Attached files
file | filename |
---|---|
EX-32.2 - Granto, Inc. | v206217_ex32-2.htm |
EX-31.1 - Granto, Inc. | v206217_ex31-1.htm |
EX-31.2 - Granto, Inc. | v206217_ex31-2.htm |
EX-32.1 - Granto, Inc. | v206217_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(MARK
ONE)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED September 30,
2010.
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE TRANSITION PERIOD FROM ________ TO
__________
|
COMMISSION
FILE NUMBER: 333-150388
Rongfu
Aquaculture, Inc.
(EXACT
NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA
|
98-0655634
|
|
(STATE
OR OTHER JURISDICTION OF
|
(I.R.S.
EMPLOYER IDENTIFICATION NO.)
|
|
INCORPORATION
OR ORGANIZATION
|
Dongdu
Room 321, No. 475 Huanshidong Road
Gaungzhou
City, People’s Republic of China 510075
(ADDRESS
OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT’S
TELEPHONE NUMBER, INCLUDING AREA CODE:
011-86-20-8762-1778
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x
No o .
Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
Registrant was required to submit and post such files). Yes o
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
|
Accelerated
filer
o
|
Non-accelerated
filer
o
|
Smaller
reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.) Yes o No x
The
number of shares of Common Stock of the Registrant, par value $.001 per share,
outstanding on December 22, 2010 was 21,286,789.
RONGFU
AQUACULTURE, INC.
INDEX
TO SEPTEMBER 30, 2010 FORM 10-Q
Page
Number
|
||
Part
I - Financial Information
|
3
|
|
Item
1 - Financial Statements
|
F-1
|
|
Consolidated
Balance Sheets as of September 30, 2010 (unaudited) and December 31,
2009 (restated)
|
F-1
|
|
Consolidated
Statements of Income for the Three Months and Nine Months ended
September 30, 2010 and 2009 (unaudited)
|
F-2
|
|
Consolidated
Statements of Cash Flows for the Nine Months ended September 30, 2010
and 2009 (unaudited)
|
F-3
|
|
Consolidated
Statement of Stockholders’ Equity for the Nine Months Ended
September 30, 2010 and the Year Ended December 31, 2009
|
F-4
|
|
Notes
to the Consolidated Financial Statements (unaudited)
|
F-5
|
|
Item
2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition
|
4
|
|
Item
4 - Controls and Procedures
|
10
|
|
Part
II - Other Information
|
10
|
|
Item
2 - Unregistered Sales of Equity Securities and Use of
Proceeds
|
10
|
|
Item
6 - Exhibits
|
11
|
|
Signature
Page
|
12
|
2
PART
I - FINANCIAL INFORMATION
FORWARD-LOOKING
STATEMENTS
The discussions of the business and
activities of Rongfu Aquaculture, Inc. (“we,” “us,” “our” or “the Company”) set
forth in this Form 10-Q and in other past and future reports and announcements
by the Company may contain forward-looking statements and assumptions regarding
future activities and results of operations of the Company. You can
identify these statements by the fact that they do not relate strictly to
historical or current facts. Forward-looking statements involve risks and
uncertainties. Forward-looking statements include statements regarding, among
other things, (a) our projected sales, profitability, and cash flows, (b) our
growth strategies, (c) anticipated trends in our industry, (d) our future
financing plans and (e) our anticipated needs for working capital. They are
generally identifiable by use of the words "may," "will," "should,"
"anticipate," "estimate," "plans," “potential," "projects," "continuing,"
"ongoing," "expects," "management believes," "we believe," "we intend" or the
negative of these words or other variations on these words or comparable
terminology. These statements may be found under "Management's Discussion and
Analysis of Financial Condition and Results of Operations” as well as in this
Form 10-Q generally. In particular, these include statements relating to future
actions, prospective products or product approvals, future performance or
results of current and anticipated products, sales efforts, expenses, the
outcome of contingencies such as legal proceedings, and financial
results.
Any or
all of our forward-looking statements in this report may turn out to be
inaccurate. They can be affected by inaccurate assumptions we might make or by
known or unknown risks or uncertainties. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially as a
result of various factors, including, without limitation, the risks outlined
under "Risk Factors" and matters described in the most recent Form 10-K filed by
the Company. In light of these risks and uncertainties, there can be no
assurance that the forward-looking statements contained in this filing will in
fact occur. You should not place undue reliance on these forward-looking
statements.
We undertake no obligation to update
forward-looking statements to reflect subsequent events, changed circumstances,
or the occurrence of unanticipated events.
3
Item
1. Financial Statements
RONGFU
AQUACULTURE, INC
CONSOLIDATED
BALANCE SHEETS
AS
OF SEPTEMBER 30, 2010 AND DECEMBER 31, 2009
9/30/2010
|
12/31/2009
|
|||||||
|
(unaudited)
|
(audited
&
restated)
|
||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
|
$ | 6,695,287 | $ | 3,194,248 | ||||
Accounts
receivable
|
1,604,553 | 236,374 | ||||||
Inventories
|
10,905,977 | 2,979,753 | ||||||
Due
from shareholders
|
- | 4,008,659 | ||||||
Other
receivable
|
1,321,356 | 21,208 | ||||||
Trade
deposit
|
121,224 | |||||||
Prepaid
expenses
|
653,372 | 230,247 | ||||||
Total
Current Assets
|
21,180,545 | 10,791,713 | ||||||
Fixed
assets
|
868,448 | 405,147 | ||||||
Biological
assets
|
248,811 | 432,808 | ||||||
Total
Assets
|
$ | 22,297,804 | $ | 11,629,668 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$ | 5,036,460 | $ | - | ||||
Other
payable
|
552,475 | 2,743,960 | ||||||
Advance
from clients
|
- | 498,785 | ||||||
Short-term
bank loan
|
- | 380,273 | ||||||
Dividend
payable
|
- | 3,466,331 | ||||||
Income
tax payable
|
301,419 | 995,313 | ||||||
Derivative
liability
|
9,519,051 | - | ||||||
Total
Current Liabilities
|
15,409,405 | 8,084,662 | ||||||
Long-term
bank loan
|
- | 1,170,070 | ||||||
Total
liabilities
|
15,409,405 | 9,254,732 | ||||||
Temporary
equity:
|
||||||||
Redeemable
preferred stock, par value $0.001 per share, 2,768,721 issued at September
30, 2010 and 0 at December 31, 2009
|
7,700,000 | - | ||||||
Stockholders'
Equity
|
||||||||
Common
stock, par value, $0.001 per share, 90,000,000 shares authorized,
21,286,789 and 19,623,889 shares issued and outstanding at September 30,
2010 and December 31, 2009, respectively
|
21,287 | 19,624 | ||||||
Additional
paid in capital
|
1,056,365 | 797,808 | ||||||
Statutory
reserve
|
1,076,310 | 1,051,089 | ||||||
Other
comprehensive income
|
1,265,959 | 866,699 | ||||||
Accumulated
deficit
|
(4,231,522 | ) | (360,284 | ) | ||||
Total
Stockholders' Equity
|
(811,601 | ) | 2,374,936 | |||||
Total
Liabilities and Stockholders' Equity
|
$ | 22,297,804 | $ | 11,629,668 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-1
RONGFU
AQUACULTURE, INC.
