Pear juice concentrate for a period of 30 years. Pursuant to this
government letter, during this period no other producer will be permitted
to enter into the Laiyang Pear juice concentrate business. The risks
associated with the Laiyang Pear trademark and our status as the sole
producer of Laiyang Pear juice concentrate are disclosed on page 8 under
the risk factor “[I]f our land use rights or license of intellectual
property is revoked, we would have no operational capabilities or ability
to conduct our business.”
|
5
|
·
|
Unique and
established raw-material sourcing network. We are in a location in the
temperate zone which has had the ideal climate condition for Laiyang Pear
farming during the past 1600 years. Laiyang Pears can only be grown along
the sides of Five-dragon River in Laiyang due to the unique soil and water
quality. Laiyang is also an ideal location for transporting to other parts
of China, as well as for exporting overseas. It has traditionally been a
major fruit production area and the key fruit farming and processing base
for Chinese as well as international companies. We are strategically
located nearby the Laiyang Pear plantation area. We have contractual
interests in a pear plantation of 5,772 acres with an additional 3,295
acres to be developed each year pursuant to cooperative agreements with
contract farmers. We expect that our available acreage for
planatation will increase to 22,000 acres within the next three to five
years. In return for managing the plantations and deploying our
technology pursuant to the cooperative agreements, we obtain the exclusive
rights to purchase the products, thus allowing greater control over
quality and price stability. We have traditionally secured approximately
one-third of our supply needs through cooperative agreements with contract
farmers and two-thirds through purchases in the open market. In
addition, we have six rural land contracts from the local villagers’
collective economic organizations in the Laiyang area and have started
growing our own orchards with plans to expand in the future to develop
green-certified products. These rural land contracts all have a thirty
year term and were executed in either 2007 or 2008 for a price range from
1121 RMB to 1206 RMB per mu (equal to approximately $985 to $1060 per
acre) per year. These supply chain arrangements provide us with advantages
in terms of product quality, and stability and reliability of delivery.
See “Our Business” for the details of the exclusive license and land
leases from the Laiyang city
government.
|
|
·
|
Stringent
quality control and state-of-the-art facilities. We emphasize quality and safety
and have quality control and food safety management systems for all stages
of our business, including sourcing of raw materials, production,
packaging and storage of our products. We apply and adhere to internal
quality standards that are stricter than the PRC national standards. Our
processing facilities are ISO9001 certified and have HACCP (Hazard
Analysis & Critical Control Point) series qualifications. Our
manufacturing equipment is imported from the U.S., Italy, Germany,
Switzerland, and the U.K. and is among the most advanced in the world. We
currently have three production lines for Laiyang Pear juice concentrate
and puree with a combined production capacity of 48,000 MT and one
production line for bio feed with a production capacity of 52,000
MT. We utilize an ultra-low temperature concentration technique
to maintain the flavor and nutrients without any loss. We have
developed the emzymolysis method accompanying with 3-second instantaneous
and secondary sterilization procedure of the Laiyang Pear to innovatively
resolve browning problem and secondary sedimentation problem during the
processing or storage procedures as well as to realize the
minerals/vitamins of the Laiyang Pear well-preserved in the concentrate
form. All above processing and storage procedures/practices are
performed under strict and precise technical controls, and the related
technologies are proprietarily owned by
Longkang.
|
6
Our
Growth Strategy
We are
committed to enhancing profitability and cash flows through the following
strategies:
|
·
|
Increase production capacity to
meet market demands. Our existing production lines have been
running at close to full capacity while the market demand for our existing
products has increased. We have an abundant supply of source fruits
to support the expansion of our business. We substantially completed the
new facility and two related production lines in September 2010 and began
using both of these new production lines for the processing of juice
concentrate and puree products and the new production line for the
processing of bio animal feed in September 2010 to produce test and
sample batches of product. In addition to these new productions
lines, we intend to raise additional funds in the near future for two
additional productions lines: one for the processing of juice concentrate
and puree products and one for the processing of bio animal feed
(leftover material from production of concentrate that may be re-processed
into low-cost, nutritious animal
food).
|
|
·
|
Further
develop operated orchards to secure raw material supply. We believe that a secure
supply of principal raw materials is crucial to our future success. Hence,
we intend to further strengthen our existing cooperative relationship with
existing local farmers and contract growers. In addition, we have land
leases from the Laiyang city government and have started growing our own
orchards, to maintain the quality of the Laiyang Pear and to reduce raw
material costs.
|
|
·
|
Further expand
our distribution network to increase the prevalence of our products
nationwide. Our current sales depend heavily
on our regional distributors and their network. We are undertaking direct
sales for customers with annual assumption of 500 metric tons or above of
our products. To support our rapid sales growth, we plan to
expand our distribution network by adding new distributors in the next few
years. In addition, we also plan to expand our customer base by developing
new relationships with end users in markets we have not yet
penetrated.
|
·
|
Enhance the integrated
utilization of production resources. In September 2010, we
substantially completed two new production lines; one for juice
concentrate and puree and one for bio animal feed. We have started test
and sample productions of bio animal feed in September 2010 and expect to
distribute such products to the market in November 2010. Bio
animal feed utilizes proprietary cutting-edge fermentation technology and
the waste residues from Laiyang Pear juice concentrate production to
produce low-cost, nutritious animal food, which not only resolves issues
of pollution from waste of the production process, but also increases our
revenues.
|
|
·
|
Enhance market awareness and
establish brand equity. We believe that as we continue
our expansion efforts we will be able to increase brand awareness among
consumers and among the pharmaceutical and medical communities. We plan to
work with pharmaceutical and health supplement customers to present the
“Laiyang Pear” trademark on their products. We will also consider
developing and promoting our own brand name through focused R&D
programs, cooperation with health-supplement and pharmaceutical
manufacturers.
|
Risk
Factors
Our
ability to successfully operate our business and achieve our goals and
strategies is subject to numerous risks as discussed more fully in the section
titled “Risk Factors,” beginning on page 8, including for example:
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·
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The Chinese Government exerts
substantial influence over the manner in which we must conduct our
business;
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·
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If
our land use rights or license of intellectual property is revoked, we
would have no operational capabilities or ability to conduct our
business;
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·
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We depend on a concentration of
customers, the loss of one or more of which could materially adversely
affect our operations and
revenues;
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·
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The contractual agreements
through which we have established control of Longkang may not be as
effective in providing operational control as direct ownership of
Longkang;
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·
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Seasonal fluctuations in our
sales, which will affect our quarterly
results;
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·
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Our business may be adversely
affected by weather and environmental factors beyond our control, such as
adverse weather conditions during the squeezing
season;
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·
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We depend on a concentration of
customers, the loss of one or more or which could materially adversely
affect our operations and
revenues;
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·
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We could be adversely affected by
diminishing confidence in the safety and quality of certain food products
or ingredients, even if our practices and procedures are not
implicated;
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·
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The loss of any key employee,
including members of our senior management team, and our inability to
attract highly skilled personnel with sufficient experience in our
industry could harm our
business;
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·
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Our current management has no
experience managing and operating a public company and relies in many
instances on the professional experience and advice of third parties
including its consultants, attorneys and
accountants;
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·
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Our principal shareholder is able
to control substantially all matters requiring a vote of our shareholders
and his interests may not be aligned with the interests of our other
shareholders;
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·
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The recent nature and
implementation methods of many PRC laws applicable to us create an
uncertain environment for business operations and they could have a
negative effect on us;
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·
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Currency conversion and exchange
rate volatility could adversely affect our financial
condition;
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·
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PRC SAFE regulations regarding
offshore financing activities by PRC residents have undertaken continuous
changes which may increase the administrative burden we face and create
regulatory uncertainties that could adversely affect our
business;
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·
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A more widespread outbreak of the
H1N1 virus, avian influenza or a renewed outbreak of SARS or any other
widespread public health problem in the PRC, where all of our operations
are conducted, could have an adverse effect on our
operations;
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7
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·
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Although Longkang’s shareholders
have granted MeKeFuBang the exclusive right and option to acquire all of
their equity interests in Longkang through the VIE Option Agreement, the
exercise of such option may require approval of the PRC Ministry of
Commerce under relevant PRC
laws;
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·
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Due to various restrictions under
the PRC laws on the distribution of dividends by our PRC operating
companies, we may not be able to pay dividends to our shareholders;
and
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|
·
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In order to raise sufficient
funds to continue operations, we may have to issue additional securities
at prices which may result in substantial dilution to our
shareholders.
|
Any of
the above risks could materially and adversely affect our business, financial
position and results of operations. An investment in our securities involves
risks. You should read and consider the information set forth in “Risk Factors”
and all other information set forth in this prospectus before investing in our
securities.
Corporate
History and Organizational Structure
We were
formed under the laws of the Cayman Islands on March 10, 2006. On October
22, 2009, we acquired Merit Times International Limited (“Merit Times”), a
British Virgin Islands, or BVI, corporation, in a reverse acquisition
transaction. Pursuant to certain share exchange agreement in this reverse
acquisition transaction, we issued an aggregate of 21,333,332 ordinary shares to
the shareholders of Merit Times, their designees or assigns in exchange for all
of the issued and outstanding capital stock of Merit Times. On October 22,
2009, the share exchange closed and Merit Times became our wholly-owned
subsidiary.
Presently
all of our business operations are carried out by Shandong Longkang Juice Co.,
Ltd., a limited liability company formed under the laws of China (“Longkang”).
We do not own any equity interests in Longkang, but control and receive the
economic benefits of its business operations through contractual arrangements.
The contractual arrangements are between Longkang and its owners, on the one
hand, and Shandong MeKeFuBang Food Limited (the “WFOE” or “MeKeFuBang”), Merit
Times’ wholly-owned subsidiary in the PRC, on the other hand. The contractual
arrangements are comprised of a series of agreements, including: (1) a
Consulting Services Agreement, through which the MeKeFuBang has the right to
advise, consult, manage and operate Longkang, and collect and own all of the net
profits of Longkang; (2) an Operating Agreement, through which MeKeFuBang has
the right to recommend director candidates and appoint the senior executives of
Longkang, approve any transactions that may materially affect the assets,
liabilities, rights or operations of Longkang, and guarantee the contractual
performance by Longkang of any agreements with third parties, in exchange for a
pledge by Longkang of its accounts receivable and assets; (3) a Proxy Agreement,
under which the five owners of Longkang have vested their collective voting
control over the Operating Entity to MeKeFuBang and will only transfer their
respective equity interests in Longkang to MeKeFuBang or its designee(s); (4) a
VIE Option Agreement, under which the owners of Longkang have granted MeKeFuBang
the irrevocable right and option to acquire all of their equity interests in
Longkang; and (5) an Equity Pledge Agreement, under which the owners of Longkang
have pledged all of their rights, titles and interests in Longkang to MeKeFuBang
to guarantee Longkang’s performance of its obligations under the Consulting
Services Agreement, such pledge was registered with the Laiyang Administration
of Industry and Commerce on June 17, 2009 and has been effective under the PRC
law. Through these contractual arrangements, we have the ability to
substantially influence the daily operations and financial affairs of Longkang,
since we are able to appoint its senior executives and approve all matters
requiring shareholder approval. As a result of these contractual arrangements,
which enable us to control Longkang and to receive, through our subsidiaries,
all of its profits, we are considered the primary beneficiary of Longkang, which
is deemed our variable interest entity (“VIE”). Accordingly, we are able to
consolidate Longkang’s results, assets and liabilities into our financial
statements.
As
described above, we entered into the contractual agreements with Longkang,
rather than acquiring ownership of Longkang or its assets. This is because
we have not yet raised sufficient funds to fully acquire direct ownership of
Longkang as required under the PRC law. We have decided to exercise our
right and option to acquire all of the equity interests in Longkang pursuant to
the VIE Option Agreement within one year from the consummation of this
public offering. The risks associated with the exercise of such VIE Option
Agreement are disclosed on page 15. However, since Mr. Zhide
Jiang is a PRC natural person and Longkang is his affiliated PRC domestic
company, an acquisition of equity interests in Longkang by us may be deemed as
direct or indirect acquisition of a PRC domestic company by an offshore company
controlled by a PRC natural person. Therefore the approval of the PRC
Ministry of Commerce (“MOFCOM”) is required during the period when Mr. Zhide
Jiang has substantial interest in our company. We intend to seek such approval
from the MOFCOM within one year from this IPO. Existing shareholders
of Longkang have understood our position and passed relevant shareholders’
meeting to approve such plan.
8
Mr. Zhide
Jiang is currently our President, Chief Executive Officer and Chairman of our
Board of Directors. Mr. Jiang is also the Executive Director of Merit Times and
the Executive Director of MeKeFuBang. Mr. Jiang is the 60% stockholder and the
Executive Director of Longkang. In addition, Mr. Jiang is the Executive Director
of Proud Glory Limited, which is our majority shareholder and therefore
exercises voting and dispositive control over the shares owned by Proud Glory.
Pursuant to an incentive option agreement (the “Proud Glory Option Agreement”)
between Mr. Jiang and Mr. Chee Fung Tang, the record owner of Proud Glory
Limited, Mr. Jiang has the right and opportunity to acquire up to 100% equity
interest of Proud Glory Limited subject to certain contingencies as set forth
therein within three years starting from October 22, 2009. If Mr.
Jiang exercises all his rights to acquire 100% equity interest of Proud Glory
Limited from Mr. Tang, Mr. Jiang will indirectly hold 11,306,666 shares or
41.13% ownership interest of the Company through Proud Glory Limited, assuming
the total outstanding shares of our company remains unchanged. Therefore,
Mr. Jiang has a significant minority interest in us and has substantial
influence in determining the outcome of any corporate transaction or other
matters submitted to our shareholders for approval, including mergers,
consolidations and the sale of all or substantially all of our assets, election
of directors, and other significant corporate actions.
On August
8, 2006, the MOFCOM, joined by the China Securities Regulatory Commission
(“CSRC”), the State Administration of Foreign Exchange (“SAFE”) as well as other
government agencies, released a Provisions for Foreign Investors to Merge with
or Acquire Domestic Enterprises (the “M&A Regulation”), which took effect
September 8, 2006. These new rules significantly revised China’s regulatory
framework governing onshore-to-offshore restructurings and foreign acquisitions
of domestic enterprises. These new rules signify greater PRC government
attention to cross-border merger, acquisition and other investment activities,
by confirming MOFCOM as a key regulator for issues related to mergers and
acquisitions in China and requiring MOFCOM approval of a broad range of merger,
acquisition and investment transactions. According to the new M&A
Regulation, a related-party acquisition in which an offshore company owned or
controlled by a PRC resident acquires a domestic company controlled by the same
PRC resident shall be subject to the approval of MOFCOM.
Among
other things, the M&A Regulation also included new provisions to require
that the overseas listing of an offshore company which is directly or indirectly
controlled by a PRC resident for the purpose of overseas listing of such PRC
resident’s interests in a domestic company, known as a “special purpose
company”, must obtain the approval of CSRC prior to the listing.
The
option granted to Mr. Jiang under the Proud Glory Option Agreement works to cut
off the link of related parties acquisitions and prevent the application of the
new M&A Regulation to our situation, since Proud Glory Limited is 100% owned
by a non-PRC natural person while Mr. Jiang, a PRC resident, does not own
any equity in the offshore company. Further, our current VIE
structure avoids the acquisition transaction which is directly the target under
scrutiny of the M&A Regulation, including the requirement of CSRC
approval. Thus, we believe that, in its current practice, the M&A
Regulation does not apply to our situation.
However,
the application of this M&A Regulation remains uncertain since neither
MOFCOM nor CSRC has approved any Chinese company’s foreign listing. There is no
consensus currently existing among the leading PRC law firms regarding the scope
and applicability of the MOFCOM or CSRC approval requirements. If the MOFCOM,
CSRC or other PRC regulatory body subsequently determines that the new M&A
Regulation applies to our situation and CSRC’s approval was required for this
offering, we may face sanctions by the MOFCOM, CSRC or other PRC regulatory
agencies. In such event, these regulatory agencies may impose fines and
penalties on our operations in the PRC, limit our operating privileges in the
PRC, delay or restrict the repatriation of the proceeds from this offering into
the PRC, or take other administrative actions that could have a material adverse
effect on our business, financial condition, results of operations, reputation
and prospects, as well as the trading price of our securities.
Currently,
there have been no findings by the PRC authorities that we or our shareholders
have violated applicable laws or regulations with respect to this agreement, our
organizational structure and other related agreements. However, the
exercise of the option by Mr. Jiang under the Proud Glory Option Agreement will
subject him to the registration requirement by SAFE, and there can be no
assurance that such approval will be granted, as disclosed in the risk factor on
page 15.
See the
section titled “Corporate Structure and History – Our Corporate History” on page
37 for more information.
The
following chart reflects our organizational structure as of the date of this
prospectus.
9
Corporate
Information
The
address of our principal executive office is at No. 48 South Qingshui Road,
Laiyang City, Shandong 265200, People’s Republic of China, and our telephone
number is (86) 535-7296152. Longkang, our PRC operating company,
maintains a website at www.orientaldragon.com. Information
available on our website is not incorporated by reference in and is not deemed a
part of this prospectus.
Use
of Terms
Except
where the context otherwise requires and for the purposes of this prospectus
only:
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·
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“We,”
“us,” “our company,” “our,” “Oriental Dragon” and the “Company” refer to
the combined business of Oriental Dragon Corporation and its consolidated
subsidiaries and affiliates, but do not include the shareholders of
Oriental Dragon Corporation;
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|
·
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“Merit Times” refers to Merit
Times International Limited, our direct, wholly-owned subsidiary, a BVI
corporation;
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·
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“MeKeFuBang” refers to Shandong
MeKeFuBang Food Limited, our indirect, wholly-owned subsidiary, a wholly
foreign owned enterprise incorporated under the laws of the
PRC;
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|
·
|
“Longkang” refers to Shandong
Longkang Juice Co., Ltd., our contractually controlled affiliate and the
PRC operating company;
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·
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“China,” “Chinese” and “PRC,”
refer to the People’s Republic of
China;
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·
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“Renminbi” and “RMB” refer to the
legal currency of China; and
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·
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“U.S. dollars,” “dollars” and “$”
refer to the legal currency of the United
States.
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10
The
Offering
Ordinary
shares we are offering
|
2,500,000
shares (1)
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|
Ordinary
shares outstanding after the offering
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29,999,171
shares (2)
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|
Offering
price
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$8.00
per share (estimate)
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|
Use
of proceeds
|
We
intend to use the net proceeds of this offering to increase our
manufacturing capacity, to purchase production lines and for other general
corporate purposes. See “Use of Proceeds” on page 19 for more
information on the use of proceeds.
|
|
Risk
factors
|
Investing
in these securities involves a high degree of risk. As an investor you
should be able to bear a complete loss of your investment. You should
carefully consider the information set forth in the “Risk Factors” section
beginning on page 8.
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(1)
|
Excludes up to 375,000 shares
that may be sold upon the underwriters’ over-allotment option in this
offering. We are also concurrently registering for resale under a separate
prospectus up to 8,590,571 ordinary shares held by the selling
shareholders named under such prospectus (including 2,920,232 ordinary
shares that have been or may be acquired upon the exercise of warrants
that have been previously issued to selling shareholders named in such
prospectus). None of these securities are being offered by us and we will
not receive any proceeds from the sale of these shares. For additional
information, see below under “Corporate History and
Structure — Acquisition of Merit Times and Related
Financing.”
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(2)
|
Based on (i) 27,499,171 ordinary
shares issued and outstanding as of the date of this prospectus, and (ii)
2,500,000 ordinary shares issued in the public offering (excluding the
underwriters’ over-allotment option of up to 375,000 ordinary
shares).
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11
RISK
FACTORS
You
should carefully consider the risks described below together with all of the
other information included in this prospectus before making an investment
decision with regard to our securities. The statements contained in
or incorporated herein 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, you may lose all or part of your investment.
Risks
Relating to Our Business
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. We are currently the only licensee of the Laiyang Pear
trademark for the production of Laiyang Pear juice concentrate until 2038, and
we were issued a government letter by the Laiyang city government indicating
that we can enjoy the status as the sole producer of Laiyang Pear juice
concentrate for a period of 30 years beginning January 2008. If the government
rescinds our sole producer’s status, or it is determined that the Laiyang city
government has exceeded its authority in connection with issuing the government
letter described above, we may face increasing competition and are unlikely to
have any remedy against the Laiyang city government. In addition, we
are required to comply with certain food hygiene and safety laws and regulations
and environmental regulations in China. Although we currently are in compliance
with the above laws, we cannot provide assurance if we can meet the standard if
these laws and regulations become stricter in the future.
The
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. Any actions taken by either the central or local
governments in China could materially and adversely affect our ability to
produce Laiyang Pear juice concentrate, would would materially and adversely
affect our financial condition and results of operations.
IF OUR
LAND USE RIGHTS OR LICENSE OF INTELLECTUAL PROPERTY IS REVOKED, WE WOULD HAVE NO
OPERATIONAL CAPABILITIES OR ABILITY TO CONDUCT OUR BUSINESS.
Under
Chinese law, land is owned by state or rural collective economic organizations.
The state issues tenants the rights to use property. Rights to use property can
be revoked and tenants can be forced to vacate at any time when redevelopment of
the land is in the public interest. The public interest rationale is interpreted
broadly and the process of land appropriation may be less than transparent. Each
of our operating subsidiaries rely on these land use rights as the cornerstone
of their operations, and the loss of such rights would have a material adverse
effect on our company.
While the
Laiyang city government issued a governmental letter granting us the status of
the sole producer of Laiyang Pear juice concentrate for a period of 30 years,
the owner of the “Laiyang Pear” trademark as stated in its certificate is the
“Laiyang Fruit Cultivation Technology and Instructing Station”, which is under
the Laiyang Agriculture Bureau, an affiliate of the Laiyang city
government. Although Laiyang municipal government is the leader of
the Agriculture Bureau, and of the Laiyang Fruit Cultivation Technology and
Instructing Station, it is doubtful whether the government may directly issue
such a government letter as if it is the owner of the
trademark. Accordingly, we may be subject to challenge regarding our
status as the sole producer of the “Laiyang Pear” juice concentrate. In
addition, the trademark held by the Laiyang Fruit Cultivation Technology and
Instructing Station is currently effective only until 2018, which will require
the trademark owner to renew the trademark upon its expiration in order to
continue the benefits of Longkang under the trademark license agreement, and
each renewal is effective for only another ten years. While such
renewals are generally granted, there can be no assuarance that the trademark
owner will apply for such renewals or that they will be granted on a timely
basis or at all. Any difficulties or delays regarding these matters
could materially and adversely affect our ability to continue our current
business and our financial position and results of operation.
BECAUSE
WE DO NOT OWN ALL OF THE PLANTATIONS FROM WHICH WE OBTAIN LAIYANG PEARS TO MAKE
OUR PEAR JUICE CONCENTRATE, WE WILL BE SUBJECT TO MARKET FLUCTUATIONS AND MAY BE
FORCED TO PAY HIGHER PRICES TO OBTAIN LAIYANG PEARS.
12
We obtain
a portion of the Laiyang Pears that we use to produce our pear juice concentrate
through cooperative agreements with local farmers. Through these
contractual agreements, we have priority in purchasing the Laiyang Pears from
the local farmers. However, such purchases will be subject to supply
and demand and market fluctuations in the prices of Laiyang Pears and as a
result we may pay higher prices for such pears than if we owned all of our own
orchards. The increases in price of Laiyang Pear purchased from
local farmers may increase our cost to produce Laiyang Pear juice concentrate
and may have a material adverse effect on our sales and results of
operations.
WE DEPEND
ON A CONCENTRATION OF CUSTOMERS, THE LOSS OF ONE OR MORE OF WHICH COULD
MATERIALLY ADVERSELY AFFECT OUR OPERATIONS AND REVENUES.
Our
revenue is dependent, in large part, on significant orders from a limited number
of customers. We depend on seven primary customers to purchase our products.
Sales to our five largest customers accounted for approximately 73.7% and 79.5%
of our net sales during the years ended December 31, 2009 and 2008,
respectively. Customer demand depends on a variety of factors including, but not
limited to, our customers’ financial condition and general economic conditions.
If our sales to any of our customers are reduced for any reason, such reduction
may have a material adverse effect on our business, financial condition and
results of operations.
WEATHER
AND OTHER ENVIRONMENTAL FACTORS AFFECT OUR RAW MATERIAL SUPPLY AND A REDUCTION
IN THE QUALITY OR QUANTITY OF OUR FRESH FRUIT SUPPLIES MAY HAVE MATERIAL ADVERSE
CONSEQUENCES ON OUR FINANCIAL RESULTS.
Our
business may be adversely affected by weather and environmental factors beyond
our control, such as adverse weather conditions during the squeezing season.
Reports from Southwest China in the beginning of this year indicate that areas
of China are undergoing the most severe drought experienced in the past 100
years. We have no control over such forces of nature and cannot
assure you that the necessary raw materials will continue to be available to us
in quantities and at prices currently in effect or acceptable to us. The prices
for, and availability of, these raw materials have varied significantly and may
affect the quantity and profitability of our products. A significant reduction
in the quantity or quality of fresh fruits harvested resulting from adverse
weather conditions, disease to the crops or other factors could result in
increased per unit processing costs and decreased production, with adverse
financial consequences to the Company.
CONCERNS
OVER FOOD SAFETY AND PUBLIC HEALTH MAY AFFECT OUR OPERATIONS BY INCREASING OUR
COSTS AND NEGATIVELY IMPACTING DEMAND FOR OUR PRODUCTS.
We could
be adversely affected by diminishing confidence in the safety and quality of
certain food products or ingredients, even if our practices and procedures are
not implicated. As a result, we may also elect or be required to incur
additional costs aimed at increasing consumer confidence in the safety of our
products. For example, a crisis in China over melamine-contaminated milk in 2008
adversely impacted overall Chinese food exports since October 2008, as reported
by the Chinese General Administration of Customs, even though most foods
exported from China were not implicated by the melamine-contaminated milk. We
believe that the contaminated milk crisis also had a negative effect on sales of
our concentrated juices in fiscal year 2008. Our success depends on our ability
to maintain the quality of our existing products and new products. Product
quality issues, real or imagined, or allegations of product contamination, even
if false or unfounded, could tarnish our image and may cause consumers to choose
other products.
OUR PLANS
TO EXPAND OUR PRODUCTION AND TO IMPROVE AND UPGRADE OUR INTERNAL CONTROL AND
MANAGEMENT SYSTEM WILL REQUIRE CAPITAL EXPENDITURES IN 2010.
Our plans
to expand our production required capital expenditures in 2010. Our existing
production lines have been running at close to full capacity while the market
demand for our existing products has increased. We currently have three
production lines for Laiyang Pear juice concentrate and puree with a combined
production capacity of 48,000 MT, with a utilization rate of 95% during peak
seasons and 70% on an annual average, and one production line for bio feed with
a production capacity of 52,000 MT. We have entered into a construction contract
for the construction of a new manufacturing facility and office space at the end
of 2009. The production lines were completed and tested in September 2010,
and became fully operational in October 2010. In additional to
these two new production lines, we are planning to add one additional production
line for the fruit juice concentrate and puree and one additional production
line for bio animal feed.
We may
also need further funding to improve and upgrade our internal control and
management system and for working capital, investments, potential acquisitions
and joint ventures and other corporate requirements. Cash generated from our
operations may not be sufficient to fund these development plans, and our actual
capital expenditures and investments may significantly exceed our current
planned amounts. If either of these conditions arises, we may have to seek
external financing to satisfy our capital needs. We may not be able to obtain
external financing at reasonable costs. Failure to obtain sufficient external
funds for our development plans could adversely affect our plan to expand our
production and to improve an upgrade our internal control and management
system.
BECAUSE
WE EXPERIENCE SEASONAL FLUCTUATIONS IN OUR SALES, OUR QUARTERLY RESULTS WILL
FLUCTUATE AND OUR ANNUAL PERFORMANCE WILL DEPEND LARGELY ON RESULTS FROM THREE
QUARTERS.
Our
business is highly seasonal, reflecting the harvest season of our primary source
fruits during the months from September through February of the following
year. Typically, a substantial portion of our revenues are earned
during our first, third and fourth quarters. We generally experience lower
revenues during our second quarter. For example, during the three months ended
June 30, 2010, our revenues from Laiyang Pear juice concentrate decreased by
100.0% as compared to comparable 2009 period since we sold our entire inventory
of Laiyang pear juice concentrate in the first quarter. If sales in
the first, third and fourth quarters are lower than expected, our operating
results would be adversely affected, and it would have a disproportionately
large impact on our annual operating results.
13
WE DO NOT
PRESENTLY MAINTAIN PRODUCT LIABILITY INSURANCE, AND OUR PROPERTY AND EQUIPMENT
INSURANCE DOES NOT COVER THE FULL VALUE OF OUR PROPERTY AND EQUIPMENT, WHICH
LEAVES US WITH FINANCIAL EXPOSURE IN THE EVENT OF LOSS OR DAMAGE TO OUR
PROPERTIES OR CLAIMS FILED AGAINST US.
We
currently do not carry any product liability or other similar insurance. Unlike
the United States and many other countries, product liability claims and
lawsuits in the PRC are rare. However, we cannot guaranty that we would not face
liability in the event of the failure of any of our products. Furthermore, we
cannot guaranty that product liability exposures and litigation will not become
more commonplace in the PRC or that we will not face product liability exposure
or actual liability as we expand our sales into international markets, like the
United States, where product liability claims are more prevalent.
We may be
required from time to time to recall products entirely or from specific
co-packers, markets or batches. Product recalls could adversely affect our
profitability and our brand image. We do not maintain product recall
insurance.
While we
have not experienced any credible product liability litigation to date, there is
no guaranty that we will not experience such litigation in the future. In
the event we do experience product liability claims or a product recall, our
financial condition and business operations could be materially adversely
affected.
GOVERNMENTAL
REGULATIONS AFFECTING THE IMPORT OR EXPORT OF OUR PRODUCTS COULD NEGATIVELY
AFFECT OUR REVENUES.
The
United States and various foreign governments have imposed controls, export
license requirements, and restrictions on the export of some of our
products. We do not currently export our concentrated fruit juice
concentrate directly or indirectly out of the PRC. However, if we were to begin
exporting our products in the future, governmental regulation of exports, or our
failure to obtain required export approval for our products, could harm our
international and domestic sales and adversely affect our
revenues. In addition, failure to comply with such regulations could
result in penalties, costs, and restrictions on export privileges.
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.
14
OUR
PLANNED EXPANSION AND TECHNICAL IMPROVEMENT PROJECTS COULD BE DELAYED OR
ADVERSELY AFFECTED BY, AMONG OTHER THINGS, 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, 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 results of operations.
WE WILL
ENCOUNTER SUBSTANTIAL COMPETITION IN OUR BUSINESS AND ANY FAILURE TO COMPETE
EFFECTIVELY COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Although
there are no other producers of Laiyang Pear juice concentrate, there are
currently a number of well-established companies producing other kinds of fruit
concentrate that compete directly with our products, and some of those
competitors have significantly greater financial and other resources than us. We
anticipate that our competitors will continue to improve their products and to
introduce new products with competitive prices and performance characteristics.
Aggressive marketing or pricing by our competitors or the entrance of new
competitors into our markets could have a material adverse effect on our
business, results of operations and financial condition.
Currently,
we are the only producer of Laiyang Pear juice concentrate and pursuant to an
agreement entered into with the government of Laiyang City, we will continue to
be the only producer of Laiyang Pear juice concentrate until January 2038.
However, if the Laiyang city government rescinds our right as the exclusive
producer of Laiyang Pear juice concentrate, we could face increasing competition
although we have certain technological advantages and an existing sales network
which produces and sells Laiyang Pear juice concentrate.
OUR
LIMITED OPERATING HISTORY MAY NOT SERVE AS AN ADEQUATE BASIS TO JUDGE OUR FUTURE
PROSPECTS AND RESULTS OF OPERATIONS.
Our
limited operating history in the fruit product industry may not provide a
meaningful basis for evaluating our business. Longkang entered into the fruit
product industry in November 2004. Although our revenues have grown rapidly
since our inception, we cannot guaranty that we will maintain profitability or
that we will not incur net losses in the future. We will continue to encounter
risks and difficulties that companies at a similar stage of development
frequently experience, including the potential failure to:
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obtain sufficient working capital
to support our expansion;
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maintain or protect our
intellectual property;
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maintain our proprietary
technology;
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expand our product offerings and
maintain the high quality of our
products;
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manage our expanding operations
and continue to fill customers’ orders on
time;
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maintain adequate control of our
expenses allowing us to realize anticipated revenue
growth;
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implement our product
development, marketing, sales, and acquisition strategies and adapt and
modify them as needed;
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successfully integrate any future
acquisitions; and
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anticipate and adapt to changing
conditions in the fruit product industry resulting from changes in
government regulations, mergers and acquisitions involving our
competitors, technological developments and other significant competitive
and market dynamics.
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If we are
not successful in addressing any or all of the foregoing risks, our business may
be materially and adversely affected.
15
WE NEED
TO MANAGE GROWTH OF OUR OPERATIONS TO MAXIMIZE OUR POTENTIAL GROWTH AND ACHIEVE
OUR EXPECTED REVENUES AND OUR FAILURE TO MANAGE SUCH GROWTH WILL CAUSE A
DISRUPTION OF OUR OPERATIONS RESULTING IN THE FAILURE TO GENERATE REVENUES AT
LEVELS WE EXPECT.
In order
to maximize our potential growth in our current and potential markets, we
believe that we must expand our product 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 by constructing additional production
facilities and increasing the distribution and sales of our products by
penetrating existing markets in the PRC and entering new geographic markets in
the PRC. However, many obstacles to entering such 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.
WE MAY
NOT BE ABLE TO SUCCESSFULLY INTRODUCE NEW PRODUCTS, WHICH COULD DECREASE OUR
PROFITABILITY.
Our
future business and financial performance depends, in part, on our ability to
successfully respond to consumer preference by introducing new products and
improving existing products. We incur significant development and marketing
costs in connection with the introduction of new products. Successfully
launching and selling new products puts pressure on our sales and marketing
resources, and we may fail to invest sufficient funds in order to market and
sell a new product effectively. If we are not successful in marketing
and selling new products, our results of operations could be materially
adversely affected.
WE MAY
NOT BE ABLE TO OBTAIN SUFFICIENT CAPITAL TO FUND OUR GROWING OPERATIONS AND WE
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 or 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 on reasonable terms, or at all.
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,
including for acquisitions. We cannot assure you that we will be able to obtain
sufficient 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, performance, underlying asset values or prospects of
such companies. For these reasons, our ordinary shares can also be expected to
be subject to volatility resulting from purely market forces over which we 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 affecting our stock price could limit our
ability to obtain such funding.
If we
cannot obtain additional funding, we may be required to: (i) limit our plant
expansion; (ii) limit our marketing efforts; and/or (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 funding, we may not be able to negotiate terms
and conditions for receiving additional funding that are favorable 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 our ordinary
shares.
WE RELY
ON HIGHLY QUALIFIED PERSONNEL AND IF WE ARE UNABLE TO RETAIN OR MOTIVATE KEY
PERSONNEL OR HIRE QUALIFIED PERSONNEL, WE MAY NOT BE ABLE TO GROW
EFFECTIVELY.
The
Company’s future success also depends upon its continuing ability to attract and
retain highly qualified personnel. Expansion of the Company’s business and the
management and operation of the Company will require additional managers and
employees with industry experience, and the success of the Company will be
highly dependent on the Company’s ability to attract and retain skilled
management personnel and other employees. There can be no assurance that the
Company will be able to attract or retain highly qualified personnel.
Competition for skilled personnel in our industry is significant. This
competition may make it more difficult and expensive to attract, hire and retain
qualified managers and employees.
16
THE LOSS
OF THE SERVICES OF OUR KEY EMPLOYEES, PARTICULARLY THE SERVICES RENDERED BY
ZHIDE JIANG, OUR CHIEF EXECUTIVE OFFICER AND DIRECTOR, COULD HARM OUR
BUSINESS.
Our
success depends to a significant degree on the services rendered to us by our
key employees. If we fail to attract, train and retain sufficient
numbers of these qualified people, our prospects, business, financial condition
and results of operations will be materially and adversely affected. In
particular, we are heavily dependent on the continued services of Zhide Jiang,
our Chief Executive Officer and Director. We do not have employment agreements
with any of the members of our senior management team, each of whom may
voluntarily terminate his employment with us at any time. Following any
termination of employment, these employees would not be subject to any
non-competition covenants. The loss of any key employee, including members of
our senior management team, and our inability to attract highly skilled
personnel with sufficient experience in our industry could harm our
business.
WE MAY
INCUR SIGNIFICANT COSTS TO ENSURE COMPLIANCE WITH UNITED STATES CORPORATE
GOVERNANCE AND ACCOUNTING REQUIREMENTS.
We may
incur significant costs associated with our public company reporting
requirements, costs associated with newly applicable corporate governance
requirements, including requirements under the Sarbanes-Oxley Act of 2002 and
other rules implemented by the Securities and Exchange Commission. We expect all
of these applicable rules and regulations to significantly increase our legal
and financial compliance costs and to make some activities more time consuming
and costly. We also expect that these applicable rules and regulations will make
it more difficult and more expensive for us to obtain director and officer
liability insurance and we may be required to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar
coverage. As a result, it may be more difficult for us to attract and retain
qualified individuals to serve on our board of directors or as executive
officers. We are currently evaluating and monitoring developments with respect
to these newly applicable rules, and we cannot predict or estimate the amount of
additional costs we may incur or the timing of such costs.
WE MAY
NOT BE ABLE TO MEET THE INTERNAL CONTROL REPORTING REQUIREMENTS IMPOSED BY THE
SECURITIES AND EXCHANGE COMMISSION RESULTING IN A POSSIBLE DECLINE IN THE PRICE
OF OUR ORDINARY SHARES AND OUR INABILITY TO OBTAIN FUTURE
FINANCING.
As
directed by Section 404 of the Sarbanes-Oxley Act of 2002, 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. We are required to include a report of management on
our internal control over financial reporting. The internal control
report must include a statement
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Of management’s responsibility
for establishing and maintaining adequate internal control over its
financial reporting;
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Of management’s assessment of the
effectiveness of its internal control over financial reporting as of year
end; and
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Of the framework used by
management to evaluate the effectiveness of our internal control over
financial reporting.
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While
we expect to expend significant resources on 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
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
ordinary shares and our ability to secure additional financing as
needed.
17
THE
TRANSACTION BY WHICH WE BECAME A PUBLICLY-REPORTING COMPANY INVOLVED A REVERSE
MERGER OF A FOREIGN COMPANY INTO A FOREIGN SHELL COMPANY, SO THAT 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, Longkang prepared its financial statements for the first time
under U.S. generally accepted accounting principles and recently had its initial
audit of its financial statements in accordance with Public Company
Accounting Oversight Board (United States). As Longkang does not
have long term familiarity with U.S. generally accepted accounting
principles, it may be more difficult for it to comply on a timely basis with SEC
reporting requirements than a comparable domestic company.
OUR
PRINCIPAL SHAREHOLDER IS ABLE TO CONTROL SUBSTANTIALLY ALL MATTERS REQUIRING A
VOTE OF OUR SHAREHOLDERS AND HIS INTERESTS MAY DIFFER FROM THE INTERESTS OF OUR
OTHER SHAREHOLDERS.
Zhide
Jiang, our President, Chief Executive Officer and Chairman of the Board of
Directors, beneficially owns approximately 41.13% of our issued and outstanding
ordinary shares. On June 7, 2010, our shareholders approved the proposal of our
board of directors to reduce the required quorum to one-third of the shares
entitled to vote for future shareholder meetings. Therefore, Mr. Jiang is able
to individually establish a quorum at any shareholder meeting and to control
substantially all matters requiring approval by our shareholders, including the
election of our directors and officers. This concentration of ownership may also
have the effect of discouraging, delaying or preventing a future change of
control, which could deprive our stockholders of an opportunity to receive a
premium for their shares as part of a sale of our company and might reduce the
price of our shares.
MR. ZHIDE
JIANG, OUR PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF THE BOARD OF
DIRECTORS, HAS A CONTROLLING INFLUENCE IN US, OUR SUBSIDIARIES AND LONGKANG,
WHICH ENABLES HIM TO DETERMINE THE OUTCOME OF ANY CORPORATE TRANSACTION OR OTHER
MATTERS SUBMITTED TO OUR SHAREHOLDERS FOR APPROVAL. WE CANNOT ASSURE YOU THAT
MR. ZHIDE JIANG WILL ALWAYS ACT IN OUR BEST INTEREST OR IN THE BEST INTEREST OF
OUR SHAREHOLDERS.
Mr. Zhide
Jiang is currently the President, Chief Executive Officer and Chairman of the
Board of Directors of the Company. Mr. Jiang is also the Executive Director of
Merit Times and the Executive Director of MeKeFuBang. Mr. Jiang is the 60%
shareholder and the Executive Director of Longkang. In addition, Mr. Jiang is
the Executive Director of Proud Glory Limited, which is our majority shareholder
and therefore exercises voting and dispositive control over the shares owned by
Proud Glory. Pursuant to the Proud Glory Option Agreement between Mr. Jiang and
Mr. Chee Fung Tang, the record owner of Proud Glory Limited, for a period of
three years commencing on October 22, 2009, Mr. Jiang has the right to acquire
up to 100% of the equity interests of Proud Glory Limited held by Mr. Tang,
subject to certain contingencies as set forth therein. Therefore, Mr.
Jiang has a controlling influence in determining the outcome of any corporate
transaction or other matters submitted to our shareholders for approval,
including mergers, consolidations and the sale of all or substantially all of
our assets, election of directors, and other significant corporate actions. Mr.
Jiang may also have the power to prevent or cause a change in control. In
addition, without the consent of Mr. Jiang, we could be prevented from entering
into transactions that could be beneficial to us. Therefore we cannot assure you
that Mr. Jiang will always act in the best interest of the Company or its
shareholders.
18
OUR
MANAGEMENT HAS NO EXPERIENCE IN MANAGING AND OPERATING A PUBLIC COMPANY. ANY
FAILURE TO COMPLY OR ADEQUATELY COMPLY WITH FEDERAL SECURITIES LAWS, RULES OR
REGULATIONS COULD SUBJECT US TO FINES OR REGULATORY ACTIONS, WHICH MAY
MATERIALLY ADVERSELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.
Our
current management has no experience managing and operating a public company and
relies in many instances on the professional experience and advice of third
parties including its consultants, attorneys and accountants. Failure to comply
or adequately comply with any laws, rules, or regulations applicable to our
business may result in fines or regulatory actions, which may materially
adversely affect our business, results of operation, or financial
condition.
ADAM WASSERMAN,
OUR CHIEF FINANCIAL OFFICER, DOES NOT DEDICATE 100% OF HIS TIME ON OUR
BUSINESS.
Adam
Wasserman, our Chief Financial Officer, provides services to us under an
employment agreement, which permits him to provide services to other companies.
Mr. Wasserman is chief executive officer of CFO Oncall, Inc. and CFO Oncall
Asia, Inc. (collectively “CFO Oncall”), where he owns 80% and 60% of such
businesses, respectively. All compensation paid to Mr. Wasserman is paid
to CFO Oncall, Inc, or CFO Oncall Asia, Inc. CFO Oncall, Inc. provides chief
financial officer services to various companies. Mr. Wasserman also serves as
chief financial officer of Gold Horse International, Inc, and Transax
International, Inc. He is also a director of China Direct Industries, Inc. and
Bohai Pharmaceuticals Group, Inc. since July 12, 2010. Mr. Wasserman dedicates
approximately 45% of his business time to our Company. In addition to Mr.
Wasserman’s time, CFO Oncall has full-time dedicated, bilingual, professional
employees that also assist Mr. Wasserman with our Company’s financial matters
and communication needs. Mr. Wasserman’s other projects may detract from
the time he can spend on our business.
Risks
Relating to Our Corporate Structure
THE
CONSULTING AGREEMENT BETWEEN MEKEFUBANG AND LONGKANG MAY BE TERMINATED IF
CIRCUMSTANCES ARISE WHICH MATERIALLY AND ADVERSELY AFFECT THE PERFORMANCE OR THE
OBJECTIVES OF SUCH AGREEMENT, AND WE MIGHT NOT BE ABLE TO COLLECT ALL OF THE NET
PROFITS OF LONGKANG, WHICH WILL ADVERSELY AFFECT OUR OPERATIONS AND
PERFORMANCE.
Presently
all of our business operations are carried out by Longkang. We do not own any
equity interests in Longkang, but control and receive the economic benefits of
its business operations through various contractual arrangements. One of the
contractual agreements is a Consulting Services Agreement, by and between
MeKeFuBang and Longkang through which MeKeFuBang has the right to advise,
consult, manage and operate Longkang, and collect all of the net profits of
Longkang. Pursuant to the Consulting Services Agreement, either party may
terminate such agreement if circumstances arise which materially and adversely
affect the performance or the objectives of this agreement. If circumstances
that materially affect our performance do arise in the future and if either
party decides to terminate this agreement, we might not be able to control and
receive the economic benefits of Longkang and it will adversely affect our
operations and performance.
THE
CONTRACTUAL AGREEMENTS THROUGH WHICH WE HAVE ESTABLISHED CONTROL OF LONGKANG MAY
NOT BE AS EFFECTIVE IN PROVIDING OPERATIONAL CONTROL OVER LONGKANG AS DIRECT
OWNERSHIP. BECAUSE WE RELY ON LONGKANG FOR OUR REVENUE, ANY TERMINATION OF, OR
DISRUPTION TO, THESE CONTRACTUAL ARRANGEMENTS COULD DETRIMENTALLY AFFECT OUR
BUSINESS.
Presently
all of our business operations are carried out by Longkang. We do not own any
equity interests in Longkang, but control and receive the economic benefits of
its business operations through various contractual arrangements. The
contractual arrangements are between Longkang, its owners, and MeKeFuBang, our
wholly-owned subsidiary in the PRC. The contractual arrangements are comprised
of a series of agreements, including: (1) a Consulting Services Agreement, (2)
an Operating Agreement, (3) a Proxy Agreement, (4) a VIE Option Agreement, and
(5) an Equity Pledge Agreement, the pledge under which has been registered with
competent authority and has been effective under the PRC laws. Through these
contractual arrangements, we have the ability to substantially influence the
daily operations and financial affairs of Longkang, as we are able to appoint
its senior executives and approve all matters requiring shareholder approval.
Accordingly, we consolidate Longkang’s results, assets and liabilities in our
financial statements.
However,
these contractual agreements may be terminated under certain circumstances. In
addition, these agreements are governed by the PRC laws and regulations. PRC
laws and regulations concerning the validity of the contractual arrangements are
uncertain, as many of these laws and regulations are relatively new and may be
subject to change, and their official interpretation and enforcement by the PRC
government may involve substantial uncertainty. Further, our contractual
arrangements are governed by PRC laws and provide for the resolution of disputes
through arbitration proceedings pursuant to PRC laws. If Longkang or its
stockholders fail to perform their obligations under the contractual
arrangements, we may have to rely on legal remedies under PRC laws, including
seeking specific performance or injunctive relief, and claiming damages, and
there is a risk that we may be unable to obtain these remedies. Therefore our
contractual arrangements may not be as effective in providing control over
Longkang as direct ownership. Because we rely on Longkang for our revenue, any
termination of or disruption to these contractual arrangements could
detrimentally affect our business.
Risks
Relating to the People's Republic of China
SUBSTANTIALLY
ALL OF OUR BUSINESS, ASSETS AND OPERATIONS ARE LOCATED IN THE PRC.
Substantially
all of our business, assets and operations are located in the PRC. The economy
of the PRC differs from the economies of most developed countries in many
respects. The economy of the PRC has been transitioning from a planned economy
to a market-oriented economy. However, all the lands in the PRC are 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 the PRC’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 may have a negative
effect on us.
CERTAIN
POLITICAL AND ECONOMIC CONSIDERATIONS RELATING TO 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.
19
THE
RECENT NATURE AND UNCERTAIN APPLICATION OF MANY PRC LAWS APPLICABLE TO US CREATE
AN UNCERTAIN ENVIRONMENT FOR BUSINESS OPERATIONS AND THEY COULD HAVE A NEGATIVE
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 as precedents. 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.
For
example, Chinese laws and regulations concerning the validity of the contractual
arrangements are uncertain, as many of these laws and regulations are relatively
new and may be subject to change, and their official interpretation and
enforcement by the Chinese government may involve substantial uncertainty.
Additionally, our contractual arrangements are governed by Chinese laws and
provide for the resolution of disputes through arbitration proceedings pursuant
to Chinese laws. If Longkang or its stockholders fail to perform the obligations
under the contractual arrangements, we may have to rely on legal remedies under
PRC laws, including seeking specific performance or injunctive relief, and
claiming damages, and there is a risk that we may be unable to obtain these
remedies. The legal environment in China is not as developed as in other
jurisdictions. As a result, uncertainties in the legal system could limit our
ability to enforce the contractual arrangements. Therefore our contractual
arrangements may not be as effective in providing control over Longkang as
direct ownership. Due to such uncertainty, we may have to take such additional
steps in the future as may be permitted by the then applicable law and
regulations in China to further strengthen our control over or toward actual
ownership of Longkang or its assets. Because we rely on Longkang for our
revenue, any termination of or disruption to these contractual arrangements
could detrimentally affect our business.
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 or 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.
Our
operating company is a FIE to which the Foreign Exchange Control Regulations are
applicable. Accordingly, we will have to maintain sufficient foreign exchange to
pay dividends and/or satisfy other foreign exchange requirements.
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, most of the time in the region of approximately
RMB8.28 to $1.00. 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. Provisions
on Administration of Foreign Exchange, as amended in August 2008, further
changed China’s exchange regime to a managed floating exchange rate regime based
on market supply and demand. Since reaching a high against the U.S. dollar
in July 2008, however, the Renminbi has traded within a narrow band against the
U.S. dollar, remaining within 1.0% of its July 2008 high but never
exceeding it. As a consequence, the Renminbi has fluctuated sharply since July
2008 against other freely traded currencies, in tandem with the
U.S. dollar. It is difficult to predict how long the current situation may
last and when and how it may change again, particularly in view of recent
statements by Chinese government officials in June 2010.
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.
20
SINCE
MOST OF OUR ASSETS ARE LOCATED IN PRC, ANY DIVIDENDS OF PROCEEDS FROM
LIQUIDATION IS SUBJECT TO THE APPROVAL OF THE RELEVANT CHINESE GOVERNMENT
AGENCIES.
Our
assets are predominantly located inside the 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.
IT MAY BE
DIFFICULT TO AFFECT SERVICE OF PROCESS AND ENFORCEMENT OF LEGAL JUDGMENTS UPON
OUR COMPANY AND OUR OFFICERS AND DIRECTORS BECAUSE THEY RESIDE OUTSIDE THE
UNITED STATES.
As our
operations are presently based in the PRC and certain of our directors and
officers reside in the PRC, service of process on our company and such directors
and officers may be difficult to effect within the United States. Also, our main
assets are located in the PRC and any judgment obtained in the United States
against us may not be enforceable outside the United States.
AN
OUTBREAK OF AVIAN INFLUENZA, THE H1N1 “SWINE-FLU” VIRUS, A REOCCURRENCE OF
SEVERE ACUTE RESPIRATORY SYNDROME (“SARS”), OR ANOTHER WIDESPREAD PUBLIC HEALTH
PROBLEM, COULD ADVERSELY AFFECT OUR OPERATIONS.
A more
widespread outbreak of the H1N1 virus, avian influenza or a renewed outbreak of
SARS or any other widespread public health problem in the PRC, where all of our
operations are conducted, could have an adverse effect on our operations. If
such an outbreak were to occur, our operations may be impacted by a number of
health-related factors, including quarantines or closures of some of our
offices, that would adversely disrupt our operations.
WE DERIVE
SUBSTANTIALLY ALL OF OUR REVENUES FROM SALES IN THE PRC AND ANY DOWNTURN IN THE
CHINESE ECONOMY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND
FINANCIAL CONDITION.
Substantially
all of our revenues are generated from sales in the PRC. We anticipate that
revenues from sales of our products in the PRC will continue to represent the
substantial portion of our total revenues in the near future. Our sales and
earnings can also be affected by changes in the general economy since purchases
of juice products are generally discretionary for consumers. Our success is
influenced by a number of economic factors which affect disposable consumer
income, such as employment levels, business conditions, interest rates, oil and
gas prices and taxation rates. Adverse changes in these economic factors, among
others, may restrict consumer spending, thereby negatively affecting our sales
and profitability.
UNDER THE ENTERPRISE INCOME TAX LAW, WE MAY BE
CLASSIFIED AS A “RESIDENT ENTERPRISE” OF CHINA. SUCH CLASSIFICATION WILL LIKELY RESULT IN
UNFAVORABLE TAX CONSEQUENCES TO US AND OUR NON-PRC
STOCKHOLDERS.
China passed a new Enterprise Income Tax Law, or the EIT
Law, and its implementing rules, both of which became effective on January 1,
2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it
can be treated in a manner similar to a Chinese enterprise for enterprise income
tax purposes. The implementing rules of the EIT Law define de facto management
as “substantial and overall management and control over the production and
operations, personnel, accounting, and properties” of the
enterprise.
On
April 22, 2009, the State Administration of Taxation issued the Notice
Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled
Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria
of de facto Management Bodies, or the Notice, further interpreting the
application of the EIT Law and its implementation to offshore entities
controlled by a Chinese enterprise or group. Pursuant to the Notice, an
enterprise incorporated in an offshore jurisdiction and controlled by a Chinese
enterprise or group will be classified as a “non-domestically incorporated
resident enterprise” if (i) its senior management in charge of daily operations
reside or perform their duties mainly in China; (ii)
its financial or personnel decisions are made or approved by bodies or persons
in China; (iii) its substantial assets and
properties, accounting books, corporate chops, board and stockholder minutes are
kept in China; and (iv) at least half of its
directors with voting rights or senior management often resident in China. A resident enterprise would be subject to an
enterprise income tax rate of 25% on its worldwide income and must pay a
withholding tax at a rate of 10% when paying dividends to its non-PRC
stockholders. However, it remains unclear as to whether the Notice is applicable
to an offshore enterprise controlled by a Chinese natural person. Nor are
detailed measures on imposition of tax from non-domestically incorporated
resident enterprises are available. Therefore, it is unclear how tax authorities
will determine tax residency based on the facts of each
case.
Mr. Chee Fung Tang, the beneficial owner of approximately 41.13%
of our common stock through his interests in Proud Glory Limited has granted to
Mr. Zhide Jiang, a PRC resident, an option to acquire Mr. Tang’s
interests in Proud Glory. We may be deemed to be a resident enterprise by
Chinese tax authorities if Mr. Jiang chooses to exercise his right under the
option agreement to acquire Mr.Tang’s interest in Proud Glory Limited in the
future and gains control over Proud Glory Limited. If the PRC tax authorities
determine that we are a “resident enterprise” for PRC enterprise income tax
purposes, a number of unfavorable PRC tax
consequences could follow. First, we may be
subject to the enterprise income tax at a rate of 25% on our worldwide taxable
income as well as PRC enterprise income tax reporting obligations. In our case,
this would mean that income such as non-China
source income would be subject to PRC enterprise income tax at a rate of 25%.
Currently, we do not have any non-China source income. Second,
although under the EIT Law and its implementing rules dividends paid to us from
our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee
that such dividends will not be subject to a 10% withholding tax, as the PRC
foreign exchange control authorities, which enforce the withholding tax, have
not yet issued guidance with respect to the processing of outbound remittances
to entities that are treated as resident enterprises for PRC enterprise income
tax purposes. Finally, it is possible that future guidance issued with respect
to the new “resident enterprise” classification could result in a situation in
which a 10% withholding tax is imposed on dividends we pay to our non-PRC
stockholders and with respect to gains derived by our non-PRC stockholders from
transferring our shares. We are actively monitoring the possibility of “resident
enterprise” treatment for the 2009 tax year and are evaluating appropriate
organizational changes to avoid this treatment, to the extent
possible.
If we
were treated as a “resident enterprise” by PRC tax authorities, we would be
subject to taxation in both the U.S. and China, and
our PRC tax may not be creditable against our U.S.
tax.
PRC
REGULATIONS REGARDING OFFSHORE FINANCING ACTIVITIES BY PRC RESIDENTS HAVE
UNDERTAKEN CONTINUOUS CHANGES WHICH MAY INCREASE THE ADMINISTRATIVE BURDEN WE
FACE AND CREATE REGULATORY UNCERTAINTIES THAT COULD ADVERSELY AFFECT OUR
BUSINESS.
