Attached files
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EX-4.1 - Mobile Presence Technologies Inc. | v206309_ex4-1.htm |
EX-1.1 - Mobile Presence Technologies Inc. | v206309_ex1-1.htm |
EX-3.1(C) - Mobile Presence Technologies Inc. | v206309_ex3-1c.htm |
EX-23.1 - Mobile Presence Technologies Inc. | v206309_ex23-1.htm |
As
filed with the Securities and Exchange Commission on December 23,
2010
Registration
No. 333-166172
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Amendment
No. 6 to
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
CHINA
SHANDONG INDUSTRIES, INC.
(Exact
Name of Registrant as Specified in Charter)
Delaware
|
2511
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20-8545693
|
||
(State
or Other Jurisdiction of
Incorporation)
|
(Primary Standard Industrial Classification
Code
Number)
|
(IRS
Employer Identification No.)
|
No.
2888 Qinghe Road
Development
Zone Cao County
Shandong
Province, 274400 China
(86)
530-3431658
(Address,
including zip code, and telephone number,
including
area code, or registrant’s principal executive offices)
Jinliang
Li
Chief
Executive Officer
China
Shandong Industries, Inc.
No.
2888 Qinghe Road
Development
Zone Cao County
Shandong
Province, 274400 China
(86)
530-3431658
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies
to:
Lawrence
G. Nusbaum
Gusrae,
Kaplan, Bruno & Nusbaum PLLC
120
Wall Street, 11th Floor
New
York, New York 10005
Tel:
(212) 269-1400
Fax:
(212) 809-5449
|
Mitchell
Nussbaum
Loeb
& Loeb LLP
345
Park Avenue
New
York, NY 10154
Tel:
(212) 407-4159
Fax:
(212) 407-4990
|
Approximate
date of commencement of proposed sale to the 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 small reporting
company:
Large
accelerated filer
¨
|
Accelerated
filer ¨
|
Non-accelerated
filer
¨
|
Smaller
reporting company
x
|
Calculation
of Registration Fee
Title of each class of securities to be registered
|
Proposed maximum
aggregate offering price
|
Amount of
registration fee |
||||||
|
|
|||||||
Common
stock, par value $0.0001 per share
|
$ | 23,000,000 | (1) | $ | 1,639.90 | |||
Underwriter’s
options to purchase common stock (2)
|
100 | (2) | .01 | |||||
Common
stock underlying underwriter’s options (3)
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1,250,000 | (2) | 89.13 | |||||
Total
Registration Fee
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$ | 1,729.04 | (4) |
(1)
|
Estimated
solely for the purpose of calculating the amount of the registration in
accordance with Rule 457(o) under the Securities Act of 1933, as
amended. Includes an estimated $3,000,000 proposed maximum
aggregate offering price from the sale of shares of common stock which may
be issued pursuant to the exercise of a 45-day option granted by the
registrant to the underwriters to cover over-allotments, if
any.
|
(2)
|
Pursuant
to Rule 416 under the Securities Act of 1933, as amended, there are also
being registered an indeterminable number of shares of our common stock as
may be issued to prevent dilution as a result of stock splits, stock
dividends or similar transactions.
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(3)
|
The
Registrant will sell to the underwriters for $100 options to purchase a
number of shares of common stock that is equal to 5% the aggregate number
of shares sold in this offering excluding the over-allotment
option. The options will be exercisable at a per share exercise
price equal to 125% of the public offering price. As
estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(g) under the Securities Act, the proposed maximum
aggregate offering price of the underwriters’ options is $1,250,000,
which is equal to 125% of $1,000,000 (5% of
$20,000,000). In accordance with Rule 457(g) under the
Securities Act, because the shares of the Registrant’s common stock
underlying the underwriters’ options are registered hereby, no
separate registration fee is required with respect to the options
registered hereby.
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(4)
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Previously
paid.
|
The
Registrant 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
hereafter become effective in accordance with Section 8(a) of the Securities Act
of 1933, or until the registration statement shall become effective on such date
as the Commission, acting pursuant to Section 8(a), may
determine.
The
information in this preliminary 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 is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS
|
SUBJECT TO COMPLETION. DATED DECEMBER
23, 2010 .
|
_________
Shares of Common Stock
We are
offering ______________ shares of our common stock at a price of $_____ per
share.
Our
common stock is currently quoted on the OTC Bulletin Board under the symbol
“CSNH”. The last reported sale price of our common stock on the OTC
Bulletin Board on December 21, 2010 was $3.32 per share. We intend to
apply for listing of our common stock on the NASDAQ Capital Market. If the
application is not approved, we will not complete this
offering.
__________________________
Investing
in our securities involves a high degree of risk. See “Risk Factors”
beginning on page 10 of this prospectus for a discussion of information that
should be considered in connection with an investment in our
securities.
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.
|
Per share
|
Total
|
||||||
Public
offering price
|
$ | $ | ||||||
Underwriting
discounts and commissions (1)
|
$ | $ | ||||||
Proceeds
to us, before expenses
|
$ | $ |
(1) The underwriter will receive
compensation in addition to the discounts and commissions as set forth under
“Underwriting.”
We
have paid the underwriter a $25,000 advance upon the execution of an engagement
letter with it. The underwriter has a 45-day option to purchase up to 15%
of the total number of shares of our common stock to be sold in this offering
solely to cover over-allotments, if any. The underwriter will also be
entitled to a non-accountable expense allowance equal to 1% of the public
offering price and will receive options to purchase 5% of the aggregate number
of shares of our common stock sold in this offering.
The
underwriter expects to deliver the shares of common stock to purchasers on or
about
,
2010.
Rodman
& Renshaw, LLC
The date
of this prospectus
is
,
2010.
TABLE
OF CONTENTS
Page
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Prospectus
Summary
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1
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The
Offering
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8
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Summary
Consolidated Financial Data
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9
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Risk
Factors
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10
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Special
Note Regarding Forward-Looking Statements
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26
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Use
of Proceeds
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26
|
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Determination
of Offering Price
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26
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Dividend
Policy
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27
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Capitalization
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27
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Market
Price of and Dividends of Common Equity and Related Stock Holder
Matters
|
27
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Exchange
Rate Information
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28
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Dilution
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29
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Selected
Consolidated Financial and Operating Data
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30
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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31
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Furniture
Industry Background
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41
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Business
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43
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Company
History
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56
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Management
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57
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Executive
Compensation
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60
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Certain
Relationships and Related Transactions
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61
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Security
Ownership of Certain Beneficial Owners and Management
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62
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Description
of Securities
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63
|
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Shares
Eligible for Future Sale
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66
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Material
United States Federal Income Tax Considerations
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67
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Material
PRC Income Tax Considerations
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71
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Underwriting
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73
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Legal
Matters
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77
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Experts
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77
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Where
You Can Find Additional Information
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77
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Consolidated
Financial Statements
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F-1
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You
should only rely on the information contained in this prospectus. We
have not, and the underwriters 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.
We
obtained statistical data, market data and other industry data and forecasts
used throughout this prospectus from market research, publicly available
information and industry publications.
PROSPECTUS
SUMMARY
This summary highlights material
information contained elsewhere in this prospectus and does not contain all of
the information that you should consider in making an investment decision. We
urge you to read this entire prospectus carefully, including the “Risk Factors”
section and our financial statements and related notes appearing elsewhere in
this prospectus, before making an investment decision.
Unless otherwise expressly provided
herein, all share and per share numbers set forth herein relating to our common
stock (i) assume no exercise of (a) any warrants and/or options, (b) the
underwriters’ options and/or (c) the underwriters’ over-allotment option,
and (ii) reflect (a) a 15 for 1 forward stock split of our common stock on
December 3, 2009, (b) a 1 for 2 reverse stock split of our common stock, which
became effective on August 3, 2010, and (c) a 1 for 1.5 reverse stock split of
our common stock, which will become effective on or about January 18,
2011.
Currency,
exchange rate, and “China” and other references
Unless otherwise noted, all currency
figures in this filing are in U.S. dollars. References to "yuan" or "RMB" are to
the Chinese yuan, which is also known as the RMB. According to the
currency exchange website www.xe.com, on December 21, 2010, $1.00 was equivalent
to 6.658 yuan.
References
to “PRC” are to the People’s Republic of China.
Unless otherwise specified or required
by context, references to “we,” “our” and “us” refer collectively to (i) China
Shandong Industries, Inc., and our subsidiaries, Tianwei International
Development Corporation, an Oregon corporation and Shandong Caopu Arts &
Crafts Co., Ltd, a wholly foreign-owned enterprise organized under the laws of
the PRC. Specific discussions or comments relating only to China
Shandong Industries, Inc. will reference China Shandong Industries and those
relating only to Shandong Caopu Arts & Crafts Co., Ltd will reference
“Shandong.”
References to Shandong’s “registered
capital” are to the equity of Shandong, which under PRC law is measured not in
terms of shares owned but in terms of the amount of capital that has been
contributed to a company by a particular shareholder or all
shareholders. The portion of a limited liability company’s total
capital contributed by a particular shareholder represents that shareholder’s
ownership of us, and the total amount of capital contributed by all shareholders
is our total equity. Capital contributions are made to us by deposits
into a dedicated account in our name, which we may access in order to
meet our financial needs. When our accountant certifies to PRC
authorities that a capital contribution has been made and we have received the
necessary government permission to increase its contributed capital, the capital
contribution is registered with regulatory authorities and becomes a part of our
“registered capital.”
Our
Business
We are a designer and contract
manufacturer of household furniture in the PRC. We produce a variety of
indoor and outdoor residential furniture and wicker products that are sold and
exported to more than 30 countries. Our products are sold through well
known domestic and international retailers such as Trade Point A/S Direct
Container, Zara-Home, Habitat UK Ltd., ABM Group Inc., and Fuji Boeki Co.
Ltd. We believe that the product depth and extensive style selections we
offer allows us to be a strong resource for global furniture, retail chains and
retailers in the discounted price range.
Our products are divided into 3
categories based upon their features and producing methods, which are (i)
furniture products, (ii) straw-wicker products, and (iii) wooden crafts
products.
Our furniture products are primary
indoor furniture products made of poplar and paulownia, including chairs,
barstools, tables, bookcases, cabinets, lamps and similar items.
1
Following are pictures of our sample
furniture products:
Our Straw and wicker products are
weaved and interlaced by hand into various products with different sizes and
shapes, such as wicker basket, straw drawers. Straw and wicker products are
cheaper to produce than wooden crafts products and furniture products because
the price of the raw material used in such products is less expensive
and more common in PRC households.
The following are the pictures of
certain of our straw-wicker products:
Wooden crafts products mainly refers to
decorations and accessories, “knick-knacks” and ornamental objects made of
poplar wood in a semi-manual and semi-mechanical way. Such products
include photo frames, gift boxes, bottle boxes, jewelry boxes, and bird
nests, which can be used for decoration or as functional products in houses,
offices and public places.
2
The following are pictures of certain
of our wooden crafts product:
Our operations are conducted through
our subsidiary, Shandong, located in Shandong Province, PRC. Through
Shandong, we manufacture over 20,000 different products. We focus on
providing high quality products at competitive prices. For the fiscal year
ended December 31, 2009, approximately 3% of our products were sold in the PRC
and 97% of our products were sold to companies in countries and places such as
the United States, Germany, England, Italy, Sweden, Canada and
Taiwan.
For the nine months ended September 30,
2010, we generated revenues of $62,181,727 and net income of
$10,286,442. For fiscal year 2009, we generated revenues of
$69,435,044 and net income of $12,021,155. For the 2008 fiscal year, we
generated revenues of $42,197,393 and net income of $5,761,994.
For the nine months ended September 30,
2010, our revenues and net income were approximately $35.1 million and $6.3
million, respectively, from our furniture products, approximately $25.9 million
and $3.8 million, respectively, from our straw and wicker products, and $1.2
million and $0.2 million, respectively, from our crafts products. For
fiscal year 2009, sales and net income were approximately $37.1 million and $6.7
million, respectively, from our furniture products, approximately $31.2 million
and $5.1 million, respectively, from our straw and wicker products, and $1.1
million and $0.2 million, respectively, from our crafts products.
As of September 30, 2010, we had
total assets of $56,809,128, available cash and cash equivalents of $5,987,670
and approximately 1500 full time employees. Our operating facilities
consist of 19 plants located in our Caopu Industrial Park, which includes our
existing 4 industrial parks in Cao County, Shandong Province,
PRC. Our existing industrial parks have a total area of approximately
162,688.82 square meters, of which 71,708.4 square meters consists of buildings
that house our production lines, warehouses, executive offices and related
business facilities. In December 2006, we were granted a free land
use right for an additional 98,435.32 square meters by the PRC local government,
upon which we intend to build our 5th
industrial park. As of September 30, 2010, we have land use rights
for a total of 261,124.14 square meters.
For the fiscal year ended 2009, we
produced 1,200,000 units of wooden furniture, 3,500,000 units of straw-wicker
products and 300,000 units of wooden-craft products. We believe,
based on our management’s experience, that we currently can only fulfill
approximately 60%-70% of order requests from our customers for our wooden
furniture products. We believe that the completion of our new
production facility will enable us to fulfill a greater percentage of order
requests from our customers.
Because straw, wicker and handicraft
products are relatively easy to produce, and do not require a significant
investment in technology or equipment, we do not produce such products in our
manufacturing facilities. Instead, we employ local people to
manufacture such products in their homes in Cao County, Shandong Province,
PRC.
All of our four existing industrial
parks are engaged in producing wood furniture. Our four industrial
parks consist of 19 plants, which produce a full line of residential furniture
products, including kitchen furniture, office furniture, living room furniture,
outdoor furniture and general living furniture. In order to respond
quickly to customer orders, we have designed our facilities and developed
manufacturing practices that allow us to be highly flexible so that certain of
our plants can be used to produce several types of
furniture.
3
Concentration
on Furniture Industry
Based upon our experience as
furniture makers and sellers both domestically and internationally as well as
the Shandong Caopu Arts &
Crafts Co., Ltd Poplar Furniture & Paint Line Expansion Projects Feasibility Study
Report, a
report issued by China Shandong Province Engineering Consultation Institute in
March 2009 (the “Shandong Report”), we believe that the demand for furniture has
been growing steadily worldwide. We believe that historically western
countries have accounted for the majority of world furniture production and
consumption. However, we believe that the global furniture industry
is undergoing a substantial transformation, where developing countries, such as
China, are playing an increasingly important role in wood
furniture production and consumption. As a result, although our
straw, wicker and handicraft products have been and continue to be an integral
part of our overall business, we intend to focus and devote a substantial part
of our resources to expand our wood furniture business.
Our
Competitive Advantages
We believe that we are one of the
large-scale producers and manufacturers of furniture and craft products in China
because we have (i) over $7 million production facilities and equipments in 19
plants in a total area of 162,688.82 square meters, (ii) average revenue of $40
million in past 3 years, and (iii) over 20,000 types of
products.
We believe we have the following
competitive advantages over our competitors:
|
·
|
We
believe our brand name “CAOPU” is well-known among oversea retailers and
wholesalers, such as Zara-Home, Habitat UK Ltd., ABM Group Inc., and
IKEA;
|
|
·
|
We
believe that we are becoming more well known among overseas retailers and
wholesalers for our poplar and paulownia wood
products;
|
|
·
|
Our
research and development (“R&D”) team has 24 employees, each of whom
has over 4 years of experience in furniture and craft
production;
|
|
·
|
We
have what we believe to be a strong technological team in product
improvement;
|
|
·
|
We
have developed products based on traditional folk art in Cao
County;
|
|
·
|
We
believe that our raw materials costs are lower than our competitors
because our production facility is located in an area that has an
abundance of fast-growing trees that we use in manufacturing our products;
and
|
|
·
|
Over
the past ten years, we have developed long-term customer cooperative
relationships with a number of well known companies, such as Zara-Home,
Habitat UK Ltd., ABM Group Inc., and
IKEA.
|
Our
Strengths
We believe we have the following
strengths in our own manufacturing, distribution and brand
recognition:
1. Our revenues and net income have
increased substantially over the past 2 years. Specifically, we
generated revenues of $69,435,044 and $42,197,393 in 2009 and 2008,
respectively, and achieved net income of $12,021,155 and $5,761,994 during the
twelve months ended December 31, 2009 and 2008, respectively. In
addition, for the nine months ended September 30, 2010, our revenues and net
income were $62,181,727 and $10,286,442 respectively.
2. We commit ourselves to
improve our production techniques and have flexibility in producing more
customer-oriented and/or market-oriented products.
3. We believe our management team and
products have established a good reputation among domestic and multinational
retailers around the world, such as Zara-Home, ABM Group Inc., Habitat UK Ltd.
and Fuji Boeki Co., Ltd.
4. We have a reliable
supplier network for low-cost raw materials from or outside Cao
County.
5. We impose rigorous
quality control standards for our products, not only complying with various
national quality standards but also special quality requirements demanded by our
clients.
6. We have an experienced and committed
management team, whose in-depth knowledge of the furniture business enabled our
revenue to increase the last two fiscal years.
7. The natural raw material resource in
Cao County and comparatively cheap labor costs make our products competitive in
the international furniture market.
4
Our
Weaknesses/Challenges
Need
to increase our production capacity
Most of our current production
equipment and facilities were purchased 4-5 years ago and we believe are not
sufficiently up to date to optimally allow us to meet customer demand for our
products, which we believe reduces our overall product output and
revenues. In addition, due to the age of certain of our current
production machines, we cannot produce certain products that new machines would
allow us to produce. As a result, our production capacity limits our
ability to accept certain overseas orders.
Lack
of customer name brand to end customers
We are an original equipment
manufacturer (“OEM”) for North American and European
manufacturers. Currently, we receive orders and sell our products
directly to retailers and wholesalers, who then resell our manufactured products
to end users using the brand name of such retailers and
wholesalers. Because we have not established our own name brand, end
users do not recognize or “seek out” our products, which prevents us from
selling our products under our own brand name.
Absence
of our own sales and distribution channels
We market and distribute our products
mainly to retailers and wholesalers instead of consumers and we have not set up
our own sales and distribution channels. Therefore, our sales are
partially dependent on the sales, sales efforts and distribution channels of
retailers and wholesalers who sell our products. Generally, this
subjects our revenues to factors under the control of our retailers and
wholesalers such as the quality of their showrooms, the quality and budget
for marketing and advertising of such products and the availability of space in
their showrooms and stores to show our products.
Our
Proposed Growth Strategy
Based upon the historical growing
demand for our wood furniture products and the changing dynamics of the wood
furniture industry, we believe we have a unique opportunity to substantially
increase our revenues, net income and gross margins by not only expanding the
capacity of our existing wood furniture production business but also producing
additional types of wood furniture products for which we believe there is a
large and increasing international demand.
We seek to increase our revenues by
taking advantage of the increasing demand for wood furniture
worldwide. To attempt to capitalize on such perceived opportunity, we
have developed a four prong plan as follows:
(i) increasing our production capacity
to meet increasing demands by developing a new manufacturing line;
(ii) developing new and higher end wood
furniture products by developing new manufacturing lines in the
future;
(iii) strengthening our R&D to
better able us to produce our products quicker and more efficiently;
and
(iv) strengthening and developing
stronger relationship with our current and potential new clients in foreign
countries.
Office
Location
Our executive offices are located at
No. 2888 Qinghe Road, Development Zone Cao County, Shandong province, 274400
PRC, and our telephone number is (86) 530-3432696. Our website is
www.caopu.cn and www.shandongindustries.com. Information on our
website or any other website is not a part of this prospectus.
Corporate
History and Organizational Structure
We are a holding company and all of our
active business operations are conducted by our indirect, operating subsidiary,
Shandong.
We were incorporated in February
2007 in Delaware under the name Mobile Presence Technologies, Inc. to develop
and provide software and services to enhance the use of cellular phones and
other hand held communication devices. In November 2009, we acquired
all of the issued and outstanding capital stock of Tianwei International
Development Corporation, which we refer to as Tianwei. Tianwei was
incorporated under the laws of Oregon on January 13, 2009 and is the owner
of all of the issued and outstanding capital stock of Shandong. Shandong was
organized under the laws of the PRC in August 2000 under the name Heze Caopu
Arts & Crafts Co., Ltd. In November 2000, it changed its name to Shandong
Caopu Arts & Crafts. Co., Ltd. In April 2008, Shandong has
registered capital of $7.8 million, 96.79% of which was owned by Shandong Cao
County Changsheng Arts & Crafts Co., Ltd. and the remaining 3.21% was owned
by Japan Fit Co., Ltd. In January 2009, Tianwei acquired Japan Fit’s
3.21% interest in Shandong and in July 2009, Tianwei acquired Shandong Cao
County Changsheng Arts & Crafts Co., Ltd.’s 96.79% interest in
Shandong. As a result, Tianwei became the sole owner of Shandong and
we became the 100% owner of Tianwei. In addition, as a result of its new
ownership structure, Shandong became a “Wholly Foreign Owned Enterprise” or
“WFOE” under PRC law. On December 3, 2009, we filed a certificate of
amendment to our certificate of incorporation changing our name to China
Shandong Industries, Inc. to better align our name with our business, increasing
our authorized shares of common stock to 100,000,000 and effectuating a 15 for 1
forward split of our common stock. On August 3, 2010, we effectuated a 1-for-2
reverse stock split of our common stock. Effective on or about January 18,
2011, we will effectuate a 1 for 1.5 reverse split of our shares of common
stock.
5
The following chart reflects our
organizational structure as of the date of this prospectus:
6
The following chart reflects our
organizational structure upon the closing of this public offering:
(1) CAOPU Enterprise Limited, a
BVI entity (“CAOPU”), owns approximately 86.0% of our issued and outstanding
common stock. Mr. Jinliang Li, our Chairman, Chief Executive Officer
and controlling shareholder, owns all of the issued and outstanding capital
stock of CAOPU. Of the shares owned by CAOPU, shares representing
approximately 51% of our issued and outstanding shares are held for the
benefit of Mr. Li and shares representing approximately 35% of our issued and
outstanding shares are held for the benefit of nine other minority shareholders
(none of whom owns more than 4.4% of our issued and outstanding shares
individually). The shares held by CAOPU for the benefit of Mr. Li and
the minority shareholders are held pursuant to the terms of agreements between
CAOPU and each such shareholder, a form of which is attached as an exhibit to
this registration statement. Pursuant to the terms of such
agreements, CAOPU will continue to hold such shares for the benefit of such
shareholders for a period of 15 months after we complete the public offering of
our securities, unless such time period is extended. Although Mr. Li
has no pecuniary interest in the shares held by CAOPU for the benefit of the
nine minority shareholders, by reason of his sole ownership of CAOPU, Mr. Li has
sole voting and dispositive power over such shares of our common
stock.
(2) None of the other shareholders has
more than 5% shares of our restricted common stock.
7
THE
OFFERING
Common
stock we are offering
|
shares
|
|
Offering
price
|
$ per
share
|
|
Common
stock outstanding before this offering
|
8,610,009 shares
|
|
Common
stock outstanding after this offering
|
shares
|
|
Over-allotment
option
|
We
granted the underwriters the right to purchase up
to additional
shares from us at the public offering price, less the underwriting
discount, within 45 days from the date of this prospectus to cover
over-allotments, if any.
|
|
Use
of proceeds:
|
We
intend to use the net proceeds from this offering to construct a new
production facility. This production facility will include modern
equipment and components that we believe will allow us to produce our
products more quickly and in greater quantity, without sacrificing
quality, which we believe will enable us to satisfy a greater percentage
of oversea requests for our products received by us that we are currently
unable to fulfill. The total cost of such production facility we
believe is approximately $20 million, including but not limited to (i)
$5.3 million to build a 40,000 square meter work shop, (ii) $6.7 million
to purchase the necessary equipment for the production line, and (iii)
$8.0 million to purchase raw materials and other materials used in the
manufacturing of products the new production line will produce. We
intend to obtain the balance of such funds from our working capital,
and/or retained earnings. See “Use of Proceeds” on page 26 for more
information.
|
|
Market
for our common stock
|
Our
common stock is quoted on the OTC Bulletin Board under the symbol
“CSNH”. To date, however, trading activity in our common
stock has been extremely limited. We intend to apply for the
listing of our common stock on NASDAQ Capital Market.
|
|
Proposed
NASDAQ Capital Market symbol for our common stock
|
“CPGY ”
|
|
Dividend
policy:
|
Our
board of directors does not intend to declare cash dividends on our common
stock in the foreseeable future.
|
|
Risk
Factors
|
Investing
in our 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 10.
|
8
SUMMARY
CONSOLIDATED FINANCIAL DATA
The following summary consolidated
financial data is derived from our financial statements appearing elsewhere
herein. Our auditor Bongiovanni & Associates,
C.P.A.’s, an independent registered public accounting firm, audited our balance
sheet at December 31, 2009 and 2008, and the related statements of operations,
stockholders’ equity and cash flows for the two years ended December 31, 2009
and December 31, 2008. Our September 30, 2010 balance sheet and the
related statements of operations for the quarters ended September 30, 2010 and
September 30, 2009 have not been audited. The following data should
be read in conjunction with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in this prospectus and the
financial statements and notes thereto included in this prospectus.
Financial
Summary Information
Because this is only a financial
summary, it does not contain all the financial information that may be important
to you. It should be read in conjunction with the consolidated
financial statements and related notes presented in this section.
Consolidated
Statement of Operations
Three Months Ended
|
Nine Months Ended
|
Year Ended
|
||||||||||||||||||||||
Statements of
Operations
|
September 30,
2010
|
September 30,
2009
|
September 30,
2010
|
September 30,
2009
|
December 31,
2009
|
December 31,
2008
|
||||||||||||||||||
Revenues
|
$
|
22,746,574
|
$
|
14,725,112
|
$
|
62,181,727
|
$
|
46,201,117
|
$
|
69,435,044
|
$
|
42,197,393
|
||||||||||||
Cost
of Sales
|
$
|
16,462,614
|
$
|
10,924,422
|
$
|
45,206,191
|
$
|
34,516,927
|
$
|
49,360,775
|
$
|
31,570,829
|
||||||||||||
Operating
expenses
|
$
|
761,473
|
$
|
595,057
|
$
|
2,487,106
|
$
|
1,541,838
|
$
|
2,797,647
|
$
|
2,553,693
|
||||||||||||
Income
from operations
|
$
|
5,522,487
|
$
|
3,205,633
|
$
|
14,488,430
|
$
|
10,142,353
|
$
|
17,276,623
|
$
|
8,072,871
|
||||||||||||
Other
(expense) income
|
$
|
(125,439
|
)
|
$
|
(148,829
|
)
|
$
|
(609,172
|
)
|
$
|
(292,396
|
)
|
$
|
(1,161,581
|
)
|
$
|
(356,959
|
)
|
||||||
Income
from operations before income taxes
|
$
|
5,397,048
|
$
|
3,056,804
|
$
|
13,879,257
|
$
|
9,849,956
|
$
|
16,115,042
|
$
|
7,715,912
|
||||||||||||
Income
taxes
|
$
|
1,388,588
|
$
|
764,198
|
$
|
3,592,816
|
$
|
2,433,631
|
$
|
(4,093,887
|
)
|
$
|
(1,953,918
|
)
|
||||||||||
Net
income
|
$
|
4,008,460
|
$
|
2,292,606
|
$
|
10,286,442
|
$
|
7,416,325
|
$
|
12,021,155
|
$
|
5,761,994
|
||||||||||||
Foreign
currency translation adjustment
|
$
|
371,886
|
$
|
9,088
|
$
|
823,162
|
$
|
6,157
|
$
|
(241,522
|
)
|
$
|
746,119
|
|||||||||||
Comprehensive
Income
|
$
|
4,380,346
|
$
|
2,301,694
|
$
|
11,109,604
|
$
|
7,422,482
|
$
|
11,779,634
|
$
|
6,508,113
|
||||||||||||
Earnings
per common share
|
||||||||||||||||||||||||
Basic
|
$
|
0.47
|
$
|
0.29
|
$
|
1.20
|
$
|
0.92
|
$
|
1.47
|
$
|
0.75
|
||||||||||||
Fully
diluted
|
$
|
0.45
|
$
|
0.29
|
$
|
1.17
|
$
|
0.92
|
$
|
1.47
|
$
|
0.75
|
||||||||||||
Weighted
average common shares outstanding
|
||||||||||||||||||||||||
Basic
|
8,575,000
|
8,146,250
|
8,575,000
|
8,146,250
|
8,146,250
|
7,717,500
|
||||||||||||||||||
Fully
diluted
|
8,775,000
|
8,146,250
|
8,741,676
|
8,146,250
|
8,165,139
|
7,717,500
|
Consolidated
Balance Sheets
Balance Sheet Data:
|
As of
September
30,
2010
|
As of
December 31,
2009
|
As of
December 31,
2008
|
|||||||||
Cash
|
$
|
5,987,670
|
$
|
2,185,839
|
$
|
1,751,997
|
||||||
Total
current assets
|
$
|
38,324,576
|
$
|
30,811,832
|
$
|
25,557,649
|
||||||
Fixed
assets, net
|
$
|
7,510,003
|
$
|
7,347,100
|
$
|
7,838,969
|
||||||
Other
assets
|
$
|
10,974,549
|
$
|
7,017,466
|
$
|
88,499
|
||||||
Total
Assets
|
$
|
56,809,128
|
$
|
45,176,398
|
$
|
33,485,117
|
||||||
Current
liabilities
|
$
|
10,593,108
|
$
|
10,404,684
|
$
|
10,493,036
|
||||||
Long
term liabilities
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
||||||
Stockholders’
equity
|
$
|
46,216,020
|
$
|
34,771,714
|
$
|
22,992,081
|
||||||
Total
liabilities and stockholders’ equity
|
$
|
56,809,128
|
$
|
45,176,398
|
$
|
33,485,117
|
9
RISK
FACTORS
An investment in our common stock
involves significant risks. You should carefully consider the
following risks and all other information set forth in this prospectus before
deciding to invest in our common stock. If any of the events or developments
described below occurs, our business, financial condition and results of
operations may suffer. In that case, the value of our common stock may decline
and you could lose all or part of your investment.
Our current business operations are
conducted in the PRC. Because China’s economy and its laws,
regulations and policies are different from those typically found in the West
and are continually changing, we face certain risks, which are summarized
below.
Risks
Related to Our Business and Industry
The
current economic and credit environment could have an adverse effect on demand
for certain of our products and services, which would in turn have a negative
impact on our results of operations, our cash flows, our financial condition,
our ability to borrow and our stock price.
Since at least 2008, global market and
economic conditions have been disrupted and volatile. Concerns over
increased energy costs, geopolitical issues, the availability and cost of
credit, the U.S. mortgage market and a declining residential real estate market
in the U.S. have contributed to this increased volatility and diminished
expectations for the economy and the markets going forward. These
factors, combined with volatile oil prices, declining business and consumer
confidence and increased unemployment, have precipitated a global
recession. It is difficult to predict how long the current economic
conditions will persist, whether they will deteriorate further, and which of our
products, if not all of them, will be adversely affected. These
conditions, if they continue, could cause a material decrease in our sales, net
income and an increase in the prices we pay for raw materials used in producing
our furniture products and, thus, materially affect our operating results and
financial condition.
We may be unable to maintain an
effective system of internal control over financial reporting, and as a result
we may be unable to accurately report our financial results.
Our reporting obligations as a public
company place a significant strain on our management, operational and financial
resources and systems. If we fail to maintain an effective system of
internal control over financial reporting, we could experience delays or
inaccuracies in our reporting of financial information, or non-compliance with
the SEC, reporting and other regulatory requirements. This could subject us to
regulatory scrutiny and result in a loss of public confidence in our management,
which could, among other things, cause our stock price to drop.
We
issued financial statements that we were required to restate in that they were
not to be relied upon as a result of ineffective disclosure controls and
procedures.
On June 17, 2010, our management
concluded that our audited consolidated financial statements for the fiscal year
ended December 31, 2009 (the “2009 Year”), and our unaudited consolidated
financial statements for the quarter ended March 31, 2010 (the “2010 1st
Quarter”), could no longer be relied upon. We filed a Current Report
on Form 8-K with the SEC disclosing that the financial statements could not be
relied upon on June 23, 2010. During the course of our review, we
determined that our revenues were understated by approximately $10 million for
the 2009 Year and overstated by approximately $55,000 for the 2010 1st
Quarter. We further determined that our net income will increase by
approximately $2 million for the 2009 Year, and decrease by approximately
$24,000 for the 2010 1st Quarter. As a result, we restated our
financial statements for the 2009 Year as well as for the 2010 1st
Quarter.
The reason for the discrepancy in our
financial statements was that we recognized revenue on the date that we
physically received clearance papers from the Chinese customs department
(“Customs”). These clearance papers permit us to ship our products to
their purchasers. However, there is a time lag between the date that
we receive physical delivery of the clearance papers from Customs and the date
that Customs actually approves the shipment of our products. On June
17, 2010, we concluded that the date that Customs actually approves the shipment
of our products is the more appropriate and accurate date on which to recognize
revenue.
While both the initial and subsequent
means of recognizing revenue are consistent with GAAP, we believe that our
presentation to our auditors of a policy that our management later concluded was
less appropriate than the policy that we presently have in place resulted from
inadequate internal communications. We further believe that such
internal communications may indicate that our disclosure controls and procedures
were ineffective as of the end of December 31, 2009 and March 31, 2010 since the
information necessary to adopt the most appropriate policy was not communicated
in a sufficiently timely manner. However, we believe that this was a
relatively minor, isolated incident that is not representative of such
disclosure controls and procedures taken as a whole. In addition, we
have since the occurrence of this incident taken certain corrective steps, such
as hiring a full-time chief financial officer whom we believe has enhanced the
effectiveness of our disclosure controls and procedures.
10
Although we believe that these
corrective steps will enable management to conclude that our disclosure controls
and procedures are effective, we cannot assure you that this will be
sufficient. If we should in the future conclude that our disclosure
controls and procedures are ineffective we will be required to expend additional
resources to improve such disclosure controls and procedures. Any
additional instances of ineffective disclosure controls and procedures, among
other items, could cause our future financial statements to be incorrect, which,
if material, could require a restatement. If such further
restatements are required, there could be a material adverse affect on our
investors’ confidence that our financial statements fairly present our financial
condition and results of operations, which in turn could materially and
adversely affect the market price of our common stock.