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
Nine
Months Ended September 30,
|
Three
Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenue,
net
|
$ | 35,369,699 | $ | 21,731,927 | $ | 12,816,275 | $ | 4,763,650 | ||||||||
Cost
of goods sold
|
23,576,353 | 13,323,764 | 9,129,968 | 3,135,757 | ||||||||||||
Gross
profit
|
11,793,346 | 8,408,163 | 3,686,307 | 1,627,893 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling
expenses
|
1,299,046 | 491,112 | 457,315 | 201,031 | ||||||||||||
General
and administrative expenses
|
1,956,142 | 1,336,945 | 1,016,378 | 261,875 | ||||||||||||
Research
and development cost
|
104,255 | 56,437 | 65,612 | 21,295 | ||||||||||||
Total
operating expenses
|
3,359,443 | 1,884,494 | 1,539,305 | 484,201 | ||||||||||||
Net
income from operations
|
8,433,903 | 6,523,669 | 2,147,002 | 1,143,692 | ||||||||||||
Other
income (expenses)
|
||||||||||||||||
Loss
on Fair value of derivative liability
|
(6,251,254 | ) | - | (943,266 | ) | - | ||||||||||
Interest
income
|
10,584 | 35,510 | 3,970 | 14,670 | ||||||||||||
Interest
expense
|
(35,678 | ) | (87,436 | ) | (837 | ) | (86,986 | ) | ||||||||
Total
other (expenses) income
|
(6,276,348 | ) | (51,926 | ) | (940,133 | ) | (72,316 | ) | ||||||||
Net
income before income taxes
|
2,157,555 | 6,471,743 | 1,206,869 | 1,071,376 | ||||||||||||
Income
taxes
|
790,416 | 446,572 | 301,832 | 67,667 | ||||||||||||
Net
income
|
1,367,139 | 6,025,171 | 905,037 | 1,003,709 | ||||||||||||
Deemed
dividend from beneficial conversion feature of
|
||||||||||||||||
Series
A preferred stock
|
(4,374,579 | ) | - | - | - | |||||||||||
Dividends
paid or declared
|
(838,577 | ) | - | (78,477 | ) | - | ||||||||||
Net
income (loss) available to common shareholders
|
$ | (3,846,017 | ) | $ | 6,025,171 | $ | 826,560 | $ | 1,003,709 | |||||||
Net
income for common share
|
||||||||||||||||
Earnings
per share – Basic
|
$ | (0.19 | ) | $ | 0.31 | $ | 0.04 | $ | 0.05 | |||||||
Earnings
per share – Diluted
|
$ | (0.19 | ) | $ | 0.31 | $ | 0.04 | $ | 0.05 | |||||||
Weighted
average common shares outstanding
|
||||||||||||||||
Basic
|
20,756,854 | 19,623,889 | 21,286,789 | 19,623,889 | ||||||||||||
Diluted
|
20,756,854 | 19,623,889 | 21,286,789 | 19,623,889 | ||||||||||||
Net
income
|
$ | 1,367,139 | $ | 6,025,171 | $ | 905,037 | $ | 1,003,709 | ||||||||
Other
comprehensive income
|
399,260 | 18,092 | 497,756 | 195,901 | ||||||||||||
Comprehensive
income
|
$ | 1,766,399 | $ | 6,043,263 | $ | 1,402,793 | $ | 1,199,610 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-2
RONGFU
AQUACULTURE INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net Income
|
$
|
1,367,139
|
$
|
6,025,171
|
||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
|
63,818
|
69,050
|
||||||
Amortization
of biological assets
|
350,084
|
306,613
|
||||||
Change
in Derivative liability value
|
6,251,254
|
-
|
||||||
Professional
fee in connection with the issuance of shares
|
192,361
|
|||||||
(Increase)
/ decrease in assets:
|
||||||||
Accounts
receivables
|
(1,350,580
|
)
|
4,319,397
|
|||||
Inventories
|
(7,791,868
|
)
|
(2,598,949
|
)
|
||||
Prepaid
expense and other receivables
|
(4,967,738
|
)
|
74,559
|
|||||
Trade
deposit
|
122,525
|
-
|
||||||
Due
from shareholder
|
4,051,681
|
(2,120,712
|
)
|
|||||
Increase
/ (decrease) in current liabilities:
|
||||||||
Accounts
payable
|
4,989,183
|
1,072,821
|
||||||
Other
payable
|
848,419
|
444,127
|
||||||
Advances
from clients
|
(504,138
|
)
|
507,756
|
|||||
Income
taxes payable
|
(707,406
|
)
|
(588,817
|
)
|
||||
Net
cash provided by operating activities
|
2,914,734
|
7,511,016
|
||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchased
fixed assets
|
(560,985
|
)
|
(69,205
|
)
|
||||
Purchased
biological assets
|
(166,087
|
)
|
-
|
|||||
Net
cash used by investing activities
|
(727,072
|
)
|
(69,205
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Due
to shareholder
|
-
|
(8,520,267
|
)
|
|||||
Borrowings
of short-term bank loan
|
734,268
|
643,171
|
||||||
Payment
of short-term bank loan
|
(1,114,541
|
)
|
-
|
|||||
Borrowings
of long-term bank loan
|
-
|
1,169,403
|
||||||
Payment
of long-term bank loan
|
(1,170,070
|
)
|
-
|
|||||
Dividend
paid
|
(4,305,517
|
)
|
(14,024,570
|
)
|
||||
Proceeds
from issuance of preferred stock
|
6,561,077
|
-
|
||||||
Net
cash provided (used) by financing activities
|
705,217
|
(20,732,263
|
)
|
|||||
Effect
of exchange rate changes on cash and cash equivalents
|
608,160
|
56,062
|
||||||
Net
change in cash and cash equivalents
|
3,501,039
|
(13,234,390
|
)
|
|||||
Cash
and cash equivalents, beginning balance
|
3,194,248
|
14,823,476
|
||||||
Cash
and cash equivalents, ending balance
|
$
|
6,695,287
|
$
|
1,589,086
|
||||
SUPPLEMENTAL
DISCLOSURES:
|
||||||||
Cash
paid during the period for:
|
||||||||
Income
tax payments
|
$
|
1,725,765
|
$
|
1,236,816
|
||||
Interest
payments
|
$
|
70,519
|
$
|
87,102
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
RONGFU
AQUACULTURE, INC.
CONSOLIDATED STATEMENT
OF STOCKHOLDERS' EQUITY
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND THE YEAR ENDED DECEMBER
31, 2009
(UNAUDITED)
Additional
|
Other
|
Total
|
||||||||||||||||||||||||||
Common
Stock
|
Paid-in
|
Comprehensive
|
Statutory
|
Accumulated
|
Stockholders
|
|||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Income
|
Reserves
|
Deficit
|
Equity
|
||||||||||||||||||||||
Balance
December 31, 2009
|
19,623,889
|
$
|
19,624
|
$
|
797,808
|
$
|
866,699
|
$
|
1,051,089
|
$
|
(360,284
|
)
|
$
|
2,374,936
|
||||||||||||||
Foreign
currency translation adjustments
|
399,260
|
399,260
|
||||||||||||||||||||||||||
Issuance
of warrants
|
(3,267,797
|
)
|
(3,267,797
|
)
|
||||||||||||||||||||||||
Syndication
costs associated with preferred stock purchase agreement
|
(1,038,923
|
)
|
(1,038,923
|
)
|
||||||||||||||||||||||||
Stock
based compensation –issued in conjunction with professional services
rendered
|
191,174
|
191,174
|
||||||||||||||||||||||||||
Stock
based compensation –issued in conjunction with financing
|
1,662,900
|
1,663
|
927,872
|
929,535
|
||||||||||||||||||||||||
Syndication
costs associated with financing
|
(928,348
|
)
|
(928,348
|
)
|
||||||||||||||||||||||||
Dividends
Paid or Declared
|
(838,577
|
)
|
(838,577
|
)
|
||||||||||||||||||||||||
Transferred
to Statutory reserve
|
25,221
|
(25,221
|
)
|
-
|
||||||||||||||||||||||||
Deemed dividend
|
4,374,579
|
(4,374,579
|
)
|
-
|
||||||||||||||||||||||||
Income
for the nine months ended September 30, 2009
|
1,367,139
|
1367,139
|
||||||||||||||||||||||||||
Balance
September 30, 2010
|
21,286,789
|
$
|
21,287
|
$
|
1,056,365
|
$
|
1,265,959
|
$
|
1,076,310
|
$
|
(4,231,522
|
)
|
$
|
(811,601
|
)
|
|||||||||||||
Balance
December 31, 2008
|
19,623,889
|
$
|
19,624
|
$
|
797,808
|
$
|
861,166
|
$
|
665,852
|
$
|
12,653,251
|
$
|
14,997,701
|
|||||||||||||||
Foreign
currency translation adjustments
|
5,533
|
5,533
|
||||||||||||||||||||||||||
Transferred
to Statutory reserve
|
385,237
|
(385,237
|
)
|
-
|
||||||||||||||||||||||||
Dividend
paid or declared
|
(25,704,486
|
)
|
(25,704,486
|
)
|
||||||||||||||||||||||||
Income
for the year ended December 31, 2009
|
13,076,188
|
13,076,188
|
||||||||||||||||||||||||||
Balance
December 31, 2009
|
19,623,889
|
$
|
19,624
|
$
|
797,808
|
$
|
866,699
|
$
|
1,051,089
|
$
|
(360,284
|
)
|
$
|
2,374,936
|
The
accompanying notes are an integral part of these consolidated financial
statements
F-4
RONGFU
AQUACULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
1 - ORGANIZATION
Rongfu
Aquaculture, Inc., formerly named Granto, Inc (the “Company”) was incorporated
in Nevada on February 29, 2008. On March 29, 2010, the Company entered into a
Share Exchange Agreement with Rongfu Aquaculture, Inc. (“Rongfu”), certain
stockholders and warrant holders of Rongfu (the “Rongfu Stockholders”) and
a stockholder of Granto (the “Share Exchange Agreement”). Pursuant to the
Share Exchange Agreement, on March 29, 2010, 9 Rongfu Stockholders transferred
100% of the outstanding shares of common stock and 100% of the warrants to
purchase common stock of Rongfu held by them, in exchange for an aggregate of
18,623,889 newly issued shares of our Common Stock held by them (the “Share
Exchange Transaction”). In addition the shareholders received warrants to
purchase an aggregate of 666,666 shares of our Common Stock. In connection with
the closing of the Share Exchange Agreement, the former principal stockholder
agreed to and did cancel 1,150,000 of the 1,200,000 shares of Granto, Inc.
Common Stock held by her.
On March
29, 2010, the Company completed its merger with Rongfu in accordance with the
Share Exchange Agreement. The Share Exchange Transaction is being
accounted for as a reverse acquisition. In accordance with the Accounting and
Financial Reporting Interpretations and Guidance prepared by the staff of the
U.S. Securities and Exchange Commission, the Company (the legal acquirer) is
considered the accounting acquiree and Rongfu (the legal acquiree) is considered
the accounting acquirer for accounting purposes. Subsequent to the Share
Exchange Transaction, the financial statements of the combined entity will in
substance be those of Rongfu. The assets, liabilities and historical operations
prior to the share exchange transaction will be those of Rongfu. Subsequent to
the date of the Share Exchange Transaction, Rongfu is deemed to be a
continuation of the business of the Company. Therefore post-exchange financial
statements will include the combined balance sheet of the Company and Rongfu,
the historical operations of Rongfu and the operations of the Company and Rongfu
from the closing date of the Share Exchange Transaction forward.