On August
8, 2006, the PRC Ministry of Commerce (“MOFCOM”), joined by the China Securities
Regulatory Commission (“CSRC”), the State Administration of Foreign Exchange
(“SAFE”) as well as other government agencies, released a Provisions for Foreign
Investors to Merge with or Acquire Domestic Enterprises (“M&A Regulation”),
which took effect September 8, 2006 and was amended in 2009. These new rules
significantly revised China’s regulatory framework governing onshore-to-offshore
restructurings and foreign acquisitions of domestic enterprises. These new rules
signify greater PRC government attention to cross-border merger, acquisition and
other investment activities, by confirming MOFCOM as a key regulator for issues
related to mergers and acquisitions in China and requiring MOFCOM approval of a
broad range of merger, acquisition and investment
transactions. According to the new M&A Regulation, a
related-party acquisition in which an offshore company owned or controlled by a
PRC resident acquires a domestic company controlled by the same PRC resident
shall be subject to the approval of MOFCOM.
Among
other things, the M&A Regulation also included new provisions to require
that the overseas listing of an offshore company which is directly or indirectly
controlled by a PRC resident for the purpose of overseas listing of such PRC
resident’s interests in a domestic company, known as a “special purpose
company”, must obtain the approval of CSRC prior to the listing.
The
option granted to Mr. Jiang under the Proud Glory Option Agreement works to cut
off the link of related-party acquisition and prevent the application of the new
M&A Regulation to our situation, since Proud Glory Limited is 100% owned by
a non-PRC natural person while Mr. Jiang, as a PRC resident, does not own any
equity in the offshore company. Further, our current VIE structure
avoids the acquisition transaction which is directly the target under scrutiny
of the M&A Regulation, including the requirement of CSRC
approval. Thus, we believe that, in its current practice, the M&A
Regulation does not apply to our situation.
21
However,
the application of this M&A Regulation remains uncertain since neither
MOFCOM nor CSRC has approved any Chinese company’s foreign listing. There is no
consensus currently existing among the leading PRC law firms regarding the scope
and applicability of the MOFCOM or CSRC approval requirements. If the MOFCOM,
CSRC or other PRC regulatory body subsequently determines that the new M&A
Regulation applies to our situation and CSRC’s approval was required for this
offering, we may face sanctions by the MOFCOM, CSRC or other PRC regulatory
agencies. In such event, these regulatory agencies may impose fines and
penalties on our operations in the PRC, limit our operating privileges in the
PRC, delay or restrict the repatriation of the proceeds from this offering into
the PRC, or take other administrative actions that could have a material adverse
effect on our business, financial condition, results of operations, reputation
and prospects, as well as the trading price of our securities.
Currently,
there have been no findings by the PRC authorities that we or our shareholders
have violated applicable laws or regulations with respect to this agreement, our
organizational structure and other related agreements. However, the
exercise of the option by Mr. Jiang under the Proud Glory Option Agreement will
subject him to the registration requirement by SAFE, and there can be no
assurance that such approval will be granted.
ALTHOUGH
LONGKANG’S SHAREHOLDERS HAVE GRANTED MEKEFUBANG THE EXCLUSIVE RIGHT AND OPTION
TO ACQUIRE ALL OF THEIR EQUITY INTERESTS IN LONGKANG THROUGH THE VIE OPTION
AGREEMENT, THE EXERCISE OF SUCH OPTION MAY REQUIRE APPROVAL OF THE PRC MINISTRY
OF COMMERCE UNDER RELEVANT PRC LAWS.
Pursuant
to Section 11 of the M&A Regulation, where a PRC domestic company,
enterprise, or natural person proposes to acquire an affiliated PRC domestic
company in the name of an offshore company established or controlled by such
domestic company, enterprises, or natural person, such acquisition shall be
subject to examination and approval of PRC Ministry of Commerce. Relevant
parties are not allowed to circumvent this provision by domestic investment by
the foreign-funded enterprises or otherwise.
Since Mr.
Zhide Jiang is a PRC natural person and Longkang is his affiliated PRC domestic
company, acquisition of equity interests in Longkang by us may be deemed as
direct or indirect acquisition of a PRC domestic company by an offshore company
controlled by a PRC natural person, therefore the approval of PRC Ministry of
Commerce is required during the period when Mr. Zhide Jiang has substantial
interest in our company. We intend to seek such approval from PRC Ministry of
Commerce within one year from this IPO. Although all stockholders of Longkang
have granted MeKeFuBang the exclusive right and option to acquire all of their
equity interests in Longkang through the option agreement, we can not assure you
that we will receive such approval at the time MeKeFuBang decides to exercise
such option since interpretation and implementation of relevant laws and
regulations in China are uncertain as described in the risk factor
above. Failure to obtain such approval or registration from SAFE may
limit MeKeFuBang’s ability to collect Longkang’s profit or remit any of
MeKeFuBang’s profits out of the PRC as dividends or otherwise.
THE PRC
LAWS MAY LIMIT OUR ABILITY TO TRANSFER THE PROCEEDS FROM OUR PUBLIC OFFERING TO
LONGKANG WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
We intend
to transfer the proceeds from our public offering to MeKeFuBang, a WFOE and our
wholly-owned subsidiary in the PRC, to expand our manufacturing capability.
Currently, there is no PRC law which restricts us from transferring the proceeds
from public offering to a WFOE company. However, if the amount to be transferred
to MeKeFuBang exceeds its current total registered investment amount approved by
the PRC government, MeKeFuBang will need approval from the PRC government to
increase its total registered investment amount before such
transfer. Currently, MeKeFuBang’s total registered investment amount
has been increased from $18 million to $49.5 million. We will be able to
transfer all proceeds from this public offering as well as from our previous
private placement to Longkang. However, if we need to raise more funds in the
future, we might be required by PRC laws to apply to increase MeKeFuBang’s total
registered investment amount before such transfer, and we would be unable to
transfer such funds to our operating entity Longkang. Although we believe we
will be able to increase our total registered investment amount because the PRC
government support and encourage the investment of foreign enterprises to be
transferred into China, we can not assure you that the PRC government will grant
us such approval since the PRC government has board discretion on foreign
investment and we cannot assure you that such approval will be granted in a
certain time.
DUE TO
VARIOUS RESTRICTIONS UNDER PRC LAWS ON THE DISTRIBUTION OF DIVIDENDS BY OUR PRC
OPERATING COMPANIES, WE MAY NOT BE ABLE TO PAY DIVIDENDS TO OUR
SHAREHOLDERS.
The
Wholly-Foreign Owned Enterprise Law (1986), as amended and The Wholly-Foreign
Owned Enterprise Law Implementing Rules (1990), as amended and the Company Law
of the PRC (2006) contain the principal regulations governing dividend
distributions by wholly foreign owned enterprises. Under these regulations,
wholly foreign owned enterprises may pay dividends only out of their accumulated
profits, if any, determined in accordance with PRC accounting standards and
regulations. Additionally, such companies are required to set aside a certain
amount of their accumulated profits each year, if any, to fund certain reserve
funds. These reserves are not distributable as cash dividends except in the
event of liquidation and cannot be used for working capital purposes. The PRC
government also imposes controls on the conversion of RMB into foreign
currencies and the remittance of currencies out of the PRC. We may experience
difficulties in completing the administrative procedures necessary to obtain and
remit foreign currency for the payment of dividends from the Company’s
profits.
Furthermore,
if our subsidiaries or affiliates in China incur debt on their own in the
future, the instruments governing the debt may restrict its ability to pay
dividends or make other payments. If we or our subsidiaries are unable to
receive all of the revenues from our operations through these contractual or
dividend arrangements, we may be unable to pay dividends on our ordinary
shares.
22
Risks
Associated with Our Securities
IN ORDER
TO RAISE SUFFICIENT FUNDS TO CONTINUE OPERATIONS, WE MAY HAVE TO ISSUE
ADDITIONAL SECURITIES AT PRICES WHICH MAY RESULT IN SUBSTANTIAL DILUTION TO OUR
SHAREHOLDERS.
If we
raise additional funds through the sale of equity or convertible debt, our
current stockholders’ percentage ownership will be reduced. In addition, these
transactions may dilute the value of ordinary shares outstanding. We may have to
issue securities that may have rights, preferences and privileges senior to our
ordinary shares. We cannot provide assurance that we will be able to raise
additional funds on terms acceptable to us, if at all. If future financing is
not available or is not available on acceptable terms, we may not be able to
fund our future needs, which would have a material adverse effect on our
business plans, prospects, results of operations and financial
condition.
THE
MARKET PRICE FOR OUR ORDINARY SHARES MAY BE HIGHLY VOLATILE.
The
market price of our ordinary shares may be volatile due to certain factors,
including, but not limited to, market trends in PRC stock generally, quarterly
fluctuations in our financial and operating results; general conditions in the
agricultural and food industries in China; or changes in earnings
estimates.
IN ORDER
TO RAISE SUFFICIENT FUNDS TO CONTINUE OPERATIONS, WE MAY HAVE TO ISSUE
ADDITIONAL SECURITIES AT PRICES WHICH MAY RESULT IN SUBSTANTIAL DILUTION TO OUR
SHAREHOLDERS.
If we
raise additional funds through the sale of equity or convertible debt, our
current shareholders’ percentage ownership will be reduced. In addition, these
transactions may dilute the value of ordinary shares outstanding. We may have to
issue securities that may have rights, preferences and privileges senior to our
ordinary shares. We cannot provide assurance that we will be able to raise
additional funds on terms acceptable to us, if at all. If future financing is
not available or is not available on acceptable terms, we may not be able to
fund our future needs, which would have a material adverse effect on our
business plans, prospects, results of operations and financial
condition.
WE ARE
NOT LIKELY TO PAY CASH DIVIDENDS IN THE FORESEEABLE FUTURE.
We
currently intend to retain any future earnings for use in the operation and
expansion of our business. Accordingly, we do not expect to pay any cash
dividends in the foreseeable future, but will review this policy as
circumstances dictate. Should we determine to pay dividends in the future, our
ability to do so will depend upon the receipt of dividends or other payments
from Merit Times. Merit Times may, from time to time, be subject to restrictions
on its ability to make distributions to us, including restrictions on the
conversion of RMB into U.S. dollars or other hard currency and other regulatory
restrictions.
23
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements. The forward-looking statements
are contained principally in the sections entitled “Summary,” “Risk Factors,”
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and “Business.” These statements involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from any future results, performances
or achievements expressed or implied by the forward-looking statements. These
risks and uncertainties include, but are not limited to, the factors described
in the section captioned “Risk Factors” above.
In some
cases, you can identify forward-looking statements by terms such as
“anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,”
“plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar
expressions intended to identify forward-looking statements. Forward-looking
statements reflect our current views with respect to future events and are based
on assumptions and subject to risks and uncertainties. Given these
uncertainties, you should not place undue reliance on these forward-looking
statements. These forward-looking statements include, among other things,
statements relating to:
|
·
|
our expectations regarding the
market for our products and
services;
|
|
·
|
our expectations regarding the
continued growth of the fruit processing industry in the
PRC;
|
|
·
|
our beliefs regarding the
competitiveness of our
products;
|
|
·
|
our expectations regarding the
expansion of our manufacturing
operations;
|
|
·
|
our expectations with respect to
increased revenue growth and our ability to achieve profitability
resulting from increases in our production
volumes;
|
|
·
|
our future business development,
results of operations and financial condition;
and
|
|
·
|
competition from other fruit
juice processing companies.
|
Also,
forward-looking statements represent our estimates and assumptions only as of
the date of this prospectus. You should read this prospectus and the documents
that we reference in this prospectus, or that we filed as exhibits to the
registration statement of which this prospectus is a part, completely and with
the understanding that our actual future results may be materially different
from what we expect.
Except as
required by law, we assume no obligation to update any forward-looking
statements publicly, or to update the reasons actual results could differ
materially from those anticipated in any forward-looking statements, even if new
information becomes available in the future.
24
DETERMINATION
OF OFFERING PRICE
The
offering price of our ordinary shares was arbitrarily determined by our
management after consultation with the underwriter and was based upon
consideration of various factors including our history and prospects, the
background of our management and current conditions in the securities markets.
The price of our ordinary shares does not bear any relationship to our assets,
book value, net worth or other economic or recognized criteria of value. In no
event should the offering price of our ordinary shares be regarded as an
indicator of any future market price of our securities.
USE
OF PROCEEDS
Based on
a per share offering price of $8.00, we estimate that the net proceeds from the
sale of the 2,500,000 ordinary shares in the offering will be approximately
$18,265,000, after deducting the estimated underwriting discounts and
commissions of $1,000,000 and estimated offering expenses of approximately
$735,000. If the underwriter’s over-allotment option is exercised in
full, we estimate that our net proceeds will be approximately
$21,115,000.
The net
proceeds of this offering will be used to increase manufacturing capacity
through the construction of new factories and related facilities and the
purchase of machinery and equipment to expand our production lines as well as
create a new production line for the manufacture of animal bio-feed products.
Our intended use of proceeds is summarized in the following table. If we are
unable to raise sufficient funds from the offering, we will use our working
capital to complete the construction of the new factories and related
facilities.
Intended
Use of the Proceeds
Items
|
Amount
|
|||
Processing
facilities and related storage
|
$ |
6.1
million
|
||
Juice
filtration and processing equipment
|
$ |
6.6
million
|
||
Bio-feed
production line
|
$ |
3.8
million
|
||
Utilities
and plumbing
|
$ |
2.7
million
|
||
Land
improvements
|
$ |
1.0
million
|
||
Total
|
$ |
20.2
Million
|
DIVIDEND
POLICY
Since our
inception we have not paid any dividends on our ordinary shares. We currently do
not anticipate paying any cash dividends for the foreseeable future on our
ordinary shares. Although we intend to retain our earnings, if any, to finance
the exploration and growth of our business, our Board of Directors will have the
discretion to declare and pay dividends in the future. Payment of dividends in
the future will depend upon our earnings, capital requirements, and other
factors, which our Board of Directors may deem relevant.
In
addition, due to various restrictions under PRC laws on the distribution of
dividends by our PRC operating companies, we may not be able to pay dividends to
our shareholders. The Wholly-Foreign Owned Enterprise Law (1986), as
amended and The Wholly-Foreign Owned Enterprise Law Implementing Rules (1990),
as amended and the Company Law of the PRC (2006) contain the principal
regulations governing dividend distributions by wholly foreign owned
enterprises. Under these regulations, wholly foreign owned enterprises may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. Additionally, such
companies are required to set aside a certain amount of their accumulated
profits each year, if any, to fund certain reserve funds. These reserves are not
distributable as cash dividends except in the event of liquidation and cannot be
used for working capital purposes. The PRC government also imposes controls on
the conversion of RMB into foreign currencies and the remittance of currencies
out of the PRC. Therefore, we may experience difficulties in completing the
administrative procedures necessary to obtain and remit foreign currency for the
payment of dividends from the Company’s profits. Furthermore, if our
subsidiaries and affiliates in China incur debt on their own in the future, the
instruments governing the debt may restrict its ability to pay dividends or make
other payments. If we or our subsidiaries and affiliates are unable to receive
all of the revenues from our operations through the current contractual
arrangements, we may be unable to pay dividends on our ordinary
shares.
Further,
recent regulations promulgated by SAFE, regarding offshore financing activities
by PRC residents have undergone a number of changes which may increase the
administrative burden we face. The failure by our shareholders and affiliates
who are PRC residents, including Mr. Jiang, to make any required applications
and filings pursuant to such regulations may prevent us from being able to
distribute profits and could expose us and our PRC resident shareholders to
liability under PRC law.
In
2005, SAFE promulgated regulations in the form of public notices, which require
registrations with, and approval from, SAFE on direct or indirect offshore
investment activities by PRC resident individuals. The SAFE regulations require
PRC resident individuals to register with the relevant SAFE branch before
establishing or acquiring control over an offshore special purpose company, know
as “SPC”, for the purpose of engaging in an equity financing outside of PRC on
the strength of domestic PRC assets originally held by those resident
individuals. Without registration, the PRC entity cannot remit any of its
profits out of the PRC as dividends or otherwise. This could have a material
adverse effect on us given that we expect to be a publicly listed company in the
U.S.
Mr. Zhide
Jiang, our President, Chief Executive Officer, Chairman of the Board of
Directors and also a PRC resident individual, may be required to register at
SAFE when he receives stock of Proud Glory Limited under SAFE regulations if
SAFE considers such acquisition will constitute a directly or indirectly
controlling over a SPC having substantial interest in a PRC company and
therefore constitutes a “round-trip investment.” Failure for Mr. Zhide Jiang to
get such approval or registration from SAFE may limit our PRC subsidiary’s
ability to collect Longkang’s profit or remit any of our PRC subsidiary’s
profits out of the PRC as dividends or otherwise. It may have a material adverse
effect on us. To date, Mr. Zhide Jiang has not obtained relevant approval or
registration from SAFE as the conditions for him to acquire the stock of Proud
Glory Limited have not yet been satisfied.
25
CAPITALIZATION
The
following table sets forth our capitalization as of June 30, 2010 (unaudited)
on:
|
·
|
an actual
basis;
|
|
·
|
on
a pro forma, as adjusted, basis, to give effect to our receipt of
estimated net proceeds from the sale of 2,500,000 ordinary shares
(excluding the 375,000 shares which the underwriter has the option to
purchase to cover over-allotments, if any) in this offering at an assumed
public offering price of $8.00 per share, and after deducting estimated
underwriting discounts and commissions and estimated offering costs and
expenses aggregating approximately
$1,735,000.
|
You
should read this table in conjunction with “Use of Proceeds,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
our consolidated financial statements and related notes included elsewhere in
this prospectus.
|
|
As of June 30, 2010
|
|
|||||
|
|
Actual
|
|
|
Pro Forma, as
Adjusted
|
|
||
Shareholders’ equity:
|
||||||||
Preference
shares ($0.001 par value; 1,000,000 shares authorized, none issued and
outstanding)
|
$
|
-
|
$
|
-
|
||||
Ordinary
shares ($0.001 par value; 50,000,000 shares authorized, 27,499,171 shares
issued and outstanding on an actual basis; and 29,999,171 shares issued
and outstanding on a pro forma, as adjusted, basis (1)
|
27,499
|
29,999
|
||||||
Additional
paid-in capital
|
16,355,307
|
34,617,807
|
||||||
Retained
earnings
|
48,637,562
|
48,637,562
|
||||||
Statutory
and non-statutory reserves
|
2,949,814
|
2,949,814
|
||||||
Accumulated
other comprehensive income - cumulative foreign currency translation
adjustment
|
2,730,236
|
2,730,236
|
||||||
Total
stockholders’ equity
|
$
|
70,700,418
|
$
|
88,965,418
|
||||
Total
capitalization
|
$
|
70,700,418
|
$
|
88,965,418
|
(1)
|
The number of our ordinary shares
shown above to be outstanding after this offering is based on (i)
27,499,171 ordinary shares issued and outstanding as of June 30, 2010; and
(ii) 2,500,000 ordinary shares to be issued in the public offering
(excluding the underwriter’s over-allotment option of up to 375,000
shares).
|
MARKET
FOR OUR SECURITIES AND RELATED SHAREHOLDER MATTERS
There has
never been a public trading market for our ordinary shares and our ordinary
shares are not currently listed or quoted for trading on any national securities
exchange or national quotation system. We have applied to list our
ordinary shares on the NASDAQ Global Market.
Holders
As the
date hereof, there are 27,499,171 ordinary shares issued and
outstanding. There are approximately 500 shareholders of our ordinary
shares.
Transfer
Agent and Registrant
Our
transfer agent is Continental Stock Transfer & Trust Co., at the address of
17 Battery Place 8th floor, New York, NY 10004. Its telephone number is (212)
509-4000.
26
Securities
Authorized for Issuance Under Equity Compensation Plans
We
presently do not have any equity based or other long-term incentive programs. In
the future, we may adopt and establish an equity-based or other long-term
incentive plan if it is in the best interest of the Company and our shareholders
to do so.
DILUTION
If you
invest in our ordinary shares, your investment will be diluted immediately to
the extent of the difference between the public offering price per share you
will pay in this offering and the net tangible book value per share of our
ordinary shares immediately after this offering.
Investors
participating in this offering will incur immediate, substantial dilution. Our
net tangible book value as of June 30, 2010 was $70,700,418, or $2.57 per
ordinary share (unaudited), based on 27,499,171 ordinary shares
outstanding. Investors will incur further dilution from (i) assuming the
sale by us of 2,500,000 ordinary shares offered in this offering at an assumed
public offering price of $8.00 per ordinary share, and after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses, our as adjusted net tangible book value as of June 30, 2010 would have
been $88,965,418, or $2.97 per ordinary share. This represents an
immediate increase in net tangible book value of $0.40 per ordinary share to our
existing shareholders and an immediate dilution of $5.03 per ordinary share to
the new investors purchasing our ordinary shares in this offering.
The
following table illustrates this per share dilution:
Public
offering price per ordinary share
|
$
|
8.00
|
||||||
Net
tangible book value per ordinary share as of June 30, 2010
|
$
|
2.57
|
||||||
Net
tangible book value per ordinary share after this offering
|
$
|
2.97
|
||||||
Dilution
per ordinary share to new public investors
|
$
|
5.03
|
The
following table sets forth, on an as adjusted basis as of June 30, 2010,
the difference between the number of ordinary shares purchased from us, the
total cash consideration paid, and the average price per share paid by our
existing shareholders and by new public investors before deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by us, using an assumed public offering price of $8.00 per ordinary
share:
27
|
|
Shares Purchased
|
|
|
Total Cash Consideration
|
|
|
|
|
|||||||||||
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Average Price Per
Share
|
|
|||||
Existing shareholders
|
|
|
27,499,171
|
|
|
|
91.7
|
%
|
|
$
|
17,011,014
|
|
|
|
45.96
|
%
|
|
$
|
0.62
|
|
New
investors from public offering
|
2,500,000
|
8.3
|
%
|
$
|
20,000,000
|
54.04
|
%
|
$
|
8.00
|
|||||||||||
Total
|
29,999,171
|
100
|
%
|
$
|
37,011,014
|
100
|
%
|
The total
consideration amount for the ordinary shares held by our existing shareholders
includes total cash paid for our outstanding ordinary shares as of June 30,
2010. If the underwriter’s over-allotment option of 375,000 ordinary
shares is exercised in full, the number of shares held by existing shareholders
will be reduced to 90.5% of the total number of ordinary shares to be
outstanding after this offering; and the number of ordinary shares held by the
new investors will be increased to 2,875,000 shares, or 9.5%, of the total
number of ordinary shares outstanding after this offering.
The
discussion and tables above are based on (i) 27,499,171 ordinary shares issued
and outstanding as of June 30, 2010; and (ii) 2,500,000 ordinary shares
issued in the public offering (excluding the underwriters’ over-allotment option
of up to 375,000 ordinary shares). In addition, we may choose to
raise additional capital due to market conditions or strategic considerations
even if we believe we have sufficient funds for our current or future operating
plans. To the extent that additional capital is raised through the sale of
equity or convertible debt securities, the issuance of these securities could
result in further dilution to our shareholders.
28
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 Oriental Dragon Corporation for the fiscal years ended December 31,
2009 and 2008, and for the periods ended June 30, 2010 and 2009, should be read
in conjunction with the Oriental Dragon Corporation financial statements. 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, Special Note Regarding Forward-Looking Statements and Business sections
in this prospectus. 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.
COMPANY
OVERVIEW
We engage
in the processing, producing and distributing of Laiyang Pear fruit juice
concentrate. Our subsidiary, Merit Times, owns 100% of the issued and
outstanding capital stock of MeKeFuBang, a wholly foreign owned enterprise
incorporated under the laws of the PRC. On June 10, 2009, MeKeFuBang
entered into a series of Contractual Arrangements with Longkang, a company
incorporated under the laws of the PRC, and its five shareholders, in which
MeKeFuBang effectively assumed management of the business activities of Longkang
and has the right to appoint all executives and senior management and the
members of the board of directors of Longkang. The contractual arrangements are
comprised of a series of agreements, including a Consulting Services Agreement,
Operating Agreement, Proxy Agreement, and Option Agreement, through which
MeKeFuBang has the right to advise, consult, manage and operate Longkang for an
annual fee in the amount of Longkang’s yearly net profits after tax.
Additionally, Longkang’s shareholders have pledged their rights, titles and
equity interest in Longkang as security for MeKeFuBang to collect consulting and
services fees provided to Longkang through an Equity Pledge Agreement. In order
to further reinforce MeKeFuBang’s rights to control and operate Longkang,
Longkang’s shareholders have granted MeKeFuBang the exclusive right and option
to acquire all of their equity interests in Longkang through an Option
Agreement. As all of the companies are under common control, this has been
accounted for as a reorganization of entities and the financial statements have
been prepared as if the reorganization had occurred retroactively. We
have consolidated Longkang’s operating results, assets and liabilities
within its financial statements.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
While our
significant accounting policies are more fully described in Note 1 to our
consolidated financial statements for the year ended December 31, 2009, we
believe that the following accounting policies are the most critical to aid you
in fully understanding and evaluating this management discussion and
analysis.
Our
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. We
continually evaluate our estimates, including those related to bad debts,
inventories, recovery of long-lived assets, income taxes, and the valuation of
equity transactions. We base our estimates on historical experience and on
various other assumptions that we believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Any future changes to these estimates and assumptions could cause
a material change to our reported amounts of revenues, expenses, assets and
liabilities. Actual results may differ from these estimates under different
assumptions or conditions. We believe the following critical accounting policies
affect our more significant judgments and estimates used in the preparation of
the financial statements.
Variable
Interest Entities
Pursuant
to Financial Accounting Standards Board accounting standards, we are required to
include in our consolidated financial statements the financial statements of
variable interest entities (“VIEs”). The accounting standards require
a VIE to be consolidated by a company if that company is subject to a majority
of the risk of loss for the VIE or is entitled to receive a majority of the
VIE’s residual returns. VIEs are those entities in which we, through contractual
arrangements, bear the risk of, and enjoy the rewards normally associated with
ownership of the entity, and therefore we are the primary beneficiary of the
entity.
Longkang
is considered a VIE, and we are the primary beneficiary. We conduct our
operations in China through our PRC operating company Longkang. On October
22, 2009, we entered into agreements with Longkang pursuant to which we shall
receive 100% of Longkang’s net income. In accordance with these agreements,
Longkang shall pay consulting fees equal to 100% of its net income to our
wholly-owned subsidiary, MeKeFuBang. MeKeFuBang shall supply the
technology and administrative services needed to service Longkang.
The
accounts of Longkang are consolidated in the accompanying financial statements.
As a VIE, Longkang sales are included in our total sales, its income from
operations is consolidated with our, and our net income includes all of
Longkang’s net income, and its assets and liabilities are included in our
consolidated balance sheet. The VIEs do not have any non-controlling interest
and accordingly, did not subtract any net income in calculating the net income
attributable to us. Because of the contractual arrangements, we have pecuniary
interest in Longkang that require consolidation of Longkang’s financial
statements with our financial statements.
Accounts
receivable
We have a
policy of reserving for uncollectible accounts based on our best estimate of the
amount of probable credit losses in our existing accounts
receivable. We periodically review our accounts receivable and other
receivables to determine whether an allowance is necessary based on an analysis
of past due accounts and other factors that may indicate that the realization of
an account may be in doubt. Account balances deemed to be
uncollectible are charged to the allowance after all means of collection have
been exhausted and the potential for recovery is considered
remote.
29
As a
basis for accurately estimating the likelihood of collection, we consider a
number of factors when determining reserves for uncollectable
accounts. We believe that we use a reasonably reliable
methodology to estimate the collectability of our accounts receivable. We review
our allowances for doubtful accounts on at least a quarterly basis. We also
consider whether the historical economic conditions are comparable to current
economic conditions. If the financial condition of our customers or other
parties that we have business relations with were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
Inventories
Inventories,
consisting of raw materials and finished goods related to our products are
stated at the lower of cost or market utilizing the weighted average method. An
allowance is established when management determines that certain inventories may
not be saleable. If inventory costs exceed expected market value due to
obsolescence or quantities in excess of expected demand, we will record
additional reserves for the difference between the cost and the market value.
These reserves are recorded based on estimates. We review inventory
quantities on hand and on order and record, on a quarterly basis, a provision
for excess and obsolete inventory, if necessary. If the results of the review
determine that a write-down is necessary, we recognize a loss in the period in
which the loss is identified, whether or not the inventory is retained. Our
inventory reserves establish a new cost basis for inventory and are not reversed
until we sell or dispose of the related inventory. Such provisions are
established based on historical usage, adjusted for known changes in demands for
such products, or the estimated forecast of product demand and production
requirements.
Property
and equipment
Property
and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using straight-line method
over the estimated useful lives of the assets. The estimated useful lives of the
assets are as follows:
|
Useful Life
|
||||
Building
and building improvements
|
10 - 20 |
Years
|
|||
Manufacturing
equipment
|
10 |
Years
|
|||
Office
equipment and furniture
|
10 |
Years
|
|||
Vehicle
|
10 |
Years
|
The cost
of repairs and maintenance is expensed as incurred; major replacements and
improvements are capitalized. When assets are retired or disposed of, the cost
and accumulated depreciation are removed from the accounts, and any resulting
gains or losses are included in income in the year of disposition.
We
examine the possibility of decreases in the value of fixed assets when events or
changes in circumstances reflect the fact that their recorded value may not be
recoverable. We recognize an impairment loss when the sum of expected
undiscounted future cash flows is less than the carrying amount of the asset.
The amount of impairment is measured as the difference between the asset’s
estimated fair value and its book value.
Included
in property and equipment is construction-in-progress which consists of a
deposit on a factory under construction and machinery pending installation and
includes the costs of construction, machinery and equipment, and any interest
charges arising from borrowings used to finance these assets during the period
of construction or installation. No provision for depreciation is made on
construction-in-progress until such time as the relevant assets are completed
and ready for their intended use.
Land
use rights
There is
no private ownership of land in China. Land is owned by the government and the
government grants land use rights for specified terms. In 2008, we
acquired land use rights for cash of 78,550,010 RMB (approximately $11,300.000)
for 500 acres of plantation fields in Laiyang, China. The land contains Laiyang
Pear plantations and will be used to supply Liayang Pear to us for production.
Our land use rights have terms that expire in December 2037 through December
2054. We amortize these land use rights over the term of the
respective land use right. The lease agreement does not have any renewal option
and we have no further obligations to the lessor. Through June 30, 2010, the
Laiyang Pear orchards on this land did not produce any Laiyang Pear and we do
not expect to yield any pears that can be used in production until September
2010. Accordingly, we included the amortization of the respective
land use rights in general and administrative expenses until such time that it
yields pears from the orchards. Upon the use of pears from the orchards in the
production process, we will reflect the amortization of these land use rights in
cost of sales.
30
Revenue
recognition
The
Company recognizes revenue when persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the purchase price is
fixed or determinable and collectability is reasonably assured. The Company
recognizes revenues from the sale of juice concentrate upon shipment and
transfer of title.
Research
and development
Research
and development costs are expensed as incurred. These costs primarily consist of
fees paid to third parties and cost of material used and salaries paid for the
development of our products.
Income
taxes
We
account for income taxes pursuant to the accounting standards that require the
recognition of deferred tax assets and liabilities for both the expected impact
of differences between the financial statements and the tax basis of assets and
liabilities and for the expected future tax benefit to be derived from tax
losses and tax credit carry forwards. Additionally, the accounting
standards require the establishment of a valuation allowance to reflect the
likelihood of realization of deferred tax assets. Realization of deferred tax
assets, including those related to the temporary difference from the deduction
of imputed interest and related depreciation expenses for income tax purposes as
compared to financial statement purposes, are dependent upon future earnings.
Accordingly, prior to October 2009, the net deferred tax asset related to
temporary differences was fully offset by a valuation allowance. The Company’s
operating affiliate is governed by the Income Tax Law of the People’s Republic
of China. The Company and our wholly-owned subsidiary, Merit Times were
incorporated in the Cayman Islands and British Virgin Islands (“BVI”),
respectively. Under the current laws of the Cayman Islands and BVI, the two
entities are not subject to income taxes. Accordingly, we have not established a
provision for current or deferred taxes for these jurisdictions.
Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Prior to 2009, we had recognized a
valuation allowance for those deferred tax assets for which it is more likely
than not that realization will not occur. The Company’s deferred tax asset
relates to the temporary difference from the amortization of imputed interest
expense on a loan payable for financial statement purposes as compared the
depreciation of the related equipment for tax purposes. In 2008, the
deferred tax asset had been fully reserved with a valuation allowance as
management of the Company had not determined if realization of these assets
would occur in the future. Prior to 2009, management believed that the
realization of income tax benefits from a temporary difference arising from the
amortization of imputed interest expense on a loan payable for financial
statement purposes over the loan period from 2004 to 2009 as compared to the
depreciation of the related asset over 20 years for income tax purposes appeared
not more than likely due to the Company’s limited operating history, the fact
that prior to 2007, the Company had no cooperative agreements for the
acquisition of raw materials, and the Company had a limited number of
customers.
Accordingly,
we had provided a 100% valuation allowance on the deferred tax asset benefit to
reduce the asset to zero. In 2009, after analysis, management concluded that the
realization of the deferred tax asset is probable and accordingly, reversed the
valuation allowance and will reflect a deferred tax asset. Our
decision was based on the fact that 1) we have several years of operating
history with increasing net income; 2) In 2007, we signed cooperative agreements
with farmers for the supply of raw materials. In 2008, we acquired additional
land use rights for the production of Laiyang Pears, our main raw material; 3)
In October 2009, we entered into a financing agreement for the sale of our
ordinary shares for net proceeds of approximately $15,100,000; and 4) we have
begun our plans to diversify its product line to include the sale of animal
bio-feed products.
Foreign
currency translation
The
reporting currency of the Company is the U.S. dollar. The functional currency of
the parent company is the U.S. dollar and the functional currency of the
Company’s operating subsidiaries and affiliates is the Chinese Renminbi (“RMB”).
For the subsidiaries and affiliates whose functional currencies are the RMB,
results of operations and cash flows are translated at average exchange rates
during the period, assets and liabilities are translated at the unified exchange
rate at the end of the period, and equity is translated at historical exchange
rates. Translation adjustments resulting from the process of translating the
local currency financial statements into U.S. dollars are included in
determining comprehensive income. Transactions denominated in foreign
currencies are translated into the functional currency at the exchange rates
prevailing on the transaction dates. Assets and liabilities denominated in
foreign currencies are translated into the functional currency at the exchange
rates prevailing at the balance sheet date with any 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. All of the Company’s revenue transactions are transacted
in the functional currency. The Company does not enter any material
transaction in foreign currencies and accordingly, transaction gains or losses
have not had, and are not expected to have, a material effect on the results of
operations of the Company.
31
Asset and
liability accounts at June 30, 2010 and December 31, 2009 were translated at
6.8086 RMB to $1.00 and at 6.8372 RMB to $1.00, respectively. Equity accounts
were stated at their historical rate. The average translation rates applied to
the statements of income for the six months ended June 30, 2010 and 2009 were
6.83474 RMB and 6,84323 RMB to $1.00, respectively. Cash flows from the
Company’s operations are calculated based upon the local currencies using the
average translation rate. As a result, amounts related to assets and liabilities
reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheets.
Accumulated
other comprehensive income
Comprehensive
income is comprised of net income and all changes to the statements of
stockholders' equity, except those due to investments by stockholders, changes
in paid-in capital and distributions to stockholders. For the Company,
comprehensive income for the six months ended June 30, 2010 and 2009 included
net income and unrealized gains from foreign currency translation
adjustments.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements
That Include Software Elements.” This ASU changes the accounting model for
revenue arrangements that include both tangible products and software elements
that are “essential to the functionality,” and scopes these products out of
current software revenue guidance. The new guidance will include factors to help
companies determine what software elements are considered “essential to the
functionality.” The amendments will now subject software-enabled products to
other revenue guidance and disclosure requirements, such as guidance surrounding
revenue arrangements with multiple-deliverables. The amendments in this ASU are
effective prospectively for revenue arrangements entered into or materially
modified in the fiscal years beginning on or after June 15, 2010. Early
application is permitted. The adoption of the new ASU did not have any important
impact on the Company’s consolidated financial statements.
In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures about Fair
Value Measurements”. ASU 2010-06 requires additional disclosures about fair
value measurements including transfers in and out of Levels 1 and 2 and a higher
level of disaggregation for the different types of financial
instruments. For the reconciliation of Level 3 fair value measurements,
information about purchases, sales, issuances and settlements are presented
separately. This standard is effective for interim and annual reporting
periods beginning after December 15, 2009 with the exception of revised
Level 3 disclosure requirements which are effective for interim and annual
reporting periods beginning after December 15, 2010. Comparative
disclosures are not required in the year of adoption. The Company adopted the
provisions of the standard on January 1, 2010, which did not have a
material impact on our financial statements.
In
February 2010, the FASB (Financial Accounting Standards Board) issued Accounting
Standards Update 2010-09 (ASU 2010-09), Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements. This
amendment addresses both the interaction of the requirements of this Topic with
the SEC’s reporting requirements and the intended breadth of the reissuance
disclosure provision related to subsequent events (paragraph
855-10-50-4). All of the amendments in this Update are effective upon
issuance of the final Update, except for the use of the issued date for conduit
debt obligors. That amendment is effective for interim or annual periods ending
after June 15, 2010. The adoption of the new ASU did not have any
important impact on the Company’s consolidated financial
statements.
In March 2010, the FASB
issued ASU 2010-11, Derivatives and Hedging (Topic 815): Scope Exception Related
to Embedded Credit Derivatives. The amendments in this Update are
effective for each reporting entity at the beginning of its first fiscal quarter
beginning after June 15, 2010. Early adoption is permitted at the
beginning of each entity’s first fiscal quarter beginning after issuance of this
Update. The Company does not expect the provisions of ASU 2010-11 to
have a material effect on the financial position, results of operations or cash
flows of the Company.
In April 2010, the FASB
issued ASU 2010-13, Compensation-Stock Compensation (Topic 718): Effect of
Denominating the Exercise Price of a Share-Based Payment Award in the Currency
of the Market in Which the Underlying Equity Security Trades - a consensus of
the FASB Emerging Issues Task Force. The amendments in this Update
are effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2010. Earlier application is
permitted. The Company does not expect the provisions of ASU 2010-13
to have a material effect on the financial position, results of operations or
cash flows of the Company.
In May
2010, the FASB issued ASU 2010-19, Foreign Currency (Topic 830): Foreign
Currency Issues: Multiple Foreign Currency Exchange Rates. The
amendments in this Update are effective as of the announcement date of March 18,
2010. The Company does not expect the provisions of ASU 2010-19 to have a
material effect on the financial position, results of operations or cash flows
of the Company.
Other
accounting standards that have been issued or proposed by FASB that do not
require adoption until a future date are not expected to have a material impact
on the consolidated financial statements upon adoption.
32
RESULTS
OF OPERATIONS
Results
of Operations for the Three and Six Months ended June 30, 2010 Compared to the
Three and Six Months ended June 30, 2009
The
following tables set forth key components of our results of operations for the
periods indicated, in dollars, and key components of our revenue for the periods
indicated, in dollars. The discussion following the table is based on these
results.
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
NET
REVENUES
|
$
|
6,398,333
|
$
|
2,227,201
|
$
|
49,599,385
|
$
|
46,371,201
|
||||||||
COST
OF SALES
|
4,085,030
|
1,138,261
|
34,149,993
|
32,700,082
|
||||||||||||
GROSS
PROFIT
|
2,313,303
|
1,088,940
|
15,449,392
|
13,671,119
|
||||||||||||
OPERATING
EXPENSES:
|
||||||||||||||||
Selling
|
73,061
|
115,969
|
245,247
|
343,238
|
||||||||||||
Research
and development
|
14
|
29,977
|
73,156
|
71,019
|
||||||||||||
General
and administrative
|
536,137
|
364,904
|
1,054,265
|
794,380
|
||||||||||||
Total
Operating Expenses
|
609,212
|
510,850
|
1,372,668
|
1,208,637
|
||||||||||||
INCOME
FROM OPERATIONS
|
1,704,091
|
578,090
|
14,076,724
|
12,462,482
|
||||||||||||
OTHER
INCOME (EXPENSE):
|
||||||||||||||||
Interest
income
|
33,434
|
12,888
|
58,275
|
25,157
|
||||||||||||
Interest
expense
|
-
|
(57,063
|
)
|
-
|
(189,117
|
)
|
||||||||||
Loss
from foreign currency
|
(9,107
|
)
|
-
|
(9,107
|
)
|
-
|
||||||||||
Total
Other Income (Expense)
|
24,327
|
(44,175
|
)
|
49,168
|
(163,960
|
)
|
||||||||||
INCOME
BEFORE INCOME TAXES
|
1,728,418
|
533,915
|
14,125,892
|
12,298,522
|
||||||||||||
PROVISION
FOR INCOME TAXES
|
||||||||||||||||
Current
|
(422,250
|
)
|
(84,880
|
)
|
(3,539,301
|
)
|
(3,056,621
|
)
|
||||||||
Deferred
|
(14,929
|
)
|
-
|
(29,853
|
)
|
-
|
||||||||||
TOTAL
PROVISION FOR INCOME TAXES
|
(437,179
|
)
|
(84,880
|
)
|
(3,569,154
|
)
|
(3,056,621
|
)
|
||||||||
NET
INCOME
|
$
|
1,291,239
|
$
|
449,035
|
$
|
10,556,738
|
$
|
9,241,901
|
||||||||
COMPREHENSIVE
INCOME:
|
||||||||||||||||
NET
INCOME
|
$
|
1,291,239
|
$
|
449,035
|
$
|
10,556,738
|
$
|
9,241,901
|
||||||||
OTHER
COMPREHENSIVE INCOME:
|
||||||||||||||||
Unrealized
foreign currency translation gain
|
240,521
|
83
|
241,305
|
38,504
|
||||||||||||
COMPREHENSIVE
INCOME
|
$
|
1,531,760
|
$
|
449,118
|
$
|
10,798,043
|
$
|
9,280,405
|
Revenues. For the six months
ended June 30, 2010, we had net revenues of $49,599,385, as compared to net
revenues of $46,371,201 for the six months ended June 30, 2009, an increase of
$3,228,184 or 7.0%. For the three months ended June 30, 2010, we had net
revenues of $6,398,333 as compared to net revenues of $2,227,201 for the three
months ended June 30, 2009, an increase of $4,171,132 or 187.3%. Revenue and
changes for each product line are summarized as follows:
|
|
Six Months Ended June 30,
|
|
|||||||||||||
|
|
2010
|
|
|
2009
|
|
|
Increase
(Decrease)
|
|
|
Percentage
Change
|
|
||||
Laiyang
Pear juice concentrate
|
$
|
43,184,787
|
$
|
39,537,672
|
$
|
3,647,115
|
9.2
|
%
|
||||||||
Apple
juice concentrate
|
-
|
6,798,227
|
(6,798,227
|
)
|
(100.0
|
)%
|
||||||||||
Strawberry
juice concentrate
|
6,398,333
|
15,617
|
6,382,716
|
NM
|
||||||||||||
Other
|
16,265
|
19,685
|
(3,420
|
)
|
(17.4
|
)%
|
||||||||||
Total
net revenues
|
$
|
49,599,385
|
$
|
46,371,201
|
$
|
3,228,184
|
7.0
|
%
|
NM = Not
meaningful
33
|
|
Three Months Ended June 30,
|
|
|||||||||||||
|
|
2010
|
|
|
2009
|
|
|
Increase
(Decrease)
|
|
|
Percentage
Change
|
|
||||
Laiyang
Pear juice concentrate
|
$
|
-
|
$
|
2,207,516
|
$
|
(2,207,516
|
)
|
(100.0
|
)%
|
|||||||
Strawberry
juice concentrate
|
6,398,333
|
-
|
6,398,333
|
100.0
|
%
|
|||||||||||
Other
|
-
|
19,685
|
(19,685
|
)
|
(100.0
|
)%
|
||||||||||
Total
net revenues
|
$
|
6,398,333
|
$
|
2,227,201
|
$
|
(4,171,132
|
)
|
187.3
|
%
|
|
·
|
During
the six months ended June 30, 2010, we continued to see strong demand for
our Laiyang Pear juice concentrate products. Laiyang Pear as a trademark
has been registered by an entity affiliated with the Laiyang city
government, and we have been granted a license to use this trademark
through 2038. In January 2008, the Laiyang government issued a government
letter, which indicated that we can enjoy the status as the sole producer
of Laiyang Pear juice concentrate for a period of 30 years. Pursuant to
this government letter, during this period, no other producer will be
permitted to enter into the Laiyang Pear juice concentrate
business. During the six months ended June 30, 2010, our revenues
from Laiyang Pear juice concentrate increased by 9.2% with approximately
38.5% of the Laiyang Pear juice concentrate increased revenue attributable
to an increase in volume and 61.5% attributable to an increase in sales
price subject to market conditions. Revenues from Laiyang Pear juice
concentrate have increased due to increasing market demands from
manufacturers of pharmaceutical and health supplement
products. During the three months ended June 30,
2010, our revenues from Laiyang Pear juice concentrate decreased by 100.0%
as compared to comparable 2009 period since we sold our entire inventory
of Laiyang pear juice concentrate in the first quarter. Although we had no
revenues from the sale of Laiyang Pear juice concentrate in the second
quarter, as discussed above, for the six months ended June 30, 2010, our
overall revenues from Laiyang pear juice concentrate increased as compared
to the six months ended June 30, 2009. Our business is highly seasonal,
reflecting the harvest season of our primary source fruits, the Laiyang
Pear, during the months from September through the following
February. We produce fruit juice concentrate and store it in
cold storage until it is sold. Typically, a substantial portion
of our revenues are earned during our first, third and fourth quarters. We
generally experience lower revenues during our second
quarter. Our inventory levels increase during the third and
fourth quarter of the year and decrease substantially in the first quarter
of the year. Generally, we sell the remaining inventory balances during
the first quarter of the year and experience a significant decrease in
inventory during this quarter. We have not experienced a
shortfall in working capital during our production period and we have
sufficient working capital on hand to secure our raw materials. If we
experience a bad harvest season due to weather or other situation that we
cannot control, we would have a shortage of primary raw material and we
would experience a substantial decrease in our revenues. The 100 %
decrease in the sale of Laiyang pear juice concentrate for the three
months ended June 30, 2010 as compared to the three months ended June 30,
2009 was primarily attributable to strong demand for our remaining
inventory of pear juice concentrate during the first quarter of 2010 which
allowed us to sell all remaining pear juice concentrate for the 2009-2010
season in the first quarter of 2010. Currently, there are no known trends
or uncertainties that may have a material favorable or unfavorable impact
on net sales or revenues or income from continuing
operations.
|
|
·
|
The decrease in revenues from the
sale of apple juice concentrate of 100.0% was attributable to a decrease
in production of apple juice concentrate. In connection with the sale
of apple juice concentrate, we had a sales contract we signed with an
infant food company. This contract was entered into in 2007 and ended in
2009. We will not produce apple juice concentrate in the third quarter of
2010 and we do not anticipate renewing the apple juice concentrate sales
contract.
|
|
·
|
The increase in revenues from the
sale of strawberry juice concentrate of for the six and three months ended
June 30, 2010 of $6,382,716 and $6,398,333, respectively, was attributable
to the bumper harvest of strawberries in the 2010 period and
increased customer demands. Since we sold out of our strawberry juice
concentrate inventories, we will not produce and sell strawberry juice
concentrate in the third
quarter.
|
The
production of apple, strawberry and any other juice concentrates that we may
produce is dependent upon the season and production requirements of our Laiyang
Pear juice concentrate and may vary depending on the capacity of our limited
production lines. Generally, we only produce apple and strawberry juice
concentrate when we are not producing Laiyang Pear juice
concentrate.
Cost of sales. Cost of sales
increased by $1,449,911, or 4.4%, from $32,700,082 for the six months ended June
30, 2009 to $34,149.993 for the six months ended June 30, 2010. Cost of sales increased
by $2,946,769, or 258.9%, from $1,138,261 for the three months ended June 30,
2009 to $4,085,030 for the three months ended June 30, 2010.
Gross profit and gross
margin. Our gross profit was $15,449,392 for the six months ended June
30, 2010 as compared to $13,671,119 for the six months ended June 30, 2009
representing gross margins of 31.1% and 29.5%, respectively. Our gross profit
was $2,313,303 for the three months ended June 30, 2010 as compared to
$1,088,940 for the three months ended June 30, 2009 representing gross margins
of 36.2% and 48.9%, respectively.
Gross
margin percentages by product line are as follows:
|
|
For the Three
Months ended
June 30, 2010
|
|
|
For the Three
Months ended
June 30, 2009
|
|
|
For the Six
Months ended
June 30, 2010
|
|
|
For the Six
Months ended
June 30, 2009
|
|
||||
Laiyang
Pear juice concentrate
|
-
|
48.4
|
%
|
30.5
|
%
|
26.6
|
%
|
|||||||||
Apple
juice concentrate
|
-
|
-
|
-
|
45.9
|
%
|
|||||||||||
Strawberry
juice concentrate
|
36.2
|
%
|
-
|
35.4
|
%
|
3.6
|
%
|
|||||||||
Other
|
-
|
100.00
|
100.0
|
%
|
100.0
|
%
|
||||||||||
Overall
gross profit %
|
36.2
|
%
|
48.9
|
%
|
31.1
|
%
|
29.5
|
%
|
·
|
For the six months ended June 30,
2010, the increase in gross margin percentages related to Laiyang Pear
juice concentrate was from 26.6% in the 2009 period to 30.5% in the 2010
and was mainly attributed to an increase in sales price of approximately
$221 per metric ton. During the second quarter of 2009, our
revenues primarily consisted of the sale of Laiyang Pear juice
concentrate. We were able to increase our selling price during this period
and we recognized a higher than normal gross profit margin of
48.4%. During the second quarter of 2010, we did not sell any
Laiyang Pear juice
concentrate.
|
34
·
|
Revenues from the sale of apple
juice concentrate decreased to $0 in the first half of 2010 as compared to
the revenues from the sale of apple juice concentrate of $6,798,227 in the
2009 comparable period. In connection with the sale of apple
juice concentrate, we had a sales contract we signed with an infant food
company. This contract was entered into in 2007 and ended in 2009. This
infant food customer is a relatively small company and not likely to buy
big volume of our apple products in 2010. Since the infant food company
will not become our long-term strategic customer, in 2009, we reasonably
increased the sales price compared with the other apple juice concentrate
customers and accordingly, we were able to recognize a gross profit
percentage of 45.9%.
|
·
|
Gross margin percentages related
to strawberry juice concentrate was 35.4% in the 2010 period as compared
to 3.6% in the 2009 period. During the six months ended June 30, 2009, our
strawberry juice concentrate revenues were insignificant. During the
second quarter of 2010, we only sold strawberry juice concentrate with a
gross margin of 36.2%.
|
Gross
margin percentages can vary from period to period based on the price of raw
materials such as Laiyang pears, apples and strawberries and can fluctuate based
on market conditions such as demand and selling price. We expect gross margins
to improve as we become more efficient and begin using Laiyang Pears produced on
our pear orchards that we have rights to use for a period of
30 years.
Selling expenses. Selling
expenses were $245,247 for the six months ended June 30, 2010 and $343,238 for
the comparable period in 2009, a decrease of $97,991 or
28.5%. Selling expenses were $73,061 for the three months ended June
30, 2010 and $115,969 for the comparable period in 2009, a decrease of $42,908
or 37.0%%. Selling expenses consisted of the following:
|
|
Three Months Ended June 30,
|
|
|
Six Months ended June 30,
|
|
||||||||||
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
||||
Compensation
and related benefits
|
$
|
72,140
|
$
|
57,551
|
$
|
207,318
|
$
|
108,126
|
||||||||
Shipping
and handling
|
919
|
14,405
|
23,299
|
133,738
|
||||||||||||
Advertising
|
2
|
41,812
|
14,630
|
81,540
|
||||||||||||
Other
|
-
|
2,201
|
-
|
19,834
|
||||||||||||
Total
|
$
|
73,061
|
$
|
115,969
|
$
|
245,247
|
$
|
343,238
|
¨
|
For the six months ended June 30,
2010, compensation and related benefits increased by $99,192 or 91.7% as
compared to the 2009 comparable period due to an increase in salaries and
related benefits of $12,174 paid to sales staff and an increase in
commissions of $87,018 paid to sales staff. We expect commissions to
increase proportionally when sales increase. For the three months ended
June 30, 2010, compensation and related benefits increased by $14,589 or
25.3% as compared to the 2009 comparable period due to an increase in
salaries and related benefits of approximately $2,071 paid to sales staff
and an increase in commissions of approximately $12,518 paid to sales
staff.
|
¨
|
For
the six months ended June 30, 2010, shipping and handling decreased by
$110,439 or 82.6% as compared to the 2009 comparable
period. For the three months ended June 30, 2010, shipping and
handling decreased by $13,486 or 93.6% as compared to the 2009 comparable
period. Shipping and handling expenses were substantially paid by our
customers in the 2010 periods and were paid by us in the 2009
periods.
|
¨
|
For the six months ended June 30,
2010, advertising expense decreased by $66,910 or 82.1% as compared to the
2009 comparable period. For the three months ended June 30, 2010,
advertising expense decreased by $41,810 or 100.0% as compared to the 2009
comparable period. During the 2009 period, we spent more on
advertising and promotions such as additional juice products conferences
in order to enhance our visibility during the financial
crisis. We did not have corresponding expenses in the 2010
period. Accordingly, advertising expenses
decreased.
|
¨
|
For the six months ended June 30,
2010, other expense decreased by $19,834 or 100.0% as compared to the 2009
comparable period. For the three months ended June 30, 2010, other expense
decreased by $2,201 or 100.0% as compared to the 2009 comparable period.
During the 2010 period, we did not allocate any travel or postage expense
to selling expense.
|
35
Research and development
expenses. Research and development expenses amounted to $73,156 for the
six months ended June 30, as compared to $71,019 for the same period in 2009, an
increase of $2,137 or 3.0%. Research and development expenses
amounted to $14 for the three months ended June 30, 2010, as compared to $29,977
for the same period in 2009, a decrease of $29,963 or 100.0%. The
decrease was primarily attributable to the timing of services performed pursuant
to research and development contracts. The change in research and
development expenses was primarily attributable to the timing of services
performed pursuant to research and development contracts. On March 1,
2010, we entered into a cooperative R&D contract with the Preclinical
Medicine Research Laboratory of Shandong Medicine Academy to develop the
applications of immunoregulation and antitumor effects of Laiyang Pear juice
concentrate. This R&D project is expected to be completed by early 2012 and
the total cost of the project is $732,500 of which we have spent
$73,156. In future periods, we expect research and development
expenses to fluctuate depending on the nature, timing and costs of third party
research and development contracts.
General and administrative expenses.
General and administrative expenses amounted to $1,054,265 for the six
months ended June 30, 2010, as compared to $794,380 for the same period in 2009,
an increase of $259,885 or 32.7%. General and administrative
expenses amounted to $536,137 for the three months ended June 30, 2010, as
compared to $364,904 for the same period in 2009, an increase of $171,233 or
46.9%. General and administrative expenses consisted of the
following:
|
|
For the Three Months ended
June 30,
|
|
|
For the Six Months ended
June 30,
|
|
||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Compensation
and related benefits
|
$
|
150,807
|
$
|
86,327
|
$
|
281,494
|
$
|
121,470
|
||||||||
Professional
fees
|
74,965
|
-
|
137,650
|
-
|
||||||||||||
Depreciation
|
53,477
|
64,795
|
105,897
|
104,730
|
||||||||||||
Amortization
of land use rights
|
137,086
|
132,349
|
274,121
|
273,781
|
||||||||||||
Other
|
119,802
|
146,005
|
255,103
|
294,399
|
||||||||||||
Total
|
$
|
536,137
|
$
|
364,904
|
$
|
1,054,265
|
$
|
794,380
|
¨
|
For
the six months ended June 30, 2010, compensation and related benefits
increased by $160,024 or 131.7% as compared to same period in 2009. For
the three months ended June 30, 2010, compensation and related benefits
increased by $64,480 or 74.7% as compared to same period in 2009. In
January 2010, we hired our chief financial officer and other
administrative staff in connection with becoming a public company. In
January 2010, we hired our chief financial officer and other
administrative staff in connection with becoming a public
company.
|
¨
|
For
the three and six months ended June 30, 2010, professional fees consisted
legal fees, accounting fees and other fees associated with becoming a
public company. We did not incur these fees in the 2009
period. In 2010, we expect professional fees to increase
related to our status as a publicly traded
company.
|
¨
|
For the six months ended June 30,
2010, depreciation expense increased by $1,167 or 1.1% as compared to the
same period in 2009. For the three months ended June 30, 2010,
depreciation expense decreased by $11,318 or 17.5% as compared to the same
period in 2009.
|
¨
|
For the six months ended June 30,
2010, amortization of land use rights increased by $340 or less than 1.0%
as compared to the same period in 2009. For the three months ended June
30, 2010, amortization of land use rights increased by $4,737 or 3.6% as
compared to the same period in 2009. Currently, we include the
amortization of the respective land use rights in general and
administrative expenses until such time that we yield pears from the
orchards on the land. Upon the use of pears from the orchards in the
production process, we will reflect the amortization of these land use
rights in cost of sales.
|
¨
|
Other general and administrative
expenses which consist of entertainment, utilities, office maintenance,
travel expenses, pension, miscellaneous taxes, office supplies and
telephone decreased by $39,296 or 13.3% for the six months ended June 30,
2010 as compared with the same period in 2009. The decrease was
attributable to a decrease in miscellaneous taxes of $49,000 and other
expenses of $17,700 offset by an increase in travel and entertainment fees
of $27,400. For the three months ended June 30, 2010, other general and
administrative expenses decreased by $26,203 or 17.9% as compared with the
same period in 2009. The decrease was attributable to a decrease in
miscellaneous taxes of $16,540 and a decrease in other expenses of
$9,663.
|
Income from operations. For
the six months ended June 30, 2010, income from operations was $14,076,724, as
compared to $12,462,482 for the six months ended June 30, 2009, an increase of
$1,614,242 or 13.0%. For the three months ended June 30, 2010, income from
operations was $1,704,091 as compared to $578,090 for the three months ended
June 30, 2009, an increase of $1,126,001 or 194.8%.