Because
we will require additional financing to expand our operation in accordance with
our growing strategy, our failure to obtain necessary financing will impair our
growth strategy.
As of September 30, 2010, we had
working capital of $ 27,731,468. Our capital requirements in
connection with our planned development and growth of our business are
significant.
We believe we can substantially
increase our revenue, net income and gross margins by implementing a growth
strategy that focuses on (i) selling new wood furniture products and (ii)
increasing our existing manufacturing capacity. To implement our
growth strategy, we intend to expand our current Caopu Industrial Park by (i)
constructing our 5th industrial
park, located in such area, which will include the 2 new production facilities
and an R&D center (ii) upgrading our existing facilities to further attempt
to maximize our existing production lines, and (iii) setting up new facilities
that will produce products used in the production of our new and existing
furniture lines. We also intend to open retail stores overseas
to sell our products directly to end users.
The estimated costs for this and other
projects that are part of our growth strategy in the future will cost us an
estimated approximately $74.8 million in aggregate and will be undertaken in
phases over a period of 3 to 5 years depending on the funds available to us
including internal capital and external capital. We intend to use the
net proceeds from this offering to fund a substantial portion of the first of
our 2 proposed new production lines. Such production line costs an
estimated approximately $20 million. As a result, following the
closing of this offering, we will still need an additional approximately $2
million to finish our new furniture production line. The additional
$2 million needed to complete such production line is expected to come from our
working capital and/or retained earnings. We currently estimate,
however, the first of our 2 proposed production lines will be in production
approximately 3 to 6 months after closing of this public offering.
We currently have no commitments
with any third party to obtain such additional financing and we cannot assure
you that we will be able to obtain additional financing on any terms, and, if we
are able to raise additional funds, it may be necessary for us to sell our
securities at a price which is at a significant discount from the market price
and on other terms which may be disadvantageous to us. In connection
with any such financing, we may be required to provide registration rights to
the investors and pay damages to the investors in the event that the
registration statement is not filed or declared effective by specified
dates. The price and terms of any financing which would be available
to us could result in both the issuance of a significant number of shares and
significant downward pressure on our stock price. If we are unable to
obtain and/or fund the additional $2 million ourselves, our revenues and net
income could decrease.
Failure
to produce and/or sell our new products may have an adverse effect on
us.
As part of our growth strategy we
intend to construct 2 new production lines which will manufacture products that
we perceive global demand for. The failure by us to successfully
manufacture such new products on a cost effective and timely basis and/or sell
such products in sufficient amounts would result in us having expended
substantial fund and time without producing corresponding revenues and net
income, which could, among other negative items, weaken our cash position and
further reduce our operating results.
An
increase in the cost of raw materials, or our failure to obtain enough raw
materials will adversely affect sales and revenues.
Raw materials required for the
crafts and furniture industry include poplar, paulownia and other natural
sources. Any increase in the prices of these raw materials in the
future will affect the price at which we can sell our products. In
addition, as we expand our business, we may encounter the problem of a shortage
of raw materials. If we are not able to raise our prices to pass on
increased costs or if we cannot obtain enough raw materials to meet the
expansion of our business, we would be unable to maintain our margins, which
would adversely affect our financial condition.
Because
our funds are held in banks which do not provide insurance, the failure of any
bank in which we deposit our funds could affect our ability to continue in
business.
Banks and other financial institutions
in the PRC do not provide insurance for funds held on deposit. A
significant portion of our assets are in the form of cash deposited with banks
in the PRC, and in the event of bank failure, we may not have access to, or may
lose entirely, our funds on deposit. Depending upon the amount of
cash we maintain in a bank that fails, our inability to have access to such cash
deposits could impair our operations, and, if we are not able to access funds to
pay our suppliers, employees and other creditors, we may be unable to continue
in business.
11
We
may be unable to successfully expand our manufacturing capacity, which could
result in material delays, quality issues, increased costs and loss of business
opportunities, which may negatively impact our product margins and
profitability.
Part of our future growth strategy
is to increase our manufacturing capacity to meet increasing demand for our
existing products. Assuming we obtain sufficient funding to increase our
manufacture capacity, any projects undertaken by us to increase such capacity
may not be constructed on the anticipated timetable or within
budget. We may also experience quality control issues as we implement
these manufacturing upgrades and ramp up production. Any material
delay in completing these projects, or any substantial increase in costs or
quality issues in connection with these projects, could materially delay our
ability to bring our products to market and adversely affect our business,
reduce our revenue, income and available cash, all of which could result in
harming our financial condition.
If
we fail to meet evolving demands and requirements of customers for our furniture
and other products, through product enhancements or introducing new products, or
if our products cannot compete effectively, our financial results may be
negatively affected.
The market for our furniture and other
products is characterized by changing design and evolving demands and
requirements of customers and industry. Our competitors are continuously
developing and designing new products, which, if successful, could undermine the
competitiveness of our products. Our current and future research and
development efforts will focus on developing and designing new products,
applications and technologies to enhance our existing products. If we
fail to timely develop new product enhancements and new products or if the
competitiveness of our products are greatly undermined, we may be unable to grow
our revenue as expected and may incur expenses relating to the development or
acquisition of new products and technologies that are not fully offset by the
revenue they generate, which could result in a substantial and material
loss of our current customers, future business opportunities and a decrease in
revenues, income and available cash.
29%
of our products were sold to Trade Point A/S Direct Container (“Trade Point”) in
the fiscal 2009, but only 6.4% of our products were sold to such customer for
the nine months ended September 30, 2010.
In Fiscal 2009, we sold approximately
$20,103,933 (29% of our revenues) of our products to Trade Point. For the nine
months ended September 30, 2010, we sold $3,989,617 (6.4% of our revenues) of
our products to Trade Point. We believe this reduction resulted from other
customers increasing their orders for our products, while Trade Point
decreased its orders for our products for the nine months ended September
30, 2010.
We cannot provide assurances that the
decline in Trade Point’s orders of our products will not continue, nor can we
guarantee that sales of our products to other customers will continue to
increase. The continue loss or substantial decrease in sales of our
products to Trade Point for the remaining portion of the year could result in a
substantial reduction in our revenues and net income for 2010. See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Comparison of the Three and Nine Months Ended September 30, 2010
and 2009”.
Our
business and operations are experiencing rapid growth. If we fail to effectively
manage our growth, our business and operating results could be
harmed.
We have experienced, and may continue
to experience, rapid growth in our operations, which has placed, and may
continue to place, significant demands on our management, operational and
financial infrastructure. If we do not effectively manage our growth,
the quality of our products and services could suffer, which could negatively
affect our operating results. To effectively manage this growth, we
will need to continue to improve our operational, financial and management
controls and our reporting systems and procedures. These systems
enhancements and improvements may require significant capital expenditures and
management resources. Failure to implement these improvements could hurt our
ability to manage our growth and our financial position.
We
generated more than 5% of our revenues from sales of our products to customers
located in each of Denmark, the United States, Japan, Germany, and Spain for
fiscal 2009.
For fiscal 2009, we generated
approximately 34.4% of our revenues from sales of our products to Denmark, 6.38%
to the United States, 5.65% to Japan, 6.95% to Germany, and 6.1% to
Spain. The percentage of sales to each country varies each
year. If the domestic demand for our products decrease in one or more
of the above countries, or there is any material social and/or regulatory
changes in any of the above countries, such as increases in tariffs and taxes,
such factors could result in a material decrease in our revenues and net
income.
Failure
to enhance our brand recognition could have a material adverse effect on our
business and results of operations.
We believe we will need to expend
significant time, effort and resources to enhance the recognition of our
brands. We believe developing our brand is important to our sales and
marketing efforts. A failure to enhance the recognition of our brands
could have a material adverse effect on our ability to sell our product and thus
affect our business and results of operations. If we fail to develop
a positive public image and reputation, our existing business with our customers
could decline and we may fail to develop additional business, which could in
turn adversely affect our prospects and results of
operations.
12
We
may face increased competition and, if we are unable to compete successfully,
our financial condition and results of operations may be adversely
affected.
We believe the main factors that
have and in the future could negatively impact our operating results are (i)
cost of raw materials, (ii) the prices at which our products are sold by third
party retailers, (iii) research and development, (iv) demand for our new
products, and (v) our capital requirements. Because we believe we have an
advantage over our competitors in the price at which we obtain our raw materials
and our research and development, we believe our current products have an
advantage over competitors’ products. However, we may not be able to
continue to compete effectively with our existing competitors, or compete
effectively with new competitors. In addition, some of our
competitors may acquire or have more financial and other resources than we
do. If we fail to compete effectively, our business operations and
financial condition will suffer.
Our
intellectual property rights are valuable, and any inability to adequately
protect, or uncertainty regarding validity, enforceability or scope of them
could undermine our competitive position and reduce the value of our products,
services and brand, and litigation to protect our intellectual property rights
may be costly.
We attempt to strengthen and
differentiate our product portfolio by developing new and innovative products
and product improvements. As a result, our patents, trademarks, trade
secrets, copyrights and other intellectual property rights are important assets
to us. Various events outside of our control pose a threat to our
intellectual property rights as well as to our products and
services. For example, effective intellectual property protection may
not be available in China and other countries in which our products are
sold. Also, although we have applied for the intellectual property
protection of 7 patents and have registered our trademark in China, Japan
and the World Intellectual Property Organization, the efforts we have taken to
protect our proprietary rights may not be sufficient or
effective. Any significant impairment of our intellectual property
rights could harm our business or our ability to compete and adversely affect
our results of operation. Also, protecting our intellectual property rights is
costly and time consuming. Policing the unauthorized use of our
proprietary technology can be difficult and expensive. Litigation
might be necessary to protect our intellectual property rights. But
due to the relative unpredictability of the Chinese legal system and potential
difficulties of enforcing a court’s judgment in China, there is no guarantee
that litigation would result in an outcome favorable to us. Furthermore, any
such litigation may be costly and may divert our management’s attention away
from our core business. An adverse determination in any lawsuit
involving our intellectual property is likely to jeopardize our business
prospects and reputation. Although currently we are not aware of any
of such litigation, we have no insurance coverage against the litigation costs
so we would be forced to bear all litigation costs if we cannot recover them
from other parties in the future. All of the foregoing factors could
harm our business, financial condition and results of operations. Any
increase in the unauthorized use of our intellectual property in the future
could make it more expensive for us to do business and harm our operating
results.
We
may be exposed to infringement or misappropriation claims by third parties,
which, if determined adversely against us, could adversely affect our business
and subject us to significant liability to third parties.
Our success mainly depends on our
ability to use and develop our technology and product designs without infringing
upon the intellectual property rights of third parties. We may be
subject to litigation involving claims of patent infringement or violations of
other intellectual property rights of third parties. The holders of
patents and other intellectual property rights potentially relevant to our
product offerings may be unknown to us, which may make it difficult for us to
acquire a license on commercially acceptable terms. There may also be
technologies licensed to and relied upon by us that are subject to infringement
or other corresponding allegations or claims by third parties which may damage
our ability to rely on such technologies. In addition, although we
endeavor to ensure that companies that work with us possess appropriate
intellectual property rights or licenses, we cannot fully avoid the risks of
intellectual property rights infringement created by suppliers of components
used in our products or by companies we work with in cooperative research
and development activities. Our current or potential competitors may
have obtained or may obtain patents that will prevent, limit or interfere with
our ability to make, use or sell our products. The defense of
intellectual property claims, including patent infringement suits, and related
legal and administrative proceedings can be both costly and time consuming, and
may significantly divert the efforts and resources of our
technical personnel and management. These factors could
effectively prevent us from pursuing some or all of our business operations and
result in our customers or potential customers deferring, canceling or limiting
their purchase or use of our products, which may have a material adverse effect
on our business, financial condition and results of operations.
Problems
with product quality or product performance could result in a decrease in
clients and revenue, unexpected expenses and loss of market share.
We believe our results of operations
depend partly on our ability to deliver quality products on a timely and cost
effective basis. Although currently our products need to pass our own quality
test before being shipped to customers, as we develop new products and expand
our operations, it may become more difficult to guarantee the quality of our
products. Any deterioration in the performance or quality of any of
our products, including as a result of the expansion of our manufacturing
capabilities, could result in delays in delivery, cancellations of orders or
client returns and complaints, loss of goodwill and harm to our brand and
reputation. These problems may lead to a decrease in customers and revenues,
harm to our brand, unexpected expenses, loss of market share, the
incurrence of significant repair costs, diversion of the attention of our
personnel from our product development efforts or customer relations problems,
any one of which may materially and adversely affect our business, financial
condition and results of operations.
13
Environmental
claims or failure to comply with any present or future environmental laws or
regulations may require us to spend additional funds and may harm our results of
operations.
We are subject to environmental, health
and safety laws and regulations such as Environmental Protection Law, Regulation
on Work Safety Licenses, Production Safety Law, etc. that affect our operations,
facilities and products in China. Any failure to comply with any
present or future environmental, health and safety laws and regulations could
result in the assessment of damages or imposition of fines against us,
suspension of production, cessation of our operations or even criminal
sanctions. New laws and regulations could also require us to acquire
costly equipment or to incur other significant expenses. Our failure
to control the use of, or adequately restrict the discharge of, hazardous
substances could subject us to potentially significant monetary damages and
fines or suspension of our business operations, which may harm our results of
operations.
Because
we depend on retailers or wholesalers to market our products in the
international market, any problems encountered by these third parties, or our
failure to maintain relationships with these third parties or to expand third
parties, could negatively affect our sales.
We do not have any sales offices
outside of the PRC although most of our products are sold to overseas companies
and we depend on other companies to market our products in the international
market. As a result, we are dependent upon third parties, over which
we have no control, to develop and implement an international marketing
effort. Any problems encountered by these third parties, including
potential violations of laws of the PRC or other countries, or our failure to
maintain relationships with the third parties or to expand third parties, may
adversely affect the sales of our products which would, in turn, affect our
sales and net income.
We
rely on highly skilled personnel and the continuing efforts of our executive
officers and, if we are unable to retain, motivate or hire qualified personnel,
our business may be severely disrupted.
Our performance largely depends on
the talents and efforts of highly skilled individuals and in particular, the
technology and expertise held by our chief executive officer, Jinliang
Li.
Our future success depends on our
continuing ability to identify, hire, develop, motivate and retain highly
skilled personnel for all areas of our organization. Our continued
ability to compete effectively depends on our ability to attract new technology
developers and to retain and motivate our existing contractors.
Our chief executive officer and chief
financial officer have employment contracts with certain of our operating
subsidiaries as described elsewhere in this prospectus. However, if
any disputes arise between any such person and us, we cannot assure you, in
light of uncertainties associated with the Chinese legal system, the extent to
which any of such agreements could be enforced in China, where such persons
reside and hold some of their assets.
If one or more of our executive
officers are unable or unwilling to continue in their present positions, we may
not be able to replace them readily, if at all. Therefore, our
business may be severely disrupted, and we may incur additional expenses to
recruit and retain new officers. In addition, if any of our
executives joins a competitor or forms a competing company, we may lose some of
our customers.
Our
financial and operating performance may be adversely affected by epidemics,
adverse weather conditions, natural disasters and other
catastrophes.
Our financial and operating
performance may be adversely affected by epidemics, adverse weather conditions,
natural disasters and other catastrophes. For example, in early 2003,
several economies in Asia, including China, were affected by the outbreak of
severe acute respiratory syndrome, or SARS. During May and June of
2003, many businesses in China were closed by the PRC government to prevent
transmission of SARS. Our business could be materially and adversely
affected by the effects of H1N1 flu (swine flu), avian flu, severe acute
respiratory syndrome or other epidemics or outbreaks. In April 2009,
an outbreak of H1N1 flu first occurred in Mexico and quickly spread to other
countries, including the U.S. and China. In the last decade, China
has suffered health epidemics related to the outbreak of avian influenza and
severe acute respiratory syndrome. Any prolonged occurrence or
recurrence of H1N1 flu (swine flu), avian flu, SARA or other adverse public
health developments in China may have a material adverse effect on our business
and operations. These health epidemics could result in severe travel
restrictions and closures that would restrict our ability to ship our
products. Potential outbreaks could also lead to temporary closure of
our manufacturing facilities, our suppliers’ facilities and/or our end-user
customers’ facilities, leading to reduced production, delayed or cancelled
orders, and decrease in demand for our products. Any future
health epidemic or outbreaks that could disrupt our operations and/or restrict
our shipping abilities may have a material adverse effect on our business and
results of operations. Furthermore, the 2008 Sichuan earthquake also
had a negative impact on many businesses in the region. Losses caused
by epidemics, adverse weather conditions, natural disasters and other
catastrophes, including SARS, avian flu, swine flu, earthquakes or typhoons,
will adversely affect our operations.
14
Although
we have insurance coverage in the PRC, we are not protected from risks that are
customarily covered by insurance in the United States.
We have purchased property insurance
for our properties, including raw materials, semi-manufactured goods,
manufactured goods, buildings and machinery equipment, for a total insured
amount of RMB 19,968,577.69, or approximately $2,922,334, for the period from
June 14, 2010 to June 13, 2011. We also purchased insurance for money
contained in treasury, safe and money withdrawn or carried in transit, for a
total insured amount of RMB 3,100,000, or approximately $453,728, for the period
from December 3, 2010 to December 2, 2011. However, this property insurance may
not cover the full value of our property and equipment, which would
leave exposed in the event of loss or damage to our properties or claims
filed against us.
We currently do not carry any product
liability or other similar insurance. We cannot assure
you that we would not face liability in the event of the failure of any of our
products. This is particularly true given our plan to significantly
expand our sales into international markets, like the United States, where
product liability claims are more prevalent.
We do not have business liability or
business disruption insurance coverage for our operations in the
PRC.
We do not maintain a reserve fund for
warranty or defective products claims. Our costs could substantially
increase if we experience a significant number of warranty claims. We
have not established any reserve funds for potential warranty claims since
historically we have experienced few warranty claims for our products so that
the costs associated with our warranty claims have been low. If we
experience an increase in warranty claims or if our repair and replacement costs
associated with warranty claims increase significantly, it would have a material
adverse effect on our financial condition and results of
operations.
Under
PRC law, we are required to obtain and retain permits and business licenses, and
our failure to do so would adversely impact our ability to conduct business in
China.
We hold various permits, business
licenses, and approvals authorizing our operations and activities, which are
subject to periodic review and reassessment by the Chinese
authorities. Standards of compliance necessary to pass such reviews
change from time to time and differ from jurisdiction to jurisdiction, leading
to a degree of uncertainty. If renewals, or new permits, business
licenses or approvals required in connection with existing or new facilities or
activities, are not granted or are delayed, or if existing permits, business
licenses or approvals are revoked or substantially modified, we may not be able
to continue to operate our facilities which would have a material adverse affect
on our operations . If new standards are applied to renewals or new
applications, it could prove costly for us to meet these new
standards.
If
we make any acquisitions, they may disrupt or have a negative impact on our
business.
Although we have no present plans for
any specific acquisition, in the event that we make acquisitions, we could have
difficulty integrating the acquired companies’ personnel and operations with our
own. In addition, the key personnel of the acquired business may not
be willing to work for us. We cannot predict the effect expansion may
have on our core business. Regardless of whether we are successful in
making an acquisition, the negotiations could disrupt our ongoing business,
distract our management and employees and increase our expenses. In
addition to the risks described above, acquisitions are accompanied by a number
of inherent risks, including, without limitation, the following:
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the
difficulty of integrating acquired products, services or
operations;
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the
potential disruption of the ongoing businesses and distraction of our
management and the management of acquired
companies;
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the
difficulty of incorporating acquired rights or products into our existing
business;
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difficulties
in disposing of the excess or idle facilities of an acquired company or
business and expenses in maintaining such
facilities;
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difficulties
in maintaining uniform standards, controls, procedures and
policies;
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the
potential impairment of relationships with employees and customers as a
result of any integration of new management
personnel;
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the
potential inability or failure to achieve additional sales and enhance our
customer base through cross-marketing of the products to new and existing
customers;
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the
effect of any government regulations which relate to the business
acquired;
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potential
unknown liabilities associated with acquired businesses or product lines,
or the need to spend significant amounts to retool, reposition or modify
the marketing and sales of acquired products or the defense of any
litigation, whether of not successful, resulting from actions of the
acquired company prior to our
acquisition.
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Our business could be severely impaired
if and to the extent that we are unable to succeed in addressing any of these
risks or other problems encountered in connection with these acquisitions, many
of which cannot be presently identified, these risks and problems could disrupt
our ongoing business, distract our management and employees, increase our
expenses and adversely affect our results of operations.
15
Risks
Related to Doing Business in China
The
payment of dividends in the PRC is subject to limitations. We may not be able to
pay dividends to our stockholders.
We conduct all of our business
through our consolidated subsidiaries and affiliated companies incorporated in
the PRC. We rely on dividends paid by these consolidated subsidiaries
for our cash needs, including the funds necessary to pay any dividends and other
cash distributions to our stockholders, to service any debt we may incur and to
pay our operating expenses. The payment of dividends by entities
established in the PRC is subject to limitations. Regulations in the
PRC currently permit payment of dividends only out of accumulated profits as
determined in accordance with accounting standards and regulations in the PRC,
subject to certain statutory procedural requirements. Our PRC
subsidiary, even though it is a wholly foreign owned enterprise, is also
required to allocate at least 10.0% of its after-tax profit based on PRC
accounting standards each year to its general reserves or statutory reserve fund
until the aggregate amount of such reserves reaches 50.0% of its registered
capital. Our statutory reserves are not distributable as loans,
advances or cash dividends. In addition, if our PRC subsidiary incurs
debt on its own behalf in the future, the instruments governing the debt may
restrict its ability to pay dividends or make other distributions to
us. Since the aggregate amount of our general reserves equaled at
least 50% of our registered capital as of December 31, 2009, our PRC subsidiary
was not required to allocate any funds to these reserves. Any
limitations on the ability of our PRC subsidiary to transfer funds to us could
materially and adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends and
otherwise fund and conduct our business.
The
PRC economic cycle may negatively impact our operating results.
We believe that the rapid growth of
the PRC economy before 2008 generally led to higher levels of
inflation. We believe that the PRC economy has more recently
experienced a decrease in its growth rate. We believe that a number
of factors have contributed to this deceleration, including appreciation of the
RMB, the currency of China, which has adversely affected China’s
exports. In addition, we believe the deceleration has been
exacerbated by the recent global crisis in the financial services and credit
markets, which has resulted in significant volatility and dislocation in
the global capital markets. It is uncertain how long the global
crisis in the financial services and credit markets will continue and the
significance of the adverse impact it may have on the global economy in general
or the Chinese economy in particular. Slowing economic growth in
China could result in weakening growth and demand for our products which could
reduce our revenues and income. In the event of a recovery in the
PRC, renewed high growth levels may again lead to inflation. The
government’s attempts to control inflation may adversely affect the business
climate and growth of private enterprise. In addition, our
profitability may be adversely affected if prices for our products rise at a
rate that is insufficient to compensate for the rise in
inflation.
Currency
fluctuations and restrictions on currency exchange may adversely affect our
business, including limiting our ability to convert Chinese Renminbi, or RMB,
into foreign currencies
and, if the RMB were to decline in value, reducing our revenue in U.S. dollar
terms.
The
exchange rate of the RMB is currently managed by the Chinese government. On July
21, 2005, the People's Bank of China, or the People's Bank, with the
authorization of the State Council of the PRC, announced that the RMB exchange
rate would no longer be pegged to the U.S. Dollar and would float based on
market supply and demand with reference to a basket of currencies. According to
public reports, the governor of the People's Bank has stated that the basket is
composed mainly of the U.S. Dollar, the European Union Euro, the Japanese Yen
and the South Korean Won. Also considered, but playing smaller roles, are the
currencies of Singapore, the United Kingdom, Malaysia, Russia, Australia, Canada
and Thailand. The weight of each currency within the basket has not been
announced.
The
initial adjustment of the RMB exchange rate was an approximate 2% revaluation
from an exchange rate of 8.28 RMB per U.S. Dollar to 8.11 RMB per U.S. Dollar.
The People's Bank also announced that the daily trading price of the U.S. Dollar
against the RMB in the inter-bank foreign exchange market would be allowed to
float within a band of 0.3% around the central parity published by the People's
Bank, while the trading prices of the non-U.S. Dollar currencies against the RMB
would be allowed to move within a certain band announced by the People's Bank.
The People's Bank has stated that it will make adjustments of the RMB exchange
rate band when necessary according to market developments as well as the
economic and financial situation. In a later announcement published on May 18,
2007, the band was extended to 0.5%. Since July 2008, the RMB has traded at 6.83
RMB per U.S. Dollar. Recent reports indicate an upward revaluation in the value
of the RMB against the U.S. Dollar may be allowed. The People's Bank announced
on June 19, 2010 its intention to allow the RMB to move more freely against the
basket of currencies, which increases the possibility of sharp fluctuations in
the value of the RMB in the near future and thus the unpredictability associated
with the RMB exchange rate.
Despite
this change in their exchange rate regime, the Chinese government continues to
manage the valuation of the RMB. The value of our common stock will be
indirectly affected by the foreign exchange rate between the U.S. dollar and the
RMB. Appreciation or depreciation in the value of the RMB relative to the U.S.
dollar would affect our financial results reported in U.S. dollar terms
without giving effect to any underlying change in our business or results of
operations. Fluctuations in the exchange rate will also affect the relative
value of any dividend we issue that will be exchanged into U.S. dollars, as well
as earnings from, and the value of, any U.S. dollar-denominated investments we
make in the future.
16
The
income statements of our operations are translated into U.S. dollars at the
average exchange rates in each applicable period. To the extent the U.S. dollar
strengthens against foreign currencies, the translation of these foreign
currencies denominated transactions results in reduced revenue, operating
expenses and net income for our international operations. Similarly, to the
extent the U.S. dollar weakens against foreign currencies, the translation of
these foreign currency denominated transactions results in increased revenue,
operating expenses and net income for our international operations. We are also
exposed to foreign exchange rate fluctuations as we convert the financial
statements of our foreign subsidiaries into U.S. dollars in consolidation. If
there is a change in foreign currency exchange rates, the conversion of the
foreign subsidiaries’ financial statements into U.S. dollars will lead to a
translation gain or loss, which is recorded as a component of other
comprehensive income. In addition, we have certain assets and liabilities that
are denominated in currencies other than the relevant entity’s functional
currency. Changes in the functional currency value of these assets and
liabilities create fluctuations that will lead to a transaction gain or
loss.
Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into foreign
currencies.
Uncertainties
with respect to the PRC legal system could adversely affect us and we may have
limited legal recourse under PRC law if disputes arise under our contracts with
third parties.
Since 1979, we believe PRC legislation
and regulations have significantly enhanced the protections afforded to various
forms of foreign investments in China. However, China has not
developed a fully integrated legal system and recently enacted laws and
regulations may not sufficiently cover all aspects of economic activities in
China. In particular, because these laws and regulations are
relatively new, the interpretation and enforcement of these laws and regulations
involve uncertainties. In addition, the PRC legal system is based in
part on government policies and internal rules (some of which are not published
on a timely basis or at all) that may have a retroactive
effect. As a result, sometimes we may not be aware of our
violation of these policies and rules until some time after
violation.
The Chinese government has enacted some
laws and regulations dealing with matters such as corporate organization and
governance, foreign investment, commerce, taxation and trade. However, their
experience in implementing, interpreting and enforcing these laws and
regulations is limited, and our ability to enforce commercial claims or to
resolve commercial disputes is unpredictable. The resolution of these
matters may be subject to the exercise of considerable discretion by agencies of
the Chinese government, and forces unrelated to the legal merits of a particular
matter or dispute may influence their determination. Any rights we
may have to specific performance, or to seek an injunction under PRC law, in
either of these cases, are severely limited, and without a means of recourse by
virtue of the Chinese legal system, we may be unable to prevent these
situations from occurring. The occurrence of any such events could
have a material adverse effect on our business, financial condition and results
of operations.
Under
the PRC EIT Law, we and/or Tianwei may be classified as a “resident enterprise”
of the PRC. Such classification could result in tax consequences to us, our
non-PRC resident shareholders and Tianwei.
On March 16, 2007, the National
People’s Congress approved and promulgated a new tax law, the PRC Enterprise
Income Tax Law, or “EIT Law,” which took effect on January 1,
2008. Under the EIT Law, enterprises are classified as resident
enterprises and non-resident enterprises. 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 bodies” as a managing body that in
practice exercises “substantial and overall management and control over the
production and operations, personnel, accounting, and properties” of the
enterprise; however, it remains unclear whether the PRC tax authorities would
deem our managing body as being located within China. Due to the short history
of the EIT Law and lack of applicable legal precedents, the PRC tax authorities
determine the PRC tax resident treatment of a foreign company on a case-by-case
basis.
If the PRC tax authorities determine
that we and/or Tianwei are a “resident enterprise” for PRC enterprise income tax
purposes, a number of PRC tax consequences could follow. First, we
and/or Tianwei could be subject to the enterprise income tax at a rate of 25
percent on our and/or Tianwei’s worldwide taxable income, as well as PRC
enterprise income tax reporting obligations. Second, under the EIT
Law and its implementing rules, dividends paid between “qualified resident
enterprises” are exempt from enterprise income tax. As a result,
if we and Tianwei are treated as PRC “qualified resident enterprises,” all
dividends paid from Shandong to Tianwei and from Tianwei to us would be exempt
from PRC tax.
Finally, the new “resident enterprise”
classification could result in a situation in which a 10% PRC tax is imposed on
dividends we pay to our non-PRC stockholders that are not PRC tax “resident
enterprises” and gains derived by them from transferring our common stock, if
such income is considered PRC-sourced income by the relevant PRC
authorities. In such event, we may be required to withhold a 10% PRC
tax on any dividends paid to non-PRC resident stockholders. Our
non-PRC resident stockholders also may be responsible for paying PRC tax at a
rate of 10% on any gain realized from the sale or transfer of our common stock
in certain circumstances. We would not, however, have an obligation to withhold
PRC tax with respect to such gain.
17
Moreover, the State Administration of
Taxation (“SAT”) released Circular Guoshuihan No. 698 (“Circular 698”) on
December 15, 2009 that reinforces the taxation of non-listed equity transfers by
non-resident enterprises through overseas holding vehicles. Circular
698 addresses indirect share transfers as well as other
issues. Circular 698 is retroactively effective from January 1 2008.
According to Circular 698, where a foreigner (non-PRC resident) who indirectly
holds shares in a PRC resident enterprise through a non-PRC offshore holding
company indirectly transfers equity interests in a PRC resident enterprise by
selling the shares of the offshore holding company, and the latter
is located in a country or jurisdiction where the effective tax burden is
less than 12.5 percent or where the offshore income of his, her, or its
residents is not taxable, the foreign investor is required to provide the PRC
tax authority in charge of that PRC resident enterprise with certain relevant
information within 30 days of the transfer. The tax authorities in
charge will evaluate the offshore transaction for tax purposes. In
the event that the tax authorities determine that such transfer is abusing forms
of business organization and a reasonable commercial purpose for the offshore
holding company other than the avoidance of PRC income tax liability is lacking,
the PRC tax authorities will have the power to re-assess the nature of the
equity transfer under the doctrine of substance over form. A
reasonable commercial purpose may be established when the overall international
(including U.S.) offshore structure is set up to comply with the requirements of
supervising authorities of international (including U.S.) capital
markets. If the SAT’s challenge of a transfer is successful, it may
deny the existence of the offshore holding company that is used for tax planning
purposes and subject the seller to PRC tax on the capital gain from such
transfer. Since Circular 698 has a short history, there is uncertainty as to its
application. We (or a foreign investor) may become at risk of being
taxed under Circular 698 and may be required to expend valuable resources to
comply with Circular 698 or to establish that we (or such foreign investor)
should not be taxed under Circular 698, which could have a material adverse
effect on our financial condition and results of operations (or such foreign
investor’s investment in us).
If any such PRC taxes apply, a non-PRC
resident stockholder may be entitled to a reduced rate of PRC taxes under an
applicable income tax treaty and/or a foreign tax credit against such
stockholder’s domestic income tax liability (subject to applicable conditions
and limitations). Prospective investors should consult with their own
tax advisors regarding the applicability of any such taxes, the effects of any
applicable income tax treaties, and any available foreign tax
credits. For further information, see the discussion in the section
of this prospectus entitled “Material PRC Income Tax Considerations”
below.
Failure
to comply with PRC regulations relating to the establishment of offshore special
purpose companies by PRC residents may materially adversely affect
us.
In October 2005, the PRC State
Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant
Issues in the Foreign Exchange Control over Financing and Return Investment
Through Special Purpose Companies by Residents Inside China, generally referred
to as Circular 75. The policy announced in this notice required PRC
residents to register with the relevant SAFE branch before establishing or
acquiring control over an offshore special purpose company, or SPV, for the
purpose of engaging in an equity financing outside of China on the strength of
domestic PRC assets originally held by those residents. Failure to comply with
the requirements of Circular 75 and any of its internal implementing
guidelines as applied by SAFE in accordance with Circular 106 may result in
fines and other penalties under PRC laws for evasion of applicable foreign
exchange restrictions. Any such failure could also result in the
SPV’s affiliates being impeded or prevented from distributing their profits and
the proceeds from any reduction in capital, share transfer or liquidation
to the SPV, or from engaging in other transfers of funds into or out of
China.