Rongfu
was incorporated in Delaware on January 13, 2009. Flourishing Blessing (Hong
Kong) Co., Ltd. (“Hong Kong Rongfu”) was incorporated on November 11, 2008.
Pursuant to a Share Exchange Agreement, dated as of December 29, 2009,
(the “December 2009 Agreement") all of the shareholders of Hong Kong Rongfu
exchanged all of the outstanding shares of Hong Kong Rongfu for shares of common
stock of Rongfu and Rongfu became the owner of 100% of the outstanding capital
stock of Hong Kong Rongfu. Hong Kong Rongfu owns 100% of the capital stock of
Guangzhou Flourishing Blessing Hansen Agriculture Technology Limited (“Guangzhou
Flourishing”). Guangzhou Flourishing is a wholly foreign-owned enterprise, or
“WFOE,” under the laws of the People’s Republic of China (“PRC”) by virtue
of its status as a wholly-owned subsidiary of a non-PRC company, Hong Kong
Rongfu. In connection with the closing of the December 2009
Agreement, Guangzhou Flourishing entered into and consummated a
series of agreements (the "Contractual Agreements”),with Chen Zhisheng and
Foshan Nanhai Ke Da Heng Sheng Aquatic Co., Ltd. (“Nanhai Ke Da Heng
Sheng”). Under the Contractual Agreements, Guangzhou Flourishing
agreed to assume control of the operations and management of Nanhai Ke Da Heng
Sheng in exchange for a management fee equal to Nanhai Ke Da Heng Sheng’s
earnings before taxes. As a result, the business of Nanhai Ke Da Heng
Sheng and Hainan Ke Da Heng Sheng Aquit Germchit Co., Ltd.,
a PRC corporation (“Hainan Ke Da Heng Sheng”) , 70% of the outstanding
stock of which is owned by Nanhai Ke Da Heng Sheng, will be conducted
by Guangzhou Flourishing. We anticipate that Nanhai Ke Da Heng Sheng and Hainan
Ke Da Heng Sheng will continue to be the contracting parties under their
customer contracts, bank loans and certain other assets until such time as those
may be transferred to Guangzhou Flourishing. Nanhai Ke Da Heng Sheng
was formed in the PRC on April 30, 2003 as a limited liability company (a
company solely owned by a natural person). Hainan Ke Da Heng Sheng was formed in
the PRC on August 6, 2007 as a limited liability company. Guangzhou Flourishing
was incorporated in the PRC on January 9, 2009 as a WFOE.
The
Contractual Agreements completed in December 2009 provide that Guangzhou
Flourishing has controlling interest in Nanhai Ke Da Heng Sheng under FASB
Accounting Standards Codification “Consolidation of Variable Interest Entities”,
an Interpretation of an Accounting Research Bulletin, which requires Guangzhou
Flourishing to consolidate the financial statements of Nanhai Ke Da Heng Sheng
and Hainan Ke Da Heng Shen and ultimately consolidate with its parent company,
Rongfu Aquaculture, Inc.
F-5
RONGFU
AQUACULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,
2010
(UNAUDITED)
Note
1 – ORGANIZATION –(CONTINUED)
The
Company, through its subsidiaries, and Contractual Agreements, is engaged in
integrated business of aquaculture including Tilapia brood stock, Tilapia fry,
Tilapia farming, and marketing for Tilapia. It is specializing in the production
of the Hengsheng Brand Nile Tilapia and the new licensed New Jifu
Tilapia.
In the
opinion of the management of the Company, the accompanying consolidated interim
financial statements contain all material adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the consolidated financial
position of the Company at September 30, 2010 and the results of its operations
for the nine and three month periods ended September 30, 2010 and 2009 and its
cash flows for the nine month periods September 30, 2010 and 2009. Actual
results may differ from these estimates as a result of different assumptions or
conditions.
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
and represent the pro forma historical results of the consolidated group. The
Company adopted the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (the “Codification”) on July 1, 2009. For the nine months
ended September 30, 2010, all reference for periods subsequent to January
1, 2010 is based on the Codification. The Company's functional currency is the
Chinese Renminbi, however the accompanying consolidated financial statements
have been translated and presented in United States Dollars.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Rongfu
Aquaculture, Inc. and its wholly owned subsidiaries, Hong Kong Rongfu,
Guangzhou Flourishing, Nanhai Ke Da Heng Sheng, and Hainan Ke Da Heng Sheng
(collectively referred to herein as the” Company”). All material
inter-company accounts, transactions and profits have been eliminated in
consolidation. The Company has adopted the Consolidation Topic of the FASB
Accounting Standards Codification which requires a variable interest entity
(“VIE”) to be consolidated by a company if that company is subject to a majority
of the risk of loss for the VIE or is entitled to receive a majority of the
VIE’s residual returns.
Translation
Adjustment
As of
September 30, 2010 and December 31, 2009, the accounts of the Company were
maintained, and its financial statements were expressed, in Chinese Yuan
Renminbi (“CNY”). Such financial statements were translated into U.S. Dollars
(“USD”) in accordance with the Foreign Currency Matters Topic of the
Codification, with the CNY as the functional currency. According to the
Codification, all assets and liabilities were translated at the current exchange
rate, stockholders’ equity are translated at the historical rates and income
statement items are translated at the average exchange rate for the period. The
resulting translation adjustments are reported under other comprehensive income
in accordance with the Comprehensive Income Topic of the Codification, as a
component of shareholders’ equity. Transaction gains and losses are reflected in
the income statement.
Statement
of Cash Flows
In
accordance with the Statement of Cash Flows Topic of the Codification, cash
flows from the Company’s operations are based upon the local currencies. As a
result, amounts related to assets and liabilities reported on the statement of
cash flows will not necessarily agree with changes in the corresponding balances
on the balance sheet.
F-6
RONGFU
AQUACULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Comprehensive
Income
The
Company follows the Comprehensive Income Topic of the Codification.
Comprehensive income is a more inclusive financial reporting methodology that
includes disclosure of certain financial information that historically has not
been recognized in the calculation of net income.
Risks and
Uncertainties
The
Company’s operations are carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, by the general state of
the PRC’s economy. The Company’s business may be influenced by changes in
governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.
Contingencies
Certain
conditions may exist as of the date the financial statements are issued, which
may result in a loss to the Company but which will only be resolved when one or
more future events occur or fail to occur. The Company’s management and legal
counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to
legal proceedings that are pending against the Company or unasserted claims that
may result in such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be sought. There
were no contingencies of this type as of September 30, 2010 and December 31,
2009.
If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial statements. If
the assessment indicates that a potential material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material would be
disclosed. There were no contingencies of this type as of September 30,
2010 and December 31, 2009.
Loss
contingencies considered to be remote by management are generally not disclosed
unless they involve guarantees, in which case the guarantee would be
disclosed.
Cash and
Cash Equivalents
Cash and
cash equivalents include cash in hand and cash in time deposits, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
F-7
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts
Receivable
The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Reserves are recorded primarily on a specific
identification basis. There were no allowances for doubtful accounts as of
September 30, 2010 and December 31, 2009.
Inventories
Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market. As of September 30, 2010 and December 31, 2009, inventories consist of
the following:
9/30/2010
|
12/31/2009
|
|||||||
Raw
materials
|
$ | 20,643 | $ | 47,185 | ||||
Work
in process and finished goods
|
10,885,334 | 2,932,568 | ||||||
Total
|
$ | 10,905,977 | $ | 2,979,753 |
Property,
Plant & Equipment
Property
and equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. Depreciation of
property and equipment is provided using the straight-line method for
substantially all assets with estimated lives of:
Buildings
|
10-20
years
|
Fishing
gear
|
5-10 years
|
Transportation
equipment
|
5-10
years
|
Office
equipment
|
3-5
years
|
F-8
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
As of
September 30, 2010 and December 31, 2009, Property, Plant & Equipment
consist of the following:
9/30/2010
|
12/31/2009
|
|||||||
Buildings
|
$
|
214,466
|
$
|
73,631
|
||||
Fishing
gear
|
758,351
|
424,938
|
||||||
Transportation
equipment
|
37,330
|
37,330
|
||||||
Office
equipment
|
126,840
|
40,102
|
||||||
Total
|
1,136,987
|
576,001
|
||||||
Accumulated
depreciation
|
(268,539
|
)
|
(170,854
|
)
|
||||
$
|
868,448
|
$
|
405,147
|
Depreciation
expense for the nine months ended September 30, 2010 and 2009 was $63,818 and
$69,050, respectively.