36
Other income (expenses). For
the six months ended June 30, 2010, other income amounted to $49,168 as compared
to other expenses of $163,960 for the same period in 2009. For the
three months ended June 30, 2010, other income amounted to $24,327 as
compared to other expenses of $44,175 for the same period in
2009. For the three and six months ended June 30, 2010 and 2009,
other income (expense) included:
¨
|
For the three and six months
ended June 30, 2010, interest expense decreased by $189,117 and $57,063 or
100%, respectively. In connection with the acquisition of the net assets
of the Company, which occurred in 2004, we assumed a loan payable to a
third party related to the original construction of our factory. The loan
was non-interest bearing. Since the agreement did not have a stated
interest rate, we used an imputed interest rate of interest of 6.12% based
on PRC central bank five year and up loan rate effective October
2004. The loan we repaid in full prior to December 31, 2009,
and accordingly, we did not incur any interest expense in the 2010
period.
|
¨
|
For the three and six months
ended June 30, 2010, interest income increased by $20,546 or 159.4% and
$33,118 or 131.6%, respectively, and related to an increase in funds in
interest bearing accounts.
|
¨
|
For the three and six months
ended June 30, 2010, loss from foreign currency increased by $9,107 or
100.0% and related to the recording of certain deposits on
equipment.
|
Income tax expense. For the
three and six months ended June 30, 2010, income tax expense increased by
$352,299 or 415.1% and $512,533, or 16.8%, respectively, as compared to the
comparable period in 2009 which was attributed to an increase in taxable
income.
Net income. As a result of
the factors described above, our net income for the six months ended June 30,
2010 and 2009 was $10,556,738, or $0.38 per ordinary share (basic and diluted)
and $9,241,901, or $0.43 per ordinary share (basic and diluted), respectively.
Our net income for the three months ended June 30, 2010 and 2009 was $1,291,239,
or $0.05 per ordinary share (basic and diluted) and $449,035, or $0.02 per
ordinary share (basic and diluted).
Foreign currency translation
gain. The functional currency of our subsidiaries operating in the PRC is
the Chinese Yuan or Renminbi (“RMB”). The financial statements of our
subsidiaries are translated to U.S. dollars using period end rates of exchange
for assets and liabilities, and average rates of exchange (for the period) for
revenues, costs, and expenses. Net gains and losses resulting from foreign
exchange transactions are included in the consolidated statements of operations.
As a result of these translations, which are a non-cash adjustment, we reported
a foreign currency translation gain of $241,305 for the six months ended June
30, 2010 as compared to $38,504 for the same period year 2009. We reported a
foreign currency translation gain of $240,521 for the three months ended June
30, 2010 as compared to $83 for the same period year 2009. These non-cash gains
had the effect of increasing our reported comprehensive income.
Comprehensive income. For the
six months ended June 30, 2010, comprehensive income of $10,798,043 is derived
from the sum of our net income of $10,556,738 plus foreign currency translation
gains of $241,305. For the three months ended June 30, 2010,
comprehensive income of $1,531,760 is derived from the sum of our net income of
$1,291,239 plus foreign currency translation gains of $240,521.
37
Results
of Operations for the Year ended December 31, 2009 Compared to the Year ended
December 31, 2008
The
following tables set forth key components of our results of operations for the
years indicated, in dollars, and key components of our revenue for the years
indicated, in dollars. The discussion following the table is based on these
results.
|
For the Years Ended
December 31,
|
|||||||
|
2009
|
2008
|
||||||
NET
REVENUES
|
$
|
82,627,335
|
$
|
74,232,226
|
||||
COST
OF SALES
|
59,566,445
|
54,897,949
|
||||||
GROSS
PROFIT
|
23,060,890
|
19,334,277
|
||||||
OPERATING
EXPENSES:
|
||||||||
Selling
|
456,024
|
686,724
|
||||||
Research
and development
|
1,408,501
|
256,283
|
||||||
General
and administrative
|
1,929,938
|
1,710,215
|
||||||
Total
Operating Expenses
|
3,794,463
|
2,653,222
|
||||||
INCOME
FROM OPERATIONS
|
19,266,427
|
16,681,055
|
||||||
OTHER
INCOME (EXPENSE):
|
||||||||
Interest
income
|
62,512
|
50,251
|
||||||
Interest
expense
|
(335,560
|
)
|
(976,204
|
)
|
||||
Total
Other Income (Expense)
|
(273,048
|
)
|
(925,953
|
)
|
||||
INCOME
BEFORE INCOME TAXES
|
18,993,379
|
15,755,102
|
||||||
(PROVISION
FOR) BENEFIT FROM INCOME TAXES
|
||||||||
Current
|
(4,817,299
|
)
|
(4,196,701
|
)
|
||||
Deferred
|
894,789
|
-
|
||||||
TOTAL
PROVISION FOR INCOME TAXES
|
(3,922,510
|
)
|
(4,196,701
|
)
|
||||
NET
INCOME
|
$
|
15,070,869
|
$
|
11,558,401
|
||||
COMPREHENSIVE
INCOME:
|
||||||||
NET
INCOME
|
$
|
15,070,869
|
$
|
11,558,401
|
||||
OTHER
COMPREHENSIVE INCOME:
|
||||||||
Unrealized
foreign currency translation gain
|
75,088
|
1,304,006
|
||||||
|
||||||||
COMPREHENSIVE
INCOME
|
$
|
15,145,957
|
$
|
12,862,407
|
Revenues. For the year ended
December 31, 2009, we had net revenues of $82,627,335, as compared to net
revenues of $74,232,226 for the year ended December 31, 2008, an increase of
11.3%. Revenue and changes for each product line is summarized as
follows:
|
2009
|
2008
|
Increase
(Decrease)
|
Percentage
Change
|
||||||||||||
Pear juice concentrate
|
$
|
73,369,847
|
$
|
64,565,458
|
$
|
8,804,389
|
13.6
|
%
|
||||||||
Apple
juice concentrate
|
6,800,563
|
7,454,906
|
(654,343
|
)
|
(8.8
|
)%
|
||||||||||
Strawberry
juice concentrate
|
2,389,486
|
2,087,970
|
301,516
|
14.4
|
%
|
|||||||||||
Other
|
67,439
|
123,892
|
(56,453
|
)
|
(45.6
|
)%
|
||||||||||
Total
net revenues
|
$
|
82,627,335
|
$
|
74,232,226
|
$
|
8,395,109
|
11.3
|
%
|
During
the year ended December 31, 2009, we continued to see strong demand for our pear
juice concentrate products. In 2009, our revenues from pear juice concentrate
increased by 13.6% with approximately 83.2% of the pear concentrate increased
revenue attributable to an increase in volume and 16.8% attributable to an
increase in sales price subject to market conditions. Revenues from Laiyang Pear
juice concentrate have increased due to increasing market demands from the
pharmaceutical and health supplement products. The decrease in
revenues from the sale of apple juice concentrate of 8.8% was primarily
attributable to a decrease in production of apple juice concentrate. The
increase in revenues from the sale of strawberry juice concentrate of 14.4% was
attributable to our increase in production of strawberry juice
concentrate. The production of apple and strawberry juice concentrate
is dependent upon the season and production requirements of our pear juice
concentrate and may vary depending on the capacity of our limited production
lines. Generally, we only produce apple and strawberry juice concentrate when we
are not producing pear juice concentrate.
Cost of sales. Cost of sales
increased by $4,668,496, or 8.5%, from $54,897,949 for the year ended December
31, 2008 to $59,566,445 for the year ended December 31, 2009 and was
attributable to the increase in our net revenue.
Gross profit and gross
margin. Our gross profit was $23,060,890 for year ended December 31, 2009
as compared to $19,334,277 for the year ended December 31, 2008 representing
gross margins of 27.9% and 26.0%, respectively. The increase in our gross margin
percentage was primarily attributable to the increased usage in production
capacity and the increase in gross margin percentage related to pear juice
concentrate and apple juice concentrate offset by the decrease in gross margin
percentage related to strawberry juice concentrate. The increase in gross margin
percentages related to pear juice concentrate was from 23.8% in the fiscal 2008
to 26.2% in fiscal 2009 and was mainly attributed to the increase in sales
price.
While revenues from the sale of apple juice concentrate decreased in 2009 as
compared to the revenues from the sale of apple juice concentrate in 2008, the
gross margin percentages related to apple juice concentrate increased from 44.1%
in 2008 to 46.3% in 2009. The increase in gross margin percentages related to
apple juice concentrate from 44.1% in 2008 to 46.3% in 2009 is primarily due to
an increase in our sales price. Specifically, the high margin level of apple
juice concentrate for the fiscal year ended December 31, 2008 and December 31
2009, respectively, is due to the sales contract we signed with an infant food
company. This contract was entered into in 2007 and ended in 2009. This infant
food customer is a relatively small company and not likely to buy big volume of
our apple products in the future. Since it won’t become our long-term strategic
customer, we reasonably increased the sales price compared with the other apple
juice concentrate customers. As this customer bought our product to produce
infant food, it specifically required us to use the best quality apples strictly
selected from our own orchards, and to apply the highest level quality standards
and refrigeration storage. Therefore, we had more pricing power and charged a
higher price for this customer. There is no minimum
guaranteed price that we must pay for apples. Gross margin percentages can vary
from period to period based on the price of raw materials such as pears, apples
and strawberries and can also fluctuate based on market conditions such as
demand and selling price, We expect gross margins to improve as we become more
efficient and begin using pears produced on our pear orchards that we have
rights to use for a period of 30 years. Gross margin percentages by product
line are as follows:
|
For the Year ended
December 31, 2009
|
For the Year ended
December 31, 2008
|
||||||
Pear juice concentrate
|
26.2
|
%
|
23.8
|
%
|
||||
Apple
juice concentrate
|
46.3
|
%
|
44.1
|
%
|
||||
Strawberry
juice concentrate
|
26.1
|
%
|
28.8
|
%
|
||||
Other
|
100.0
|
%
|
57.2
|
%
|
||||
|
||||||||
Overall
gross profit %
|
27.9
|
%
|
26.0
|
%
|
38
Selling expenses. Selling
expenses were $456,024 for the year ended December 31, 2009 and $686,724 for the
comparable year in 2008. Selling expenses consisted of the
following:
2009
|
2008
|
|||||||
Compensation
and related benefits
|
$
|
185,076
|
$
|
119,154
|
||||
Shipping
and handling
|
151,486
|
337,333
|
||||||
Advertising
|
99,622
|
209,701
|
||||||
Other
|
19,840
|
20,536
|
||||||
$
|
456,024
|
$
|
686,724
|
|
·
|
Compensation and related benefits
increased by $65,922 or 55.3% due to an increase in salaries and related
benefits of approximately $25,000 paid to sales staff and an increase in
commissions of approximately $41,000 paid on increased
revenues.
|
|
·
|
Shipping and handling decreased
by $185,847 or 55.1% due to a decrease in our shipping expenses which were
substantially paid by our customers in fiscal 2009 but were
mainly paid by us in fiscal 2008 offset by an increase in our handling
expenses incurred by the increased
revenues.
|
|
·
|
Advertising expense decreased by
$110,079 or 52.5%. During the last quarter of fiscal 2008, we attended
many national juice products conferences in order to enhance our
visibility. We did not have corresponding expenses in fiscal 2009.
Accordingly, advertising expenses
decreased.
|
|
·
|
Other expense decreased by $696,
or 3.4% due to a decrease in exhibition fees
paid.
|
Research and development
expenses. Research and development expenses amounted to $1,408,501 for
the year ended December 31, 2009, as compared to $256,283 for the same period in
2008, an increase of $1,152,218 or 449.6%. The increase was primarily
attributable to an increase in a research and development contracts with third
parties which were fulfilled in fiscal 2009. Accordingly, we accrued all of
expenses related to the research and development contracts. In future periods,
we expect research and development expenses to fluctuate depending on the
nature, timing and costs of third party contracts.
General and administrative expenses.
General and administrative expenses amounted to $1,929,938 for the year
ended December 31, 2009, as compared to $1,710,215 for the same period in 2008,
an increase of $219,723 or 12.8%. General and administrative expenses consisted
of the following:
|
2009
|
2008
|
||||||
Compensation
and related benefits
|
$
|
528,785
|
$
|
265,818
|
||||
Depreciation
|
209,532
|
282,403
|
||||||
Amortization
of land use rights
|
547,750
|
538,202
|
||||||
Other
|
643,871
|
623,792
|
||||||
|
$
|
1,929,938
|
$
|
1,710,215
|
|
·
|
For the year ended December 31,
2009, compensation and related benefits increased by $262,967 or 98.9% as
compared to the year ended December 31, 2008 and was attributable to the
increased accrual of a discretionary bonus to employees of approximately
$262,000.
|
|
·
|
For the year ended December 31,
2009, depreciation expense decreased by $72,871 or 25.8% as compared to
the year ended December 31,
2008.
|
|
·
|
For the year ended December 31,
2009, amortization of land use rights increased by $9,548 or 1.8% as
compared to the year ended December 31, 2008. Currently, we include the
amortization of the respective land use rights in general and
administrative expenses until such time that we yield pears from the
orchards on the land. Upon the use of pears from the orchards in the
production process, we will reflect the amortization of these land use
rights in cost of sales.
|
|
·
|
Other general and administrative
expenses which consist of professional fees, entertainment, utilities,
office maintenance, travel expenses, pension, miscellaneous taxes, office
supplies and telephone increased by $20,079 or 3.2% for the year ended
December 31, 2009 as compared with the same period in 2008.In 2010, we
expect professional fees to increase related to our status as a publicly
traded company.
|
39
Income from operations. For
the year ended December 31, 2009, income from operations was $19,266,427, as
compared to $16,681,055 for the year ended December 31, 2008, an increase of
$2,585,372 or 15.5%.
Other income (expenses). For
the year ended December 31, 2009, other expense amounted to $273,048 as
compared to other expenses of $925,953 for the same period in
2008. For the years ended December 31, 2009 and 2008, other income
(expense) included:
|
·
|
Interest expense decreased by
$640,644 or 65.6%. In connection with the acquisition of the
net assets of the Company, which occurred in 2004, we assumed a loan
payable to a third party related to the original construction of the our
factory. The loan was non-interest bearing. Since the agreement did not
have a stated interest rate, we used an imputed interest rate of interest
of 6.12% based on PRC central bank five year and up loan rate effective
October 2004. For the year ended December 31, 2009 and 2008,
imputed interest expense related to this loan amounted to $335,560 and
$976,204, respectively. During the year ended December 31, 2009, we repaid
loans of approximately $13,808,000, which reduced interest expense for the
year. The loan we repaid in full prior to December 31, 2009 and
accordingly, we do not expect to incur any interest expense in the near
future.
|
|
·
|
Interest income increased by
$12,261 or 24.4% and related to an increase in funds in interest bearing
accounts.
|
Income tax expense. Income
tax expense decreased by $274,191, or 6.5%, for the year ended December 31, 2009
as compared to the comparable period in 2008 which was primarily attributed to a
deferred income tax benefit of approximately $895,000 generated in fiscal 2009
offset by the increase in provision for income taxes of approximately $621,000
as a result of the increase in taxable income generated by our operating
entities. Prior to 2009, we had recognized, a valuation allowance for those
deferred tax assets for which it is more likely than not that realization will
not occur. Our deferred tax asset relates to the timing difference from the
amortization of imputed interest for financial statement purposes as compared
the amortization of the related equipment for tax purposes. Prior to
2009, management believed that the realization of income tax benefits from a
timing difference arising from the amortization of imputed interest for
financial statement purposes over the period from 2004 to 2009 as compared to
the these amortization of the related asset over 20 years for income tax
purposes appeared not more than likely due to the Company’s limited operating
history, the fact that prior to 2007, the Company had no cooperative agreements
for the acquisition of raw materials, and the Company had a limited
number of customers. Accordingly, we had provided a 100% valuation
allowance on the deferred tax asset benefit to reduce the asset to zero. In
2009, after analysis, management concluded that the realization of the deferred
tax asset is probable and accordingly, reversed the valuation allowance in the
amount of approximately $895,000 and will reflect a deferred tax asset on our
balance sheet.
Net income. As a result of
the factors described above, our net income for the year ended December 31, 2009
was $15,070,869, or $0.67 per ordinary share (basic and diluted). For the year
ended December 31, 2008, we had net income of $11,558,401, or $0.54 per ordinary
share (basic and diluted).
Foreign currency translation
gain. The functional currency of our subsidiaries operating in the PRC is
the Chinese Yuan or Renminbi (“RMB”). The financial statements of our
subsidiaries are translated to U.S. dollars using period end rates of exchange
for assets and liabilities, and average rates of exchange (for the period) for
revenues, costs, and expenses. Net gains and losses resulting from foreign
exchange transactions are included in the consolidated statements of operations.
As a result of these translations, which are a non-cash adjustment, we reported
a foreign currency translation gain of $75,088 for the year ended December 31,
2009 as compared to $1,304,006 for the same period year 2008. This non-cash gain
had the effect of increasing our reported comprehensive income.
Comprehensive income. For the
year ended December 31, 2009, comprehensive income of $15,145,957 is derived
from the sum of our net income of $15,070,869 plus foreign currency translation
gains of $75,088.
40
LIQUIDITY
AND CAPITAL RESOURCES
As of
June 30, 2010, our balance of cash and cash equivalents was $47,761,578, as
compared to $26,574,338 as of December 31, 2009. These funds were located
in financial institutions located in China.
Our
primary uses of cash have been for the construction of our new factory and
warehouse facility and for deposits on equipment for the new productions lines
as discussed below. Additionally, we use cash for employee compensation, new
product development and working capital. All funds received have been expended
in the furtherance of growing the business and establishing brand portfolios.
The following trends are reasonably likely to result in a material decrease in
our liquidity over the near to long term:
|
o
|
An increase in working capital
requirements to finance higher level of
inventories,
|
|
o
|
Addition of administrative and
sales personnel as the business
grows,
|
|
o
|
Increases in advertising, public
relations and sales promotions for existing and new brands as the company
expands within existing markets or enters new
markets,
|
|
o
|
Development of new products in
the bio-animal feed industry to complement our current
products,
|
|
o
|
The cost of being a public
company and the continued increase in costs due to governmental compliance
activities, and
|
|
o
|
Capital expenditures to add
production lines.
|
In
September 2010, we added two new production lines: one for the processing of
juice concentrate and puree products and one for the processing of bio animal
feed as a byproduct of Laiyang Pear juice concentrate and fruit puree products
to further diversify our product mix and increase our revenues. We incurred
approximately $17,000,000 in costs in connection with the addition of these two
production lines. We began using both of these new production lines -
one for the processing of juice concentrate and puree products and one for the
processing of bio animal feed in September 2010 to produce test and sample
batches of product. . We have not generated any revenues from either
of the new production lines. The offering proceeds from the November 2009
private placement, along with the proceeds from operations, were being used to
fund the above production lines expansion. As outlined below, during the six
months ended June 30, 2009, we used cash of approximately $10,900,000 to pay off
loans and acquisition payables. We currently plan on using net cash provided by
operating activities to fund our internal growth and fund an expansion of our
distribution channels. In addition to the new productions lines
discussed above, we intend to raise additional funds in the near future for two
additional production lines: one for the processing of juice concentrate and
puree products and one for the processing of bio animal feed. We estimated
that these two new production lines will cost approximately $20,000,000 and will
be paid for from the proceeds of this public offering. However there are no
assurances that we will be able to raise additional funds in the near
future.
Changes
in our working capital position are summarized as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
Increase
in Working
|
|
|||
2010
|
2009
|
Capital
|
||||||||||
Current
assets
|
$
|
48,761,578
|
$
|
42,649,780
|
$
|
6,111,798
|
||||||
Current
liabilities
|
5,142,805
|
6,784,193
|
1,641,388
|
|||||||||
Working
capital
|
$
|
43,618,773
|
$
|
35,865,587
|
$
|
7,753,186
|
Our
working capital increased $7,753,186 to $43,618,773 at June 30, 2010 from
working capital of $35,865,587 at December 31, 2009. This increase in working
capital is primarily attributable to a net increase in cash and restricted cash
of approximately $21,187,000, a decrease in accrued expenses of $693,000, and a
decrease in income taxes payable of approximately $1,899,000 offset by a
decrease in inventories of $13,339,000 and an increase in other taxes payable of
$576,000.
Our
business is highly seasonal, reflecting the harvest season of our primary source
fruits during the months from June through February of the following
year. Typically, a substantial portion of our revenues are earned
during our first, third and fourth quarters. We generally experience lower
revenues during our second quarter. Our inventory levels increase
during the third and fourth quarter of the year and decrease substantially in
the first quarter of the year. Generally, we pay our suppliers during
the third and fourth quarters. The impact from the use of cash to secure raw
materials and for production during these quarters is lessened by the receipt of
cash upon delivery of our products during the production
period. Generally we sell the remaining inventory balances during the
first quarter on the year and experience a significant decrease in inventory
during this quarter. We have not experienced a shortfall in working
capital during our production period and we have sufficient working capital on
hand to secure our raw materials.
During
2010, we received payment upon delivery of our products. We have been able to
collect our accounts receivable balances in advance of the delivery.
Accordingly, as of June 30, 2010, we had no accounts receivable. In the future,
we expect to continue to collect payments in advance of delivery.
Cash
flows from the Company's operations are calculated based upon the local
currencies using the average translation rate. As a result, amounts related to
assets and liabilities reported on the statement of cash flows will not
necessarily agree with changes in the corresponding balances on the balance
sheets.
41
The
following summarizes the key components of the Company’s cash flows for the six
months ended June 30, 2010 and 2009:
|
|
Six Months Ended
|
|
|||||
|
|
June 30,
|
|
|
June 30,
|
|
||
2010
|
2009
|
|||||||
Net
cash provided by operating activities
|
$
|
23,031,324
|
$
|
29,912,779
|
||||
Cash
flows used in investing activities
|
$
|
(3,706,365
|
)
|
$
|
-
|
|||
Cash
flows provided by (used in) financing activities
|
$
|
1,704,407
|
$
|
(10,891,835
|
)
|
|||
Effect
of exchange rate on cash
|
$
|
157,874
|
$
|
(1,576
|
)
|
|||
Net
increase in cash and cash equivalents
|
$
|
21,187,240
|
$
|
19,019,368
|
Net cash
flow provided by operating activities was $23,031,324 for the six months ended
June 30, 2010 as compared to net cash flow provided by operating activities of
$29,912,779 for the six months ended June 30, 2009, a decrease of $6,881,455.
Net cash flow provided by operating activities for the six months ended June 30,
2010 consisted of net income of $10,556,738, the add back (deduction) of
non-cash items such as depreciation of $475,753, the amortization of land use
rights of $274,121, stock-based compensation of $23,999, deferred income taxes
of $29,853 and a reduction of a reserve for inventory obsolescence of $(18,787),
and changes in operating assets and liabilities consisting of a decrease in
inventories of $13,339,472 attributable to the seasonality factors described
above, a decrease in prepaid VAT on purchases of $25,660, and an increase in
other taxes payable of 574,009 offset by a decrease in accounts payable of
$63,241, a decrease in income taxes payable of $1,478,111 due to the payment of
2009 income taxes due, and a decrease in accrued expenses of $708,132
attributable to the payment of research and development expenses in 2009. Net
cash flow provided by operating activities for the six months ended June 30,
2009 consisted of net income of $9,241,901, the add back of non-cash items such
as $448,917 of depreciation and the amortization of land use rights of $273,781,
and changes in operating assets and liabilities consisting of a decrease in
accounts receivable of $5,110,943, a decrease in inventories of $13,604,321
attributable to the seasonality factors described above, a decrease in prepaid
and other current assets of $995,776, a decrease in prepaid VAT on purchase of
$221,262, and an increase in other taxes payable of $98,302, an increase in
income taxes payable of $686,617 offset by a decrease in accounts payable of
$615,052 and a decrease in accrued expenses of
$153,989.
Net
cash flow used in investing activities was $3,706,365 for the six months ended
June 30, 2010 as compared to net cash used in investing activities of $0 for the
six months ended June 30, 2009. During the six months ended June 30, 2010, we
used cash of $3,706,365 towards the construction of our new manufacturing
facility and the purchase of property and equipment for our two new production
lines. During the third quarter of 2010, we will invest additional cash for the
completion of our new manufacturing facility and for production equipment of
approximately $12,500,000.
Net cash
flow provided by financing activities was $1,704,407 for the six months
ended June 30, 2010 as compared to net cash flow used in financing activities of
$10,891,835 for the six months ended June 30, 2009. During the six months
ended June 30, 2010, we received operating cash from our restricted cash held in
escrow of $1,704,407. During the six months ended June 30, 2009, we used cash
for the repayment of loans of $10,039,970 and the repayment of acquisition
payables of $851,865.
The
following summarizes the key components of the Company’s cash flows for the year
ended December 31, 2009 and 2008:
|
Years Ended
|
|||||||
|
December 31,
|
December 31,
|
||||||
|
2009
|
2008
|
||||||
Net
cash provided by operating activities
|
$
|
27,500,838
|
$
|
13,573,941
|
||||
Cash
flows used in investing activities
|
$
|
(863,047
|
)
|
$
|
(11,285,512
|
)
|
||
Cash
flows used in financing activities
|
$
|
(2,097,174
|
)
|
$
|
(9,925,998
|
)
|
||
Effect
of exchange rate on cash
|
$
|
4,863
|
$
|
494,982
|
||||
Net
increase (decrease) in cash and cash equivalents
|
$
|
24,545,480
|
$
|
(7,142,587
|
)
|
Net cash
flow provided by operating activities was $27,500,838 for the year ended
December 31, 2009 as compared to net cash flow provided by operating activities
of $13,573,941 for the year ended December 31, 2008, an increase of $13,926,897.
Net cash flow provided by operating activities for the year ended December 31,
2009 was mainly due to net income of $15,070,869, the add back of non-cash items
such as $948,579 of depreciation, and the amortization of land use rights of
$547,750, a decrease in accounts receivable of $5,112,699, a decrease in
inventories of $2,282,001, a decrease in prepaid and other current assets of
$996,118, a decrease in prepaid VAT on purchases of $351,682, an increase in
accrued expenses of $1,120,405 and an increase in income taxes payable of
$2,446,481 offset by an increase in deferred income taxes asset of $894,789 and
a decrease in accounts payable of $512,258. Net cash flow provided by operating
activities for the year ended December 31, 2008 was mainly due to net income of
$11,558,401, the add back of non-cash items such as $930,720 of depreciation,
and the amortization of land use rights of $538,202, a decrease in inventories
of $5,568,816 and, an increase in accrued expenses of $880,768 offset by an
increase in accounts receivable of $3,397,094 and a decrease in income taxes
payable of $2,498,796.
Net cash
flow used in investing activities was $863,047 for the year ended December 31,
2009 as compared to net cash used in investing activities of $11,285,512 for the
year ended December 31, 2008. During the year ended December 31, 2009, we used
cash of $863,047 for the purchase of property and equipment. During the year
ended December 31, 2008, we used cash of $11,282,274 to acquire land use rights
to pear plantations. We intend to use the pears harvested for our
production. Additionally, we used cash of $3,238 for the purchase of
property and equipment.
Net cash
flow used in financing activities was $2,097,174 for the year ended
December 31, 2009 as compared to net cash flow used in financing activities of
$9,925,998 for the year ended December 31, 2008. During the year ended
December 31, 2009, we received gross proceeds from the sale of common stock of
$17,011,014 and proceeds from subscription receivable of $50,000 and we used
cash to increase restricted cash balancer by $2,587,917, we used cash for the
repayment of loans of $13,808,178, the payment of offering costs of $1,909,936
and the payment of acquisition payables of $852,157. During the year ended
December 31, 2008, we used cash for the repayment of loans of $4,769,114 and the
repayment of acquisition payables of $5,156,884.
The
Company currently generates its cash flow through operations which it believes
will be sufficient to sustain current level operations for at least the next
twelve months.
42
Recent
Offering
On
October 22, 2009, pursuant to a Subscription Agreement (the “Subscription
Agreement”) between the Company and certain investors (the “Investors”) named in
the Subscription Agreement, we completed an offering (the “Offering”) of the
sale of investment units (the “Units”) for gross proceeds of $15,096,011, each
Unit consisting of 50,000 Ordinary Shares, par value $0.001 per share (the
“Ordinary Shares”) and five-year warrants to purchase 25,000 of the Ordinary
Shares of the Company, at an exercise price of $6.00 per share (the
“Warrants”). Additionally, on November 2, 2009, we entered into and
closed on the second and final round of a private placement by raising gross
proceeds of $1,915,003 through the sale of Units pursuant to a Subscription
Agreement between the Company and certain Investors named in the Subscription
Agreement. Together with the first closing on October 22, 2009, we raised
aggregate gross proceeds of $17,011,014 from the Offering, and issued 5,670,339
Ordinary Shares and 2,835,177 Warrants to Investors.
Additionally,
our majority shareholder, Proud Glory Limited, of which Mr. Zhide Jiang is the
managing director (the “Lock-Up Shareholder”), entered into a Lock-Up Agreement
with the Company whereby the Lock-Up Shareholder agreed it will not, offer,
pledge, sell or otherwise dispose of any Ordinary Shares or any securities
convertible into or exercisable or exchangeable for Ordinary Shares during the
period beginning on and including the date of the final Closing of the Offering
for a period of eighteen (18) months.
Pursuant
to an Investor Relations Escrow Agreement, amongst us, Grandview Capital, Inc.
(“Grandview”), Access America Investments, LLC (“Access America”) and Anslow
& Jaclin, LLP as escrow agent, dated October 22, 2009 (the “Investor
Relations Escrow Agreement”), we placed a total of $120,000 in an escrow account
with our counsel to be used for the payment of investor relation fees. Further,
pursuant to a Holdback Escrow Agreement, amongst us, Grandview, Access America
and Anslow & Jaclin, LLP as escrow agent, dated October 22, 2009 (the
“Holdback Escrow Agreement”), we placed escrow funds equal to ten percent (10%)
of the Offering proceeds, with our counsel to be held in escrow until such time
as a qualified chief financial officer has been approved and appointed as an
officer of Oriental Dragon. Finally, pursuant to a Going Public
Escrow Agreement, amongst us, Grandview, Access America and Anslow & Jaclin,
LLP as escrow agent, dated October 22, 2009 (the “Going Public Escrow
Agreement”), we placed a total of $1,000,000 from the Offering proceeds with our
counsel to be used for the payment of fees and expenses related to becoming a
public company and listing our Ordinary Shares on a senior exchange. Pursuant to
each of the Investor Relations Escrow Agreement, Holdback Escrow Agreement and
Going Public Escrow Agreement, in the event that the proceeds of such escrow
accounts have not been fully distributed within two years from the date thereof,
the balance of such escrow proceeds shall be returned to us. In January 2010, we
hired a chief financial officer and $1,509,600 was released from escrow to
us. At June 30, 2010, we had restricted cash held in escrow of
$883,509.
Contractual
Obligations
The
following tables summarize our contractual obligations as of June 30, 2010, and
the effects of these obligations are expected to have on our liquidity and cash
flows in future periods.
|
|
Payments Due by Period
|
|
|||||||||||||
|
|
Total
|
|
Less than 1
year
|
|
1-3 Years
|
|
3-5
Years
|
|
5 Years
+
|
|
|||||
Contractual
Obligations :
|
||||||||||||||||
Construction
and equipment (1)
|
$
|
12,500,000
|
$
|
12,500,000
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
Total
Contractual Obligations:
|
$
|
12,500,000
|
$
|
12,500,000
|
$
|
-
|
$
|
-
|
$
|
-
|
|
(1)
|
Represents the estimated amount
of additional construction costs to be incurred and the cost of equipment
to be acquired as part of our expansion plans to add additional production
capacity. The construction project and all payments are
expected to be completed in the third quarter of
2010.
|
OFF-BALANCE
SHEET ARRANGEMENTS
There are
no off-balance sheet arrangements between us and any other entity that have, or
are reasonably likely to have, a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to shareholders.
43
CORPORATE
HISTORY AND STRUCTURE
Our
Corporate History
We were
incorporated under the laws of Cayman Islands on March 10, 2006. On
May 31, 2006, we completed a private placement offering by selling 177,500
ordinary shares to 355 offshore private investors for $35,500. On July 18, 2006,
we sold an additional 54,000 shares to 108 offshore private investors for
$10,800. On October 22, 2009, we acquired Merit Times in a reverse acquisition
transaction, which involved a financing transaction and a share exchange
transaction which are more fully described below.
Background
and History of Merit Times
We own
all of the issued and outstanding capital stock of Merit Times, which in turn
owns 100% of the outstanding capital stock of MeKeFuBang. On June 10, 2009,
MeKeFuBang entered into a series of contractual agreements with Longkang, and
its five shareholders, in which MeKeFuBang effectively assumed management of the
business activities of Longkang and has the right to appoint all executives and
senior management and the members of the board of directors of Longkang. The
contractual arrangements are comprised of a series of agreements, including a
Consulting Services Agreement, Operating Agreement, Proxy Agreement, and VIE
Option Agreement, through which MeKeFuBang has the right to advise, consult,
manage and operate Longkang for an annual fee in the amount of Longkang’s yearly
net profits after tax. Additionally, Longkang’s shareholders have pledged their
rights, titles and equity interest in Longkang as security for MeKeFuBang to
collect consulting and services fees provided to Longkang through an Equity
Pledge Agreement. In order to further reinforce MeKeFuBang’s rights to control
and operate Longkang, Longkang’s shareholders have granted MeKeFuBang the
exclusive right and option to acquire all of their equity interests in Longkang
through the VIE Option Agreement.
On June
10, 2009, the Chairman of Shandong Longkang Juice Co., Ltd, Mr. Zhide Jiang, as
a PRC citizen, entered into a call option agreement, which we refer to as the
Original Option Agreement, with Mr. Chee Fung Tang, a Hong Kong passport holder
and the Merit Times shareholders. Under the Original Option Agreement, Mr. Jiang
shall serve as CEO, director or other officer of Merit Times for a certain
period of time; and in anticipation of Mr. Jiang’s continuance contributions to
the companies including Merit Times and Longkang, if the companies meet certain
thresholds of the revenue conditions, Mr. Jiang shall have the right to be
transferred the shares of Merit Times at a nominal price. In addition, the
Original Option Agreement also provides that Mr. Tang shall not dispose of any
of the shares of Merit Times without Mr. Jiang’s consent.
On August
5, 2009, Mr. Chee Fung Tang, a Hong Kong resident and the sole shareholder of
Proud Glory Limited (a British Virgin Islands company, which became the major
shareholder of Merit Times after Merit Times recapitalized), entered into a new
Incentive Option Agreement, which we refer to as the Proud Glory Option
Agreement, with Mr. Jiang. Pursuant to Proud Glory Option Agreement, the
Original Option Agreement was terminated on the effective date of Proud Glory
Option Agreement. The effective date of Proud Glory Option Agreement is October
22, 2009.
Under the
Proud Glory Option Agreement, Mr. Jiang shall serve as managing director or
other officer of Merit Times for at least 3 years; and in anticipation of Mr.
Jiang’s continuance contributions to the group including Merit Times, MeKeFuBang
and Longkang, if the group meets certain thresholds of the revenue conditions
set forth therein, Mr. Jiang shall have rights and options to be transferred up
to 100% shares of Proud Glory Limited at a nominal price within the next three
years (the “Option”). In addition, the Proud Glory Option Agreement also
provides that Mr. Tang shall not dispose any of the shares of Proud Glory
Limited without Mr. Jiang’s consent.
Mr. Chee
Fung Tang owns 10,000 shares, which represent 100% of the issued and outstanding
shares of Proud Glory Limited (the “Option Shares”). Under the terms of the
Proud Glory Option Agreement, the Option shall vest and become exercisable and
Mr. Zhide Jiang shall have the right to receive the Option Shares upon exercise
of the Option subject to the fulfillment of the following
conditions:
34% of
the Option Shares subject to the Option shall vest and become exercisable on the
date of fulfillment of the 2009 revenue of a minimum of ¥6,000,000 RMB (equal to
approximately $879,018), 33% of the Option Shares subject to the Option shall
vest and become exercisable on the date of fulfillment of the 2010 revenue of a
minimum of ¥20,000,000 RMB (equal to approximately $2,930,060) and 33% of the
Option Shares subject to the Option shall vest and become exercisable on the
date of fulfillment of the 2011 revenue of a minimum of ¥30,000,000 RMB (equal
to approximately $4,395,090). The Option is exercisable at an exercise price of
$0.10 per share for a period of five years from the date of the Option. If Mr.
Jiang exercises all his rights to acquire all equity interest of Proud Glory
Limited from Mr. Tang, Mr. Jiang will indirectly hold 11,306,666 shares or
41.13% ownership interest of the Company through Proud Glory Limited, assuming
the total outstanding shares of our company remains unchanged..
The
following chart reflects our organizational structure as of the date of this
prospectus.
44
Contractual
Arrangements between MeKeFuBang, Longkang and its stockholders
As
described in this section above, our relationships with the Longkang and its
stockholders are governed by a series of contractual arrangements between
MeKeFuBang, and Longkang, which is our operating company in the PRC. Under PRC
laws, Longkang is an independent legal person and is not exposed to liabilities
incurred by the other parties. On June 10, 2009, MeKeFuBang entered
into a series of contractual agreements with Longkang and its five shareholders,
in which MeKeFuBang effectively assumed management of the business activities of
Longkang and has the right to appoint all executives and senior management and
the members of the board of directors of Longkang.
Details
of these contractual arrangements are as follows:
(1) Consulting Services
Agreement. Pursuant to the exclusive consulting services agreement
between MeKeFuBang and Longkang, MeKeFuBang has the exclusive right to provide
to Longkang general business operation services, including advice and strategic
planning, as well as consulting services related to the technological research
and development of the Longkang’s products (the “Services”). Under this
agreement, MeKeFuBang owns the intellectual property rights developed or
discovered through research and development, in the course of providing the
Services, or derived from the provision of the Services. Longkang shall pay a
quarterly consulting service fees in Renminbi (“RMB”) to MeKeFuBang that is
equal to all of Longkang’s profits for such quarter. The term of this
agreement is 20 years from June 10, 2009 and may be extended only upon
MeKeFuBang’s written confirmation prior to the expiration of the this agreement,
with the extended term to be mutually agreed upon by the
parties.
45
(2) Operating
Agreement. Pursuant to the operating agreement among MeKeFuBang, Longkang
and all shareholders of Longkang, MeKeFuBang provides guidance and instructions
on Longkang’s daily operations, financial management and employment issues.
Longkang shareholders must designate the candidates recommended by MeKeFuBang as
their representatives on the boards of directors of Longkang. MeKeFuBang has the
right to appoint senior executives of Longkang. In addition, MeKeFuBang agrees
to guarantee Longkang’s performance under any agreements or arrangements
relating to Longkang’s business arrangements with any third party. Longkang, in
return, agrees to pledge their accounts receivable and all of their assets to
MeKeFuBang. Moreover, Longkang agrees that without the prior consent of
MeKeFuBang, Longkang will not engage in any transactions that could materially
affect its assets, liabilities, rights or operations, including, without
limitation, incurrence or assumption of any indebtedness, sale or purchase of
any assets or rights, incurrence of any encumbrance on any of its assets or
intellectual property rights in favor of a third party or transfer of any
agreements relating to its business operation to any third party. The term of
this agreement shall commence from the effective and shall last for the maximum
period of time permitted by law unless terminated early in accordance with
certain provision or by any other agreements reached by all parties, with any
extended term to be mutually agreed upon by the parties. Longkang shall not
terminate this agreement.
(3) Equity Pledge
Agreement. Under the equity pledge agreement between Longkang’s
shareholders and MeKeFuBang, Longkang’s shareholders pledged all of their equity
interests in Longkang to MeKeFuBang to guarantee Longkang’s performance of its
obligations under the consulting services agreement. If Longkang or its
shareholders breaches their respective contractual obligations, MeKeFuBang, as
pledgee, will be entitled to certain rights, including the right to sell the
pledged equity interests. Longkang’s shareholders also agreed that upon
occurrence of any event of default, MeKeFuBang shall be granted an exclusive,
irrevocable power of attorney to take actions in the place and stead of the
Longkang’s shareholders to carry out the security provisions of the equity
pledge agreement and take any action and execute any instrument that MeKeFuBang
may deem necessary or advisable to accomplish the purposes of the equity pledge
agreement. Longkang’s shareholders agreed not to dispose of the pledged equity
interests or take any actions that would prejudice MeKeFuBang’s interest. The
equity pledge agreement will expire two (2) years after Longkang’s obligations
under the consulting services agreements have been fulfilled. The
equity pledge under such agreement was registered with the Laiyang
Administration of Industry and Commerce on June 17, 2009 and has been effective
under the PRC laws.
(4) VIE Option
Agreement. Under the option agreement between Longkang’s shareholders and
MeKeFuBang, Longkang’s shareholders irrevocably granted MeKeFuBang or its
designated person an exclusive option to purchase, to the extent permitted under
PRC law, all or part of the equity interests in Longkang for the cost of the
initial contributions to the registered capital or the minimum amount of
consideration permitted by applicable PRC law. MeKeFuBang or its designated
person has sole discretion to decide when to exercise the option, whether in
part or in full. The term of this agreement shall last for the maximum period of
time permitted by law unless terminated in accordance with this agreement. As
disclosed in the Risk Factors section on page 15, the acquisition of equity
interests in Longkang by us may be deemed as direct or indirect acquisition of a
PRC domestic company by an offshore company controlled by a PRC natural person,
therefore the approval of PRC Ministry of Commerce is required during the period
when Mr. Zhide Jiang has substantial interest in our company. To
date, Mr. Zhide Jiang has not obtained relevant approval or registration from
the PRC government.
(5) Proxy Agreement.
Pursuant to the proxy agreement between the Longkang’s stockholders and
MeKeFuBang, the Longkang stockholders agreed to irrevocably grant a person to be
designated by MeKeFuBang with the right to exercise the Longkang stockholders’
voting rights and their other rights, including the attendance at and the voting
of Longkang’s stockholders’ shares at stockholders’ meetings (or by written
consent in lieu of such meetings) in accordance with applicable laws and its
articles of association, including but not limited to the rights to sell or
transfer all or any of his equity interests of Longkang, and appoint and vote
for the directors and chairman as the authorized representative of the
stockholders of Longkang. The proxy agreement may be terminated by joint consent
of the parties or upon 30-day written notice.
On
August 8, 2006, the MOFCOM, joined by the China Securities Regulatory Commission
(“CSRC”), the State Administration of Foreign Exchange (“SAFE”) as well as other
government agencies, released a Provisions for Foreign Investors to Merge with
or Acquire Domestic Enterprises (the “M&A Regulation”), which took effect on
September 8, 2006. These new rules significantly revised China’s regulatory
framework governing onshore-to-offshore restructurings and foreign acquisitions
of domestic enterprises. These new rules signify greater PRC government
attention to cross-border merger, acquisition and other investment activities,
by confirming MOFCOM as a key regulator for issues related to mergers and
acquisitions in China and requiring MOFCOM approval of a broad range of merger,
acquisition and investment transactions. According to the new M&A
Regulation, a related-party acquisition in which an offshore company owned or
controlled by a PRC resident acquires a domestic company controlled by the same
PRC resident shall be subject to the approval of MOFCOM.
Among
other things, the M&A Regulation also included new provisions to require
that the overseas listing of an offshore company which is directly or indirectly
controlled by a PRC resident for the purpose of overseas listing of such PRC
resident’s interests in a domestic company, known as a “special purpose
company”, must obtain the approval of CSRC prior to the listing.
The
option granted to Mr. Jiang under the Proud Glory Option Agreement works to cut
off the link of related-party acquisition and prevent the application of the new
M&A Regulation to our situation, since Proud Glory Limited is 100% owned by
a non-PRC natural person while Mr. Jiang, as a PRC resident, does not own any
equity in the off-shore company. Further, our current VIE structure
avoids the acquisition transaction which is directly the target under scrutiny
of the M&A Regulation, including the requirement of CSRC
approval. Thus, we believe that, in its current practice, the M&A
Regulation does not apply to our situation.
However,
the application of this M&A Regulation remains uncertain since neither
MOFCOM nor CSRC has approved any Chinese company’s foreign listing. There is no
consensus currently existing among the leading PRC law firms regarding the scope
and applicability of the MOFCOM or CSRC approval requirements. If the MOFCOM,
CSRC or other PRC regulatory body subsequently determines that the new M&A
Regulation applies to our situation and CSRC’s approval was required for this
offering, we may face sanctions by the MOFCOM, CSRC or other PRC regulatory
agencies. In such event, these regulatory agencies may impose fines and
penalties on our operations in the PRC, limit our operating privileges in the
PRC, delay or restrict the repatriation of the proceeds from this offering into
the PRC, or take other administrative actions that could have a material adverse
effect on our business, financial condition, results of operations, reputation
and prospects, as well as the trading price of our securities.
Currently,
there have been no findings by the PRC authorities that we or our shareholders
have violated applicable laws or regulations with respect to this agreement, our
organizational structure and other related agreements. However, the
exercise of the option by Mr. Jiang under the Proud Glory Option Agreement will
subject him to the registration requirement by SAFE, and there can be no
assurance that such approval will be granted, as disclosed in the risk factor on
page 15.
46
2 Mr. Zhide Jiang is the Executive Director of Proud Glory Limited, which is our majority shareholder. Pursuant to the Proud Glory Option Agreement between Mr. Zhide Jiang and Mr. Chee Fung Tang, the record owner of Proud Glory Limited, Mr. Zhide Jiang has the right and opportunity to acquire up to 100% equity interest of Proud Glory Limited subject to certain contingencies as set forth therein within three years starting from October 22, 2009. If Mr. Jiang exercises all his rights to acquire all equity interest of Proud Glory Limited from Mr. Tang, Mr. Jiang will indirectly hold 11,306,666 shares or 41.13% ownership interest of the Company through Proud Glory Limited, assuming the total outstanding shares of our company is unchanged.
³ The
“other” shareholders were shareholders of Merit Times who received shares of
Oriental Dragon Corp. pursuant to the share exchange agreement. Each
“other” shareholder received their respective shares in Merit Times for a cash
contribution $1.00 per share for an aggregate amount of $23,500. All of the
“other” shareholders are listed below.
SUI
Zhengang, WEI Detao, WU Peng, YU Zhimin, LI Fengjun, FU Wei, AI Yunian, JU
Hongying were various business associates of Mr. Jiang in matters unrelated to
Longkang.
In
additional to their cash contribution, GEP Capital Group, LLC, Grandview
Capital, Inc. and Cawston Enterprises Ltd., Li Ping and Ju Hongping received
shares in Merit Times as consideration for business advisory or financial
advisory services to the Company in connection with the
recapitalization.
Acquisition
of Merit Times and Related Financing
On
October 22, 2009, we acquired Merit Times in a reverse acquisition transaction,
which involved a financing transaction and a share exchange transaction. In
accordance with a Share Exchange Agreement dated October 22, 2009, which we
refer to as the Exchange Agreement, by and among us, Merit Times, and the
shareholders of Merit Times (the “Merit Times Shareholders”), we acquired 100%
of the issued and outstanding shares of Merit Times in exchange for 21,333,332
shares or 97.77% of our ordinary shares issued and outstanding after the closing
of the share exchange transaction, thereby making Merit Times our wholly owned
subsidiary. Pursuant to the terms of the Exchange Agreement, Access America
Fund, LP (“Access America”), the principal shareholder of the Company, cancelled
a total of 794,000 ordinary shares of the Company. Further, the prior officers
and directors of the Company resigned and Mr. Zhide Jiang was appointed as the
President, Chief Executive Officer and Chairman of the Board of Directors of the
Company.
In the
related financing transaction, on October 22, 2009, and November 2, 2009, we
completed a private placement of investment units (the “Units”) for a total of
$17,011,014, each Unit consisting of fifty thousand (50,000) ordinary shares and
five-year warrants to purchase twenty five thousand (25,000) ordinary shares of
the Company, at an exercise price of $6.00 per share (the “Investor Warrants”).
In the aggregate, we issued 5,670,339 ordinary shares and Investor Warrants to
purchase a total of 2,835,177 ordinary shares in this financing. Grandview
Capital, Inc. (“Grandview”), the lead placement agent, and Rodman & Renshaw,
LLC (“Rodman”), the co-placement agent, were our placement agents (the
“Placement Agents”) in connection with the financing transaction. For the
placement agent services, we paid a cash commission equal to 7% of the aggregate
gross proceeds of the Units sold and issued five-year warrants to purchase
567,035 ordinary shares (“Agent Warrants”, together with the “Investor
Warrants,” collectively refer to as the “Warrants”), which equal 10% of the
number of ordinary shares sold in the above financing transaction, exercisable
at any time at a price equal to $6.00 per share
In
connection with the financing, Proud Glory Limited and the Company entered
into an escrow agreement with the investors in which Proud Glory Limited agreed
to a “make good” obligation and to place into escrow a total of 4,600,000
ordinary shares of the Company. The escrowed shares will become subject to
disbursement to Proud Glory Limited or to the private placement investors based
upon our financial performance in the fiscal years ended 2009 and
2010.
Under the
“make good” arrangement, minimum net income thresholds of $14,000,000 and
$18,000,000 with a 10% allowable variation were established for the 2009 and
2010 fiscal years, respectively. If, in a given fiscal year, the applicable
minimum net income threshold is not met, escrowed shares, on a pro-rata basis,
in an amount equal to the percentage of variation from the net income threshold
times the total number of escrow shares, are required to be disbursed to
the private placement investors. If any escrow shares are distributed to
investors resulting from the Company not attaining the 2009 net income
thresholds, Proud Glory Limited will place an additional amount of shares into
escrow so that the escrow shares total 4,600,000. If the net income
equals or exceeds $12,600,000 in 2009 and $16,200,000 million in 2010, then the
applicable thresholds will be deemed met and all escrow shares will be disbursed
to Proud Glory Limited.
Notwithstanding
the above, Mr. Zhide Jiang is the beneficial owner of the shares held by Proud
Glory Limited. As described above under the corporate structure, on August 5,
2009, Mr. Zhide Jiang entered into the Proud Glory Option Agreement with Mr.
Chee Fung Tang, the record stockholder of Proud Glory Limited, pursuant to which
Mr. Zhide Jiang shall have rights and options to acquire up to 100% shares of
Proud Glory Limited at nominal price within the next three years if he continues
serving as chief executives of our affiliated companies for no less than three
year period of time and if such companies meet certain thresholds of the revenue
conditions. As a result, if we fail to meet the minimum net income threshold
under the “make good” arrangement, Mr. Zhide Jiang’s equity interest in Proud
Glory Limited will be disbursed to the private placement investors.
Additionally,
our majority shareholder, Proud Glory Limited, of which Mr. Zhide Jiang is the
managing director (the “Lock-Up Shareholder”), entered into a Lock-Up Agreement
with us whereby the Lock-Up Shareholder agreed it will not, offer, pledge, sell
or otherwise dispose of any ordinary shares or any securities convertible into
or exercisable or exchangeable for ordinary shares during the period beginning
on and including the date of the final closing of the aforementioned financing
transaction for a period of eighteen (18) months.
47
OUR
BUSINESS
Overview
We are
a producer and
supplier of Laiyang Pear juice concentrate and licensee of the “Laiyang Pear”
trademark, owned by an entity affiliated with the Laiyang city government in
Shandong province, People’s Republic of China, which we refer to as China or the
PRC. As compared to other pear juice concentrate products made in China, our
product holds a special distinction not shared by the others—the reputation of
the Laiyang Pear. This distinction has its roots in a long,
historical public perception in China that pears produced in the Laiyang region
are a premium product due to their exceptional taste and deemed nutritional and
medical benefits, including under the tenets of Traditional Chinese Medicine
(TCM).
Our
products are mainly used as the functional ingredient in many pharmaceutical and
health supplement products, representing a combined 89% of sales for the year
ended December 31, 2009. The State Science and Technology Commission of China
has recently certified that Laiyang Pear contains 46 kinds of organic acids,
nicotinic acid, heteropolysaccharides, protocatechuic acid, polyphenols,
carotene, vitamin B1, vitamin B2, vitamin C and varied minerals such as calcium,
phosphorus and iron. Our products are sold primarily in Shandong, Guangdong,
Liaoning and Jiangsu provinces via seven key distributors with the requisite
transportation and cold-storage logistics ability.
We
generate revenues mostly from the sale of Laiyang Pear juice concentrate. We
have also generated revenues from the sale of apple juice concentrate and
strawberry juice concentrate. Our revenues for the fiscal year ended December
31, 2009 were $82.6 million, representing an 11% growth from the fiscal year
ended December 31, 2008 with revenues of $74.2 million. Our fiscal year 2009 net
income was $15.1 million, representing an increase of 30% compared with our
fiscal year 2008 net income of $11.6 million. Our revenue for the six months
ended June 30, 2010 were $49.6 million, representing an increase of 7.0% from
the six months ended June 30, 2009 with revenues of $46.4 million. Our net
income for the six months ended June 30, 2010 was $10.6 million, representing an
increase of 14.2% compared with our net income of $9.2 for the six months ended
June 30, 2009.
On May
6, 2010, our Board of Directors approved the change of Emerald Acquisition
Corporation’s name to Oriental Dragon Corporation to better reflect our current
business, and the filing of an amendment to the Articles of Association of the
Company to reduce the required quorum to one-third of the shares entitled to
vote for future shareholder meetings. A special shareholder meeting was held on
June 7, 2010 and both actions were approved. The name change was filed with the
Registrar of Companies of the Cayman Islands and became effective on August 27,
2010.
Our
Industry
The
market demand for Laiyang Pear juice concentrate to be used in pharmaceutical
and health supplement industries is continuing to grow. In early 2010, the
Forecasting and Analysis Report of the Market and Investment Opportunities of
China Fruit Juice Industry, issued by China Economy Research Associates (the
“CERA” report), provided that during recent years, in China, people’s immune
system functions have been substantially affected adversely and respiratory
disease incidence has been increasing year by year as a result of increasing
pollution and continuous deterioration of the global living environment.
According the statistics published by the Ministry of Health of the PRC (“MOH”),
nearly 300 million people infected respiratory diseases each year, among which
over 50 million people are cough patients. According to China National Center of
Health Statistics, for every 10 Chinese children one child has the cough illness
and the elderly people are more prone to seasonal cough in winters. A stubborn
cough could easily lead to high blood pressure, cerebral hypoxia, pulmonary
heart disease and other complications. Thus cough products have a large consumer
population and a broad market prospect.
Our
concentrate is used in the manufacture of various kinds of products, including
Laiyang Pear cough syrup, Laiyang Pear concentrated decoction and Laiyang Pear
cough granule products. According to the CERA report, current
alternatives using Laiyang Pear juice concentrate include herbal mixes and some
western medicines, such as Codeine, which are addictive and have adverse side
effects to health. The herbal mixes deployed as alternatives usually are
comprised of lotus leaves, semen sterculiae lychnophorae, honeysuckle and lily,
which cost 2-3 times as Laiyang Pear juice concentrate and can be purchased from
open market or herbal wholesalers. The Industry Analysis Report was
published by Beijing Zongheng Economy Research Institute, a private organization
specializing in providing market and industrial research services to government,
international organizations, colleges and universities, scientific academies and
institutes and mid-to-large sized enterprises.