We have requested our shareholders who
are PRC residents to make the necessary applications, filings and amendments as
required under Circular 75 and other related rules. We attempt to
comply, and attempt to ensure that our shareholders who are subject to these
rules comply, with the relevant requirements. However, we cannot
provide any assurances that our shareholders who are PRC residents
will comply with our request to make any applicable registrations, and nor
can we provide any assurances that our shareholders who are PRC residents will
be able to obtain such applicable registration or comply with other
requirements required by Circular 75 or other related rules or that, if
challenged by government agencies, the structure of our organization fully
complies with all applicable registrations or approvals required by Circular
75. Moreover, because of uncertainty over how Circular 75 will be
interpreted and implemented, and how or whether SAFE will apply it to us, we
cannot predict how it will affect our business operations or future
strategies. A failure by such PRC resident shareholders or future PRC
resident shareholders to comply with Circular 75 or other related rules, if SAFE
requires it, could subject these PRC resident shareholders to fines or legal
sanctions, restrict our overseas or cross-border investment activities, limit
our subsidiaries’ ability to make distributions or pay dividends or affect our
ownership structure, which could adversely affect our business and
prospects.
Adverse
changes in political and economic policies of the Chinese government could have
a material adverse effect on the overall economic growth of China, which could
reduce the demand for our products and materially and adversely affect our
competitive position.
Our business, financial condition,
results of operations and prospects are affected significantly by economic,
political and legal developments in China. The Chinese economy
differs from the economies of most developed countries in many respects,
including:
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the
amount of government
involvement;
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the
level of development;
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the
growth rate;
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the
control of foreign exchange;
and
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the
allocation of resources.
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While the Chinese economy has grown
significantly in the past 20 years, we believe the growth has been uneven, both
geographically and among various sectors of the economy. The Chinese
government has implemented various measures to encourage economic growth and
guide the allocation of resources. We believe some of these measures
benefit the overall Chinese economy, but may also have a negative effect on
us. For example, our financial condition and results of operations
may be adversely affected by government control over capital investments or
changes in tax regulations that are applicable to us.
The Chinese economy has been
transitioning from a planned economy to a more market-oriented
economy. Although in recent years the Chinese government has
implemented measures emphasizing the utilization of market forces for economic
reform, the reduction of state ownership of productive assets and the
establishment of sound corporate governance in business enterprises, a
substantial portion of the productive assets in China is still owned by the
Chinese government. The Chinese government also exercises significant
control over Chinese economic growth through the allocation of resources,
controlling payment of foreign currency-denominated obligations, setting
monetary policy and providing preferential treatment to particular industries or
companies.
Contract
drafting, interpretation and enforcement in China involve significant
uncertainty.
We have entered into numerous
contracts governed by PRC law, many of which are material to our
business. As compared with contracts in the United States, contracts
governed by PRC law tend to contain less detail and to not be as
comprehensive in defining contracting parties’ rights and
obligations. As a result, contracts in China are more vulnerable to
disputes and legal challenges. In addition, contract interpretation
and enforcement in China is not as developed as in the United States, and the
result of any contract dispute is subject to significant
uncertainties. Therefore, we cannot assure you that we will not be
subject to disputes under our material contracts, and if such disputes arise, we
cannot assure you that we will prevail.
The
application of PRC regulations relating to the overseas listing of PRC domestic
companies is uncertain, and we may be subject to penalties for failing to
request approval of the PRC authorities prior to listing our shares in the
U.S.
On August 8, 2006, six PRC
government agencies, namely, the Ministry of Commerce (“MOFCOM”), the State
Administration for Industry and Commerce (”SAIC”), the China Securities
Regulatory Commission (“CSRC”), SAFE, the State-Owned Assets Supervision and
Administration Commission, (“SASAC”), and the State Administration for Taxation
(“SAT”), jointly issued the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors (the “ New M&A Rules ”), which became
effective on September 8, 2006. The New M&A Rules purport, among
other things, to require offshore “special purpose vehicles”, that are (1)
formed for the purpose of overseas listing of the equity interests of PRC
companies via acquisition and (2) are controlled directly or indirectly by PRC
companies and/or PRC individuals, to obtain the approval of the CSRC prior to
the listing and trading of their securities on overseas stock
exchanges. On September 21, 2006, pursuant to the New M&A Rules
and other PRC Laws, the CSRC published on its official website relevant guidance
with respect to the listing and trading of PRC domestic enterprises’ securities
on overseas stock exchanges (the “Related Clarifications”), including a list of
application materials regarding the listing on overseas stock exchanges by
special purpose vehicles. We were and are not required to obtain the
approval of CSRC under the New M&A Rules in connection with this transaction
because (i) we were and are not a special purpose vehicle formed or controlled
by PRC individuals; and (ii) the conversion of Shandong from a joint venture to
a wholly foreign owned enterprise neither was nor is subject to the New M&A
Rules included within the New M&A Rules and Guidance Manual on
Administration of Entry of Foreign Investment issued by the Department of
Foreign Investment Administration of the MOFCOM in December
2008.
However, there are substantial
uncertainties regarding the interpretation, application and enforcement of these
rules, and CSRC has yet to promulgate any written provisions or formally to
declare or state whether the overseas listing of a PRC-related
company structured similar to ours is subject to the approval of
CSRC. Any violation of these rules could result in fines and other
penalties on our operations in China, restrictions or limitations on remitting
dividends outside of China, and other forms of sanctions that may cause a
material and adverse effect to our business, operations and financial
conditions.
The New M&A Rules also
established additional procedures and requirements that are expected to make
merger and acquisition activities by foreign investors more time-consuming and
complex, including requirements in some instances that the Ministry of Commerce
be notified in advance of any change-of-control transaction in which a foreign
investor takes control of a PRC domestic enterprise that owns well-known
trademarks or China’s traditional brands. We may grow our business in part by
acquiring other businesses. Complying with the requirements of the
New M&A Rules in completing this type of transaction could be
time-consuming, and any required approval processes, including CSRC approval,
may delay or inhibit our ability to complete such transactions, which could
affect our ability to expand our business or maintain our market
share.
19
We
may face regulatory uncertainties that could restrict our ability to issue
equity compensation to our directors and employees and other parties who are PRC
citizens or residents under PRC law. The grant of stock options under
our China Shandong Industries, Inc. 2010 Omnibus Securities and Incentive Plan
(the “2010 Plan”) will require registration with SAFE.
On April 6, 2007, SAFE issued the
“Operating Procedures for Administration of Domestic Individuals Participating
in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed
Company,” also known as “Circular 78”. It is not clear whether
Circular 78 covers all forms of equity compensation plans or only those that
provide for the grant of stock options. For any equity compensation
plan which is so covered and is adopted by a non-PRC listed company after April
6, 2007, Circular 78 requires all participants who are PRC citizens to register
with, and obtain the approval of, SAFE prior to their participation in any such
plan. In addition, Circular 78 also requires PRC citizens to register with SAFE
and make the necessary applications and filings if they participate in an
overseas listed company’s covered equity compensation plan prior to April 6,
2007. As of the date of this filing, although we have not adopted our
2010 Plan, we plan to adopt it and may grant equity compensation, including, but
not limited to, stock options, under our 2010 Plan to our PRC employees and/or
directors. The grant of any equity compensation under our 2010 Plan to a PRC
citizen, however, may under Circular 78 require the PRC citizen to register with
and obtain approval of SAFE. We believe that the registration and
approval requirements contemplated in Circular 78 will be burdensome and time
consuming. If it is determined that our 2010 Plan, or any equity
compensation grant under the Plan, is subject to Circular 78, failure to comply
with such provisions of Circular 78 may subject us and any recipients thereof to
fines and legal sanctions and prevent us from being able to grant equity
compensation to our PRC employees and/or directors. In that case, our
ability to compensate our employees and directors through equity compensation
would be hindered and/or prevented.
Capital
outflow policies in the PRC may hamper our ability to remit income to the United
States.
The PRC has adopted currency and
capital transfer regulations. These regulations may require that we
comply with complex regulations for the movement of capital and as a result we
may not be able to remit all income earned and proceeds received in connection
with our operations or from the sale of our operating subsidiary to the U.S. or
to our stockholders.
Our
operations and assets in the PRC are subject to significant political and
economic uncertainties.
Government policies are subject to
rapid change and the government of the PRC may adopt policies which have the
effect of hindering private economic activity and greater economic
decentralization. There is no assurance that the government of China
will not significantly alter its policies from time to time without notice
in a manner with reduces or eliminates any benefits from its present policies of
economic reform. In addition, a substantial portion of productive
assets in China remains government-owned. For instance, all lands are
state or rural collective economic organizations owned and leased to business
entities or individuals through governmental grants of the land use
rights. The grant process is typically based on government policies
at the time of the grant, which could be lengthy and complex. This
process may adversely affect our business. The government of China
also exercises significant control over China’s economic growth through the
allocation of resources, controlling payment of foreign currency and providing
preferential treatment to particular industries or
companies. Uncertainties may arise as a result of changing
governmental policies and measures. In addition, changes in laws and
regulations, or their interpretation, or the imposition of confiscatory
taxation, restrictions on currency conversion, imports and sources of supply,
devaluations of currency, the nationalization or other expropriation of private
enterprises, as well as adverse changes in the political, economic or social
conditions in China, could have a material adverse effect on our business,
results of operations and financial condition.
Our use of the
allocated land may be subject to challenges in the future.
All land use rights owned by us are
land use rights relating to allocated land. The local governmental
authorities have granted such land use rights to us for free use given our
contribution to the development of the local economy. However,
pursuant to the Catalogue on
Allocated Land issued by the Ministry of Land Resources of the PRC (the
“Catalogue”), the land use rights for allocated land may only be granted to
those specific projects which are in compliance with the Catalogue, subject to
the approval of the competent governmental authorities. We, as a
privately owned furniture manufacturer, may not be qualified to be granted such
land use rights for allocated land according to the
Catalogue. Consequently, our use of such land may be subject to
challenge in the future, and the legal consequences could include the
confiscation of such land by the governmental authorities or a demand that we
pay a market price for purchasing the land use rights for such land and
converting the allocated land use right to a granted land use
right.
We have begun the application
process to convert the allocated land into granted land and we have received the
consent from Heze City Government in July 2010. Currently, we are
waiting for the final consent from Shandong Provincial
Government. Although we intend to pay the relevant grant fees (which
we believe are at a favorable price specially offered to us by the local
government, approximately $3,824 per mu (1 mu equals 666.67 square
meters) or $1,497,800.4 for our current total land use right of 261,124.14
square meters), we cannot ensure that our use of such land will not be subject
to challenges before we convert the allocated land into granted
land.
20
Because
Chinese law governs almost all of our material agreements, we may not be able to
enforce our legal rights within China or elsewhere, which could result in a
significant loss of business, business opportunities, or capital.
Chinese law governs almost all of
our material agreements. We cannot assure you that we will be able to
enforce any of our material agreements or that remedies will be available
outside of China. The system of laws and the enforcement of existing
laws in China may not be as certain in implementation and interpretation as in
the United States. Our inability to enforce or obtain a remedy under
any of our current or future agreements could result in a significant loss of
business, business opportunities or capital. It will be extremely
difficult to acquire jurisdiction and enforce liabilities against our officers,
directors and assets based in China.
Substantially all of our assets will
be located in the PRC and all of our officers and our present directors reside
outside of the United States. As a result, it may not be possible for
United States investors to enforce their legal rights, to effect service of
process upon our directors or officers or to enforce judgments of United States
courts predicated upon civil liabilities and criminal penalties of our directors
and officers under federal securities laws. Moreover, we have been
advised that China does not have treaties providing for the reciprocal
recognition and enforcement of judgments of courts with the United States.
Further, it is unclear if extradition treaties now in effect between the United
States and China would permit effective enforcement of criminal penalties of the
federal securities laws.
Imposition
of trade barriers and taxes may reduce our ability to do business
internationally, and the resulting loss of revenue could harm our
profitability.
We may experience barriers to
conducting business and trade in our targeted emerging markets in the form of
delayed customs clearances, customs duties and tariffs. In addition,
we may be subject to repatriation taxes levied upon the exchange of income from
local currency into foreign currency, substantial taxes on profits, revenues,
assets and payroll, as well as value-added tax. The markets in which
we plan to operate may impose onerous and unpredictable duties, tariffs and
taxes on our business and products, and there can be no assurance that this will
not reduce the level of sales that we achieve in such markets, which would
reduce our revenues and profits.
Failure
to comply with the United States Foreign Corrupt Practices Act could subject us
to penalties and other adverse consequences.
We are subject to the United States
Foreign Corrupt Practices Act, which generally prohibits United States companies
from engaging in bribery or other prohibited payments to foreign officials for
the purpose of obtaining or retaining business. Foreign companies,
including some that may compete with us, are not subject to these prohibitions.
Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices
occur from time-to-time in the PRC. We cannot assure you that our
employees or other agents will not engage in such conduct for which we might be
held responsible. If our employees or agents are found to have
engaged in such practices, we could suffer severe penalties and other
consequences that may have a material adverse effect on our business, financial
condition and results of operations.
New
labor laws in the PRC may adversely affect our results of
operations.
On June 29, 2007, the PRC government
promulgated a new labor law, namely, the Labor Contract Law of the PRC, or the
New Labor Contract Law, which became effective on January 1,
2008. The New Labor Contract Law imposes greater liabilities on
employers and significantly affects the cost of an employer’s decision to reduce
its workforce. Further, it requires that certain terminations be
based upon seniority and not merit. In the event we decide to
significantly change or decrease our workforce, the New Labor Contract Law could
adversely affect our ability to effect such changes in a manner that is most
advantageous to our business or in a timely and cost-effective manner, thus
materially and adversely affecting our financial condition and results of
operations.
Failure of paying
the housing funds for the employees may be subject to challenges by the
government authorities.
According to the Housing Fund Administrative
Regulations, an employer is obligated to pay the relevant housing funds
for its employees. The monthly housing fund contributed by an
employer for an employee shall be at least 5% of such employee’s average monthly
salary for the previous year. If we fail to pay the mandatory
housing funds for our employees, the competent authority may order us to pay
such funds within a prescribed time of period; if we still fail to cure such
situation after receiving the order, the competent authority may require the
relevant court to enforce such payments. We believe this will result
in us paying approximately $ 103,359 (RMB 700,000) for the year ended December
31, 2010.
We have completed the necessary
procedures and have started to pay the employee housing funds with the
appropriate PRC authorities in July 2010. We will contribute 5% of
the average monthly base salary for the previous year for each of our employees
as such employees’ housing funds.
Risks
Related to Ownership of our Common Stock
Volatility
in our common stock price may subject us to securities litigation.
Stock markets, in general, have
experienced in recent months, and continue to experience, significant price and
volume volatility, and the market price of our common stock may continue to be
subject to similar market fluctuations unrelated to our operating performance or
prospects. This increased volatility, coupled with depressed economic
conditions, could continue to have a depressing effect on the market price of
our common stock. The following factors, many of which are beyond our
control, may influence our stock price:
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the
status of our growth strategy including the building of our new production
line with the net proceeds from the
offering;
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announcements
of technological or competitive
developments;
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regulatory
developments in the PRC affecting us, our customers or our
competitors;
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announcements
regarding patent or other intellectual property litigation or the issuance
of patents to us or our competitors or updates with respect to the
enforceability of patents or other intellectual property rights generally
in the PRC or internationally;
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actual
or anticipated fluctuations in our quarterly operating
results;
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changes
in financial estimates by securities research
analysts;
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changes
in the economic performance or market valuations of our
competitors;
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additions
or departures of our executive
officers;
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release
or expiration of lock-up or other transfer restrictions on our outstanding
common stock; and
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sales
or perceived sales of additional shares of our common
stock.
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In addition, the securities markets
have, from time to time, experienced significant price and volume fluctuations
that are not related to the operating performance of particular
companies. Any of these factors could result in large and sudden
changes in the volume and trading price of our common stock and could cause our
stockholders to incur substantial losses. In the past, following
periods of volatility in the market price of a company’s securities,
stockholders have often instituted securities class action litigation against
that company. If we were involved in a class action suit or other
securities litigation, it would divert the attention of our senior management,
require us to incur significant expense and, whether or not adversely
determined, have a material adverse effect on our business, financial condition,
results of operations and prospects.
If
you purchase the common stock sold in this offering, you will experience
immediate dilution.
If you purchase the common stock sold
in this offering, you will experience immediate dilution of $ per share
based on an offering price of $ , because the price that you pay for shares
of our common stock will be greater than the net tangible book value per share
of shares of our common stock.
We
do not anticipate paying cash dividends on our common stock in the foreseeable
future.
We do not anticipate paying cash
dividends in the foreseeable future on shares of our common
stock. Presently, we intend to retain all of our earnings, if any, to
finance development and expansion of our business. PRC capital and
currency regulations may also limit our ability to pay
dividends. Consequently, your only opportunity to achieve a positive
return on your investment in our company will be if the market price of our
common stock appreciates.
Your
ability to bring an action against us or against our directors and officer, or
to enforce a judgment against us or them, will be limited because we conduct
substantially all of our operations in the PRC and because the majority of our
directors and officers reside outside of the United States.
We are a Delaware holding company and
substantially all of our assets are located outside of the United
States. Substantially all of our current operations are conducted in
the PRC. In addition, most of our directors and officers are
nationals and residents of countries other than the United States. A
substantial portion of the assets of these persons are located outside
the United States. As a result, it may be difficult for you to
effect service of process within the United States upon these
persons. It may also be difficult for you to enforce in U.S. courts
judgments on the civil liability provisions of the U.S. federal securities laws
against us and our officers and directors, most of whom are not residents in the
United States and the substantial majority of whose assets are located outside
of the United States. In addition, there is uncertainty as to whether
the courts of the PRC would recognize or enforce judgments of U.S.
courts. Our counsel as to PRC law has advised us that the
recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures
Law. Courts in the PRC may recognize and enforce foreign
judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties
between the PRC and the country where the judgment is made or on reciprocity
between jurisdictions. The PRC does not have any treaties or other
arrangements that provide for the reciprocal recognition and enforcement of
foreign judgments with the United States. In addition, according to
the PRC Civil Procedures
Law, courts in the PRC will not enforce a foreign judgment against us or
our directors and officers if they decide that the judgment violates basic
principles of PRC law or national sovereignty, security or the public
interest. So it is uncertain whether a PRC court would enforce a
judgment rendered by a court in the United States.
22
Anti-takeover
provisions of the Delaware General Corporation Law and some provisions in our
certificate of incorporation and bylaws could have a material adverse effect on
the rights of holders of our common stock.
We are subject to Section 203 of the
Delaware General Corporation Law. This provision generally prohibits
a Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date the
stockholder became an interested stockholder, unless:
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prior
to such date, the board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
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upon
consummation of the transaction that resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85.0%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by persons who are directors and
officers and by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer;
or
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on
or subsequent to such date, the business combination is approved by the
Board of Directors and authorized at an annual meeting or special meeting
of stockholders and not by written consent, by the affirmative vote of at
least 66.7% of the outstanding voting stock that is not owned by the
interested stockholder.
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Section 203 defines a business
combination to include:
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any merger
or consolidation involving the corporation and the interested
stockholder;
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any
sale, transfer, pledge or other disposition of 10.0% or more of the assets
of the corporation involving the interested
stockholder;
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subject
to certain exceptions, any transaction that results in the issuance or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
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any
transaction involving the corporation that has the effect of increasing
the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder;
or
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the
receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
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In general, Section 203 defines an
“interested stockholder” as any entity or person beneficially owning 15.0% or
more of the outstanding voting stock of a corporation, or an affiliate or
associate of the corporation and was the owner of 15.0% or more of the
outstanding voting stock of a corporation at any time within three years prior
to the time of determination of interested stockholder status; and any entity or
person affiliated with or controlling or controlled by such entity or
person.
Anti-takeover provisions of the
Delaware General Corporation Law, may make it more difficult to acquire our
company or effect a change in control of our company, even if an acquisition or
change in control would be in the interest of our stockholders or if an
acquisition or change in control would provide our stockholders with a premium
for their shares over then prevailing market prices.
Our
certificate of incorporation and bylaws contain provisions that could have the
effect of discouraging potential acquisition proposals or tender offers or
delaying or preventing a change in control of our company, including changes a
stockholder might consider favorable. In particular, our certificate of
incorporation and bylaws, as applicable, among other things, provide
that:
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our
Board of Directors shall have the ability to alter our bylaws without
stockholder approval;
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an
advance notice procedure with regard to the nomination of candidates for
election as directors and with regard to business to be brought before a
meeting of stockholders; and
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vacancies
on our Board of Directors may be filled by a majority of directors in
office, although less than a
quorum.
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Such provisions may have the effect
of discouraging a third party from acquiring our company, even if doing so would
be beneficial to our stockholders. These provisions are intended to
enhance the likelihood of continuity and stability in the composition of our
board of directors and in the policies formulated by them, and to discourage
some types of transactions that may involve an actual or threatened change in
control of our company. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal and to discourage some
tactics that may be used in proxy fights. However, these provisions could
have the effect of discouraging others from making tender offers for our
shares. These provisions also may have the effect of preventing
changes in our management.
23
We
will be a “controlled company” within the meaning of the NASDAQ Marketplace
rules and, as a result, will qualify for and will rely on certain exemptions
from certain corporate governance requirements.
After the closing of this offering,
CAOPU will continue to control a majority of the voting power of our outstanding
common stock. As a result, we will be a “controlled company” pursuant
to Rule 5615 (c) of the corporate governance standards of the NASDAQ Stock
Market LLC. Under such rules, a company of which more than 50% of the
voting power for the election of directors is held by an individual, a group or
another company is a “controlled company” and may elect not to comply with
certain corporate governance requirements of the NASDAQ Stock Market LLC,
including the requirements that:
• a
majority of the board of directors consist of independent
directors;
• the
nominating and corporate governance committee be composed entirely of
independent directors with a written charter addressing the committee’s purpose
and responsibilities;
• the
compensation committee be composed entirely of independent directors with a
written charter addressing the committee’s purpose and responsibilities;
and
• there
be an annual performance evaluation of the nominating and corporate governance
and compensation committees.
This controlled company exemption does
not extend to the audit committee requirements under Rule 5605(c) or the
requirement for executive sessions of Independent Directors under Rule
5605(b)(2).
Upon the completion of this offering,
we intend to elect to be treated as a “Controlled Company.” As a result,
you may not have the same protections afforded to stockholders of companies that
are mandatorily subject to all of the corporate governance requirements of the
NASDAQ Stock Market LLC.
One
of our directors and officers controls a majority of our common stock and his
interests may not align with the interests of our other
stockholders.
Jinliang Li, our chairman, chief
executive officer and president, controls CAOPU, a private BVI
entity. CAOPU will both before and after the offering beneficially
own in excess of 50.1% of our issued and outstanding common
stock. This significant concentration of share ownership may
adversely affect the trading price of our common stock because investors often
perceive a disadvantage in owning shares in a company with one or several
controlling stockholders. Furthermore, our directors and officers, as
a group, have the ability to significantly influence or control the outcome of
all matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions, such as mergers,
consolidations or the sale of substantially all of our assets. This
concentration of ownership may have the effect of delaying or preventing a
change in control of our company which could deprive our stockholders of an
opportunity to receive a premium for their shares as part of a sale of our
company and might reduce the price of our common stock. In addition,
without the consent of Mr. Li or CAOPU Enterprise Limited, we could be prevented
from entering into transactions that could be beneficial to us. Mr.
Li or CAOPU Enterprise Limited may cause us to take actions that are opposed by
other stockholders as his interests may differ from those of other
stockholders.
Future
issuances of capital stock may depress the trading price of our common
stock.
Any issuance of shares of our common
stock (or common stock equivalents) after this offering could dilute the
interests of our existing stockholders and could substantially decrease the
trading price of our common stock. We may issue additional shares of
our common stock in the future for a number of reasons, including to finance our
operations and business strategy (including in connection with acquisitions,
strategic collaborations or other transactions).
Sales of a substantial number of shares
of our common stock in the public market could depress the market price of our
common stock, and impair our ability to raise capital through the sale of
additional equity securities. We cannot predict the effect that
future sales of our common stock or other equity-related securities would have
on the market price of our common stock.
If
following the closing of the offering, shares of our common stock remains
subject to the U.S. “Penny Stock” Rules, investors who purchase our common stock
in the offering may have difficulty re-selling their shares of our common stock
as the liquidity of the market for our shares may be adversely affected by the
impact of the “Penny Stock” Rules.
Although we anticipate that
following this offering, shares of our common stock will trade on the NASDAQ
Capital Market, in the event that shares of our common stock do not become
listed on the NASDAQ Capital Market or if our shares are in the future delisted
from the NASDAQ Capital Market, it may be more difficult for investors in the
offering to sell the shares of our common stock. A "penny stock" is
generally defined by regulations of the U.S. Securities and Exchange Commission
("SEC") as an equity security with a market price of less than US$5.00 per
share. However, an equity security with a market price under US$5.00
will not be considered a penny stock if it fits within any of the following
exceptions:
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(i)
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the
equity security is listed on a national securities
exchange;
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(ii)
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the
issuer of the equity security has been in continuous operation for less
than three years, and either has (a) net tangible assets of at least
US$5,000,000, or (b) average annual revenue of at least US$6,000,000;
or
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(iii)
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the
issuer of the equity security has been in continuous operation for more
than three years, and has net tangible assets of at least
US$2,000,000.
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Although we believe our common stock is
not a penny stock based upon the exception “iii” above, we cannot provide any
assurance that in the future our common stock will not be classified as Penny
Stock.
If an investor buys or sells a penny
stock, SEC regulations require that the investor receive, prior to the
transaction, a disclosure explaining the penny stock market and associated
risks. Furthermore, trading in our common stock is currently subject to Rule
15g-9 of the Exchange Act, which relates to non-NASDAQ and non-exchange listed
securities. Under this rule, broker/dealers who recommend our
securities to persons other than established customers and accredited investors
must make a special written suitability determination for the purchaser and
receive the purchaser's written agreement to a transaction prior to
sale.
The low price of our common stock
has a negative effect on the amount and percentage of transaction costs paid by
individual shareholders. The low price of our common stock also
limits our ability to raise additional capital by issuing additional
shares. There are several reasons for
these effects. First, the internal policies of certain
institutional investors prohibit the purchase of low-priced
stocks. Second, many brokerage houses do not permit low-priced stocks
to be used as collateral for margin accounts or to be purchased on margin.
Third, some brokerage house policies and practices tend to discourage individual
brokers from dealing in low-priced stocks. Finally, broker's
commissions on low-priced stocks usually represent a higher percentage of the
stock price than commissions on higher priced stocks. As a result,
our stockholders may pay transaction costs that are a higher percentage of their
total share value than they would if our share price were substantially
higher.
As
an issuer of “penny stock” the protection provided by the federal securities
laws relating to a forward-looking statement does not apply to us and as a
result we could be subject to legal action.
Although federal securities laws
provide a safe harbor for forward-looking statements made by a public company
that files reports under the federal securities laws, this safe harbor is not
available to issuers of penny stocks. As a result, if we are a penny
stock, we will not have the benefit of this safe harbor protection in the event
of any legal action based upon a claim that the material provided by us
contained a material misstatement of fact or was misleading in any material
respect because of our failure to include any statements necessary to make the
statements not misleading. Such an action could hurt our financial
condition.
The
issuance of any of our equity securities pursuant to our 2010 Plan or any other
equity compensation plans we intend to adopt may dilute the value of existing
stockholders and may affect the market price of our stock.
In the future, we may issue to our
officers, directors, employees and/or other persons equity based compensation
under our 2010 Plan and/or any other equity based compensation plan we intend to
adopt to provide motivation and compensation to our officers, employees and key
independent consultants. The award of any such incentives could
result in an immediate and potentially substantial dilution to our existing
stockholders and could result in a decline in the value of our stock
price. The exercise of these options and the sale of the underlying
shares of common stock and the sale of stock issued pursuant to stock grants may
have an adverse effect upon the price of our stock.
If
we fail to comply with Section 404 of the Sarbanes-Oxley Act of 2002 our
business could be harmed and our stock price could decline.
Rules adopted by the SEC pursuant to
Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of
our internal control over financial reporting, and attestation of this
assessment by our company's independent registered public
accountants. The SEC extended the date to comply with the
attestation requirements for non-accelerated filers, as defined by the
SEC. Accordingly, we are subject to the rules requiring an annual
assessment of our internal controls and the requirement to provide an
attestation of management's assessment by our independent registered public
accountants will first apply to our annual report for the 2010 fiscal
year. The standards that must be met for management to assess the
internal control over financial reporting as effective are complex, and require
significant documentation, testing and possible remediation to meet the detailed
standards. The attestation process by our independent registered
public accountants is new and we may encounter problems or delays in completing
the implementation of any requested improvements and receiving an
unqualified attestation of our assessment by our independent registered public
accountants. If we cannot assess our internal control over financial
reporting as effective, or our independent registered public
accountants are unable to provide an unqualified attestation report on such
assessment, investor confidence and share value may be negatively
impacted.
25
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The prospectus contains
forward-looking statements that involve substantial risks and
uncertainties. You can identify these statements by forward-looking
words such as "may", "expect", "plans", "intends", "anticipate", "believe",
"estimate" and "continue" or similar words. You should read
statements that contain these words carefully because they discuss our future
expectations and contain projections of our future results of operations or of
our financial condition or state other "forward-looking"
information. These 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 represent our estimates and assumptions only as of the date of this
prospectus and, except as required by law, we undertake no obligation to update
or revise publicly any forward-looking statements, whether as a result of
new information, future events or otherwise after the date of this
prospectus. The forward-looking statements contained in this
prospectus are excluded from the safe harbor protection provided by the Private
Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act
of 1933, as amended. We believe that it is important to communicate
our future expectations to our investors. However, there may be
events in the future that we are not able to accurately predict or
control. The factors listed above in the section captioned "Risk
Factors", as well as any cautionary language in this prospectus, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations described in our forward-looking
statements. Before you invest in our securities, you should be aware
that the occurrence of the events described as risk factors and elsewhere in
this prospectus could have a material adverse effect on our business, operating
results and financial condition.
USE
OF PROCEEDS
We estimate that the net proceeds from
the sale of common stock we are offering pursuant to this prospectus will be
approximately $18.0 million after deducting the underwriting discount and our
expenses of the offering, and assuming a public offering price of
$ per share. If the over-allotment option is exercised in
full, we estimate that our net proceeds will be approximately
$ .
We intend to use the net proceeds
from this offering to fund a substantial portion of a new furniture production
line. This new production line will be fitted with more “state of the
art” manufacturing equipment and components that we believe will enable us to
fulfill a greater percentage of overseas requests for our products that we
currently are unable to fulfill. We estimate that such production
line we will cost us approximately $20 million. Of this amount,
approximately (i) $5.3 million would be used to construct a 40,000 square meter
production line, (ii) $6.7 million would be used to purchase new equipment to be
used in the production line, and (iii) $8.0 million to purchase raw materials
and other materials used in the manufacturing of products the new production
line will produce.
The following chart sets forth in
general terms certain financial information regarding our proposed new furniture
production facility that we intend to build using the net proceeds of this
offering:
Purpose
|
Approximate Application
of Net Proceeds |
Percentage of
Net Proceeds |
||||||
Build
40,000 square meter production line
|
$ | 5.3 million | 28.9 | % | ||||
Purchase
new equipment
|
$ | 6.7 million | 36.4 | % | ||||
Purchase
raw materials and other auxiliary materials
|
$ | 6.0 million | 34.7 | % | ||||
Total
|
$ | 18.0 million | * | 100 | % |
* We intend to fund the balance of an
estimated approximately $2.0 million of the costs of this first production line
out of working capital and/or retained earnings.
The expected use of net proceeds of
this offering represents our intentions based on our current plans and business
conditions. The amount and timing of our actual expenditures will
depend on numerous factors, including increases in construction costs and
expenses or unforeseen delays in construction of our new production line and any
unforeseen cash needs. As a result, we will retain broad discretion
in the allocation and use of the net proceeds of this offering. We
have no current plans, agreements or commitments for any material acquisitions
or licenses of any technologies, products or businesses.
DETERMINATION
OF OFFERING PRICE
The public offering price of the
shares offered by this prospectus, and the aggregate amount to be raised through
this offering, were determined by our board of directors based upon negotiations
with our underwriter and will be based on a discount to the closing market price
of the stock immediately prior to the closing date of this
offering.
26
DIVIDEND
POLICY
We have never declared or paid any cash
dividends on our common stock. We do not anticipate paying any cash
dividends on our common stock in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of our board of
directors and will depend upon our financial condition, operating results,
capital requirements, Delaware and PRC laws, and other factors that our board of
directors deems relevant.
CAPITALIZATION
The following table sets forth
our cash and our capitalization as of September 30, 2010 on an actual basis
(unaudited) and on a pro forma basis to reflect our sale of shares of common
stock in this offering, at an assumed initial public offering price of
$ per share (the closing price of one share of our common stock
on
, 2010), after deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us.
The pro forma information below is
illustrative only and our capitalization following the completion of this
offering may be different based on the actual initial public offering price and
other terms of this offering determined at pricing. You should read
this table together with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our September 30, 2010 financial
statements and the related notes appearing elsewhere in this
prospectus.
At September 30, 2010 (1)
|
||||||||
Actual
(Unaudited)
|
Pro Forma
|
|||||||
Stockholders’
Equity:
|
|
|
||||||
Preferred
Stock, $.0001 par value, 5,000,000 shares authorized; -0- shares issued
and outstanding
|
$ | — | $ | — | ||||
Common
Stock, $.0001 par value, 100,000,000 shares authorized; 8,575,000 shares
issued and to be issued and outstanding after offering
|
$ | 1,286 | ||||||
Additional
paid-in capital
|
$ | 8,133,416 | ||||||
Statutory
and discretionary surplus reserve
|
$ | 3,608,243 | ||||||
Accumulated
other comprehensive (loss)
|
$ | 798,140 | ||||||
Retained
earnings
|
$ | 33,674,935 | ||||||
Total
Stockholders’ Equity
|
$ | 46,216,020 | (1 | ) | ||||
|
||||||||
Total
Capitalization
|
$ | 56,809,128 | $ |
(1) The above
financial and share and per share numbers, unless expressly provided to the
contrary, excludes all effects from any exercise of the (i)
underwriters’ option, (ii) the underwriters’ overallotment option, and/or
(iii) the exercise of any of our outstanding options and/or
warrants.