Long-Lived
Assets
The
Company adopted the Property, Plant and Equipment Topic of the Codification,
which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes previous accounting guidance,
“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of,” and “Reporting the Results of Operations for a Disposal of a
Segment of a Business.” The Company periodically evaluates the carrying value of
long-lived assets to be held and used, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets carrying amounts. In that event, a loss is
recognized based on the amount by which the carrying amount exceeds the fair
market value of the long-lived assets. Loss on long-lived assets to be disposed
of is determined in a similar manner, except that fair market values are reduced
for the cost of disposal. Based on its review, the Company believes
that, as of September 30, 2010, there were no impairments of its long-lived
assets.
Derivative
Liability
The
Company issued warrants in connection with the Share Exchange Agreement and
Series A Preferred Stock Purchase Agreement dated March 29, 2010 (the
“Stock Purchase Agreement”).
The
Company determined that the warrants did not qualify for a scope exception under
ASC 815 as they were determined to not be indexed to the Company’s stock as
prescribed by ASC 815. The warrants, under ASC 815, were classified
as derivative liability for the then relative fair market value of $3,267,797
and marked to market. For the nine months ended September 30, 2010,
the Company recorded a loss on change in fair value of derivative liability of
$6,251,254 to mark to market for the increase in fair value of the warrants
through September 30, 2010. Under ASC 815, the warrants will be
carried at fair value and adjusted at each reporting period.
F-9
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair
Value of Financial Instruments
In
accordance with FASB ASC 820, fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability (i.e., the “exit
price”) in an orderly transaction between market participants at the measurement
date.
In
determining fair value, the Company uses various valuation
approaches. In accordance with GAAP, a fair value hierarchy for
inputs is used in measuring fair value that maximizes the use of observable
inputs and minimizes the use of unobservable inputs by requiring that the most
observable inputs be used when available. Observable inputs are those
that market participants would use in pricing the asset or liability based on
market data obtained from sources independent of the
Company. Unobservable inputs reflect the Company’s assumptions about
the inputs market participants would use in pricing the asset or liability
developed based on the best information available in the
circumstances. The fair value hierarchy is categorized into three
levels based on the inputs as follows:
|
·
|
Level 1 — inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or
liabilities in active
markets.
|
|
·
|
Level 2 — inputs to the valuation
methodology include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the assets or
liability, either directly or indirectly, for substantially the full term
of the financial
instruments.
|
|
·
|
Level 3 — inputs to the valuation
methodology are unobservable and significant to the fair
value.
|
As of
September 30, 2010 and December 31, 2009, the derivative liabilities amounted to
$9,519,051 and $0. In accordance with the accounting standards, the Company
determined that the carrying value of these derivatives approximated the fair
value using the level 1 inputs.
Revenue
Recognition
The
Company records revenues for goods shipped at the time of
shipment. For goods delivered by the Company to a customer’s site,
revenues are recognized at time of delivery.
The
Company believes that recognizing revenue at these times is appropriate because
the Company’s sales policies meet the four criteria of the SEC’s staff
Accounting Bulletin No. 104, which are: (i) persuasive evidence that an
arrangement exists, (ii) service has occurred, (iii) the seller’s price to the
buyer is fixed and determinable and (iv) collection is reasonably
assured.
Research
and development cost
Research
and development costs are expensed in the period when they are incurred. During
the nine months ended September 30, 2010 and 2009, research and development
costs were $104,255 and $56,437, respectively. During the three months ended
September 30, 2010 and 2009, research and development costs were $65,612 and
$21,295, respectively.
Advertising
Advertising
expense consists primarily of costs of promotion for corporate image and product
marketing and costs of direct advertising. The Company expenses all advertising
costs as incurred. Advertising expense for the nine months ended September 30,
2010 and 2009 was $34,537 and $41,106, respectively. Advertising
expense for the three months ended September 30, 2010 and 2009 was $18,849
and $32,470, respectively.
F-10
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Shipping
and handling fees
The
Company follows ASC 605-45, “Handling Costs, Shipping Costs”. The
Company does not charge its customers for shipping and handling. The Company
classifies shipping and handling costs as part of general and administrative
expense. Shipping and handling fees for the nine months
ended September 30, 2010 and 2009 were $442,591 and $118,035, respectively.
Shipping and handling fees for the three months ended September 30, 2010
and 2009 were $198,997 and $70,449, respectively.
Advances
from Clients
The
Company records deposits received by customers prior to the completion of the
sale as deferred revenues and included as a component of advances from
clients. At such time as the revenue cycle is complete, these monies
will be recognized into revenues.
Income
Taxes
The
Company utilizes the accounting guidance, “Accounting for Income Taxes,” which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. It is the Company’s intention to
permanently reinvest earnings from activity with PRC. And thereby indefinitely
postpone repatriation of these funds to the US. Accordingly, no domestic
deferred income tax provision has been made for US income tax which could
result from paying dividend to the Company.
There
were no deferred taxes at September 30, 2010 and December 31,
2009.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk are cash, accounts receivable and other receivables arising from its normal
business activities. The Company places its cash in what it believes to be
credit-worthy financial institutions. The Company has a diversified customer
base, all are in China. The Company controls credit risk related to accounts
receivable through credit approvals, credit limits and monitoring procedures.
The Company routinely assesses the financial strength of its customers and,
based upon factors surrounding the credit risk, establishes an allowance, if
required, for uncollectible accounts and, as a consequence, believes that its
accounts receivable credit risk exposure beyond such allowance is
limited.
Note
3 –OTHER RECEIVABLES
Other
receivables mainly consist of prepayment of fish equipment amounting to
$1,194,030. As of September 30, 2010 and December 31, 2009, the other
receivables excluding the prepayment of fish equipment were $127,326 and
$21,208, respectively.
F-11
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note 4 – BIOLOGICAL ASSETS
As of
September 30, 2010 and December 31, 2009, Biological assets at cost consist of
the following:
9/30/2010
|
12/31/2009
|
|||||||
Carp
|
$
|
28,101
|
$
|
20,562
|
||||
Tilapia
|
959,561
|
959,561
|
||||||
Yellow
bone fish
|
55,385
|
-
|
||||||
California
bass
|
15,999
|
-
|
||||||
Snakeheads
|
265,368
|
178,204
|
||||||
Total
|
1,324,414
|
1,158,327
|
||||||
Accumulated
amortization
|
(1,075,603
|
)
|
(725,519
|
)
|
||||
$
|
248,811
|
$
|
432,808
|
Amortization
expense for the nine months ended September 30, 2010 and 2009 was $ 350,084 and
$ 306,613 respectively.
Biological
assets are amortized using the straight-line method over their estimated period
of benefit, ranging from three to five years. Management evaluate the
recoverability of biological assets periodically and take into account events or
circumstances that warrant revised estimates of useful lives or that indicate
that any changes exists. All of the Company’s biological assets are subject to
amortization with estimated lives of:
Carp
|
5
years
|
Tilapia
|
3
years
|
Snakeheads
|
3
years
|
California
bass
|
3
years
|
Yellow
bone fish
|
3
years
|
Note
5 – RELATED PARTIES
One of
the Company’s vendors is a related party. As of and for the nine months ended
September 30, 2010, such vendor accounted for approximately 19% of the Company’s
purchases and 38% of accounts payable. As of and for the nine months
ended September 30, 2009, such vendor accounted for approximately 53% of the
Company’s purchases and 87% of accounts payable.
For the
nine months ended September 30, 2010, the Company collected all amounts
previously due from the shareholder.
Note
6 – DUE FROM/TO SHAREHOLDER
As of
September 30, 2010, due from shareholder was $0.
During
the fourth quarter of 2009, the Company loaned an aggregate of RMB 21,900,000
($3,201,343 translated at $1=RMB 6.8372) to a shareholder. The shareholder
invested the entire proceeds of the loan in the construction of Foshan Nanhai
Guanyao Processing Industrial Park, which has a total area of 108,000 square
meters with the construction area of 85,000 square meters. The loan bears
interest and may be paid off by deducting the shareholder’s allocation of
shareholders’ dividends or other means. After the construction has been
completed, the Company has a first option to rent Foshan Nanhai Guanyao
Processing Industrial Park on terms to be determined. This amount is included in
the Due from shareholders of $4,008,659 as of December 31, 2009. During the nine
months ended September 30, 2010 this loan was repaid.
No
interest was levied from the related transaction. The facilities are constructed
in progress and third parties have rented part of the facilities. The Company
has not rented the facilities yet.
Note
7 – CONCENTRATIONS
As of
September 30, 2010, three customers accounted for 65% of accounts
receivable. As of September 30, 2009, two customers accounted for 99% of
accounts receivable.
For the
nine months ended September 30, 2010, the Company had three vendors who
accounted for 56% of total purchases. As of December 31, 2009, two customers
accounted for 20% of accounts receivable. For the nine months ended
September 30, 2009, the Company had two vendors who accounted for 66% of
total purchases and one related party vendor who accounted for 60%. For the
three months ended September 30, 2009, the Company had two vendors who accounted
for 39% of total purchases and one related party vendor who accounted for 16%.
At September 30, 2010, 87% of accounts payable was due to related parties. For
the three months ended September 30, 2009, the Company had two vendors who
accounted for 77% of total purchases and one related party vendor who accounted
for 70% of total purchases.