Additionally,
according to a report on China’s fruit processing industry issued by Beijing
Business & Intelligence Consulting Co. Ltd. (“BBIC,” and such report is
hereinafter referred to as the “BBIC Report”), an independent market research
firm, China’s fruit processing industry has grown significantly in the past
several years. The total output of fruit processed products in China grew from
$16.8 billion in 2005 to $35.8 billion in 2009, representing a compound annual
growth rate (“CAGR”) of 20.8%. The sales of fruit processed products in China
grew from $16.0 billion in 2005 to $32.9 billion in 2009, representing a CAGR of
19.7%.
BBIC
projected that the total sales and net income of fruit processed products in
China will reach $37.2 billion and $2.5 billion in 2010, or a growth of 42.52%
and 66.67%, respectively, during the four-year period from 2007 to 2010.
The table below sets forth the sales and net income of fruit processing
industry in China from 2005 to 2010 and projected sales and net income of fruit
processing industry in China from 2008 to 2010.
Sales
and Projected Sales and Net Income of Fruit Processing Industry in China,
2005-2010
(in Billions of U.S. $)
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
||||||||||||||||||
Sales
|
16.0
|
21.0
|
26.1
|
28.5
|
32.9
|
37.2
|
||||||||||||||||||
Net
Income
|
0.9
|
1.2
|
1.5
|
1.8
|
2.2
|
2.5
|
Source:
2006-2008 Fruit processing industry research report, Beijing Business &
Intelligence Consulting Co. Ltd.
48
China’s
economy has grown significantly in recent years. According to the National
Bureau of Statistics of China (the “NBS”), China’s gross domestic product (the
“GDP”) has increased from RMB12.0 trillion ($1.6 trillion) in 2002 to RMB25.0
trillion ($3.4 trillion) in 2007. The International Monetary Fund also estimated
that China’s real GDP should grow at an annual growth rate of 10.0% in 2008.
China’s economic growth has resulted in a significant increase in household
disposable income in China. According to the NBS, between 2002 and 2007, urban
household disposable income per capita increased from RMB7,703 ($1,055) to
RMB13,786 ($1,887), or a CAGR of 17.4%, and rural household disposable income
per capita increased from RMB2,476 ($339) to RMB4,140 ($557), or a CAGR of
12.1%. We believe that as GDP and disposable income increase, fruit
processed products will become more affordable and consumers will generally
spend an increasing portion of their disposable income on healthy nutritional
products, such as our premium specialty fruit based products.
With
approximately one quarter of the world’s population, China represents a key
growth driver for the global fruit food market. According to Euromonitor,
an independent research firm, although China is the largest producer of apples,
third largest producer of oranges, and one of the top producers of pears and
peaches in the world, per capita fruit juice consumption in China is currently
well below that of major developed countries.
Due to
low labor costs and an abundant supply of fruit, most notably apples, pears, and
kiwifruit, China is a large fruit juice concentrate producer and the largest
apple juice concentrate producer in the world. The export of fruit products is
also a growing aspect of the fruit processing industry in China. With
improvements in the quality and quantity of the production, marketing, and
transportation technologies, China has strengthened its position in the world
market. According to the BBIC Report, processed fruit export sales are expected
to reach $10.9 billion in 2010, representing a 42.72% growth over that in
2007. Although we do not presently export any of our products, we may
wish to do so in the future.
We
believe that improved living standards and growing household disposable income
have led to greater health awareness among the population. As people
become more affluent, we believe that their spending on quality healthy and
nutritional products, like our products, will increase.
Therefore,
we anticipate that China’s fruit concentrate industry will continue to
grow.
Products
We
currently produce three types of fruit juice concentrate: Laiyang Pear, apple
and strawberry, with Laiyang Pear juice concentrate accounting for 91.1% of
overall sales volume and 88.9% of total revenue for 2009. We are the only
producer of Laiyang Pear juice concentrate, which is known for its exceptional
taste, nutritional and medical benefits; and applications in health supplement
and pharmaceutical products and is mainly used in pharmaceutical and health
supplement industries. Laiyang Pears enjoy a reputation in China rooted in long
history for their exceptional taste and deemed nutritional benefits, including
under the tenets of TCM. Laiyang Pears have been
described in publications going back as long as the Compendium of Materia
Medica, the first comprehensive pharmacopoeia of China, written 400 years ago.
Due to the climate and environmental benefits in Laiyang city, the Laiyang Pear
only grows in Laiyang City, Shandong Province, and has been doing so for over
1,600 years. The annual sales volume of fruit juice concentrate for fiscal year
2009 is 35,891 metric tons (“MT”) in China. We currently have three production
lines for Laiyang Pear juice concentrate and puree with a combined production
capacity of 48,000 MT, with a utilization rate of 95% during peak seasons and
70% on an annual average, and one production line for bio feed with a production
capacity of 52,000 MT. The production season of Laiyang Pear juice concentrate
is from September to next February each year.
In
November 2009, Longkang submitted its proprietary technologies for developing
Laiyang Pear juice concentrate to relevant authorities for the official
certification: Scientific and Technological Achievement Certificate (STAC) —
Technology Research and Applications of Laiyang Pear Juice Concentrate’s
Effective Health and Medical Functions. As analyzed, judged and unanimously
approved by appraisal authorities and the national experts in China’s juice
processing industry, it was found that Laiyang Pear contains 46 kinds of organic
acids, vitamin B1, B2, vitamin C, nicotinic acid, protocatechuic acid,
polyphenols, a wide variety of polysaccharides, polyphenols, carotene, and
minerals such as calcium, phosphorus and iron. The Laiyang Pear’s features
include both a low sodium and high potassium content.
The two
STAC reports are approved by China authorized agencies. Such STAC reports are
prepared by parties that have no material relationships with us and are approved
by governmental agencies of China. This is a mandatory certification
process.
Current
product portfolio
Laiyang
Pear juice concentrate is the most significant source of our revenue. During the
fiscal year of 2009 and 2008, Laiyang Pear juice concentrate represented 88.9%
and 90.2% of our net revenues and 91.1% and 92.6% of sales volume, respectively.
In comparison, apple juice concentrate contributed 8.2% and 10.0% of revenue in
fiscal year 2009 and 2008, while strawberry juice concentrate contributed 2.9%
and 2.8% of revenues, respectively. Apple and strawberry juice
concentrate are primarily produced during the off-season for Laiyang Pear
production.
Laiyang
Pear juice concentrate uses Laiyang Pear as its main raw material. We have
imported equipment from United States and Europe to produce Laiyang Pear juice
concentrate. The product maintains Laiyang Pear’s nutritional and medical
benefits. Our products are mainly sold to health supplement, pharmaceutical,
food and beverage industries. In 2009 the percentages of our products sold to
such industries are 54%, 35%, 7% and 4% respectively. Due to the climate and
environmental benefits in Laiyang city, the Laiyang Pear only grows in Laiyang
City, Shandong Province in China and has been doing so for over 1600
years.
Laiyang
Pear contains a variety of organic acids, vitamins B1 and B2, vitamin C,
nicotinic acid, protocatechuic acid, carotene, composite
heteropolysaccharides, protocatechuic acid and various minerals such as calcium,
phosphorus and iron. The fruit is both low in sodium and high in
potassium.
49
We have
been working with colleges and institutions to study Laiyang Pear producing
technology, and we have developed applications through new technology that
reduces browning of the produce and that helps to maintain Laiyang Pear’s
nutritional and medical benefits by storing the concentrate at a low
temperature. We have also developed a filtration process through which we are
able to achieve higher quality juice concentrate by separating various sediment
substances from the crude juice. After the undesirable sediments are
removed, a clarified crude juice of increased quality and shelf-life is obtained
and turned into juice concentrate. Although our production facilities are
running at full capacity, there is an increasingly high demand for Laiyang Pear
juice extract.
Expanding
Product Mix
We intend
to maintain our leadership in the production of Laiyang Pear juice concentrate,
and at the same time, diversify into other agricultural products to mitigate
risk. Specifically, we intend to increase our investment in high margin
products. For example, on average, berry concentrates’ gross margin is
approximately 40%. As a result, we plan to expand our offerings to include
fruits such as blueberries, raspberries, blackberries, apricots and yellow
peaches. We also plan to produce bio animal feed, which is a byproduct of pear
juice concentrate. Recently, we added one new production line for Laiyang Pear
juice concentrate and fruit puree, and one new production line for bio animal
feed. The production line for Laiyang Pear juice concentrate and fruit puree was
imported from Italy in June 2010. The production line for bio animal fee was
purchased from a Chinese manufacturer in June 2010. Both production lines were
installed, tested and adjusted in September 2010 and became fully operational in
October 2010. The products will be distributed to the market in November 2010.
We currently have not generated any revenues from these two new production
lines.
We intend
to enter into new markets as follows:
Puree Products: Puree
consumption is growing 10% per annum in China. In addition, about half of all
fruit puree consumed in Japan is imported from China. The major customers in
puree products are fruit distributors and baked goods companies. The gross
margin for pear puree, apple puree and strawberry puree are 30%, 25% and 40%
respectively.
Bio Animal Feed: We
have received increased interest for high-quality bio feed after the 2008
scandals with tainted milk products in China. The major customers in bio animal
feed are livestock and poultry companies. If we enter into the bio animal feed
industry, no additional raw materials will be required for us as we can use the
residue from our juice concentrate processing. There is a total of 500,000 MT of
fruit and vegetable waste in Laiyang area.
Through
our research with China Agriculture University, Laiyang Pear wastes, as the main
raw material for bio animal feed described above, consist of Laiyang Pear pulp,
Laiyang Pear seeds, and Laiyang Pear stalks which account for 96.2%, 3.1% and
0.7% respectively. They contain various nutritional compositions such as crude
protein, crude fiber, crude fat, non-nitrogen extract, calcium, digestible
energy, metabolizable energy, phosphorus, potassium, iron, manganese, sulfur and
many other mineral substances and trace elements, of which the iron content in
Laiyang Pear wastes is 4.9 times that of corn; lysine, methionine and arginine
content is 1.7 times, 1.2 times and 2.75 times that of corn; vitamin B2 is 3.5
times that of corn, and more than 15% total sugar in nitrogen-free extract.
Other fruit and vegetable wastes, which are rich in sugar, vitamin C and starch,
can also be used as raw materials for bio feed. However, such other raw
materials are required to be fresh, clean and free of debris or
sediment.
We will
use fermenter, inoculated cans, vacuum pumps, fermentation tanks, stainless
steel pumps, ozone machines, laboratories, and laboratory equipment to produce
bio animal feed in accordance with the quality standard “China Feedstuff
Sanitation Standard” and “Chinese Feedstuff Quality Control New Technology
Standard.” The shelf life of the bio animal feed product is 12
months.
The
bio-feed, which we produce through fermenting fruit and vegetable wastes,
utilizes microorganisms and complex enzymes as zymophytes so as to convert the
raw materials into the bio-fermented feed comprised of mycoproteins,
bioactive amino acids of small- peptides, micro-bio-active probiotics
and complex enzymes. The four-strain high-protein bacteria applied for bio
animal feed production can effectively transform the carbohydrates in the fruit
wastes, such as organic acids, tartaric acids and hemicelluloses into various
proteins and accordingly enhance the overall protein content in fruit
wastes. Our bio feed product is also featured with rich content
of nutritional components, various probiotics, over 20
kinds of amino acids, a wide variety of vitamins as well as microelements. It
also contains varied organic acids including oligose, citric acid, tartaric acid
and more.
Modern
medical experts worldwide have proved through scientific research efforts that
amino acids, vitamins, microelements and oligose are all indispensable nutrients
for all animal lives, i.e., protein. Protein is the foundation of life and amino
acids can maintain normal operation of physiological function, antibody and
metabolism of animals. A shortage of protein will result in deteriorating
physique, slower development, weakened immunity, anemia and hypodynamia, up to
edema or fatal threat to life. Vitamins play an important regulatory role in
substance metabolism and help improve the metabolism; microelements can regulate
the homeostasis of animals, benefit metabolism of blood fat and prevent
arteriosclerosis. Oligose is a natural immunopotentiator, whose active
constituents are B-1.3/1.6 glycogen-accumulating organisms and mannitose and
helpful to reproductive assimilation of beneficial bacterium in animal
bodies.
Therefore,
the bio animal feed we intend to produce has higher protein content and nutrient
content than other average feeds. As such, long-term use of bio animal feed will
improve dairy cattle’s immune system and disease resistance.
In
connection with the technology used to produce bio animal feed, we are under
application of a patent with the State Intellectual Property Office of P.R.
China to protect our technology. The application number is 200910015442.2. Such
technology and production method is owned by Zhide Jiang, the Chief Executive
Officer of Longkang. Mr. Jiang has agreed to transfer such patent application to
Longkang for free.
Features of animal feed
products:
In 2007,
Longkang and China Agriculture University worked together and developed animal
feed production technology by fermenting fruit and vegetable waste. The main
features of animal feed product are:
|
·
|
Low cost: While the normal feed
price is approximately 2500RMB/MT, the price at which we estimate we can
sell our bio-animal feed is approximately 1600RMB/MT. In our
production, we can utilize residue from Laiyang Pear juice concentrate
production, therefore there is no incremental raw material cost for
production.
|
|
·
|
High milk production: The protein
content of our product will be 15% which is 5% higher than normal animal
feed. Our research shows that the dairy cattle have higher milk production
after taking the bio-feed
product.
|
|
·
|
Reduced waste: The residue from
production has historically needed to be disposed of as
waste. By utilizing the waste to produce bio-feed, waste shall
be reduced.
|
|
·
|
Improves dairy cattle’s immune
system and disease resistance: Bio-feed can be used as feed attractant
before and after weaning calves in order to support their immune
system.
|
50
Production
Production
facility
Our
primary production facility is located in Laiyang city, Shandong province in the
PRC. We currently have three production lines for Laiyang Pear juice concentrate
and puree with a combined production capacity of 48,000 MT, one production line
for bio feed with a production capacity of 52,000 MT and occupy approximately
5,772 acres of plantation fields. The three Laiyang Pear juice concentrate and
fruit puree production lines include one APV UK production line with a capacity
of 20 MT per hour, one SIG Italy production line with a capacity of 60 MT per
hour and one Catelli Italy production line with a capacity of 30 MT per hour.
The supporting facilities of plate heat exchanger and tubular sterilization
machine are from Shanghai Beverage Machinery Factory with capacity of 20MT per
hour, and we are also equipped with a vertical filter from Nanjing Gaoyou filter
factory.
Production
process & technology
When we
produce fruit juice concentrate, we usually crush and beat fresh fruits into
mashes, and press fruit mashes until fruit juice comes out. We then mix raw
fruit juice with proper amount of compound enzyme to remove pectin and starch.
Finally, we filter concentrate fruit juice in concentrators to achieve the
target content of soluble solids, acidity and other quality standards. We have
recently adopted a number of new technologies for our production processes. One
example is that we have been introducing a secondary precipitation process which
gives us 10% more juice concentrate from the same input by separating various
sediment substances from the crude juice. After the undesirable
sediments are removed, a clarified crude juice of increased quality and
shelf-life is obtained and turned into juice concentrate. We estimate that this
will reduce costs in the amount of approximately 416RMB/ton. In addition, we
have developed technology that reduces browning of the produce and that helps to
maintain Laiyang Pear’s nutritional and medical benefits by storing the
concentrate at a low temperature.
Quality
Control
We place
primary importance on the quality of our products. Our production facility
has ISO 9001 and HACCP series qualifications. We have established a quality
control and food safety management system for the purchase of raw materials,
fruit processing, packaging, storage and distribution. We have also
adopted internal quality standards that we believe are stricter than the
standards mandated by the PRC government.
Specifically,
our requirements for the light transmittance, turbidity, sourness and hygienic
criteria of Laiyang Pear juice concentrate are all higher than the national
standard in PRC. As juice has a high turbidity and low light transmittance, the
acidophilic heat-resistant bacteria in the juice are more likely to reproduce
and metabolize when the juice concentrate is diluted to commodity juice,
producing chemical compound, bromophenesic acid, which worsens the flavor of
juice or even results in white sediment on the bottom of inner package. Our
Laiyang Pear juice concentrate product is free of this problem because it is
produced following the quality requirements higher than the national standard.
In addition, the higher the sourness, the higher the content of vitamin C and
other nutrients would be, which is beneficial to the human body. By implementing
quality criteria higher than the national standard, we make our products more
competitive in the market.
High
quality raw materials are crucial to the production of quality fruit products.
Therefore, we rigorously examine and test fresh fruits arriving at our plant.
Any fruits that fail to meet our quality standard will be rejected. We perform
routine product inspections and sample testing at our production facility and
adhere to strict hygiene standards. All of our products undergo inspection at
each stage of the production process, as well as post production inspections and
final checking before distribution for sales. Products in storage or in the
course of distribution are also subject to regular quality testing.
Raw
Materials and Suppliers
Laiyang
Pear, iron drums and coal are our major raw materials.
Our
headquarters and manufacturing facilities are strategically located in close
proximity to the Laiyang Pear orchards on the Jiaodong Peninsula, providing easy
access to the only supply of Laiyang Pear in the world. We maintain effective
costs through cooperative agreements with local farmers and through receiving
government support.
We are a
party to two kinds of cooperative agreements: (i) a five year cooperative
agreement with local farmers pursuant to which Longkang sends technical managers
to these local farmers for technical guidance and follow-up service during the
production process and (ii) a five year cooperative agreement with local farmers
pursuant to which Longkang subcontracts the orchards to these farmers for 1200
RMB per mu (equal to approximately $1055 per acre) each year. With respect to
the first type of cooperative agreement, Longkang shall purchase all the
qualified Laiyang Pear from contract farmers at the higher of (a) the minimum
guarantee price of 750 RMB per ton (equal to approximately $110 per ton) or (b)
the market price. If Longkang and the contract farmers have cooperated for more
than 5 years, the unit price of the qualified raw fruits will increase
approximately $34 per ton. In connection with the minimum guaranteed price paid
to farmer at the time of the purchase, we do not have any other price guarantees
to adjust the price of previously purchased pears. In addition, the Laiyang
government exempted agriculture and forestry specialty tax on us of 260 RMB per
mu (equal to approximately $228 per acre). This is conditioned on that we shall
implement our development plan, as describe below, to develop an additional
3,295 acres of Laiyang Pear plantation per year. By doing so, we will actively
help to increase the income of local farmers and boost the development of the
Laiyang Pear industry.
We have
also secured our supply of Laiyang Pear by acquiring land use rights to 500
acres of Laiyang Pear orchards with plans to acquire additional land use rights
in the future to develop green-certified products. These supply arrangements
provide us with advantages in terms of product quality, and stability and
reliability of delivery.
Green
certified products in China refer to a specific mode of production, identified
by the specialized agencies, licensing the use of clean green food logo safety
trademark on high-quality and nutritious food. Green certified products have two
standards: AA-and A grade. AA grade refers to the process of food production
that does not use any harmful synthetic substances; A-grade refers to the
production process that allows limited use of qualified synthetic substances. In
short, green certified products are safe, healthy and nutritious.
The
Laiyang Pear has a history of nearly 1,600 years of known production. The oldest
Laiyang Pear tree still producing the pears is more than 400 years old. The
fields for growing Laiyang Pear total approximately 82,372 acres, and result in
total production of approximately 1.5 million tons of Laiyang Pear. We have the
exclusive use of a pear plantation of 5,772 acres with an additional 3,295 acres
to be developed each year pursuant to cooperative agreements with contract
farmers. Longkang currently uses approximately 350,000 tons of Laiyang Pear,
which is approximately 23% of the total Laiyang Pear production. In addition, in
2009, the China Agriculture Ministry decided to develop 164,745 acres of Laiyang
Pear plantations which will be managed by the Laiyang city government. Laiyang
city government will implement such order by developing 16,475 acres of Laiyang
Pear plantation each year, among which Longkang will develop our own plantation
amounting to 3,295 acres each year, so as to ensure enough raw materials to
increase capacity. Thus, we plan to develop 3,295 acres of Laiyang Pear
plantation per year. We are therefore confident that there will be enough raw
materials to meet the increased capacity for our company following the
expansion.
Other
main suppliers are Qixia Fangyuan Co., Ltd, Laiyang Dali Co., Ltd, Yingwei Yu,
Zuwei Jiang, and Lijun Wang.
|
·
|
Qixia
Fangyuan Co., Ltd.
is located at Qixia Industrial Zone. It produces 400,000 iron drums every
year, of which we need about 120,000 drums to package the juice
concentrate products. The iron drums are produced in accordance with
international standards and we have had no quality or supply problems with
this company in the last few
years.
|
51
|
·
|
Laiyang Dali
Co., Ltd. is located
in Laiyang city and it supplies coal throughout the year. We signed a long
term contract with Laiyang Dali Co., Ltd. for approximately 20,000 tons of
coal per year. There have been no quality problems with this company in
the last few years.
|
|
·
|
Yingwei Yu,
Zuwei Jiang and Lijun Wang have been working in the fruit
buying and transportation business for many years. They have many branch
stations which allow us to harvest a high volume of pears during harvest
season. They have specialists and equipment required to test the quality
of our pears.
|
Research
& Development
Our
research and development activities are driven by changing consumer tastes and
preferences, the need to develop high margin product segments, adapting to
healthy lifestyle demands, utilizing all components of the raw materials, and
growing demand for green products.
There are
40 skilled food specialists employed by us who guarantee the product
quality. These food specialists also assist us with new product
development. We also work with outside institutions to get their support. For
instance, in 2005, through the efforts of the experts from South Korea, Italy
and the Chinese Research Institute of Fruit, as well as our food specialists,
issues such as the difficulty of storing the Laiyang Pear; the fact that the
Laiyang Pear easily turns brown and that Laiyang Pears were difficult to
transport were all resolved, making for a successful production of Laiyang Pear
juice concentrate.
We
continue to work with third party institutions and research institutes for
technical support and cooperation. We have established long-term relationships
with the China Agricultural University; Laiyang Agricultural College; Shandong
Institute of Light Industry and China Research Institute of Fruit, so that we
can timely update and achieve better understanding in technology, information
and human resource for the China and international markets.
We also
invested in advanced laboratory equipment, including chromatography, precision
scales, spectrophotometer, high-speed centrifuges, small tube sterilization
machine, membrane filter and relevant equipment of fruit juice production
testing, as well as the sterile laboratories which can be used for precise
analysis in comprehensive study.
Below are
the summaries of our current research projects:
We
cooperate with Laiyang Agricultural College commencing from January 2005 to work
on a research project regarding Laiyang Pear juice concentrate decolorization to
develop natural honey. The project was completed in December 2009 and the total
cost of the project was $1,025,055.
In 2006,
we entered into an agreement with China Agriculture College called the Project
of High Tech Bio Feed Stuff from Fruit and Vegetable Waste. The research being
conducted pursuant to this agreement began in January 2006 and was completed in
December 2009. The project cost $879,000. Under the terms of this agreement,
anything produced in connection with this research project will belong to
us.
In
connection with the technology used to produce bio animal feed, we have applied
for a patent with the State Intellectual Property Office of the PRC. The
application number is 200910015442.2. Such technology and production method is
owned by Zhide Jiang, the Chief Executive Officer of Longkang. Mr. Jiang has
agreed to grant the right to use such technology to Longkang for
free.
In
addition, beginning in January 2005, we cooperated with Fruit Research Institute
of China to work on a research project regarding abstract preservatives and oil
from seeds and waste from after juice concentrate production for use in cosmetic
skin care products and natural preservatives. The project was completed in
December 2009 and the total cost of the project was $585,745.
Commencing
in January 2005 and ending in December 2009, together with Fruit Research
Institute of China, we also worked on a research project regarding secondary
precipitation to increase production of Laiyang Pear juice concentrate. The
total cost of the project was $585,745.
On March
1, 2010, we entered into a cooperative research and development contract with
the Preclinical Medicine Research Laboratory of Shandong Medicine Academy to
study the effects of Laiyang Pear juice concentrate. This project is expected to
be completed by early 2012 and the total cost of the project is expected to be
approximately $732,500.
Marketing,
Sales & Distribution
Currently,
our products are only sold in the PRC, and we utilize distributors for the sale
of our products. We have a total of seven (7) distributors, some of which are
also the end users of the product. Our customers pick up the products from our
factory directly using refrigerated trucks.
We
anticipate that we will be able to sell our products through direct sales to the
pharmaceuticals and health supplement manufacturers in the second half of 2010,
and we have begun direct marketing to the end users. In our direct marketing
efforts, we have collected information lists about potential end users who are
mainly in the pharmaceutical or healthcare industry. We have contacted these
potential end users to introduce our products, and send free samples upon
request. Once we negotiate purchase terms and execute a contract with the
customer, our factories will begin producing the product to the customer
specifications. We intend to visit our major customers periodically to make sure
that they are satisfied with our products and services.
52
Customer
Concentration
The
Company’s customers are in the health supplement, pharmaceutical, fruit juice,
and other food product industries in Shandong, Guangdong, Liaoning and Jiangsu
provinces in the PRC. Below is a chart indicates the geographic distribution in
2008 and 2009:
Currently
we have seven customers. Our customers and sales for 2009 & 2008 are as
follows:
Customers
|
2009(US)
|
2008(US)
|
Applied Market
|
||||||
Shandong
Zhanhua Haohua Fruit Juice Co., Ltd.
|
$
|
10,887,161
|
$
|
17,344,300
|
This
customer uses juice concentrate as an ingredient in their own beverage
products and also sells to Pharma and health supplement
producers.
|
||||
Qingdao
Dongxu Xinshen Trading Co.
|
14,121,668
|
11,878,235
|
This
customer sells juice concentrate to Chinese medicine and juice beverage
suppliers.
|
||||||
Yantai
Jinyuan Food Co., Ltd.
|
11,504,347
|
11,415,522
|
This
customer sells to pharmaceutical and healthy supplement manufacturers and
also uses juice concentrate as a sweetener for their export
products.
|
||||||
Xintai
Hengxin Trading Co.
|
11,775,909
|
9,180,354
|
This
customer sells to pharmaceutical and healthy supplement manufacturers, and
to bakery, candy, fruit juice and other producers.
|
||||||
Guangzhou
Huaqing Trading Co., Ltd.
|
10,584,740
|
9,111,255
|
This
customer sells pharmaceutical and healthy supplement manufacturers and to
food additive, fruit juice and export companies.
|
||||||
Dandong
Jinwang Trading Limited
|
10,757,553
|
8,787,622
|
This
customer distributes to pharmaceutical and health supplement
manufacturers.
|
||||||
Dongtai
Hongda Company
|
12,928,518
|
6,413,590
|
This
customer distributes to pharmaceutical and health supplement
manufacturers.
|
According
to our development strategies, in 2009 we revised our sales policies to
emphasize and enhance sales strength to the customers in the pharmaceutical and
health supplement industries, so as to increase the revenue proportion
of the customers that produce end-products in pharmaceutical and
health supplement industries versus those in the food and beverage
industries. We plan to increase the revenue percentage in the
pharmaceutical and health supplement industries to more than 90% by the end of
2010.
Due to
the higher profit margin as well as the pricing power of our products being sold
to pharmaceutical and health supplement industries, on the one hand, and the
limitation of our production capacity, on the other hand, we negotiated with our
customers to accept the adjusted supply proportion for different industries. As
a result, as compared with the year ended December 31, 2008, for the year ended
December 31, 2009 our sales to Shandong Zhanhua Haohua Fruit Juice Co., Ltd.,
which mainly uses our products for food and beverage products, decreased
significantly by 59.3%, whereas the sales to Qingdao Dongxu Xinshen Trading Co.,
Dandong Jinwang Trading Limited, and Dongtai Hongda Company, which mainly use
our products for pharmaceutical and health supplement products and are our most
important sales targets, increased significantly by 18.9%, 22.4% and 101.6%,
respectively.
Overall,
54% of our products are sold to health supplement companies, 35% to Chinese
medicine companies, 7% to fruit juice producers and 4% to food
producers.
Pursuant
to our sales contracts with the above customers, in 2008 and 2009, our Laiyang
Pear juice concentrate was sold from $2,570 to $2,710 per ton and primarily, we
receive a cash payment when the products are delivered to the customers. As a
sales incentive, we also entered into supplemental agreements with certain
customers pursuant to which we provided them with a 1% sales revenue rebate if
our customers placed their orders in first quarter of 2009 and paid us within
three months after the sales were made. We do not plan to offer such rebates
again in the future.
Growth
Strategy
We are
committed to enhancing profitability and cash flows through the following
strategies:
|
·
|
Increase production capacity to
meet market demands. Our existing production lines
have been running at close to full capacity while the market demand for
our existing products has increased. We have an abundant supply of
source fruits to support the expansion of our business. In September 2010,
we added one new production line for the production of Laiyang Pear juice
concentrate, one new production line for the production of bio animal feed
(leftover material from production of concentrate that may be re-processed
into low-cost, nutritious animal food). In the near future, we plan on
adding two additional production lines: one for the production of Laiyang
Pear juice concentrate and one for the production of bio animal
feed.
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Further
develop exclusively operated orchards to secure raw material
supply. We
believe that a secure supply of principal raw materials is crucial to our
future success. Hence, we intend to further strengthen our existing
cooperative relationship with existing local farmers and contract growers.
In addition, we have exclusive land leases from the Laiyang city
government and have started growing our own orchards, to maintain the
quality of the Laiyang Pear and to reduce raw material
costs.
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Further expand
our distribution network to increase the prevalence of our products
nationwide. Our current sales depend heavily
on our regional distributors and their network. We are undertaking direct
sales for customers with annual assumption of 500 metric tons or above of
our products. To support our rapid sales growth, we plan to
expand our distribution network by adding new distributors in the next few
years. In addition, we also plan to expand our customer base by developing
new relationships with end users in markets we have not yet
penetrated.
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Enhance the integrated
utilization of production resources. In September 2010, we
substantially completed two new production lines: one for juice
concentrate and puree and one for bio animal feed. We have started the
production of test and sample batches of bio animal feed in September 2010
and expect to distribute such products to the market in November
2010. Bio animal feed utilizes proprietary cutting-edge
fermentation technology and the waste residues from Laiyang Pear juice
concentrate production to produce low-cost, nutritious animal food, which
not only resolves issues of pollution from waste of the production
process, but also increases our
revenues.
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Enhance market
awareness and establish brand equity. We believe that as we
continue our expansion efforts we will be able to increase brand awareness
among consumers and among the pharmaceutical and medical community. In
addition, as Laiyang Pear has been registered as a trademark by the
Laiyang government and we have been authorized as the exclusive producer
of Laiyang Pear juice concentrate until January 2039, we plan to work with
pharmaceutical and health supplement customers to present the “Laiyang
Pear” trademark on their products. We will also consider developing and
promoting our own brand name through focused R&D programs, cooperation
with health-supplement and pharmaceutical
manufacturers.
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53
Competition
As
compared to other pear juice concentrate products made in China, our product
holds a special distinction not shared by the others—the reputation of the
Laiyang Pear. This distinction has its roots in a long, historical
public perception in China that pears produced in the Laiyang region are a
premium product due to their exceptional taste and deemed nutritional and
medical benefits, including under the tenets of Traditional Chinese Medicine
(TCM). Our main product is Laiyang Pear juice concentrate and we face
little direct competition due to the following reasons: (i) the fact that we are
currently the only producer of Laiyang Pear juice concentrate ; (ii) Laiyang
Pear only grows on both sides of Five Dragon River in Laiyang city due to unique
climate and environmental factors; (iii) the Laiyang Pear trademark is a
registered trademark of an entity affiliated with the Laiyang city government,
and we have been granted a license to use this trademark through 2038. In
January 2008, the Laiyang government issued a government letter, which indicated
that we can enjoy the status as the sole producer of Laiyang Pear juice
concentrate for a period of 30 years; and (iv) no other producer can use the
trademark or enter into the Laiyang Pear juice concentrate business until the
exclusive rights held by the Company have expired. The “Laiyang Pear” trademark
was registered with the Trademark Office of the State Administration of
Industry and Commerce of the PRC on October 28, 1998 (Registration
No.#1219975. Registrant: Laiyang Fruit Cultivation Technology and Instructing
Station) and was approved as Famous Geographical Mark Product on
September 23, 2009. Additionally, we are authorized under a trademark
license agreement with the trademark owner to use the “Laiyang Pear” trademark.
The risks associated with the Laiyang Pear trademark and our status as the sole
producer of Laiyang Pear juice concentrate are disclosed on page 8 under the
risk factor “[I]f our land use rights or license of intellectual property is
revoked, we would have no operational capabilities or ability to conduct our
business.”
While
there are no other producers of Laiyang Pear juice concentrate permitted to
manufacture Laiyang Pear juice concentrate within the territory of Laiyang city,
there are, however, a number of well-established companies producing other kinds
of fruit concentrate that compete directly with our product offerings, and some
of those competitors have significantly more financial and other resources than
we possess. We anticipate that our competitors will continue to improve their
products and to introduce new products with competitive price and performance
characteristics. Accordingly, we plan to enter into puree market and bio animal
feed industry to diverse the market risk to our current products.
Competitive
Advantages
We
believe that our success to date and potential for future growth can be
attributed to a combination of our strengths, including the
following:
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Natural health
benefits of Laiyang Pears. Laiyang Pears enjoy a reputation
in China rooted in long history for their deemed nutritional benefits,
including under the tenets of TCM, and are used in many health-supplement
products. Laiyang Pears have been described in publications going back as
long as the Compendium of Materia Medica, the first comprehensive
pharmacopoeia of China, written 400 years ago. TCM is still widely
respected and followed in China, as well as in other parts of the
world. Laiyang Pear has high content of composite
heteropolysaccharides, protocatechuic acid and polyphenols. Laiyang Pear
juice concentrate contains 46 kinds of organic acids, vitamin B1, vitamin
B2, vitamin C, nicotinic acid, heteropolysaccharides, protocatechuic acid,
polyphenols, carotene, and varied minerals such as calcium, phosphorus and
iron. Laiyang Pear’s value has been recognized and applied in
TCM for hundreds of years.
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Sole Laiyang
Pear juice concentrate producer in PRC. We are currently the only
producer of Laiyang Pear juice concentrate in the PRC, and we enjoy a
strong geographic advantage due to our proximity to the Laiyang Pear
orchards. The use of premium quality raw materials provides products made
with our concentrate with the nutritional benefits of the Laiyang Pear.
“Laiyang Pear” is a trademark that has been registered by an entity
affiliated with the Laiyang city government, and we have been granted a
license to use this trademark through 2038. The “Laiyang Pear” trademark
was registered with the China State Administration of Industry and
Commerce on October 28, 1998 (Registration No. #1219975. Registrant:
Laiyang Fruit Cultivation Technology and Instructing Station) and was
approved as Famous Geographical Mark Product on September 23, 2009. In
January 2008, the Laiyang government issued a government letter, which
indicated that we can enjoy the status as the sole producer of Laiyang
Pear juice concentrate for a period of 30 years. Pursuant to this
government letter, during this period no other producer will be permitted
to enter into the Laiyang Pear juice concentrate business. The
risks associated with the Laiyang Pear trademark and our status as the
sole producer of Laiyang Pear juice concentrate are disclosed on page 8
under the risk factor “[I]f our land use rights or license of intellectual
property is revoked, we would have no operational capabilities or ability
to conduct our business.”
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Unique and
established raw-material sourcing network. We are in a location in the
temperate zone which has had the ideal climate condition for Laiyang Pear
farming during the past 1600 years. Laiyang Pears can only be grown along
the sides of Five-dragon River in Laiyang due to the unique soil and water
quality. Laiyang is also an ideal location for transporting to other parts
of China, as well as for exporting overseas. It has traditionally been a
major fruit production area and the key fruit farming and processing base
for Chinese as well as international companies. We are strategically
located nearby the Laiyang Pear plantation area. We have contractual
interests in a pear plantation of 5,772 acres with an additional 3,295
acres to be developed each year pursuant to cooperative agreements with
contract farmers. We expect that our available acreage for
planatation will increase to 22,000 acres within the next three to five
years. In return for managing the plantations and deploying our
technology pursuant to the cooperative agreements, we obtain the exclusive
rights to purchase the products, thus allowing greater control over
quality and price stability. We have traditionally secured approximately
one-third of our supply needs through cooperative agreements with contract
farmers and two-thirds through purchases in the open market. In
addition, we have six rural land contracts from the local villagers’
collective economic organizations in the Laiyang area and have started
growing our own orchards with plans to expand in the future to develop
green-certified products. These rural land contracts all have a thirty
year term and were executed in either 2007 or 2008 for a price range from
1121 RMB to 1206 RMB per mu (equal to approximately $985 to $1060 per
acre) per year. These supply chain arrangements provide us with advantages
in terms of product quality, and stability and reliability of delivery.
See “Our Business” for the details of the exclusive license and land
leases from the Laiyang city
government.
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Stringent
quality control and state-of-the-art facilities. We emphasize quality and safety
and have quality control and food safety management systems for all stages
of our business, including sourcing of raw materials, production,
packaging and storage of our products. We apply and adhere to internal
quality standards that are stricter than the PRC national standards. Our
processing facilities are ISO9001 certified and have HACCP (Hazard
Analysis & Critical Control Point) series qualifications. Our
manufacturing equipment is imported from the U.S., Italy, Germany,
Switzerland, and the U.K. and is among the most advanced in the world. We
currently have three production lines for Laiyang Pear juice concentrate
and puree with a combined production capacity of 48,000 MT, and one
production line for bio feed with a production capacity of 52,000
MT. We utilize an ultra-low temperature concentration technique
to maintain its flavor and nutrients without any loss. We have
developed the emzymolysis method accompanying with 3-second instantaneous
and secondary sterilization procedure to innovatively resolve browning
problem and secondary sedimentation problem during the processing or
storage procedures as well as to realize the minerals/vitamins of the
Laiyang Pear well-preserved in the concentrate form. All above
processing and storage procedures/practices are under strict and precise
technical controls, and the related technologies are proprietarily owned
by Longkang.
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54
Intellectual
Property
To date,
we do not have any registered trademarks for our technologies. However, we rely
on trade secret protection and confidentiality agreements to protect our
proprietary information and know-how and have entered into non-disclosure
agreements with certain of our key employees and executives to protect our trade
secrets. In connection with the technology used to produce bio animal feed, we
have acquired from Mr. Jiang Zhide a patent application with the State
Intellectual Property Office of the PRC to protect our technology. The
application number is 200910015442.2. Such technology and production method is
originally owned by Zhide Jiang, the Chief Executive Officer of Longkang. Mr.
Jiang has agreed to transfer the patent application to Longkang for
free.
The
“Laiyang Pear” trademark is owned by the Laiyang Fruit Cultivation Technology
and Instructing Station, an affiliate of the Laiyang city
government.
Regulation
The food
industry, of which fruit based products forms a part, is subject to extensive
regulation in China. The following discussion summarizes the most significant
PRC regulations governing our business in China.
Food
Hygiene and Safety Laws and Regulations
As a
producer of food products in China, we are subject to a number of PRC laws and
regulations governing food safety and hygiene, including:
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the PRC Food Safety
Law;
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the PRC Product Quality
Law;
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the PRC Food Hygiene
Law;
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the Implementation Rules for the
PRC Food Safety Law;
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the Implementation Rules on the
Administration and Supervision of Quality and Safety in Food Producing and
Processing Enterprises (trail
implementation);
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the Regulation on the
Administration of Production Licenses for Industrial
Products;
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the General Measure on Food
Quality Safety Market Access
Examination;
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the General Standards for the
Labeling of Prepackaged
Foods;
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the Standardization
Law;
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the Regulation on Hygiene
Administration of Food
Additive;
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the Regulation on Administration
of Bar Code of Merchandise;
and
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the PRC Metrology
Law.
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These
laws and regulations set out safety and hygiene standards and requirements for
various aspects of food production, such as the use of additives, production,
packaging, handling, labeling and storage, as well as facilities and equipment.
Failure to comply with these laws and regulations may result in confiscation of
our products and proceeds from the sales of non-compliant products, destruction
of our products and inventory, fines, suspension of production and operation,
product recalls, revocation of licenses, and, in extreme cases, criminal
liability.
Environmental
Regulations
We are
subject to various governmental regulations related to environmental protection.
The major environmental regulations applicable to us include:
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the Environmental Protection Law
of the PRC;
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the Law of PRC on the Prevention
and Control of Water
Pollution;
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Implementation Rules of the Law
of PRC on the Prevention and Control of Water
Pollution;
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the Law of PRC on the Prevention
and Control of Air
Pollution;
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Implementation Rules of the Law
of PRC on the Prevention and Control of Air
Pollution;
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the Law of PRC on the Prevention
and Control of Solid Waste Pollution;
and
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the Law of PRC on the Prevention
and Control of Noise
Pollution.
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We have
obtained all permits and licenses required for production of our products and
believe we are in material compliance with all applicable laws and
regulations.
55
Environment
Protection
Our
manufacturing facilities are subject to various pollution control regulations
with respect to noise, water and air pollution and the disposal of waste and
hazardous materials. We are also subject to periodic inspections by local
environmental protection authorities. We have sewage treatment
equipment used for biological treatment. The Laiyang Environmental Protection
Agency samples our waste water discharge on a regular basis to make sure the
waste water satisfies all environmental requirements. To date, we have not
been advised of any violations of any environmental regulations. We are not
currently subject to any pending actions alleging any violations of applicable
PRC environmental laws.
Properties
Our
corporate office is located at No. 48 South Qingshui Road, Laiyang City,
Shandong 265200 People’s Republic of China. Under PRC law, a private entity may
not own land in China. Land is owned by the PRC government and the
PRC government grants land use rights for specified periods of
time. The local government has granted us land use rights which
consist of approximately 500 acres of pear orchards and land for our production
facilities and offices, with terms that expire in December 2037 through
December 2054. We acquired the land use rights of these 500 acres of
land in Laiyang through six (6) rural land contracts with the local villagers’
collective economic organizations in the Laiyang area.Each of the rural land
contracts entered into with the local villagers’ collective economic
organizations have a thirty year term and were executed in either 2007 or 2008
with annual rents ranging from 1121 RMB to 1206 RMB per mu (equal to
approximately $985 to $1060 per acre).
In
addition to the land use rights that we have been granted by the local
villagers’ collective economic organizations, we have entered into several
cooperative agreements with local contract farmers, pursuant to which we manage
5,272 acres of cooperative plantations, which represents approximately 6.4% of
the total acreage on which Laiyang Pears are currently grown in Laiyang city.
These cooperative agreements with local farmers allow us to have the exclusive
management and Laiyang Pear purchase rights of the plantation but without land
use rights. Such contract pear plantation’s construction and growing cost are
invested by local farmers. However, we are responsible to provide the management
and technical instructions and in return, we have the priority rights to
purchase Laiyang pears harvested from our contract plantations. Consequently we
have saved substantial capital expenditures, and need to pay higher prices and
face the potential influences from market price fluctuations as compared with
using the Laiyang pears of the 500 acres of self-owned plantation.
We
currently have three production lines for Laiyang Pear juice concentrate and
puree with a combined production capacity of 48,000 MT, and one production line
for bio feed with a production capacity of 52,000 MT.
Employees
As of the
date hereof, we have approximately 170 full-time employees. Our employees are
not represented by any collective bargaining agreement, and we have never
experienced a work stoppage. We believe we have good relations with our
employees.
Insurance
We have
property insurance for our facility located in Laiyang city. We believe
our insurance coverage is customary and standard for companies of comparable
size in comparable industries in China.
We do not
have any business liability, interruption or litigation insurance coverage for
our operations in China. Insurance companies in China offer limited business
insurance products. While business interruption insurance is available to a
limited extent in China, we have determined that the risks of interruption, cost
of such insurance and the difficulties associated with acquiring such insurance
on commercially reasonable terms make it impractical for us to have such
insurance. Therefore, we are subject to business and product liability
exposure. See “Risk Factors – We do not presently maintain product
liability insurance, and our property and equipment insurance does not cover the
full value of our property and equipment, which leaves us with exposure in the
event of loss or damage to our properties or claims filed against
us.”
Litigation
From time
to time, we may become involved in various lawsuits and legal proceedings, which
arise, in the ordinary course of business. However, litigation is subject
to inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. We are currently not
aware of any such legal proceedings or claims that we believe will have a
material adverse effect on our business, financial condition or operating
results.
MANAGEMENT
Directors
and Executive Officers
The
following table sets forth the name, age, and position of our executive officers
and directors. Executive officers are elected annually by our Board of
Directors. Each executive officer holds his office until he resigns,
is removed by the Board, or his successor is elected and
qualified. Directors are elected annually by our shareholders at the
annual meeting. Each director holds his office until his successor is
elected and qualified or his earlier resignation or removal.
NAME
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AGE
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POSITION
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Date of
Appointment
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Zhide
Jiang
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52
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President,
Chief Executive Officer and Chairman of the Board of
Directors
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October
22, 2009
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Adam
Wasserman
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46
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Chief
Financial Officer
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June
22, 2010
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Lili
Jiang
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32
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Director
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May
28, 2010
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Barry
Shapiro
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69
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Director,
Chair of the Audit Committee and Member of the Governance and Nominating
Committee
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May
28, 2010
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Chengrong
Wang
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52
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Director,
Member of the Audit Committee, and Chair of the Compensation Committee and
the Governance and Nominating Committee
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May
28, 2010
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Maosen
Cui
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46
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Director
and Member of the Audit Committee and the Governance and Nominating
Committee
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May
28, 2010
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Zhide
Jiang, President, Chief Executive Officer and Chairman
Mr. Jiang
is the founder and has served as the chairman of the board of directors of
Shandong Longkang Juice Co., Ltd. since November 2004. Prior to founding
Shandong Longkang Juice Co., Ltd., Mr. Jiang served as Chairman for Laiyang
Starch Factory and Laiyang Second Alcohol Brewing Co., Ltd. from April 1984 to
October 2004. He was an engineer for Laiyang Agricultural Machinery Co., Ltd.
from September 1976 to March 1984. He graduated from Wuxi University in 1976. We
believe that Mr. Jiang’s experience in the fruit juice processing industry and
educational background qualify him to serve as a president, chief executive
officer and chairman of the board of directors of the Company.
Adam
Wasserman, Chief Financial Officer
Adam
Wasserman has been an integral member of executive management responsible for
financial and accounting. He has a strong background in financial reporting,
budgeting and planning, mergers and acquisitions, auditing, accounting,
automated systems, banking relations and internal controls. Mr.
Wasserman has substantial experience with SEC filings such as initial public
offerings, 10-Ks and 10-Qs. Mr. Wasserman has a strong background in
serving companies located in China, and has been extensively involved in
managing private-to-public projects and providing consulting services to public
companies in China since 1999.
56
Mr.
Wasserman is chief executive officer for CFO Oncall, Inc. and CFO Oncall Asia,
Inc. (collectively “CFO Oncall”), where he owns 80% and 60% of such businesses,
respectively. CFO Oncall, Inc. provides chief financial officer services
to various companies. Mr. Wasserman has served as the Chief Financial
Officer of Transax International Limited since May 2005 and Gold Horse
International, Inc. since July 2007 to the present. Mr. Wasserman
also served as Chief Financial Officer for Lotus Pharmaceuticals, Inc. from
October 2006 to April 2009, China Wind Systems, Inc. in 2007 and 2008, Genesis
Pharmaceuticals Enterprises, Inc. from October 2001 until October 2007, and
all under the terms of the consulting agreement with CFO Oncall,
Inc.
From 1991
to 1999, he was Senior Audit Manager at American Express Tax and Business
Services, in Fort Lauderdale, Florida, where his responsibilities included
supervising, training and evaluating senior staff members, work
paper review, auditing, maintaining positive client relations, preparation
of tax returns and preparation of financial statements and the related
footnotes. From 1986 to 1991, he was employed by Deloitte & Touche,
LLP. During his employment, his significant assignments included audits of
public (SEC reporting) and private companies, tax preparation and planning,
management consulting, systems design, staff instruction, and
recruiting.
Mr.
Wasserman holds a Bachelor of Science from the State University of New York at
Albany. He is a CPA (New York) and a member of The American Institute of
Certified Public Accountants, is a director, treasurer and an executive board
member of Gold Coast Venture Capital Association and is a director and audit
committee member of China Direct Industries, Inc., a NASDAQ listed company,
since January 2010 and Bohai Pharmaceuticals Group, Inc, since July 12,
2010.
Lili
Jiang, Director
Ms. Jiang
has served as Deputy General Manager of Shandong Longkang Juice Co., Ltd. since
2004 and is in charge of the Sales and Marketing Department. With twelve years
of extensive experience and know-how of our business, Ms. Jiang has established
solid customer base, strong and dynamic sales teams with demonstrated excellent
sales records, and made significant contribution to the Company’s growth. She
obtained a master degree from University of Leicester in business analysis and
finance in 2004 and a bachelor degree from Yantai University in business
administration in 2000. We believe that Ms. Jiang’s experience in sales and
educational background qualify her to serve as a director.
Barry
Shapiro, Director, Chair of the Audit Committee and Member of the Governance and
Nominating Committee
Since May
2010 Mr. Shapiro is a managing member of Roadside Transportation LLC, a newly
formed entity which is an authorized sales representative of an unrelated
provider of roadside assistance services. He is a Certified Public Accountant
licensed in Florida. Mr. Shapiro has been an audit partner since February 2007
with McGladrey & Pullen, a licensed CPA firm that provides assurance
services and since September 2005 as a managing director with RSM McGladrey, a
professional services firm providing tax and consulting services. In July 2009,
Mr. Shapiro retired as a partner with McGladrey & Pullen and as a managing
director with RSM McGladrey. From 1990 through February 2007 he was an audit
partner with Millward & Co., an accounting and auditing firm in Fort
Lauderdale, Florida. In 1998, American Express Tax & Business Services (TBS)
acquired the tax and consulting practices of Millward & Co. and from 1998 to
September 2005 he was a managing director of TBS.
Mr.
Shapiro has more than forty years experience in accounting and auditing, with
requisite professional certification. This background has provided Mr. Shapiro
with financial sophistication and financial oversight responsibilities. Mr.
Shapiro has an understanding of generally accepted accounting principles and
financial statements and the ability to assess the general application of such
principles in connection with the accounting for estimates, accruals and
reserves. He has experience in preparing, auditing, analyzing or evaluating
financial statements, understanding internal controls and procedures for
financial reporting and has actively supervised people engaged in such
activities. We believe that this significant experience qualifies him to serve
as a director.
Chengrong
Wang, Director, Member of the Audit Committee, and Chair of the Compensation
Committee and the Governance and Nominating Committee
From
November 1999 to the present, Mr. Wang serves as the professor and director of
the Study and Research Department of deep processing technologies of the fruits
and vegetables in Agriculture University of Qingdao. From October 1993 to
October 1999, he was the associate professor of the Food Science and
Technologies Department of Laiyang Agriculture College. From September 1988 to
February 1993, Mr. Wang served as a director of the Teaching and Research
Section of Fruits Storage and Processing Technologies, Agriculture Department of
Laiyang Agriculture College. From October 1993 to October 1984, he was a teacher
in the Agriculture Department of Laiyang Agriculture College. Mr. Wang obtained
a master degree in Agricultural products’ storage and processing technologies
from Beijing Agricultural University in 1988 and a bachelor degree in fruits
planting from Laiyang Agriculture College in 1982.
Mr. Wang
won the 2nd Prize
of Technical Invention of Shandong Province in 2006, awarded by the People’s
Government of Shandong province, regarding Apple Hybridization Technologies for
High Acid Degree. From 1999 to 2009, Mr. Wang was in charge of approximately 15
scientific and technical research projects funded by national and provincial
authorities totaling 5 million RMB, including the Production and Processing
Technologies of Laiyang Pear, the Storage and Keeping Fresh Technologies of
Laiyang Pear, and Deep Processing Technologies of Laiyang Pear’s
fruit.
Mr. Wang
wrote two books which are “Commercial Theories of Agriculture Products,”
published by China Agriculture Publishing House in August 2007 and “The
Integrated Applications of Agriculture Related Products,” published by China
Agriculture Publishing House in September 2009.
As an
outstanding scientist specializing in the fruit and vegetable processing
technologies, we believe that Mr. Wang will provide valuable advice to our
research and development programs, technical instructions and production
technologies and qualify him to serve as a director.
Maosen
Cui, Director and Member of the Audit Committee and the Governance and
Nominating Committee
Mr. Cui
has served as Professor and director of the Study and Research Department at
Qingdao Agriculture University since 2003. From 1988 to 2003, he was a teacher
at the Party School of Shandong Province. Mr. Cui obtained a master degree from
Peking University in economics in 1988 and a bachelor degree from Shandong
Economic College in 1985. Mr. Cui specializes in marketing, especially in brand
planning, developing and marketing. He published several books including
Marketing and more than 30 theses in the marketing area. He has mentored and
instructed marketing talents for many years, and several of his students are now
actively serving in various industries for Fortune 500 companies.
As a
well-known marketing expert, Mr. Cui is expected to provide valuable advice
related to the marketing and branding strategies, which is essential to
accomplish our growth plan in the near future and qualify him to serve as a
director.
57
The
Board of Directors and Committees
Subject
to certain exceptions, under the listing standards of the NASDAQ Global Market,
a listed company’s board of directors must consist of a majority of independent
directors. Currently, our board of directors has determined that each of the
non-management directors, Barry Shapiro, MaoSen Cui and ChengRong Wang, is an
“independent” director as defined by the listing standards of NASDAQ Global
Market currently in effect and approved by the U.S. Securities and Exchange
Commission (“SEC”) and all applicable rules and regulations of the SEC. All
members of the Audit, Compensation and Nominating Committees satisfy the
“independence” standards applicable to members of each such committee. The board
of directors made this affirmative determination regarding these directors’
independence based on discussions with the directors and on its review of the
directors’ responses to a standard questionnaire regarding employment and
compensation history; affiliations, family and other relationships; and
transactions with the Company. The board of directors considered relationships
and transactions between each director or any member of his immediate family and
the Company and its subsidiaries and affiliates. The purpose of the board of
director’s review with respect to each director was to determine whether any
such relationships or transactions were inconsistent with a determination that
the director is independent under the NASDAQ Global Market rules.
Audit
Committee
We
established our Audit Committee in May 2010. The Audit Committee consists of
Barry Shapiro, MaoSen Cui and ChengRong Wang, each of whom is an independent
director. Barry Shapiro, Chairman of the Audit Committee, is an “audit committee
financial expert” as defined under Item 407(d) of Regulation S-K. The purpose of
the Audit Committee is to represent and assist our board of directors in its
general oversight of our accounting and financial reporting processes, audits of
the financial statements and internal control and audit functions. The Audit
Committee’s responsibilities include:
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The appointment, replacement,
compensation, and oversight of work of the independent auditor, including
resolution of disagreements between management and the independent auditor
regarding financial reporting, for the purpose of preparing or issuing an
audit report or performing other audit, review or attest
services.
|
|
·
|
Reviewing and discussing with
management and the independent auditor various topics and events that may
have significant financial impact on our company or that are the subject
of discussions between management and the independent
auditors.
|
The board
of directors has adopted a written charter for the Audit Committee. A copy of
the Audit Committee Charter is posted on our corporate website at: www.orientaldragon.com.
Compensation
Committee
We
established our Compensation Committee in May 2010. The Compensation Committee
consists of only one person, Mr. ChengRong Wang, who is an independent director.
Mr. ChengRong Wang is the Chairman of the Compensation Committee. The
Compensation Committee is responsible for the design, review, recommendation and
approval of compensation arrangements for our directors, executive officers and
key employees, and for the administration of our equity incentive plans,
including the approval of grants under such plans to our employees, consultants
and directors. The Compensation Committee also reviews and determines
compensation of our executive officers, including our Chief Executive Officer.
The board of directors has adopted a written charter for the Compensation
Committee. A copy of the Compensation Committee Charter is posted on our
corporate website at: www.orientaldragon.com.
Governance
and Nominating Committee
The
Governance and Nominating Committee consists of Barry Shapiro, MaoSen Cui and
ChengRong Wang, each of whom is an independent director. ChengRong Wang is the
Chairman of the Governance and Nominating Committee. The Governance and
Nominating Committee assists in the selection of director nominees, approves
director nominations to be presented for stockholder approval at our annual
general meeting and fills any vacancies on our board of directors, considers any
nominations of director candidates validly made by stockholders, and reviews and
considers developments in corporate governance practices. The board of directors
has adopted a written charter for the Nominating Committee. A copy of
the Governance and Nominating Committee Charter is posted on our corporate
website at: www.orientaldragon.com.
Family
Relationships
Lili
Jiang, our Director, is the daughter of Zhide Jiang, a principal stockholder,
President, Chief Executive Officer and Chairman of the Board of Directors of the
Company. There are no other family relationships among any of the directors and
executive officers.