MARKET
PRICE AND DIVIDENDS
OF
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our common stock is traded
over-the-counter on the OTCBB under the symbol “CSNH”. We intend to
apply for listing of our common stock on the NASDAQ Capital Market. Our common
stock commenced trading on the OTCBB in January 2009. Since such
date, there has been extremely limited trading in our common stock.
The following table sets forth the
high and low bid prices, on the OTCBB, as reported and summarized by the OTCBB,
for each fiscal quarter during the fiscal year ended December 31, 2009 and for
the first, second and third quarters of 2010. The last reported sale
price of our common stock on the OTC Bulletin Board on December 21, 2010 was
$3.32 per share
Quarter Ended
|
High
|
Low
|
||||||
Year
2010:
|
||||||||
First
Quarter
|
$ | $6.60 | $ | $0.21 | ||||
Second
Quarter
|
9.87 | 4.95 | ||||||
Third
Quarter
|
13.62 | 3.75 | ||||||
Year
2009:
|
||||||||
First
Quarter
|
$ | 1.80 | $ | 1.68 | ||||
Second
Quarter
|
1.68 | 1.68 | ||||||
Third
Quarter
|
3.18 | 1.68 | ||||||
Fourth
Quarter
|
3.15 | 3.03 |
27
Holders
At December 20, 2010, there
were 22 shareholders of record of our common stock. This does
not include the number of persons or entities who hold stock in nominee or
“street” name through various brokerage firms.
Equity
Compensation Plan Information
We adopted the China Shandong
Industries, Inc. 2010 Omnibus Securities and Incentive Plan (the “2010 Plan”) on
July 1, 2010. Our 2010 Plan provides for the issuance of stock
options and restricted stock awards or a combination of the
foregoing.
We have reserved in the aggregate
shares of our common stock (which will be increased proportionally if the
underwriter’s over-allotted option is exercised) for issuance under our 2010
Plan equal to 10% of the aggregate number of shares of our common stock which
are issued and outstanding immediately after this offering.
EXCHANGE
RATE INFORMATION
Our business is primarily conducted in
China and all of our revenues are denominated in RMB. Capital
accounts of our consolidated financial statements are translated into United
States dollars from RMB at their historical exchange rates when the capital
transactions occurred. Assets and liabilities are translated at the
exchange rates as of the balance sheet date. Income and
expenditures are translated at the average exchange rate of the period. RMB is
not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No
representation is made that the RMB amounts could have been, or could be,
converted into United States dollars at the rates used in
translation.
The following table sets forth
information concerning exchange rates between the RMB and the United States
dollar for the periods indicated.
Year Ended December 31,
|
Period End
|
Yearly
Average
|
||||||
|
||||||||
2007
|
7.3046 | 7.5869 | ||||||
2008
|
6.8346 | 6.9253 | ||||||
2009
|
6.8282 | 6.8314 | ||||||
2010
|
||||||||
January
to September 30, 2010
|
6.7011 |
(1)
|
The
exchange rates reflect the exchange rates as set forth on the website of
The People’s Bank of China.
|
|
(2)
|
Annual
averages are calculated from month-end rates. Monthly averages are
calculated using the average of the daily rates during the relevant
period.
|
28
DILUTION
If you
invest in our shares of common stock, your investment will be diluted
immediately to the extent of the difference between the public offering price
per share of common stock that you will pay in this offering, and the net
tangible book value per share of common stock immediately after this
offering.
Our
net tangible book value as of September 30, 2010 was $46,143,152, or $5.36 per
share of common stock. Net tangible book value per share is
determined by dividing tangible stockholders’ equity, which is total tangible
assets less total liabilities, by the aggregate number of shares of common stock
outstanding. Tangible assets represent total assets excluding
goodwill and other intangible assets. Dilution in net tangible book value per
share represents the difference between the amount per share of common stock
issued in this offering and the net tangible book value per share of our common
stock immediately afterwards. Assuming the sale by us of shares of
common stock at a public offering price of $[__] per share after deducting
the underwriting discount and commissions and estimated offering expenses, our
as adjusted net tangible book value as of September 30, 2010 would have been
approximately $[__] million, or $[__] per share common
stock. This represents an immediate increase in net tangible book
value of $[__] per share to our existing shareholders and an immediate dilution
of $[__] per share to the new investors purchasing shares of common stock
in this offering.
The following table illustrates this
per share dilution:
Public
offering price(1)
|
$
|
|||
Net
tangible book value before this offering
|
$
|
5.36
|
||
Increase
attributable to new investors
|
$
|
|||
Pro
forma net tangible book value after this offering(2)
|
$
|
|||
Dilution
to new investors
|
$
|
(1)
Before deduction of underwriters’ discounts and commissions, corporate finance
fee and other estimated offering expenses.
(2) After
deduction of underwriters’ discounts and commissions, corporate finance fee and
other estimated offering expenses.
The pro forma net tangible book value
after the offering is calculated as follows:
Numerator:
|
||||
Net
tangible book value before this offering
|
$
|
5.36
|
||
Net
proceeds from this offering(1)
|
$
|
|||
Offering
costs paid in advance and excluded from net tangible book value before
this offering
|
$
|
|||
|
$
|
|||
Denominator:
|
||||
Shares
of common stock outstanding prior to this offering
|
8,610,009
|
|||
Shares
of common stock included in the offering
|
||||
Total
|
(1) Net
of underwriters’ discounts and commissions, corporate finance fee and other
estimated offering expenses.
29
SELECTED
CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated
financial information should be read in conjunction with our consolidated
financial statements and related notes included as part of this prospectus as
well as and the information contained in the section of this prospectus
captioned “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.” The selected consolidated statement of income
data for the (i) fiscal years ended December 31, 2009 and 2008 and the
consolidated balance sheet data as of December 31, 2009 and 2008 have been
derived from our audited consolidated financial statements included elsewhere in
this prospectus, and (ii) for the nine months ended September 30, 2010 and 2009
and consolidated balance sheet date as of September 30, 2010 have been derived
from our unaudited financial statements included elsewhere in this
prospectus. The results of operations for past accounting periods are not
necessarily indicative of the results to be expected for any future
periods.
Consolidated
Statement of Operations
Statements of
Operations
|
Three Months
ended
September 30,
2010
|
Three Months
ended
September 30,
2009
|
Nine Months
ended
September 30,
2010
|
Nine Months
ended
September 30,
2009
|
Year ended
December 31,
2009
|
Year Ended
December 31,
2008
|
||||||||||||||||||
Revenues
|
$ | 22,746,574 | $ | 14,725,112 | $ | 62,181,727 | $ | 46,201,117 | $ | 69,435,044 | $ | 42,197,393 | ||||||||||||
Cost
of Sales
|
$ | 16,462,614 | $ | 10,924,422 | $ | 45,206,191 | $ | 34,516,927 | $ | 49,360,775 | $ | 31,570,829 | ||||||||||||
Operating
expenses
|
$ | 761,473 | $ | 595,057 | $ | 2,487,106 | $ | 1,541,838 | $ | 2,797,647 | $ | 2,553,693 | ||||||||||||
Income
from operations
|
$ | 5,522,487 | $ | 3,205,633 | $ | 14,488,430 | $ | 10,142,353 | $ | 17,276,623 | $ | 8,072,871 | ||||||||||||
Other
(expense) income
|
$ | (125,439 | ) | $ | (148,829 | ) | $ | (609,172 | ) | $ | (292,396 | ) | $ | (1,161,581 | ) | $ | (356,959 | ) | ||||||
Income
from operations before income taxes
|
$ | 5,397,048 | $ | 3,056,804 | $ | 13,879,257 | $ | 9,849,956 | $ | 16,115,042 | $ | 7,715,912 | ||||||||||||
Income
taxes
|
$ | 1,388,588 | $ | 764,198 | $ | 3,592,816 | $ | 2,433,631 | $ | (4,093,887 | ) | $ | (1,953,918 | ) | ||||||||||
Net
income
|
$ | 4,008,460 | $ | 2,292,606 | $ | 10,286,442 | $ | 7,416,325 | $ | 12,021,155 | $ | 5,761,994 | ||||||||||||
Foreign
currency translation adjustment
|
$ | 371,886 | $ | 9,088 | $ | 823,162 | $ | 6,157 | $ | (241,522 | ) | $ | 746,119 | |||||||||||
Comprehensive
Income
|
$ | 4,380,346 | $ | 2,301,694 | $ | 11,109,604 | $ | 7,422,482 | $ | 11,779,634 | $ | 6,508,113 |
Consolidated
Balance Sheets
Balance Sheet Data:
|
As of
September
30,
2010
|
As of
December 31,
2009
|
As of
December 31,
2008
|
|||||||||
Cash
|
$
|
5,987,670
|
$
|
2,185,839
|
$
|
1,751,997
|
||||||
Total
current assets
|
$
|
38,324,576
|
$
|
30,811,832
|
$
|
25,557,649
|
||||||
Fixed
assets, net
|
$
|
7,510,003
|
$
|
7,347,100
|
$
|
7,838,969
|
||||||
Other
assets
|
$
|
10,974,549
|
$
|
7,017,466
|
$
|
88,499
|
||||||
Total
Assets
|
$
|
56,809,128
|
$
|
45,176,398
|
$
|
33,485,117
|
||||||
Current
liabilities
|
$
|
10,593,108
|
$
|
10,404,684
|
$
|
10,493,036
|
||||||
Long
term liabilities
|
$
|
-0-
|
$
|
-0-
|
$
|
-0-
|
||||||
Stockholders’
equity
|
$
|
46,216,020
|
$
|
34,771,714
|
$
|
22,992,081
|
||||||
Total
liabilities and stockholders’ equity
|
$
|
56,809,128
|
$
|
45,176,398
|
$
|
33,485,117
|
30
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following
discussion together with our consolidated financial statements and the related
notes included elsewhere in this prospectus. This discussion contains
forward-looking statements that are based on our current expectations, estimates
and projections about our business and operations. Our actual results
may differ materially from those currently anticipated and expressed in such
forward-looking statements as a result of a number of factors, including those
which we discuss under “Risk Factors” and elsewhere in this
prospectus.
General
We are engaged in the business of
manufacturing and marketing wood furniture, straw and wicker products, and wood
handicraft products. Our wood furniture products include items such
as coffee tables, cabinets, bed frames, stools. Our straw and wicker
products include items such as wicker baskets, bottle holders and
planters. Our wood handicraft products include items such as
decorative boxes, wood baskets and various storage cabinets.
We produce over 20,000 different
products which are sold in more than thirty countries and places, including the
PRC, United States, Germany, England, Holland, Italy, Sweden, Japan, Canada,
Denmark, Hong Kong, and Taiwan. Our products are sold through well
known retailers such as Trade Point A/S Direct Container, Zara-Home, Habitat UK
Ltd., ABM Group Inc., and Fuji Boeki Co. Ltd. We believe that our products offer
competitive prices and high quality.
Our operations are conducted in the PRC
through our subsidiary, Shandong. For the three and nine months ended September
30, 2010, we generated sales of $22,746,574 and $62,181,727, respectively, and
net income of $4,008,460 and $10,286,442, respectively. For the 2009
fiscal year, we generated sales and net income of $69,435,044 and $12,021,155,
respectively, and for the 2008 fiscal year we generated sales and net income of
$42,197,393 and $5,761,994, respectively.
For the nine months ended September 30,
2010, sales of our wood furniture products, straw-wicker products and handicraft
products accounted for approximately $35.1 million, $25.9 million and $1.2
million, respectively, of our revenues. For the 2009 fiscal year,
sales of our wood furniture products, straw-wicker products and handicraft
products accounted for approximately $37.1 million, $31.2 million and $1.1
million, respectively, of our revenues, and for the 2008 fiscal year,
approximately $20.1 million, $21.2 million and $0.9 million,
respectively.
Our straw and wicker products as well
as our wood handicraft products are high margin products as such products
generally are manufactured by local persons in their homes, the raw material
costs are low and the production of such products does not require advanced
technology.
Based upon our perceived and historical
growing demand for our wood furniture product and the changing demographics of
the wood furniture industry, we believe we have a unique opportunity to
substantially increase our revenues, net income and gross margins by not only
expanding the manufacturing capacity of our existing wood furniture business but
also producing different types of wood furniture products that we believe there
is a large and increasing international demand for.
As a result, while we intend to
continue manufacturing and sell our straw, wicker and handicraft products, we
intend to devote substantial financial and other resources on our wood furniture
products by not only producing new products but also increasing our current
manufacturing capacity by renovating and upgrading our current production
facilities.
Important
Factors Affecting our Results of Operations
We believe significant factors that
could affect our operating results are the (i) cost of raw materials, (ii)
prices of our products to our international retailers and wholesalers and their
markup to the end users, (iii) consumer acceptance of our new wood furniture
line, and (iv) general economic conditions in China and global
markets.
Critical
Accounting Policies
We prepare financial statements in
conformity with U.S. GAAP, which requires us to make estimates and assumptions
that affect the amounts reported in our combined and consolidated financial
statements and related notes. We periodically evaluate these
estimates and assumptions based on the most recently available information, our
own historical experience and various other assumptions that we believe are
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Since the use of
estimates is an integral component of the financial reporting process, actual
results could differ from those estimates. Some of our accounting
policies require higher degrees of judgment than others in their
application. We believe the following accounting policies involve the
most significant judgments and estimates used in the preparation of our
financial statements.
Revenue
recognition
Revenue is recognized when the risks
and rewards of ownership and title to the product have transferred to the
customers, the selling price is fixed or determinable, and collection is
reasonably assured. We generally record revenues when shipments clear
the Chinese customs department. We offer varying payment terms for
our customers and are generally responsible for paying the delivery cost of our
products.
31
Accounts
Receivable
Most of our sales were conducted on
pre-payment or COD basis. However, during the normal course of
business, we extend to some of our customers interest-free, unsecured credit for
a term of 90 days depending on a customer’s credit history, as well as local
market practices. We review our accounts receivables quarterly and
determine the amount of allowances, if any, necessary for doubtful
accounts. Historically, we have not had any material bad debt
write-offs; however, we provide an arbitrary reserve amount for possible bad
debts based upon 5% of the accounts receivable balances per year. We
review our accounts receivable balances to determine whether specific reserves
are required due to such issues as disputed balances with distributors, declines
in distributors’ credit worthiness, or unpaid balances exceeding agreed-upon
terms. Based upon the results of these reviews, we determine
whether a specific provision should be made to provide a reserve for
possible bad debt write-offs. We determined that no additional bad debt write
offs were necessary or required in 2009 or 2008.
As of September 30, 2010, we had
outstanding gross accounts receivables of $18,885,302, and allowance for bad
debts of $427,860. We believe that these outstanding amounts will be collected
pursuant to the terms and conditions within the period agreed with our
customers. During the reported periods, neither material problems relating to
distributor payments nor specific additional bad debt write-offs occurred. In
terms of our liquidity, we reflect the extended interest-free unsecured credit
in our cash flows for the reported periods. Therefore, we anticipate no changes
from past cash flow patterns.
Inventories
We state inventories, consisting of
work in process, raw materials and packaging materials, at the lower of cost or
market. Cost is determined on a first in first out basis which includes an
appropriate share of production overheads based on normal operating capacity and
includes all expenditures incurred in bringing the goods to the point of sale
and putting them in a saleable condition. Work in progress includes direct
materials, direct production cost and an allocated portion of production
overhead. We evaluate inventory periodically for possible obsolescence of our
raw materials to determine if a provision for obsolescence is necessary. Our
estimates for determining the provision for obsolescence may be affected by
technological changes and developments to our product offerings and changes in
governmental regulations.
As of
September 30, 2010, we had inventory balance of $13,221,788.
Recently
Issued Accounting Standards
Fair Value Measurements and
Disclosures
(Accounting
Standards Update (“ASU”) 2010-06)
In
January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and
Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements.”
ASU 2010-06 requires new disclosures regarding transfers in and out of the Level
1 and 2 and activity within Level 3 fair value measurements and clarifies
existing disclosures of inputs and valuation techniques for Level 2 and 3 fair
value measurements. ASU 2010-06 also includes conforming amendments to
employers’ disclosures about postretirement benefit plan assets. The new
disclosures and clarifications of existing disclosures are effective for interim
and annual reporting periods beginning after December 15, 2009, except for
the disclosure of activity within Level 3 fair value measurements, which is
effective for fiscal years beginning after December 15, 2010, and for
interim periods within those years. The adoption of this statement is not
expected to have a material impact on our consolidated financial position or
results of operation.
FASB
Accounting Standards Codification
(Accounting
Standards Update (“ASU”) 2009-01)
In
June 2009, FASB approved the FASB Accounting Standards Codification (“the
Codification”) as the single source of authoritative nongovernmental GAAP. All
existing accounting standard documents, such as FASB, American Institute of
Certified Public Accountants, Emerging Issues Task Force and other related
literature, excluding guidance from the Securities and Exchange Commission
(“SEC”), have been superseded by the Codification. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification has become nonauthoritative. The Codification did not
change GAAP, but instead introduced a new structure that combines all
authoritative standards into a comprehensive, topically organized online
database. The Codification is effective for interim or annual periods
ending after September 15, 2009, and impacts our financial statements as all
future references to authoritative accounting literature will be referenced in
accordance with the Codification. There have been no changes to the
content of our consolidated financial statements or disclosures as a result of
implementing the Codification during the fiscal year ended December 31,
2009.
As a
result of our implementation of the Codification during the fiscal year ended
December 31, 2009, previous references to new accounting standards and
literature are no longer applicable. In the current annual financial
statements, we will provide reference to both new and old guidance to assist in
understanding the impacts of recently adopted accounting literature,
particularly for guidance adopted since the beginning of the current fiscal year
but prior to the Codification.
32
Subsequent Events
(Included
in Accounting Standards Codification (“ASC”) 855 “Subsequent Events”, previously
SFAS No. 165 “Subsequent Events”)
SFAS No.
165 established general standards of accounting for and disclosure of events
that occur after the balance sheet date, but before the financial statements are
issued or available to be issued (“subsequent events”). An entity is
required to disclose the date through which subsequent events have been
evaluated and the basis for that date. For public entities, this
is the date the financial statements are issued. SFAS No. 165 does not apply to
subsequent events or transactions that are within the scope of other GAAP and
did not result in significant changes in the subsequent events reported by
us. SFAS No. 165 became effective for interim or annual periods
ending after June 15, 2009 and did not impact our consolidated financial
statements. We evaluated for subsequent events through the issuance
date of our consolidated financial statements. No recognized or non-recognized
subsequent events were noted.
Determination
of the Useful Life of Intangible Assets
(Included
in ASC 350 “Intangibles — Goodwill and Other”, previously FSP SFAS No. 142-3
“Determination of the Useful Lives of Intangible Assets”)
FSP SFAS
No. 142-3 amended the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under previously issued goodwill and intangible assets
topics. This change was intended to improve the consistency between
the useful life of a recognized intangible asset and the period of expected cash
flows used to measure the fair value of the asset under topics related to
business combinations and other GAAP. The requirement for determining
useful lives must be applied prospectively to intangible assets acquired after
the effective date and the disclosure requirements must be applied prospectively
to all intangible assets recognized as of, and subsequent to, the effective
date. FSP SFAS No. 142-3 became effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. The adoption of FSP SFAS No. 142-3 did not
impact our consolidated financial statements.
Noncontrolling
Interests
(Included
in ASC 810 “Consolidation”, previously SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51”)
SFAS No.
160 changed the accounting and reporting for minority interests such that they
will be recharacterized as noncontrolling interests and classified as a
component of equity. SFAS No. 160 became effective for fiscal years beginning
after December 15, 2008 with early application prohibited. We
implemented SFAS No. 160 at the start of fiscal 2009 and no longer record an
intangible asset when the purchase price of a noncontrolling interest exceeds
the book value at the time of buyout. The adoption of SFAS No. 160 did not have
any other material impact on our consolidated financial statements.
Consolidation
of Variable Interest Entities — Amended
(To
be included in ASC 810 “Consolidation”, SFAS No. 167 “Amendments to FASB
Interpretation No. 46(R)”)
SFAS No.
167 amends FASB Interpretation No. 46(R) “Consolidation of Variable Interest
Entities regarding certain guidance for determining whether an entity is a
variable interest entity and modifies the methods allowed for determining the
primary beneficiary of a variable interest entity. The amendments
include: (1) the elimination of the exemption for qualifying special purpose
entities, (2) a new approach for determining who should consolidate a
variable-interest entity, and (3) changes to when it is necessary to reassess
who should consolidate a variable-interest entity. SFAS No. 167 is effective for
the first annual reporting period beginning after November 15, 2009, with
earlier adoption prohibited. We implemented SFAS No. 167 in fiscal
2010, which does not have any material impact on our consolidated financial
statements.
Results
of Operations
The
following tables set forth key components of our results of operations for the
periods indicated, in dollars and as a percentage of revenue.
The
following tables set forth key components of our results of operations for the
periods indicated, in dollars and as a percentage of revenue.
33
(All
amounts in U.S. dollars, except for the percentages)
Statements of
|
For the three months ended
|
For the nine months ended
|
||||||||||||||||||||||||||||||
Operations
|
9/30/2010
|
9/30/2009
|
9/30/2010
|
9/30/2009
|
||||||||||||||||||||||||||||
$
|
%(1)
|
$
|
%(1)
|
$
|
%(1)
|
$
|
%(1)
|
|||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||||||
Revenues
|
22,746,574 | - | 14,725,112 | - | 62,181,727 | - | 46,201,117 | - | ||||||||||||||||||||||||
Cost
of goods sold (exclusive of depreciation and
amortization
|
16,462,614 | 72.37 | % | 10,924,422 | 74.19 | % | 45,206,191 | 72.70 | % | 34,516,927 | 74.71 | % | ||||||||||||||||||||
Operating
expenses
|
761,473 | 3.35 | % | 595,057 | 4.04 | % | 2,487,106 | 4.00 | % | 1,541,838 | 3.34 | % | ||||||||||||||||||||
Income
from operations
|
5,522,487 | 24.28 | % | 3,205,633 | 21.77 | % | 14,488,430 | 23.30 | % | 10,142,353 | 21.95 | % | ||||||||||||||||||||
Other
(expense)
|
(125,439 | ) | 0.55 | % | (148,829 | ) | 1.01 | % | (609,172 | ) | 0.98 | % | (292,396 | ) | 0.63 | % | ||||||||||||||||
Net
income before income taxes
|
5,397,048 | 23.73 | % | 3,056,804 | 20.76 | % | 13,879,257 | 22.32 | % | 9,849,956 | 21.32 | % | ||||||||||||||||||||
Net
income
|
4,008,460 | 17.62 | % | 2,292,606 | 15.57 | % | 10,286,442 | 16.54 | % | 7,416,325 | 16.05 | % |
(1) Percentage of
revenues
Comparison
of Three and Nine Months Ended September 30, 2010 and 2009
Revenues
Our
revenues consist of the sales of our products, net of returns and
allowances. As we do not currently have our own sales force, we sell
our products directly to non-related retailers and wholesalers (such as ABM
Group) who then sell such products to the ultimate end users. To
date, returns and allowances have been virtually non-existent and as such have
had no material effect on our revenues.
Revenues
for the three and nine months ended September 30, 2010 were $22,746,574 and
$62,181,727, respectively, representing an increase of $8,021,462 or 54.5%, and
$15,980,610 or 34.6%, compared to revenues of $14,725,112 and $46,201,117 for
the comparative periods ended September 30, 2009. For the three
months ended September 30, 2010, our main products, consisting of wood
furniture, straw-wicker and handicraft products, generated sales of
approximately $12.6 million, $9.7 million, and $0.4 million, respectively, or
approximately 55%, 43% and 2% of our total revenues for the three months ended
September 30, 2010. For the nine months ended September 30, 2010, these products
generated sales of approximately $35.1 million, $25.9 million, and $1.2 million,
respectively, or approximately 56%, 42% and 2% of our total revenues for the
nine months ended September 30, 2010.
Sales of
our wood furniture, straw-wicker and handicraft products generated revenues of
approximately $4.5 million, $22.9 million, and $9.9 million and $22.4 million,
$0.3 million and $0.9 million, respectively, for the three and nine months ended
September 30, 2009, respectively.
The
increase in our revenues during the three and nine months ended September 30,
2010 compared to the same periods ended September 30, 2009 was primarily
attributable to the increased number of orders we received from our customers as
a result of the addition of newly-developed products to our production
lines.
For the
nine months ended September 30, 2010, we sold $3,989,617 (6.4% of our aggregate
revenues) of our products to Trade Point. In Fiscal 2009, we sold
approximately $20,103,933 (29% of our aggregate revenues) of our products to
Trade Point. We believe this reduction resulted from other customers
increasing their orders for our products, while Trade Point decreased its
orders for our products for the nine months ended September 30, 2010.
Even though the substantial reduction of sales of our products to Trade Point in
the nine months of 2010 has been replaced by increased sales to other customers,
we cannot provide assurance that the decline in Trade Point’s orders of our
products will not continue, nor can we provide assurance that sales of our
products to our other customers will continue to increase. The continued
loss or substantial decrease in sales of our products to Trade Point for the
remaining portion of 2010 could result in a substantial reduction in our
revenues and net income for 2010. See “Risk Factor”.
Cost
of Goods Sold (excluding depreciation and amortization)
Our cost
of goods sold consists primarily of costs of direct and indirect raw materials,
direct labor, and other costs directly attributable to the production of
products, excluding depreciation and amortization expenses, shipping and
handling expenses, inspection costs, and other costs of our distribution
network, which are included in our Selling, General and Administrative
expenses.
Cost of
goods sold for the three months ended September 30, 2010 was approximately
$16,462,614, an increase of approximately $5,538,192, or approximately 50.7%,
from approximately $10,924,422 for the comparative period in
2009. For the nine months ended September 30, 2010, we had cost of
goods sold of $45,206,191, increased by $10,689,264, or approximately 31.0%,
from approximately $34,516,927 for the comparative period ended September 30,
2009. Such increase was due primarily to greater use of raw materials
resulting from increased orders from our customers.
34
Selling
and marketing expenses
Generally,
our selling and marketing expenses mainly consist of advertising, shipping and
handling costs, exhibition expenses, inspection costs, and the other costs of
our distribution network which are expensed as incurred during the selling
activities. The expenses incurred by us to market and show our products
internationally at trade shows or similar industry exhibitions are examples for
our selling and marketing expenses. Such expenses include the
expenses to set up exhibition booths for our products, transportation costs to
bring our products and representatives to the trade shows and exhibitions, and
similar related costs and expenses. All the freight costs of shipping
our products internationally to our retailers and wholesalers are borne by such
retailers and wholesalers and are not included herein.
Our
selling and marketing expenses were $215,692 and $608,729 for the three and nine
months ended September 30, 2010, respectively, including $76,782 and $344,071 in
shipping and handling expenses for the three month and nine months ended
September 30, 2010, respectively. Our selling and marketing expenses
increased by approximately $57,574 or 36.4%, and $153,316 or 33.7% for the three
and nine months ended September 30, 2010, respectively, from $158,118 and
$455,413 for the comparative periods ended September 30, 2009. Such
increase resulted from the rises in transportation fees, port incidental charges
and trade inspection fees as a result of increased sales revenue.
General
and administrative expenses
Our general and administrative expenses
are principally comprised of 3 items including salaries of our employees not
involved in the actual manufacturing of our products, such as our executive
officers and internal accounting and book keeping personnel; depreciation of our
fixed assets such as our manufacturing facilities, offices and warehouses as
well as certain expenses such as amortization of land use rights granted to us
by PRC government agencies; and insurance payments paid by us to
the PRC government to cover such items as disability, retirement and medical
benefits for our employees.
Our
general and administrative expenses for the three months ended September 30,
2010 were $276,555, representing a decrease of approximately $60,741 or 18.0%,
compared to approximately $337,296 for the comparative period in
2009. The decrease was primarily due to effective cost controls that
we implemented. For the nine months ended September 30, 2010, our
general and administrative expenses of $884,730, represented an increase by
approximately $157,119 or 21.6%, compared to approximately $727,611 for the
comparative period in 2009. Such increases in expenses resulted from
an increase in legal fees, audit fees and other cash payments for professional
services attributable to becoming a publicly traded company in the United
States.
Research
and Development
Our
research and development expenditures totaled approximately $111,923 and
$501,642 for the three and nine months ended September 30, 2010, respectively,
increasing by approximately $12,281 or 12.3%, and by $142,829 or 39.8% compared
to approximately $99,642 and $358,813 for the same periods ended September 30,
2009. The increase was due to our growing investment in research and
development of new products, including our proposed new furniture production
line. We expect our research and development expenditures to continue
to increase as a result of further diversification of our product lines in the
future.
Professional
and consulting expenses
During
the three and nine months ended September 30, 2010, we had professional and
consulting fees of $157,303 and $492,005, respectively, which represented
non-cash payments from the issuance of warrants and shares of common
stock. We entered into an agreement to issue a total of 100,000
warrants, among other items, for the services rendered in connection with our
process of going public. The services were rendered to us and the
related expense of $334,702 was recorded based on the estimated fair value of
the warrants at the date of the grant to our service consultants. The
fair market value was calculated using the Black-Schools options pricing model,
assuming approximately 5.15% risk-free interest, 0% dividend yield, 60%
volatility, and a life of two years.
Pursuant
to the aforementioned agreement, we also agreed to issue 21,467 shares of our
common stock to the consultant to reimburse expenses of $161,000 advanced by the
consultant. The fair value of the shares was determined using the
fair value of our common stock on the grant date, at a market price of $7.50.
The shares have not been issued as of the date of this
prospectus.
In
addition, we provided each of our three independent directors an Offer Letter
dated July 1, 2010, pursuant to which, we agreed to issue a total of 2,500
shares, or 833 shares per person, as compensations to the independent directors’
service during the third quarter of 2010. The fair value of such
shares was approximately $17,325 based upon the market value of the number of
shares multiplied with the last market quoted price of $6.93 on the grant
date. 1,667 shares were issued on October 29, 2010, and the remaining
833 shares have not been issued as of the date of this
prospectus.
We did
not have any professional and consulting expenses during the three and nine
months ended September 30, 2009.
Interest
expense
Our
interest expenses were approximately $131,218 for the three months ended
September 30, 2010, decreased by approximately $18,090 or 12.1%, compared to
approximately $149,308 in the same periods ended September 30,
2009. The decrease in interest expenses during the third quarter of
2010 was due to the repayment of approximately 50% of our outstanding short-term
loans during the third quarter of 2010 compared to the same period in
2009.
35
Our
interest expenses were approximately $722,966 for the nine months ended
September 30, 2010, representing an increase by approximately $283,143 or 64.4%,
compared to approximately $439,823 in the same period ended September 30,
2009. The increase in interest expenses during the nine months ended
September 30, 2010 was attributable to the additional short-term loans we
incurred during the nine months ended September 30, 2010 compared to the same
period in 2009.
Income
Tax Expense
Income tax expense for the three and
nine months ended September 30, 2010 was approximately $1,388,588 and
$3,592,816, respectively. The increase by approximately $624,390 or
81.7%, and by approximately $1,159,185 or 47.6% for the three and nine months
ended September 30, 2010, respectively, compared to income tax expense of
$764,198 and $2,433,631 for the same periods ended September 30, 2009, was
primarily attributable to the increase in taxable profits as a result of
significant increase in sales revenues. Our income taxes are based on
a statutory 25% effective tax rate in both years. There was no
deferred income tax for the three and nine months ended September 30,
2010.
Net
income
Net
income for three and nine months ended September 30, 2010 was approximately
$4,008,460 and $10,286,442, respectively, an increase of approximately
$1,715,854 or 74.8%, and by $2,870,117 or 38.7%, compared to net income of
approximately $2,292,606 and $7,416,325 for the same periods ended September 30,
2009.
Net
income as a percentage of our sales revenues increased to 17.6% and 16.5% for
the three and nine months ended September 30, 2010, respectively, from 15.6% and
$16.0% in the comparative periods in 2009. The increase in net income
during the three and nine months ended September 30, 2010 was due primarily to
the significant increase in our sale revenues exceeding the effects of a
correlative increase in cost of goods sold. In addition, there was an
increase in our income taxes for the nine months ended September 30, 2010 versus
the same period ended September 30, 2009 caused by an increase in income from
operations before income taxes during the nine months ended September 30,
2010. This increase in income taxes lessened the effect of the
increase in net income for the nine months ended September 30, 2010 compared
with the same period in 2009, similar to the effect of the increase in cost of
goods sold and the increase in operating expenses had on the increase of net
income for the nine months ended September 30, 2010 compared with the same
period in 2009.
Comparison
of the fiscal year ended December 31, 2009 and fiscal year ended December 31,
2008
(All
amounts in U.S. dollars, except for the percentages)
Statements of Operations
|
For the year ended December 31, 2009
|
For the year ended December 31, 2008
|
||||||||||||||
USD
|
% of
Revenue
|
USD
|
% of
Revenue
|
|||||||||||||
Revenues
|
$
|
69,435,044
|
-
|
%
|
$
|
42,197,393
|
-
|
%
|
||||||||
Cost
of Sales (exclusive of depreciation)
|
$
|
(49,360,775
|
)
|
71.1
|
%
|
$
|
(31,570,829
|
)
|
74.8
|
%
|
||||||
Operating
expenses
|
$
|
2,797,647
|
4.0
|
%
|
$
|
2,553,693
|
6.1
|
%
|
||||||||
Income
from operations
|
$
|
17,276,623
|
24.9
|
%
|
$
|
8,072,871
|
19.1
|
%
|
||||||||
Other
expense
|
$
|
(1,161,581
|
)
|
1.7
|
%
|
$
|
(356,959
|
)
|
0.8
|
%
|
||||||
Net
income before income taxes
|
$
|
16,115,042
|
23.2
|
%
|
$
|
7,715,912
|
18.3
|
%
|
||||||||
Net
income
|
$
|
12,021,155
|
17.3
|
%
|
$
|
5,761,994
|
13.7
|
%
|
Revenues
Revenue
for the fiscal year ended December 31, 2009 was $69,435,044, an increase of
$27,237,651, or 64.5%, from $42,197,393 for the comparable period in 2008.