F-12
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
8 – COMPENSATED ABSENCES
Regulation
45 of the local labor law of PRC entitles employees to annual vacation leave
after 1 year of service. In general, all leave must be utilized annually, with
proper notification. Any unutilized leave is cancelled. The management estimated
that there is insignificant unutilized leave as at September 30, 2010 and
September 30, 2009.
Note
9 – COMMON STOCK
On March
29, 2010, the Company entered into the Share Exchange Agreement. Pursuant to the
Share Exchange Agreement, on March 29, 2010, 9 Rongfu Stockholders transferred
100% of the outstanding shares of common stock and 100% of the warrants to
purchase common stock of Rongfu held by them, in exchange for an aggregate of
18,623,889 newly issued shares of our Common Stock and warrants to purchase an
aggregate of 666,666 shares of our Common Stock. In connection with the closing
of the Share Exchange Agreement, the former principal stockholder agreed to and
did cancel 1,150,000 of the 1,200,000 shares of Rongfu Aquaculture, Inc. Common
Stock held by her.
F-13
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
10 – SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANTS
On March
29, 2010, the Company entered into the Stock Purchase Agreement with eighteen
investors. The Company authorized and issued to Investors $7,700,000, of the
Company’s convertible, redeemable Series A Preferred Stock, $0.001 par value per
share (the “Series A Stock”) at a price of $2.78 per share (the “Series A Issue
Price”). The shares are convertible into shares of the Company’s common stock,
par value $0.001 per share. In connection with the Stock Purchase Agreement the
Company incurred offering costs of $1,038,923, which are subtracted from the
total proceeds and recorded in additional paid in capital.
The
Series A Stock, in preference to the holders of common stock, shall be entitled
to receive, when and as declared by the Board of Directors out of funds that are
legally available therefore, cumulative dividends at the rate of six percent
(6%) per annum of the original Series A Issue Price on each outstanding of
Series A Preferred payable semi-annually on each February 28 and August
31. Payment of these dividends shall be made, at the Company’s
option, in cash or shares of common stock. Each holder of the Series
A Stock shall be entitled to one vote for each whole share of common stock into
which such shares of Series A Stock could be converted in accordance with the
agreement.
The
Company has agreed to pay liquidated damages to its warrant holders if the
Registration Statement is not filed by May 13, 2010 and/or not declared
effective by the SEC on or before October 25, 2010. The liquidated damages are
equal to 1% of the purchase price of the purchased shares owned by investors.
The maximum aggregate liquidated damages payable to the investors under this
Agreement shall be 6% of the aggregated purchase price paid by the investors
pursuant to this Purchase Agreement. The Company must pay the liquidated damages
in cash. Liquidated damages of $207,900 have been accrued as a component of
other payables.
Pursuant
to the Purchase Agreement the holders of Series A Stock also received 3,460,902
5 year warrants to purchase common shares. The warrants have an exercise price
of $3.47 for 1,730,451 warrants and $4.17 for the remaining 1,730,451
warrants.
Assuming
a valuation of $3.10 per share and the conversion of the Series A Stock into
4,221,389 shares of common stock at an effective conversion price of
approximately $1.52 per share which is obtained by dividing the amount to be
allocated to the BCF by the 2,768,721 common shares.
The
Company measured and recognized an aggregate of $3,267,797 of the fair value of
warrants to additional paid in capital upon issuance of these warrants. The
terms of the warrants provide for an adjustment to the exercise price of these
warrants if the company closes on the sale or issuance of common stock at a
price which is less than the exercise price then in effect for these
warrants. The Company determined that the warrants did not qualify
for a scope exception under SFAS No. 133 as they were determined to not be
indexed to the Company’s stock. On March 29, 2010, the warrants were classified
as a derivative liability for the then fair market value and marked to
market.
Aggregate
|
|||||||||||
Exercise
|
Remaining
|
Intrinsic
|
|||||||||
Total
|
Price
|
Life
|
Value
|
||||||||
Outstanding,
December 31, 2009
|
- | ||||||||||
Granted
in 2010
|
|||||||||||
-
in connection with exchange agreement
|
666,666 | $ | 2.44-2.93 |
4.5
years
|
|||||||
-
in connection with Series A preferred
|
3,460,902 | $ | 3.47-4.17 |
4.5
years
|
|||||||
Exercised
in 2010
|
|||||||||||
Outstanding,
September 30, 2010
|
4,127,568 |
Note
11-DERIVATIVE FINANCIAL INSTRUMENTS
The
balance sheet caption derivative liabilities consist of warrants to purchase
4,127,568 shares of the Company’s common stock, issued to consultants and
investor relations in connection with the merger agreements and in connection
with the Stock Purchase Agreement. These derivative financial instruments are
indexed to an aggregate of 2,768,721 and 0 shares of the Company’s common stock
as of September 30, 2010 and December 31, 2009, respectively, and are carried at
fair value. The following tabular presentations sets forth information about the
derivative instruments for the periods September 30, 2010 and December 31,
2009:
Derivative income (expense)
|
Nine Months Ended
September 30, 2010
|
Three Months Ended
September 30, 2010
|
||||||
Warrant
derivative
|
$ | (6,251,054 | ) | $ | (943,266 | ) |
Liabilities
|
September 30, 2010
|
December 31, 2009
|
|||
Warrant
derivative
|
9,519,051
|
0-
|
Freestanding
derivative instruments, consisting of warrants are valued using the
Black-Scholes-Merton valuation methodology because that model embodies all of
the relevant assumptions that address the features underlying these instruments.
Significant assumptions used in the Black Scholes models included: conversion or
strike prices ranging from $2.44-$4.17; volatility 73.27% based upon
forward terms of instruments; terms-remaining life of 4.5 years ; and a risk
free rate ranging from 1.79%-2.5%.
Note
12 - INCOME TAXES
The
Company operates in more than one jurisdiction with complex regulatory
environments subject to different interpretations by the taxpayer and the
respective governmental taxing authorities, we evaluate our tax positions and
establish liabilities, if required. For uncertain tax position which may be
challenged by local tax authorities and may not be fully sustained despite our
belief that the underlying tax positions maybe be fully supportable. At this
time the Company is not able to make a reasonable estimate of the impact on
the effective tax rate related these items which could be
challenged.
F-14
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
12 - INCOME TAXES – (CONTINUED)
Pursuant
to the PRC Income Tax Laws, the Enterprise Income Tax (“EIT”) is at a statutory
rate of 25%. The Company is an agriculture enterprise and under PRC Income Tax
Laws, it is entitled to have new PRC tax policy for the agriculture enterprise.
The Company’s derived from three areas including fish breeding, fish
cultivation and selling adult fish. For income from fish breeding, it is
entitled to an exemption. For income from fish cultivation, EIT is a discount
rate of 12.5%. For income from selling adult fish, EIT is a rate of
25%.
The
following is a reconciliation of income tax expense:
September
30, 2010
|
International
|
Total
|
||||||
Current
|
$
|
790,416
|
$
|
790,416
|
||||
September
30, 2009
|
International
|
Total
|
||||||
Current
|
$
|
446,572
|
$
|
446,572
|
Nine Months Ended September 30,
|
Three Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Reconciliation
of Effective tax rate
|
||||||||||||||||
Statutory
tax rate
|
25 | % | 25 | % | 25 | % | 25 | % | ||||||||
Non
deductibility of permanent items
|
26 | % | 0 | % | 9 | % | 0 | % | ||||||||
Tax
benefits from discounts and exemption
|
(18 | )% | (18 | )% | (20 | )% | (54 | )% | ||||||||
Others
|
4 | % | 0 | % | 11 | % | 35 | % | ||||||||
Effective
tax rate
|
37 | % | 7 | % | 25 | % | 6 | % |
If the
Company were subject to the standard 25% EIT, it would have incurred $1,587,300
and $1,193,111 of income tax expense for the nine months ended September 30,
2010 and 2009, respectively. The standard income tax rate would have
caused the Company to incur an additional expense of $0.08 and $0.06 per share
for the nine months ended September 30, 2010 and 2009,
respectively.
If the
Company were subject to the standard 25% EIT, it would have incurred $422,316
and $577,110 of income tax expense for the three months ended September 30, 2010
and 2009, respectively. The standard income tax rate would have
caused the Company to incur an additional expense of $0.02 and $0.03 per share
for the three months ended September 30, 2010 and 2009,
respectively.
Note
13– COMMITMENTS & CONTINGENCIES
The
Company leases facilities under operating leases, which expire on different
dates. It pays for on an annual basis and accrues for throughout the year. For
the nine months ended September 30, 2010 and 2009, rent expense was $ 232,379
and $ 315,059. Future payments under these leases are as follows as
of September 30:
2011
|
$
|
382,899
|
||
2012
|
$
|
365,660
|
||
2013
|
$
|
334,234
|
||
2014
|
$
|
268,287
|
||
2015
|
$
|
111,825
|
||
Thereafter
|
$
|
439,246
|
||
Total
|
$
|
1,902,151
|
F-15
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
14– EARNINGS PER SHARE
In
accordance with FASB ASC Topic 260-1-50, “Earnings per Share”, and SEC Staff
Accounting Bulletin No. 98, basic net income or loss per common share is
computed by dividing net income or loss for the period by the weighted - average
number of common shares outstanding during the period. Under
FASB ASC 260-10-50, diluted income or loss per share is computed by dividing net
income or loss for the period by the weighted - average number of common and
common equivalent shares, such as stock options, warrants and convertible
securities outstanding during the period.