Involvement
in Certain Legal Proceedings
To the
best of our knowledge, our directors and officer has not been convicted in a
criminal proceeding, excluding traffic violations or similar misdemeanors, nor
has been a party to any judicial or administrative proceeding during the past
five years that resulted in a judgment, decree or final order enjoining the
person from future violations of, or prohibiting activities subject to, federal
or state securities laws, or a finding of any violation of federal or state
securities laws, except for matters that were dismissed without sanction or
settlement. Except as set forth in our discussion below in “Certain
Relationships and Related Transactions,” our directors and officer has not been
involved in any transactions with us or any of our affiliates or associates
which are required to be disclosed pursuant to the rules and regulations of the
SEC.
Code
of Business Conduct and Ethics
On May
28, 2010, our board of directors amended and restated its Code of Business
Conduct and Ethics, which applies to all directors, officers and employees. The
purpose of the Code is to promote honest and ethical conduct. A copy of the Code
is posted on our corporate website located at www.orientaldragon.com. The
Code is available in print, without charge, upon written request to us at
Oriental Dragon Corporation, Attention: Secretary, No. 48 South Qingshui Road,
Laiyang City, Shandong 265200, People’s Republic of China. We intend
to post promptly any amendments to or waivers of the Code on our corporate
website.
Code
of Ethics
We
currently do not have a code of ethics that applies to our officers, employees
and director, including our Chief Executive Officer, however, we intend to adopt
one in the near future.
EXECUTIVE
COMPENSATION
Summary
Compensation Table— Fiscal Years Ended December 31, 2009, 2008 and
2007
The
following table sets forth information concerning all cash and non-cash
compensation awarded to, earned by or paid to the named persons for services
rendered in all capacities during the noted periods.
Name and
Principal
Position (1)
|
Year
Ended
June 30
|
Salary
($)
|
Bonus ($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
Earnings
($)
|
Non-
Qualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
Joseph
R. Rozelle,
|
2007
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||||||||
former
CEO and
|
2008
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||||||||
Director
(1)
|
2009
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||||||||
David
Richardson,
|
2007
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||||||||
former
Director (1)
|
2008
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
|||||||||||||||||||||||||
2009
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
||||||||||||||||||||||||||
Zhide
Jiang,
|
2007
|
5,010
|
0
|
0
|
0
|
0
|
0
|
0
|
5,010
|
|||||||||||||||||||||||||
President,
CEO and
|
2008
|
5,010
|
0
|
0
|
0
|
0
|
0
|
0
|
5,010
|
|||||||||||||||||||||||||
Director
(2)
|
2009
|
4,768
|
0
|
0
|
0
|
0
|
0
|
0
|
4,768
|
(1)
|
On October 22, 2009, Joseph R.
Rozelle and David Richardson tendered their resignations from all offices
held in the Company, effective immediately, and from the board of
directors effective November 7, 2009, which was within 10 days of filing
an information statement required by Rule 14f-1 promulgated under the
Exchange Act.
|
58
(2)
|
On October 22, 2009, Zhide Jiang
was elected as the President and Chief Executive Officer of the Company
effective immediately. He was also appointed as Chairman of the Board of
Director of the Company effective November 7, 2009, which was within 10
days of filing an information statement required by Rule 14f-1 promulgated
under the Exchange Act.
|
Outstanding
Equity Awards at Fiscal Year End
None of
our executive officers received any equity awards, including, options,
restricted stock or other equity incentives during the fiscal year ended
December 31, 2009.
Employment
Agreements
On
February 1, 2010, we entered into an employment agreement with Mr. Chin (the
“Employment Agreement”) pursuant to which Mr. Chin was appointed as our the
Chief Financial Officer for a term of five (5) years. Pursuant to the Employment
Agreement, Mr. Chin received a base salary of $66,000 per year, payable in
twelve equal monthly installments. Upon completion of an underwritten initial
public offering, Mr. Chin’s base salary would be increased to $86,000. From
the second year of the employment term, the Board of Directors of the Company
might increase Mr. Chin’s base salary and issue warrants to purchase our
ordinary shares to Mr. Chin based on an annual assessment of his performance.
Our board of directors approved the Employment Agreement on January 27,
2010. The Employment Agreement was terminated on June 22, 2010 by the
Company.
On June
22, 2010, Mr. Wasserman entered into an employment agreement (the “Wasserman
Employment Agreement”) with the Company for the appointment as the Chief
Financial Officer of the Company for a term of one year which may be extended
for additional terms by mutual agreement of the parties. Pursuant to the
Wasserman Employment Agreement, Mr. Wasserman will receive base salary of
$60,000 per year, payable in equal monthly installments. Mr. Wasserman shall
also be granted the Company’s ordinary shares in the amount of $6,000 (the
“Compensation Shares”) payable on the first day of each quarter beginning
November 1, 2010 (the “Share Payable Date”). The per share price of the
Compensation Shares shall be the closing bid price of the Company’s ordinary
shares on the date that is three (3) trading days prior to the Share Payable
Date. From the second year of the employment term, the Board of Directors of the
Company may increase the base salary and issue certain warrants to Mr. Wasserman
based on the annual assessment of his performance. The Board of Directors
approved the Wasserman Employment Agreement on June 22, 2010.
Currently,
Mr. Wasserman’s compensation is paid to CFO Oncall, Inc. or CFO Oncall Asia,
Inc. where he serves as Chief Executive Officer and he owns 80% and 60%,
respectively.
On August
3, 2010, we entered into director agreements with our three independent
directors for a period of one year from June 1, 2010 to May 31, 2011. We will
pay a cash payment of $30,000 per year to be paid quarterly to Barry Shapiro,
$15,000 per year to be paid semi-annually to Mr. Chengrong Wang, and $10,000 per
year to be paid semi-annually to Mr. Maosen Cui, commencing on June 1, 2010.
Additionally, we will reimburse the independent directors for all reasonable
out-of-pocket expenses incurred by the independent directors in attending any
in-person meetings, provided that the independent director complies with the
generally applicable policies, practices and procedures of the Company for
submission of expense reports, receipts or similar documentation of such
expenses. Any reimbursements for allocated expenses (as compared to
out-of-pocket expenses of the Director) must be approved in advance by the
Company. We have also agreed to maintain a director and officer insurance policy
with a minimum coverage of $3 million.
We
currently have not entered into director agreement with Ms. Lili Jiang, a member
of the board of directors, and we will not pay any compensation for her director
services.
Compensation
of Directors
During
the 2007, 2008 and 2009 fiscal years, no member of our board of directors
received any compensation solely for service as a director.
Compensation
Committee Interlocks and Insider Participation
During
the last fiscal year we did not have a standing Compensation Committee. Our
board of directors was responsible for the functions that would otherwise be
handled by the compensation committee.
Indemnification
of Directors and Executive Officers and Limitation of Liability
Cayman
Islands law does not limit the extent to which a company’s articles of
association may provide for indemnification of officers and directors, except to
the extent any such provision may be held by the Cayman Islands courts to be
contrary to public policy, such as to provide indemnification against civil
fraud or the consequences of committing a crime. Our articles of
association provide for indemnification of our officers and directors for any
liability incurred in their capacities as such, except through their own willful
negligence or default.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or 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 and is therefore unenforceable.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions
with Related Persons
On April
10, 2006, we issued an aggregate of 1,050,000 of our ordinary shares to the
individuals and entities set forth below for $1,050 in cash, at a purchase price
of $0.001 per share, as follows:
Name
|
Number of Shares
|
Relationship to Us
|
|||
Nautilus
Global Partners, LLC
700
Gemini, Suite 100
Houston,
TX 77058
|
1,000,000
|
Joseph
Rozelle, our former President and Chief Financial Officer, also is the
President of Nautilus Global Partners, LLC.
|
|||
Mid-Ocean
Consulting Limited
Bayside
House
Bayside
Executive Park
West
Bay Street & Blake Road
Nassau,
Bahamas
|
50,000
|
David
Richardson, one of our former directors, also is the owner, president and
CEO of Mid-Ocean
Consulting.
|
59
On
October 22, 2009, David Richardson and Joseph Rozelle resigned as our officers
and directors in connection with the reverse merger transaction. There were no
disagreements between David Richardson and Joseph Rozelle and us or any officer
or director of the Company.
Reorganization
Related Transactions
Merit
Times owns 100% of the issued and outstanding capital stock of
MeKeFuBang. On June 10, 2009, MeKeFuBang entered into a series of
contractual agreements with Longkang, and its five shareholders, in which
MeKeFuBang effectively assumed management of the business activities of Longkang
and has the right to appoint all executives and senior management and the
members of the board of directors of Longkang. The contractual arrangements are
comprised of a series of agreements, including a Consulting Services Agreement,
Operating Agreement, Proxy Agreement, and VIE Option Agreement, through which
MeKeFuBang has the right to advise, consult, manage and operate Longkang for an
annual fee in the amount of Longkang’s yearly net profits after tax.
Additionally, Longkang’s shareholders have pledged their rights, titles and
equity interests in Longkang as security for MeKeFuBang to collect consulting
and services fees provided to Longkang through an Equity Pledge Agreement. In
order to further reinforce MeKeFuBang’s rights to control and operate Longkang,
Longkang’s shareholders have granted MeKeFuBang the exclusive right and option
to acquire all of their equity interests in Longkang through the VIE Option
Agreement.
On June
10, 2009, the Chairman and the major shareholder of Longkang, Mr. Zhide Jiang,
as a PRC citizen, entered into a call option agreement (“Original Option
Agreement”) with Mr. Chee Fung Tang, a Hong Kong passport holder (“Hong Kong
Resident”) and the Merit Times Shareholders. Under the Original Option
Agreement, Mr. Jiang shall agree to serve as CEO, director or other officer of
Merit Times for a certain period of time; and in anticipation of Mr. Jiang’s
continuance contributions to the companies including Merit Times and Longkang,
if the companies meet certain thresholds of the revenue conditions, Mr. Jiang
shall have rights and options to be transferred the shares of Merit Times at a
nominal price. In addition, Original Option Agreement also provides that Mr.
Tang shall not dispose any of the shares of Merit Times without Mr. Jiang’s
consent.
On August
5, 2009, Mr. Tang, a Hong Kong resident and the sole shareholder of Proud Glory
Limited (a BVI company, which became the major shareholder of Merit Times after
Merit Times recapitalized), entered into a new incentive option agreement
(“Proud Glory Option Agreement”) with Mr. Jiang.
Pursuant
to Proud Glory Option Agreement, the Original Option Agreement was terminated on
the effective date of Proud Glory Option Agreement. The effective date of Proud
Glory Option Agreement is October 22, 2009.
Under the
Proud Glory Option Agreement, for at least three years, Mr. Jiang shall serve as
managing director or other officer of Merit Times; and in anticipation of Mr.
Jiang’s continuing contributions to the group including Merit Times, MeKeFuBang
and Longkang, if the group meets certain thresholds of the revenue conditions,
Mr. Jiang shall have rights and options to be transferred up to 100% shares of
Proud Glory Limited at a nominal price within the next three years (the
“Option”).
In
addition, the Proud Glory Option Agreement also provides that Mr. Tang shall not
dispose any of the shares of Proud Glory Limited without Mr. Jiang’s
consent.
Policies
and Procedures for Review, Approval or Ratification of Transactions with Related
Persons
We are in
the process of adopting a written related-person transactions policy that sets
forth our policies and procedures regarding the identification, review,
consideration and approval or ratification of “related-persons transactions.”
For purposes of our policy only, a “related-person transaction” will be a
transaction, arrangement or relationship (or any series of similar transactions,
arrangements or relationships) in which we and any “related person” are
participants involving an amount that exceeds $50,000. Transactions involving
compensation for services provided to us as an employee, director, consultant or
similar capacity by a related person will not be covered by this policy. A
related person will be any executive officer, director or a holder of more than
five percent of our ordinary shares, including any of their immediate family
members and any entity owned or controlled by such persons.
Under the
policy, we expect that where a transaction has been identified as a
related-person transaction, management must present information regarding the
proposed related-person transaction to our audit committee (or, where approval
by our audit committee would be inappropriate, to another independent body of
our board of directors) for consideration and approval or ratification. The
presentation will be expected to include a description of, among other things,
the material facts, and the direct and indirect interests of the related
persons, the benefits of the transaction to us and whether any alternative
transactions are available. To identify related-person transactions in advance,
we will rely on information supplied by our executive officers, directors and
certain significant shareholders. In considering related-person transactions,
our audit committee will take into account the relevant available facts and
circumstances including, but not limited to:
|
·
|
the risks, costs and benefits to
us;
|
|
·
|
the impact on a director’s
independence in the event the related person is a director, immediate
family member of a director or an entity with which a director is
affiliated;
|
60
|
·
|
the terms of the
transaction;
|
|
·
|
the availability of other sources
for comparable services or products;
and
|
|
·
|
the terms available to or from,
as the case may be, unrelated third parties or to or from our employees
generally.
|
In the
event a director has an interest in the proposed transaction, the director must
excuse himself or herself form the deliberations and approval. Our policy will
require that, in determining whether to approve, ratify or reject a
related-person transaction, our audit committee must consider, in light of known
circumstances, whether the transaction is in, or is not inconsistent with, the
best interests of our company and our shareholders, as our audit committee
determines in the good faith exercise of its discretion. We did not previously
have a formal policy concerning transactions with related persons.
Promoters
and Certain Control Persons
We did
not have any promoters at any time during the past five fiscal
years.
Other
than stated above, none of the following persons has any direct or indirect
material interest in any transaction to which we are a party since our
incorporation or in any proposed transaction to which we are proposed to be a
party:
(A)
|
Any
of our directors or
officers;
|
(B)
|
Any
proposed nominee for election as our
director;
|
(C)
|
Any
person who beneficially owns, directly or indirectly, shares carrying more
than 10% of the voting rights attached to our ordinary shares;
or
|
(D)
|
Any
relative or spouse of any of the foregoing persons, or any relative of
such spouse, who has the same house as such person or who is a director or
officer of any parent or subsidiary of our
company.
|
CHANGE
IN ACCOUNTANTS
Prior to
our reverse acquisition transaction with Merit Times, our independent registered
public accounting firm was PMB Helin Donovan, LLP (“PMB”), while Merit Time’s
independent registered public accounting firm was Sherb & Co., LLP. On
October 22, 2009, concurrent with the change in control transaction discussed
above, our board of directors approved the dismissal of PMB, as our independent
auditor, effective immediately. Concurrent with the decision to dismiss PMB as
our independent auditor, our board of directors elected to continue the existing
relationship of Merit Times with Sherb & Co., LLP as our independent
auditor.
PMB’s
reports on the financial statements of the Company for the years ended December
31, 2008 and 2007 did not contain an adverse opinion or a disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.
In
connection with the audit and review of the financial statements of the Company
through October 22, 2009, there were no disagreements on any matter of
accounting principles or practices, financial statement disclosures, or auditing
scope or procedures, which disagreements if not resolved to their satisfaction
would have caused them to make reference in connection with PMB’s opinion to the
subject matter of the disagreement.
In
connection with our audited financial statements for the years ended December
31, 2008 and 2007 and interim unaudited financial statement through October 22,
2009, there have been no reportable events with us as set forth in Item
304(a)(1)(v) of Regulation S-K.
During
the fiscal years ended December 31, 2008 and 2007 and through October 22, 2009,
neither us nor anyone acting on our behalf consulted Sherb & Co., LLP with
respect to (i) the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on our financial statements, and neither a written report was
provided to us or oral advice was provided that Sherb & Co., LLP concluded
was an important factor considered by us in reaching a decision as to the
accounting, auditing or financial reporting issue; or (ii) any matter that was
the subject of a disagreement or reportable events set forth in Item
304(a)(1)(iv) and (v), respectively, of Regulation S-K.
61
We
provided PMB with a copy of this disclosure on October 22, 2009, providing PMB
with the opportunity to furnish us with a letter addressed to the SEC stating
whether it agrees with the statement made by us herein in response to Item
304(a) of Regulation S-K and, if not, stating the respect in which it does not
agree. A letter from PMB dated October 23, 2009 was filed by us as Exhibit 16.1
to our current report on Form 8-K on October 27, 2009.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT
The
following table sets forth certain information as of the date hereof with
respect to the beneficial ownership of our ordinary shares, the sole outstanding
class of our voting securities, by (i) each shareholder known to be the
beneficial owner of 5% or more of the outstanding ordinary shares of the
Company, (ii) each executive officer and director, and (iii) all executive
officers and directors as a group.
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. ordinary shares subject to options, warrants or
convertible securities exercisable or convertible within 60 days as of the date
hereof are deemed outstanding for computing the percentage of the person or
entity holding such options, warrants or convertible securities but are not
deemed outstanding for computing the percentage of any other person and is based
on 27,499,171 ordinary shares issued and outstanding on a fully converted basis
as of the date hereof.
Name and Address
of Beneficial Owner (1)(2)
|
Title
|
Shares of
Common
Stock
Beneficially
Owned
Before the
Offering
|
Percent of
Class
Beneficially
Owned
Prior to
Offering (3)
|
Shares of
Common
Stock
Beneficially
Owned
After the
Offering
|
Percent of Class
Beneficially
Owned After
Offering (4)
|
|||||||||||||
|
|
|
||||||||||||||||
Directors
and Executive Officers
|
|
|
|
|||||||||||||||
Zhide
Jiang (5)(6)
No.
48 South Qingshui Road
Laiyang
City, Shandong 265200
People’s
Republic of China
|
President,
Chief Executive Officer and Chairman of the Board of
Directors
|
11,306,666 | 41.13 | % | 11,306,666 | 37.70 | % | |||||||||||
Adam
Wasserman
No.
48 South Qingshui Road
Laiyang
City, Shandong 265200
People’s
Republic of China
|
Chief
Financial Officer
|
- | - | - | - | |||||||||||||
Lili
Jiang
No.
48 South Qingshui Road
Laiyang
City, Shandong 265200
People’s
Republic of China
|
Director
|
- | - | - | - | |||||||||||||
Barry
Shapiro
905
SE 1 Way
Deerfield
Beach, FL 33433
|
Director
|
- | - | - | - | |||||||||||||
ChengRong
Wang
700
Great Wall Road,
Chengyang
District, Qingdao,
Shandong
266109, China
|
Director
|
- | - | - | - | |||||||||||||
MaoSen
Cui
700
Great Wall Road,
Chengyang
District, Qingdao,
Shandong
266109, China
|
Director
|
- | - | - | - | |||||||||||||
Officers
and Directors as a
Group
(a total of 6 persons)
|
11,306,666 | 41.13 | % | 11,306,666 | 37.70 | % | ||||||||||||
5%
Owners
|
||||||||||||||||||
Access
America Fund LP (7)
11200
Westheimer #508
Houston
TX 77042
|
2,114,004 | 7.52 | % | 2,114,004 | 7.05 | % | ||||||||||||
Chen
Han Qing (8)
40
Hao Tai Hu Hong Qiao Hua
Yuan
Wu
Xi Shi, Jiang Su Province,
241000
People’s
Republic of China
|
1,500,000 | (4) | 5.36 | % | 1,500,000 | (4) | 5.00 | % |
(1)
|
Pursuant to Rule 13d-3 under the
Exchange Act, a person has beneficial ownership of any securities as to
which such person, directly or indirectly, through any contract,
arrangement, undertaking, relationship or otherwise has or shares voting
power and/or investment power or as to which such person has the right to
acquire such voting and/or investment power within 60
days.
|
(2)
|
Unless otherwise stated, each
beneficial owner has sole power to vote and dispose of the
shares.
|
(3)
|
Applicable percentage of
ownership is based on 27,499,171 ordinary shares outstanding as of the
date hereof together with securities exercisable or convertible into
ordinary shares within sixty (60) days as of the date hereof for each
shareholder.
|
(4)
|
Based on 29,999,171 ordinary
shares, which consists of (i) 27,499,171 ordinary shares issued and
outstanding as of the date hereof, and (ii) 2,500,000 ordinary shares
issued in the public offering (excluding the underwriter’s over-allotment
option of up to 375,000
shares).
|
(5)
|
The 11,306,666 shares are held in
the name of Proud Glory Limited, of which Mr. Jiang is the Managing
Director.
|
(6)
|
The Company’s management have
agreed that, without the prior written consent of Investors, they will
not, offer, pledge, sell or otherwise dispose of any ordinary shares or
any securities convertible into or exercisable or exchangeable for
ordinary shares during the period beginning on November 2, 2009 for a
period of eighteen (18)
months.
|
(7)
|
The number of shares beneficially
owned by Access America includes (i) 206,000 ordinary shares retained in
connection with the share exchange transaction dated October 22, 2009,
(ii) 920,667 ordinary shares and Warrants to purchase 460,334 ordinary
shares issued in the Financing directly owned by Access America, and (iii)
351,335 ordinary shares and Warrants to purchase 175,668 ordinary shares
issued in the Financing indirectly owned through AAI Global Longkang Pear
Juice Acquisition, LLC. Access America has voting and
investment discretion over securities held by AAI Global Longkang Pear
Juice Acquisition, LLC. Mr. Christopher Efird, President of Access
America, has voting control over Access
America.
|
(8)
|
The number of shares beneficially
owned by Chen Han Qing includes Warrants to purchase 500,000 ordinary
shares at $6.00 per
share.
|
62
DESCRIPTION
OF SECURITIES
We are a
Cayman Islands company and our affairs are governed by our memorandum and
articles of association, or its amendment, and the Companies Law (2009 Revision)
of the Cayman Islands, or the Companies Law.
We are
authorized to issue 50,000,000 ordinary shares, par value $.001 and 1,000,000
shares of preferred stock, par value $.001. As of the date hereof, 27,499,171 ordinary
shares were issued and outstanding and no shares of preferred stock were issued
and outstanding.
The
following are summaries of material provisions of our amended and restated
memorandum and articles of association and the Companies Law insofar as they
relate to the material terms of our securities.
General
The
objects for which we are established are unrestricted and we shall have full
power and authority to carry out any object not prohibited by the Companies Law.
Our shareholders who are nonresidents of the Cayman Islands may freely hold and
vote their shares.
Ordinary
Shares
Dividends. Subject
to any rights and restrictions of any other class or series of shares, our board
of directors may, from time to time, declare dividends on the shares issued and
authorize payment of the dividends out of our lawfully available funds. No
dividends shall be declared by the board out of our company except the
following:
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•
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profits;
or
|
|
•
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“share premium account,” which
represents the excess of the price paid to our company on issue of its
shares over the par or “nominal” value of those shares, which is similar
to the U.S. concept of additional paid in
capital.
|
However,
no dividend shall bear interest against the Company.
Voting Rights. The
holders of our ordinary shares are entitled to one vote per share, including the
election of directors. Voting at any meeting of shareholders is by show of hands
unless a poll is demanded. A poll may be demanded by the chairman or one or more
shareholders present in person or by proxy holding not less than one-tenth of
the total voting rights of all shareholders having the right to vote at the
meeting. A quorum required for a meeting of shareholders consists of
shareholders who hold at least one-third of our outstanding shares entitled to
vote at the meeting present in person or by proxy.
Any
ordinary resolution to be made by the shareholders requires the affirmative vote
of a simple majority of the votes of the ordinary shares cast in a general
meeting, while a special resolution requires the affirmative vote of no less
than two-thirds of the votes of the ordinary shares cast. Under Cayman Islands
law, some matters, such as amending the memorandum and articles, changing the
name or resolving to be registered by way of continuation in a jurisdiction
outside the Cayman Islands, require approval of shareholders by a special
resolution.
There are
no limitations on non-residents or foreign shareholder in the memorandum and
articles to hold or exercise voting rights on the ordinary shares imposed by
foreign law or by the charter or other constituent document of our company.
However, no person will be entitled to vote at any general meeting or at any
separate meeting of the holders of the ordinary shares unless the person is
registered as of the record date for such meeting and unless all calls or other
sums presently payable by the person in respect of ordinary shares in the
Company have been paid.
Winding Up;
Liquidation. Upon the winding up of our company, after the
full amount that holders of any issued shares ranking senior to the ordinary
shares as to distribution on liquidation or winding up are entitled to receive
has been paid or set aside for payment, the holders of our ordinary shares are
entitled to receive any remaining assets of the Company available for
distribution as determined by the liquidator. The assets received by the holders
of our ordinary shares in a liquidation may consist in whole or in part of
property, which is not required to be of the same kind for all
shareholders.
Calls on Ordinary Shares and
Forfeiture of Ordinary Shares. Our board of directors may from
time to time make calls upon shareholders for any amounts unpaid on their
ordinary shares in a notice served to such shareholders at least 14 days prior
to the specified time and place of payment. Any ordinary shares that have been
called upon and remain unpaid are subject to forfeiture.
Redemption of Ordinary
Shares. We may issue shares that are, or at its option or at
the option of the holders are, subject to redemption on such terms and in such
manner as it may, before the issue of the shares, determine. Under the Companies
Law, shares of a Cayman Islands company may be redeemed or repurchased out of
profits of the company, out of the proceeds of a fresh issue of shares made for
that purpose or out of capital, provided the memorandum and articles authorize
this and it has the ability to pay its debts as they come due in the ordinary
course of business.
No Preemptive
Rights. Holders of ordinary shares will have no preemptive or
preferential right to purchase any securities of our company.
Variation of Rights Attaching to
Shares. If at any time the share capital is divided into
different classes of shares, the rights attaching to any class (unless otherwise
provided by the terms of issue of the shares of that class) may, subject to the
memorandum and articles, be varied or abrogated with the consent in writing of
the holders of a majority of the issued shares of that class or with the
sanction of a special resolution passed at a general meeting of the holders of
the shares of that class.
Preferred
Stock
The Board
of Directors is empowered to designate and issue from time to time one or more
classes or series of Preferred Stock and to fix and determine the relative
rights, preferences, designations, qualifications, privileges, options,
conversion rights, limitations and other special or relative rights of each such
class or series so authorized. Such action could adversely affect the voting
power and other rights of the holders of the Company’s capital shares or could
have the effect of discouraging or making difficult any attempt by a person or
group to obtain control of the Company. We currently do not have any
Preferred Stock issued and outstanding.
Warrants
The
Warrants to purchase ordinary shares are issued in conjunction with a purchase
of the Units. Upon closing of the private placement financing
transaction on November 2, 2009, we issued Warrants to purchase 2,835,177 of our
ordinary shares. Each Warrant entitles the holder to purchase one
Ordinary Share. The Warrants will be exercisable in whole or in part,
at an exercise price equal to $6.00 per share (“Exercise Price”). The
Warrants may be exercised at any time upon the election of the holder, beginning
on the date of issuance and ending of the fifth anniversary of the final closing
of the abovementioned financing.
The
Warrants will be detachable and separately transferable only during the Warrant
exercise period; upon the expiration of the Warrant exercise period, the
Warrants will expire and become void.
63
In order
to exercise the Warrants, the Warrant must be surrendered at the office of the
Warrant Agent prior to the expiration of the Warrant exercise period, with the
form of exercise appearing with the Warrant completed and executed as indicated,
accompanied by payment of the full exercise price for the number of Warrants
being exercised. In the case of partial exercise, the Warrant Agent
will issue a new warrant to the exercising warrant holder, or assigns,
evidencing the Warrants which remain unexercised. In our discretion,
the Warrant Agent may designate a location other than our office for surrender
of Warrants in the case of transfer or exercise.
The
exercise price and number of ordinary shares to be received upon the exercise of
Warrants are subject to adjustment upon the occurrence of certain events, such
as stock splits, stock dividends or our recapitalization. In the
event of our liquidation, dissolution or winding up, the holders of Warrants
will not be entitled to participate in the distribution of our
assets.
Holders
of Warrants have no voting, pre-emptive, subscription or other rights of
shareholders in respect of the Warrants, nor shall the Holders be entitled to
receive dividends.
We also
issued to the Placement Agents or their designees, for nominal consideration,
five-year warrants to purchase 567,035 shares of our ordinary shares, which
shall equal 10% of the number of ordinary shares sold in the abovementioned
financing, exercisable at any time at a price equal to $6.00 per
share.
SHARES
ELIGIBLE FOR FUTURE SALE
Prior to
this offering, there has been no public market for our ordinary shares. Future
sales of substantial amounts of our ordinary shares in the public market could
adversely affect market prices. Upon completion of this offering, we will have
outstanding an aggregate of 29,991,171 ordinary shares, assuming no
exercise of the underwriter’s over-allotment option. Of the
outstanding ordinary shares as of the completion of this offering, the 2,500,000
shares sold in the offering and the 8,590,571 shares registered for resale under
a separate prospectus will be freely tradeable without restriction or further
registration under the Securities Act, except that any ordinary shares purchased
by our “affiliates,” as that term is defined in Rule 144 of the Securities Act,
may generally only be sold in compliance with the limitations of Rule 144
described below.
All other
outstanding ordinary shares not sold in this offering or registered under a
separate resale prospectus will be deemed “restricted securities” under Rule
144. Restricted securities may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rule 144 promulgated
under the Securities Act, which rules are summarized below. Our shareholders
will not be eligible to utilize Rule 144 until October 27, 2010, at the
earliest, which is 12 months from the date we filed our Form 10 information, as
required under Rule 144. Subject to the lock-up agreements described below and
the provisions of Rules 144, additional shares will be available for sale in the
public market as follows:
Approximate Number of
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|
|
Ordinary Shares Eligible for
|
|
|
Future Sale
|
|
Date
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2,500,000
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After
the date of this prospectus, freely tradable ordinary shares sold in this
offering.
|
|
8,590,571
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After
the date of this prospectus, these shares will have been registered under
a separate prospectus (“Resale Prospectus”) and will be freely tradable by
selling stockholders listed in the Resale Prospectus. These shares consist
of all of the ordinary shares registered under the Resale Prospectus,
including 2,920,232 ordinary shares that have or may be issued upon
exercise of outstanding warrants.
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|
9,125,834
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On
October 27, 2010, which is twelve months after the filing of a current
report on Form 8-K reporting the closing of the share exchange
transaction. These shares may be sold under and subject to Rule
144. These shares include the shares that were issued in
connection with the share exchange transaction and 487,500 shares held by
the original shareholders prior to the share exchange, and excluding the
shares held by Mr. Zhide Jiang subject to the Lock-Up
Agreement.
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11,306,666
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On
May 2, 2011, which is eighteen months after the final closing date of
private placement transaction. Mr. Zhide Jiang, our President and CEO,
entered into a Lock-Up Agreement with us whereby he agreed he will not,
offer, pledge, sell or otherwise dispose of any ordinary shares or any
securities convertible into or exercisable or exchangeable for ordinary
shares during the period beginning on and including the date of the final
closing of the financing transaction for a period of eighteen (18)
months.
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8,000
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On
November 12, 2010, which is six months after the issuance of such shares.
These shares may be sold under and subject to Rule 144. These shares
were issued to CFO Oncall Asia, Inc., a company 60% owned by Adam
Wasserman, our chief financial officer for his services
rendered.
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Rule
144
In
general, under Rule 144 a person, or persons whose shares are aggregated, who is
not deemed to have been one of our affiliates at any time during the 90 days
preceding a sale and who has beneficially owned shares of our ordinary shares
for at least six months, including the holding period of any prior owner, except
if the prior owner was one of our affiliates, would be entitled to sell all of
their shares, provided the availability of current public information about our
company.
Sales
under Rule 144 may also subject to manner of sale provisions and notice
requirements and to the availability of current public information about our
company. Any substantial sale of ordinary shares pursuant to any resale
registration statement or Rule 144 may have an adverse effect on the market
price of our ordinary shares by creating an excessive supply.
We issued
21,333,332 ordinary shares to the Merit Times stockholders pursuant to the share
exchange that closed on October 22, 2010. Additionally, there are
487,500 shares held by the original shareholders who were issued the shares
prior to the share exchange. These shares may not be sold pursuant to Rule
144 until October 27, 2010, which is 12 months after the filing of a current
report on Form 8-K reporting the closing of the share exchange
transaction. Approximately, 11,306,666 of these shares are subject to
a lock-up agreement and cannot be offered, pledged, sold or otherwise disposed
of until May 2, 2011.
The
information in this preliminary prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This preliminary prospectus is
not an offer to sell these securities and it is not soliciting an offer to buy
these securities in any jurisdiction where the offer or sale is not
permitted.
64
UNDERWRITING
Subject
to the terms and conditions of the underwriting agreement dated [_________],
2010, Roth Capital Partners, LLC (the “Underwriter”), has agreed to
purchase from us the number of ordinary shares set forth below at the public
offering price less the underwriting discounts and commissions set forth on the
cover page of this prospectus.
Underwriter
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Number of Shares
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||
Roth
Capital Partners, LLC
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[____
|
] | |
Total
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[____
|
] |
The
underwriting agreement provides that the agreement may be terminated by the
Underwriter at any time prior to delivery of and payment for the shares if, in
the Underwriter’s judgment, payment for and delivery of the shares is rendered
impracticable or inadvisable by reason of events specified in the underwriting
agreement, including but not limited to the state of the financial markets and
our financial condition. Subject to the foregoing, the underwriter is committed
to purchase all of the ordinary shares being offered by us if any of such shares
are purchased, other than those covered by the over-allotment option described
below.
The
following table shows the per share and total underwriting discounts and
commissions to be paid to the Underwriter to the Company. Such
amounts are shown assuming both no exercise and full exercise of the
underwriter’s over-allotment option to purchase 375,000 additional
shares.
Paid by the Company
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No Exercise
|
Full Exercise
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||||||
Per
share
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$ | $ | ||||||
Total.
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$ | $ |
The
Underwriter proposes to offer the ordinary shares directly to the public at the
public offering price set forth on the cover page of this prospectus. The
Underwriter may offer the ordinary shares to some dealers at that price less a
concession not in excess of $[______] per share. Dealers may reallow a
concession not in excess of $[______] per share to some other dealers. After the
ordinary shares are released for sale to the public, the Underwriter may vary
the offering price and other selling terms.
We have
granted to the Underwriter an option, exercisable for up to 45 days after the
date of this prospectus, to purchase up to 375,000 additional ordinary shares at
the public offering price set forth on the cover of this prospectus solely to
cover over-allotments, if any.
The
Underwriter is expected to make offers and sales both inside and outside the
United States through its respective selling agents. Any offers and sales in the
United States will be conducted by broker-dealers registered with the
SEC.
The
Underwriter has entered into an agreement in which it agrees to restrictions on
where and to whom it and any dealer purchasing from it may offer ordinary
shares, as a part of the distribution of the shares. The Underwriter also has
agreed that it may sell ordinary shares itself.
We have
agreed to indemnify the Underwriter against some liabilities, including
liabilities under the Securities Act, and to contribute to payments that the
Underwriter may be required to make in respect thereof.
We have
agreed to pay the Underwriter a non-accountable expense allowance in the amount
of not more than $50,000 for its reasonable out-of-pocket expenses, including
the fees and disbursements of the Underwriter’s legal counsel.
The
Underwriter may engage in over-allotment, stabilizing transactions, syndicate
covering transactions, penalty bids and passive market making in accordance with
Regulation M under the Exchange Act. Over-allotment involves syndicate sales in
excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the ordinary shares in the open market after
the distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representative to reclaim a selling concession from a
syndicate member when the ordinary shares originally sold by the syndicate
member is purchased in a syndicate covering transaction to cover syndicate short
positions. Penalty bids may have the effect of deterring syndicate members from
selling to people who have a history of quickly selling their shares. In passive
market making, market makers in the ordinary shares who are underwriters or
prospective underwriters may, subject to some limitations, make bids for or
purchases of the ordinary shares until the time, if any, at which a stabilizing
bid is made. These stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the ordinary shares to be higher than it
would otherwise be in the absence of these transactions. These transactions may
be effected on the NASDAQ Global Market or otherwise and, if commenced, may be
discontinued at any time.
65
In
connection with the offering, the Underwriter may make short sales of the
issuer’s shares and may purchase the issuer’s shares on the open market to cover
positions created by short sales. Short sales involve the sale by the
Underwriter of a greater number of shares than they are required to purchase in
the offering. ‘Covered’ short sales are sales made in an amount not greater than
the Underwriter’s ‘overallotment’ option to purchase additional shares in the
offering. The Underwriter may close out any covered short position by either
exercising its overallotment option or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
Underwriter will consider, among other things, the price of shares available for
purchase in the open market as compared to the price at which they may purchase
shares through the overallotment option. ‘Naked’ short sales are sales in excess
of the overallotment option. The Underwriter must close out any naked short
position by purchasing shares in the open market. A naked short position is more
likely to be created if the Underwriter is concerned that there may be downward
pressure on the price of the shares in the open market after pricing that could
adversely affect investors who purchase in the offering. Similar to other
purchase transactions, the Underwriter’s purchases to cover the syndicate short
sales may have the effect of raising or maintaining the market price of the
issuer’s stock or preventing or retarding a decline in the market price of
issuer’s stock. As a result, the price of the issuer’s stock may be higher than
the price that might otherwise exist in the open market.
Prior to
this offering, there has been no public market of the ordinary shares.
Consequently, the public offering price will be determined by negotiations
between us and the Underwriter. Among the factors considered in these
negotiations will be prevailing market conditions, the market capitalizations
and the stages of development of other companies that we and the Underwriter
believe to be comparable to us, estimates of our business potential, our results
of operations in recent periods, the present state of our development and other
factors deemed relevant.
We
estimate that our out of pocket expenses for this offering will be approximately
$250,000 in addition to Underwriter discounts and commissions.
Other
Terms
Lock-Up Agreement. We, and
certain of our shareholders, have agreed with the Underwriter that
we, and they, will not, without the prior consent of the Underwriter, for a
period of 180 days following the closing of this offering, (A) offer,
pledge, issue, sell, contract to sell, purchase, contract to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any ordinary shares or
any securities convertible into or exercisable or exchangeable for ordinary
shares; or (B) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
our ordinary shares, whether any such transaction described in clause (A) or (B)
above is to be settled by delivery of ordinary shares or such other securities,
in cash or otherwise; or (C) file any registration statement with the Commission
relating to the offering of any ordinary shares or any securities convertible
into or exercisable or exchangeable for ordinary shares. The
restrictions contained in the preceding sentence shall not apply to (1) the
shares to be sold hereunder, or (2) the issuance of ordinary shares upon the
exercise of options or warrants disclosed as outstanding in this
prospectus. The 180-day restricted period described in the preceding
paragraph will be automatically extended if: (1) during the last 17 days of the
180-day restricted period, we issue an earnings release or announce material
news or a material event; or (2) prior to the expiration of the 180-day
restricted period, we announce that we will release earnings results during the
16-day period beginning on the last day of the 180-day period, in which case the
restrictions described in the preceding paragraph will continue to apply until
the expiration of the 18-day period beginning on the date of the earnings
release or the announcement of the material news or material event.
The
underwriting agreement provides for indemnification between us and the
Underwriter against specified liabilities, including liabilities under the
Securities Act, and for contribution by us and the Underwriter to payments that
may be required to be made with respect to those liabilities. We have been
advised that, in the opinion of the Securities and Exchange Commission,
indemnification of liabilities under the Securities Act is against public policy
as expressed in the Securities Act, and is therefore,
unenforceable.
Foreign
Regulatory Restrictions on Purchase of the Ordinary Shares
No action
may be taken in any jurisdiction other than the United States that would permit
a public offering of the ordinary shares or the possession, circulation or
distribution of this prospectus in any jurisdiction where action for that
purpose is required. Accordingly, the ordinary shares may not be offered or
sold, directly or indirectly, and neither the prospectus nor any other offering
material or advertisements in connection with the ordinary shares may be
distributed or published in or from any country or jurisdiction except under
circumstances that will result in compliance with any applicable rules and
regulations of any such country or jurisdiction.
In
addition to the public offering of the shares in the United States, the
underwriters may, subject to the applicable foreign laws, also offer the common
shares to certain institutions or accredited persons in the following
countries:
United Kingdom. No offer of
ordinary shares has been made or will be made to the public in the United
Kingdom within the meaning of Section 102B of the Financial Services and Markets
Act 2000, as amended, or FSMA, except to legal entities which are authorized or
regulated to operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in securities or
otherwise in circumstances which do not require the publication by us of a
prospectus pursuant to the Prospectus Rules of the Financial Services Authority,
or FSA. Each underwriter: (i) has only communicated or caused to be communicated
and will only communicate or cause to be communicated an invitation or
inducement to engage in investment activity (within the meaning of Section 21 of
FSMA) to persons who have professional experience in matters relating to
investments falling within Article 19(5) of the Financial Services and Markets
Act 2000 (Financial Promotion) Order 2005 or in circumstances in which Section
21 of FSMA does not apply to us; and (ii) has complied with, and will comply
with all applicable provisions of FSMA with respect to anything done by it in
relation to the shares in, from or otherwise involving the United
Kingdom.
European Economic Area. In
relation to each member state of the European Economic Area which has
implemented the Prospectus Directive, which we refer to as a Relevant Member
State, with effect from and including the date on which the Prospectus Directive
is implemented in that Relevant Member State, which we refer to as the Relevant
Implementation Date, no offer of ordinary shares has been made and or will be
made to the public in that Relevant Member State prior to the publication of a
prospectus in relation to the ordinary shares which has been approved by the
competent authority in that Relevant Member State or, where appropriate,
approved in another Relevant Member State and notified to the competent
authority in that Relevant Member State, all in accordance with the Prospectus
Directive, except that, with effect from and including the Relevant
Implementation Date, an offer of ordinary shares may be made to the public in
that Relevant Member State at any time: (a) to legal entities which are
authorized or regulated to operate in the financial markets or, if not so
authorized or regulated, whose corporate purpose is solely to invest in
securities; (b) to any legal entity which has two or more of (i) an average of
at least 250 employees during the last financial year; (ii) a total balance
sheet of more than €43,000,000 and (iii) an annual net turnover of more than
€50,000,000, as shown in its last annual or consolidated accounts; or (c) in any
other circumstances which do not require the publication by us of a prospectus
pursuant to Article 3 of the Prospectus Directive. For the purposes of this
provision, the expression an “offer of ordinary shares to the public” in
relation to any ordinary shares in any Relevant Member State means the
communication in any form and by any means of sufficient information on the
terms of the offer and the ordinary shares to be offered so as to enable an
investor to decide to purchase or subscribe the ordinary shares, as the same may
be varied in that Relevant Member State by any measure implementing the
Prospectus Directive in that Relevant Member State and the expression Prospectus
Directive means Directive 2003/71/ EC and includes any relevant implementing
measure in each Relevant Member State.
66
Germany. Any offer or
solicitation of ordinary shares within Germany must be in full compliance with
the German Securities Prospectus Act (Wertpapierprospektgesetz — WpPG). The
offer and solicitation of securities to the public in Germany requires the
approval of the prospectus by the German Federal Financial Services Supervisory
Authority (Bundesanstalt für Finanzdienstleistungsaufsicht — BaFin). This
prospectus has not been and will not be submitted for approval to the BaFin.
This prospectus does not constitute a public offer under the German Securities
Prospectus Act (Wertpapierprospektgesetz). This prospectus and any other
document relating to the ordinary shares, as well as any information contained
therein, must therefore not be supplied to the public in Germany or used in
connection with any offer for subscription of the ordinary shares to the public
in Germany, any public marketing of the ordinary shares or any public
solicitation for offers to subscribe for or otherwise acquire the ordinary
shares. The prospectus and other offering materials relating to the offer of the
ordinary shares are strictly confidential and may not be distributed to any
person or entity other than the designated recipients hereof.
Greece. This prospectus has
not been approved by the Hellenic Capital Markets Commission or another EU
equivalent authority and consequently is not addressed to or intended for use,
in any way whatsoever, by Greek residents. The ordinary shares have not been
offered or sold and will not be offered, sold or delivered directly or
indirectly in Greece, except to (i) “qualified investors” (as defined in article
2(f) of Greek Law 3401/2005) and/or to (ii) less than 100 individuals or legal
entities, who are not qualified investors (article 3, paragraph 2(b) of Greek
Law 3401/2005), or otherwise in circumstances which will not result in the offer
of the new ordinary shares being subject to the Greek Prospectus requirements of
preparing a filing a prospectus (under articles 3 and 4 of Greek Law
3401/2005).
Italy. This offering of the
ordinary shares has not been cleared by Consob, the Italian Stock Exchanges
regulatory agency of public companies, pursuant to Italian securities
legislation and, accordingly, no ordinary shares may be offered, sold or
delivered, nor may copies of this prospectus or of any other document relating
to the ordinary shares be distributed in Italy, except (1) to professional
investors (operatori qualificati); or (2) in circumstances which are exempted
from the rules on solicitation of investments pursuant to Decree No. 58 and
Article 33, first paragraph, of Consob Regulation No. 11971 of May 14, 1999, as
amended. Any offer, sale or delivery of the ordinary shares or distribution of
copies of this prospectus or any other document relating to the ordinary shares
in Italy under (1) or (2) above must be (i) made by an investment firm, bank or
financial intermediary permitted to conduct such activities in Italy in
accordance with the Decree No. 58 and Legislative Decree No. 385 of September 1,
1993, or the Banking Act; and (ii) in compliance with Article 129 of the Banking
Act and the implementing guidelines of the Bank of Italy, as amended from time
to time, pursuant to which the issue or the offer of securities in Italy may
need to be preceded and followed by an appropriate notice to be filed with the
Bank of Italy depending, inter alia, on the aggregate value of the securities
issued or offered in Italy and their characteristics; and (iii) in compliance
with any other applicable laws and regulations.
Cyprus. The Underwriter has
agreed that (i) it will not be providing from or within Cyprus any “Investment
Services”, “Investment Activities” and “Non-Core Services” (as such terms are
defined in the Investment Firms Law 144(I) of 2007, (the “IFL”) in relation to
the ordinary shares, or will be otherwise providing Investment Services,
Investment Activities and Non-Core Services to residents or persons domiciled in
Cyprus. Each underwriter has agreed that it will not be concluding in Cyprus any
transaction relating to such Investment Services, Investment Activities and
Non-Core Services in contravention of the IFL and/or applicable regulations
adopted pursuant thereto or in relation thereto; and (ii) it has not and will
not offer any of the ordinary shares other than in compliance with the
provisions of the Public Offer and Prospectus Law, Law 114(I)/2005.
Switzerland. This document
does not constitute a prospectus within the meaning of Art. 652a of the Swiss
Code of Obligations. The ordinary shares may not be sold directly or indirectly
in or into Switzerland except in a manner which will not result in a public
offering within the meaning of the Swiss Code of Obligations. Neither this
document nor any other offering materials relating to the ordinary shares may be
distributed, published or otherwise made available in Switzerland except in a
manner which will not constitute a public offer of the ordinary shares of in
Switzerland.
Norway. This prospectus has
not been approved or disapproved by, or registered with, the Oslo Stock
Exchange, the Norwegian Financial Supervisory Authority (Kredittilsynet) nor the
Norwegian Registry of Business Enterprises, and the ordinary shares are marketed
and sold in Norway on a private placement basis and under other applicable
exceptions from the offering prospectus requirements as provided for pursuant to
the Norwegian Securities Trading Act.
67
Botswana. The company hereby
represents and warrants that it has not offered for sale or sold, and will not
offer or sell, directly or indirectly the ordinary shares to the public in the
Republic of Botswana, and confirms that the offering will not be subject to any
registration requirements as a prospectus pursuant to the requirements and/or
provisions of the Companies Act, 2003 or the Listing Requirements of the
Botswana Stock Exchange.
Hong Kong. The ordinary
shares may not be offered or sold by means of any document other than (i) in
circumstances which do not constitute an offer to the public within the meaning
of the Companies Ordinance (Cap.32, Laws of Hong Kong), or (ii) to “professional
investors” within the meaning of the Securities and Futures Ordinance (Cap.571,
Laws of Hong Kong) and any rules made thereunder, or (iii) in other
circumstances which do not result in the document being a “prospectus” within
the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no
advertisement, invitation or document relating to the ordinary shares may be
issued or may be in the possession of any person for the purpose of issue (in
each case whether in Hong Kong or elsewhere), which is directed at, or the
contents of which are likely to be accessed or read by, the public in Hong Kong
(except if permitted to do so under the laws of Hong Kong) other than with
respect to ordinary shares which are or are intended to be disposed of only to
persons outside Hong Kong or only to “professional investors” within the meaning
of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any
rules made thereunder.
Singapore. This prospectus
has not been registered as a prospectus with the Monetary Authority of
Singapore. Accordingly, this prospectus and any other document or material in
connection with the offer or sale, or invitation for subscription or purchase,
of the ordinary shares may not be circulated or distributed, nor may the
ordinary shares be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to persons in
Singapore other than (i) to an institutional investor under Section 274 of the
Securities and Futures Act, Chapter 289 of Singapore, or the SFA, (ii) to a
relevant person, or any person pursuant to Section 275(1A), and in accordance
with the conditions, specified in Section 275 of the SFA or (iii) otherwise
pursuant to, and in accordance with the conditions of, any other applicable
provision of the SFA. Where the ordinary shares are subscribed or purchased
under Section 275 by a relevant person which is: (a) a corporation (which is not
an accredited investor) the sole business of which is to hold investments and
the entire share capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the trustee is not an
accredited investor) whose sole purpose is to hold investments and each
beneficiary is an accredited investor, shares, debentures and units of shares
and debentures of that corporation or the beneficiaries’ rights and interest in
that trust shall not be transferable for 6 months after that corporation or that
trust has acquired the ordinary shares under Section 275 except: (i) to an
institutional investor under Section 274 of the SFA or to a relevant person, or
any person pursuant to Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA; (ii) where no consideration is given for
the transfer or (iii) by operation of law.
People’s Republic of China.
This prospectus has not been and will not be circulated or distributed in
the PRC, and ordinary shares may not be offered or sold, and will not be offered
or sold to any person for re-offering or resale, directly or indirectly, to any
resident of the PRC except pursuant to applicable laws and regulations of the
PRC. For the purpose of this paragraph only, the PRC does not include Taiwan and
the special administrative regions of Hong Kong and Macau.
Israel. This Prospectus does
not constitute an offer to sell the ordinary shares to the public in Israel or a
prospectus under the Israeli Securities Law, 5728-1968 and the regulations
promulgated thereunder, or the Israeli Securities Law, and has not been filed
with or approved by the Israel Securities Authority. In Israel, pursuant to an
exemption afforded under the Israeli Securities Law, this Prospectus may be
distributed only to, and may be directed only at, investors listed in the first
addendum to the Israeli Securities Law, or the Addendum, consisting primarily of
certain mutual trust and provident funds, or management companies thereto,
banks, as defined under the Banking (Licensing) Law, 5741-1981, except for joint
service companies purchasing for their own account or for clients listed in the
Addendum, insurers, as defined under the Supervision of Financial Services Law
(Insurance), 5741-1981, portfolio managers purchasing for their own account or
for clients listed in the Addendum, investment advisers purchasing for their own
account, Tel Aviv Stock Exchange members purchasing for their own account or for
clients listed in the Addendum, underwriters purchasing for their own account,
venture capital funds, certain corporations which primarily engage in the
capital market and fully-owned by investors listed in the Addendum and
corporations whose equity exceeds NIS250 Million, collectively referred to as
institutional investors. Institutional investors may be required to submit
written confirmation that they fall within the scope of the
Addendum.
United Arab Emirates. This
document has not been reviewed, approved or licensed by the Central Bank of the
United Arab Emirates (the “UAE”), Emirates Securities and Commodities Authority
or any other relevant licensing authority in the UAE including any licensing
authority incorporated under the laws and regulations of any of the free zones
established and operating in the territory of the UAE, in particular the Dubai
International Financial Services Authority (the “DFSA”), a regulatory authority
of the Dubai International Financial Centre (the “DIFC”). The issue of ordinary
shares does not constitute a public offer of securities in the UAE, DIFC and/or
any other free zone in accordance with the Commercial Companies Law, Federal Law
No. 8 of 1984 (as amended), DFSA Offered Securities Rules and the Dubai
International Financial Exchange Listing Rules, accordingly, or otherwise. The
ordinary shares may not be offered to the public in the UAE and/or any of the
free zones including, in particular, the DIFC. The ordinary shares may be
offered and this document may be issued, only to a limited number of investors
in the UAE or any of its free zones (including, in particular, the DIFC) who
qualify as sophisticated investors under the relevant laws and regulations of
the UAE or the free zone concerned. Management of the company, and the
representatives represent and warrant that the ordinary shares will not be
offered, sold, transferred or delivered to the public in the UAE or any of its
free zones including, in particular, the DIFC.
68
Oman. For the attention of
the residents of Oman:
The
information contained in this memorandum neither constitutes a public offer of
securities in the Sultanate of Oman (“Oman”) as contemplated by the Commercial
Companies Law of Oman (Sultani Decree 4/74) or the Capital Market Law of Oman
(Sultani Decree 80/98), nor does it constitute an offer to sell, or the
solicitation of any offer to buy non-Omani securities in Oman as contemplated by
Article 6 of the Executive Regulations to the Capital Market Law of Oman (issued
vide Ministerial Decision No 4/2001), and nor does it constitute a distribution
of non-Omani securities in Oman as contemplated under the Rules for Distribution
of Non-Omani Securities in Oman issued by the Capital Market Authority of Oman
(“CMA”). Additionally, this memorandum is not intended to lead to the conclusion
of any contract of whatsoever nature within the territory of Oman.
This
memorandum has been sent at the request of the investor in Oman, and by
receiving this memorandum, the person or entity to whom it has been issued and
sent understands, acknowledges and agrees that this memorandum has not been
approved by the CMA or any other regulatory body or authority in Oman, nor has
any authorization, license or approval been received from the CMA or any other
regulatory authority in Oman, to market, offer, sell, or distribute the ordinary
shares within Oman.
No
marketing, offering, selling or distribution of any financial or investment
products or services has been or will be made from within Oman and no
subscription to any securities, products or financial services may or will be
consummated within Oman. The Underwriter is not a company licensed by the CMA to
provide investment advisory, brokerage, or portfolio management services in
Oman, nor banks licensed by the Central Bank of Oman to provide investment
banking services in Oman. The Underwriter does not advise persons or entities
resident or based in Oman as to the appropriateness of investing in or
purchasing or selling securities or other financial products.
Nothing
contained in this memorandum is intended to constitute Omani investment, legal,
tax, accounting or other professional advice. This memorandum is for your
information only, and nothing herein is intended to endorse or recommend a
particular course of action. You should consult with an appropriate professional
for specific advice on the basis of your situation.
Any
recipient of this memorandum and any purchaser of the ordinary shares pursuant
to this memorandum shall not market, distribute, resell, or offer to resell the
ordinary shares within Oman without complying with the requirements of
applicable Omani law, nor copy or otherwise distribute this memorandum to
others.
Canada.
Resale
Restrictions
The
distribution of our securities in Canada is being made only on a private
placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of our securities are made. Any resale of our securities in Canada must
be made under applicable securities laws that will vary depending on the
relevant jurisdiction, and which may require resales to be made under available
statutory exemptions or under a discretionary exemption granted by the
applicable Canadian securities regulatory authority. Purchasers are advised to
seek legal advice prior to any resale of our securities.
Representations of
Purchasers
By
purchasing our securities in Canada and accepting a purchase confirmation a
purchaser is representing to us and the dealer from whom the purchase
confirmation is received that:
|
·
|
the purchaser is entitled under
applicable provincial securities laws to purchase our securities without
the benefit of a prospectus qualified under those securities
laws;
|
|
·
|
where required by law, that the
purchaser is purchasing as principal and not as
agent;
|
|
·
|
the purchaser has reviewed the
text above under Resale Restrictions;
and
|
|
·
|
the purchaser acknowledges and
consents to the provision of specified information concerning its purchase
of our securities to the regulatory authority that by law is entitled to
collect the information.
|
69
Further
details concerning the legal authority for this information are available on
request.
Rights of Action — Ontario
Purchasers Only
Under
Ontario securities legislation, certain purchasers who purchase a security
offered by this prospectus during the period of distribution will have a
statutory right of action for damages, or while still the owner of our
securities, for rescission against us in the event that this prospectus contains
a misrepresentation without regard to whether the purchaser relied on the
misrepresentation. The right of action for damages is exercisable not later than
the earlier of 180 days from the date the purchaser first had knowledge of the
facts giving rise to the cause of action and three years from the date on which
payment is made for our securities. The right of action for rescission is
exercisable not later than 180 days from the date on which payment is made for
our securities. If a purchaser elects to exercise the right of action for
rescission, the purchaser will have no right of action for damages against us.
In no case will the amount recoverable in any action exceed the price at which
our securities were offered to the purchaser and if the purchaser is shown to
have purchased the securities with knowledge of the misrepresentation, we will
have no liability. In the case of an action for damages, we will not be liable
for all or any portion of the damages that are proven to not represent the
depreciation in value of our securities as a result of the misrepresentation
relied upon. These rights are in addition to, and without derogation from, any
other rights or remedies available at law to an Ontario purchaser. The foregoing
is a summary of the rights available to an Ontario purchaser. Ontario purchasers
should refer to the complete text of the relevant statutory
provisions.