During 2009, our main products, wood furniture, straw-wicker products, and
handicraft products, generated sales of approximately $37.1 million, $31.2
million and $1.1 million , respectively, approximately 53.4%, 45.0% and 1.6% of
our total revenues during the 2009 fiscal year. Sales of our wood
furniture, straw-wicker products and handicraft products contributed
approximately $20.1 million, $21.2 million and $0.9 million, respectively, in
the revenues of 2008, approximately 47.6%, 50.2%, and 2.2%, respectively, of our
total revenues in such period.
The
increase in our revenues in 2009 compared to 2008 was primarily attributable to
our selling products to additional customers, which we believe resulted from the
high quality of our products and stable product supply, as well as increased
purchases of our products by our existing clients due to improvement in quality
and design of our existing products based upon our clients’ demands and
suggestions. We also believe the increase in our revenues during 2009 is a
result of the increase in consumer spending as a whole due to the recovery of
global economic conditions.
36
Cost
of Goods Sold (excluding depreciation and amortization)
Cost of
goods sold for the fiscal year ended December 31, 2009 was $49,360,775, an
increase of $17,789,946, or approximately 56.3%, from $31,570,829 for the
comparable period in 2008. Such increase was due to the increase in our
sales. Compared to the increase in sales, the increase in cost of goods
sold was smaller, which was primarily attributable to the price of our main raw
material, poplar, dropped approximately 26.1% from RMB1,150/cubic meter to
RMB850/cubic meter during 2009.
Selling
and marketing expenses
Our
selling and marketing expenses were approximately $831,245 in the year ended
December 31, 2009, an increase of $145,141, or 21.2%, from approximately
$686,104 for the comparable period in 2008. Such expenses included
approximate $416,811 and $311,258 in shipping and handling expenses for the year
ended December 31, 2009 and 2008, respectively. The increase was resulted
from an increase in transportation fee, port incidental charges and trade
inspection fee due to increased sales.
General
and administrative expenses
Our
general and administrative expenses for the fiscal year ended December 31, 2009
were approximately $1,463,818, a decrease of $432, or less than 1%, compared to
$1,464,250 for the comparable period in 2008.
We expect
our general and administrative expenses to increase in 2010 and thereon as a
result of the increase in legal, professional and audit fees attributable to
being a publicly reporting company in the United States of America.
Research
and Development
Our
research and development expenditures totaled $502,584 in 2009, an increase of
approximately $99,245, or 24.6%, as compared to $403,339 in 2008. The
increase was due to our growing investment in research and development of new
products, including our proposed new furniture line. We expect our research and
development expenditures to increase as we attempt to diversify our product
lines in the future.
Interest
expense
Interest
expense for the fiscal year ended December 31, 2009 was $753,093, an increase of
$1,227, or 0.2%, compared to $751,865 for the comparable period in
2008. Although total amount of debt decreased from 2008 to 2009, two
particular notes payable to local banks in 2008 that carried low interest rates
were paid off in 2009. In addition, short-term borrowings in 2009, that carried
higher interest rates, increased in 2009 compared to 2008.
Other
Income
Other
income for the fiscal year ended December 31, 2009 was $202,851, a decrease of
$164,248, or 44.7%, compared to $367,099 for the comparable period in
2008. The decrease was attributable to the subsidy income earned from
the government’s tax incentive fund during 2009 was less than that during
2008.
Income
Tax Expense
Income
tax expense for the fiscal year ended December 31, 2009 was $4,093,887, of which
$3,415,978 was current and $677,909 was deferred. The deferred tax
provision was due to a temporary difference between book income and taxable
income attributable to goods in transit at the end of the
year. An increase of approximately $2,139,969 or 109.5% for fiscal
year 2009, compared to income tax expense of $1,953,918 for fiscal year 2008,
was primarily attributable to the increase in our taxable profits in
2009. The income taxes are based on a statutory 25% effective
tax rate in both years. There was no deferred income tax for the
fiscal year 2008.
Net income
Net
income for fiscal 2009 was $12,021,155, an increase of $6,259,161, or 108.6%, as
compared to $5,761,994 in 2008. Net income as a percentage of our
sales revenues increased 3.6% in 2009 from 13.7% in fiscal 2008. The
increase was primarily attributable to the increase in sales during
2009.
Liquidity
and Capital Resources
The following table sets forth a
summary of our net cash flow information for the periods
indicated:
37
(All
amounts in U.S. dollars)
For the nine months ended
|
||||||||
September 30,
2010*
|
September 30, 2009*
|
|||||||
(Consolidated,
unaudited)
|
(Consolidated,
unaudited)
|
|||||||
Net
cash provided by operating activities
|
$ | 6,821,740 | $ | 6,543,795 | ||||
Net
cash (used in) investing activities
|
$ | (4,741,994 | ) | $ | (1,909,393 | ) | ||
Net
cash provided by / (used in) financing activities
|
$ | 898,923 | $ | (2,009,034 | ) | |||
Effect
of Foreign currency translation
|
$ | 823,162 | $ | (309 | ) | |||
Net
increase (decrease) in cash and equivalents
|
$ | 3,801,831 | $ | 2,625,059 | ||||
Cash
and cash equivalents, beginning of period
|
$ | 2,185,839 | $ | 1,751,997 | ||||
Cash
and cash equivalents, end of period
|
$ | 5,987,670 | $ | 4,377,056 |
* The above financial data
have been derived from our unaudited consolidated financial statements for the
nine months ended September 30, 2010 and 2009.
Comparison
of the nine months ended September 30, 2010 and the nine months ended September
30, 2009
Operating
Activities
Net cash
provided by operating activities was approximately $6,821,740 for the nine
months ended September 30, 2010, compared to net cash provided by operating
activities of approximately $6,543,795 for the comparable period in
2009. Positive cash flows during the nine months ended September 30,
2010 were due primarily to net income of $10,286,442, plus the non-cash expenses
such as depreciation of $618,042, warrants granted for services of $334,702, and
stock based compensation of $178,325, partially offset by the increase in
accounts receivable and inventories by $1,623,644 and $2,868,042, respectively,
and the decrease in tax payable in the amount of
$953,331. Comparably, positive cash flows during the nine months
ended September 30, 2009 were due primarily to the net income of $7,416,325,
plus the decrease in inventories by $1,409,893, partially offset by the increase
in accounts receivables by $2,023,893, and the decrease in accrued liabilities
by $645,958.
Investing
Activities
Cash used
in investing activities mainly consists of capital expenditures, expenditures
for property, plant, and equipment, and additions to construction in
progress.
Net
cash flows used in investing activities were $4,741,994 and $1,909,393 for the
nine months ended September 30, 2010 and 2009, respectively. Negative
cash flows during the nine months ended September 30, 2010 were primarily
attributable to the spending in reconstruction, renewal and expansion of our old
workshop buildings and facilities. We incurred $780,945 and $803,038
in expenditures for property, plant and equipment during the nine months ended
September 30, 2010 and 2009, respectively. We also had $3,961,049
incurred in construction in progress during the nine months ended September 30,
2010 compared to $1,106,355 in such expenditures for the comparable period in
2009. The amounts of these additional expenditures increased as we
continued to expand our operating facilities.
Financing
Activities
Net
cash provided by financing activities was $898,923 for the nine months ended
September 30, 2010, due primarily to the proceeds from short-term loans of
$11,568,813 payable to local banks, which bear an annual interest rate depending
on the loan from 4.86% to 9.558%, offset by the repayments of $10,669,890 during
this period. For comparison, we had cash flows of $2,009,034 used in
financial activities for the nine months ended September 30, 2009, due to the
repayments of short-term notes of $9,254,138, offset by the net proceeds from
short term borrowings of $7,245,104.
Comparison
of the fiscal year ended December 31, 2009 and fiscal year ended December 31,
2008
Operating
Activities
Net cash
provided by operating activities was approximately $9,066,854 for the year ended
December 31, 2009, compared to net cash of approximately $940,455 used in
operations for the year ended December 31, 2008, an increase of approximately
$10,007,309, which was due to the increase in net income as a result of
increased customer base. In addition, we shortened our customers’
credit limits to increase the turnover of trade accounts receivable, inventories
and other receivables. We are subject to the regulations of the PRC
which restricts the transfer of cash from China, except under certain specific
circumstances. Accordingly, such funds may not be readily
available to us to satisfy future obligations which may be incurred outside the
PRC, if applicable.
38
Investing
Activities
Net
cash used in investing activities was approximately $8,053,319 for the year
ended December 31, 2009, an increase in cash outflow of approximately $7.4
million during 2009 from approximately $675,026 for the comparable period in
2008, which was primarily attributable to the expansion and improvement of our
current facilities, including construction in progress, in order to fulfill
increased demand. We incurred $1,121,964 in expenditures for
property, plant and equipment in 2009 compared to $1,094,614 in such
expenditures in 2008, increasing by $27,350 in 2009. We also had
$6,931,355 incurred in construction in progress in 2009 compared to the decrease
by $125,685 in such expenditures in 2008. In 2008, we disposed of
property, plant and equipment that generated proceeds of $293,904. We
had no such activities in 2009.
Financing
Activities
Net
cash used in financing activities was $523,508 for the year ended December 31,
2009, compared to net cash provided by financial activities of $2,634,152 for
the same period in 2008. The difference was attributable to the
following financing activities, some of which caused an increase in cash from
financing activities and some of which caused a decrease in cash from financing
activities. The combined effects of these changes caused the
difference between periods. First, we repaid $2,635,020 aggregate
principal amount of notes payables to banks in 2009 compared to $4,893,495 in
2008. Secondly, we had proceeds of short-term borrowings of
$5,787,983 in 2009 compared to $1,754,245 in 2008. Third, in 2009, we
had $3,676,471 in repayments of short-term borrowings, which was only
$360,969 in 2008. Fourth, we had proceeds from borrowing on
notes payable of $6,359,126 in 2008. We had no borrowings of notes
payable in 2009; rather we only had proceeds from short-term
borrowings. Short-term borrowings and notes payable are similar in
nature but are classified differently in this prospectus. Fifth, in 2008,
we paid dividends of approximately $224,755 to our shareholders but no dividends
were paid in 2009. Our ability to pay dividends may be restricted due
to the foreign exchange control policies and availability of cash balance of our
Chinese operating subsidiary. A majority of our revenue earned and
currency received are denominated in RMB, which is subject to the exchange
control regulation in China; as a result, we may unable to distribute any
dividends outside of China due to PRC exchange control regulations that restrict
our ability to convert RMB into US Dollars. Accordingly, our
subsidiaries’ funds may not be readily available to us to satisfy obligations
incurred outside the PRC, which could adversely affect our business and
prospects and/or our ability to meet our cash obligations.
Based
upon our present plans, we believe that cash on hand, cash flow from operations
and funds available to us through financing will be sufficient to fund our
capital needs for at least the next 12 months. We expect that our
primary sources of funding for our operations for the upcoming 12 months and
thereafter will result from our cash flow from operations and from the net
proceeds of this offering. However, our ability to maintain
sufficient liquidity depends partially on our ability to achieve anticipated
levels of revenue, while continuing to control costs. If we did not
have sufficient available cash, we would have to seek additional debt or equity
financing through other external sources, which may not be available on
acceptable terms, or at all. Failure to maintain financing
arrangements on acceptable terms would have a material adverse effect
on our business, consolidated results of operations and financial
condition.
Loan
Facilities
We
believe that we currently maintain a good business relationship with our bank
loans. As of September 30, 2010, our outstanding bank loans that were
classified as short term borrowings on the accompanying consolidated balance
sheet were as follows:
(All
Amounts in U.S. Dollars)
|
|||||
Name
|
Amount
|
Maturity Date
|
|||
Bank of
China, Cao County Branch (1)
|
$
|
223,844
|
11/17/2010
|
||
Bank
of China, Cao County Branch (2)
|
$
|
522,302
|
10/21/2010
|
||
Bank
of China, Cao County Branch (3)
|
$
|
1,044,605
|
2/03/2011
|
||
Laishang
Bank (A/K/A Commercial Bank (Heze Branch) (4)
|
$
|
2,238,438
|
4/29/2011
|
||
Laishang
Bank (A/K/A Commercial Bank (Heze Branch) (5)
|
$
|
447,688
|
9/28/2010
|
||
Construction
Bank of China, Cao County Branch (6)
|
$
|
2,984,585
|
10/25/2010
|
||
Construction
Bank of China, Cao County Branch (7)
|
$
|
1,492,292
|
11/03/2010
|
||
Total
|
$
|
8,953,754
|
(1)
Short term loan (No. Year 2009 Cao Zhong Yin Si Dai Zi 011). The term of this
loan agreement is from November 18, 2009 to November 17, 2010, with an interest
rate of 6.372% per annum. The purpose of this loan is to purchase raw
materials. The loan is the master contract of the Maximum Mortgage
Contract (No. Year 2009 Di Xie Zi 001), Shandong is the guarantor for this
loan.
(2)
Short term loan (No. Year 2009 Cao Zhong Yin Si Dai Zi 006). The term of this
loan agreement is from October 22, 2009 to October 21, 2010, with an interest
rate of 6.372% per annum. The purpose of this loan is to purchase raw
materials. The loan is the master contract of the Maximum Mortgage
Contract (No. Year 2009 Di Xie Zi 001), Shandong is the guarantor for this
loan.
(3)
Short term loan (No. Year 2010 Cao Zhong Yin Si Dai Zi 001). The term of this
loan agreement is from February 4, 2010 to February 3, 2011, with an interest
rate of 6.372% per annum. The purpose of this loan is to purchase raw
materials. Shandong Enterprise Credit Guarantee Co., Ltd is the guarantor for
this loan and takes join and several liabilities.
39
(4) Short
term loan (No.2010043001210). The term of this loan agreement is from April 30,
2010 to April 29, 2011, with an interest rate of 9.558% per
annum. The loan is to be used as our working fund to purchase
raw materials, which should be repaid from our sales income or
others. Shandong Cao County Shengfeng Food Limited is the guarantor
for this loan and takes joint and several liabilities.
(5) Short
term loan (No.2009120701210). The term of this loan agreement is from December
7, 2009 to September 28, 2010, with an interest rate of 9.558% per
annum. The loan is to be used as our working fund, which should
be repaid from our sales income. Heze JXY Food Limited and Shandong
Cao Xian Changsheng Arts & Crafts Company Ltd are the guarantors for this
loan and take joint and several liabilities. Subsequent to the end of third
quarter of 2010, the principal and accrued interest of this loan was repaid in
full.
(6) Short
term loan (No.CXCKDDRZ2010008). The term of this loan agreement is from
June 28, 2010 to October 25, 2010, with an interest rate of 4.86% per
annum. The loan is to be used as our working fund, which should
be repaid from our sales income. Heze JXY Food Limited is the
guarantor for this loan and takes joint and several liabilities.
(7) Short
term loan (No.CXCKDDRZ2010010). The term of this loan agreement is from
July 8, 2010 to November 3, 2010, with an interest rate of 4.86% per
annum. The loan is to be used as our working fund, which should
be repaid from our sales income. Heze JXY Food Limited is the
guarantor for this loan and takes joint and several liabilities.
We
anticipate rollovers of all current facilities coming due in the 2011 fiscal
year and do not foresee a squeeze on the availability of credit to fund our
operations and meet our growth objectives.
Capital
Expenditures
We
believe that substantially all of our capital expenditures going forward will be
related to our furniture business as we diversify our product base, build
component manufacturing facilities and renovate our existing manufacturing
facilities.
We
believe that our existing cash, cash equivalents and cash flows from operations,
proceeds from this offering, and our credit lines will be sufficient to meet our
anticipated cash needs over the next 12 months, including, but not limited to,
building our 1st new
production line to manufacture wooden furniture that we believe would enable us
to fulfill a great percentage of our overseas demands. We will,
however, require substantial additional cash resources to implement the balance
of our growth strategy discussed elsewhere, including any acquisitions we may
decide to pursue.
We
intend to use these net proceeds of this offering to construct a new
production facility, which will produce higher grade furniture. The
total cost of such production is approximately $20 million, including but not
limited to (i) $5.3 million to build a 40,000 square meter work shop, and (ii)
$6.7 million to purchase the necessary equipment for the production
line. The balance of the cost of our first production line will be
funded from working capital and/or retained earnings.
With
the proceeds from this offering, we plan to build the first of our new
production lines in 2010 and 2011. In addition, we also plan to (i) build
another new production line to produce high end furniture, which we currently
estimate will cost an additional approximately $15 million, (ii) build an
R&D center, which we currently estimate will cost approximately $1.4
million, (iii) upgrade our existing facilities and establish new compatible
facilities for a complete furniture production line, such as carton, paint and
hardware workhouse, which we currently estimate will cost approximately $36.6
million, and (iv) set up overseas sales stores. The timing of the
construction of these items will depend upon our ability to raise the required
additional capital, for which we do not currently have plans.
We
regularly review our cash funding requirements and attempt to meet those
requirements through a combination of cash on hand, cash provided by operations
and private financing.
We do not
use derivative financial instruments in our investment portfolio and have no
foreign exchange contracts. Our financial instruments consist of cash
and cash equivalents, trade accounts receivable and accounts
payable. We consider investments in highly-liquid instruments
purchased with a remaining maturity of 90 days or less at the date of purchase
to be cash equivalents.
40
FURNITURE
INDUSTRY BACKGROUND
Except as
otherwise expressly provided herein, the following information on the furniture
industry has been derived from the Shandong Report.
Overview
of the Industry
Pursuant
to an article dated July 27, 2009, titled The Global Competitiveness of the Chinese Wooden
Furniture Industry, issued by Forest Policy and Economics, global trade in
furniture has grown rapidly in the past decades because of packing and shipping
innovations such as ready-to-assemble and knock-down furniture as well as
decreasing world trade barriers. The increased openness in the furniture
markets has caused the international trade of furniture to grow faster than
furniture production and the international trade of manufacture. The
international trade of furniture has increased from $42 billion in 1997 to $97
million in 2007.
Pursuant
to an article dated June 2008, titled Worldwide Furniture Market: An
Analysis, and a Furniture and Related Products NAICS
Code 337, issued by the U.S. Department of Commerce Industry Report in
2009, the worldwide furniture market grew steadily from 2000 to 2007, however,
because of current worldwide economic conditions, the furniture industry has
experienced a downturn in furniture shipments for 2008 and 2009.
Residential furniture makes up the major share of the market, followed by
office furniture. North America makes up the biggest portion of the world
market, followed by Europe.
China
Market
According
to an article dated October 9, 2008, titled 2008 International Trade
Development Tendency of
China Furniture,
the major furniture manufacturing provinces in China are Shandong (where we are
located), Guangzhou and Jiangsu, and furniture manufactured in China is now
exported to over 200 countries.
According
to an article dated August 12, 2009, titled Furniture China 2009 – Huge Buyer Demand Met the Industry
in China, 2009 was a challenging year for the global economy, and the
Chinese furniture industry experienced unprecedented difficulties.
According to the China National Furniture Association’s report, from
January to approximately July 2009, China’s furniture exports declined 9.45%.
However, with the Chinese government’s policies "to maintain growth,
expand domestic demand, and readjust the industry structure" and through
determined industry-wide efforts, the Chinese furniture industry began to show
signs of recovery.
According
to the same article, the financial crisis starting from 2008 has forced the
Chinese furniture industry into a transition period which has brought an
accelerated pace in consolidation and restructuring of Chinese furniture
industry. Being an “evergreen” industry, according to such article,
China’s furniture industry is expected to bounce back even more vigorously with
an extended phase of healthy and steady development.
According
to an article dated July 1, 2010, titled China: Wood Product Imports Retain
Upward Trend, issued by the International Tropical Timber Organization,
the total value of wood furniture exports in the first four months of 2010 were
$2,772 million, up 37% from the first four months of 2009. Furniture
exports to the U.S. were $870 million, up 20% of the same period in
2009.
U.S.
Market
According
to a Furniture and Related
Products NAICS Code 337, issued by the U.S. Department of Commerce
Industry Report in 2009, the furniture industry in United States is a relatively
mature cyclical industry with long-term growth dependent on population and
income growth. Furniture exports to the United States have increased
sharply in recent years. In the past two decades, China, India, Russia and
the Eastern European countries have entered the global manufactory and export
market. Also, falling tariffs rates have increased exports to the United
Sates, first through such tariff reduction programs as the Generalized System of
Preferences (“GSP”) and the North American Free trade Agreement (“NAFTA”) and
then, pursuant to the Uruguay Round negotiations, through zero-for-zero tariff
reductions for major exporting countries. The result is that today certain
furniture imported by the United States enters on a duty-free
basis.
According
to the Furniture and Related
Products NAICS Code 337, over the past decade, furniture exports to the
United States have increased much more rapidly than have furniture exports from
the United States. Between 1999 and 2007, exports to the United States
increased 107.7% to $3.4 billion while its exports increased 40.4% to $27.2
billion. 2008 was the first down year for imports of furniture since
2001into the United States. Imports by the United States during the first
nine months of 2008 were down 4% while its exports increased 17.2%. The
weak economy and housing market as well as the falling dollar on exchange
markets were the primary causes for the drop in imports.
According
to the Furniture and Related Products NAICS
Code 337, China was the largest supplier of furniture to the United
States, accounting for 54.4% of its imports in 2007. Canada, Mexico,
Vietnam, and Italy together accounted for 26.4% of exports into the United
States in 2007. According to this report, China is also a growing market
for furniture subassemblies, parts and supplies. Over the past eight years,
exports from the United States to Canada and Mexico increased 74.3% and 96.2%,
respectively, while exports from China increased 312.8%.
41
European
Market
A
substantial portion of furniture exported to Europe from China is low-end
practical furniture. Germany is the largest importer of furniture in
Europe, with most imports coming from countries that are members of the European
Union and Eastern Europe. In recent years, Germany imported more furniture
from countries in Asia, especially from China and Indonesia. After
Germany, the United Kingdom is the second largest furniture export market in
Europe. Its top furniture exporting countries are Italy, Denmark and
China.
Italy
is the largest furniture exporting country in Europe. In 2008, there were
approximately 36,000 furniture manufacturers and 216,000 employees in the
Italian furniture industry. However, in the past few years, Italy’s export
volume remained relatively static (about $800 million per year), while several
of its competitors, including Canada, China and Poland, showed increased export
trends.
Japan
Market
In recent
years, Asia has experienced a substantial surge in the demand for its
manufactured goods from the United States and Japan. One sector in China which
has benefited from this increase in demand is furniture.
In Japan,
about 80% of furniture manufacturers are private middle to small sized
enterprises. Japan’s domestic manufacturing furniture industry accounts for
approximately 80% of furniture purchased by Japan, with the remaining 20% of
furniture used in Japan imported from foreign countries.
Since
1996, Japan’s furniture imports have experienced substantial growth. Japan
imports low-cost wood furniture mainly from Taiwan and Eastern European regions,
and high-cost furniture mainly from Europe and the United States.
However, in 2000, China exceeded Taiwan for the first time as the
largest supplier of low-cost wood furniture to Japan. Most imported metal
furniture comes from Taiwan and China, accounting for 42.7% and 37.3%,
respectively of imports of such products.
42
BUSINESS
Overview
We are a
designer and contract manufacturer of household furniture in the Peoples
Republic of China (“PRC”). We produce a variety of indoor and outdoor
residential furniture and wicker products that is sold and exported to more than
30 countries. Our products are sold through well known domestic and
international retailers such as Trade Point A/S Direct Container (Denmark),
Zara-Home, Habitat UK Ltd., ABM Group Inc. and US; Fuji Boeki
Co. Ltd. The product depth and extensive style selections we offer we
believe allows us to be a strong resource for global furniture, retail chains
and retailers in the discounted price range.
Our
subsidiary, Shandong, manufactures over 20,000 different products.
We focus on providing high quality products at competitive prices.
For the calendar year ended December 31, 2009, approximately 3% of our
products were sold in the PRC and 97% of our products were sold to companies in
countries and places such as the United States, Germany, England, Italy, Sweden,
Canada, and Taiwan.
Because
straw, wicker and handicraft products are relatively easy to produce and do not
require a significant investment in technology or equipment, we do not produce
such products in our manufacturing facilities. Instead, we employ local people
to manufacture such products in their homes in Cao County, Shandong Province,
PRC.
All of
our four existing industrial parks are engaged in producing wood furniture.
Our four industrial parks consist of 19 plants, which produce a full line
of residential furniture products, including kitchen furniture, office
furniture, living room furniture, outdoor furniture and general living
furniture. In order to respond quickly to customer orders, we have
designed our facilities and developed manufacturing practices that allow us to
be highly flexible so that certain of our plants can be used to produce several
types of furniture.
Concentration
on Furniture Industry
Based
upon our experience as furniture markers and sellers both domestically and
internationally as well as the Shandong Report, we believe that the demand for
furniture has been growing steadily worldwide. We believe that
historically western countries have accounted for the majority of world
furniture production and consumption. However, we believe that the
global furniture industry is undergoing a substantial transformation, where
developing countries, such as China, are playing an increasingly important role
in wood furniture production and consumption. As a result, although
our straw, wicker and handicraft products have been and continue to be an
integral part of our overall business, we intend to focus and devote substantial
of our resources to expand our wood furniture business.
Our
Competitive Advantages
We
believe that we are one of the large-scale producers and manufacturers of
furniture and craft products in China because we have (i) over $7 million
production facilities and equipments in 19 plants in a total area of 162,688.82
square meters, (ii) average revenue of $40 million in past 3 years, and (iii)
over 20,000 products.
We
believe we have the following advantages over our competitors:
|
·
|
We
believe our brand name “CAOPU” is well-known among oversea retailers and
wholesalers, such as Zara-Home, Habitat UK Ltd., ABM Group Inc., and
IKEA;
|
|
·
|
We
believe that we are becoming better known among overseas retailers and
wholesalers for our poplar and paulownia wood
products;
|
|
·
|
Our
research and development (“R&D”) team has 24 employees, each of whom
has over 4 years of experience in furniture and craft
production;
|
|
·
|
We
have what we believe to be a strong technological team in product
improvement;
|
|
·
|
We
have developed products based on traditional folk art in Cao
County;
|
|
·
|
We
believe that our raw materials costs are lower than our competitors
because our production facility is located in an area that has an
abundance of fast-growing trees that we use in manufacturing our products;
and
|
|
·
|
Over
the past ten years, we have developed long-term customer cooperative
relationships with a number of well known companies, such as Zara-Home,
Habitat UK Ltd., ABM Group Inc. and
IKEA.
|
43
Our
Strengths
Track
record of growth
Our
revenues and net income has increased substantially over the past 2 years.
Specifically, we generated revenues of $62,181,727 and achieved net income
of $10,286,442 during nine months ended September 30, 2010, as compared to
$46,201,117 in revenues and $7,416,325 of net income for the comparable period
in 2009. We generated revenues of $69,435,044 and achieved net income of
$12,021,155 during the twelve months ended December 31, 2009, and $42,197,393 in
revenues and $5,761,994 of net income for the comparable period in 2008.
Following this offering, we plan to increase the aggregate annual
production capacity for our existing products and to launch a higher end
furniture line that we believe will have higher profit margins.
Flexibility
to Consumer Demands
We
believe our production capability is customer-oriented in that we can change
certain aspects of our production ability to accommodate customer orders and
requirements. In this regard, we believe our production capabilities are
very flexible in that we offer, manufacture and/or sell diversified products to
meet diversified customers’ demands. With years of experience, we believe
we have the ability to customize our products in accordance with customers’
ever-changing needs and requirements. To attempt to increase our
flexibility to further meet our customer demands quickly and efficiently, we
also have committed ourselves to (i) purchasing high technique
manufacturing equipment and more investment in our own research and development
and (ii) improving our products’ variety, style and design based on market
trends based upon our customers’ tastes and preferences based upon the
information we receive in the domestic and international trade fairs we
attend.
Strong
Recognition from Domestic and International Customers
We
believe the solid reputation that our management team has developed over the
last number of years in the furniture industry in China and in other countries
such as the United States, Germany, England, Italy, Sweden, Canada, including an
established track record for consistently providing quality products at
competitive prices, has enabled us to develop a strong customer base which
includes several reputable domestic and multinational retailers, including
Zara-Home, Habitat UK Ltd. ABM Group Inc. and Fuji Boeki Co., Ltd.
Reliable
Supplier Network for Low-Cost Raw Materials
We
believe that many of our current suppliers with whom we have longstanding
relationships prefer to sell raw materials to us as opposed to other purchasers,
at competitive prices, due to our large order and track record for prompt
payment. We believe these long-standing supplier relationships
provide us with a competitive advantage in China. Since Cao County is a
natural area for the raw materials required to make our products, the
supply of raw materials is greater than we require. Thus, we are able to
leverage our purchasing power to obtain favorable pricing and delivery
terms. In addition, none of our current sources of raw materials
supplies more than 5% of the raw materials we require.
Experienced
Management and Operational Teams with Domestic PRC Market Knowledge
Our
senior management team and key operating personnel have extensive management and
operating experience and domestic PRC industry knowledge. In
particular, Mr. Jinliang Li, our chairman and chief executive officer, has
managed and operated businesses in the furniture industry in the PRC for
approximately 25 years. Mr. Zhiqiang Zhong, the
production manager of Shandong, has experience in the furniture industry in the
PRC for approximately 22 years, Mr. Zhiyu Wang, chief financial officer of
Shandong, has experience in furniture industry for approximately 24 years, Mr.
Jiawei Li, our director and chief marketing manager of Shandong, has experience
in marketing and furniture industry for approximately 4 years. We believe
that our management team’s experience and in-depth knowledge of the furniture
business will enable us to continue to successfully execute our expansion
strategies. In addition, we believe our management team’s strong track
record will enable us to continue to take advantage of market opportunities that
may arise.
We
are Taking Advantage of Industry Trends
According
to an article dated October 9, 2008, titled 2008 International Trade Development
Tendency of China Furniture, the major furniture manufacturing provinces
in China are Shandong (where we are located), Guangzhou and Jiangsu, and
furniture manufactured in China is now exported to over 200
countries. We believe this shift to China in furniture manufacturing
is attributable to the increasing labor, operational and manufacturing costs in
more developed countries. Consequently, we believe retailers in
developed countries are relying more on imported furniture
products. Our strategy is to take advantage of this
trend.
44
Our
Weaknesses/Challenges
Need
to increase our production capacity
Most
of our current production equipment and facilities was purchased 4-5 years ago,
which we do not believe are sufficiently modern to optimally allow us to meet
customer demand for our products, which we believe reduces our overall product
output and revenues. In addition, due to the age of certain of our current
machinery, we cannot produce certain products that new machines would allow us
to produce. As a result, our production capacity limits our ability to
accept certain overseas orders.
Lack
of customer name brand to end customers
We are
an original equipment manufacturer (“OEM”) for North American and European
manufacturers. Currently, we receive orders and sell our products directly
to retailers and wholesalers, who then resell our manufactured products to end
users using the brand name of such retailers and wholesalers. We have not
established our own name brand; as a result, end users do not recognize or “seek
out” our products, which prevents us from selling them under our own brand
name.
Absence
of our own sales and distribution channels
We market
and distribute our products mainly to retailers and wholesalers instead of
consumers and we have not set up our own sales and distribution channels.
Therefore, our sales are partially dependent on the sales, sales efforts
and distribution channels of retailers and wholesalers who sell our products.
Generally, this subjects our revenues to factors under the control
of our retailers and wholesalers such as the quality of their showrooms,
the quality and budget for marketing and advertising of such products and the
availability of space in their showrooms and stores to show our
products.
Our
Proposed Growth Strategy
Based
upon the historical growing demand for our wood furniture products and the
changing dynamics of the wood furniture industry, we believe we have a unique
opportunity to substantially increase our revenues, net income and gross margins
by not only expanding the capacity of our existing wood furniture
production business but also producing additional types of wood furniture
products for which we believe there is a large and increasing international
demand. We seek to increase our revenues by taking advantage of the
increasing demand for wood furniture worldwide, as such we have developed a
growth strategy that we believe will allow us to capitalize on this opportunity.
Our growth strategy is focused on increasing our production capacity of
wooden furniture and manufacturing new products that we believe are in high
demand internationally.
Develop
new products
In
order to produce higher end products we plan to develop a second new production
line in 2011. Based upon, among other items, our attendance at trade shows
and discussions with our larger clients, we believe that we can substantially
increase our revenues, gross margins and net income by producing an additional
production line.
The cost
to set up our second production line will be approximately $15 million.
Although we currently do not have the funds to establish such production
line, we intend in the future to attempt to obtain the required funding through
a combination of the sale of our securities, working capital and/or retained
earnings.
Increasing
production capacity
We
believe, based our managements’ experience, that our current production capacity
for our existing wooden furniture products can only satisfy between 60% and 70%
of the overseas requests for our products. Based on the profit margin the
demands may bring, we currently select to place and satisfy the requests with
higher profit margins (around 60% to 70%), and reject the requests with lower
margins (around 30%-40%).
Our
strategy to increase our capacity is multifaceted. In December 2006, we
were granted by the PRC government a land-use permit to use approximately
98,435.32 square meters to establish our fifth industrial park to expand our
current Caopu Industrial Park. In such industrial
park, which also will be located in Caopu Industrial Park near our existing 4
industrial parks, we plan to build a new furniture production line with more
state of the art manufacturing equipment and components in 2010 which we believe
will enable us to fulfill a greater percentage of oversea requests for our
products that we currently do not have the capacity to fulfill. We believe
this plan will not only increase our production capacity but also increase our
gross margins and strengthen our market share in our product industry. The
total estimated cost to build the new production line is approximately $20
million, which includes workshop construction cost as well as equipment and
machinery cost.
We intend
to use the net proceeds from this public offering to fund a substantial portion
of the $20 million, with the balance of funds coming from our working capital
and/or retained earnings.
45
Strengthening
R&D
We
believe product innovation and technology advancement are vital for our business
expansion. In the past years, we mainly depended on in-house research.