The
following table sets forth the computation of basic and diluted earnings per
share of common stock:
Nine Months Ended
September 30,
|
Three Months Ended
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Basic
and diluted earnings per share:
|
||||||||||||||||
Numerator:
|
||||||||||||||||
(Loss)/Income used
in computing
|
$ | (3,846,017 | ) | $ | 6,025,171 | $ | 826,560 | $ | 1,003,709 | |||||||
Denominator:
|
||||||||||||||||
Weighted
average common shares outstanding
|
20,756,854 | 19,623,889 | 21,286,789 | 19,623,889 | ||||||||||||
Basic and
diluted earnings per
share
|
$ | (0.19 | ) | $ | 0.31 | $ | 0.04 | $ | 0.05 |
Note
15 – STATUTORY RESERVE
In
accordance with the laws and regulations of the PRC, a WFOE’s income, after
the payment of the PRC income taxes, shall be allocated to the statutory surplus
reserves and statutory public welfare fund. Prior to January 1, 2006 the
proportion of allocation for reserve was 10 percent of the profit after tax to
the surplus reserve fund and additional 5-10 percent to the public affair fund.
The public welfare fund reserve was limited to 50 percent of the registered
capital. Effective January 1, 2006, there is now only one fund requirement. The
reserve should be 10 percent of income after tax, not to exceed 50 percent of
registered capital. Statutory Reserve funds are restricted for set off against
losses, expansion of production and operation or increase in register capital of
the respective company. Statutory public welfare fund is restricted to the
capital expenditures for the collective welfare of employees.
These reserves are not transferable to the Company in the form of cash
dividends, loans or advances. These reserves are therefore not available for
distribution except in liquidation. As of September 30, 2010 and December 31,
2009, the Company had allocated $1,076,310 and $1,051,089, to these
non-distributable reserve funds.
F-16
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
16- OTHER COMPREHENSIVE INCOME
Balances
of related after-tax components comprising accumulated other comprehensive
income, included in stockholders’ equity, at September 30, 2010 and
December 31, 2009, are as follows:
Foreign
Currency
Translation
Adjustment
|
Accumulated
Other
Comprehensive
Income
|
|||||||
Balance
at December 31, 2008
|
$
|
861,166
|
$
|
861,166
|
||||
Change
for 2009
|
5,533
|
5,533
|
||||||
Balance
at December 31, 2009
|
$
|
866,699
|
$
|
866,699
|
||||
Change
for nine months ended 9/30/2010
|
399,260
|
399,260
|
||||||
Balance
at September 30, 2010
|
$
|
1,265,959
|
1,265,959
|
Note
17- RESTATEMENT
The
accompanying consolidated balance sheet and statement of stockholders’ equity as
of, and for the year ended, December 31, , 2009 have been restated for the
following matter:
The
number of shares of the Company’s common stock outstanding at December 31, 2009
was overstated in such financial statements.
Therefore,
we have restated the financial statements to correct this error. The net effect
of this reclassification is as follows:
A
decrease in the Company’s common stock by $1,187 from $20,811 to $19,624 and an
increase of additional paid in capital by the same amount.
Note
18- SUBSEQUENT EVENTS
For the
nine months ended September 30, 2010, the Company has evaluated subsequent
events for potential recognition and disclosure through the date of
issuance of these financial statements.. Based upon this evaluation management
has concluded that no subsequent events requiring recognition or disclosure
existed.
F-17
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
The
following discussion and analysis of the consolidated financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and related notes of Rongfu Aquaculture, Inc. appearing
elsewhere in this report. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Actual results may
differ materially from those anticipated in these forward-looking
statements.
Overview
The
Company is engaged in commercial freshwater aquaculture in the PRC. It sells
fish and fish fry and also acts as a freshwater fish dealer (generating trading
profits from the purchase of fish from third party farmers and the immediate
sale of such fish to wholesalers).
The
Company operates 13 adult fish breeding farms, covering a total area of 8,249 mu
Three of the Company’s farms are located in Hainan Province, two in the
town of Wenchang and one in Nanling. The other 10 farms are located in
Guangdong Province in the towns or villages of Nanhai, Qinyuan, Taishan,
Yangdong and Gaoyao. 9 of the farms consist of a series of man-made
ponds. Each pond is outfitted with one or more oxygen aeration machines which
float on the surface and one or more feeding machines which provide food to the
fish twice per day. The aeration machines provide oxygen to the fish and enable
the natural removal of fish wastes so that the water does not become toxic for
the fish.
4 of the
Company’s farms are each comprised of a single lake created by damming a river.
Oxygen aeration equipment is not needed since the lakes have a much larger area
than the ponds dug by the Company. The land on which the farms are located is
leased by the Company from the village under leases for terms of 4 to 30
years.
In
addition to its adult fish breeding farms, the Company operates a breeding farm
in Wenchang, Hainan Province in which tilapia fry are produced from brood
stock.
At its
facilities in Nanhai (at which the Company’s fish clinic is also located) and
Wenchang, the Company also has constructed and maintains concrete tanks where
the Company incubates tilapia. The Company also incubates snakehead and crucian
carp fry in its tank in Nanhai. After the incubation period the Company sells
approximately 95% of the fry to distributors.
4
Comparison
of three months ended September 30, 2010 and September 30, 2009
The
following table presents the Company’s consolidated net sales for its lines of
business for the three months ended September 30, 2010 and three months ended
September 30, 2009, respectively:
Three Months Ended
September 30, 2010 and 2009
|
%
|
|||||||||||
2010
|
2009
|
Change
|
||||||||||
Farm
growing
|
$ | 7,112,859 | $ | 2,230,948 | 219 | % | ||||||
Breeding
|
$ | 1.107.114 | $ | 837,051 | 32 | % | ||||||
Trading
|
$ | 4,596,302 | $ | 1,695,651 | 171 | % | ||||||
Consolidated
|
$ | 12,816,275 | $ | 4,763,650 | 169 | % |
Revenue
for the three months ended September 30, 2010 were $12,816,275, an increase of
$8,052,625 or 169%, when compared to the same period in 2009. Such increase was
attributed to the increase in sales of the trading business of adult fish by
$2.9 million, particularly snakehead which contributed an increasing
proportion of revenues of the trading business (60%) for the current quarter,
and the increase in farm growing of adult fish by $4.9 million attributable to
the increase in farm growing of snakehead compared to the same period of 2009.
The opening in May 2010 of our logistics center greatly facilitated the
distribution of snakehead to Guangzhou Province and other regions in the
PRC. For the three months ended September 30, 2010, sales
of fish fry increased $270,063 compared to the same period of the prior year,
due to sales of fry of our two new fish – yellow catfish and California
perch.
Cost of
goods sold for the three months ended September 30, 2010 were $9,129,968, an
increase of $5,994,211 or 191%, when compared to the same sales period of the
prior year, which consisted of an increase of $3,380,015 for breeding adult fish
, an increase of $2,563,000 for the trading business, and a slight increase of
$51,196 for breeding fish fry. The percentage increase in cost of goods sold is
higher than that of the percentage increase in revenue mainly because the
revenues of the farm growing segment, with relatively higher costs of sales
increased proportionately more than revenues of the breeding
segment.
Gross
profit for the three months ended September 30, 2010 was $3,686,307, an increase
of $2,058,414 or 126%, when compared to the same period in 2009. The increase in
gross profit is comprised of an increase of $1,501,897 for breeding adult
fish, an increase of $337,650 for the Company’s trading business and an increase
of $218,867 for breeding fish fry. The percentage increase in gross profit for
the three months ended September 30, 2010 over the three months ended September
30, 2009 is lower than the percentage increase in revenues for the same periods
due to higher costs of goods sold in the three months ended September 30, 2010
as a result of changes in the product mix.
Selling,
general and administrative expenses for the three months ended September 30,
2010 were $1,473,963, an increase of $1,010,787 or 218%, when compared to the
same period in 2009, mainly attributable to the increase in selling expenses of
$256,284 relating to the increase in sales and the increase in general and
administrative expenses of $754,503 mainly due to an increase in professional
fees associated with being a public company, expenses associated with the
expansion of our business and the accrual for liquidated damages to certain
investors who hold registration rights as a result of the failure to have a
registration statement related to the resale of our common stock underlying the
Series A Preferred Stock and warrants held by such investors declared effective
by October 25, 2010.
Research
and development expenses for the three months ended September 30, 2010 were
$65,612, an increase of $44,317 or 208%, when compared with $21,295 in the same
period in 2009.
Income
from operations for the three months ended September 30, 2010 was $2,147,002, an
increase of $1,003,310 or 88%, when compared to the same period in 2009. The
main reason for the increase in income from operations was the increase in
revenues, offset by the increase in selling, general and administrative
expenses.
Interest
income for the three months ended September 30, 2010 was $3,970, a decrease of
$10,700 or 73%, when compared to the same period in 2009, primarily because the
Company used a part of its interest earning funds to pay dividends and income
tax in the fourth quarter in 2009, which decreased the Company’s interest income
as a consequence. Interest expense for the three months ended
September 30, 2010 was $837, a decrease of $86,149 due to the repayment of the
Company’s short term bank loans, when compared to the same period in
2009.