Enforcement of Legal
Rights
All of
our directors and officers as well as the experts named herein may be located
outside of Canada and, as a result, it may not be possible for Canadian
purchasers to effect service of process within Canada upon us or those persons.
All or a substantial portion of our assets and the assets of those persons may
be located outside of Canada and, as a result, it may not be possible to satisfy
a judgment against us or those persons in Canada or to enforce a judgment
obtained in Canadian courts against us or those persons outside of
Canada.
Taxation and Eligibility for
Investment
Canadian
purchasers of our securities should consult their own legal and tax advisors
with respect to the tax consequences of an investment in our securities in their
particular circumstances and about the eligibility of our securities for
investment by the purchaser under relevant Canadian legislation.
LEGAL
MATTERS
The
Company is being represented by Anslow & Jaclin, LLP with respect to legal
matters of United States federal securities and New Jersey State law. The
validity of the ordinary shares offered by this prospectus and legal matters as
to Cayman Islands law will be passed upon for us by Conyers Dill &
Pearman. Loeb & Loeb LLP is acting as counsel for the
underwriter. Legal matters as to PRC law will be passed upon for us by Allbright
Law Offices. Anslow & Jaclin, LLP may rely upon Allbright Law Offices with
respect to matters governed by PRC law.
EXPERTS
The
consolidated financial statements of our company included in this prospectus and
in the registration statement have been audited by Sherb & Co., LLP,
independent registered public accounting firm, to the extent and for the periods
set forth in their report appearing elsewhere herein and in the registration
statement, and are included in reliance on such report, given the authority of
said firm as an expert in auditing and accounting.
ADDITIONAL
INFORMATION
We filed
with the Securities and Exchange Commission a registration statement under the
Securities Act of 1933 for the ordinary shares in this offering. This prospectus
does not contain all of the information in the registration statement and the
exhibits and schedule that were filed with the registration statement. For
further information with respect to us and our ordinary shares, we refer you to
the registration statement and the exhibits and schedule that were filed with
the registration statement. Statements contained in this prospectus about the
contents of any contract or any other document that is filed as an exhibit to
the registration statement are not necessarily complete, and we refer you to the
full text of the contract or other document filed as an exhibit to the
registration statement. A copy of the registration statement and the exhibits
and schedules that were filed with the registration statement may be inspected
without charge at the Public Reference Room maintained by the Securities and
Exchange Commission at 100 F Street, N.E. Washington, DC 20549, and copies of
all or any part of the registration statement may be obtained from the
Securities and Exchange Commission upon payment of the prescribed fee.
Information regarding the operation of the Public Reference Room may be obtained
by calling the Securities and Exchange Commission at 1-800-SEC-0330. The
Securities and Exchange Commission maintains a website that contains reports,
proxy and information statements, and other information regarding registrants
that file electronically with the SEC. The address of the website is
www.sec.gov.
70
We file
periodic reports under the Securities Exchange Act of 1934, including annual,
quarterly and special reports, and other information with the Securities and
Exchange Commission. These periodic reports and other information are available
for inspection and copying at the regional offices, public reference facilities
and website of the Securities and Exchange Commission referred to
above.
71
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
June 30,
|
|
|
December 31,
|
|
||
2010
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$
|
47,761,578
|
$
|
26,574,338
|
||||
Cash
- restricted
|
883,509
|
2,587,916
|
||||||
Inventories,
net of reserve for obsolete inventory
|
29,767
|
13,345,511
|
||||||
Prepaid
VAT on purchases
|
56,902
|
82,330
|
||||||
Deferred
income taxes
|
59,935
|
59,685
|
||||||
Total
Current Assets
|
48,791,691
|
42,649,780
|
||||||
PROPERTY
AND EQUIPMENT - net
|
10,187,562
|
7,397,661
|
||||||
OTHER
ASSETS:
|
||||||||
Land
use rights, net
|
15,570,652
|
15,779,542
|
||||||
Deposit
on equipment
|
484,190
|
-
|
||||||
Deferred
income taxes - net of current portion
|
809,128
|
835,586
|
||||||
Total
Assets
|
$
|
75,843,223
|
$
|
66,662,569
|
||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$
|
479,428
|
$
|
540,830
|
||||
Accrued
expenses
|
699,363
|
1,392,155
|
||||||
Income
taxes payable
|
3,356,352
|
4,819,891
|
||||||
Other
taxes payable
|
607,662
|
31,317
|
||||||
Total
Current Liabilities
|
5,142,805
|
6,784,193
|
||||||
COMMITMENT
|
||||||||
SHAREHOLDERS'
EQUITY:
|
||||||||
Preference
shares ($0.001 par value; 1,000,000 shares authorized, none issued and
outstanding at June 30, 2010 and December 31, 2009,
respectively)
|
-
|
-
|
||||||
Ordinary
shares ($0.001 par value; 50,000,000 shares authorized, 27,499,171 and
27,491,171 shares issued and outstanding at June 30, 2010 amd December 31,
2009, respectively)
|
27,499
|
27,492
|
||||||
Additional
paid-in capital
|
16,355,307
|
16,331,315
|
||||||
Retained
earnings
|
48,637,562
|
38,080,824
|
||||||
Statutory
and non-statutory reserves
|
2,949,814
|
2,949,814
|
||||||
Accumulated
other comprehensive income - cumulative foreign currency translation
adjustment
|
2,730,236
|
2,488,931
|
||||||
Total
Shareholders' Equity
|
70,700,418
|
59,878,376
|
||||||
Total
Liabilities and Shareholders' Equity
|
$
|
75,843,223
|
$
|
66,662,569
|
See
condensed notes to unaudited consolidated financial statements
F-1
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
||||||||||
|
|
June 30,
|
|
|
June 30,
|
|
||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||
NET
REVENUES
|
$
|
6,398,333
|
$
|
2,227,201
|
$
|
49,599,385
|
$
|
46,371,201
|
||||||||
COST
OF SALES
|
4,085,030
|
1,138,261
|
34,149,993
|
32,700,082
|
||||||||||||
GROSS
PROFIT
|
2,313,303
|
1,088,940
|
15,449,392
|
13,671,119
|
||||||||||||
OPERATING
EXPENSES:
|
||||||||||||||||
Selling
|
73,061
|
115,969
|
245,247
|
343,238
|
||||||||||||
Research
and development
|
14
|
29,977
|
73,156
|
71,019
|
||||||||||||
General
and administrative
|
536,137
|
364,904
|
1,054,265
|
794,380
|
||||||||||||
Total
Operating Expenses
|
609,212
|
510,850
|
1,372,668
|
1,208,637
|
||||||||||||
INCOME
FROM OPERATIONS
|
1,704,091
|
578,090
|
14,076,724
|
12,462,482
|
||||||||||||
OTHER
INCOME (EXPENSE):
|
||||||||||||||||
Interest
income
|
33,434
|
12,888
|
58,275
|
25,157
|
||||||||||||
Interest
expense
|
-
|
(57,063
|
)
|
-
|
(189,117
|
)
|
||||||||||
Loss
from foreign currency
|
(9,107
|
)
|
-
|
(9,107
|
)
|
-
|
||||||||||
Total
Other Income (Expense)
|
24,327
|
(44,175
|
)
|
49,168
|
(163,960
|
)
|
||||||||||
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
1,728,418
|
533,915
|
14,125,892
|
12,298,522
|
||||||||||||
PROVISION
FOR INCOME TAXES:
|
||||||||||||||||
Current
|
(422,250
|
)
|
(84,880
|
)
|
(3,539,301
|
)
|
(3,056,621
|
)
|
||||||||
Deferred
|
(14,929
|
)
|
-
|
(29,853
|
)
|
-
|
||||||||||
Total
Provision for Income Taxes
|
(437,179
|
)
|
(84,880
|
)
|
(3,569,154
|
)
|
(3,056,621
|
)
|
||||||||
NET
INCOME
|
$
|
1,291,239
|
$
|
449,035
|
$
|
10,556,738
|
$
|
9,241,901
|
||||||||
COMPREHENSIVE
INCOME:
|
||||||||||||||||
NET
INCOME
|
$
|
1,291,239
|
$
|
449,035
|
$
|
10,556,738
|
$
|
9,241,901
|
||||||||
OTHER
COMPREHENSIVE INCOME:
|
||||||||||||||||
Unrealized
foreign currency translation gain
|
240,521
|
83
|
241,305
|
38,504
|
||||||||||||
COMPREHENSIVE
INCOME
|
$
|
1,531,760
|
$
|
449,118
|
$
|
10,798,043
|
$
|
9,280,405
|
||||||||
NET
INCOME PER ORDINARY SHARE:
|
||||||||||||||||
Basic
|
$
|
0.05
|
$
|
0.02
|
$
|
0.38
|
$
|
0.43
|
||||||||
Diluted
|
$
|
0.05
|
$
|
0.02
|
$
|
0.38
|
$
|
0.43
|
||||||||
WEIGHTED
AVERAGE ORDINARY SHARES OUTSTANDING:
|
||||||||||||||||
Basic
|
27,496,446
|
21,333,332
|
27,493,823
|
21,333,332
|
||||||||||||
Diluted
|
27,496,446
|
21,333,332
|
27,493,823
|
21,333,332
|
See
condensed notes to unaudited consolidated financial statements
F-2
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Six Months Ended
|
||||||||
June
30,
|
||||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$
|
10,556,738
|
$
|
9,241,901
|
||||
Adjustments
to reconcile net income from operations to net cash provided by operating
activities:
|
||||||||
Depreciation
|
475,753
|
448,917
|
||||||
Amortization
of land use rights
|
274,121
|
273,781
|
||||||
Decrease
in reserve for inventory obsolescence
|
(18,797
|
)
|
-
|
|||||
Stock-based
compensation
|
23,999
|
-
|
||||||
Deferred
income taxes
|
29,853
|
-
|
||||||
Changes
in assets and liabilities:
|
||||||||
Accounts
receivable
|
-
|
5,110,943
|
||||||
Inventories
|
13,339,472
|
13,604,321
|
||||||
Prepaid
and other current assets
|
-
|
995,776
|
||||||
Prepaid
VAT on purchases
|
25,660
|
221,262
|
||||||
Accounts
payable
|
(63,241
|
)
|
(615,052
|
)
|
||||
Accrued
expenses
|
(708,132
|
)
|
(153,989
|
)
|
||||
Other
taxes payable
|
574,009
|
98,302
|
||||||
Income
taxes payable
|
(1,478,111
|
)
|
686,617
|
|||||
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
23,031,324
|
29,912,779
|
||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Deposits
on property and equipment
|
(482,338
|
)
|
-
|
|||||
Purchase
of property and equipment
|
(3,224,027
|
)
|
-
|
|||||
NET
CASH USED IN INVESTING ACTIVITIES
|
(3,706,365
|
)
|
-
|
|||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Decrease
in cash - restricted
|
1,704,407
|
-
|
||||||
Payment
on loan payable
|
-
|
(10,039,970
|
)
|
|||||
Payment
on acquisition payables
|
-
|
(851,865
|
)
|
|||||
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
1,704,407
|
(10,891,835
|
)
|
|||||
EFFECT
OF EXCHANGE RATE ON CASH
|
157,874
|
(1,576
|
)
|
|||||
NET
INCREASE IN CASH
|
21,187,240
|
19,019,368
|
||||||
CASH -
beginning of year
|
26,574,338
|
2,028,858
|
||||||
CASH
- end of period
|
$
|
47,761,578
|
$
|
21,048,226
|
||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash
paid for:
|
||||||||
Interest
|
$
|
-
|
$
|
189,117
|
||||
Income
taxes
|
$
|
5,017,412
|
$
|
2,370,004
|
See
condensed notes to unaudited consolidated financial statements.
F-3
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Emerald
Acquisition Corporation (the ‘Company”) was formed under the laws of the Cayman
Islands on March 10, 2006. On October 22, 2009, the Company acquired Merit
Times International Limited (“Merit Times”) in a reverse acquisition
transaction. Merit Times was established on February 8, 2008, under the laws of
British Virgin Islands. Merit Times was established as a “special purpose
vehicle” for foreign fund raising. Pursuant to a share exchange agreement in
this reverse acquisition transaction, the Company issued an aggregate of
21,333,332 ordinary shares to the shareholders of Merit Times, their designees
or assigns in exchange for all of the issued and outstanding capital stock of
Merit Times. On October 22, 2009, the Share Exchange closed and Merit
Times became the Company’s wholly-owned subsidiary.
Presently all
of the Company’s business operations are carried out by Shandong Longkang Juice
Co., Ltd., a limited liability company under the laws of China
(“Longkang”). The Company does not own any equity interests in Longkang, but
control and receive the economic benefits of its business operations through a
series of contractual arrangements (the “Contractual Arrangements”) dated June
10, 2009. The Contractual Arrangements are between Longkang and its owners, on
the one hand, and Shandong MeKeFuBang Food Limited (the “WFOE” or “MeKeFuBang”)
a wholly foreign owned enterprise incorporated on June 9, 2009 under the laws of
the People’s Republic of China (PRC), Merit Times’ wholly-owned subsidiary in
the PRC, on the other hand. The contractual arrangements are comprised of a
series of agreements, including: (1) a Consulting Services Agreement, through
which the MeKeFuBang has the right to advise, consult, manage and operate
Longkang, and collect and own all of the net profits of Longkang; (2) an
Operating Agreement, through which MeKeFuBang has the right to recommend
director candidates and appoint the senior executives of Longkang, approve any
transactions that may materially affect the assets, liabilities, rights or
operations of Longkang, and guarantee the contractual performance by Longkang of
any agreements with third parties, in exchange for a pledge by Longkang of
its accounts receivable and assets; (3) a Proxy Agreement, under which the five
owners of Longkang have vested their collective voting control over the
Operating Entity to MeKeFuBang and will only transfer their respective equity
interests in Longkang to MeKeFuBang or its designee(s); (4) an Option Agreement,
under which the owners of Longkang have granted MeKeFuBang the irrevocable right
and option to acquire all of their equity interests in Longkang; and (5) an
Equity Pledge Agreement, under which the owners of Longkang have pledged all of
their rights, titles and interests in Longkang to MeKeFuBang to guarantee
Longkang’s performance of its obligations under the Consulting Services
Agreement. Through these contractual arrangements, the Company has the
ability to substantially influence the daily operations and financial affairs of
Longkang, since the Company is able to appoint its senior executives and approve
all matters requiring stockholder approval. As a result of these Contractual
Arrangements, which enables the Company to control Longkang and to receive,
through its subsidiaries, all of its profits, the Company is considered the
primary beneficiary of Longkang, which is deemed its variable interest entity
(“VIE”). Accordingly, the Company consolidates Longkang’s results, assets and
liabilities in its financial statements.
Prior to
the Exchange Agreement, there were 1,281,500 Ordinary Shares issued and
outstanding. Pursuant to the terms of the Exchange Agreement, a shareholder of
the Company cancelled a total of 794,000 Ordinary Shares of the Company.
Following the combination prior to the Offering, there are 21,820,832 Ordinary
Shares of the Company issued and outstanding.
The
Company, through its subsidiaries and variable interest entity, engages in the
production of fruit juice concentrate in the PRC, specializing in processing,
producing and distributing Laiyang Pear fruit juice concentrate. The Company is
the only producer of Laiyang Pear fruit juice concentrate, which contains 46
kinds of Organic Acid, Vitamin B1, B2, Vitamin C, Nicotinic Acid, Protocatechuic
Acid, Carotene and mineral substances such as Calcium, Phosphorus and Iron,
etc., and therefore is known for its taste, nutritional and medical benefits,
and application in health supplements, pharmaceuticals, and the food and
beverage industries.
F-4
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Basis of
presentation
Management
acknowledges its responsibility for the preparation of the accompanying interim
consolidated financial statements which reflect all adjustments, consisting of
normal recurring adjustments, considered necessary in its opinion for a fair
statement of its consolidated financial position and the results of its
operations for the interim period presented.
These
consolidated financial statements should be read in conjunction with the summary
of significant accounting policies and notes to consolidated financial
statements included in the Company’s Form 10-K annual report for the year ended
December 31, 2009.
The
accompanying unaudited condensed consolidated financial statements for Emerald
Acquisition Corporation, its subsidiaries and variable interest entities, have
been prepared in accordance with accounting principles generally accepted in the
United States of America (the “U.S. GAAP”) for interim financial information and
with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Operating
results for interim periods are not necessarily indicative of results that may
be expected for the fiscal year as a whole. This basis differs from that used in
the statutory accounts of our subsidiaries in China, which were prepared in
accordance with the accounting principles and relevant financial regulations
applicable to enterprises in the PRC. All necessary adjustments have been made
to present the financial statements in accordance with U.S. GAAP.
The
Company’s consolidated financial statements include the financial statements of
its wholly-owned subsidiary, Merit Times International Limited, MeKeFuBang, as
well as the financial statements of Longkang. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Longkang
is considered a variable interest
entity (“VIE”), and the Company is the primary
beneficiary. The Company’s relationships with Longkang and its
shareholders are governed by a series of contractual arrangements between
MeKeFuBang, the Company’s wholly foreign-owned enterprise in the PRC, and
Longkang, which is the operating company of the Company in the PRC. Under PRC
laws, each of MeKeFuBang and Longkang is an independent legal entity and none of
them are exposed to liabilities incurred by the other party. The contractual
arrangements constitute valid and binding obligations of the parties of such
agreements. Each of the contractual arrangements and the rights and obligations
of the parties thereto are enforceable and valid in accordance with the laws of
the PRC. On June 10, 2009, the Company entered into the following contractual
arrangements with Longkang.
Operating Agreement -
Pursuant to the operating agreement among MeKeFuBang, Longkang and all
shareholders of Longkang (the “Longkang Shareholders”), MeKeFuBang provides
guidance and instructions on Longkang’s daily operations, financial management
and employment issues. Longkang Shareholders must designate the candidates
recommended by MeKeFuBang as their representatives on the boards of directors of
Longkang. MeKeFuBang has the right to appoint senior executives of Longkang. In
addition, MeKeFuBang agrees to guarantee Longkang’s performance under any
agreements or arrangements relating to Longkang’s business arrangements with any
third party. Longkang, in return, agrees to pledge their accounts receivable and
all of their assets to MeKeFuBang. Moreover, Longkang agrees that without the
prior consent of MeKeFuBang, Longkang will not engage in any transactions that
could materially affect its assets, liabilities, rights or operations,
including, without limitation, incurrence or assumption of any indebtedness,
sale or purchase of any assets or rights, incurrence of any encumbrance on any
of its assets or intellectual property rights in favor of a third party or
transfer of any agreements relating to its business operation to any third
party. The term of this agreement shall commence from the effective and shall
last for the maximum period of time permitted by law unless terminated early in
accordance with certain provision or by any other agreements reached by all
parties, with any extended term to be mutually agreed upon by the parties.
Longkang shall not terminate this agreement.
F-5
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Consulting Services
Agreement - Pursuant to the exclusive consulting services agreement
between MeKeFuBang and Longkang, MeKeFuBang has the exclusive right to provide
to Longkang general business operation services, including advice and strategic
planning, as well as consulting services related to the technological research
and development of the Longkang’s products (the “Services”). Under this
agreement, MeKeFuBang owns the intellectual property rights developed or
discovered through research and development, in the course of providing the
Services, or derived from the provision of the Services. Longkang shall pay a
quarterly consulting service fees in Renminbi (“RMB”) to MeKeFuBang that is
equal to all of Longkang’s profits for such quarter.
Equity Pledge
Agreement - Under the equity pledge agreement between Longkang’s
shareholders and MeKeFuBang, Longkang’s Shareholders pledged all of their equity
interests in Longkang to MeKeFuBang to guarantee Longkang’s performance of its
obligations under the consulting services agreement. If Longkang or Longkang’s
Shareholders breaches their respective contractual obligations, MeKeFuBang, as
pledgee, will be entitled to certain rights, including the right to sell the
pledged equity interests. Longkang’s Shareholders also agreed that upon
occurrence of any event of default, MeKeFuBang shall be granted an exclusive,
irrevocable power of attorney to take actions in the place and stead of the
Longkang’s Shareholders to carry out the security provisions of the equity
pledge agreement and take any action and execute any instrument that MeKeFuBang
may deem necessary or advisable to accomplish the purposes of the equity pledge
agreement. Longkang’s Shareholders agreed not to dispose of the pledged equity
interests or take any actions that would prejudice MeKeFuBang’s interest. The
equity pledge agreement will expire two (2) years after Longkang’s obligations
under the consulting services agreements have been fulfilled.
Option Agreement
- Under the option
agreement between Longkang’s Shareholders and MeKeFuBang, Longkang’s
Shareholders irrevocably granted MeKeFuBang or its designated person an
exclusive option to purchase, to the extent permitted under
PRC law, all or part of the equity interests in Longkang for the cost of the
initial contributions to the registered capital or the minimum amount of
consideration permitted by applicable PRC law. MeKeFuBang or its designated
person has sole discretion to decide when to exercise the option, whether in
part or in full. The term of this agreement shall last for the maximum period of
time permitted by law unless terminated in accordance with this agreement.
The
accounts of Longkang are consolidated in the accompanying
consolidated financial statements pursuant to Financial Accounting Codification
Standards Topic 810-10-05 and related subtopics related to the consolidation of
Variable Interest Entities As a VIE, Longkang’s sales
are included in the Company’s total sales, its income from operations is
consolidated with the Company’s, and the Company’s net income includes all of
Longkang’s net income. The Company does not have any
non-controlling interest and accordingly, did not subtract any net income in
calculating the net income attributable to the Company. Because of the
contractual arrangements, the Company had a pecuniary interest in Longkang that require consolidation of the Company’s and
Longkang financial statements.
Use of
estimates
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, expenses, and the related disclosures at the date
of the consolidated financial statements and during the reporting period. Actual
results could materially differ from these estimates. Significant estimates
include the allowance for doubtful accounts, the allowance for obsolete
inventory, the useful life of property and equipment and intangible assets, and
assumptions used in assessing impairment of long-term assets.
F-6
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair value of financial
instruments
The
Company adopted the guidance of Accounting Standards Codification (“ASC”) 820
for fair value measurements which clarifies the definition of fair value,
prescribes methods for measuring fair value, and establishes a fair value
hierarchy to classify the inputs used in measuring fair value as
follows:
Level
1-Inputs are unadjusted quoted prices in active markets for identical assets or
liabilities available at the measurement date.
Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in
active markets, quoted prices for identical or similar assets and liabilities in
markets that are not active, inputs other then quoted prices that are
observable, and inputs derived from or corroborated by observable market
data.
Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own
assumptions on what assumptions the market participants would use in pricing the
asset or liability based on the best available information.
The
carrying amounts reported in the balance sheets for cash, accounts receivable,
loans payable, accounts payable and accrued expenses, and advances to suppliers
approximate their fair market value based on the short-term maturity of these
instruments. The Company did not identify any assets or liabilities that are
required to be presented on the balance sheets at fair value in accordance with
the accounting guidance.
ASC
825-10 “Financial
Instruments”, allows entities to voluntarily choose to measure certain
financial assets and liabilities at fair value (fair value option). The fair
value option may be elected on an instrument-by-instrument basis and is
irrevocable, unless a new election date occurs. If the fair value option is
elected for an instrument, unrealized gains and losses for that instrument
should be reported in earnings at each subsequent reporting date. The Company
did not elect to apply the fair value option to any outstanding
instruments.
Cash and cash
equivalents
For
purposes of the consolidated statements of cash flows, the Company considers all
highly liquid instruments purchased with a maturity of three months or less and
money market accounts to be cash equivalents. The Company maintains cash and
cash equivalents with various financial institutions mainly in the PRC and the
U.S. Balances in the U.S are insured up to $250,000 at each bank. Balances
in banks in the PRC are uninsured.
As at
June 30, 2010 and December 31, 2009, restricted cash consisted of cash deposits held with
Company counsel (see Note 7).
Concentrations of credit
risk
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC's economy. The Company's operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in North America. The Company's results may be adversely affected by
changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
F-7
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentrations of credit
risk (continued)
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash and trade accounts receivable. Substantially
all of the Company’s cash is maintained with state-owned banks within the PRC,
and no deposits are covered by insurance. The Company has not experienced any
losses in such accounts and believes it is not exposed to any risks on its cash
in bank accounts. A significant portion of the Company's sales are cash sales
since the demand for our products exceeds our current supply.
At June
30, 2010 and December 31, 2009, the Company’s cash balances by geographic area
were as follows:
June
30, 2010
|
December
31, 2009
|
|||||||||||||||
Country:
|
||||||||||||||||
China
|
$
|
47,761,578
|
100.0
|
%
|
$
|
26,574,338
|
100.0
|
%
|
||||||||
Total
cash and cash equivalents
|
$
|
47,761,578
|
100.0
|
%
|
$
|
26,574,338
|
100.0
|
%
|
Accounts
receivable
Accounts
receivable are presented net of an allowance for doubtful accounts. The Company
maintains allowances for doubtful accounts for estimated losses. The Company
reviews the accounts receivable on a periodic basis and makes general and
specific allowances when there is doubt as to the collectability of individual
balances. In evaluating the collectability of individual receivable balances,
the Company considers many factors, including the age of the balance, customer’s
historical payment history, its current credit-worthiness and current economic
trends. Accounts are written off after exhaustive efforts at collection. At June
30, 2010 and December 31, 2009, the Company has established, based on a review
of its outstanding balances, an allowance for doubtful accounts in the amount of
$0 and $0, respectively.
Inventories
Inventories,
consisting of raw materials, work in process and finished goods related to the
Company’s products are stated at the lower of cost or market utilizing the
weighted average method. An allowance is established when management determines
that certain inventories may not be saleable. If inventory costs exceed expected
market value due to obsolescence or quantities in excess of expected demand, the
Company will record reserves for the difference between the cost and the market
value. These reserves are recorded based on estimates. The Company
recorded an inventory reserve of $74,140 and $92,619 at June 30, 2010 and
December 31, 2009, respectively. Cost of sales represents all direct and
indirect costs associated with the production of products for sale to customers.
These costs include cost of raw materials, direct and indirect labor and benefit
costs, freight in, depreciation, and storage fees.
Property and
equipment
Property
and equipment are carried at cost and are depreciated on a straight-line basis
over the estimated useful lives of the assets. The cost of repairs and
maintenance is expensed as incurred; major replacements and improvements are
capitalized. When assets are retired or disposed of, the cost and
accumulated depreciation are removed from the accounts, and any resulting gains
or losses are included in income in the year of disposition. The Company
examines the possibility of decreases in the value of fixed assets when events
or changes in circumstances reflect the fact that their recorded value may not
be recoverable. Included in property and equipment is
construction-in-progress which consists of a deposit on a factory under
construction and machinery pending installation and includes the costs of
construction, machinery and equipment, and any interest charges arising from
borrowings used to finance these assets during the period of construction or
installation. No provision for depreciation is made on construction-in-progress
until such time as the relevant assets are completed and ready for their
intended use.
F-8
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impairment of long-lived
assets
In
accordance with ASC Topic 360, the Company reviews, long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable, or at least
annually. The Company recognizes an impairment loss when the sum of expected
undiscounted future cash flows is less than the carrying amount of the asset.
The amount of impairment is measured as the difference between the asset’s
estimated fair value and its book value. The Company did not record any
impairment charges for the six-month periods ended June 30, 2010 and
2009.
The
Company is governed by the Income Tax Law of the People’s Republic of
China. The Company accounts for income taxes using the liability method
prescribed by ASC 740 “Income
Taxes”. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial reporting and tax bases
of assets and liabilities using enacted tax rates that will be in effect in the
year in which the differences are expected to reverse. The Company records a
valuation allowance to offset deferred tax assets if based on the weight of
available evidence, it is more-likely-than-not that some portion, or all, of the
deferred tax assets will not be realized. The effect on deferred taxes of a
change in tax rates is recognized as income or loss in the period that includes
the enactment date.
Pursuant
to accounting standards related to the accounting for uncertainty in income
taxes, the evaluation of a tax position is a two-step process. The first step is
to determine whether it is more likely than not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50% likelihood of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met. The accounting standard also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosures, and transition.
Advances from
customers
Advances
from customers consist of prepayments from customers for merchandise that had
not yet been shipped. The Company recognizes the deposits as revenue as
customers take delivery of the goods, in accordance with its revenue recognition
policy. Advances from customers at June 30, 2010 and December 31,
2009 amounted to $0 and $0, respectively.
Revenue
recognition
Pursuant
to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes
revenue when persuasive evidence of an arrangement exists, delivery has occurred
or services have been rendered, the purchase price is fixed or determinable and
collectability is reasonably assured. The Company recognizes revenues from the
sale of juice concentrate upon shipment and transfer of title.
Shipping
costs
Shipping
costs are included in selling expenses and totaled $23,299 and $133,738 for the
six months ended June 30, 2010 and 2009, respectively.
F-9
CONDENSED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Employee
benefits
The
Company’s operations and employees are all located in the PRC. The Company
makes mandatory contributions to the PRC government’s health, retirement benefit
and unemployment funds in accordance with the relevant Chinese social security
laws, which is approximately 25% of salaries. For the six months ended June 30,
2010 and 2009, the costs of these payments are charged to general and
administrative expenses in the same period as the related salary costs and
amounted to $42,090 and $43,740, respectively.
Advertising
Advertising
is expensed as incurred and is included in selling expenses on the accompanying
statement of operations. For the six months ended June 30, 2010 and 2009,
advertising expense amounted to $14,631 and $81,450, respectively.
Research and
development
Research
and development costs are expensed as incurred. For the six months ended June
30, 2010 and 2009, research and development costs amounted to $73,156 and
$71,019, respectively.
Foreign currency
translation
The
reporting currency of the Company is the U.S. dollar. The functional currency of
the parent company is the U.S. dollar and the functional currency of the
Company’s operating subsidiaries and affiliates is the Chinese Renminbi (“RMB”).
For the subsidiaries and affiliates whose functional currencies are the RMB,
results of operations and cash flows are translated at average exchange rates
during the period, assets and liabilities are translated at the unified exchange
rate at the end of the period, and equity is translated at historical exchange
rates. Translation adjustments resulting from the process of translating the
local currency financial statements into U.S. dollars are included in
determining comprehensive income. The cumulative translation adjustment
and effect of exchange rate changes on cash for the six months ended June 30,
2010 and 2009 was $157,874 and $(1,576), respectively. Transactions denominated
in foreign currencies are translated into the functional currency at the
exchange rates prevailing on the transaction dates. Assets and liabilities
denominated in foreign currencies are translated into the functional currency at
the exchange rates prevailing at the balance sheet date with any 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. All of the Company’s revenue transactions are
transacted in the functional currency. The Company does not enter any material
transaction in foreign currencies and accordingly, transaction gains or losses
have not had, and are not expected to have, a material effect on the results of
operations of the Company.
Asset and
liability accounts at June 30, 2010 and December 31, 2009 were translated at
6.8086 RMB to $1.00 and at 6.8372 RMB to $1.00, respectively. Equity accounts
were stated at their historical rate. The average translation rates applied to
the statements of income for the six months ended June 30, 2010 and 2009 were
6.83474RMB and 6.84323 RMB to $1.00, respectively. Cash flows from the
Company's operations are calculated based upon the local currencies using the
average translation rate. As a result, amounts related to assets and liabilities
reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheets.
Accumulated other
comprehensive income
Comprehensive
income is comprised of net income and all changes to the statements of
stockholders' equity, except those due to investments by stockholders, changes
in paid-in capital and distributions to stockholders. For the Company,
comprehensive income for the six months ended June 30, 2010 and 2009 included
net income and unrealized gains from foreign currency translation
adjustments.
F-10
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Related
parties
Parties
are considered to be related to the Company if the parties that, directly or
indirectly, through one or more intermediaries, control, are controlled by, or
are under common control with the Company. Related parties also include
principal owners of the Company, its management, members of the immediate
families of principal owners of the Company and its management and other parties
with which the Company may deal if one party controls or can significantly
influence the management or operating policies of the other to an extent that
one of the transacting parties might be prevented from fully pursuing its own
separate interests. The Company shall disclose all related party transactions.
All transactions shall be recorded at fair value of the goods or services
exchanged. Property purchased from a related party is recorded at the cost to
the related party and any payment to or on behalf of the related party in excess
of the cost is reflected as a distribution to related party.
Income per share of ordinary
stock
ASC 260
“Earnings Per Share”,
requires dual presentation of basic and diluted earnings per share (“EPS”) with
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. Basic EPS
excludes dilution. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Basic net income per ordinary
share is computed by dividing net income available to ordinary shareholders by
the weighted average number of shares of ordinary shares outstanding during the
period. Diluted income per ordinary share is computed by dividing net income by
the weighted average number of shares of common stock, common stock equivalents
and potentially dilutive securities outstanding during each period.
Potentially dilutive ordinary shares consist of common stock warrants (using the
treasury stock method). Common stock warrants were not included in the
following calculation as the effect on net income per ordinary share was
anti-dilutive. The following table presents a reconciliation of basic and
diluted net income per ordinary share:
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
income available to ordinary shareholders for basic and diluted net income
per ordinary share
|
$
|
1,291,239
|
$
|
449,035
|
$
|
10,556,738
|
$
|
9,241,901
|
||||||||
Weighted
average ordinary shares outstanding – basic
|
27,496,446
|
21,333,332
|
27,493,823
|
21,333,332
|
||||||||||||
Effect
of dilutive securities:
|
||||||||||||||||
Warrants
|
-
|
-
|
-
|
-
|
||||||||||||
Weighted
average ordinary shares outstanding– diluted
|
27,496,446
|
21,333,332
|
27,493,823
|
21,333,332
|
||||||||||||
Net
income per ordinary share - basic
|
$
|
0.05
|
$
|
0.02
|
$
|
0.38
|
$
|
0.43
|
||||||||
Net
income per ordinary share - diluted
|
$
|
0.05
|
$
|
0.02
|
$
|
0.38
|
$
|
0.43
|
The
Company's aggregate common stock equivalents at June 30, 2010 and 2009 include
the following:
2010
|
2009
|
|||||||
Warrants
|
3,402,212
|
-
|
||||||
Total
|
3,402,212
|
-
|
F-11
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting
pronouncements
In
October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements
That Include Software Elements.” This ASU changes the accounting model for
revenue arrangements that include both tangible products and software elements
that are “essential to the functionality,” and scopes these products out of
current software revenue guidance. The new guidance will include factors to help
companies determine what software elements are considered “essential to the
functionality.” The amendments will now subject software-enabled products to
other revenue guidance and disclosure requirements, such as guidance surrounding
revenue arrangements with multiple-deliverables. The amendments in this ASU are
effective prospectively for revenue arrangements entered into or materially
modified in the fiscal years beginning on or after June 15, 2010. Early
application is permitted. The adoption of the new ASU did not have any important
impact on the Company’s consolidated financial statements.
In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures about Fair
Value Measurements”. ASU 2010-06 requires additional disclosures about fair
value measurements including transfers in and out of Levels 1 and 2 and a higher
level of disaggregation for the different types of financial
instruments. For the reconciliation of Level 3 fair value measurements,
information about purchases, sales, issuances and settlements are presented
separately. This standard is effective for interim and annual reporting
periods beginning after December 15, 2009 with the exception of revised
Level 3 disclosure requirements which are effective for interim and annual
reporting periods beginning after December 15, 2010. Comparative
disclosures are not required in the year of adoption. The Company adopted the
provisions of the standard on January 1, 2010, which did not have a
material impact on our financial statements.
In
February 2010, the FASB (Financial Accounting Standards Board) issued Accounting
Standards Update 2010-09 (ASU 2010-09), Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements. This
amendment addresses both the interaction of the requirements of this Topic with
the SEC’s reporting requirements and the intended breadth of the reissuance
disclosure provision related to subsequent events (paragraph 855-10-50-4).
All of the amendments in this Update are effective upon issuance of the final
Update, except for the use of the issued date for conduit debt obligors. That
amendment is effective for interim or annual periods ending after June 15,
2010. The adoption of the new ASU did not have any important impact on the
Company’s consolidated financial statements.
In March 2010, the FASB
issued ASU 2010-11, Derivatives and Hedging (Topic 815): Scope Exception Related
to Embedded Credit Derivatives. The amendments in this Update are
effective for each reporting entity at the beginning of its first fiscal quarter
beginning after June 15, 2010. Early adoption is permitted at the
beginning of each entity’s first fiscal quarter beginning after issuance of this
Update. The Company does not expect the provisions of ASU 2010-11 to have
a material effect on the financial position, results of operations or cash flows
of the Company.
In April 2010, the FASB
issued ASU 2010-13, Compensation-Stock Compensation (Topic 718): Effect of
Denominating the Exercise Price of a Share-Based Payment Award in the Currency
of the Market in Which the Underlying Equity Security Trades - a consensus of
the FASB Emerging Issues Task Force. The amendments in this Update are
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2010. Earlier application is
permitted. The Company does not expect the provisions of ASU 2010-13 to
have a material effect on the financial position, results of operations or cash
flows of the Company.
In May
2010, the FASB issued ASU 2010-19, Foreign Currency (Topic 830): Foreign
Currency Issues: Multiple Foreign Currency Exchange Rates. The amendments
in this Update are effective as of the announcement date of March 18, 2010. The
Company does not expect the provisions of ASU 2010-19 to have a material effect
on the financial position, results of operations or cash flows of the
Company.
Other
accounting standards that have been issued or proposed by FASB that do not
require adoption until a future date are not expected to have a material impact
on the consolidated financial statements upon adoption.
F-12
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
NOTE 2 -
INVENTORIES
At June
30, 2010 and December 31, 2009, inventories consisted of the
following:
2010
|
2009
|
|||||||
Raw
materials
|
$
|
103,907
|
$
|
120,990
|
||||
Finished
goods
|
-
|
13,317,140
|
||||||
103,907
|
13,438,130
|
|||||||
Less:
reserve for obsolete inventory
|
(74,140
|
)
|
(92,619
|
)
|
||||
$
|
29,767
|
$
|
13,345,511
|
NOTE 3 -
PROPERTY AND
EQUIPMENT
At June
30, 2010 and December 31, 2009, property and equipment consisted of the
following:
Useful
Life
|
2010
|
2009
|
||||||||
Office
equipment and furniture
|
10
Years
|
$
|
121,325
|
$
|
113,418
|
|||||
Manufacturing
equipment
|
10
Years
|
8,003,800
|
7,970,320
|
|||||||
Vehicles
|
10
Years
|
135,255
|
76,490
|
|||||||
Construction
in progress
|
-
|
4,037,669
|
863,511
|
|||||||
Building
and building improvements
|
10-20
Years
|
3,108,283
|
3,095,281
|
|||||||
15,406,332
|
12,119,020
|
|||||||||
Less:
accumulated depreciation
|
(5,218,770
|
)
|
(4,721,359
|
)
|
||||||
$
|
10,187,562
|
$
|
7,397,661
|
For the
six months ended June 30, 2010 and 2009, depreciation expense amounted to
$475,753 and $448,917, of which $369,856 and $344,187 is included in cost of
sales, and $105,897 and $104,730 is included in general and administrative
expenses, respectively.
NOTE 4 –
LAND USE
RIGHTS
There is
no private ownership of land in China. Land is owned by the government and the
government grants land use rights for specified terms. In 2008, the
Company acquired land use rights for cash of 78,550,010 RMB (approximately
$11,300.000) for 500 acres of plantation fields in Laiyang, China. The land
contains Laiyang Pear plantations and will be used to supply pears to the
Company for production. The Company’s land use rights have terms that expire in
December 2037 through December 2054. The Company amortizes these land use
rights over the term of the respective land use right. The lease agreement does
not have any renewal option and the Company has no further obligations to the
lessor. Through June 30, 2010, the pear orchards on this land did not
produce any pears and the Company does not expect to yield any pears that can be
used in production until September 2010. Accordingly, the Company included
the amortization of the respective land use rights in general and administrative
expenses until such time that it yields pears from the orchards. Upon the use of
pears from the orchards in the production process, the Company will reflect the
amortization of these land use rights in cost of sales. For the six months ended
June 30, 2010 and 2009, amortization of land use rights amounted to $274,121 and
$273,781, respectively. At June 30, 2010 and December 31, 2009, land use
rights consist of the following:
Useful
Life
|
2010
|
2009
|
||||||||
Land
Use Rights
|
30
- 50 years
|
$
|
17,179,181
|
$
|
17,107,320
|
|||||
Less:
Accumulated Amortization
|
(1,608,529
|
)
|
(1,327,778
|
)
|
||||||
$
|
15,570,652
|
$
|
15,779,542
|
F-13
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
NOTE 4 –
LAND USE RIGHTS
(continued)
Amortization
of land use rights attributable to future periods is as follows:
Years
ending June 30:
|
||||
2011
|
$
|
550,347
|
||
2012
|
550,347
|
|||
2013
|
550,347
|
|||
2014
|
550,347
|
|||
2015
|
550,347
|
|||
Thereafter
|
12,818,917
|
|||
$
|
15,570,652
|
NOTE 5 –
LOAN
PAYABLE
In
connection with the acquisition of the net assets of the Company, which occurred
in 2004, the Company assumed a loan payable to a third party related to the
original construction of the its factory. The loan was due in annual
installments through December 2010 and was non-interest bearing. Since the
agreement did not have a stated interest rate, the Company used an imputed
interest rate of interest of 6.12% based on PRC central bank five year and up
loan rate effective October 2004. In December 2009, the loan payable was
repaid in full. For the six months ended June 30, 2010 and 2009, imputed
interest expense related to this loan amounted to $0 and $189,117,
respectively.
NOTE 6 –
ACCRUED
EXPENSES
At June
30, 2010 and December 31, 2009, accrued expenses consist of the
following:
2010
|
2009
|
|||||||
Accrued
research and development costs
|
$
|
440,619
|
$
|
877,552
|
||||
Accrued
payroll and employees benefit
|
132,994
|
424,208
|
||||||
Other
|
125,750
|
90,395
|
||||||
$
|
699,363
|
$
|
1,392,155
|
NOTE 7 –
CASH -
RESTRICTED
Pursuant
to an Investor Relations Escrow Agreement, amongst the Company, Grandview
Capital, Inc. (“Grandview”), Access America Investments, LLC and Anslow &
Jaclin, LLP as escrow agent, dated October 22, 2009 (the “Investor Relations
Escrow Agreement”), the Company placed a total of $120,000 in an escrow account
with its counsel to be used for the payment of investor relation fees. Further,
pursuant to a Holdback Escrow Agreement, amongst the Company, Grandview, Access
America Investments, LLC and Anslow & Jaclin, LLP as escrow agent, dated
October 22, 2009 (the “Holdback Escrow Agreement”), the Company placed escrow
funds equal to ten percent (10%) of the Offering proceeds, with its counsel to
be held in escrow until such time as a qualified chief financial officer has
been approved and appointed as an officer of Emerald. In January 2010, a
qualified chief financial officer was approved and appointed as an officer of
Emerald and accordingly, $1,509,600 was released from escrow. Finally,
pursuant to a Going Public Escrow Agreement, amongst the Company, Grandview,
Access America Investments, LLC and Anslow & Jaclin, LLP as escrow agent,
dated October 22, 2009 (the “Going Public Escrow Agreement”), the Company placed
a total of $1,000,000 from the Offering proceeds with its counsel to be used for
the payment of fees and expenses related to becoming a public company and
listing its Ordinary Shares on a senior exchange. Pursuant to each of the
Investor Relations Escrow Agreement and Going Public Escrow Agreement, in the
event that the proceeds of such escrow accounts have not been fully distributed
within two years from the date thereof, the balance of such escrow proceeds
shall be returned to the Company. At June 30, 2010 and December 31, 2009, cash -
restricted amounted to $883,509 and $2,587,916, respectively.
F-14
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
NOTE 8 –
SHAREHOLDERS’
EQUITY
Common
stock
In May
2010, the Company issued 8,000 shares of its common stock to its chief financial
officer for services rendered pursuant to an engagement agreement. The shares
were valued at fair value on the dates of grant and the Company recorded
stock-based compensation of $12,000 and reduced accounts payable by
$12,000.
Warrants
Warrant
activity for the six months ended June 30, 2010 is summarized as
follows:
Number of
Warrants
|
Weighted
Average
Exercise Price
|
|||||||
Balance
at beginning of year
|
3,402,210
|
$
|
6.00
|
|||||
Granted
|
-
|
-
|
||||||
Exercised
|
-
|
-
|
||||||
Balance
at end of period
|
3,402,210
|
$
|
6.00
|
|||||
Warrants
exercisable at end of period
|
3,402,210
|
$
|
6.00
|
The
following table summarizes the shares of the Company's common stock issuable
upon exercise of warrants outstanding at June 30, 2010:
Warrants Outstanding
|
Warrants Exercisable
|
||||||||||||||||||||
Range of
Exercise Price
|
Number
Outstanding at
June 30, 2010
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Weighted
Average
Exercise Price
|
Number
Exercisable at
June 30, 2010
|
Weighted
Average
Exercise Price
|
||||||||||||||||
$ |
6.00
|
3,402,210
|
4.31
|
$
|
6.00
|
3,402,210
|
$
|
6.00
|
NOTE 9 –
MAJOR
CUSTOMERS
For the
six months ended June 30, 2010 and 2009, eight and seven customers accounted for
100.0% of the Company’s revenues, respectively. For the six months ended
June 30, 2010, one customer accounted for approximately 24% of the Company’s net
revenue.
NOTE 10 –
RESTRICTED NET
ASSETS
Schedule
I of Article 5-04 of Regulation S-X requires the condensed financial information
of registrant shall be filed when the restricted net assets of consolidated
subsidiaries exceed 25 percent of consolidated net assets as of the end of the
most recently completed fiscal year. For purposes of the above test, restricted
net assets of consolidated subsidiaries shall mean that amount of the
registrant's proportionate share of net assets of consolidated subsidiaries
(after intercompany eliminations) which as of the end of the most recent fiscal
year may not be transferred to the parent company by subsidiaries in the form of
loans, advances or cash dividends without the consent of a third party (i.e.,
lender, regulatory agency, foreign government, etc.).
F-15
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
NOTE 10 –
RESTRICTED NET ASSETS
(continued)
The
condensed parent company financial statements have been prepared in accordance
with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of
the subsidiaries of Emerald Acquisition Corporation exceed 25% of the
consolidated net assets of Emerald Acquisition Corporation. The ability of our
Chinese operating affiliates to pay dividends may be restricted due to the
foreign exchange control policies and availability of cash balances of the
Chinese operating subsidiaries. Because a significant portion of our operations
and revenues are conducted and generated in China, all of our revenues being
earned and currency received are denominated in Renminbi (RMB). RMB is subject
to the exchange control regulation in China, and, as a result, we may be unable
to distribute any dividends outside of China due to PRC exchange control
regulations that restrict our ability to convert RMB into US
Dollars.
The
condensed parent company financial statements have been prepared using the same
accounting principles and policies described in the notes to the consolidated
financial statements, with the only exception being that the parent company
accounts for its subsidiaries using the equity method. Refer to the consolidated
financial statements and notes presented above for additional information and
disclosures with respect to these financial statements.
EMERALD
ACQUISITION CORPORATION
CONSOLIDATED
PARENT COMPANY BALANCE SHEETS
(Unaudited)
As
of
June
30,
|
As
of
December
31,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Cash
and cash equivalents
|
$
|
7,996,543
|
$
|
10,487,306
|
||||
Cash
– restricted
|
883,509
|
2,587,916
|
||||||
Total
Current Assets
|
8,880,052
|
13,075,222
|
||||||
Investments
in subsidiaries at equity
|
61,860,130
|
46,906,159
|
||||||
Total
Assets
|
$
|
70,740,182
|
$
|
59,981,381
|
||||
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$
|
39,764
|
$
|
103,005
|
||||
Total
Current Liabilities
|
39,764
|
103,005
|
||||||
Shareholders'
equity:
|
||||||||
Ordinary
shares ($0.001 par value; 50,000,000 shares authorized, 27,499,171 and
27,491,171 shares issued and outstanding at June 30, 2010 and December 31,
2009, respectively)
|
27,499
|
27,492
|
||||||
Additional
paid-in capital
|
16,355,307
|
16,331,315
|
||||||
Statutory
reserve
|
2,949,814
|
2,949,814
|
||||||
Retained
earnings
|
48,637,562
|
38,080,824
|
||||||
Accumulated
other comprehensive income
|
2,730,236
|
2,488,931
|
||||||
Total
Shareholders' Equity
|
70,700,418
|
59,878,376
|
||||||
Total
Liabilities and Shareholders' Equity
|
$
|
70,740,182
|
$
|
59,981,381
|
F-16
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
CONDENSED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
NOTE 10 –
RESTRICTED NET ASSETS
(continued)
EMERALD
ACQUISITION CORPORATION
CONDENSED PARENT
COMPANY STATEMENTS OF OPERATIONS
(Unaudited)
For the Six Month
Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
REVENUES
|
$
|
-
|
$
|
-
|
||||
OPERATING
EXPENSES:
|
||||||||
General
and administrative
|
155,928
|
-
|
||||||
Total
Operating Expenses
|
155,928
|
-
|
||||||
LOSS
FROM OPERATIONS
|
(155,928
|
)
|
-
|
|||||
LOSS
ATTRIBUTABLE TO PARENT ONLY
|
(155,928
|
)
|
-
|
|||||
EQUITY
INCOME EARNINGS OF SUBSIDIARIES
|
10,712,666
|
9,241,901
|
||||||
NET
INCOME
|
$
|
10,556,738
|
$
|
9,241,901
|
EMERALD
ACQUISITION CORPORATION
CONSOLIDATED
PARENT COMPANY STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Month
Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$
|
10,556,738
|
$
|
9,241,901
|
||||
Adjustments
to reconcile net income to net cash used in operating
activities:
|
||||||||
Equity
in earnings of subsidiary
|
(10,712,666
|
)
|
(9,241,901
|
)
|
||||
Stock
based compensation
|
23,999
|
|||||||
Changes
in assets and liabilities:
|
||||||||
Accounts
payable
|
(63,241
|
)
|
-
|
|||||
NET
CASH USED IN OPERATING ACTIVITIES
|
(195,170
|
)
|
-
|
|||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Investment
payments to subsidiaries
|
(4,000,000
|
)
|
-
|
|||||
NET
CASH USED IN INVESTING ACTIVITIES
|
(4,000,000
|
)
|
-
|
|||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Decrease
in cash – restricted
|
1,704,407
|
-
|
||||||
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
1,704,407
|
-
|
||||||
NET
DECREASE IN CASH
|
(2,490,763
|
)
|
-
|
|||||
CASH
- beginning of year
|
10,487,306
|
-
|
||||||
CASH
- end of period
|
$
|
7,996,543
|
$
|
-
|
F-17
EMERALD
ACQUISITION CORPORATION AND SUBIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
December
31, 2009 and 2008
F-18
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
CONTENTS
Report
of Independent Registered Public Accounting Firm
|
F-20
|
|
Consolidated
Financial Statements:
|
||
Consolidated
Balance Sheets – As of December 31, 2009 and
2008
|
F-21
|
|
Consolidated
Statements of Income and Comprehensive Income – For the Years
ended December 31, 2009 and 2008
|
F-22
|
|
Consolidated
Statements of Shareholders’ Equity – For the Years Ended December 31, 2009
and 2008
|
F-23
|
|
Consolidated
Statements of Cash Flows – For the Years ended December 31,
2009 and 2008
|
F-24
|
|
Notes
to Consolidated Financial Statements
|
F-25o
F-43
|
F-19
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
Emerald
Acquisition Corporation and Subsidiaries
Laiyang,
China
We have
audited the accompanying consolidated balance sheets of Emerald Acquisition
Corporation and Subsidiaries as of December 31, 2009 and 2008 and the related
consolidated statements of income, changes in shareholders’ equity, and cash
flows for the years ended December 31, 2009 and 2008. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purposes of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining on a test basis, evidence
supporting the amount and disclosures in the combined financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Emerald Acquisition
Corporation and Subsidiaries as of December 31, 2009 and 2008, and the results
of their operations and their cash flows for the years ended December 31, 2009
and 2008, in conformity with accounting principles generally accepted in the
United States of America.