For fiscal years 2009 and 2008, we spent approximately $0.5 million and
$0.4 million, respectively on R&D. We intend to build a new R&D
center in the fifth industrial park in 2011. We believe our R&D
initiatives will substantially shorten the time of both traditional and new
product development. It is currently contemplated by us that the proposed
new R&D center will include a 6,000 square meter building with an experiment
workshop, office, training room and housing. The estimated cost of R&D
center is an estimated approximately $1.4 million consisting of (i)
$850,000 for building costs and (ii) $550,000 for equipment costs. We
intend to finance the cost of our proposed new R&D facility through either
our own working capital and/or attempting to obtain additional financing, which
will be decided by our Board of Directors at the appropriate time.
Strengthening
our relationships with key customers and diversifying our customer
base.
We intend
to strengthen our relationships with key customers while further expanding our
customer base. We plan to continue providing high-quality and
cost-competitive products to our existing customers and to use our existing
customer network and strong industry reputation to expand our product sales
internationally. We also plan subject to available financing to
improve our overseas sales networks by establishing retail stores to allow
us to sell our products directly to the end users in the United States,
Japan and Europe. We intend to continue to use customer feedback to
improve the quality of our products and services and to strengthen our long-term
base of domestic and international customers.
Seasonality
Our
operating results and cash flows historically have not been subject to seasonal
variations. Although we do not currently anticipate any changes, this
pattern may change, however, as a result of new market opportunities or new
product introductions.
Operations
We market
our products under our brand name “CAOPU”, which we believe is recognized
in western countries.
We have
established a coordinated supply chain management system ranging from production
to sale. Shandong’s factory is located on 162,688.82 square meters of
land, and consists of 18 buildings with a total floor space of 71,708.4 square
meters. In addition, Shandong’s factory is divided into four industry
parks with 19 plants. We have over 1,500 employees in the
Shandong factory.
Rigorous
Quality Control Standards
Consistent
with our continuing commitment to quality, we impose rigorous quality control
standards at various stages of our production process. We strictly
comply with various national quality standards, established by the General
Administration of Quality Supervision, Inspection and Quarantine of China, with
respect to the hardware and paint used in the manufacture of furniture,
straw-wicker and handicraft products. We also strictly comply with various
quality standards in accordance with the clients’ special quality
requirements.
In order
to improve the modern management level of enterprise and adapt to the demand of
the international market, Shandong has obtained ISO 9001 International Quality
Management System Certificate, ISO 14001 Environment Management System
Certificate, OHSMS18001 Occupation Health & Safe Management System
Certificate and CE Certificate (a certificate enabling our products to enter the
Europe Union).
Products
Historically,
our business has been primarily focused on straw-wicker, furniture and
handicrafts products. We produce over 20,000 different products. We
believe our wide variety of product categories, styles and finishes enable us to
respond quickly to changing consumer preferences. We believe we
offer retailers a comprehensive production line principally in the lower price
range. Based on our sales and large client base, we believe our
products represent good value, and that the style and quality of our furniture
compares favorably with more premium-priced products.
In 2009,
approximately 97% of our revenues resulted from sales of our products
internationally, with the remaining approximately 3% resulting from sales in the
PRC.
The
following table lists our products by category and their respective contribution
to our sales for the 12 months ended December 31, 2009. Among all the
countries listed below, we believe that sales to Denmark, U.S., Japan, Germany,
Spain and Sweden are material to our business.
46
Product
Category
|
Certain Products
|
Country where products were
delivered
|
Revenue ($)
|
Revenue
Percentage
(%)
|
|||||||
Furniture
|
Poplar
& paulownia furniture including: folding screens, stools, 3-tier
/5-tier bookshelves, coffee tables, bed cabinet
|
U.S.A.,
U.K., Germany, Japan, Italy, Spain
|
$
|
37.1 million
|
53.4
|
%
|
|||||
Straw-wicker
|
Trunk,
wash baskets, baskets, drawers, folder boxes, storage chests, fruit trays,
bread baskets, vase covers
|
Spain,
Germany, Italy, Holland, Greece, Poland, Portugal, Austria, UK, Japan,
Malta, Malaysia, Australia, U.S.A.
|
$
|
31.2 million
|
45.0
|
%
|
|||||
Wooden
Crafts
|
Christmas
gifts, photo frames, gift boxes, wood tubes, bottle boxes, decorative
wooden plates, toys, pet supplies
|
U.S.A.,
Japan, Malta, Malaysia, European country
|
$
|
1.1 million
|
1.6
|
%
|
Wood Furniture
We
established our first wooden furniture production line in 2004 by producing
furniture made from poplar and paulownia. Poplar and paulownia wood
generally have distinctive characteristics of color, a smoother surface and
lighter weight than certain other types of wood. In addition, Cao County
is the natural base for the growth of both poplar and paulownia. The
average time it takes poplar and paulownia trees to grow to maturity in Cao
County is two to three years shorter than for other kinds of trees generally
used for wood furniture in China. Over the past few years,
revenues from wood furniture products have increased substantially and have
become a substantial percentage of our overall product sales.
Japan and
Europe are the primary target markets for sales of such wood
furniture. For the fiscal year 2009, sales and net income were
approximately $37.1 million and $6.7 million, respectively, from our furniture
products, approximately $31.2 and $5.1million from our straw and wicker
products, and $1.1 million and $0.2 million, respectively, from our crafts
products.
In fiscal
2009, wood furniture products accounted for approximately $37.1 million and
$6.7million of our overall revenues and net income, respectively, and
approximately 53.4% of our overall sales. For the nine months ended
September 30, 2010, wooden furniture products accounted for $35.1 million and
$6.3 million of overall revenue and net income respectively, and approximately
56% of our overall sales.
Because
of the growing demand, higher gross margins and changing dynamics of the
international wood furniture industry, specifically, production moving away from
countries such as the United States and Italy toward developing countries with
cheaper labor, such as China and India, we have been and intend to focus
substantial resources and efforts on our wood furniture production.
Straw-wicker
products
Because
straw-wicker are easy to produce, do not require a significant investment in
technology or equipment, we do not produce such products in our manufacturing
facilities. Instead, we employ local residents to manufacture such
products in their homes in Cao County, Shandong Province, PRC. Although we
have expanded our business to wood furniture manufacturing, straw-wicker
products are continue to be an integral part of our overall
business.
In fiscal
2009, straw-wicker products accounted for approximately $31.2 million and
$5.1million of our overall revenues and net income, respectively, and 45.0% of
our overall revenues. For the nine months ended September 30, 2010,
straw-wicker products accounted for approximately $25.9 million and $3.8 million
of overall revenue and net income respectively, and 42% of our overall
sales.
Handicraft
Products
With the advantage of having poplar and
paulownia resources in Cao Country, in 2000 we expanded our product mix to
include wooden handicrafts. We are dedicated to producing a wide variety
of novel-designed wooden handicrafts. We produce more than 800
kinds of wooden handicrafts varying from household articles, to office appliance
and pet supplies.
In fiscal 2009, handicraft products
account for $ approximately 1.1 million and $0.2 million of our overall
revenues and net income, respectively, and 1.6% of our overall
revenues. For the nine months ended September 30, 2010, handicraft
product accounted for approximately $1.2 million and $0.2 million of overall
revenue and net income respectively, and 2% of our overall
sales.
47
Manufacturing
We
operated approximately 162,688.82 square meters of manufacturing and supply
plant capacity in Shandong Province for furniture and handicrafts
production. These manufacturing and other facilities consist of 19
plants, which are located in our existing 4 industrial parks. In December
2006, we were granted an additional 98,435.32 square meters free land use right
by the PRC Government, upon which we will build the fifth industrial park in
2010. As of September 30, 2010, we have the land use right for a total of
261,124.14 square meters. We consider the machinery and equipment at such
location generally to be relatively up to date and well-maintained.
The manufacturing equipment at those locations include band saws, cut-to-size
saws, sanders, single-plate saws, multi-plate saws, thickness, matchers,
multiple-drillings, copying machines, engraving machines, routers, chilling
presses, roll coaters, and leaching paint machines.
Following are photos of our manufacture
plants:
Our
domestic manufacturing strategy includes:
· More
frequent and cost-effective production runs,
· Identification
and recycling of product waste, and
· Improvement
of our relationships with suppliers by establishing primary
suppliers.
Production
Process
The
manufacturing process of each of our products generally involves various steps.
The following charts indicate the steps in manufacturing straw-wicker
products, wooden craft products and furniture products.
48
1. Steps to manufacture straw-wicker
products:
2. Steps to manufacture wooden craft
products:
3. Steps to manufacture furniture
products:
The
technology and procedures used in the above processes vary depending on the
different products that we manufacture and depend upon the product
specifications prescribed by a particular customer.
Raw
Materials
The
principal materials used in manufacturing our wood furniture products include
lumber, veneers, plywood, particle board, hardware, glue, finishing materials,
glass products, laminates, fabrics and metals. We use a variety of species
of lumber, including cherry, oak, ash, poplar, paulownia wood, pine and
maple. The main raw materials for our straw-wicker products are
thin grasses, seaweed, wheat straw and maize-leaf. The main raw material
used in or handicrafts products are poplar and paulownia wood. We
believe that our sources for raw materials are adequate and that we are not
dependent on any one supplier. Our five largest suppliers, (Shandong
Beier Chemical Co., Ltd, Cao County Shengcheng Carton Plant, Cao County Minzu
Carton Plant, Shengli Xie and Hongming Yu) accounted for an aggregate of
approximately 7% of our raw materials for all of our furniture and
handicrafts manufacturing operations during 2009. No single supplier
accounted for more than 10% of our raw material purchases.
All of
our operations are located in Cao County, PRC, the southwest of Shandong
Province, which is at the junction of Anhui Province, Henan Province, Jiangsu
and Shandong Province. We currently have four industrial plants
located in such area. In and around Cao County, there are a
substantial number of poplar and paulownia trees. The wood from such trees
are used to make a variety of types of furniture, such as chairs, desks,
cabinets, tables, stools, and dividers. Furniture made of poplar and
paulownia has the following distinct characteristics: unique color, smooth
surface, light weight (making it easy to carry and ship), and a low
price. We believe that these characteristics have made it
popular in Asia, Europe and the United States. Cao County also has a large
supply of readily available raw materials for our straw-and-wicker
products.
49
Customers and
Suppliers
We
believe we have successfully established long-term, stable business
relationships with over three hundred customers in over thirty countries.
Our products are sold in stores operated by such well known retailers as
Zara-Home, Habitat UK Ltd., ABM Group Inc., and Fuji Boeki Co.
Ltd.
We
receive most of our orders twice a year through attending the Chinese Export
Commodities Fair (or Canton Fair) in May and October in Guangzhou City,
China, respectively. In addition, we select which orders to fulfill from
customers based upon the particular price and profit margin we receive from the
products, and, as a result, our top ten customers change each year.
In fiscal
2009, our top 10 purchasers of our products were as follows:
Major
customers
Name
|
12 months ended
December 31, 2009
(’000s)
|
Percentage of
Overall
Sales (%)
|
||||||
Trade
Point A/S Direct Container (Denmark)
|
$ | 20,104 | 29.0 | % | ||||
Bettenwelt
Gmbh & Co. KG (Germany)
|
$ | 4,826 | 7.0 | % | ||||
Zara-Home
(Spain)
|
$ | 4,238 | 6.1 | % | ||||
JYSK
SP. Zoo, Gdansk. (Denmark)
|
$ | 3,792 | 5.5 | % | ||||
ABM
Group Inc. (USA)
|
$ | 2,700 | 3.9 | % | ||||
FIT
Co., Ltd. (Japan)
|
$ | 2,477 | 3.6 | % | ||||
Axis
Imex, Inc. (USA)
|
$ | 1,731 | 2.5 | % | ||||
Fuji
Boeki Co., Ltd. (Japan)
|
$ | 1,449 | 2.1 | % | ||||
Sofibo
China Limited (Hong Kong)
|
$ | 1,355 | 2.0 | % | ||||
Habitat
UK Ltd. (England)
|
$ | 1,219 | 1.8 | % |
In fiscal
2009, our top 10 suppliers for raw materials used to manufacture our products
were as follows:
Suppliers
of Raw Materials
Name
|
Amount (USD)
12 months
ended December 31,
2009 (’000s)
|
Location
|
Percentage*
|
||||||
Shandong
Beier Chemical Co., Ltd.
|
$ | 90.9 |
Cao County
|
2.3 | % | ||||
Cao
County Shengcheng Carton Plant
|
$ | 77.1 |
Cao
County
|
1.9 | % | ||||
Cao
County Minzu Carton Plant
|
$ | 45 |
Cao
County
|
1.1 | % | ||||
Shengli
Xie
|
$ | 30.9 |
Cao
County
|
* | % | ||||
Hongming
Yu
|
$ | 26.5 |
Cao
County
|
* | % | ||||
Hongqing
Zhang
|
$ | 24.3 |
Cao
County
|
* | % | ||||
Tengjian
Wang
|
$ | 22.1 |
Cao
County
|
* | % | ||||
Enzhu
Zhang
|
$ | 18.5 |
Cao
County
|
* | % | ||||
Qingping
Wang
|
$ | 16.5 |
Cao
County
|
* | % | ||||
Xiaoyou
Liu
|
$ | 15.4 |
Cao
County
|
* | % |
* Means
less than 1%.
Quality
Control
Consistent
with our continuing commitment to quality, we impose rigorous quality control
standards at various stages of our production process. We strictly
comply with various national quality standards, established by the General
Administration of Quality Supervision, Inspection and Quarantine of China, with
respect to the hardware and paint used in the manufacture of
furniture, straw-wicker and handicraft products. We also strictly
comply with various quality standards based on the clients’ special quality
requirements.
50
Marketing
and Sales
We have
developed a broad domestic and international network with our independent third
party retailers and wholesalers who sell our products to their
customers after purchasing them directly from us. We believe this broad
network helps reduce exposure to regional recessions, and allows us to
capitalize on emerging channels of distribution.
We
believe general marketing practice followed in the furniture industry is to
exhibit products at international and regional furniture markets. In the
spring and fall of each year, a seven-day furniture market is held in High
Point, North Carolina, which is attended by most buyers and is regarded by
the industry as the international market. Generally, we follow the
general marketing practice followed by furniture manufacturers in the furniture
industry by exhibiting our products at international and regional furniture
markets attended by buyers for furniture retailers. We market our products
by participating in tradeshows and exhibitions in both the PRC and abroad.
We believe that we have built up a solid business reputation among
numerous well-known retailers. We sell our furniture through over 300
retailers and wholesalers of residential home furnishings, who are broadly
dispersed internationally, including: Trade Point A/S Direct
Container, Zara-Home, Bettenwelt Gmbh & Co. KG, JYSK SP Zoo
Gdansk, and Habitat UK Ltd. in Europe; ABM Group Inc. and Axis Imex, Inc., in
the US; Fuji Boeki Co. Ltd. in Japan.
We
believe no significant part of our business is dependent upon a single customer,
however, the loss of our larger customers could have a material impact on our
business. Approximately 97% of our net sales during fiscal year
ended 2009 were to international customers.
Generally,
we sell our finished products directly to third party retailers and wholesalers
without any commission. We believe our broad network of 3rd party
retailers and wholesalers reduces our exposure to regional recessions and allows
us to capitalize on emerging trends in channels of
distribution.
Warehousing,
Inventory and Supply Chain Management
We
distribute furniture to retailers and wholesalers from our distribution centers
and warehouses in Caopu Industrial Park. We ship containers of finished
products directly from our manufacturing facilities to the port of Qingdao to
third-party retailers and wholesalers.
There is
no backlog of unshipped orders for all of our products as of September 30,
2010. We believe, based on our managements’ experience, our current
production capacity for our existing wooden furniture products can only satisfy
an estimated approximately between 60% and 70% of our overseas demands. As
a result, we are planning to expand our current production facility in order to
meet all the demands we received or would received from oversea
clients.
Competition
Competitive
Environment
The
furniture industry is highly competitive and includes a large number of foreign
and domestic manufacturers and importers, none of which dominates the
market. Currently, the arts and crafts industry is a
concentrated industry in China. The majority of arts and crafts producers
are located in southern and eastern China. While the markets in which we
compete include a large number of relatively small and medium-sized
manufacturers, certain competitors have substantially greater sales volumes and
financial resources than we do.
With
regard to the production scale and products categories, our main competitors are
as follows:
Existing Competitors for our wood furniture
products:
Puyang Hongda Wooden Products Co.,
Ltd, a company specialized in wooden furniture and wooden handicrafts
production, focuses its business on producing paulownia products, mixed hard
wood products, and mahogany products. Depending on technological advantages and
advanced craftsmanship, we believe the company is attempting to expand into the
United States market, keeping Japan and Europe as its main export
countries.
Existing
Competitors for straw-and-wicker and handicrafts
manufacturers:
Nanjing Artall Light Industry Co.,
Ltd, a subsidiary of Jiangsu Holly Corporation, a public company on the
Shanghai Stock Exchange. It is a manufacturing and trading corporation located
in Jiangsu Province with annual export value exceeding RMB200
million, Artall is primarily engaged in producing gift products,
handicrafts, kitchen applicants, travel products, outdoor products, toys, pet
supplies, and willow products.
51
Shandong Jiaxiang Jinyi Arts & Crafts Co., Ltd, a
company established in 1986, has a diversified product line featuring
straw and wicker products, ranging from stone handicrafts, copper
handicrafts, and iron handicrafts to Lu Brocade and Straw/Reed/Kenaf
products.
Intellectual
Property
As
of September 30, 2010, we have the following intellectual property
rights:
Patents
On June
20, 2010, we applied for 10 new design patents for furniture
products with the appropriate PRC governmental authorities, in the
name of Shandong Caopu Arts & Crafts Co., Ltd. We have
received the patent authorization written notice for such application
from the appropriate PRC governmental authorities in August 2010, and we believe
we will receive the patent certificates in 2011.
Pursuant
to an Exclusive Patent License Agreement dated as of July 2, 2010 (the
“Agreement”), Mr. Li, our majority shareholder, Chairman and Chief Executive
Officer, and the owner of the following listed seven (7) patents authorized us
to use such patents exclusively on a royalty free base. Since such
patents do not reflect current design trend in our industry and are easy to be
imitated, we do not believe it is economically beneficial to keep them valid by
paying annual fee with appropriate PRC governmental authorities. All
such 7 patents expired in August 2010.
Trademarks
and Domain Names
We have
registered five trademarks:
Trademark
|
Certificate
No.
|
Category
|
Registrant
|
Valid Term
|
||||
(1)
|
3722006
|
28
|
Shandong
|
June
7, 2006 to June 6, 2016
|
||||
(1)
|
3722025
|
20
|
Shandong
|
February
14, 2006 to February 13, 2016
|
||||
(1)
|
3722007
|
20
|
Shandong
|
February
14, 2006 to February 13, 2016
|
||||
(2)
|
4900955
|
20
|
Shandong
|
Registered
in Japan
|
||||
(3)
|
904344
|
20,
28
|
Shandong
|
January,
2007 to January,
2017
|
(1)
Registered with the PRC Trademark Bureau under the State of Administration for
Industry & Commerce.
(2)
Registered in Japan.
(3)
Registered with World Intellectual Property Organization.
We have registered the following domain
names:
Domain Name
|
Owner
|
Registration Date
|
Expiration Date
|
|||
www.caopu.cn
|
Shandong
|
June
15, 2006
|
June
15, 2011
|
|||
www.cpgy.com
|
Shandong
|
April
27, 2002
|
April
27, 2012
|
|||
www.caopu.cc
|
Shandong
|
June
15, 2006
|
June
15, 2016
|
Employees
As of
September 30, 2010, we had approximately 1,500 employees. In 2009, our
average compensation per employee per month was RMB 1,050 or approximately US$
155. We also paid social security insurance fees for employees who
required such insurance under PRC law.
We have a
human resource performance review system and series of incentive policies that
allow personnel reviews to be carried out monthly or bi-monthly, depending on
the length of employees’ service for Shandong.
The
following table shows a breakdown of our employees by function as of September
30, 2010:
52
Functions
|
Number
of
employees
|
% of
total
|
||||||
Manufacturing
|
1,329 | 88.6 | % | |||||
Sales
and Marketing
|
45 | 3 | % | |||||
General
Administration, Purchasing and Logistics
|
60 | 4 | % | |||||
Quality
Control, Technology and Research & Development
|
66 | 4.4 | % | |||||
Total
|
1,500 | 100 | % |
From time
to time, we also employ third-party auditors to issue Capital Verification
Reports once a year. We have not experienced any significant labor
disputes and consider our relationship with our employees to be
good.
Government
Regulations
Insurance
Plans
We are subject to a wide range of
regulation covering our business. We are required to provide to our
employees the following state-mandated insurance plans:
|
·
|
Retirement
insurance: we withhold a portion of each employee’s average monthly salary
from the prior year, as determined by the provincial government, generally
8%, and contribute an additional amount determined by law, up to
approximately 20% of such average monthly
salary
|
|
·
|
Medical
insurance: we withhold approximately 2% of each employee’s average monthly
salary from the prior year and contribute an additional amount totaling
approximately 6% of such average monthly
salary.
|
|
·
|
Unemployment
insurance: we withhold approximately 1% of each employee’s average monthly
salary from the prior year, and contribute an additional amount totaling
approximately 2% of such average monthly
salary.
|
|
·
|
Industrial
injury insurance: we contribute an amount totaling approximately 1.1% of
each employee’s average monthly salary from the prior
year.
|
Circular
75 Compliance and Approval
SAFE
issued the Notice on Issues Relating to the Administration of Foreign Exchange
in Fund-raising and Reverse Investment Activities of Domestic Residents
Conducted via Offshore Special Purpose Companies, or “Notice 75,” on October 21,
2005, which became effective as of November 1, 2005 and the operating procedures
in May 2007, collectively the SAFE Rules. According to the SAFE Rules,
prior registration with the local SAFE branch is required for PRC residents to
establish or to control an offshore company for the purposes of financing that
offshore company with assets or equity interests in an onshore enterprise
located in the PRC. An amendment to registration or filing with the local SAFE
branch by such PRC resident is also required for the injection of equity
interests or assets of an onshore enterprise in the offshore company or overseas
funds raised by such offshore company, or any other material change involving a
change in the capital of the offshore company. The SAFE rules define “PRC
residents” to include both legal persons and natural persons who either
hold legal PRC identification documents, or who habitually reside in China due
to economic interests or needs. If any PRC resident fails to file its SAFE
registration for an existing offshore enterprise, any dividends remitted by the
onshore enterprise to its overseas parent after October 21, 2005 will be
considered to be an evasion of foreign exchange purchase rules, and the
payment of the dividend will be illegal. As a result, both the
onshore enterprise and its actual controlling persons can be fined. In
addition, failure to comply with the registration procedures may result in
restrictions on the relevant onshore enterprise, including prohibitions on the
payment of dividends and other distributions to its offshore parent or affiliate
and capital inflow from the offshore enterprise. The PRC resident
shareholders of the offshore enterprise may also be subject to penalties under
Chinese foreign exchange administration regulations.
We have
requested our shareholders and beneficial owners who may be subject to SAFE
Rules to make the necessary applications, filings and amendments as required
under SAFE Rules. We have advised these shareholders and beneficial owners
to comply with the relevant requirements. It is our understanding that
these shareholders are in the process of making the required
filings. However, we cannot provide any assurance that all
of our shareholders and beneficial owners who may be PRC residents will
comply with our request to make or obtain any applicable registrations or comply
with other requirements required by SAFE Rules. The failure or inability
of our PRC resident shareholders or beneficial owners to make any required
registrations or comply with other requirements may subject such shareholders or
beneficial owners to fines and legal sanctions and may also limit our ability to
contribute additional capital into or provide loans to our PRC
subsidiaries, limit the ability of our PRC subsidiaries to pay dividends or
otherwise distribute profits to us, or otherwise adversely affect
us.
53
Approvals,
Licenses and Certificates
We
require a number of approvals, licenses and certificates in order to operate our
business. Our principal approvals, licenses and certificates are set forth
below:
·
|
Business
License (No.371700400000825) issued on August 14, 2009 by Heze
Administration for Industry and Commerce;
|
·
|
Organization
Code Certificate issued by Heze Administration of Quality and Technology
Supervision (code No. 724299773,
and registration No. Zu Dai Guan 371700-000137-2), the valid
period of which is from June 2007 to June
2011;
|
·
|
Taxation
Registration Certificate (Lu He Shui Zi No. 372922724299773) issued by the
Cao County National Taxation
Bureau and Caopu County Local Taxation Bureau in September 2009;
and
|
·
|
Registration
Form for Operators of Foreign Trading (the code No (2009)0809) issued
by People’s Government of Shandong
Province on August 12,
2009.
|
Properties
There is no private land ownership in
PRC. Land in the PRC is owned by the government and cannot be sold to any
individual or entity. Instead, the government grants or allocates
landholders a “land use right,” which is sometimes referred to informally as
land ownership. Land use rights are granted for specific
purposes and for limited periods. Each period may be
renewed at the expiration of the initial and any subsequent
terms. Granted land use rights are transferable and may be used
as security for borrowings and other obligations. Generally
speaking, there are four primary ways of obtaining land use rights in the
PRC:
· Grant
of the right to use land;
· Assignment
of the right to use land;
· Lease
of the right to use land; and
· Allocated
land use rights.
Our executive offices and manufacturing
facilities are located in Shandong, China, on approximately 130,000 square
meters. We have been issued a Land Use Right Certificate for such property
until 2056 by the municipal government of Shandong, which may be renewed
upon our application and the municipal governments’
approval. We currently have land use rights for
18 buildings on such property as listed below. We believe that our
existing facilities are well maintained and in good operating condition .
Our land use rights are set forth
below:
Land
Use Rights through Grants from Land Management Authority
Land Use Right
Certificate No.
|
Address
|
Area
|
Usage
|
Land Nature
|
Expiration
Date
|
|||||
Cao
Count, China (2006) No.176
|
Zhongkou
Village, Pulianji Town, Cao County
|
68,329.32 ㎡
|
Industrial
Land
|
Allocated
State-owned land
|
October
2056
|
|||||
Cao
Count, China (2003) No.80
|
Zhongkou
Village, Pulianji Town
|
41,572.46㎡
|
Industrial
land
|
Allocated
State-owned land
|
June
2053
|
|||||
Cao
Count, China (2006) No.189
|
Zhongkou
Village, Pulianji Town ,Cao County
|
98,435.32㎡
|
Industrial
land
|
Allocated
State-owned land
|
December 2056
|
|||||
Cao
Count, China (2001) No.0106
|
Longhuadian
Village, Pulianji Town, Cao County
|
13,150㎡
|
Industrial
land
|
Allocated
State-owned land
|
July
2053
|
|||||
Cao
Count, China (2001) No. 0105
|
|
ZhaocaiyuanVillage,
Pulianji Town, Cao County
|
|
39,637.04㎡
|
|
Industrial
land
|
|
Allocated
State-owned land
|
|
March
2051
|
54
All land
use rights currently owned by us are land use rights relating to allocated land.
The local governmental authorities have granted such land use rights to us
for free use given our contribution to the development of the local economy.
However, pursuant to the
Catalogue on Allocated Land issued by the Ministry of Land Resources of
the PRC, the land use rights for allocated land may only be granted to those
specific projects which are in compliance with the Catalogue, subject to the
approval of the competent governmental authorities. We, as a privately
owned furniture manufacturer, may not be qualified to be granted with such land
use rights for allocated land according to the Catalogue. Consequently,
our use of such land may be subject to challenges in the future, and the legal
consequences could include the confiscation of such land by the governmental
authorities or the request on us to pay a market price for purchasing the land
use rights for such land and converting the allocated land use right to granted
land use right.
Although
we intend to pay the relevant grant fees (which we believe are at a favorable
price specially offered to us by the local government, approximately
$3,824 per mu (1 mu equals 666.67 square
meters), or $1,497,800.4 for our current total land use right of 261,124.1
square meters) and we have started the application process to convert the
allocated land into granted land in July 2010 and are currently waiting for the
final consent from Shandong Provincial Government, we cannot ensure that our use
of such land may not be subject to challenges before we convert the allocated
land into granted land.
Premises
Our
operating facilities consist of 19 plants located in our existing four
industrial parks in Cao County, Shandong Province, PRC. The existing industrial
parks have a total area of 162,688.82 square meters, of which 71,708.4 square
meters consists of buildings that house our production lines, warehouses,
executive offices and related business items.
Insurance
We
maintain various insurance policies to safeguard against risks and unexpected
events. We provide social security insurance, including pension insurance,
unemployment insurance, work related injury insurance, maternity insurance and
medical insurance to in accordance with PRC regulations (see Government
Regulations). We
also maintain insurance for our plants, machinery, equipment, inventories and
motor vehicles. However, we do not maintain product liability
insurance for our products.
Legal
Proceedings
We are
not currently a party to any material legal or administrative
proceedings. We are not aware of any material legal or administrative
proceedings threatened against us. From time to time, we are subject to
various legal or administrative proceedings arising in the ordinary course of
our business.
55
COMPANY
HISTORY
We
were incorporated in February 2007 in Delaware under the name Mobile Presence
Technologies, Inc. to develop and provide software and services to enhance the
use of cellular phones and other hand held communication devices. Since
our inception we had not generated any material revenues and determined to
change our business. In November 2009, we acquired all of the issued
and outstanding capital stock of Tianwei International Development Corporation,
which we refer to as Tianwei, pursuant to a Stock Exchange and Reorganization
Agreement. The transaction by which we acquired Tianwei is more fully
described below. Tianwei was incorporated under the laws of Oregon on
January 13, 2009 and is the owner of all of the issued and outstanding capital
stock of Shandong. Shandong was organized under the laws of the PRC
in August 2000 under the name Heze Caopu Arts & Crafts Co., Ltd.
In November 2000, it changed its name to Shandong Caopu Arts & Crafts.,
Ltd. In April 2008, Shandong has registered capital of $7.8
million, 96.79% of which was owned by Shandong Cao County Changsheng Arts &
Crafts Co., Ltd. and the remaining 3.21% was owned by Japan Fit Co.,
Ltd. In January 2009, Tianwei acquired Japan Fit’s 3.21% interest and
in July 2009, Tianwei acquired Shandong Cao County Changsheng Arts & Crafts
Co., Ltd.’s 96.79% interest in Shandong. As a result, Tianwei became
the sole owner of Shandong and we became the 100% owner of
Tianwei. In addition, as a result of its new ownership structure,
Shandong became what is known as a “Wholly Foreign Owned Enterprise” or
“WFOE.” On December 3, 2009 we filed a certificate of amendment to
our Certificate of Incorporation changing our name to “China Shandong
Industries, Inc.”, to better align our name with our business,
increasing the authorized shares of our common stock to 100,000,000,
increasing our authorized blank check preferred stock to 5,000,000 shares, and
effectuating a 15 for 1 forward split of our common stock. Effective
on or about January 18, 2011, we will effectuate a 1 for 1.5 reverse split of
our shares of common stock.
Stock
Exchange Agreement
On
November 6, 2009, pursuant to a Stock Exchange and Reorganization Agreement (the
“Exchange Agreement”), dated as of October 22, 2009, by and among us, Tianwei,
CAOPU, London Financial Group Ltd., a company organized under the laws of the
British Virgin Islands (“LFG”), Phoebus Vision Investment Developing Group,
Ltd., a company organized under the laws of the British Virgin Islands
(“Phoebus”), and Timothy Lightman (“TL”), we acquired all of the issued and
outstanding capital stock of Tianwei. Pursuant to the Exchange Agreement,
we issued an aggregate of 7,717,500 shares of our common stock to CAOPU,
LFG and Phoebus in exchange for all of the issued and outstanding shares of
Tianwei owned by each of CAOPU, LFG and Phoebus.
Pursuant
to the terms of the Exchange Agreement, Mr. Lightman cancelled 4,375,000 shares
of his total of 4,875,000 shares of our common stock. In addition,
effective November 5, 2009, pursuant to a separate Assignment and Assumption
Agreement by and between us and Mr. Lightman, Mr. Lightman acquired all our
assets related to our prior business and assumed all our liabilities outstanding
prior to our acquisition of Tianwei.
Effective
as of the closing of our acquisition of Tianwei, our prior officers and
directors resigned, and our current officers and directors were
appointed.
56
MANAGEMENT
Directors,
Executive Officers and Significant Employees
The
following table sets forth the name, age and position of each of our directors
and executive officers.
Name
|
Age
|
Position
|
||
Mr.
Jinliang Li
|
51
|
Chief
Executive Officer (“CEO”) and Director
|
||
Mr.
Jiawei Li
|
26
|
Director
and Chief Marketing Manager of Shandong
|
||
Ms.
Yuhong Lei
|
33
|
Chief
Financial Officer (“CFO”)
|
||
Ms.
Aihua Li
|
47
|
Corporate
Secretary
|
||
Mr.
Fuhua Wu (1)(2)(3)
|
48
|
Independent
Director
|
||
Ms.
Man Zhang (1)(2)(3)
|
37
|
Independent
Director
|
||
Ms.
Yvonne Zhang (1)(2)(3)
|
36
|
Independent
Director
|
(1)
|
Member
of the Compensation Committee
|
(2)
|
Member
of the Audit Committee
|
(3)
|
Member
of the Nominating and Corporate Governance
Committee
|
Set forth
below is biographical information concerning our executive officers and
directors.
Jinliang
Li, became our
Chief Executive Officer (“CEO”) and a director in November
2009. Since August 2000, Mr. Li has served, and he continues to
serve, as the President and General Manager of Shandong. From 1981 to
August 2000, he served as a manager of Cao County Caopu Arts & Crafts Co.,
Ltd. Mr. Li has 30 years experience in sales and production of
handicrafts and furniture. In addition, from January 2008 to present,
Mr. Li served as a member of National People’s Congress of Shandong
Province. Mr. Li graduated from Shandong Agricultural University in
2002.
Jiawei
Li, became a
director in November 2009. Mr. Li joined Shandong in 2006, and he has
served, and continues to serve, as the Chief Marketing Manager of Shandong since
then. Mr. Li graduated from Peking University Founder Technology
College in 2006 where he received a degree in computer network technology.