Income taxes for the three
months ended September 30, 2010 was $301,832, an increase of $234,165, or 346%,
when compared to the same period in 2009. In 2010 less proportion of
fry was sold and fry was tax exempt while farmed fish was subject to a 12.5%
income tax. Trading revenue from grown fish was taxed at a rate of 25%. In 2010
more revenue was contributed by farming and trading and therefore the income
taxes were higher than that of 2009.
The
Company recorded a loss on fair value of derivative liability of
$943,266 for the three months ended September 30, 2010.
5
Net
income for the three months ended September 30, 2010 was $905,037 as compared to
net income of $1,003,709 for the three months ended September 30, 2009 due to
the increase in revenue offset by the increase in selling, general and
administrative expenses and the non-cash item of loss on fair value of
derivative liability of $943,266 in the third quarter of fiscal year
2010. On March 29, 2010, the Company completed a private placement of
its preferred stock and five year warrants to purchase an aggregate of 4,127,268
shares of common stock. The warrants are required to be recorded as a derivative
instrument liability, carried at fair value and marked-to-market at the end of
each period, with changes in the fair value each period charged or credited to
net income on the income statement.
Comparison
of nine months ended September 30, 2010 and September 30, 2009
The
following table presents the Company’s consolidated net sales for its lines of
business for the nine months ended September 30, 2010 and nine months ended
September 30, 2009, respectively:
Nine Months Ended
September 30, 2010 and 2009
|
%
|
|||||||||||
2010
|
2009
|
Change
|
||||||||||
Farm
growing
|
$ | 21,128,289 | $ | 13,407,185 | 58 | % | ||||||
Breeding
|
$ | 5,094,679 | $ | 4,369,794 | 17 | % | ||||||
Trading
|
$ | 9,146,731 | $ | 3,954,949 | 131 | % | ||||||
Consolidated
|
$ | 35,369,699 | $ | 21,731,927 | 63 | % |
Revenue
for the nine months ended September 30, 2010 were $35,369,699, an increase of
$13,637,772 or 63%, when compared to the same period in 2009. Such increase was
mainly attributed to the increase in sales of adult fish purchased by farmers,
which increased $5,191,782, and the sales of adult fish from farm growing, which
increased $7,721,705 compared to the same period of 2009 following the opening
in May, 2010 of our logistics center which facilitated the distribution of
snakehead to Guangzhou Province and other regions in the PRC. For the
nine months ended September 30, 2010, sales of fish fry increased
$724,885 compared to the same period of the prior year, due to sales of fry of
our two new fish – yellow catfish and California perch.
Cost of
goods sold for the nine months ended September 30, 2010 were $23,576,353, an
increase of $10,252,589 or 77%, when compared to the same sales period of the
prior year, which consisted of an increase of $5,551,304 for breeding adult
fish, an increase of $4,595,380 for trading business, and an increase of
$105,905 for breeding fish fry The percentage increase in cost of goods sold is
higher than that of the percentage increase in revenue mainly because the
revenues of the farm growing segment, with relatively higher costs of sales,
increased proportionately more than revenues of the breeding
segment.
Gross
profit for the nine months ended September 30, 2010 was $11,793,346, an increase
of $3,385,183 or 40%, when compared to the same period in 2009. The increase in
gross profit is comprised of an increase of $2,169,801 for breeding adult
fish, an increase of $596,402 for the Company’s trading business, and an
increase of $618,980 for breeding fish fry. The percentage increase in gross
profit for the nine months ended September 30, 2010 over the nine months ended
September 30, 2009 is lower than the percentage increase in revenues for the
same periods due to higher costs of goods sold in the nine months ended
September 30, 2010 as a result of changes in the product mix.
Selling,
general and administrative expenses for the nine months ended September 30, 2010
were $3,255,188, an increase of $1,427,131 or 78%, when compared to the same
period in 2009. The increase was mainly attributed to the increase of
selling expenses of $807,934 for the expansion of our business and the increase
in general and administrative expenses by $619,196, mainly due to increases in
professional fees associated with our being a public company, the expenses
associated with the expansion of our business and the accrual for liquidated
damages to certain investors who hold registration rights as a result of the
failure to have a registration statement related to the resale of our common
stock underlying the Series A Preferred Stock and warrants held by such
investors declared effective by October 25, 2010.
Income
from operations for the nine months ended September 30, 2010 was $8,433,903, an
increase of $1,910,234 or 29%, when compared to the same period in 2009. The
increase was attributable to the increase in gross profit of $3,385,183 due to
the expansion in sales of adult fish, fish fry and trading business, offset by
the increase in selling, general and administrative expenses by
$1,427,131.
6
Interest
income for the nine months ended September 30, 2010 was $10,584, a decrease of
$24,926 or 70%, when compared to the same period in 2009, primarily because the
Company used a part of its interest earning funds to pay dividends and income
tax of the fourth quarter in 2009, which decreased the Company’s interest income
as a consequence. Interest expense for the nine months ended
September 30, 2010 was $35,678, a decrease of $51,758 or 59% due to the
repayment of the Company’s short term bank loans, when compared to the same
period in 2009.
Income
taxes for the nine months ended September 30, 2010 were $790,416, an increase of
$343,844, or 77%, when compared to the same period in 2009. In 2010
less proportion of fry was sold and fry was tax exempt while farmed fish was
subject to a 12.5% income tax. Trading revenue from grown fish was taxed at a
rate of 25%. In 2010 more revenue was contributed by farming and trading and
therefore the income taxes were higher than that of 2009.
The
Company recorded a loss on fair value of derivative liability of $6,251,254 for
the nine months ended September 30, 2010.
Net
income for the nine months ended September 30, 2010 was $1,498,039 as compared
to net income of $6,025,171 for the nine months ended September 30, 2009 due to
the increase in revenue offset by the increase in selling, general and
administrative expenses and the non-cash item of loss on fair value of
derivative liability of $6,251,254 in the first three quarters in fiscal year
2010 and the professional fee in connection with the services rendered in
reverse merger for the issuance of shares in the first quarter in
2010. On March 29, 2010, the Company completed a private placement of
its preferred stock and five year warrants to purchase an aggregate of 4,127,268
shares of common stock. The warrants are required to be recorded as a derivative
instrument liability, carried at fair value and marked-to-market at the end of
each period, with changes in the fair value each period charged or credited to
net income on the income statement.
During
the nine months ended September 30, 2010, total assets increased by $10,668,136,
or 92%, from $11,629,668 at December 31, 2009 to $22,297,804 at September 30,
2010. The majority of the increase was in cash, accounts receivable,
advance payment and prepayment, and inventories, which was partially offset
by a decrease in amount due from shareholders.
During
the nine months ended September 30, 2010, cash increased by $3,501,039, or 110%,
to $6,695,287 as compared to $3,194,248 at December 31, 2009. This is mainly
attributed to the funding from investors of net proceeds amounting to $6,561,077
in second quarter this year, offset by the increase in inventories, payment of
dividends to shareholders in 2009.
At
September 30, 2010, the accounts receivable balance increased by $1,368,179, or
579%, from the balance at December 31, 2009. The increase is due to the
increase in revenue in the nine months ended September 30, 2010. In addition, we
have granted our customers a longer credit period as a strategy to increase our
market share.
At
September 30, 2010, the other receivables increased by $1,300,148, or 6,130%,
from the balance at December 31, 2009. The increase is mainly due to the advance
payment of $1,194,000 for fish
nets.
At
September 30, 2010, there were no amounts due from shareholders, as
compared to due from shareholders of $4,008,659 at December 31, 2009. This is
attributed to the repayment from shareholders during the first quarter of
2010.
The
Company’s inventory at September 30, 2010 was $10,905,977, an increase of
$7,926,224, or 266%, compared to inventory at December 31, 2009. Inventories
mainly consists of adult tilapia, snakehead, crucian carp and other varieties of
freshwater fish. The main reason of the increase of inventory is the Company
increased its breeding capacity in the nine months ended September 30,
2010.
At
September 30, 2010 fixed assets were $868,448, mainly consisting of
aerators, feeding machine and other equipments used in fish farms, representing
an increase of $463,301, or 114%, compared to fixed assets at December 31,
2009.
At
September 30, 2010 biological assets were $248,811, a decrease of $183,997,
or 43%, compared to biological assets at December 31, 2009. The decrease in
biological assets was due to the amortization for the nine months in 2010,
offset by the procurement of certain breeding fish during the
2010. Biological assets consist of tilapia, snakehead, crucian carp,
yellow catfish and black bass.
7
At
September 30, 2010 accounts payable were $5,036,460, as compared to $0 at
December 31, 2009. The increase in accounts payable was due to the procurement
of fish food used in fish farm and fish fry breeding mainly from related
parties.
At
September 30, 2010 other payables were $552,475, a decrease of $2,743,960, or
80%, compared to other payables at December 31, 2009. The main item included in
other payables is personal income tax payable, and the high personal income tax
payable was due to the dividend payable in the fiscal year ended
December 31, 2009, which was paid in the first quarter of 2010. On the other
hand, at September 30, 2010, there is an accrual of $207,900 for the liquidated
damages to warrant holders for the Registration Statement not declared effective
by October 25, 2010.