/s/
Sherb & Co., LLP
|
|||
Certified
Public Accountants
|
|||
New
York, New York
|
|||
March
15, 2010
|
F-20
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
December
31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$
|
26,574,338
|
$
|
2,028,858
|
||||
Cash
- restricted
|
2,587,916
|
-
|
||||||
Accounts
receivable, net of allowance for doubtful accounts and sales
discount
|
-
|
5,102,763
|
||||||
Inventories,
net of reserve for obsolete inventory
|
13,345,511
|
15,589,977
|
||||||
Prepaid
VAT on purchases
|
82,330
|
433,109
|
||||||
Prepaid
expenses and other current assets
|
-
|
994,199
|
||||||
Deferred
income taxes
|
59,685
|
-
|
||||||
Total
Current Assets
|
42,649,780
|
24,148,906
|
||||||
PROPERTY
AND EQUIPMENT - net
|
7,397,661
|
7,464,680
|
||||||
OTHER
ASSETS:
|
||||||||
Land
use rights, net
|
15,779,542
|
16,287,091
|
||||||
Deferred
income taxes - net of current portion
|
835,586
|
-
|
||||||
Total
Assets
|
$
|
66,662,569
|
$
|
47,900,677
|
||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Current
portion of loan payable
|
$
|
-
|
$
|
10,212,716
|
||||
Accounts
payable
|
540,830
|
1,050,806
|
||||||
Accrued
expenses
|
1,392,155
|
270,474
|
||||||
Acquisition
payables
|
-
|
850,501
|
||||||
Income
taxes payable
|
4,819,891
|
2,366,211
|
||||||
Other
taxes payable
|
31,317
|
-
|
||||||
Total
Current Liabilities
|
6,784,193
|
14,750,708
|
||||||
LONG-TERM
LIABILITIES:
|
||||||||
Loan
payable, net of current portion
|
-
|
3,568,628
|
||||||
Total
Liabilities
|
6,784,193
|
18,319,336
|
||||||
COMMITMENT
|
||||||||
SHAREHOLDERS'
EQUITY:
|
||||||||
Preference
shares ($0.001 par value; 1,000,000 shares authorized,
|
||||||||
none
issued and outstanding at December 31, 2009 and 2008,
respectively)
|
-
|
-
|
||||||
Ordinary
shares ($0.001 par value; 50,000,000 shares authorized, 27,491,171
and
|
||||||||
21,333,332
shares issued and outstanding at December 31, 2009 and 2008,
respectively)
|
27,492
|
21,333
|
||||||
Additional
paid-in capital
|
16,331,315
|
1,236,396
|
||||||
Subscription
receivable
|
-
|
(50,000
|
)
|
|||||
Retained
earnings
|
38,080,824
|
23,009,955
|
||||||
Statutory
and non-statutory reserves
|
2,949,814
|
2,949,814
|
||||||
Accumulated
other comprehensive income - cumulative foreign currency translation
adjustment
|
2,488,931
|
2,413,843
|
||||||
Total
Shareholders' Equity
|
59,878,376
|
29,581,341
|
||||||
Total
Liabilities and Shareholders' Equity
|
$
|
66,662,569
|
$
|
47,900,677
|
See notes
to consolidated financial statements
F-21
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Years Ended
|
||||||||
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
NET
REVENUES
|
$
|
82,627,335
|
$
|
74,232,226
|
||||
COST
OF SALES
|
59,566,445
|
54,897,949
|
||||||
GROSS
PROFIT
|
23,060,890
|
19,334,277
|
||||||
OPERATING
EXPENSES:
|
||||||||
Selling
|
456,024
|
686,724
|
||||||
Research
and development
|
1,408,501
|
256,283
|
||||||
General
and administrative
|
1,929,938
|
1,710,215
|
||||||
Total
Operating Expenses
|
3,794,463
|
2,653,222
|
||||||
INCOME
FROM OPERATIONS
|
19,266,427
|
16,681,055
|
||||||
OTHER
INCOME (EXPENSE):
|
||||||||
Interest
income
|
62,512
|
50,251
|
||||||
Interest
expense
|
(335,560
|
)
|
(976,204
|
)
|
||||
Total
Other Income (Expense)
|
(273,048
|
)
|
(925,953
|
)
|
||||
INCOME
BEFORE PROVISION FOR INCOME TAXES
|
18,993,379
|
15,755,102
|
||||||
(PROVISION
FOR) BENEFIT FROM INCOME TAXES:
|
||||||||
Current
|
(4,817,299
|
)
|
(4,196,701
|
)
|
||||
Deferred
|
894,789
|
-
|
||||||
Total
Provision for Income Taxes
|
(3,922,510
|
)
|
(4,196,701
|
)
|
||||
NET
INCOME
|
$
|
15,070,869
|
$
|
11,558,401
|
||||
COMPREHENSIVE
INCOME:
|
||||||||
NET
INCOME
|
$
|
15,070,869
|
$
|
11,558,401
|
||||
OTHER
COMPREHENSIVE INCOME:
|
||||||||
Unrealized
foreign currency translation gain
|
75,088
|
1,304,006
|
||||||
COMPREHENSIVE
INCOME
|
$
|
15,145,957
|
$
|
12,862,407
|
||||
NET
INCOME PER ORDINARY SHARE:
|
||||||||
Basic
|
$
|
0.67
|
$
|
0.54
|
||||
Diluted
|
$
|
0.67
|
$
|
0.54
|
||||
WEIGHTED
AVERAGE ORDINARY SHARES OUTSTANDING:
|
||||||||
Basic
|
22,495,050
|
21,333,332
|
||||||
Diluted
|
22,495,050
|
21,333,332
|
See notes
to consolidated financial statements
F-22
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
For the
Years Ended December 31, 2009 and 2008
Ordinary
|
Statutory
|
Accumulated
|
||||||||||||||||||||||||||||||
Shares
|
Additional
|
and
|
Other
|
Total
|
||||||||||||||||||||||||||||
Number
of
|
Paid-in
|
Subscription
|
Retained
|
Non-Statutory
|
Comprehensive
|
Shareholders'
|
||||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Receivable
|
Earnings
|
Reserves
|
Income
|
Equity
|
|||||||||||||||||||||||||
Balance,
December 31, 2007
|
21,333,332
|
$
|
21,333
|
$
|
1,236,396
|
$
|
(50,000
|
)
|
$
|
12,710,564
|
$
|
1,690,804
|
$
|
1,109,837
|
$
|
16,718,934
|
||||||||||||||||
Adjustment
to non-statutory reserves
|
-
|
-
|
-
|
-
|
(1,259,010
|
)
|
1,259,010
|
-
|
-
|
|||||||||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
Net
income for the year
|
-
|
-
|
-
|
-
|
11,558,401
|
-
|
-
|
11,558,401
|
||||||||||||||||||||||||
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
1,304,006
|
1,304,006
|
||||||||||||||||||||||||
Total
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
12,862,407
|
||||||||||||||||||||||||
Balance,
December 31, 2008
|
21,333,332
|
21,333
|
1,236,396
|
(50,000
|
)
|
23,009,955
|
2,949,814
|
2,413,843
|
29,581,341
|
|||||||||||||||||||||||
Reorganization
of Company
|
487,500
|
488
|
(488
|
)
|
50,000
|
-
|
-
|
-
|
50,000
|
|||||||||||||||||||||||
Sale
of ordinary shares
|
5,670,339
|
5,671
|
17,005,343
|
-
|
-
|
-
|
-
|
17,011,014
|
||||||||||||||||||||||||
Offering
costs
|
-
|
-
|
(1,909,936
|
)
|
-
|
-
|
-
|
-
|
(1,909,936
|
)
|
||||||||||||||||||||||
Comprehensive
income:
|
||||||||||||||||||||||||||||||||
Net
income for the year
|
-
|
-
|
-
|
-
|
15,070,869
|
-
|
-
|
15,070,869
|
||||||||||||||||||||||||
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
75,088
|
75,088
|
||||||||||||||||||||||||
Total
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
15,145,957
|
||||||||||||||||||||||||
Balance,
December 31, 2009
|
27,491,171
|
$
|
27,492
|
$
|
16,331,315
|
$
|
-
|
$
|
38,080,824
|
$
|
2,949,814
|
$
|
2,488,931
|
$
|
59,878,376
|
See notes
to consolidated financial statements
F-23
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the Years Ended
|
||||||||
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$
|
15,070,869
|
$
|
11,558,401
|
||||
Adjustments
to reconcile net income from operations to net cash provided by operating
activities:
|
||||||||
Depreciation
|
948,579
|
930,720
|
||||||
Amortization
of land use rights
|
547,750
|
538,202
|
||||||
Increase
in reserve for inventory obsolescence
|
-
|
30,055
|
||||||
Deferred
income taxes
|
(894,789
|
)
|
-
|
|||||
Changes
in assets and liabilities:
|
||||||||
Accounts
receivable
|
5,112,699
|
(3,397,094
|
)
|
|||||
Inventories
|
2,282,001
|
5,568,816
|
||||||
Prepaid
and other current assets
|
996,118
|
(33,778
|
)
|
|||||
Prepaid
VAT on purchases
|
351,682
|
-
|
||||||
Accounts
payable
|
(512,258
|
)
|
(3,353
|
)
|
||||
Accrued
expenses
|
1,120,405
|
880,768
|
||||||
Other
taxes payable
|
31,301
|
-
|
||||||
Income
taxes payable
|
2,446,481
|
(2,498,796
|
)
|
|||||
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
27,500,838
|
13,573,941
|
||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Acquisition
of land use rights
|
-
|
(11,282,274
|
)
|
|||||
Purchase
of property and equipment
|
(863,047
|
)
|
(3,238
|
)
|
||||
NET
CASH USED IN INVESTING ACTIVITIES
|
(863,047
|
)
|
(11,285,512
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Gross
proceeds from sale of common stock
|
17,011,014
|
-
|
||||||
Increase
in cash - restricted
|
(2,587,917
|
)
|
-
|
|||||
Payment
of offering costs
|
(1,909,936
|
)
|
-
|
|||||
Proceeds
from subscription receivable
|
50,000
|
-
|
||||||
Payment
on loan payable
|
(13,808,178
|
)
|
(4,769,114
|
)
|
||||
Payment
on acquisition payables
|
(852,157
|
)
|
(5,156,884
|
)
|
||||
NET
CASH USED IN FINANCING ACTIVITIES
|
(2,097,174
|
)
|
(9,925,998
|
)
|
||||
EFFECT
OF EXCHANGE RATE ON CASH
|
4,863
|
494,982
|
||||||
NET
INCREASE (DECREASE) IN CASH
|
24,545,480
|
(7,142,587
|
)
|
|||||
CASH -
beginning of year
|
2,028,858
|
9,171,445
|
||||||
CASH
- end of year
|
$
|
26,574,338
|
$
|
2,028,858
|
||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash
paid for:
|
||||||||
Interest
|
$
|
335,560
|
$
|
976,204
|
||||
Income
taxes
|
$
|
2,370,618
|
$
|
6,695,497
|
||||
NON-CASH
INVESTING AND FINANCING ACTIVITIES:
|
||||||||
Unappropriated
retained earnings allocated to statutory reserve
|
$
|
-
|
$
|
1,259,010
|
See notes
to consolidated financial statements.
F-24
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Emerald
Acquisition Corporation (the ‘Company”) was formed under the laws of the Cayman
Islands on March 10, 2006. On October 22, 2009, the Company acquired Merit
Times International Limited (“Merit Times”) in a reverse acquisition
transaction. Merit Times was established on February 8, 2008, under the laws of
British Virgin Islands. Merit Times was established as a “special purpose
vehicle” for foreign fund raising. Pursuant to a share exchange agreement in
this reverse acquisition transaction, the Company issued an aggregate of
21,333,332 ordinary shares to the shareholders of Merit Times, their designees
or assigns in exchange for all of the issued and outstanding capital stock of
Merit Times. On October 22, 2009, the Share Exchange closed and Merit
Times became the Company’s wholly-owned subsidiary.
Presently all
of the Company’s business operations are carried out by Shandong Longkang Juice
Co., Ltd., a limited liability company under the laws of China (“Longkang
Juice”). The Company does not own any equity interests in Longkang Juice, but
control and receive the economic benefits of its business operations through a
series of contractual arrangements (the “Contractual Arrangements”) dated June
10, 2009. The Contractual Arrangements are between Longkang Juice and its
owners, on the one hand, and Shandong MeKeFuBang Food Limited (the “WFOE” or
“MeKeFuBang”) a wholly foreign owned enterprise incorporated on June 9, 2009
under the laws of the People’s Republic of China (PRC), Merit Times’
wholly-owned subsidiary in the PRC, on the other hand. The contractual
arrangements are comprised of a series of agreements, including: (1) a
Consulting Services Agreement, through which the MeKeFuBang has the right to
advise, consult, manage and operate Longkang Juice, and collect and own all of
the net profits of Longkang Juice; (2) an Operating Agreement, through which
MeKeFuBang has the right to recommend director candidates and appoint the senior
executives of Longkang Juice, approve any transactions that may materially
affect the assets, liabilities, rights or operations of Longkang Juice, and
guarantee the contractual performance by Longkang Juice of any agreements with
third parties, in exchange for a pledge by Longkang Juice of its accounts
receivable and assets; (3) a Proxy Agreement, under which the five owners
of Longkang Juice have vested their collective voting control over the
Operating Entity to MeKeFuBang and will only transfer their respective equity
interests in Longkang Juice to MeKeFuBang or its designee(s); (4) an Option
Agreement, under which the owners of Longkang Juice have granted MeKeFuBang the
irrevocable right and option to acquire all of their equity interests in
Longkang Juice; and (5) an Equity Pledge Agreement, under which the owners of
Longkang Juice have pledged all of their rights, titles and interests in
Longkang Juice to MeKeFuBang to guarantee Longkang Juice’s performance of its
obligations under the Consulting Services Agreement. Through these
contractual arrangements, the Company has the ability to substantially influence
the daily operations and financial affairs of Longkang Juice, since the Company
is able to appoint its senior executives and approve all matters requiring
stockholder approval. As a result of these Contractual Arrangements, which
enables the Company to control Longkang Juice and to receive, through its
subsidiaries, all of its profits, the Company is considered the primary
beneficiary of Longkang Juice, which is deemed its variable interest entity
(“VIE”). Accordingly, the Company consolidates Longkang Juice’s results, assets
and liabilities in its financial statements.
Prior to
the Exchange Agreement, there were 1,281,500 Ordinary Shares issued and
outstanding. Pursuant to the terms of the Exchange Agreement, a shareholder of
the Company cancelled a total of 794,000 Ordinary Shares of the
Company. Following the combination prior to the Offering, there are
21,820,832 Ordinary Shares of the Company issued and outstanding.
The
Company, through its subsidiaries and variable interest entity, engages in the
production of fruit juice concentrate in the PRC, specializing in processing,
producing and distributing Laiyang Pear fruit juice concentrate. The Company is
the only producer of Laiyang Pear fruit juice concentrate, which contains 46
kinds of Organic Acid, Vitamin B1, B2, Vitamin C, Nicotinic Acid, Protocatechuic
Acid, Carotene and mineral substances such as Calcium, Phosphorus and Iron,
etc., and therefore is known for its taste, nutritional and medical benefits,
and application in health supplements, pharmaceuticals, and the food and
beverage industries.
F-25
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Basis of
presentation
Management
acknowledges its responsibility for the preparation of the accompanying
financial statements which reflect all adjustments, consisting of normal
recurring adjustments, considered necessary in its opinion for a fair statement
of its financial position and the results of its operations for the years
presented. The accompanying financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (“U.S.
GAAP”). This basis differs from that used in the statutory accounts of our
subsidiaries in China, which were prepared in accordance with the accounting
principles and relevant financial regulations applicable to enterprises in the
PRC. All necessary adjustments have been made to present the financial
statements in accordance with U.S. GAAP.
The
Company’s consolidated financial statements include the financial statements of
its wholly-owned subsidiary, Merit Times International Limited, MeKeFuBang, as
well as the financial statements of Longkang. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Longkang
is considered a variable interest entity (“VIE”), and the Company is the primary
beneficiary. The Company’s relationships with Longkang and its
shareholders are governed by a series of contractual arrangements between
MeKeFuBang, the Company’s wholly foreign-owned enterprise in the PRC, and
Longkang, which is the operating company of the Company in the PRC. Under PRC
laws, each of MeKeFuBang and Longkang is an independent legal entity and none of
them are exposed to liabilities incurred by the other party.
The contractual arrangements constitute valid and binding obligations of
the parties of such agreements. Each of the contractual arrangements and the
rights and obligations of the parties thereto are enforceable and valid in
accordance with the laws of the PRC. On June 10, 2009, the Company entered into
the following contractual arrangements with Longkang.
Operating Agreement -
Pursuant to the operating agreement among MeKeFuBang, Longkang and all
shareholders of Longkang (the “Longkang Shareholders”), MeKeFuBang provides
guidance and instructions on Longkang’s daily operations, financial management
and employment issues. Longkang Shareholders must designate the candidates
recommended by MeKeFuBang as their representatives on the boards of directors of
Longkang. MeKeFuBang has the right to appoint senior executives of Longkang. In
addition, MeKeFuBang agrees to guarantee Longkang’s performance under any
agreements or arrangements relating to Longkang’s business arrangements with any
third party. Longkang, in return, agrees to pledge their accounts receivable and
all of their assets to MeKeFuBang. Moreover, Longkang agrees that without the
prior consent of MeKeFuBang, Longkang will not engage in any transactions that
could materially affect its assets, liabilities, rights or operations,
including, without limitation, incurrence or assumption of any indebtedness,
sale or purchase of any assets or rights, incurrence of any encumbrance on any
of its assets or intellectual property rights in favor of a third party or
transfer of any agreements relating to its business operation to any third
party. The term of this agreement shall commence from the effective and shall
last for the maximum period of time permitted by law unless terminated early in
accordance with certain provision or by any other agreements reached by all
parties, with any extended term to be mutually agreed upon by the parties.
Longkang shall not terminate this agreement.
F-26
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Consulting Services
Agreement - Pursuant to the exclusive consulting services agreement
between MeKeFuBang and Longkang, MeKeFuBang has the exclusive right to provide
to Longkang general business operation services, including advice and strategic
planning, as well as consulting services related to the technological research
and development of the Longkang’s products (the “Services”). Under this
agreement, MeKeFuBang owns the intellectual property rights developed or
discovered through research and development, in the course of providing the
Services, or derived from the provision of the Services. Longkang shall pay a
quarterly consulting service fees in Renminbi (“RMB”) to MeKeFuBang that is
equal to all of Longkang’s profits for such quarter.
Equity Pledge
Agreement - Under the equity pledge agreement between Longkang’s
shareholders and MeKeFuBang, Longkang’s Shareholders pledged all of their equity
interests in Longkang to MeKeFuBang to guarantee Longkang’s performance of its
obligations under the consulting services agreement. If Longkang or Longkang’s
Shareholders breaches their respective contractual obligations, MeKeFuBang, as
pledgee, will be entitled to certain rights, including the right to sell the
pledged equity interests. Longkang’s Shareholders also agreed that upon
occurrence of any event of default, MeKeFuBang shall be granted an exclusive,
irrevocable power of attorney to take actions in the place and stead of the
Longkang’s Shareholders to carry out the security provisions of the equity
pledge agreement and take any action and execute any instrument that MeKeFuBang
may deem necessary or advisable to accomplish the purposes of the equity pledge
agreement. Longkang’s Shareholders agreed not to dispose of the pledged equity
interests or take any actions that would prejudice MeKeFuBang’s interest. The
equity pledge agreement will expire two (2) years after Longkang’s obligations
under the consulting services agreements have been fulfilled. The
equity pledge under this agreement was registered with the Laiyang
Administration of Industry and Commerce on June 17, 2009 and has been effective
under the PRC laws.
Option Agreement
- Under the option
agreement between Longkang’s Shareholders and MeKeFuBang, Longkang’s
Shareholders irrevocably granted MeKeFuBang or its designated person an
exclusive option to purchase, to the extent permitted under PRC law, all or part
of the equity interests in Longkang for the cost of the initial contributions to
the registered capital or the minimum amount of consideration permitted by
applicable PRC law. MeKeFuBang or its designated person has sole discretion to
decide when to exercise the option, whether in part or in full. The term of this
agreement shall last for the maximum period of time permitted by law unless
terminated in accordance with this agreement.
The
accounts of Longkang are consolidated in the accompanying consolidated financial
statements pursuant to Financial Accounting Codification Standards Topic
810-10-05 and related subtopics related to the consolidation of Variable
Interest Entities As a VIE, Longkang’s sales are included in the Company’s total
sales, its income from operations is consolidated with the Company’s, and the
Company’s net income includes all of Longkang’s net income. The Company does not
have any non-controlling interest and accordingly, did not subtract any net
income in calculating the net income attributable to the Company. Because of the
contractual arrangements, the Company had a pecuniary interest in Longkang that
require consolidation of the Company’s and Longkang financial
statements.
Use of
estimates
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, expenses, and the related disclosures at the date
of the consolidated financial statements and during the reporting period. Actual
results could materially differ from these estimates. Significant estimates in
2009 and 2008 include the allowance for doubtful accounts, the allowance for
obsolete inventory, the useful life of property and equipment and intangible
assets, and assumptions used in assessing impairment of long-term
assets.
F-27
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair value of financial
instruments
The
Company adopted the guidance of Accounting Standards Codification (“ASC”) 820
for fair value measurements which clarifies the definition of fair value,
prescribes methods for measuring fair value, and establishes a fair value
hierarchy to classify the inputs used in measuring fair value as
follows:
Level
1-Inputs are unadjusted quoted prices in active markets for identical assets or
liabilities available at the measurement date.
Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in
active markets, quoted prices for identical or similar assets and liabilities in
markets that are not active, inputs other then quoted prices that are
observable, and inputs derived from or corroborated by observable market
data.
Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own
assumptions on what assumptions the market participants would use in pricing the
asset or liability based on the best available information.
The
carrying amounts reported in the balance sheets for cash, accounts receivable,
loans payable, accounts payable and accrued expenses, and advances to suppliers
approximate their fair market value based on the short-term maturity of these
instruments. The Company did not identify any assets or liabilities that are
required to be presented on the balance sheets at fair value in accordance with
the accounting guidance.
ASC
825-10 “Financial
Instruments”, allows entities to voluntarily choose to measure certain
financial assets and liabilities at fair value (fair value option). The fair
value option may be elected on an instrument-by-instrument basis and is
irrevocable, unless a new election date occurs. If the fair value option is
elected for an instrument, unrealized gains and losses for that instrument
should be reported in earnings at each subsequent reporting date. The Company
did not elect to apply the fair value option to any outstanding
instruments.
Cash and cash
equivalents
For
purposes of the consolidated statements of cash flows, the Company considers all
highly liquid instruments purchased with a maturity of three months or less and
money market accounts to be cash equivalents. The Company maintains cash and
cash equivalents with various financial institutions mainly in the PRC and the
U.S. Balances in the U.S are insured up to $250,000 at each
bank. Balances in banks in the PRC are uninsured.
Cash –
restricted
As at
December 31, 2009, restricted cash consisted of cash deposits held with Company
counsel (see Note 10).
Concentrations of credit
risk
The
Company’s operations are carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC’s economy. The Company’s operations in the PRC are subject to
specific considerations and significant risks not typically associated with
companies in North America. The Company’s results may be adversely affected by
changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
F-28
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentrations of credit
risk (continued)
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash and trade accounts receivable. Substantially
all of the Company’s cash is maintained with state-owned banks within the PRC,
and no deposits are covered by insurance. The Company has not experienced any
losses in such accounts and believes it is not exposed to any risks on its cash
in bank accounts. A significant portion of the Company’s sales are cash sales
since the demand for our products exceeds our current supply.
At
December 31, 2009 and 2008, the Company’s cash balances by geographic area were
as follows:
December 31, 2009
|
December 31, 2008
|
|||||||||||||||
Country:
|
||||||||||||||||
United
States
|
$
|
-
|
-
|
$
|
-
|
-
|
||||||||||
China
|
26,574,338
|
100.0
|
%
|
2,028,858
|
100.0
|
%
|
||||||||||
Total
cash and cash equivalents
|
$
|
26,574,338
|
100.0
|
%
|
$
|
2,028,858
|
100.0
|
%
|
Accounts
receivable
Accounts
receivable are presented net of an allowance for doubtful accounts. The Company
maintains allowances for doubtful accounts for estimated losses. The Company
reviews the accounts receivable on a periodic basis and makes general and
specific allowances when there is doubt as to the collectability of individual
balances. In evaluating the collectability of individual receivable balances,
the Company considers many factors, including the age of the balance, customer’s
historical payment history, its current credit-worthiness and current economic
trends. Accounts are written off after exhaustive efforts at collection. At
December 31, 2009 and 2008, the Company has established, based on a review of
its outstanding balances, an allowance for doubtful accounts in the amount of $0
and $41,598, respectively.
Inventories
Inventories,
consisting of raw materials, work in process and finished goods related to the
Company’s products are stated at the lower of cost or market utilizing the
weighted average method. An allowance is established when management determines
that certain inventories may not be saleable. If inventory costs exceed expected
market value due to obsolescence or quantities in excess of expected demand, the
Company will record reserves for the difference between the cost and the market
value. These reserves are recorded based on estimates. The Company
recorded an inventory reserve of $92,619 and $92,390 at December 31, 2009
and 2008, respectively. Cost of sales represents all direct and indirect costs
associated with the production of products for sale to customers. These costs
include cost of raw materials, direct and indirect labor and benefit costs,
freight in, depreciation, and storage fees.
Property and
equipment
Property
and equipment are carried at cost and are depreciated on a straight-line basis
over the estimated useful lives of the assets. The cost of repairs and
maintenance is expensed as incurred; major replacements and improvements are
capitalized. When assets are retired or disposed of, the cost and
accumulated depreciation are removed from the accounts, and any resulting gains
or losses are included in income in the year of disposition. The Company
examines the possibility of decreases in the value of fixed assets when events
or changes in circumstances reflect the fact that their recorded value may not
be recoverable. Included in property and equipment is
construction-in-progress which consists of a deposit on a factory under
construction and machinery pending installation and includes the costs of
construction, machinery and equipment, and any interest charges arising from
borrowings used to finance these assets during the period of construction or
installation. No provision for depreciation is made on construction-in-progress
until such time as the relevant assets are completed and ready for their
intended use.
F-29
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impairment of long-lived
assets
In
accordance with ASC Topic 360, the Company reviews, long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable, or at least
annually. The Company recognizes an impairment loss when the sum of expected
undiscounted future cash flows is less than the carrying amount of the asset.
The amount of impairment is measured as the difference between the asset’s
estimated fair value and its book value. The Company did not record any
impairment charges for the years ended December 31, 2009 and 2008.
Income
taxes
The
Company is governed by the Income Tax Law of the People’s Republic of
China. The Company accounts for income taxes using the liability
method prescribed by ASC 740 “Income Taxes”. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial reporting and tax bases of assets and
liabilities using enacted tax rates that will be in effect in the year in which
the differences are expected to reverse. The Company records a valuation
allowance to offset deferred tax assets if based on the weight of available
evidence, it is more-likely-than-not that some portion, or all, of the deferred
tax assets will not be realized. The effect on deferred taxes of a change in tax
rates is recognized as income or loss in the period that includes the enactment
date.
Pursuant
to accounting standards related to the accounting for uncertainty in income
taxes, the evaluation of a tax position is a two-step process. The first step is
to determine whether it is more likely than not that a tax position will be
sustained upon examination, including the resolution of any related appeals or
litigation based on the technical merits of that position. The second step is to
measure a tax position that meets the more-likely-than-not threshold to
determine the amount of benefit to be recognized in the financial statements. A
tax position is measured at the largest amount of benefit that is greater than
50% likelihood of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold should
be recognized in the first subsequent period in which the threshold is met.
Previously recognized tax positions that no longer meet the more-likely-than-not
criteria should be de-recognized in the first subsequent financial reporting
period in which the threshold is no longer met. The accounting standard also
provides guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosures, and transition.
Advances from
customers
Advances
from customers consist of prepayments from customers for merchandise that had
not yet been shipped. The Company recognizes the deposits as revenue as
customers take delivery of the goods, in accordance with its revenue recognition
policy. Advances from customers at December 31, 2009 and 2008
amounted to $0 and $0, respectively.
Revenue
recognition
Pursuant
to the guidance of ASC Topic 605 and ASC Topic 360, the Company recognizes
revenue when persuasive evidence of an arrangement exists, delivery has occurred
or services have been rendered, the purchase price is fixed or determinable and
collectability is reasonably assured. The Company recognizes revenues from the
sale of juice concentrate upon shipment and transfer of title.
Shipping
costs
Shipping
costs are included in selling expenses and totaled $151,486 and $337,333 for the
years ended December 31, 2009 and 2008, respectively.
F-30
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Employee
benefits
The
Company’s operations and employees are all located in the PRC. The
Company makes mandatory contributions to the PRC government’s health, retirement
benefit and unemployment funds in accordance with the relevant Chinese social
security laws, which is approximately 25% of salaries. For the years ended
December 31, 2009 and 2008, the costs of these payments are charged to
general and administrative expenses in the same period as the related salary
costs and amounted to $83,303 and $56,505, respectively.
Advertising
Advertising
is expensed as incurred and is included in selling expenses on the accompanying
statement of operations. For the years ended December 31, 2009 and 2008,
advertising expense amounted to $99,622 and $209,701, respectively.
Research and
development
Research
and development costs are expensed as incurred. For the years ended December 31,
2009 and 2008, research and development costs amounted to $1,408,501 and
$256,283, respectively.
Foreign currency
translation
The
reporting currency of the Company is the U.S. dollar. The functional currency of
the parent company is the U.S. dollar and the functional currency of the
Company’s operating subsidiaries and affiliates is the Chinese Renminbi (“RMB”).
For the subsidiaries and affiliates whose functional currencies are the RMB,
results of operations and cash flows are translated at average exchange rates
during the period, assets and liabilities are translated at the unified exchange
rate at the end of the period, and equity is translated at historical exchange
rates. Translation adjustments resulting from the process of translating the
local currency financial statements into U.S. dollars are included in
determining comprehensive income. The cumulative translation
adjustment and effect of exchange rate changes on cash for the years ended
December 31, 2009 and 2008 was $4,862 and $494,982, respectively. Transactions
denominated in foreign currencies are translated into the functional currency at
the exchange rates prevailing on the transaction dates. Assets and liabilities
denominated in foreign currencies are translated into the functional currency at
the exchange rates prevailing at the balance sheet date with any 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. All of the Company’s revenue transactions are
transacted in the functional currency. The Company does not enter any material
transaction in foreign currencies and accordingly, transaction gains or losses
have not had, and are not expected to have, a material effect on the results of
operations of the Company.
Asset and
liability accounts at December 31, 2009 and 2008 were translated at 6.8372 RMB
to $1.00 and at 6.8542 RMB to $1.00, respectively. Equity accounts were stated
at their historical rate. The average translation rates applied to the
statements of income for the years ended December 31, 2009 and 2008 were 6.84088
RMB and 6.96225 RMB to $1.00, respectively. Cash flows from the
Company’s operations are calculated based upon the local currencies using the
average translation rate. As a result, amounts related to assets and liabilities
reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheets.
Accumulated other
comprehensive income
Comprehensive
income is comprised of net income and all changes to the statements of
stockholders’ equity, except those due to investments by stockholders, changes
in paid-in capital and distributions to stockholders. For the Company,
comprehensive income for the years ended December 31, 2009 and 2008 included net
income and unrealized gains from foreign currency translation
adjustments.
F-31
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Related
parties
Parties
are considered to be related to the Company if the parties that, directly or
indirectly, through one or more intermediaries, control, are controlled by, or
are under common control with the Company. Related parties also include
principal owners of the Company, its management, members of the immediate
families of principal owners of the Company and its management and other parties
with which the Company may deal if one party controls or can significantly
influence the management or operating policies of the other to an extent that
one of the transacting parties might be prevented from fully pursuing its own
separate interests. The Company shall disclose all related party transactions.
All transactions shall be recorded at fair value of the goods or services
exchanged. Property purchased from a related party is recorded at the cost to
the related party and any payment to or on behalf of the related party in excess
of the cost is reflected as a distribution to related party.
Income per share of ordinary
stock
ASC 260
“Earnings Per Share”,
requires dual presentation of basic and diluted earnings per share (“EPS”) with
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. Basic EPS
excludes dilution. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. Basic net income per
ordinary share is computed by dividing net income available to ordinary
shareholders by the weighted average number of shares of ordinary shares
outstanding during the period. Diluted income per ordinary share is computed by
dividing net income by the weighted average number of shares of common stock,
common stock equivalents and potentially dilutive securities outstanding
during each period. Potentially dilutive ordinary shares consist of common stock
warrants (using the treasury stock method). Common stock warrants were not
included in the following calculation as the effect on net income per ordinary
share was anti-dilutive. The following table presents a reconciliation of basic
and diluted net income per ordinary share:
Years Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Net
income available to ordinary shareholders for basic and diluted net income
per ordinary share
|
$
|
15,070,869
|
$
|
11,558,401
|
||||
Weighted
average ordinary shares outstanding – basic
|
22,495,050
|
21,333,332
|
||||||
Effect
of dilutive securities:
|
||||||||
Warrants
|
-
|
-
|
||||||
Weighted
average ordinary shares outstanding– diluted
|
22,495,050
|
21,333,332
|
||||||
Net
income per ordinary share - basic
|
$
|
0.67
|
$
|
0.54
|
||||
Net
income per ordinary share - diluted
|
$
|
0.67
|
$
|
0.54
|
The
Company’s aggregate common stock equivalents at December 31, 2009 and 2008
include the following:
2009
|
2008
|
|||||||
Warrants
|
3,402,212
|
-
|
||||||
Total
|
3,402,212
|
-
|
F-32
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting
pronouncements
In June
2009, the FASB issued Accounting Standards Update No. 2009-01, “Generally
Accepted Accounting Principles” (ASC Topic 105) which establishes the FASB
Accounting Standards Codification (“the Codification” or “ASC”) as the official
single source of authoritative U.S. generally accepted accounting principles
(“GAAP”). All existing accounting standards are superseded. All other accounting
guidance not included in the Codification will be considered non-authoritative.
The Codification also includes all relevant Securities and Exchange Commission
(“SEC”) guidance organized using the same topical structure in separate sections
within the Codification. Following the Codification, the Board will
not issue new standards in the form of Statements, FASB Staff Positions or
Emerging Issues Task Force Abstracts. Instead, it will issue Accounting
Standards Updates (“ASU”) which will serve to update the Codification, provide
background information about the guidance and provide the basis for conclusions
on the changes to the Codification. The Codification is not intended to change
GAAP, but it will change the way GAAP is organized and presented. The
Codification was effective for our third-quarter 2009 financial statements and
the principal impact on our financial statements is limited to disclosures as
all references to authoritative accounting literature have been referenced in
accordance with the Codification.
In April
2009, the FASB issued ASC Topic 320-10-65, “Recognition and Presentation of
Other-Than-Temporary Impairments”. This update provides guidance for allocation
of charges for other-than-temporary impairments between earnings and other
comprehensive income. It also revises subsequent accounting for
other-than-temporary impairments and expands required disclosure. The update was
effective for interim and annual periods ending after June 15, 2009. The
adoption of ASC Topic 320-10-65 did not have a material impact on the results of
operations and financial condition.
In April
2009, the FASB issued ASC Topic 320-10-65, “Interim Disclosures About Fair Value
of Financial Instruments”. This update requires fair value disclosures for
financial instruments that are not currently reflected on the balance sheet at
fair value on a quarterly basis and is effective for interim periods ending
after June 15, 2009. The Company’s financial instruments include cash
and cash equivalents, accounts receivable, accounts payable, accrued expenses
and notes payable. At December 31, 2009 and 2008, the carrying value
of the Companies financial instruments approximated fair value, due to their
short term nature.
In May
2009, the FASB issued (ASC Topic 855), “Subsequent Events” (ASC Topic 855). This
guidance is intended to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or available to be issued. It is effective for
interim and annual reporting periods ending after June 15, 2009. The
adoption of this guidance did not have a material impact on our consolidated
financial statements.
In June
2009, the FASB issued ASC Topic 810-10, “Amendments to FASB Interpretation No.
46(R)”. This updated guidance requires a qualitative approach to identifying a
controlling financial interest in a variable interest entity (VIE), and requires
ongoing assessment of whether an entity is a VIE and whether an interest in a
VIE makes the holder the primary beneficiary of the VIE. It is effective for
annual reporting periods beginning after November 15, 2009. The adoption of ASC
Topic 810-10 did not have a material impact on the Company’s results of
operations or financial condition.
F-33
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE 1 –
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In
October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue
Arrangements.” This ASU establishes the accounting and reporting guidance for
arrangements including multiple revenue-generating activities. This ASU provides
amendments to the criteria for separating deliverables, measuring and allocating
arrangement consideration to one or more units of accounting. The amendments in
this ASU also establish a selling price hierarchy for determining the selling
price of a deliverable. Significantly enhanced disclosures are also required to
provide information about a vendor’s multiple-deliverable revenue arrangements,
including information about the nature and terms, significant deliverables, and
its performance within arrangements. The amendments also require providing
information about the significant judgments made and changes to those judgments
and about how the application of the relative selling-price method affects the
timing or amount of revenue recognition. The amendments in this ASU are
effective prospectively for revenue arrangements entered into or materially
modified in the fiscal years beginning on or after June 15, 2010. Early
application is permitted. The Company is currently evaluating this new
ASU.
In
October 2009, the FASB issued ASU No. 2009-14, “Certain Revenue Arrangements
That Include Software Elements.” This ASU changes the accounting model for
revenue arrangements that include both tangible products and software elements
that are “essential to the functionality,” and scopes these products out of
current software revenue guidance. The new guidance will include factors to help
companies determine what software elements are considered “essential to the
functionality.” The amendments will now subject software-enabled products to
other revenue guidance and disclosure requirements, such as guidance surrounding
revenue arrangements with multiple-deliverables. The amendments in this ASU are
effective prospectively for revenue arrangements entered into or materially
modified in the fiscal years beginning on or after June 15, 2010. Early
application is permitted. The Company is currently evaluating this new
ASU.
Other
accounting standards that have been issued or proposed by FASB that do not
require adoption until a future date are not expected to have a material impact
on the consolidated financial statements upon adoption.
Subsequent
Events
For
purposes of determining whether a post-balance sheet event should be evaluated
to determine whether it has an effect on the financial statements for the period
ending December 31, 2009, subsequent events were evaluated by the Company as of
March 30, 2010, the date on which the consolidated financial statements at and
for the year ended December 31, 2009, were available to be issued.
NOTE 2 –
ACCOUNTS
RECEIVABLE
At
December 31, 2009 and 2008, accounts receivable consisted of the
following:
2009
|
2008
|
|||||||
Accounts
receivable
|
$
|
-
|
$
|
5,144,361
|
||||
Less:
allowance for doubtful accounts
|
-
|
(41,598
|
)
|
|||||
$
|
-
|
$
|
5,102,763
|
F-34
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE 3 -
INVENTORIES
At
December 31, 2009 and 2008, inventories consisted of the following:
2009
|
2008
|
|||||||
Raw
materials
|
$
|
120,990
|
$
|
266,581
|
||||
Work
in process
|
-
|
690
|
||||||
Finished
goods
|
13,317,140
|
15,415,096
|
||||||
13,438,130
|
15,682,367
|
|||||||
Less:
reserve for obsolete inventory
|
(92,619
|
)
|
(92,390
|
)
|
||||
$
|
13,345,511
|
$
|
15,589,977
|
NOTE 4 -
PROPERTY AND
EQUIPMENT
At
December 31, 2009 and 2008, property and equipment consisted of the
following:
|
Useful Life
|
2009
|
2008
|
|||||||
Office
equipment and furniture
|
10
Years
|
$
|
113,418
|
$
|
113,136
|
|||||
Manufacturing
equipment
|
10
Years
|
7,970,320
|
7,950,552
|
|||||||
Vehicles
|
10
Years
|
76,490
|
76,300
|
|||||||
Construction
in progress
|
-
|
863,511
|
-
|
|||||||
Building
and building improvements
|
10-20
Years
|
3,095,281
|
3,087,605
|
|||||||
12,119,020
|
11,227,593
|
|||||||||
Less:
accumulated depreciation
|
(4,721,359
|
)
|
(3,762,913
|
)
|
||||||
$
|
7,397,661
|
$
|
7,464,680
|
For the
years ended December 31, 2009 and 2008, depreciation expense amounted to
$948,579 and $930,720, of which $666,176 and $676,540 is included in cost of
sales, and $282,403 and $254,180 is included in general and administrative
expenses, respectively.
NOTE 5 –
LAND USE
RIGHTS
There is
no private ownership of land in China. Land is owned by the government and the
government grants land use rights for specified terms. In 2008, the
Company acquired land use rights for cash of 78,550,010 RMB (approximately
$11,300.000) for 500 acres of plantation fields in Laiyang, China. The land
contains pear plantations and will be used to supply pears to the Company for
production. The Company’s land use rights have terms that expire in December
2037 through December 2054. The Company amortizes these land use
rights over the term of the respective land use right. The lease agreement does
not have any renewal option and the Company has no further obligations to the
lessor. In 2009 and 2008, the pear orchids on this land did not
produce any pears and the Company does not expect to yield any pears that can be
used in production until September 2010. Accordingly, the Company
included the amortization of the respective land use rights in general and
administrative expenses until such time that it yields pears from the orchards.
Upon the use of pears from the orchids in the production process, the Company
will reflect the amortization of these land use rights in cost of sales. For the
years ended December 31, 2009 and 2008, amortization of land use rights amounted
to $547,750 and $538,202, respectively. At December 31, 2009 and
2008, land use rights consist of the following:
Useful
Life
|
2009
|
2008
|
||||||||
Land
Use Rights
|
30
– 50 years
|
$
|
17,107,320
|
$
|
17,064,890
|
|||||
Less:
Accumulated Amortization
|
(1,327,778
|
)
|
(777,799
|
)
|
||||||
$
|
15,779,542
|
$
|
16,287,091
|
F-35
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE 5 –
LAND USE RIGHTS
(continued)
Amortization
of land use rights attributable to future periods is as follows:
Years
ending December 31:
|
||||
2010
|
$
|
548,045
|
||
2011
|
548,045
|
|||
2012
|
548,045
|
|||
2013
|
548,045
|
|||
2014
|
548,045
|
|||
Thereafter
|
13,039,317
|
|||
$
|
15,779,542
|
NOTE 6 –
LOAN
PAYABLE
In
connection with the acquisition of the net assets of the Company, which occurred
in 2004, the Company assumed a loan payable to a third party related to the
original construction of the its factory. The loan was due in annual
installments through December 2010 and was non-interest bearing. Since the
agreement did not have a stated interest rate, the Company used an imputed
interest rate of interest of 6.12% based on PRC central bank five year and up
loan rate effective October 2004. At December 31, 2009 and 2008, loan
payable amounted to $0 and $13,781,344, respectively. For the year
ended December 31, 2009 and 2008, imputed interest expense related to this loan
amounted to $335,560 and $976,204, respectively.
NOTE 7 –
ACCRUED
EXPENSES
At
December 31, 2009 and 2008, accrued expenses consist of the
following:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Accrued
research and development costs
|
$
|
877,552
|
$
|
-
|
||||
Accrued
payroll and employees benefit
|
424,208
|
196,896
|
||||||
Other
|
90,395
|
73,578
|
||||||
$
|
1,392,155
|
$
|
270,474
|
NOTE 8 –
ACQUISITION
PAYABLES
In
connection with the acquisition of the net assets of the Company, which occurred
in 2004, the Company assumed certain accounts payable to third parties. These
payables were payable on demand. At December 31, 2009 and 2008, acquisition
payables amounted to $0 and $850,501, respectively.
NOTE 9 –
INCOME
TAXES
The
Company accounts for income taxes pursuant to the accounting standards that
require the recognition of deferred tax assets and liabilities for both the
expected impact of differences between the financial statements and the tax
basis of assets and liabilities, and for the expected future tax benefit to be
derived from tax losses and tax credit carryforwards. Additionally, the
accounting standards require the establishment of a valuation allowance to
reflect the likelihood of realization of deferred tax assets. Realization of
deferred tax assets, including those related to the temporary differences from
the deduction of depreciation and related expenses for income tax purposes as
compared to financial statement purposes, are dependent upon future earnings.
Accordingly, prior to 2009, the net deferred tax asset related to the temporary
differences was fully offset by a valuation allowance. The Company’s operating
affiliate is governed by the Income Tax Law of the People’s Republic of China.
The Company and its wholly-owned subsidiary, Merit Times were incorporated in
the Cayman Islands and British Virgin Islands (“BVI”), respectively. Under the
current laws of the Cayman Islands and BVI, the two entities are not subject to
income taxes. Accordingly, the Company has not established a provision for
current or deferred taxes for these jurisdictions.
F-36
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE 9 –
INCOME TAXES
(continued)
Under the
Income Tax Laws of PRC, since January 2008, Chinese companies are generally
subject to an income tax at an effective rate of 25%, on income reported in the
statutory financial statements after appropriate tax adjustments.
The table
below summarizes the reconciliation of the Company’s income tax provision
(benefit) computed at the China statutory rate and the actual tax
provision:
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Income
tax provision at China statutory rate of 25%
|
$
|
4,748,345
|
$
|
3,938,776
|
||||
Permanent
difference - Non-deductible Cayman Island and BVI
loss
|
44,715
|
-
|
||||||
Other
|
(1,668
|
)
|
26,785
|
|||||
(Decrease)
increase in valuation allowance
|
(868,882
|
)
|
231,140
|
|||||
Total
provision for income taxes
|
$
|
3,922,510
|
$
|
4,196,701
|
||||
Tax
provision (benefit):
|
||||||||
Current
|
$
|
4,817,299
|
$
|
4,196,701
|
||||
Deferred
|
(894,789
|
)
|
-
|
|||||
$
|
3,922,510
|
$
|
4,196,701
|
The
Company’s deferred tax assets as of December 31, 2009 and 2008 are as
follows:
December 31,
|
||||||||
2009
|
2008
|
|||||||
Deferred
tax asset:
|
||||||||
Temporary
differences (i)
|
$
|
895,271
|
$
|
868,882
|
||||
Total
gross deferred tax asset
|
895,271
|
868,882
|
||||||
Less:
valuation allowance
|
-
|
(868,882
|
)
|
|||||
Net
deferred tax asset
|
$
|
895,271
|
$
|
-
|
||||
Deferred
tax asset:
|
||||||||
Current
|
$
|
59,685
|
$
|
-
|
||||
Long-term
|
835,586
|
-
|
||||||
Total
deferred tax asset
|
$
|
895,271
|
$
|
-
|
(i) Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The Company’s deferred tax asset
relates to the temporary difference in financial and tax bases of certain
property and equipment and a related loan payable. In 2004, in
connection with the assumption of a non-interest bearing long-term loan payable,
the Company imputed interest expense of approximately $3,900,000 and recorded a
debt discount and reduced the financial statement basis of certain property and
equipment by approximately $3,900,000. For financial statement purposes, the
debt discount was amortized into interest expense over the loan period from 2004
to 2009 and the property and equipment is being amortized over a period of 20
years. For tax purposes, we did not recognize any interest expense and we are
depreciating the undiscounted value of the property and equipment over a 20 year
period.
Prior to
2009, the Company had recognized a valuation allowance for those deferred tax
assets for which it is more likely than not that realization will not
occur. In 2008, the deferred tax asset had been fully reserved with a
valuation allowance as management of the Company had not determined if
realization of these assets would occur in the future. Prior to 2009, management
believed that the realization of income tax benefits from a temporary difference
arising from the amortization of the imputed debt discount for financial
statement purposes as compared to the depreciation of the related property and
equipment over 20 years for income tax purposes appeared not more than likely
due to the Company’s limited operating history, the fact that prior to 2007, the
Company had no cooperative agreements for the acquisition of raw materials, and
the Company had a limited number of customers.
F-37
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE 9 –
INCOME TAXES
(continued)
Accordingly,
the Company had provided a 100% valuation allowance on the deferred tax asset
benefit to reduce the asset to zero. In 2009, after analysis, management
concluded that the realization of the deferred tax asset is probable and
accordingly, reversed the valuation allowance and reflected a deferred tax
asset. The Company’s decision was based on the fact that 1) the
Company now has several years of operating history with increasing net income;
2) In 2007, the Company signed cooperative agreements with farmers for the
supply of raw materials. In 2008, the Company acquired additional land use
rights for the production of pears, its main raw material; 3) In October 2009,
the Company entered into a financing agreement for the sale of its ordinary
shares for net proceeds of approximately $15,100,000; and 4) the Company has
begun its plans to diversify its product line to include the sale of animal
bio-feed products.
NOTE 10 –
SHAREHOLDERS’
EQUITY
(a) Common
stock
Recapitalization
On
October 22, 2009, pursuant to a Share Exchange Agreement (See Note 1), the
Company issued 21,333,332 ordinary shares to the shareholders of Merit Times,
their designees or assigns in exchange for all of the issued and outstanding
capital stock of Merit Times. Pursuant to the terms of the Share Exchange
Agreement, a shareholder of the Company cancelled a total of 794,000 Ordinary
Shares of the Company. Following the combination prior to the
Offering, there are 21,820,832 Ordinary Shares of the Company issued and
outstanding.
Offering
On
October 22, 2009, pursuant to a Subscription Agreement (the “Subscription
Agreement”) between the Company and certain investors (the “Investors”) named in
the Subscription Agreement, the Company completed an offering (the “Offering”)
of the sale of investment units (the “Units”) for gross proceeds of $15,096,011,
each Unit consisting of 50,000 Ordinary Shares, par value $0.001 per share (the
“Ordinary Shares”) and five-year warrants to purchase 25,000 of the Ordinary
Shares of the Company, at an exercise price of $6.00 per share (the
“Warrants”). Additionally, on November 2, 2009, the Company entered
into and closed on the second and final round of a private placement by raising
gross proceeds of $1,915,003 through the sale of Units pursuant to a
Subscription Agreement between the Company and certain Investors named in the
Subscription Agreement. Together with the first closing on October 22, 2009,
Emerald raised aggregate gross proceeds of $17,011,014 from the Offering, and
issued 5,670,339 Ordinary Shares and 2,835,177 Warrants to
Investors.
Additionally,
the Company’s majority shareholder, Proud Glory Limited, of which Mr. Zhide
Jiang is the managing director (the “Lock-Up Shareholder”), entered into a
Lock-Up Agreement with the Company whereby the Lock-Up Shareholder agreed it
will not, offer, pledge, sell or otherwise dispose of any Ordinary Shares or any
securities convertible into or exercisable or exchangeable for Ordinary Shares
during the period beginning on and including the date of the final Closing of
the Offering for a period of eighteen (18) months.
F-38
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE10 –
SHAREHOLDERS’ EQUITY
(continued)
Pursuant
to an Investor Relations Escrow Agreement, amongst the Company, Grandview
Capital, Inc. (“Grandview”), Access America and Anslow & Jaclin, LLP as
escrow agent, dated October 22, 2009 (the “Investor Relations Escrow
Agreement”), the Company placed a total of $120,000 in an escrow account with
its counsel to be used for the payment of investor relation fees. Further,
pursuant to a Holdback Escrow Agreement, amongst the Company, Grandview, Access
America and Anslow & Jaclin, LLP as escrow agent, dated October 22, 2009
(the “Holdback Escrow Agreement”), the Company placed escrow funds equal to ten
percent (10%) of the Offering proceeds, with its counsel to be held in escrow
until such time as a qualified chief financial officer has been approved and
appointed as an officer of Emerald. Finally, pursuant to a Going
Public Escrow Agreement, amongst the Company, Grandview, Access America and
Anslow & Jaclin, LLP as escrow agent, dated October 22, 2009 (the “Going
Public Escrow Agreement”), the Company placed a total of $1,000,000 from the
Offering proceeds with its counsel to be used for the payment of fees and
expenses related to becoming a public company and listing its Ordinary Shares on
a senior exchange. Pursuant to each of the Investor Relations Escrow Agreement,
Holdback Escrow Agreement and Going Public Escrow Agreement, in the event that
the proceeds of such escrow accounts have not been fully distributed within two
years from the date thereof, the balance of such escrow proceeds shall be
returned to the Company.
In
connection with the Offering, the Company agreed to file a registration
statement on Form S-1 (“Registration Statement”) within 30 days after Closing
(“Required Filing Date”) and use our best efforts to have it declared effective
within 180 days after Closing to register (i) 100% of its Ordinary Shares issued
in this Offering; (ii) 100% of the Ordinary Shares underlying the Warrants and
Agent Warrants issued in this Offering (“Warrant Shares”) (collective, (the
“Registrable Securities”). If a Registration Statement covering the
registration of the Registrable Securities is not filed with the Commission by
the Required Filing Date, the Company shall issue 200,000 Ordinary Shares to the
Investors, distributed pro rata, per calendar month, or portion thereof, up to a
maximum of 1,000,000 Ordinary Shares of Emerald. The Company filed its
Registration Statement prior to the Required Filing Date.
In
connection with the Offering, the Company and the Company’s management entered
into a Make Good Escrow Agreement, whereby management placed a total of
4,600,000 of management’s Ordinary Shares in escrow (the “Escrow Shares”) and
agreed to transfer the Escrow Shares, in whole or in part as described below, to
the Investors on a pro rata basis in the event that the Company does not meet
certain performance targets for its fiscal years ending December 31, 2009 and
December 31, 2010. Under the “make good” arrangement, minimum net income
thresholds of $14,000,000 and $18,000,000 with a 10% allowable variation
were established for the 2009 and 2010 fiscal years, respectively. If, in a
given fiscal year, the applicable minimum net income threshold is not met,
escrowed shares, on a pro-rata basis, in an amount equal to the percentage of
variation from the net income threshold times the total number of escrow
shares, are required to be disbursed to the private placement
investors. If any escrow shares are distributed to investors resulting
from the Company not attaining the 2009 net income thresholds, Proud Glory
Limited will place an additional amount of shares into escrow so that the escrow
shares total 4,600,000. If the net income equals or exceeds
$12,600,000 in 2009 and $16,200,000 million in 2010, then the applicable
thresholds will be deemed met and all escrow shares will be disbursed to Proud
Glory Limited.
Currently,
the Company believes that it can reasonably achieve the contracted financial
performance thresholds (the “make-good targets”) for both years of 2009 and
2010. In the case where the Company does achieve the make-good targets and
releases the escrowed shares back to Proud Glory Limited, the Company does not
believe the fair value of the escrowed shares should be recognized as
compensation or an expense. According to SEC Staff Announcement Topic No. D-110,
to overcome the presumption that the release of shares are compensatory, the
Company is required to consider the substance of the arrangement, including
whether the arrangement was entered into for purposes unrelated to, and not
contingent upon, continued employment. For example, as a condition of a
financing transaction, investors may request that specific significant
shareholders, who also may be officers or directors, participate in an escrowed
share arrangement. If the escrowed shares will be released or canceled without
regard to continued employment, specific facts and circumstances may indicate
that the arrangement is in substance an inducement made to facilitate the
transaction on behalf of the company, rather than as compensatory. In such
cases, the Company generally believes that the arrangement should be recognized
and measured according to its nature and reflected as a reduction of the
proceeds allocated to the newly-issued securities.
F-39
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE10 –
SHAREHOLDERS’ EQUITY
(continued)
The
Shares Escrow Agreement and Lock-Up Agreement are clearly not entered into for
purposes related to, or contingent upon, continued employment of the key
executive. The sole reason for the Company and Mr. Jiang to escrow
and lock up the shares is to induce the PIPE investors to close the financing
transaction. Therefore, the Company believes the fair value of the
escrow shares (determined by the fair market price of the common stock on the
date of the Shares Escrow Agreement), when released back to Proud Glory, should
be recorded as reduction of the financing proceeds. Such reduction
will be debited to the account of additional paid-in capital and will be fully
offset by the corresponding credit to the additional paid-in capital, resulting
in no change in net equity of the balance sheet.
On the
other hand, if the make good targets are not met and the escrowed shares are
forfeited and delivered to the PIPE investors instead, it will be accounted for
as a recapitalization transaction with the PIPE investors, also resulting in no
income or expense being recognized in the Company’s financial
statements.
Placement
Agent
Grandview,
the lead placement agent, and Rodman & Renshaw, LLC, the co-placement agent,
are the placement agents (the “Placement Agents”) in connection with the
Offering. For the placement agent services, the Company paid a cash commission
equal to 7% of the aggregate gross proceeds of the Units sold and issued
five-year warrants to purchase 567,035 Ordinary Shares, which equal 10% of the
number of Ordinary Shares sold in this Offering, exercisable at any time at a
price equal to $6.00 per share for a five-year period (“Agent
Warrants”).
(b)
Warrants
Warrant
activity for the year ended December 31, 2009 is summarized as
follows:
|
Number of
Warrants
|
Weighted
Average
Exercise Price
|
||||||
Balance
at beginning of year
|
-
|
$
|
-
|
|||||
Granted
|
3,402,210
|
6.00
|
||||||
Exercised
|
-
|
-
|
||||||
Balance
at end of year
|
3,402,210
|
$
|
6.00
|
|||||
Warrants
exercisable at end of year
|
3,402,210
|
$
|
6.00
|
The
following table summarizes the shares of the Company’s common stock issuable
upon exercise of warrants outstanding at December 31, 2009:
|
Warrants Outstanding
|
Warrants Exercisable
|
|||||||||||||||||||
Range of
Exercise Price
|
Number
Outstanding at
December 31, 2009
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
Weighted Average
Exercise Price
|
Number
Exercisable at
December 31,
2009
|
Weighted Average
Exercise Price
|
||||||||||||||||
$
|
6.00
|
3,402,210
|
4.81
|
6.00
|
3,402,210
|
6.00
|
F-40
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE 11 –
MAJOR
CUSTOMERS
For the
years ended December 31, 2009 and 2008, seven customers accounted for 100.0% of
the Company’s revenues, respectively. In 2009, no customer accounted
for more than 20% of the Company’s net revenues. In 2008, one customer accounted
for 23.4% of net revenues.
NOTE
12 – STATUTORY AND NON-STATUTORY
RESERVES
The
Company is required to make appropriations to reserve funds, comprising the
statutory surplus reserve, statutory public welfare fund and discretionary
surplus reserve, based on after-tax net income determined in accordance with
generally accepted accounting principles of the PRC (the “PRC GAAP”).
Appropriation to the statutory surplus reserve should be at least 10% of the
after tax net income determined in accordance with the PRC GAAP until the
reserve is equal to 50% of the entities’ registered capital or members’ equity.
Appropriations to the statutory public welfare fund are at a minimum of 5% of
the after tax net income determined in accordance with PRC GAAP. Commencing on
January 1, 2006, the new PRC regulations waived the requirement for
appropriating retained earnings to a welfare fund. For the years ended December
31, 2009 and 2008, statutory reserve activity is as follows:
Statutory
|
Non-
Statutory
|
Total
|
||||||||||
Balance
– December 31, 2007
|
$
|
622,823
|
$
|
1,067,981
|
$
|
1,690,804
|
||||||
Addition
to reserves
|
-
|
1,259,010
|
1,259,110
|
|||||||||
Balance
– December 31, 2008
|
622,823
|
2,326,991
|
2,949,814
|
|||||||||
Addition
to reserves
|
-
|
-
|
-
|
|||||||||
Balance
– December 31, 2009
|
$
|
622,823
|
$
|
2,326,991
|
$
|
2,949,814
|
NOTE 13 –
RESTRICTED NET
ASSETS
Schedule
I of Article 5-04 of Regulation S-X requires the condensed financial information
of registrant shall be filed when the restricted net assets of consolidated
subsidiaries exceed 25 percent of consolidated net assets as of the end of the
most recently completed fiscal year. For purposes of the above test, restricted
net assets of consolidated subsidiaries shall mean that amount of the
registrant’s proportionate share of net assets of consolidated subsidiaries
(after intercompany eliminations) which as of the end of the most recent fiscal
year may not be transferred to the parent company by subsidiaries in the form of
loans, advances or cash dividends without the consent of a third party (i.e.,
lender, regulatory agency, foreign government, etc.).
The
condensed parent company financial statements have been prepared in accordance
with Rule 12-04, Schedule I of Regulation S-X as the restricted net assets of
the subsidiaries of Emerald Acquisition Corporation exceed 25% of the
consolidated net assets of Emerald Acquisition Corporation. The ability of our
Chinese operating affiliates to pay dividends may be restricted due to the
foreign exchange control policies and availability of cash balances of the
Chinese operating subsidiaries. Because a significant portion of our operations
and revenues are conducted and generated in China, all of our revenues being
earned and currency received are denominated in Renminbi (RMB). RMB is subject
to the exchange control regulation in China, and, as a result, we may be unable
to distribute any dividends outside of China due to PRC exchange control
regulations that restrict our ability to convert RMB into US
Dollars.