Mr. Jinliang Li, our Chief Executive Officer and a director, is the father
of Mr. Jiawei Li.
Yuhong
Lei, became our
Chief Financial Officer (“CFO”) in March 2010. Prior to her
appointment as our CFO, Ms. Lei was a Senior Financial Analyst with J&R
Investment Service Limited commencing in 2009, where her responsibilities
included monitoring financial markets on behalf of J&R’s senior
management. From 2008 to 2009, Ms. Lei acted as a Financial Analyst
with Linear Capital Asia Limited, where she provided consulting services to the
firm’s clients. From 2003 to 2006, Ms. Lei was a Business Analyst
with PetroChina Jiangxi Region Sales Company, where she provided business
analysis to the company’s sales and marketing division. From 1999 to 2002,
Ms. Lei was the director of the saving office of a branch of China
Construction Bank in Liaoyang City, Liaoning Province, China, where she was in
charge of its financial management and daily operation. Ms. Lei received a
MBA from the University of Bradford in 2007 and a BA in Insurance from Liaoning
University in 1999.
Aihua Li,
became our Corporate Secretary in March 2010. From June 2009 to March
2010, Ms. Li served as a special legal counsel for Shandong Fangming
Pharmaceutical Stock Co., Ltd., a private company in China. From December
2009 to March 2010, Ms. Li also served as a special counsel for
Shandong Longtai Food Co., Ltd, a private Company in China. From
July 2008 to present, Ms. Li has served as a special legal counsel for Heze JXY
Food Co., Ltd, which merged with an Australian listed Company. From
February 2005 to February 2006, Ms. Li served as a legal and investment
development counsel for Shandong Haiyang Hanyue Printing Co., Ltd., a private
company in China. Ms. Li is the founder and senior partner of Shandong
Dingjian Law Office, and has practicing law in China for approximately 17
years. Ms. Li is a part-time law professor in Heze University, serves
as a member of Chinese People’s Political Consultative Conference of Heze City,
and has been working as a counsel for China Council of the Promotion for
International Trade, Heze Branch since 2005. Ms. Li received a master of
law degree from Peking University in 2003.
57
Fuhua Wu,
became one of our Independent Directors in July 2010. Mr. Wu has served as
a non-executive Director of China JXY Food Limited, a public company listed in
Australia from 2009 to present. Prior to joining us, Mr. Wu worked for
Sinostar Pec Holdings Limited, a public company listed in Singapore, from
October 2006 to July 2007. Mr. Wu has continued to be a vice president of
Heze Chamber of Commerce of China Chamber of International Commerce since August
2004. Mr. Wu received a degree in political science from the Communist
Party of China Central University in December 1995.
Man Zhang,
became one of our Independent Directors in July 2010. Ms. Zhang has served as a managing
director for TSFF Asset Management Ltd., from March 2010 to present, where
she is in charge of its private equity investment business. From January
2008 to December 2009, Ms. Zhang served as a CEO for ZDJH Investment &
Management Ltd., where she was in charge of the investment in medical
facilities. From June 2006 to December 2009, Ms. Zhang served as a
project partner in the private placement and investment banking department of
Joseph Capital LLC, identifying and screening new investment opportunities,
building pipelines of investment targets, conducting due diligence and providing
financial analysis and structure of potential investments. From
January 2008 to December 2009, Ms. Zhang served as a CEO of Cornerstone Medical
Investment & Management Ltd., where she was in charge of the
investment. Ms. Zhang graduated from Shanghai Jiao Tong University
with a degree in Science in Biomedical Engineering in June 1996. Ms. Zhang
received a Master of Business Administration (MBA) from Carnegie Mellon
University, Tepper School of Business in May 2006.
Yvonne
Zhang, became one of our Independent Directors in July 2010. Ms.
Zhang is a Certified Public Accountant and a founder of V-Trust Accounting and
Tax Service from July 2006 to present, providing consulting services to Chinese
based clients relating to (i) Chinese GAAP and US GAAP reconciliation and
conversion, (ii) assisting in ensuring clients’ financial statements and
footnotes are prepared in compliance with US GAAP standards, (iii) bookkeeping
tasks and auditing, and (iv) filing related tax returns for both corporations
and individuals. From April 2010 to present, Ms. Zhang serves as an
independent director and Chairwoman of the Audit Committee of Weikang Bio-Tech
Group Inc., a public company listed in the U.S. From August 2007
to March 2010, Ms. Zhang serviced as the CFO for U.S. China Mining Group
Inc, a public company listed on OTC Bulletin Board. From June 2005 to June
2006, Ms. Zhang served as the audit in charge of Kabani & Company,
performing full-scope financial statements audits for publicly-traded and
privately-held companies from planning, field work, supervising to final SEC
filing. Ms. Zhang received a B.S. in accountancy from California State
University in 1999, and is a member of AICPA, Institute of Management
Accountants.
We
believe Mr. Jinliang Li and Mr. Jiawei Li both play important roles in our
business. With Mr. Jinliang Li’s 25-year experience in the furniture
industry in China, and Mr. Jiawei Li’s experience in marketing, we believe their
in-depth knowledge of the furniture business will assist us in our expansion
plans discussed elsewhere in this prospectus. Based on Mr. Fuhua Wu, Ms.
Man Zhang and Ms. Yvonne Zhang’s experience in other public companies as well as
their related financial experience as described above, we believe their
appointment as independent directors will assist us in the compliance of related
regulations and strengthen our internal controls.
All of
our directors hold their positions on the board until our next annual meeting of
the shareholders and until their successors have been qualified after being
elected or appointed. Officers serve at the discretion of the board of
directors.
Director
Independence
After
the closing of this offering, CAOPU (an entity controlled by Mr. Li, our
Chairman and Chief Executive Officer) will continue to control a majority of the
voting power of our outstanding common stock. As a result, we will be a
“controlled company” pursuant to Rule 5615 (c) of the corporate governance
standards of the NASDAQ Stock Market LLC (see “Risk Factors”).
We
have appointed three independent directors, Mr. Fuhua Wu, Ms. Man Zhang, and Ms.
Yvonne Zhang as required by Rule 5605(a)(2) of the NASDAQ Capital Market.
Neither Mr. Jinliang Li nor Mr. Jiawei Li qualifies as an independent
director.
Board Committees
Our Board
of Directors has the following committees: an Audit Committee, a Compensation
Committee, and a Nominating and Corporate Governance Committee. The
composition and responsibilities of each committee is described below.
Members will serve on these committees until their resignation or until
otherwise determined by our Board of Directors.
Audit
Committee
Our
Audit Committee consists of Mr. Fuhua Wu, Ms. Man Zhang, and Ms. Yvonne Zhang,
each of whom satisfies the independence requirements under Nasdaq Listing Rule
5605(a)(2) and SEC rules and regulations applicable to audit committee members
and have an understanding of fundamental financial statements. Ms.
Yvonne Zhang serves as chairman of the Audit Committee. Ms. Yvonne Zhang
qualifies as an “audit committee financial expert” as that term is defined in
the applicable SEC rules and regulations. The designation of Ms. Yvonne
Zhang as an “audit committee financial expert” will not impose on her any
duties, obligations or liability that are greater than those that are generally
imposed on her as a member of our Audit Committee and our Board of Directors,
and her designation as an “audit committee financial expert” will not affect the
duties, obligations or liability of any other member of our Audit Committee or
Board of Directors.
58
The Audit
Committee will monitor our corporate financial statements and reporting and our
external audits, including, among other things, our internal controls and audit
functions, the results and scope of the annual audit and other services provided
by our independent registered public accounting firm and our compliance with
legal matters that have a significant impact on our financial statements.
Our Audit Committee will consult with our management and our independent
public accounting firm prior to the presentation of financial statements to
stockholders and, as appropriate, initiate inquiries into aspects of our
financial affairs. Our Audit Committee will be responsible for
establishing procedures for the receipt, retention and treatment of complaints
regarding accounting, internal accounting controls or auditing matters, and for
the confidential, anonymous submission by our employees of concerns regarding
questionable accounting or auditing matters, and has established such procedures
to become effective upon the effectiveness of the registration statement of
which this prospectus forms a part. In addition, our Audit Committee is
directly responsible for the appointment, retention, compensation and oversight
of the work of our independent auditors, including approving services and
fee arrangements. All related party transactions must be approved by our Audit
Committee before we enter into them.
Our
independent auditors and internal financial personnel will meet regularly, and
will have unrestricted access to, our Audit Committee.
Compensation
Committee
Our
Compensation Committee consists of Mr. Fuhua Wu, Ms. Man Zhang, and Ms. Yvonne
Zhang, each of whom satisfies the independence requirements of Nasdaq Listing
Rule 5605(a)(2) and SEC rules and regulations. Each member of this committee is
a non-employee director, as defined pursuant to Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended, and an outside director, as defined
pursuant to Section 162(m) of the Internal Revenue Code of 1986, as
amended. Ms. Man Zhang serves as chairman of the Compensation
Committee.
The
Compensation Committee will review and approve our compensation policies and all
forms of compensation to be provided to our executive officers and directors,
including, annual salaries, bonuses, and other incentive compensation
arrangements. In addition, our Compensation Committee will administer our
stock option and employee stock purchase plans, including granting stock options
to our executive officers and directors. Our Compensation Committee will
review and approve employment agreements with executive officers and other
compensation policies and matters.
Nominating
and Corporate Governance Committee
Our
Nominating and Corporate Governance Committee consists of Mr. Fuhua Wu, Ms. Man
Zhang, and Ms. Yvonne Zhang, each of whom satisfies the independence
requirements of Nasdaq Listing Rule 5605(a)(2) and SEC rules and regulations.
Mr. Fuhua Wu serves as chairman of the Nominating and Corporate Governance
Committee.
Our
Nominating and Corporate Governance Committee will identify, evaluate and
recommend nominees to our Board of Directors and committees of our Board of
Directors, conduct searches for appropriate directors and evaluate the
performance of our Board of Directors and of individual directors. The
Nominating and Corporate Governance Committee also will be responsible for
reviewing developments in corporate governance practices, evaluating the
adequacy of our corporate governance practices and reporting and making
recommendations to the Board of Directors concerning corporate governance
matters.
Family
Relationships
Mr.
Jinliang Li, our Chief Executive Officer and a director, is the father of
Mr. Jiawei Li, one
of our directors. Other than such
relationship, there
are no other family relationships among our directors and executive officers.
There is no arrangement or understanding between or among our executive
officers and directors pursuant to which any director or officer was or is to be
selected as a director or officer, and there is no arrangement, plan or
understanding as to whether non-management shareholders will exercise their
voting rights to continue to elect the current board of
directors.
59
EXECUTIVE
COMPENSATION
The
following Summary Compensation Table shows the compensation awarded to or earned
by our Chief Executive Officer for fiscal 2009 and 2008. No person had
compensation in excess of $100,000 during 2009. Also shown is the
compensation awarded to or earned by our former President and Chief Executive
Officer due to the fact that he held such positions during a portion of fiscal
2009. The persons listed in the following Summary Compensation Table are
referred to herein as the “Named Executive Officers.”
Name and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||
Timothy
Lightman (former
President
|
2009
|
-0-
|
-0-
|
-0-
|
-0-
|
|||||||||||||
CEO
and Director)(1)
|
2008
|
1,000
|
-0-
|
-0-
|
1,000
|
|||||||||||||
Jinliang
Li
|
2009
|
12,302
|
-0-
|
-0-
|
12,302
|
|||||||||||||
(CEO
and Director) (2)
|
2008
|
12,302
|
-0-
|
-0-
|
12,302
|
(1) Mr. Lightman resigned as
a president, CEO and Director, effective November 5, 2009.
(2) Mr.
Jinliang Li was appointed our Chief Executive Officer and Director on November
5, 2009, Mr. Li’s base salary is RMB 7,000/month, or RMB 84,000 per annum
year. Compensation for 2008 and 2009 includes compensation
earned as the CEO and director of the operating company prior to the reverse
merger in November 2009. Starting from January 1, 2010, Mr. Li’s base
salary was increased to RMB 144,000, approximately $21,089, per annum
year.
Compensation
Discussion and Analysis
It is
intended that each member of our board of directors who is not our employee (a
“non-employee director”) will receive an annual retainer in cash and/or shares
of common stock as determined by our board of directors and all directors will
be reimbursed for costs and expenses related to attendance at meetings of
the board of directors.
Our
employee directors will not receive any additional compensation for serving on
our board of directors or any committee of our board of directors, and our
non-employee directors will not receive any compensation from us for their roles
as directors other than the retainer, attendance fees and stock option grants
described above.
It is not
uncommon for PRC private companies in China to have base salaries as the sole
form of compensation. The base salary level is established and
reviewed based on the level of responsibilities, the experience and tenure of
the individual and the current and potential contributions of the
individual. The base salary is compared to the list of similar
positions within comparable peer companies, such as Heze JXY Food Co., Ltd. and
Cao County Yangguang Arts & Crafts Co. Ltd., and consideration is
given to the executive’s relative experience, responsibility, terms of
employment and the current and potential contribution to us in his or her
position. Base salaries are reviewed periodically and at the time of
promotion or other changes in responsibilities.
Mr.
Jinliang Li is one of our founders, and has been our CEO since 2000. Under
his leadership, our revenues and net income have grown substantially in both
2008 and 2009. We believe that our revenues and net income will continue
to grow under his supervision in the future. From 2010 on, the base salary
we pay to Mr. Jinliang Li will increase 30% if our revenues and net incomes
increase between 30% and 40%, respectively, on an annualized basis.
Mr.
Jiawei Li is responsible for the marketing and sales of our products under the
supervision of Mr. Jinliang Li. He has more than four (4) years of
international marketing and sales experience. He has represented us in a
variety of international and domestic trade fairs. From 2010 on, the base
salary we pay to Mr. Jiawei Li will increase 30% if our revenues and net incomes
increase between 30% and 40% annually compared with the prior fiscal year and
his base salary will increase 40% if our revenues and net incomes increase more
than 40% compared with the prior fiscal year.
We plan
to implement a more comprehensive compensation program, which takes into account
other elements of compensation, including, without limitation, short and long
term compensation, cash and non-cash, and other equity-based compensation such
as stock options. We expect that this compensation program will be
comparable to the programs of our peer companies and aimed to retain and attract
talented individuals.
As
discussed above, we have formed a compensation committee to oversee the
compensation of our named executive officers. The majority of the members
of the compensation committee will be independent directors.
60
Employment
Agreements
We
entered into an employment agreement with Yuhong Lei on March 30, 2010, pursuant
to which Ms. Lei was hired as our chief financial officer for a period of one
year for an annual salary of $52,738.
Tianwei
International Limited, our wholly owned subsidiary, entered into an
employment agreement with Jinliang Li on August 15, 2009, pursuant to which
Mr. Jinliang Li was hired as the chairman of Tianwei International Limited and
received an annual salary of $12,302 per year in 2009. On January 1, 2010,
Tianwei International Limited entered into a new employment agreement with
Jinliang Li, pursuant to which Mr. Jinliang Li’s base salary was increased to
approximately $21,089 per annum year.
Shandong
entered into an employment agreement with each of Jiawei Li, Zhiqiang Zhong, and
Zhiyu Wang, pursuant to which such persons were employed by Shandong as its
marketing manager, production manager and chief financial officer, respectively.
Messrs. Jiawei Li, Zhong and Wang received an annual salary of $5,273 per
year, pursuant to such employment agreements. On January 1,
2010, Shandong entered into a new employment agreement with Jiawei Li to
increase his base salary to approximately $10,571per annum
year.
On July
1, 2010, we entered into an Offer Letter with each of Fuhua Wu, Man Zhang and
Yvonne Zhang for their service as the Independent Directors to our Board of
Directors. As members of the committees of our Board of Directors, each of them
will receive 5,000 shares of our common stock at the rate of 1,250 shares of our
common stock each quarter, provided at such time they continue to be our
Independent Directors and committee members.
All such
employment agreements are “at-will” agreements.
Director
Compensation
During
the fiscal year ended December 31, 2009, we did not pay our directors
compensation for their service on our Board of Directors.
On
July 1, 2010, we entered into a Stock Option Agreement with Mr. Jinliang Li (our
chairman and chief executive officer) for his contribution and work as our
Chairman and Chief Executive Officer, pursuant to which, Mr. Li received the
right to purchase for a period of 10 years commencing on July 2,
2011, 666,667 shares of our common stock at a price per share equal to the
per share sale price of a share of our common stock in this public
offering.
Indemnification
of Officers and Directors
Our
amended certificate of incorporation limits the personal liability of directors
for breach of fiduciary duty to the maximum extent permitted by the General
Corporation Law of the State of Delaware, referred to herein as the “DGCL”.
Our amended certificate of incorporation provides that no director will
have personal liability to us or to our stockholders for monetary damages for
breach of fiduciary duty or other duty as a director. However, these
provisions do not eliminate or limit the liability of any of our directors for
any of the following:
· any
breach of their duty of loyalty to us or our stockholders;
· acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law;
· voting
or assenting to unlawful payments of dividends or other distributions;
or
· any
transaction from which the director derived an improper personal
benefit.
Any
amendment to or repeal of these provisions will not eliminate or reduce the
effect of these provisions in respect of any act or failure to act, or any cause
of action, suit or claim that would accrue or arise prior to any amendment or
repeal or adoption of an inconsistent provision. If the DGCL is
amended to provide for further limitations on the personal liability of
directors of corporations, then the personal liability of our directors will be
further limited in accordance with the DGCL.
In
addition, our amended certificate of incorporation provides that we must
indemnify our directors and officers and we must advance expenses, including
attorneys’ fees, to our directors and officers in connection with legal
proceedings, subject to very limited exceptions.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Our
founder, Timothy Lightman, purchased 4,925,000 shares of our common stock in
February 2007, upon our formation, for an aggregate price of $98.50, and on
November 5, 2009, he cancelled 4,375,000 shares of our common stock and acquired
all of our assets related to our prior business and assumed all of our
liabilities.
61
On
November 5, 2009, Mr. Lightman purchased all of our assets, including, those
assets related to our then proposed cellular telephone application. Mr.
Lightman also assumed all of our then indebtedness or other obligations in
existence as of November 5, 2009, including all of our obligations for attorney
fees, accountant fees, taxes and transfer agent fees and agreed to indemnify and
hold us harmless against the same. The consideration for the assets other
than the assumption of liabilities was nominal and was based upon negotiations
between us and Mr. Lightman.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information, as of December 20, 2010 and
as adjusted to reflect the sale of our common stock in this offering, with
respect to the beneficial ownership of our common stock by (i) each of our
directors and named executive officers, (ii) all of our directors and executive
officers as a group, and (iii) each person, or group of affiliated persons,
known to us to beneficially own more than 5% of our common
stock.
Beneficial
ownership is determined in accordance with SEC rules and generally includes
voting or investment power with respect to securities. Unless otherwise
indicated, the stockholders listed in the table have sole voting and investment
power with respect to the shares indicated.
The
table below lists the number of shares of our common stock and percentage of
shares beneficially owned prior to this offering based on 8,610,009 shares of
our common stock issued and outstanding as of December 20, 2010. The table
also lists the number of shares of our common stock and percentage of shares
beneficially owned after this offering based on shares of our
common stock outstanding upon completion of this offering, assuming no exercise
of the underwriters’ options or over-allotment option.
For
purposes of the table below, we treat shares of our common stock subject to
options or warrants that are currently exercisable or exercisable within 60 days
after December 20, 2010 to be outstanding and to be beneficially owned by
the person holding the options or warrants for the purpose of computing the
percentage ownership of the person, but we do not treat the shares as
outstanding for the purpose of computing the percentage ownership of any other
stockholder.
Except as
otherwise set forth below, the address of each of the persons or entities listed
in the table is c/o China Shandong Industries, Inc., No. 2888 Qinghe Road,
Development Zone Cao County, Shandong Province, 274400 China.
Shares
Beneficially Owned
Prior
to Offering
|
Shares
Beneficially Owned
After
the Offering(1)
|
|||||||||||||
Name
|
Number
|
Percentage
|
Number
|
Percentage
|
||||||||||
Named
Executive Officers and Directors:
|
||||||||||||||
Jinliang
Li (Director and CEO) (2)(3)
|
7,408,800 | 86.0 | % | % | ||||||||||
Jiawei
Li (Director) (2)
|
360,150 | 4.2 | % | % | ||||||||||
Yuhong
Lei (CFO)
|
0 | 0 | % | % | ||||||||||
Aihua
Li (Corporate Secretary)
|
0 | 0 | % | % | ||||||||||
Fuhua
Wu (Independent Director) (4)
|
3,333 | * | * | |||||||||||
Man
Zhang (Independent Director) (4)
|
3,333 | * | * | |||||||||||
Yvonne
Zhang (Independent Director) (4)
|
3,333 | * | * | |||||||||||
Zhiyu
Wang (CFO of Shandong) (2)
|
368,725 | 4.3 | % | % | ||||||||||
All
executive officers and directors as a group (8 persons)
(2)
|
7,418,799 | 86.0 | % | % | ||||||||||
5%
Stockholders:
|
||||||||||||||
CAOPU
Enterprise Limited (2)
Mill
Mall, Suite 6, Wickhams Cay 1
PO
Box 3085, Road Town
Tortola,
British Virgin Islands
|
7,408,800 | 86.0 | % | % |
62
* Less
than one percent
(1)
Assumes no exercise of the (i) underwriters’ overallotment option and/or (ii)
the underwriters’ options.
(2)
Includes 7,408,800 shares of our common stock owned by
CAOPU. CAOPU acquired such shares pursuant to the Stock Exchange and
Reorganization Agreement dated as of October 22, 2009. Mr. Jinliang
Li is the sole shareholder of CAOPU and may be deemed to beneficially own the
shares of common stock owned by CAOPU. Such number of shares also includes
360,150 shares of our common stock owned by Jiawei Li, the son of Mr. Jinliang
Li, and 2,675,400 shares of our common stock owned by other eight (8) persons
(including, but not limited to, Zhiyu Wang, the CFO of Shandong) pursuant to
agreements between CAOPU and each of such persons as described elsewhere herein.
Although Mr. Li has no pecuniary interest in such 3,035,550 shares of our
common stock beneficially owned by such 9 minority shareholders, by reason of
Mr. Li’s sole ownership of CAOPU Enterprise Limited. Mr. Li does have sole
voting and dispositive power over such 3,035,550 shares.
(3)
Excludes a stock option to purchase 666,667 shares of our common stock at a
price per share equal to the per share price of a share of our common stock sold
in this public offering. Such stock option is exercisable for a period of
10 years commencing on July 2, 2011.
(4)
For acting as Independent Directors to our Board of Directors, as members of the
committees of our Board of Directors, Fuhua Wu, Man Zhang and Yvonne Zhang will
each receive 3,333 shares of our common stock at the rate of 833 shares of our
common stock each quarter, provided at such time they continue to be our
Independent Directors and committee members.
DESCRIPTION
OF SECURITIES
The
following is a summary description of our capital stock and certain provisions
of our certificate of incorporation and by-laws, copies of which have been filed
as exhibits to our registration statements of which this prospectus forms a
part. The following discussion is qualified in its entirety by
reference to such exhibits.
General
We are
authorized to issue 100,000,000 shares of our common stock, par value $.0001 per
share and 5,000,000 shares of our preferred stock.
Common
Stock
As of
November 30, 2010, there were 8,610,009 shares of our common stock issued
and outstanding, which were held of record by
approximately 22 shareholders. As of December 20, 2010, we
have reserved 866,667 shares of our common stock for issuance upon exercise of
our outstanding options, warrants, rights and convertible
securities.
Holders
of our common stock are entitled to one vote per share on matters on which our
stockholders vote. There are no cumulative voting
rights. Subject to any preferential dividend rights of any
outstanding shares of preferred stock, holders of our common stock are entitled
to receive dividends, if declared by our Board of Directors, out of funds that
we may legally use to pay dividends. If we liquidate or dissolve, holders
of our common stock are entitled to share ratably in our assets once our debts
and any liquidation preference owed to any then-outstanding preferred
stockholders are paid. Our certificate of incorporation does not
provide our common stock with any redemption, conversion or preemptive rights.
All shares of our common stock that are outstanding as of the date of this
prospectus and, upon issuance and sale, all shares we are selling in this
offering, will be fully-paid and nonassessable.
Preferred
Stock
Our Board
of Directors has the authority, without further stockholder authorization, to
issue from time to time shares of our preferred stock in one or more series and
to fix the terms, limitations, relative rights and preferences and variations of
each series. Although we have no present plans to issue any shares of our
preferred stock, the issuance of shares of our preferred stock, or the issuance
of rights to purchase such shares, could decrease the amount of earnings and
assets available for distribution to the holders of our common stock, could
adversely affect the rights and powers, including voting rights, of our common
stock, and could have the effect of delaying, deterring or preventing a change
in control of us or an unsolicited acquisition proposal. As of the date
thereof, we have no preferred stock issued and outstanding and no current plans
to issue any our preferred stock.
63
Warrants
We
entered into an Amendment No. 1 to China Research Group Investor Relations
Consulting Agreement, dated April 13, 2010 but made effective as of October 22,
2009, pursuant to which we agreed to issue to China Research Group Investor
Relations (i) 33,333 shares of our common stock, and (ii) a 2 year warrant to
purchase 100,000 shares of common stock at an exercise price equal to the
greater of the per share price that a share of our common stock is sold at in
this public offering price and $9.90 per share. The number of warrant
shares and exercise price will be adjusted proportionately for any stock
splits. The warrant is presently exercisable.
On April 13, 2010, pursuant to an
Amended and Restated Agreement, by and between our company and Linear Capital
Asia Limited, Inc. (“Linear”), we agreed to issue
to Linear (i) 21,467 shares of our common stock (the number was based upon
$161,000, the amount of funds advanced by Linear to us, divided by the
assigned value of our common stock of $7.50 per share), and (ii) a 2 year
warrant to purchase 100,000 shares of common stock at an exercise price equal to
the greater of (a) the per share public offering price of a share of common
stock in this public offering, and (b) $7.50 per share if this public offering
is not completed. The number of warrant shares and the exercise price will
be adjusted proportionately for any stock splits. The warrant is presently
exercisable.
Underwriters’ Options
We have also agreed to issue to the
underwriters of this offering options to purchase such number of shares of our
common stock equal to 5% of the aggregated number of shares of our common stock
sold in this offering. The options will have an exercise price equal to
125% of the offering price sold in this offering and may be exercised on a
cashless basis. The options are exercisable commencing one year after the
closing of this public offering, and will be exercisable for four years
thereafter. The options are not redeemable by us. The options and
the shares of our common stock issuable upon exercise of the options have been
deemed compensation by the Financial Industry Regulatory Authority (“FINRA”),
and, are, therefore, subject to a 180-day lock-up pursuant to Rule 5110(g)(1) of
FINRA. The underwriters (or permitted assignees under the Rule) may not
sell, transfer, assign, pledge, or hypothecate the options or shares of our
common stock underlying the options, nor will they engage in any hedging, short
sale, derivative, put, or call transaction that would result in the effective
economic disposition of the options or our shares of common stock underlying the
options for a period of 180 days from the date of this prospectus. The
options will provide for adjustment in the number and price of shares of our
common stock issuable upon exercise of the options in the event of
recapitalization, merger or other structural transaction to prevent mechanical
dilution.
Demand
Registration Rights
The underwriters’ options
provide for demand registration rights for the sale of our common stock
underlying such options. Holders will have one demand registration
right at our expense, and a second demand registration right which will be at
the expense of the holders of the underwriters’ options.
Piggyback Registration
Rights
The underwriters’ options also
provide for piggyback registration rights for the sale of our common stock
underlying such options. Under these provisions, during the seven year period
following the effective date of the registration statement of which this
prospectus is a part, if we register any securities for public sale, including
pursuant to any stockholder-initiated demand registration, these holders will
have the right to include their shares of our common stock in the registration
statement, subject to customary exceptions. The underwriters of any
underwritten offering will have the right to limit the number of shares of our
common stock having registration rights to be included in the registration
statement, and piggyback registration rights are also subject to the priority
rights of stockholders having demand registration rights in any demand
registration.
Expenses
of Registration
We will pay all registration expenses
related to one demand, and any piggyback registration, other than underwriting
discounts and commissions and any professional fees or costs of accounting,
financial or legal advisors to any of the holders of registrable
securities.
Delaware
Anti-Takeover Law
We are subject to the provisions of
Section 203 of the DGCL. In general, Section 203 prohibits a Delaware
corporation from engaging in a “business combination” with an “interested
stockholder” for a three-year period following the time that this stockholder
becomes an interested stockholder, unless the business combination is
approved in a prescribed manner. A “business combination” includes,
among other things, a merger, asset or stock sale or other transaction resulting
in a financial benefit to the interested stockholder. An “interested
stockholder” is a person who, together with affiliates and associates, owns, or
did own within three years prior to the determination of interested stockholder
status, 15% or more of the corporation’s voting stock. Under
Section 203, a business combination between a corporation and an interested
stockholder is prohibited unless it satisfies one of the following
conditions:
·
|
before
the stockholder became interested, the Board of Directors approved either
the business combination or the transaction which resulted in the
stockholder becoming an interested
stockholder;
|
64
·
|
upon
completion of the transaction which resulted in the stockholder becoming
an interested stockholder, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the
transaction commenced,excluding for purposes of determining the voting
stock outstanding shares owned by persons who are directors and also
officers, and employee stock plans, in some instances;
or
|
·
|
at
or after the time the stockholder became interested, the business
combination was approved by the Board of Directors of the corporation and
authorized at an annual or special meeting of stockholders by the
affirmative vote of at least two-thirds of the outstanding voting stock
which is not owned by the interested
stockholder.
|
Our
Corporate Charter Documents
Our amended certificate of
incorporation and bylaws include provisions that are intended to enhance the
likelihood of continuity and stability in our Board of Directors and in its
policies. These provisions might have the effect of delaying or preventing
a change in control and may make the removal of incumbent management more
difficult even if such transactions could be beneficial to the interests of
stockholders. These provisions will be described in an amendment to this
registration statement.
Listing
We have applied for listing of our
common stock on NASDAQ Capital Market. Our common stock will begin trading
on or promptly after the effective date of this prospectus.
Transfer
Agent
The transfer agent for our common stock
is Colonial Stock Transfer Company, Inc., 66 Exchange Place - Suite 100, Salt
Lake City, UT 84111, Phone: (801) 355-5740.
65
SHARES
ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been
a limited public market for our common stock, and we cannot assure you that a
significant public market for our common stock will develop or be sustained
after this offering. As described below, no shares currently outstanding
will be available for sale immediately after this offering due to certain
contractual and securities law restrictions on resale. Sales of
substantial amounts of our common stock in the public market after the
restrictions lapse could cause the prevailing market price to decline and limit
our ability to raise equity capital in the future.
Immediately after this offering, we
will have shares of our common stock issued outstanding, or shares if
the underwriters’ over-allotment option is exercised in full. Of these
shares, shares sold in this offering, or shares if
the over-allotment option is exercised in full, will be freely tradable without
restriction or further registration under the Securities Act, except for any
shares of our common stock purchased by one of our affiliates within the meaning
of Rule 144 under the Securities Act. As of December 20, 2010, 7,752,501
shares of our outstanding common stock are restricted securities as that term is
defined in Rule 144, with the remaining 857,508 shares being
unrestricted. 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. Those shares of
common stock have been eligible for sale under Rule 144 since November 6,
2010.
Rule
144
The availability of Rule 144 will vary
depending on whether restricted shares are held by an affiliate or a
non-affiliate. In general, under Rule 144 as in effect on the date of this
prospectus, a person who has beneficially owned restricted shares of our common
stock or warrants for at least six months would be entitled to sell their
securities provided that (i) such person is not deemed to have been one of our
affiliates at the time of, or at any time during the three months
preceding, a sale and (ii) we are subject to the Exchange Act periodic reporting
requirements for at least three months before the sale.
Persons who have beneficially owned
restricted shares of our common stock or warrants for at least six months but
who are our affiliates at the time of, or at any time during the three months
preceding, a sale, would be subject to additional restrictions, by which such
person would be entitled to sell within any three-month period only a number of
securities that does not exceed the greater of either of the
following:
·
|
1%
of the number of shares of common stock then outstanding, which will
equal shares immediately after this offering
(assuming no exercise of the underwriter’s over-allotment option.);
and
|
·
|
the
average weekly trading volume of our common stock during the four calendar
weeks preceding the filing of a notice on
Form 144 with respect to the
sale.
|
Prior to our acquisition of Tianwei
on November 6, 2009, we were a “shell” company as defined under Rule 405 of the
Securities Act. Because we were a shell company, holders of our
restricted securities may not rely on Rule 144 to sell their securities until
November 12, 2010, which is 12 months after the filing of the Current
Report on Form 8-K reporting the closing of the acquisition. In addition,
any sales by affiliates under Rule 144 are also limited by manner of sale
provisions and notice requirements and the availability of current public
information about us.
66
MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a summary of the
material U.S. federal income tax consequences to an investor of the acquisition,
ownership and disposition of our common stock purchased by the investor pursuant
to this offering. As used in this discussion, “we”, “our” and “us” refers
only to China Shandong Industries, Inc.
The discussion below of the U.S.
federal income tax consequences to “U.S. Holders” will apply to a beneficial
owner of our common stock that is for U.S. federal income tax
purposes:
· an
individual citizen or resident of the United States;
· a
corporation (or other entity treated as a corporation) that is created or
organized (or treated as created or organized) in or under the laws of the
United States, any state thereof or the District of Columbia;
· an
estate whose income is includible in gross income for U.S. federal income tax
purposes regardless of its source; or
· a
trust if (i) a U.S. court can exercise primary supervision over the trust’s
administration and one or more U.S. persons are authorized to control all
substantial decisions of the trust, or (ii) it has a valid election in effect
under applicable U.S.Treasury regulations to be treated as a U.S.
person.
If a beneficial owner of our common
stock is not described as a U.S. Holder and is not an entity treated as a
partnership or other pass-through entity for U.S. federal income tax purposes,
such owner will be considered a “Non-U.S. Holder.” The material U.S. federal
income tax consequences applicable to Non-U.S. Holders is described below under
the heading “Non-U.S. Holders.”