At
September 30, 2010, there was no advance from clients, as compared to the
advance from clients of $498,785 at December 31, 2009. Because goods were
distributed to clients in the first quarter of 2010, there was no advance from
clients as of September 30, 2010.
At
September 30, 2010, there was no bank loan, as compared to current portion
of bank loan of $380,273 at December 31, 2009. The loan was fully repaid
prior to September 30, 2010.
At
September 30, 2010, there was no dividend payable, as compared to a dividend
payable of $3,466,331 at December 31, 2009 since the dividend was fully paid in
the nine months ended September 30, 2010.
At
September 30, 2010 income tax payable was $301,419, a decrease of $693,894, or
70%, compared to income tax payable at December 31, 2009. This is mainly
because the fourth quarter is the peak season of sales normally, and therefore
the income tax for the nine months ended September 30, 2010 is lower than the
income tax for the whole 2009 fiscal year.
Liquidity
and Capital Resources
The
Company has typically financed its operations and expansion from cash flows from
operations and loans from its shareholders and banks. The Company consummated a
reverse merger transaction and raised approximately $7.7 million in gross
proceeds in a private placement financing on March 29, 2010.
Nanhai Ke
Da Heng Sheng has entered into two credit line agreements with Foshan Nanhai
Allied Rural Credit Union Danzhao Credit Association with credit lines of RMB
7,000,000 (approximately $ 1,044,605 based on the conversion rate as of
September 30, 2010) and RMB 5,000,000 (approximately $746,146 based on the
conversion rate as of September 30, 2010), respectively. The two credit lines
are secured by real estate owned by the sister-in-law of Chen Zhisheng, our
Chairman of the Board. The agreements were entered into on January
14, 2009 and January 13, 2009, respectively, for two-year terms expiring in
January 2011. Outstanding loans under the two credit lines bear interest at a
rate of 5.4% per year. Interest is payable monthly. As of September 30, 2010,
there were no outstanding loans payable
8
Critical
Accounting Policies and Estimates
Management's
discussion and analysis of its financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
Our financial statements reflect the selection and application of accounting
policies which require management to make significant estimates and judgments.
See note 2 to our consolidated financial statements, "Summary of Significant
Accounting Policies." Management bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. We believe that the following reflect the more
critical accounting policies that currently affect our financial condition and
results of operations.
Principles of
Consolidation
The
consolidated financial statements include the accounts of Rongfu Aquaculture,
Inc (formerly, Granto, Inc.) and its wholly owned subsidiaries, Flourishing HK,
the WOFE, Nanhai Ke Da Heng Sheng, and Hainan Ke Da Heng Sheng
(collectively referred to herein as the” Company”). All material
inter-company accounts, transactions and profits have been eliminated in
consolidation. The Company has adopted the Consolidation Topic of the FASB
Accounting Standards Codification which requires a variable interest entity
(“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.
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Inventories
Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market.
Derivative
Liability
The
Company issued warrants in connection with the Purchase Agreement dated March
29, 2010 with certain reset exercise price provisions.
Adoption
of the Derivative and Hedging Topic of the FASB Accounting Standards
Codification (“ASC 815”), the Company determined that the warrants did not
qualify for a scope exception under ASC 815 as they were determined to not be
indexed to the Company’s stock as prescribed by ASC 815. The
warrants, under ASC 815, were classified as derivative liability for the then
relative fair market value of $ 3,267,797 and marked to market. For
the nine months ended September 30, 2010, the Company recorded a loss
on change in fair value of derivative liability of $6,251,254 to mark to market
for the increase in fair value of the warrants through ended September 30,
2010. Under ASC 815, the warrants will be carried at fair value
and adjusted at each reporting period.
Fair Value of Financial
Instruments
The
Financial Instrument Topic of the Codification requires that the Company
disclose estimated fair values of financial instruments. The carrying amounts
reported in the statements of financial position for current assets and current
liabilities qualifying as financial instruments are a reasonable estimate of
fair value.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with the Revenue
Recognition Topic of the Codification. Sales revenue is recognized at the date
of shipment to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations of the
Company exist and collectability is reasonably assured. Payments received before
all of the relevant criteria for revenue recognition are satisfied are recorded
as unearned revenue.
Income
Taxes
The
Company utilizes the accounting guidance, “Accounting for Income Taxes,” which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
It is the
Company’s intention to permanently reinvest earnings from activity with China
and thereby indefinitely postpone repatriation of these funds to the U.S.
Accordingly, no domestic deferred income tax provision has been made for U.S.
income tax which could result from paying dividends to the Company.
At
September 30, 2010, there were permanent tax differences relating to stock based
compensation in conjunction with professional services of $191,141 and the loss
on change in fair value of derivative liability of $6,251,254 to mark to market
for the increase in fair value of the warrants through ended September 30,
2010.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk are cash, accounts receivable and other receivables arising from its normal
business activities. The Company places its cash in what it believes to be
credit-worthy financial institutions. The Company has a diversified customer
base, all are in China. The Company controls credit risk related to accounts
receivable through credit approvals, credit limits and monitoring procedures.
The Company routinely assesses the financial strength of its customers and,
based upon factors surrounding the credit risk, establishes an allowance, if
required, for uncollectible accounts and, as a consequence, believes that its
accounts receivable credit risk exposure beyond such allowance is
limited.
Off-Balance
Sheet Arrangements
The
Company does not have any off-balance sheet arrangements.
9
Item
3. Quantitative and Qualitative Disclosure About Market Risk
Not
applicable.
Item
4. Controls and Procedures.
Disclosure
Controls and Procedures
The
Company’s management, with participation of the Company’s Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company’s disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) as of the end of the period covered by this report. The
term “disclosure controls and procedures” as defined in Rules 13a-15(e) and
15d-15(e) means controls and other procedures of the Company that are designed
to ensure that information required to be disclosed by a company in reports,
such as this report, that it files, or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the U.S. Securities and Exchange Commission’s (“SEC”) rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by
a company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the Company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on that evaluation, management
concluded that, as of September 30, 2010, the Company’s disclosure controls and
procedures were not effective at that reasonable assurance level to satisfy the
objectives for which they are intended.
Changes
in Internal Control over Financial Reporting
On March
29, 2010 the Company completed the acquisition of Rongfu Aquaculture, Inc.
(“Rongfu”) pursuant to a share exchange agreement. The acquisition was accounted
for as a recapitalization effected by a share exchange. Rongfu is considered the
acquirer for accounting and financial reporting purposes. Prior to the
acquisition the Company was a shell company.
During
the preparation of our financial statements for the quarter ended
September 30, 2010, we determined that there existed deficiencies in
controls relating to the following and that it was necessary for the Company to
restate to its previously issued financial statements for the fiscal years ended
December 31, 2008 and December 31, 2009 and the quarters ended March 31, 2009
and March 31, 2010 and June 30, 2009 and June 30, 2010 for the following
reasons.
1. The
number of shares of the Company’s common stock outstanding as of December 31,
2008 and December 31, 2009 and the weighted average common shares outstanding
for the years ended December 31, 2009 and December 31, 2008 and for the quarters
ended March 31, 2009, June 30, 2009, March 31, 2010 and June 30, 2010 were
overstated in such financial statements and earnings per share for the fiscal
years ended December 31, 2009 and December 31, 2008 and for the quarters ended
March 31, 2009, June 30, 2009, March 31, 2010 and June 30, 2010 were understated
in such financial statements.
2. The
value attributed to shares of the Company’s common stock which were issued for
prior services on March 29, 2010 should have been expensed in the Company’s
income statements for the quarter ended March 31, 2010 and for the six months
ended June 30, 2010.
3.
$7,700,000 of Preferred Stock included under Stockholders’ Equity on the
Company’s balance sheets as of March 31, 2010 and June 30, 2010 should be
reclassified as Temporary Equity.
We have
further concluded that such deficiencies represented material weaknesse. As a
result, we concluded that the Company’s internal controls over financial
reporting were not effective at September 30, 2010.
The
Company is in the process of enhancing its financial reporting by implementation
of stronger internal controls through the recruitment of high caliber personnel
with strong financial reporting backgrounds and the establishment
of effective checking and reviewing procedures. In 2011 we plan to enrich
the accounting knowledge of all of our financial and accountting personnel
by holding training to increase the awareness and use of controls and
transparency by all staff and by redesigning document flows
and establishing strong control points.
PART
II - OTHER INFORMATION
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
The
Company did not sell any of its equity securities during the three months ended
September 30, 2010.
10
Item
6. Exhibits
(a)
|
Exhibits
|
31.1 -
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 -
Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 -
Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 -
Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
11
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned there unto duly
authorized.
RONGFU
AQUACULTURE, INC.
|
||
Date: December
22, 2010
|
BY:
|
/s/ Kelvin Chan
|
Kelvin
Chan
|
||
Chief
Executive Officer
|
||
Date:
December 22, 2010
|
BY:
|
/s/ Keith
Hor
|
Keith
Hor
|
||
Chief
Financial Officer
|
12
INDEX TO
EXHIBITS
EXHIBIT
NUMBER
|
DESCRIPTION
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of
2002.
|
13