The
condensed parent company financial statements have been prepared using the same
accounting principles and policies described in the notes to the consolidated
financial statements, with the only exception being that the parent company
accounts for its subsidiaries using the equity method. Refer to the consolidated
financial statements and notes presented above for additional information and
disclosures with respect to these financial statements.
F-41
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE 13 –
RESTRICTED NET ASSETS
(continued)
EMERALD
ACQUISITION CORPORATION
CONSOLIDATED
PARENT COMPANY BALANCE SHEETS
As of
December 31,
|
As of
December 31,
|
|||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 10,487,306 | $ | - | ||||
Cash
– restricted
|
2,587,916 | - | ||||||
Total
Current Assets
|
13,075,222 | - | ||||||
Investments
in subsidiaries at equity
|
46,906,159 | 29,581,341 | ||||||
Total
Assets
|
$ | 59,981,381 | $ | 29,581,341 | ||||
LIABILITIES AND SHAREHOLDERS’
EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
103,005 | - | ||||||
Total
Current Liabilities
|
103,005 | - | ||||||
Shareholders’
equity:
|
||||||||
Ordinary
shares ($0.001 par value; 50,000,000 shares authorized, 27,491,171 and
21,333,332 shares issued and outstanding at December 31, 2009 and 2008,
respectively)
|
27,492 | 21,333 | ||||||
Additional
paid-in capital
|
16,331,315 | 1,236,396 | ||||||
Statutory
reserve
|
2,949,814 | 1,216,292 | ||||||
Subscription
receivable
|
- | (50,000 | ) | |||||
Retained
earnings
|
38,080,824 | 23,009,955 | ||||||
Accumulated
other comprehensive income
|
2,488,931 | 2,413,843 | ||||||
Total
Shareholders’ Equity
|
59,878,376 | 29,581,341 | ||||||
Total
Liabilities and Shareholders’ Equity
|
$ | 59,981,381 | $ | 29,581,341 |
EMERALD
ACQUISITION CORPORATION
CONDENSED PARENT
COMPANY STATEMENTS OF OPERATIONS
For the Year Ended
December 31,
|
||||||||
2009
|
2008
|
|||||||
REVENUES
|
$ | - | $ | - | ||||
OPERATING
EXPENSES:
|
||||||||
General
and administrative
|
178,861 | - | ||||||
Total
Operating Expenses
|
178,861 | - | ||||||
LOSS
FROM OPERATIONS
|
(178,861 | ) | - | |||||
LOSS
ATTRIBUTABLE TO PARENT ONLY
|
(178,861 | ) | - | |||||
EQUITY
INCOME EARNINGS OF SUBSIDIARIES
|
15,249,730 | 11,558,401 | ||||||
NET
INCOME
|
$ | 15,070,869 | $ | 11,558,401 |
F-42
EMERALD
ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2009 and 2008
NOTE 13 –
RESTRICTED NET ASSETS
(continued)
EMERALD
ACQUISITION CORPORATION
CONSOLIDATED
PARENT COMPANY STATEMENTS OF CASH FLOWS
For the Year Ended
December 31,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 15,070,869 | $ | 11,558,401 | ||||
Adjustments
to reconcile net income to net cash used in operating
activities:
|
||||||||
Equity
in earnings of subsidiary
|
(15,249,730 | ) | (11,558,401 | ) | ||||
Changes
in assets and liabilities:
|
||||||||
Accounts
payable
|
103,005 | - | ||||||
NET
CASH USED IN OPERATING ACTIVITIES
|
(85,856 | ) | - | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Investment
payments to subsidiaries
|
(2,000,000 | ) | - | |||||
Increase
in cash – restricted
|
(2,587,916 | ) | - | |||||
NET
CASH USED IN INVESTING ACTIVITIES
|
(4,587,916 | ) | - | |||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from sale of ordinary shares
|
17,011,014 | - | ||||||
Proceeds
from subscription receivable
|
50,000 | - | ||||||
Payment
of placement fees and expenses
|
(1,909,936 | ) | - | |||||
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
15,151,078 | - | ||||||
NET
INCREASE IN CASH
|
10,487,306 | - | ||||||
CASH
- beginning of year
|
- | - | ||||||
CASH
- end of year
|
$ | 10,487,306 | $ | - |
NOTE 14 –
COMMITMENT
On
December 24, 2009, as part of the Company’s expansion plans to add additional
production capacity, the Company entered into a construction contract for the
construction of a new manufacturing facility and office space for 19,680,000 RMB
(approximately $2,880,000). The construction project and all payments
are expected to be completed in the second quarter of 2010. As of
December 31, 2009, the Company paid $863,511 which has been reflected in
property and equipment as construction in process. At December 31,
2009, future amounts due under the construction contract amount to approximately
$2,106,000.
F-43
2,500,000
Ordinary Shares
Oriental
Dragon Corporation
PROSPECTUS
Roth
Capital Partners
Until ,
2010, all dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers’ obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
_________,
2010
72
[RESALE
PROSPECTUS ALTERNATE PAGE]
The
information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission becomes effective. This prospectus is
not an offer to sell these securities and we are not soliciting offers to
buy these securities in any state where the offer or sale is not
permitted.
|
PRELIMINARY
PROSPECTUS
|
Subject
to Completion
|
November
2, 2010
|
8,590,571
Ordinary Shares
ORIENTAL
DRAGON CORPORATION
This
prospectus relates to 8,590,571 of our ordinary shares,
par value $0.001 per share, of Oriental Dragon Corporation that may be sold
from time to time by the selling shareholders named in this prospectus, which
includes:
|
·
|
5,670,339 of our ordinary
shares; and
|
|
·
|
2,920,232 of our ordinary
shares issuable upon the exercise of warrants held by the selling
shareholders.
|
We will
not receive any of the proceeds from the sale of our ordinary shares by the
selling shareholders but we will receive funds from the exercise of
the warrants held by the selling shareholders if and when those warrants are
exercised for cash. We will utilize any proceeds from the exercise of such
warrants for general corporate and working capital purposes.
Our
securities are presently not traded on any market or securities exchange. We
have applied to list our ordinary shares on the NASDAQ Global Market under the
symbol “ODH”.
Since
there is currently no public market established for our securities, the selling
security holders will sell at a fixed price that is equal to the price at which
we sell shares in our public offering pursuant to the registration statement of
which this prospectus is a part. Once, and if, our ordinary shares are listed on
the NASDAQ Global Market and there is an established market for these resale
shares, the selling shareholders may sell the resale shares from time to time at
the market price prevailing on the NASDAQ Global Market at the time of offer and
sale, or at prices related to such prevailing market prices or in negotiated
transactions or a combination of such methods of sale directly or through
brokers.
Investing
in our ordinary shares involves a high degree of risk. See “Risk Factors”
beginning on page 8 to read about factors you should consider before buying
shares of our ordinary shares.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
The date
of this prospectus is ____________, 2010
73
[RESALE
PROSPECTUS ALTERNATE PAGE]
TABLE OF
CONTENTS
PROSPECTUS
SUMMARY
|
4 | ||
RISK
FACTORS
|
8 | ||
FORWARD-LOOKING
STATEMENTS
|
17 | ||
USE
OF PROCEEDS
|
18 | ||
DIVIDEND
POLICY
|
18 | ||
MARKET
FOR OUR SECURITIES AND RELATED SHAREHOLDER MATTERS
|
19 | ||
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
22 | ||
CORPORATE
STRUCTURE AND HISTORY
|
37 | ||
DESCRIPTION
OF BUSINESS
|
40 | ||
MANAGEMENT
|
48 | ||
EXECUTIVE
COMPENSATION
|
49 | ||
TRANSACTIONS
WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS; DIRECTOR
INDEPENDENCE
|
50 | ||
CHANGE
IN ACCOUNTANTS
|
52 | ||
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
53 | ||
DESCRIPTION
OF CAPITAL STOCK
|
54 | ||
SHARES
ELIGIBLE FOR FUTURE SALE
|
55 | ||
SELLING
SHAREHOLDERS
|
68 | ||
PLAN
OF DISTRIBUTION
|
71 | ||
LEGAL
MATTERS
|
73 | ||
EXPERTS
|
73 | ||
ADDITIONAL
INFORMATION
|
73 | ||
INDEX
TO FINANCIAL STATEMENTS
|
F-1 | ||
PART
II INFORMATION NOT REQUIRED IN THE PROSPECTUS
|
75 | ||
SIGNATURES
|
80 |
Please
read this prospectus carefully. It describes our business, our financial
condition and results of operations. We have prepared this prospectus so that
you will have the information necessary to make an informed investment
decision.
You
should rely only on information contained in this prospectus. We have
not authorized any other person to provide you with different
information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the offer or sale
is not permitted. The information in this prospectus is complete and
accurate as of the date on the front cover, but the information may have changed
since that date.
74
[RESALE
PROSPECTUS ALTERNATE PAGE]
The
Offering
Ordinary
shares offered by selling shareholders
|
8,590,571
ordinary shares, including 2,920,232 ordinary shares that are issuable
upon the exercise of warrants held by the selling
shareholders.
|
|
Ordinary
shares outstanding before the offering
|
27,499,171
(1)
|
|
Terms
of the offering
|
The
selling shareholders will determine when and how they will sell the
securities offered in this prospectus.
|
|
Use
of proceeds
|
We
will not receive proceeds from the resale of shares by the selling
shareholders. To the extent that the selling shareholders exercise, for
cash, all of the warrants covering the 2,920,232 ordinary shares
registered for resale under this prospectus, we would receive $17,521,392
in aggregate from such exercises. We intend to use such proceeds for
general corporate and working capital purposes.
|
|
Risk
Factors
|
See
“Risk Factors” beginning on page 8 and other information included in
this prospectus for a discussion of factors you should consider before
deciding to invest in shares of our ordinary
shares.
|
(1)
|
The number of our ordinary shares
outstanding as of the date hereof, excludes up to 2,500,000 ordinary
shares (excluding an underwriters’ option to purchase an additional
375,000 shares to cover over-allotments) to be offered by us in a firm
commitment public offering concurrently
herewith.
|
75
[RESALE
PROSPECTUS ALTERNATE PAGE]
USE
OF PROCEEDS
We will
not receive any of the proceeds from the sale of our ordinary shares by the
selling shareholders. The selling shareholders will receive all of the net
proceeds from the sales of ordinary shares offered by them under this
prospectus. To the extent that the selling shareholders exercise, for cash, all
of the warrants covering the 2,920,232 ordinary shares registered for resale
under this prospectus, we would receive approximately $17,521,392 in the
aggregate from such exercises. We intend to use such proceeds for working
capital, and other general corporate purposes. We will have complete discretion
over how we may use the proceeds, if any, from any exercise of the
warrants.
76
[RESALE
PROSPECTUS ALTERNATE PAGE]
SELLING
SHAREHOLDERS
We are
registering a total of 8,590,571 ordinary shares, comprised of 5,670,339
ordinary shares issued in the private placement financing transaction completed
on November 2, 2009, 2,835,177 ordinary shares underlying the Investor Warrants
at an Exercise Price of $6.00 per share held by certain of the investors and
85,055 ordinary shares underlying Agent Warrants issued to Rodman & Ranshaw,
LLC, its employees and other persons acting on its behalf.
The table
below lists the selling shareholders and other information regarding the
beneficial ownership of the securities by each of the selling
shareholders. Except as indicated in the footnotes to the table, no
selling security holder has had any material relationship with us or our
predecessors or affiliates during the last three years.
Shares Beneficially
Owned Prior to the
Offering (1)
|
Shares
Being
|
Shares Beneficially
Owned After the
Offering (1)
|
||||||||||||||||||
Name and Address of Beneficial Owner
|
Number
|
Percentage (2)
|
Offered
|
Number
|
Percentage (2)
|
|||||||||||||||
AAI
Global Longkang Pear Juice Acquisition, LLC (3)(5)
|
527,003 | 1.91 | % | 527,003 | 0 | 0 | ||||||||||||||
Access
America Fund LP (3)(6)
|
1,587,001 | 4.94 | % | 1,381,001 | 206,000 | * | ||||||||||||||
Ancora
Greater China Fund, LP (3)(7)
|
175,001 | * | 175,001 | 0 | 0 | |||||||||||||||
Chen
Han Qing (3)
|
1,500,000 | 5.36 | % | 1,500,000 | 0 | 0 | ||||||||||||||
CMT
Investments LLC (3)(8)
|
125,001 | * | 125,001 | 0 | 0 | |||||||||||||||
Domaco
Venture Capital Fund (3)(9)
|
12,500 | * | 12,500 | 0 | 0 | |||||||||||||||
EOS
Holdings LLC (3)(10)
|
300,000 | 1.09 | % | 300,000 | 0 | 0 | ||||||||||||||
Excalibur
Special Opportunities LP (3)(11)
|
250,001 | * | 250,001 | 0 | 0 | |||||||||||||||
Feng
Bai Ye (3)
|
300,000 | 1.09 | % | 300,000 | 0 | 0 | ||||||||||||||
Gibralt
Capital Corporation (3)(12)
|
250,001 | * | 250,001 | 0 | 0 | |||||||||||||||
IRA
FBO Ronald Lazar, Pershing LLC as Custodian (3)(13)
|
12,500 | * | 12,500 | 0 | 0 | |||||||||||||||
Jayhawk
Private Equity Fund (3)(14)
|
750,000 | 2.70 | % | 750,000 | 0 | 0 | ||||||||||||||
JW
Partners, LP (3)(15)
|
399,501 | 1.45 | % | 399,501 | 0 | 0 | ||||||||||||||
J.
Wild Fund, LP (3)(15)
|
25,500 | * | 25,500 | 0 | 0 | |||||||||||||||
Steve
Mazur (3)
|
75,000 | * | 75,000 | 0 | 0 | |||||||||||||||
MidSouth
Investor Fund LP (3)(16)
|
250,001 | * | 250,001 | 0 | 0 | |||||||||||||||
Anthony
G. Polak (3)(26)
|
25,001 | * | 25,001 | 0 | 0 | |||||||||||||||
Anthony
G. Polak “S” (3)
|
25,001 | * | 25,001 | 0 | 0 | |||||||||||||||
Jamie
Polak (3)(27)
|
12,500 | * | 12,500 | 0 | 0 | |||||||||||||||
RL
Capital Partners, L.P. (3)(17)
|
75,000 | * | 75,000 | 0 | 0 | |||||||||||||||
C.
Robert Shearer (3)
|
25,001 | * | 25,001 | 0 | 0 | |||||||||||||||
Silver
Rock II, LTD. (3)(18)
|
187,500 | * | 187,500 | 0 | 0 | |||||||||||||||
Taylor
International Fund, Ltd. (3)(19)
|
1,000,001 | 3.59 | % | 1,000,001 | 0 | 0 | ||||||||||||||
The
Mary Margaret Trust (3)(20)
|
25,001 | * | 25,001 | 0 | 0 | |||||||||||||||
The
USX China Fund (3)(21)
|
75,000 | * | 75,000 | 0 | 0 | |||||||||||||||
Trillion
Growth China Limited Partnership (3)(22)
|
150,000 | * | 150,000 | 0 | 0 | |||||||||||||||
Warberg
Opportunistic Trading Fund, LLC (3)(23)
|
22,500 | * | 22,500 | 0 | 0 | |||||||||||||||
Whitebox
Combined Partners, LP (3)(24)
|
436,500 | 1.58 | % | 436,500 | 0 | 0 | ||||||||||||||
Whitebox
Investment Partners, LP (3)(24)
|
88,500 | * | 88,500 | 0 | 0 | |||||||||||||||
J.
Eustace Wolfington III (3)
|
25,001 | * | 25,001 | 0 | 0 | |||||||||||||||
Brad
Carlsson (4)
|
2,777 | * | 2,777 | 0 | 0 | |||||||||||||||
John
Cassels (4)
|
4,491 | * | 4,491 | 0 | 0 | |||||||||||||||
Chirag
Choudhary (4)
|
11,225 | * | 11,225 | 0 | 0 | |||||||||||||||
Ramnarain
Jaigobind (4)
|
12,188 | * | 12,188 | 0 | 0 | |||||||||||||||
Harry
Ioannou (4)
|
962 | * | 962 | 0 | 0 | |||||||||||||||
Eric
Lord (4)
|
6,080 | * | 6,080 | 0 | 0 | |||||||||||||||
Kevin
Mangan (4)
|
2,027 | * | 2,027 | 0 | 0 | |||||||||||||||
Cynthia
Van Osch (4)
|
7,337 | * | 7,337 | 0 | 0 | |||||||||||||||
Rodman
& Renshaw, LLC (4)(25)
|
37,968 | * | 37,968 | 0 | 0 | |||||||||||||||
Total
|
8,796,571 | 28.93 | % | 8,590,571 | 206,000 | * |
77
* Less
than 1%.
(1)
|
Under
applicable SEC rules, a person is deemed to beneficially own securities
which the person has the right to acquire within 60 days through the
exercise of any option or warrant or through the conversion of a
convertible security. Also under applicable SEC rules, a person is deemed
to be the “beneficial owner” of a security with regard to which the person
directly or indirectly, has or shares (a) voting power, which includes the
power to vote or direct the voting of the security, or (b) investment
power, which includes the power to dispose, or direct the disposition, of
the security, in each case, irrespective of the person’s economic interest
in the security. Each listed selling security holder has the sole
investment and voting power with respect to all ordinary shares shown as
beneficially owned by such selling security holder, except as otherwise
indicated in the footnotes to the table.
|
(2)
|
As
of the date hereof, there were 27,499,171 ordinary shares issued and
outstanding. In determining the percent of ordinary shares beneficially
owned by a selling security holder on the date hereof, (a) the numerator
is the number of ordinary shares beneficially owned by such selling
security holder (including shares that he has the right to acquire within
60 days of the date hereof), and (b) the denominator is the sum of (i) the
27,499,171 shares outstanding on the date hereof, and (ii) the number of
ordinary shares which such selling the shareholder has the right to
acquire within 60 days of the date hereof.
|
(3)
|
We
are registering 5,670,339 ordinary shares issued in the Financing and
2,835,177 ordinary shares issuable upon exercise of outstanding Investor
Warrants at an exercise price of $6.00 per share. We
issued these Investor Warrants to investors in conjunction with our
private placement completed on November 2, 2009.
|
(4)
|
We
are registering the ordinary shares underlying the Agent Warrants issued
to Rodman & Ranshaw, LLC, the co-placement agent in the Financing,
their employees and other persons acting on its behalf to purchase 85,055
shares at $6.00 per share. These Agent Warrants were issued in
conjunction with our private placement completed on November 2,
2009. Rodman & Ranshaw, LLC is a registered broker-dealer.
Rodman & Ranshaw, LLC and its employees received such shares as
compensation for investment banking services.
|
(5)
|
Access
America has voting and investment discretion over securities held by AAI
Global Longkang Pear Juice Acquisition, LLC. Mr. Christopher Efird,
President of Access America, has voting control over Access America.
Either Access America or AAI Global Longkang Pear Juice Acquisition, LLC
is the registered representative of Smith Point Capital, a registered
broker-dealer. It acquired such shares in the ordinary course of business
and at the time of the acquisition it did not have any arrangements or
understandings with any person to distribute the
securities.
|
(6)
|
The
number of shares directly owned by Access America includes (i) 206,000
ordinary shares retained in connection with the share exchange
transaction, and (ii) 920,667 ordinary shares and Warrants to purchase
460,334 ordinary shares issued in the Financing. Access America also has
voting and investment discretion over securities held by AAI Global
Longkang Pear Juice Acquisition, LLC. Access America Mr. Christopher
Efird, President of Access America, has voting control over Access
America. Either Access America or AAI Global Longkang Pear Juice
Acquisition, LLC is the registered representative of Smith Point Capital,
a registered broker-dealer. It acquired such shares in the ordinary course
of business and at the time of the acquisition it did not have any
arrangements or understandings with any person to distribute the
securities.
|
(7)
|
John
P. Miklitsch has voting and dispositive control over securities held by
Ancora Greater China Fund, L.P. Ancora Advisors, LLC is the General
Partner of Ancora Greater China Fund, L.P., and has common management and
ownship with Ancora Securities Inc., which is a registered broker-dealer.
It acquired such shares in the ordinary course of business and at the time
of the acquisition it did not have any arrangements or understandings with
any person to distribute the securities.
|
(8)
|
Jan-Dirk
Lueders has voting and dispositive control over securities held by CMT
Investments LLC.
|
(9)
|
Jack
Polak has voting and dispositive control over securities held by Domaco
Venture Capital Fund.
|
(10)
|
Jon
Carnes has voting and dispositive control over securities held by EOS
Holdings LLC.
|
(11)
|
William
Hechter has voting and dispositive control over securities held by
Excalibur Special Opportunities LP.
|
(12)
|
Travis
Dowle has voting and dispositive control over securities held by Gibralt
Capital Corporation.
|
78
(13)
|
Ronald
Lazar has voting and dispositive control over securities held by IRA FBO
Ronald Lazar, Pershing LLC as Custodian. Ronald Lazar is a
registered investment advisor representative employed by Maxim Group LLC,
which is a registered broker-dealer. It acquired such shares in the
ordinary course of business and at the time of the acquisition it did not
have any arrangements or understandings with any person to distribute the
securities.
|
(14)
|
Kent
C. McCarthy has voting and dispositive control over securities held by
Jayhawk Private Equity Fund.
|
(15)
|
Jason
Wild has voting and dispositive control over securities held by JW
Partners, LP and J. Wild Fund, LP.
|
(16)
|
Lyman
O. Heidtke has voting and dispositive control over securities held by
MidSouth Investor Fund LP.
|
(17)
|
Ronald
Lazar has voting and dispositive control over securities held by RL
Capital Partners, L.P. Ronald Lazar is a manager of RL Capital Partners,
L.P. and is a registered investment advisor representative employed by
Maxim Group LLC, which is a registered broker-dealer. It acquired such
shares in the ordinary course of business and at the time of the
acquisition it did not have any arrangements or understandings with any
person to distribute the securities.
|
(18)
|
Rima
Salam has voting and dispositive control over securities held by Silver
Rock II, LTD.
|
(19)
|
Stephen
S. Taylor has voting and dispositive control over securities held by
Taylor International Fund, Ltd.
|
(20)
|
J.
Eustace Wolfington has voting and dispositive control over securities held
by The Mary Margaret Trust.
|
(21)
|
Stephen
L. Parr has voting and dispositive control over securities held by The USX
China Fund.
|
(22)
|
Corey
Mitchell has voting and dispositive control over securities held by
Trillion Growth China Limited Partnership.
|
(23)
|
Daniel
I. Warsh has voting and dispositive control over securities held by
Warberg Opportunistic Trading Fund, LLC.
|
(24)
|
Jonathan
Wood has voting and dispositive control over securities held by Whitebox
Combined Partners, LP and Whitebox Investment Partners,
LP.
|
(25)
|
Thomas
G. Pinou has voting and dispositive control over securities held by Rodman
& Renshaw, LLC.
|
(26)
|
Anthony
Polak is a registered investment advisor representative employed by Maxim
Group LLC, which is a registered broker-dealer. He acquired such shares in
the ordinary course of business and at the time of the acquisition he did
not have any arrangements or understandings with any person to distribute
the securities.
|
(27)
|
Jamie
Polak is a registered investment advisor representative employed by Maxim
Group LLC, which is a registered broker-dealer. He acquired such shares in
the ordinary course of business and at the time of the acquisition he did
not have any arrangements or understandings with any person to distribute
the securities.
|
79
[RESALE
PROSPECTUS ALTERNATE PAGE]
PLAN
OF DISTRIBUTION
The
selling shareholders may, from time to time, sell, transfer or otherwise dispose
of any or all of their securities or interests in securities on any stock
exchange, market or trading facility on which the shares are traded or in
private transactions. These dispositions may be at fixed prices, at prevailing
market prices at the time of sale, at prices related to the prevailing market
price, at varying prices determined at the time of sale, or at negotiated
prices.
The
selling shareholders may use any one or more of the following methods when
disposing of shares or interests therein:
|
-
|
ordinary brokerage transactions
and transactions in which the broker-dealer solicits
purchasers;
|
|
-
|
block trades in which the
broker-dealer will attempt to sell the shares as agent, but may position
and resell a portion of the block as principal to facilitate the
transaction;
|
|
-
|
purchases by a broker-dealer as
principal and resale by the broker-dealer for its
account;
|
|
-
|
an exchange distribution in
accordance with the rules of the applicable
exchange;
|
|
-
|
privately negotiated
transactions;
|
|
-
|
short sales effected after the
date the registration statement of which this Prospectus is a part is
declared effective by the
SEC;
|
|
-
|
through the writing or settlement
of options or other hedging transactions, whether through an options
exchange or otherwise;
|
|
-
|
broker-dealers may agree with the
selling shareholders to sell a specified number of such shares at a
stipulated price per share;
and
|
|
-
|
a combination of any such methods
of sale.
|
The
selling shareholders may, from time to time, pledge or grant a security interest
in some or all of the ordinary shares owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell the ordinary shares, from time to time, under this prospectus, or
under an amendment to this prospectus under Rule 424(b)(3) or other applicable
provision of the Securities Act amending the list of selling shareholders to
include the pledgee, transferee or other successors in interest as selling
shareholders under this prospectus. The selling shareholders also may transfer
the securities in other circumstances, in which case the transferees, pledgees
or other successors in interest will be the selling beneficial owners for
purposes of this prospectus.
In
connection with the sale of our ordinary shares or interests therein, the
selling shareholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
ordinary shares in the course of hedging the positions they assume. The selling
shareholders may also sell shares of our ordinary shares short and deliver these
securities to close out their short positions, or loan or pledge the ordinary
shares to broker-dealers that in turn may sell these securities. The selling
shareholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
aggregate proceeds to the selling shareholders from the sale of the ordinary
shares offered by them will be the purchase price of the ordinary shares less
discounts or commissions, if any. Each of the selling shareholders reserves the
right to accept and, together with their agents from time to time, to reject, in
whole or in part, any proposed purchase of ordinary shares to be made directly
or through agents. We will not receive any of the proceeds from this
offering.
Broker-dealers
engaged by the selling shareholders may arrange for other broker-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling shareholders (or, if any broker-dealer acts as agent for the
purchase of shares, from the purchaser) in amounts to be negotiated. The selling
shareholders do not expect these commissions and discounts to exceed what is
customary in the types of transactions involved, and in no case will the maximum
compensation received by any broker-dealer exceed eight percent
(8%).
80
The
selling shareholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act, provided
that they meet the criteria and conform to the requirements of that
rule.
Any
underwriters, agents, or broker-dealers, and any selling shareholders who are
affiliates of broker-dealers, that participate in the sale of the ordinary
shares or interests therein may be “underwriters” within the meaning of Section
2(11) of the Securities Act. Any discounts, commissions, concessions or profit
they earn on any resale of the shares may be underwriting discounts and
commissions under the Securities Act. Selling shareholders who are
“underwriters” within the meaning of Section 2(11) of the Securities Act will be
subject to the prospectus delivery requirements of the Securities Act. We know
of no existing arrangements between any of the selling shareholders and any
other shareholder, broker, dealer, underwriter, or agent relating to the sale or
distribution of the shares, nor can we presently estimate the amount, if any, of
such compensation. See “Selling shareholders” for description of any material
relationship that a shareholder has with us and the description of such
relationship.
To the
extent required, the shares of our ordinary shares to be sold, the names of the
selling shareholders, the respective purchase prices and public offering prices,
the names of any agents, dealer or underwriter, any applicable commissions or
discounts with respect to a particular offer will be set forth in an
accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this
prospectus.
In order
to comply with the securities laws of some states, if applicable, the ordinary
shares may be sold in these jurisdictions only through registered or licensed
brokers or dealers. In addition, in some states the ordinary shares may not be
sold unless it has been registered or qualified for sale or an exemption from
registration or qualification requirements is available and is complied
with.
We have
advised the selling shareholders that the anti-manipulation rules of Regulation
M under the Exchange Act may apply to sales of shares in the market and to the
activities of the selling shareholders and their affiliates. In addition, we
will make copies of this prospectus (as it may be supplemented or amended from
time to time) available to the selling shareholders for the purpose of
satisfying the prospectus delivery requirements of the Securities Act. The
selling shareholders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act.
We have
agreed to pay certain fees and expenses incurred by us incident to the
registration of the shares. Such fees and expenses are estimated to be $109,438.
We have agreed to indemnify the selling shareholders against liabilities,
including liabilities under the Securities Act and state securities laws,
relating to the registration of the shares offered by this
prospectus.
We have
agreed with the selling shareholders to keep the registration statement of which
this prospectus constitutes a part effective until the earlier of (1) such time
as all of the shares covered by this prospectus have been disposed of pursuant
to and in accordance with the registration statement or (2) the date on which
the shares may be sold pursuant to Rule 144(k) of the Securities
Act.
In
addition to the foregoing, persons who purchase warrants from a selling
shareholder pursuant to this prospectus and thereafter acquire our ordinary
shares upon the exercise of such warrants may resell such ordinary shares
without restriction by any method permitted by applicable law.
81
[RESALE
PROSPECTUS ALTERNATE PAGE]
LEGAL
MATTERS
The
Company is being represented by Anslow & Jaclin, LLP with respect to legal
matters of United States federal securities and New Jersey State law. The
validity of the ordinary shares offered by this prospectus and legal matters as
to Cayman Islands law will be passed upon for us by Conyers Dill & Pearman.
Legal matters as to PRC law will be passed upon for us by Allbright Law Offices.
Anslow & Jaclin, LLP may rely upon Allbright Law Offices with respect to
matters governed by PRC law.
EXPERTS
The
consolidated financial statements of our company included in this prospectus and
in the registration statement have been audited by Sherb & Co., LLP,
independent registered public accounting firm, to the extent and for the periods
set forth in their report appearing elsewhere herein and in the registration
statement, and are included in reliance on such report, given the authority of
said firm as an expert in auditing and accounting.
ADDITIONAL
INFORMATION
We filed
with the Securities and Exchange Commission a registration statement under the
Securities Act of 1933 for the ordinary shares in this offering. This prospectus
does not contain all of the information in the registration statement and the
exhibits and schedule that were filed with the registration statement. For
further information with respect to us and our ordinary shares, we refer you to
the registration statement and the exhibits and schedule that were filed with
the registration statement. Statements contained in this prospectus about the
contents of any contract or any other document that is filed as an exhibit to
the registration statement are not necessarily complete, and we refer you to the
full text of the contract or other document filed as an exhibit to the
registration statement. A copy of the registration statement and the exhibits
and schedules that were filed with the registration statement may be inspected
without charge at the Public Reference Room maintained by the Securities and
Exchange Commission at 100 F Street, N.E. Washington, DC 20549, and copies of
all or any part of the registration statement may be obtained from the
Securities and Exchange Commission upon payment of the prescribed fee.
Information regarding the operation of the Public Reference Room may be obtained
by calling the Securities and Exchange Commission at 1-800-SEC-0330. The
Securities and Exchange Commission maintains a website that contains reports,
proxy and information statements, and other information regarding registrants
that file electronically with the SEC. The address of the website is
www.sec.gov.
We file
periodic reports under the Securities Exchange Act of 1934, including annual,
quarterly and special reports, and other information with the Securities and
Exchange Commission. These periodic reports and other information are available
for inspection and copying at the regional offices, public reference facilities
and website of the Securities and Exchange Commission referred to
above.
82
[RESALE
PROSPECTUS ALTERNATE PAGE]
8,590,571
Ordinary Shares
ORIENTAL
DRAGON CORPORATION
PROSPECTUS
,
2010
83
PART
II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
Item
13. Other Expenses and Issuance and Distribution
The
following table sets forth the costs and expenses, other than underwriting
discounts and commissions, if any, payable by the Registrant relating to the
sale of ordinary shares being registered.
Securities
and Exchange Commission registration fee(1)
|
$ | 6,539.96 | ||
FINRA
Filing Fee(1)
|
2,800.00 | |||
NASDAQ
Listing Fee(1)
|
25,000 | |||
Transfer
Agent Fees(1)
|
(2) | |||
Accounting
fees and expenses(1)
|
(2) | |||
Legal
fees and expenses(1)
|
100,000 | |||
Blue
Sky/Underwriters’ counsel fees and expenses(1)
|
50,000 | |||
Research
and Investor Relations fees and expenses(1)
|
(2) | |||
Printing
fees and expenses(1)
|
(2) | |||
Roadshow
fees and expenses(1)
|
(2) | |||
Miscellaneous(1)
|
(2) | |||
Total
|
$ | (2) |
(1)
|
All amounts are estimates other
than the Commission’s registration fee, FINRA filing fee and NASDAQ
listing fee.
|
(2)
|
To be added by
amendment.
|
Item
14. Indemnification of Directors and Officers
Cayman
Islands law does not limit the extent to which a company’s articles of
association may provide for indemnification of officers and directors, except to
the extent any such provision may beheld by the Cayman Islands courts to be
contrary to public policy, such as to provide indemnification against
civil fraud or the consequences of committing a crime. Our articles
of association provide for indemnification of our officers and directors for any
liability incurred in their capacities as such, except through their own willful
negligence or default.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or 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 and is theretofore
unenforceable.
Item
15. Recent Sales of Unregistered Securities
Since
March 10, 2006, we have issued and sold the following unregistered
securities:
On April
10, 2006, we issued a total of 1,050,000 ordinary shares, at a par value
purchase price of $0.001 per share, for consideration of $1,050 to our founding
shareholders, including 1,000,000 shares to Joseph Rozelle and 50,000 to David
Richardson. The issuance of our shares to these individuals was made in reliance
on the exemption provided by Section 4(2) of the Securities Act for the
offer and sale of securities not involving a public offering and regulation
D promulgated thereunder.
On May
31, 2006, we sold 177,500 ordinary shares for $35,500. The restricted ordinary
shares were sold to 355 offshore private investors pursuant to a private
placement offering in lots of 500 shares each at $0.20 per share. On July
18, 2006, we sold an additional 54,000 shares for $10,800. The restricted
ordinary shares were sold to 108 offshore private investors pursuant to a
private placement offering in lots of 500 shares each at $0.20 per share.
Such securities were not registered under the Securities Act. The issuance
of these securities was exempt from registration under Regulation S of the
Securities Act. We made this determination based on the representations of
Investors, which included, in pertinent part, that such shareholders were not a
“U.S. person” as that term is defined in Rule 902(k) of Regulation S under the
Act, and that such shareholders were acquiring our securities, for investment
purposes for their own respective accounts and not as nominees or agents, and
not with a view to the resale or distribution thereof, and that the shareholders
understood that the shares of our ordinary shares may not be sold or otherwise
disposed of without registration under the Securities Act or an applicable
exemption therefrom.
On
October 22, 2009, we issued 21,333,332 ordinary shares to individuals and
entities as designated by the Merit Times Shareholders in exchange for 100% of
the outstanding shares of Merit Times pursuant to the Exchange Agreement dated
October 22, 2009. Following the transaction, 794,000 ordinary shares
were subsequently cancelled. Such securities were not registered under the
Securities Act. These securities qualified for exemption under
Section 4(2) of the Securities Act since the issuance securities by us did not
involve a public offering. The offering was not a “public offering” as defined
in Section 4(2) due to the insubstantial number of persons involved in the deal,
size of the offering, manner of the offering and number of securities offered.
We did not undertake an offering in which we sold a high number of securities to
a high number of investors. In addition, these shareholders had the necessary
investment intent as required by Section 4(2) since they agreed to and received
share certificates bearing a legend stating that such securities are restricted
pursuant to Rule 144 of the Securities Act. This restriction ensures that these
securities would not be immediately redistributed into the market and therefore
not be part of a “public offering.” Based on an analysis of the above factors,
we have met the requirements to qualify for exemption under Section 4(2) of the
Securities Act for this transaction.
84
On
October 22, 2009, we issued to certain investors a total of 5,032,005 ordinary
shares and five-year Investor Warrants to purchase an aggregate of 2,516,009
ordinary shares of the Company, at an exercise price of $6.00 per share pursuant
to the Subscription Agreement by and between the Company and such
investors. On November 2, 2009, we issued an additional 638,334
ordinary shares and five-year Investor Warrants to purchase an aggregate of
319,168 ordinary shares of the Company in the second and final round of private
placement pursuant to the Subscription Agreement. Such securities were not
registered under the Securities Act. The issuance of these securities was exempt
from registration under Regulation D, Regulation S and Section 4(2) of the
Securities Act. We made this determination based on the representations of
Investors, which included, in pertinent part, that such shareholders were either
(a) “accredited investors” within the meaning of Rule 501 of Regulation D
promulgated under the Securities Act, or (b) not a “U.S. person” as that term is
defined in Rule 902(k) of Regulation S under the Act, and that such shareholders
were acquiring our ordinary shares, for investment purposes for their own
respective accounts and not as nominees or agents, and not with a view to the
resale or distribution thereof, and that the shareholders understood that the
shares of our ordinary shares may not be sold or otherwise disposed of without
registration under the Securities Act or an applicable exemption
therefrom.
In
connection with the abovementioned financing, on October 22, 2009, we issued to
the Placement Agents five-year Agent Warrants to purchase 503,201 ordinary
shares at an exercise price of $6.00 per share. On November 2, 2009, we issued
to the Placement Agents addition five-year Agent Warrants to purchase 63,834
ordinary shares of the Company in connection with the second and final round of
private placement. Such securities were not registered under the Securities Act.
The issuance of these securities was exempt from registration under
Section 4(2) of the Securities Act. We made this determination based on the
representations of the Placement Agents, which included, in pertinent part, that
each of the Placement Agents were an “accredited investors” within the meaning
of Rule 501 of Regulation D promulgated under the Securities Act and that each
of the Placement Agent was acquiring our ordinary shares for investment purposes
for its own respective accounts and not as nominees or agents, and not with a
view to the resale or distribution thereof, and that each of the Placement Agent
understood that the our ordinary shares may not be sold or otherwise disposed of
without registration under the Securities Act or an applicable exemption
therefrom.
On May
13, 2010, we issued 8,000 ordinary shares to CFO Oncall Asia, Inc. for its
services rendered. These securities qualified for exemption under
Section 4(2) of the Securities Act since the issuance securities by us did not
involve a public offering.
In
instances described above where we issued securities in reliance upon Regulation
D, we relied upon Rule 506 of Regulation D of the Securities Act. These
shareholders who received the securities in such instances made representations
that (a) the shareholder is acquiring the securities for his, her or its own
account for investment and not for the account of any other person and not with
a view to or for distribution, assignment or resale in connection with any
distribution within the meaning of the Securities Act, (b) the shareholder
agrees not to sell or otherwise transfer the purchased shares unless they are
registered under the Securities Act and any applicable state securities laws, or
an exemption or exemptions from such registration are available, (c) the
shareholder has knowledge and experience in financial and business matters such
that he, she or it is capable of evaluating the merits and risks of an
investment in us, (d) the shareholder had access to all of our documents,
records, and books pertaining to the investment and was provided the opportunity
to ask questions and receive answers regarding the terms and conditions of the
offering and to obtain any additional information which we possessed or were
able to acquire without unreasonable effort and expense, and (e) the shareholder
has no need for the liquidity in its investment in us and could afford the
complete loss of such investment. Management made the determination that the
investors in instances where we relied on Regulation D are Accredited Investors
(as defined in Regulation D) based upon management’s inquiry into their
sophistication and net worth. In addition, there was no general solicitation or
advertising for securities issued in reliance upon Regulation D.
In
instances described above where we indicate that we relied upon Section 4(2) of
the Securities Act in issuing securities, our reliance was based upon the
following factors: (a) the issuance of the securities was an isolated private
transaction by us which did not involve a public offering; (b) there were only a
limited number of offerees; (c) there were no subsequent or contemporaneous
public offerings of the securities by us; (d) the securities were not broken
down into smaller denominations; and (e) the negotiations for the sale of the
stock took place directly between the offeree and us.
85
Item
16. Exhibits.
Exhibit No.
|
|
Description
|
1.1
|
Draft
Underwriting Agreement (7)
|
|
2.1
|
Share
Exchange Agreement by and between the Company and Merit Times
International Limited, dated October 22, 2009 (2)
|
|
3.1
|
Memorandum
of Association (1)
|
|
3.2
|
Amended
and Restated Memorandum of Association (1)
|
|
3.3
|
Articles
of Association (1)
|
|
3.4
|
Certificate of Incorporation on
Change of Name (9)
|
|
4.1
|
Form
of Warrant (2)
|
|
5.1
|
Opinion
of Conyers Dill & Pearman as to the legality of the
shares
|
|
10.1
|
Consulting
Services Agreement, dated June 10, 2009 (2)
|
|
10.2
|
Operating
Agreement, dated June 10, 2009 (2)
|
|
10.3
|
Proxy
Agreement, dated June 10, 2009 (2)
|
|
10.4
|
Option
Agreement, dated June 10, 2009 (2)
|
|
10.5
|
Option
Agreement, dated August 5, 2009 (2)
|
|
10.6
|
Equity
Pledge Agreement, dated June 10, 2009 (2)
|
|
10.7
|
Fund
Escrow Agreement, amongst the Company, Grandview Capital, Inc., Access
America Fund, LP and American Stock Transfer & Trust Company as escrow
agent, dated October 22, 2009 (2)
|
|
10.8
|
Investor
Relations Escrow Agreement, amongst the Company, Grandview Capital, Inc.,
Access America Fund, LP and Anslow & Jaclin, LLP as escrow agent,
dated October 22, 2009 (2)
|
|
10.9
|
Holdback
Escrow Agreement, amongst the Company, Grandview Capital, Inc., Access
America Fund, LP and Anslow & Jaclin, LLP as escrow agent, dated
October 22, 2009 (2)
|
|
10.10
|
Going
Public Escrow Agreement, amongst the Company, Grandview Capital, Inc.,
Access America Fund, LP and Anslow & Jaclin, LLP as escrow agent,
dated October 22, 2009 (4)
|
|
10.11
|
Make
Good Escrow Agreement, amongst the Company, Make Good Shareholder, Access
America Fund, LP and Anslow & Jaclin, LLP as escrow agent, dated
October 22, 2009 (4)
|
|
10.12
|
Lock-Up
Agreement, by and between the Company and Lockup Stockholder, dated
October 22, 2009 (2)
|
|
10.13
|
Translation
of Land Lease with Yejiabo Village, Zhaowangzhuang Town of Laiyang City
(4)
|
|
10.14
|
Translation
of Land Lease with Dongwulong Village, Zhaowangzhuang Town of Laiyang City
(4)
|
|
10.15
|
Translation
of Land Lease with JiadianVillage, Bolinzhuang Town of Laiyang City
(4)
|
|
10.16
|
Translation
of Land Lease with Beixiaoping Village, Bolinzhuang Town of Laiyang City
(4)
|
|
10.17
|
Translation
of Land Lease with Zhaojiabuzi Village, Heluo Town of Laiyang City
(4)
|
|
10.18
|
Translation
of Land Lease with Luergang Village, Zhaowangzhuang Town of Laiyang City
(4)
|
|
10.19
|
Translation
of sales agreement with Shandong Zhanhua Haohua Fruit Juice Co., Ltd.
(4)
|
|
10.20
|
Translation
of sales agreement with Qingdao Dongxu Xinshen Trading Co.
(4)
|
|
10.21
|
Translation
of sales agreement with Yantai Jinyuan Food Co., Ltd.
(4)
|
|
10.22
|
Translation
of Cooperative Agreement – Contract of Orchard Contracting and Management
(4)
|
|
10.23
|
Translation
of Cooperative Agreement (4)
|
|
10.24
|
Employment
Agreement between the Company and Larry X. Chin (5)
|
|
10.25
|
Construction
contract dated December 25, 2009 (6)
|
|
10.26
|
Employment
Agreement with Adam Wasserman (7)
|
|
10.27
|
Patent
Licensing Agreement with Zhide Jiang (7)
|
|
10.28
|
Director
Agreement with Mr. Barry Shapiro (8)
|
|
10.29
|
Director
Agreement with Mr. Chengrong Wang (8)
|
|
10.30
|
Director
Agreement with Mr. Maosen Cui (8)
|
|
21.1
|
List
of subsidiaries of the Registrant (3)
|
|
23.1
|
Consent
of Sherb & Co., LLP
|
|
23.2
|
Consent
of Conyers Dill & Pearman (included in Exhibit 5.1)
|
|
23.3
|
Opinion
and Consent of Allbright Law Offices
|
|
23.4
|
Consent
of Anslow & Jaclin, LLP
|
|
23.5
|
Consent
of Beijing Business & Intelligence Consulting Co.,
Ltd.
|
|
23.6
|
Consent
of China Economy Research Associates
|
|
23.7
|
Consent
of Beijing Zongheng Economy Research Institute
|
|
24.1
|
Power
of Attorney (included on the signature page of this Registration
Statement)
|
|
99.1
|
Translation
of Exclusive producer license from Laiyang city government
(4)
|
|
99.2
|
Translation
of 2006 – 2008 China’s Fruit Processing Industry Report issued by Beijing
Business & Intelligence Consulting Co. Ltd. (“BBIC
report”)
|
|
99.3
|
Translation
of Scientific and Technological Achievement Certificate - Technology
Research and Applications of Laiyang Pear Juice Concentrate’s Effective
Health and Medical Functions (10)
|
|
99.4
|
Translation
of Scientific and Technological Achievement Certificate - Production of
Bio Animal Feed from Fermented Fruit and Vegetable Wastes
(10)
|
|
99.5
|
Translation
of Industry Analysis Report of China Laiyang Pear Related Products issued
by Beijing Zongheng Economy Research Institute (“Industry Analysis
Report”) (10)
|
|
99.6
|
Translation
of The Forecasting and Analysis Report of the Market and Investment
Opportunities of China Fruit Juice Industry issued by China Economy
Research Associates (“CERA report”)
(10)
|
|
(1)
|
Incorporated herein by reference
to the Form 10 Registration Statement filed on July 14,
2006.
|
|
(2)
|
Incorporated herein by reference
to the current report on Form 8-K filed on October 27,
2009.
|
|
(3)
|
Incorporated herein by reference
to the registration statement on Form S-1 filed on November 20,
2009.
|
|
(4)
|
Incorporated herein by reference
to the registration statement on Form S-1/A filed on January 20,
2010.
|
|
(5)
|
Incorporated herein by reference
to the current report on Form 8-K filed on January 28,
2010.
|
|
(6)
|
Incorporated herein by reference
to the annual report on Form 10-K filed on March 31,
2010.
|
|
(7)
|
Incorporated herein by reference
to the registration statement on Form S-1/A filed on July 7,
2010.
|
|
(8)
|
Incorporated herein by reference
to the current report on Form 8-K filed on August 5,
2010
|
|
(9)
|
Incorporated herein by reference
to the current report on Form 8-K filed on September 8,
2010
|
|
(10)
|
Incorporated
herein by reference to the registration statement on Form S-1/A filed on
September 24, 2010.
|
86
Item
17. Undertakings
(A) The
undersigned Registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(a) To
include any prospectus required by Section 10(a) (3) of the Securities
Act;
(b) To
reflect in the prospectus any facts or events arising after the effective date
of this Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in this Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated maximum
offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in the
effective Registration Statement; and
(c) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement;
(2) That,
for the purpose of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser:
(a) Each
prospectus filed by the registrant pursuant to 424(b)(3) shall be deemed to be
part of the registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and
87
(b) Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or
(b)(7) as part of a registration statement in reliance on Rule 430B
relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for
the purpose of providing the information required by section 10(a) of the
Securities Act of 1933 shall be deemed to be part of and included in the
registration statement as of the earlier of the date such form of prospectus is
first used after effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As provided in
Rule 430B, for liability purposes of the issuer and any person that is at
that date an underwriter, such date shall be deemed to be a new effective date
of the registration statement relating to the securities in the registration
statement to which that prospectus relates, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof. Provided, however, that no statement
made in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such
effective date, supersede or modify any statement that was made in the
registration statement or prospectus that was part of the registration statement
or made in any such document immediately prior to such
effective date.
(5) That,
for the purpose of determining liability of the registrant under the Securities
Act of 1933 to any purchaser in the initial distribution of the
securities:
The
undersigned registrant undertakes that in a primary offering of securities of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(a) Any
preliminary prospectus or prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424;
(b) Any
free writing prospectus relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned
registrant;
(c) The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
(d) Any
other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
(B)
The
undersigned Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Registrant’s annual
report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where
applicable, each filing of an employee benefit plan’s annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in
this Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(C)
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
88
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Laiyang, China, on the
2nd day
of November, 2010.
ORIENTAL
DRAGON CORPORATION
|
||
By:
|
/s/ Zhide Jiang
|
|
Zhide
Jiang
President,
Chief Executive Officer,
and
Chairman of the Board of
Directors
|
POWER
OF ATTORNEY
Pursuant
to the requirements of the Securities Act, this registration statement has been
signed by the following persons in the capacities and on the dates indicated.
Each person whose signature appears below constitutes and appoints Zhide Jiang,
and each of them individually, his or her true and lawful attorney-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this registration
statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or any of them, or their or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Name
|
Title
|
Date
|
||
/s/ Zhide Jiang
|
President,
Chief Executive Officer and
|
November
2, 2010
|
||
Zhide
Jiang
|
Chairman
of the Board of Directors
|
|||
/s/ Adam Wasserman
|
Chief
Financial Officer and
|
November
2, 2010
|
||
Adam
Wasserman
|
Principal
Accounting Officer
|
|||
|
||||
/s/ Lili Jiang
|
Director
|
November
2, 2010
|
||
Lili
Jiang
|
||||
/s/ Barry Shapiro
|
Director
|
November
2, 2010
|
||
Barry
Shapiro
|
||||
/s/ ChengRong Wang
|
Director
|
November
2, 2010
|
||
ChengRong
Wang
|
||||
/s/ MaoSen Cui
|
Director
|
November
2, 2010
|
||
MaoSen
Cui
|
89
EXHIBIT
INDEX
Exhibit No.
|
|
Description
|
1.1
|
Draft
Underwriting Agreement (7)
|
|
2.1
|
Share
Exchange Agreement by and between the Company and Merit Times
International Limited, dated October 22, 2009 (2)
|
|
3.1
|
Memorandum
of Association (1)
|
|
3.2
|
Amended
and Restated Memorandum of Association (1)
|
|
3.3
|
Articles
of Association (1)
|
|
3.4
|
Certificate of Incorporation on
Change of Name (9)
|
|
4.1
|
Form
of Warrant (2)
|
|
5.1
|
Opinion
of Conyers Dill & Pearman as to the legality of the
shares
|
|
10.1
|
Consulting
Services Agreement, dated June 10, 2009 (2)
|
|
10.2
|
Operating
Agreement, dated June 10, 2009 (2)
|
|
10.3
|
Proxy
Agreement, dated June 10, 2009 (2)
|
|
10.4
|
Option
Agreement, dated June 10, 2009 (2)
|
|
10.5
|
Option
Agreement, dated August 5, 2009 (2)
|
|
10.6
|
Equity
Pledge Agreement, dated June 10, 2009 (2)
|
|
10.7
|
Fund
Escrow Agreement, amongst the Company, Grandview Capital, Inc., Access
America Fund, LP and American Stock Transfer & Trust Company as escrow
agent, dated October 22, 2009 (2)
|
|
10.8
|
Investor
Relations Escrow Agreement, amongst the Company, Grandview Capital, Inc.,
Access America Fund, LP and Anslow & Jaclin, LLP as escrow agent,
dated October 22, 2009 (2)
|
|
10.9
|
Holdback
Escrow Agreement, amongst the Company, Grandview Capital, Inc., Access
America Fund, LP and Anslow & Jaclin, LLP as escrow agent, dated
October 22, 2009 (2)
|
|
10.10
|
Going
Public Escrow Agreement, amongst the Company, Grandview Capital, Inc.,
Access America Fund, LP and Anslow & Jaclin, LLP as escrow agent,
dated October 22, 2009 (4)
|
|
10.11
|
Make
Good Escrow Agreement, amongst the Company, Make Good Shareholder, Access
America Fund, LP and Anslow & Jaclin, LLP as escrow agent, dated
October 22, 2009 (4)
|
|
10.12
|
Lock-Up
Agreement, by and between the Company and Lockup Stockholder, dated
October 22, 2009 (2)
|
|
10.13
|
Translation
of Land Lease with Yejiabo Village, Zhaowangzhuang Town of Laiyang City
(4)
|
|
10.14
|
Translation
of Land Lease with Dongwulong Village, Zhaowangzhuang Town of Laiyang City
(4)
|
|
10.15
|
Translation
of Land Lease with JiadianVillage, Bolinzhuang Town of Laiyang City
(4)
|
|
10.16
|
Translation
of Land Lease with Beixiaoping Village, Bolinzhuang Town of Laiyang City
(4)
|
|
10.17
|
Translation
of Land Lease with Zhaojiabuzi Village, Heluo Town of Laiyang City
(4)
|
|
10.18
|
Translation
of Land Lease with Luergang Village, Zhaowangzhuang Town of Laiyang City
(4)
|
|
10.19
|
Translation
of sales agreement with Shandong Zhanhua Haohua Fruit Juice Co., Ltd.
(4)
|
|
10.20
|
Translation
of sales agreement with Qingdao Dongxu Xinshen Trading Co.
(4)
|
|
10.21
|
Translation
of sales agreement with Yantai Jinyuan Food Co., Ltd.
(4)
|
|
10.22
|
Translation
of Cooperative Agreement – Contract of Orchard Contracting and Management
(4)
|
|
10.23
|
Translation
of Cooperative Agreement (4)
|
|
10.24
|
Employment
Agreement between the Company and Larry X. Chin (5)
|
|
10.25
|
Construction
contract dated December 25, 2009 (6)
|
|
10.26
|
Employment
Agreement with Adam Wasserman (7)
|
|
10.27
|
Patent
Licensing Agreement with Zhide Jiang (7)
|
|
10.28
|
Director
Agreement with Mr. Barry Shapiro (8)
|
|
10.29
|
Director
Agreement with Mr. Chengrong Wang (8)
|
|
10.30
|
Director
Agreement with Mr. Maosen Cui (8)
|
|
21.1
|
List
of subsidiaries of the Registrant (3)
|
|
23.1
|
Consent
of Sherb & Co., LLP
|
|
23.2
|
Consent
of Conyers Dill & Pearman (included in Exhibit 5.1)
|
|
23.3
|
Opinion
and Consent of Allbright Law Offices
|
|
23.4
|
Consent
of Anslow & Jaclin, LLP
|
|
23.5
|
Consent
of Beijing Business & Intelligence Consulting Co.,
Ltd.
|
|
23.6
|
Consent
of China Economy Research Associates
|
|
23.7
|
Consent
of Beijing Zongheng Economy Research Institute
|
|
24.1
|
Power
of Attorney (included on the signature page of this Registration
Statement)
|
|
99.1
|
Translation
of Exclusive producer license from Laiyang city government
(4)
|
|
99.2
|
Translation
of 2006 – 2008 China’s Fruit Processing Industry Report issued by Beijing
Business & Intelligence Consulting Co. Ltd. (“BBIC
report”)
|
|
99.3
|
Translation
of Scientific and Technological Achievement Certificate - Technology
Research and Applications of Laiyang Pear Juice Concentrate’s Effective
Health and Medical Functions (10)
|
|
99.4
|
Translation
of Scientific and Technological Achievement Certificate - Production of
Bio Animal Feed from Fermented Fruit and Vegetable Wastes
(10)
|
|
99.5
|
Translation
of Industry Analysis Report of China Laiyang Pear Related Products issued
by Beijing Zongheng Economy Research Institute (“Industry Analysis
Report”) (10)
|
|
99.6
|
Translation
of The Forecasting and Analysis Report of the Market and Investment
Opportunities of China Fruit Juice Industry issued by China Economy
Research Associates (“CERA report”)
(10)
|
|
(1)
|
Incorporated herein by reference
to the Form 10 Registration Statement filed on July 14,
2006.
|
|
(2)
|
Incorporated herein by reference
to the current report on Form 8-K filed on October 27,
2009.
|
|
(3)
|
Incorporated herein by reference
to the registration statement on Form S-1 filed on November 20,
2009.
|
|
(4)
|
Incorporated herein by reference
to the registration statement on Form S-1/A filed on January 20,
2010.
|
|
(5)
|
Incorporated herein by reference
to the current report on Form 8-K filed on January 28,
2010.
|
|
(6)
|
Incorporated herein by reference
to the annual report on Form 10-K filed on March 31,
2010.
|
|
(7)
|
Incorporated herein by reference
to the registration statement on Form S-1/A filed on July 7,
2010.
|
|
(8)
|
Incorporated herein by reference
to the current report on Form 8-K filed on August 5,
2010
|
|
(9)
|
Incorporated
herein by reference to the current report on Form 8-K filed on September
8, 2010
|
|
(10)
|
Incorporated
herein by reference to the registration statement on Form S-1/A filed on
September 24, 2010.
|
90