This summary is based on the Internal
Revenue Code of 1986, as amended, or the “Code,” its legislative history,
Treasury regulations promulgated thereunder, published rulings and court
decisions, all as currently in effect. These authorities are subject to
change or differing interpretations, possibly on a retroactive
basis.
This discussion does not address all
aspects of U.S. federal income taxation that may be relevant to any particular
holder based on such holder’s individual circumstances. In particular,
this discussion considers only holders that own our common stock as capital
assets within the meaning of Section 1221 of the Code, and does not address the
potential application of the Medicare contribution tax on certain unearned
income or the alternative minimum tax. In addition, this discussion does not
address the U.S. federal income tax consequences to holders that are subject to
special rules, including:
· financial
institutions or financial services entities;
· broker-dealers;
· taxpayers
who have elected mark-to-market accounting;
· tax-exempt
entities;
· governments
or agencies or instrumentalities thereof;
· insurance
companies;
· regulated
investment companies;
· real
estate investment trusts;
· certain
expatriates or former long-term residents of the United States;
· persons
that actually or constructively own 5 percent or more of our voting
stock;
· persons
that acquired our common stock pursuant to an exercise of employee
stock options, in connection with employee stock incentive plans or otherwise as
compensation;
· persons
that hold our common stock as part of a straddle, constructive sale, hedging,
conversion or other integrated transaction; or
67
· persons
whose functional currency is not the U.S. dollar.
This discussion does not address any
aspect of U.S. federal non-income tax laws, such as gift or estate tax laws, or
state, local or non-U.S. tax laws or, except as discussed herein, any tax
reporting obligations of a holder of our common stock. This discussion
assumes that any distributions made (or deemed made) by us on our common
stock and any consideration received by a holder in consideration for the sale
or other disposition of our common stock will be in United States dollars.
Additionally, the discussion does not consider the tax treatment of
partnerships or other pass-through entities or persons who hold our common stock
through such entities. If a partnership (or other entity classified as a
partnership for U.S. federal income tax purposes) is the beneficial owner of our
common stock, the U.S. federal income tax treatment of a partner in the
partnership will depend on the status of the partner and the activities of the
partnership.
We have not sought, and will not seek,
a ruling from the Internal Revenue Service (“IRS”) or an opinion of counsel as
to any U.S. federal income tax consequence described herein. The IRS may
disagree with the description herein, and its determination may be upheld by a
court. Moreover, there can be no assurance that future legislation,
regulations, administrative rulings or court decisions will not adversely affect
the accuracy of the statements in this discussion.
THIS
DISCUSSION IS ONLY A SUMMARY OF THE MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR COMMON
STOCK. IT IS NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR IN
OUR COMMON STOCK IS URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE
PARTICULAR TAX CONSEQUENCES TO SUCH INVESTOR OF THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF OUR COMMON STOCK, INCLUDING THE APPLICABILITY AND EFFECT OF ANY
STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS, AND
ANY APPLICABLE TAX TREATIES.
U.S.
Holders
Taxation
of Distributions
A U.S. Holder will be required to
include in gross income as ordinary income the amount of any cash dividend paid
on the shares of our common stock. A cash distribution on such shares will
be treated as a dividend for U.S. federal income tax purposes to the extent the
distribution is paid out of our current or accumulated earnings and profits
(as determined under U.S. federal income tax principles). Such cash
distributions in excess of such earnings and profits will constitute a return of
capital that will be applied against and reduce (but not below zero) the U.S.
Holder’s adjusted tax basis in our common stock. Any remaining excess will
be treated as gain from the sale or other disposition of the common stock and
will be treated as described under “—Taxation on the Disposition of Common
Stock” below.
Any dividends we pay to a U.S. Holder
that is treated as a taxable corporation for U.S. federal income tax purposes
will qualify for the dividends-received deduction if the applicable holding
period and other requirements are satisfied. With certain exceptions, if
the applicable holding period and other requirements are satisfied, dividends we
pay to a non-corporate U.S. Holder will constitute “qualified dividends” that
will be subject to tax at the maximum regular tax rate accorded to long-term
capital gains for tax years beginning on or before December 31, 2010, after
which the regular U.S. federal income tax rate applicable to dividends is
scheduled to return to the regular tax rate generally applicable to ordinary
income.
If PRC taxes apply to any dividends
paid to a U.S. Holder on our common stock, such taxes may be treated as foreign
taxes eligible for credit against such holder’s U.S. federal income tax
liability (subject to certain limitations), and such U.S. Holder may be entitled
to certain benefits under the income tax treaty between the United States and
the PRC. U.S. Holders should consult their own tax advisors regarding the
creditability of any such PRC tax and their eligibility for the benefits of the
income tax treaty between the United States and the PRC.
Taxation
on the Disposition of Common Stock
Upon a sale or other taxable
disposition of our common stock, a U.S. Holder will recognize capital gain or
loss in an amount equal to the difference between the amount realized and the
U.S. Holder’s adjusted tax basis in the common stock.
The regular U.S. federal income tax
rate on capital gains recognized by U.S. Holders generally is the same as
the regular U.S. federal income tax rate on ordinary income, except that
long-term capital gains recognized by non-corporate U.S. Holders are generally
subject to U.S. federal income tax at a maximum regular rate of 15 percent for
taxable years beginning before January 1, 2011 (and 20 percent thereafter).
Capital gain or loss will constitute long-term capital gain or loss if the
U.S. Holder’s holding period for the common stock exceeds one year. The
deductibility of capital losses is subject to various limitations.
If PRC taxes apply to any gain from the
disposition of our common stock by a U.S. Holder, such taxes may be treated as
foreign taxes eligible for credit against such holder’s U.S. federal income tax
liability (subject to certain limitations), and such U.S. Holder may be entitled
to certain benefits under the income tax treaty between the United States and
the PRC. U.S. Holders should consult their own tax advisors regarding the
creditability of any such PRC tax and their eligibility for the benefits of the
income tax treaty between the United States and the PRC.
68
Non-U.S.
Holders
Taxation
of Distributions
Any cash distribution we make to a
Non-U.S. Holder of shares of our common stock, to the extent paid out of our
current or accumulated earnings and profits (as determined under U.S. federal
income tax principles), will constitute a dividend for U.S. federal income tax
purposes. Unless we are treated as an “80/20 company” for U.S. federal
income tax purposes, as described below, any such dividend paid to a Non-U.S.
Holder with respect to shares of our common stock that is not effectively
connected with the Non-U.S. Holder’s conduct of a trade or business within the
United States, as described below, will be subject to U.S. federal withholding
tax at a rate of 30 percent of the gross amount of the dividend, unless such
Non-U.S. Holder is eligible for a reduced rate of withholding tax under an
applicable income tax treaty and provides proper certification of its
eligibility for such reduced rate (usually on an IRS Form W-8BEN). In
satisfying the foregoing withholding obligation with respect to a cash
distribution, we may withhold up to 30 percent of either (i) the gross amount of
the entire distribution, even if the amount of the distribution is greater than
the amount constituting a dividend, as described above, or (ii) the amount of
the distribution we project will be a dividend, based upon a reasonable estimate
of both our current and our accumulated earnings and profits for the taxable
year in which the distribution is made. If U.S. federal income tax is
withheld on the amount of a distribution in excess of the amount constituting a
dividend, the Non-U.S. Holder may obtain a refund of all or a portion of the
excess amount withheld by timely filing a claim for refund with the IRS. Any
such distribution not constituting a dividend will be treated, for U.S. federal
income tax purposes, first as reducing the Non-U.S. Holder’s adjusted tax basis
in its shares of our common stock (but not below zero) and, to the extent such
distribution exceeds the Non-U.S. Holder’s adjusted tax basis, as gain from the
sale or other disposition of the common stock, which will be treated as
described under “—Taxation on the Disposition of Common Stock”
below.
There is a possibility that we may
qualify as an “80/20 company” for U.S. federal income tax purposes. In
general, a U.S. corporation is an 80/20 company if at least 80 percent of its
gross income earned directly or from subsidiaries during an applicable testing
period is “active foreign business income.” The 80 percent test is
applied on a periodic basis. If we qualify as an 80/20 company, a
percentage of any dividend paid by us will not be subject to U.S. federal
withholding tax. A Non-U.S. Holder should consult with its own tax advisors
regarding the amount of any such dividend subject to withholding tax in
this circumstance.
Cash
Dividends we pay to a Non-U.S. Holder that are effectively connected with such
Non-U.S. Holder’s conduct of a trade or business within the United States (and,
if certain income tax treaties apply, are attributable to a U.S. permanent
establishment or fixed base maintained by the Non-U.S. Holder) will not be
subject to U.S. withholding tax, provided such Non-U.S. Holder complies with
certain certification and disclosure requirements (usually by providing an IRS
Form W-8ECI). Instead, such dividends will be subject to U.S. federal
income tax, net of certain deductions, at the same graduated individual or
corporate tax rates applicable to U.S. persons. If the Non-U.S. Holder is
a corporation, such dividends that are effectively connected income may also be
subject to a “branch profits tax” at a rate of 30 percent (or such lower rate as
may be specified by an applicable income tax treaty).
Taxation
on the Disposition of Common Stock
A Non-U.S. Holder will not be subject
to U.S. federal income tax in respect of gain recognized on a sale, exchange or
other disposition of our common stock, unless:
· the
gain is effectively connected with the conduct of a trade or business by the
Non-U.S. Holder within the U.S. (and,under certain income tax treaties, is
attributable to a U.S. permanent establishment or fixed base maintained by the
Non-U.S. Holder);
· the
Non-U.S. Holder is an individual who is present in the United States for 183
days or more in the taxable year of disposition and certain other conditions are
met; or
· we
are or have been a “United States real property holding
corporation” (“USRPHC”) for U.S. federal income tax purposes at any time
during the shorter of the five year period ending on the date of disposition or
the Non-U.S. Holder’s holding period for the common stock disposed of,
and, generally, in the case where our common stock is regularly traded
on an established securities market, the Non-U.S. Holder has owned, directly or
indirectly, more than 5 percent of our common stock at any time during the
shorter of the five year period ending on the date of disposition or the
Non-U.S. Holder’s holding period for the common stock disposed of. There can be
no assurance that our common stock will be treated as regularly traded on an
established securities market for this purpose.
Unless an applicable tax treaty
provides otherwise, gain described in the first and third bullet points above
will be subject to U.S. federal income tax, net of certain deductions, at the
same tax rates applicable to U.S. persons. Any gains described in the
first bullet point above of a Non-U.S. Holder that is a foreign corporation
may also be subject to an additional “branch profits tax” at a 30 percent rate
(or a lower applicable tax treaty rate). Any U.S. source capital gain of a
Non-U.S. Holder described in the second bullet point above (which may be offset
by U.S. source capital losses during the taxable year of the disposition) will
be subject to a flat 30 percent U.S. federal income tax (or a lower applicable
tax treaty rate).
69
In connection with the third bullet
point above, we will be classified as a USRPHC if (looking through certain
subsidiaries) the fair market value of our “United States real property
interests” equals or exceeds 50 percent of the sum of the fair market value of
our worldwide real property interests plus our other assets used or held
for use in a trade or business, as determined for U.S. federal income tax
purposes. We do not believe that we currently are a USRPHC, and we do not
anticipate becoming a USRPHC (although no assurance can be given that we will
not become a USRPHC in the future). Nevertheless, Non-U.S. Holders,
particularly those Non-U.S. Holders that could be treated as actually or
constructively holding more than 5 percent of our common stock, should consult
their own tax advisors regarding the U.S. federal income tax consequences
of owning and disposing of our common stock.
Information
Reporting and Backup Withholding
We generally must report annually to
the IRS and to each holder the amount of dividends and certain other
distributions we pay to such holder on our common stock and the amount of tax,
if any, withheld with respect to those distributions. In the case of a
Non-U.S. Holder, copies of the information returns reporting those distributions
and withholding may also be made available to the tax authorities in the country
in which the Non-U.S. Holder is a resident under the provisions of an applicable
income tax treaty or agreement. Information reporting is also generally
required with respect to proceeds from the sales and other dispositions of our
common stock to or through the United States office (and in certain cases, the
foreign office) of a broker.
In addition, backup withholding of U.S.
federal income tax, currently at a rate of 28 percent, will apply to
distributions made on our common stock to, and the proceeds from sales and other
dispositions of our common stock by, a non-corporate U.S. Holder
who:
· fails
to provide an accurate taxpayer identification number;
· is
notified by the IRS that backup withholding is required; or
· in
certain circumstances, fails to comply with applicable certification
requirements.
A Non-U.S. Holder may eliminate the
requirement for information reporting (other than with respect to distributions,
as described above) and backup withholding by providing certification of its
foreign status, under penalties of perjury, on a duly executed applicable IRS
Form W-8 or by otherwise establishing an exemption.
Backup withholding is not an additional
tax. Rather, the amount of any backup withholding will be allowed as a credit
against a U.S. Holder’s or a Non-U.S. Holder’s U.S. federal income tax liability
and may entitle such holder to a refund, provided that certain required
information is timely furnished to the IRS. Holders are urged to consult
their own tax advisors regarding the application of backup withholding and the
availability of and procedure for obtaining an exemption from backup withholding
in their particular circumstances.
70
MATERIAL
PRC INCOME TAX CONSIDERATIONS
The following discussion summarizes the
material PRC income tax considerations relating to the acquisition, ownership
and disposition of our common stock, purchased by an investor pursuant to this
offering. As used in this discussion, “we”, “our” and “us” refers only to China
Shandong Industries, Inc.
Resident
Enterprise Treatment
On March 16, 2007, the Fifth Session of
the Tenth National People’s Congress passed the Enterprise Income Tax Law of the
PRC (“EIT Law”), which became effective on January 1, 2008. Under the EIT
Law, enterprises are classified as “resident enterprises” and “non-resident
enterprises.” Pursuant to the EIT Law and its implementing rules,
enterprises established outside China whose “de facto management bodies” are
located in China are considered “resident enterprises” and subject to the
uniform 25 percent enterprise income tax rate on worldwide income.
According to the implementing rules of the EIT Law, “de facto management
body” refers to a managing body that in practice exercises overall management
control over the production and business, personnel, accounting and assets of an
enterprise.
On April 22, 2009, the State
Administration of Taxation issued the Notice on the Issues Regarding Recognition
of Enterprises that is Domestically Controlled as PRC Resident Enterprises Based
on the De Facto Management Body Criteria, which was retroactively effective as
of January 1, 2008. This notice provides that an overseas incorporated
enterprise that is controlled domestically will be recognized as a “tax-resident
enterprise” if it satisfies all of the following conditions: (i) the senior
management responsible for daily production/business operations are
primarily located in the PRC, and the location(s) where such senior management
execute their responsibilities are primarily in the PRC; (ii) strategic
financial and personnel decisions are made or approved by organizations or
personnel located in the PRC; (iii) major properties, accounting ledgers,
company seals and minutes of board meetings and stockholder meetings, etc., are
maintained in the PRC; and (iv) 50 percent or more of the board members with
voting rights or senior management habitually reside in the PRC.
Given the short history of the EIT Law
and lack of applicable legal precedent, it remains unclear how the PRC tax
authorities will determine the PRC tax resident status of a company organized
under the laws of a foreign (non-PRC) jurisdiction, such as us and Tianwei.
If the PRC tax authorities determine that we and/or Tianwei are a
“resident enterprise” for PRC enterprise income tax purposes, a number of tax
consequences could follow. First, we and/or Tianwei could be subject to
the enterprise income tax at a rate of 25 percent on our and/or Tianwei’s
worldwide taxable income, as well as PRC enterprise income tax reporting
obligations. Second, the EIT Law provides that dividend income between
“qualified resident enterprises” is exempt from income tax. As a result,
if we and Tianwei are treated as “qualified resident enterprises,” all dividends
paid from Shandong to Tianwei and from Tianwei to us would be exempt from PRC
tax.
As of the date of this prospectus,
there has not been a definitive determination as to the “resident enterprise” or
“non-resident enterprise” status of us or Tianwei. However, since it is
not anticipated that we or Tianwei would receive dividends or generate other
income in the near future, neither we nor Tianwei are expected to have any
income that would be subject to the 25 percent enterprise income tax on global
income in the near future. We and Tianwei will make any necessary tax
payment if we or Tianwei (based on future clarifying guidance issued by the
PRC), or the PRC tax authorities, determine that either we or Tianwei are a
resident enterprise under the EIT Law, and if we or Tianwei were to have income
in the future.
Dividends
from Shandong
If Tianwei is not treated as a resident
enterprise under the EIT Law, then dividends that Tianwei receives from Shandong
may be subject to PRC withholding tax. The EIT Law and the implementing
rules of the EIT Law provide that (A) an income tax rate of 25 percent will
normally be applicable to investors that are “non-resident enterprises,” or
non-resident investors, which (i) have an establishment or place of
business inside the PRC, and (ii) have income in connection with their
establishment or place of business that is sourced from the PRC or is
earned outside the PRC but has an actual connection with their establishment or
place of business inside the PRC, and (B) a PRC withholding tax at a rate of 10
percent will normally be applicable to dividends payable to non-resident
investors which (i) do not have an establishment or place of business in the PRC
or (ii) have an establishment or place of business in the PRC, but the relevant
income is not effectively connected with such establishment or place of
business, to the extent such dividends are derived from sources within the
PRC.
As described above, the PRC tax
authorities may determine the resident enterprise status of entities organized
under the laws of foreign jurisdictions on a case-by-case basis. We and
Tianwei are holding companies and substantially all of our income and that of
Tianwei may be derived from dividends. Thus, if we and/or Tianwei are
considered a “non-resident enterprise” under the EIT Law and the dividends paid
to us or Tianwei are considered income sourced within the PRC, such dividends
received may be subject to PRC withholding tax as described in the foregoing
paragraph.
As of the date of this prospectus,
there has not been a definitive determination as to the “resident enterprise” or
“non-resident enterprise” status of us or Tianwei. As described above,
however, Shandong is not expected to pay any dividends in the near future. We
and Tianwei will make any necessary tax withholding if, in the future, Shandong
were to pay any dividends and we or Tianwei (based on future clarifying guidance
issued by the PRC), or the PRC tax authorities, determine that we or Tianwei is
a non-resident enterprise under the EIT Law.
71
Dividends
that Non-PRC Resident Investors Receive From Us; Gain on the Sale or Transfer of
Our Common Stock
If dividends payable to (or gains
recognized by) our non-resident investors are treated as income derived from
sources within the PRC, then the dividends that non-resident investors receive
from us and any such gain on the sale or transfer of our common
stock may be subject to taxes under the PRC tax laws.
Under the EIT Law and the implementing
rules of the EIT Law, PRC withholding tax at the rate of 10 percent is
applicable to dividends payable to non-resident investors which (i) do not have
an establishment or place of business in the PRC or (ii) have an establishment
or place of business in the PRC but the relevant income is not effectively
connected with the establishment or place of business, to the extent that such
dividends have their sources within the PRC. Similarly, any gain realized
on the transfer of our common stock by such investors is also subject to 10
percent PRC income tax if such gain is regarded as income derived from sources
within the PRC.
The dividends paid by us to
non-resident investors with respect to our common stock, or gain non-resident
investors may realize from the sale or transfer of our common stock, may be
treated as PRC-sourced income and, as a result, may be subject to PRC tax at a
rate of 10 percent. In such event, we may be required to withhold a 10
percent PRC tax on any dividends paid to non-resident investors. In addition,
non-resident investors in our common stock may be responsible for paying PRC tax
at a rate of 10 percent on any gain realized from the sale or transfer of our
common stock if such non-resident investors and the gain satisfy the
requirements under the EIT Law and its implementing rules. However, under
the EIT Law and its implementing rules, we would not have an obligation to
withhold PRC income tax in respect of the gains that non-resident investors
(including U.S. investors) may realize from the sale or transfer of our common
stock.
If we were to pay any dividends in the
future, and if we (based on future clarifying guidance issued by the PRC), or
the PRC tax authorities, determine that we must withhold PRC tax on any
dividends payable by us under the EIT Law, we will make any necessary tax
withholding on dividends payable to our non-resident investors. If
non-resident investors as described under the EIT Law (including U.S. investors)
realize any gain from the sale or transfer of our common stock and if such gain
were considered as PRC-sourced income, such non-resident investors would be
responsible for paying 10 percent PRC income tax on the gain from the sale or
transfer of our common stock. As indicated above, under the EIT Law and
its implementing rules, we would not have an obligation to withhold PRC income
tax in respect of the gains that non-resident investors (including U.S.
investors) may realize from the sale or transfer of our common
stock.
On December 15, 2009, the State
Administration of Taxation (“SAT”) released Circular Guoshuihan No. 698
(“Circular 698”) that reinforces the taxation of non-listed equity
transfers by non-resident enterprises through overseas holding vehicles.
Circular 698 addresses indirect share transfers as well as other issues.
Circular 698 is retroactively effective from January 1 2008.
According to Circular 698, where a foreign (non-PRC resident) who
indirectly holds shares in a PRC resident enterprise through a non-PRC offshore
holding company indirectly transfers equity interests in a PRC resident
enterprise by selling the shares of the offshore holding company, and the
latter is located in a country or jurisdiction where the effective tax burden is
less than 12.5 percent or where the offshore income of his, her, or its
residents is not taxable, the foreign investor is required to provide the PRC
tax authority in charge of that PRC resident enterprise with certain relevant
information within 30 days of the transfer. The tax authorities in charge
will evaluate the offshore transaction for tax purposes. In the event that
the tax authorities determine that such transfer is abusing forms of
business organization and a reasonable commercial purpose for the offshore
holding company other than the avoidance of PRC income tax liability is lacking,
the PRC tax authorities will have the power to re-assess the nature of the
equity transfer under the doctrine of substance over form. A reasonable
commercial purpose may be established when the overall international (including
U.S.) offshore structure is set up to comply with the requirements of
supervising authorities of international (including U.S.) capital markets.
If the SAT’s challenge of a transfer is successful, it may deny the existence of
the offshore holding company that is used for tax planning purposes and subject
the seller to PRC tax on the capital gain from such transfer. Since
Circular 698 has a short history, there is uncertainty as to its application.
We (or a foreign investor) may become at risk of being taxed under
Circular 698 and may be required to expend valuable resources to comply with
Circular 698 or to establish that we (or such foreign investor) should not be
taxed under Circular 698, which could have a material adverse effect on our
financial condition and results of operations (or such foreign investor’s
investment in us).
Penalties
for Failure to Pay Applicable PRC Income Tax
Non-resident investors in us may be
responsible for paying PRC tax at a rate of 10 percent on any gain realized from
the sale or transfer of our common stock after the consummation
of this offering if such non-resident investors and the gain satisfy the
requirements under the EIT Law and its implementing rules, as described
above.
72
According to the EIT Law and its
implementing rules, the PRC Tax Administration Law (the “Tax Administration
Law”) and its implementing rules, the Provisional Measures for the
Administration of Withholding of Enterprise Income Tax for Non-resident
Enterprises (the “Administration Measures”) and other applicable PRC laws or
regulations (collectively the “Tax Related Laws”), where any gain derived by a
non-resident investor from the sale or transfer of our common stock is subject to any income
tax in the PRC, and such non-resident investor fails to file any tax return or
pay tax in this regard pursuant to the Tax Related Laws, such investor may be
subject to certain fines, penalties or punishments, including without
limitation: (1) if a non-resident investor fails to file a tax return and
present the relevant information in connection with tax payments, the competent
tax authorities shall order it to do so within the prescribed time limit
and may impose a fine up to RMB 2,000, and in egregious cases, may impose a fine
ranging from RMB 2,000 to RMB 10,000; (2) if a non-resident investor fails to
file a tax return or fails to pay all or part of the amount of tax payable,
the non-resident investor shall be required to pay the unpaid tax amount
payable, a surcharge on overdue tax payments (the daily surcharge is 0.05
percent) of the overdue amount, beginning from the day the deferral begins, and
a fine ranging from 50 percent to 500 percent of the unpaid amount of the tax
payable; (3) if a non-resident investor fails to file a tax return or pay the
tax within the prescribed time limit according to the order by the PRC tax
authorities, the PRC tax authorities may collect and check information about the
income items of the non-resident investor in the PRC and other payers (the
“Other Payers”) who will pay amounts to such non-resident investor, and send a
“Notice of Tax Issues” to the Other Payers to collect and recover the tax
payable and impose overdue fines on such non-resident investor from the amounts
otherwise payable to such non-resident investor by the Other Payers; (4) if a
non-resident investor fails to pay the tax payable within the prescribed time
limit as ordered by the PRC tax authorities, a fine may be imposed on the
non-resident investor ranging from 50 percent to 500 percent of the unpaid
tax payable, and the PRC tax authorities may, upon approval by the director of
the tax bureau (or sub-bureau) of, or higher than, the county level, take the
following compulsory measures: (i) notify in writing the non-resident investor’s
bank or other financial institution to withhold from the account thereof for
payment of the amount of tax payable, and (ii) detain, seal off, or sell by
auction or on the market the non-resident investor’s commodities, goods or other
property in a value equivalent to the amount of tax payable; or (5) if the
non-resident investor fails to pay all or part of the amount of tax payable or
surcharge for overdue tax payment, and can not provide a guarantee to the tax
authorities, the tax authorities may notify the frontier authorities to prevent
the non-resident investor or its legal representative from leaving the
PRC.
UNDERWRITING
We have entered into an underwriting
agreement with Rodman & Renshaw, LLC regarding the common stock being
offered under this prospectus. In connection with this offering and
subject to certain conditions, Rodman & Renshaw, LLC has agreed to purchase,
and we have agreed to sell, the number of shares set forth below.
Underwriter
|
Number of
Shares of
Common Stock
|
|||
Rodman
& Renshaw, LLC
|
||||
Total
|
The underwriting agreement provides
that the underwriter is obligated to purchase all of the shares offered by this
prospectus, other than those covered by the over-allotment option, if any shares
are purchased. The underwriting agreement also provides that the
underwriter’s obligations to pay for and accept delivery of the shares is
subject to the approval of certain legal matters by counsel and other
conditions, including, among other things, that (i) no stop order suspending the
effectiveness of the registration statement be in effect, (ii) no proceedings
against us will have been instituted or threatened by the SEC, (iii) we will not
have suffered a material adverse affect, and (iv) the underwriters will have
received certain opinions and auditor comfort letters.
The underwriter has advised us that it
proposes to offer our common stock to the public initially at the offering price
set forth on the cover page of this prospectus and to selected dealers at that
price less a concession of not more than $ [___] per share. The
underwriter and selected dealers may re-allow a concession to other dealers,
including the underwriter, of not more than $[___] per common share. After
the public offering of the common stock complete, the offering price, the
concessions to selected dealers and the re-allowance to their dealers may be
changed by the underwriter.
The
underwriter has informed us that they do not expect to confirm sales of our
common stock offered by this prospectus on a discretionary basis.
Over-allotment
Option. Pursuant to the underwriting agreement, we have
granted the underwriter an option, exercisable for 45 days from the date of this
prospectus, to purchase up to an additional shares of [__________] on the same
terms as the other shares being purchased by the underwriter from us. The
option may be exercised solely to cover over-allotments, if any, in the sale of
the shares that the underwriter has agreed to purchase. If the
over-allotment option is exercised in full, the total public offering price,
underwriting discount, offering expenses and net proceeds to us after offering
expenses will be $[___], $[___], $[___] and $[___],
respectively.
Stabilization and Other
Transactions. The SEC rules generally prohibit the underwriter
from trading in our securities on the open market during this offering.
However, the underwriter is allowed to engage in some open market
transactions and other activities during this offering that may cause the market
price of our securities to be above or below that which would otherwise prevail
in the open market. These activities may include stabilization, short
sales and over-allotments, syndicate covering transactions and penalty
bids.
73
· Stabilizing
transactions consist of bids or purchases made by the managing underwriter for
the purpose of preventing or slowing a decline in the market price of our
securities while this offering is in progress.
· Short
sales and over-allotments occur when the managing underwriter, on behalf of the
underwriting syndicate, sells more of our shares than they purchase from us in
this offering. In order to cover the resulting short position, the
managing underwriter may exercise the over-allotment option described above
and/or may engage in syndicate covering transactions. There is no contractual
limit on the size of any syndicate covering transaction. The underwriters
will deliver a prospectus in connection with any such short sales.
Purchasers of shares sold short by the underwriters are entitled to the
same remedies under the federal securities laws as any other purchaser of units
covered by the registration statement.
· Syndicate
covering transactions are bids for or purchases of our securities on the open
market by the managing underwriter on behalf of the underwriters in order to
reduce a short position incurred by the managing underwriter on behalf of the
underwriters.
·
A penalty bid is an arrangement permitting the managing underwriter to reclaim
the selling concession that would otherwise accrue to an underwriter if the
common stock originally sold by the underwriter were later repurchased by the
managing underwriter and therefore was not effectively sold to the public by
such underwriter.
If the underwriter commences these
activities, it may discontinue them at any time without notice. The
underwriter may carry out these transactions on the Nasdaq Stock Market, in the
over-the-counter market or otherwise.
Indemnification. 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 SEC, indemnification for liabilities
under the Securities Act is against public policy as expressed in the Securities
Act and is therefore unenforceable.
Underwriter’s Compensation. We have
agreed to sell the shares to the underwriter at the initial offering price of
$ [___] per share, which represents the public offering price of the
shares set forth on the cover page of this prospectus less a 7% underwriting
discount. The underwriting agreement also provides that the underwriter will be
paid a non-accountable expense allowance equal to 1% of the gross proceeds from
the sale of the shares offered by this prospectus, but not the shares issuable
upon exercise of the over-allotment option. The expenses for background
checks, travel and lodging and due diligence are estimated at $[___] and are
included in the accountable expenses.
The underwriting agreement also
provides that in the event the offering is terminated, the $[___] expense
advance paid to the underwriter will be returned to the extent offering expenses
are not actually incurred.
On completion of this offering, we
will sell to the underwriter for $100 options to purchase up to [___]
shares, exercisable at a price per share of $[___], which is equal
to [___] % of the initial public offering price. The options
will be exercisable for shares at any time beginning six months after the
effective date of this offering, and will expire on the fifth anniversary of the
effective date. To the extent not registered the holders of the options
will have unlimited piggy-back registration rights to include our shares of
common stock issuable upon exercise of the options as part of a registration
filed by us subject to certain exceptions, at our expense for 7 years beginning
one year from the effective date of this offering. To the extent not
registered and available for resale, the holders of the options will have a one
time demand right to cause us to register the common stock underlying the
options at our expense for 4 years beginning one year from the effective date of
this offering. Pursuant to the rules of Financial Industry Regulatory
Authority (FINRA), the options may not be sold, transferred, assigned, pledged,
or hypothecated, or be the subject of any hedging, short sale, derivative, put,
or call transaction that would result in the effective economic disposition of
the securities by any person for a period of 180 days immediately following the
date of effectiveness or commencement of sales of the offering, except to any
member participating in the offering and the officers or partners thereof, or
as otherwise permitted under FINRA Corporate Financing
Rule.
The holder of these options will
have, in that capacity, no voting, dividend or other shareholder rights.
Any profit realized on the sale of the shares issuable upon exercise of
these options may be deemed to be additional underwriting compensation.
The securities underlying these options are being registered pursuant to
the registration statement of which this prospectus is a part and we have agreed
to maintain such registration during the term of these options.
During the term of these options, the holder thereof is given the
opportunity to profit from a rise in the market price of our common stock.
We may find it more difficult to raise additional equity capital while
these options are outstanding. At any time at which these options are
likely to be exercised, we may be able to obtain additional equity capital on
more favorable terms.
The following table summarizes the
underwriting discount and non-accountable expense allowance we will pay to the
underwriter. These amounts are shown based on a selling price of $[___] per
share and both no exercise and full exercise of the underwriter’s over-allotment
option.
74
Total
|
||||||||||||
|
Per share
|
Without
over-allotment
|
With
over-allotment
|
|||||||||
Underwriting
discount
|
$ | $ | $ | |||||||||
Non-accountable
expense allowance
|
$ | |||||||||||
Proceeds,
before expenses (other than the non-accountable expense allowance), to
us
|
The other expenses of the offering that
we must pay are estimated to be approximately $ [___].
Foreign
Regulatory Restrictions on Purchase of the Common Stock
No action may be taken in any
jurisdiction other than the United States that would permit a public offering of
the common stock or the possession, circulation or distribution of this
prospectus in any jurisdiction where action for that purpose is required.
Accordingly, the common stock may not be offered or sold, directly or
indirectly, and neither the prospectus nor any other offering material or
advertisements in connection with the common stock 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 underwriter may, subject to the applicable
foreign laws, also offer the common shares to certain institutions or accredited
persons in the following countries:
Australia
If this document is
issued or distributed in Australia it is issued or distributed to "wholesale
clients" only, not to "retail clients". For the purposes of this
paragraph, the terms "wholesale client" and "retail client" have the meanings
given in section 761 of the Australian Corporations Act 2001
(Cth). This document is not a disclosure document under the
Australian Corporations Act, has not been lodged with the Australian Securities
& Investments Commission and does not purport to include the information
required of a disclosure document under the Australian Corporations
Act. Accordingly, (i) the offer of securities under this document is
only made to persons to whom it is lawful to offer such securities under one or
more exemptions set out in the Australian Corporations Act, (ii) this document
is only made available in Australia to those persons referred to in clause (i)
above, and (iii) the offeree must be sent a notice stating in substance that, by
accepting this offer, the offeree represents that the offeree is such a person
as referred to in clause (i) above, and, unless permitted under the Australian
Corporations Act, agrees not to sell or offer for sale within Australia any of
the securities sold to the offeree within 12 months after its transfer to the
offeree under this document.
China
This prospectus has not been and
will not be circulated or distributed in the PRC, and securities 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.
DIFC
DIFC and
UAE have different requirements and, as a result, a generic legend for each is
provided below.
UAE
The offering has not been approved or
licensed by the Central Bank of the United Arab Emirates (the "UAE"), Securities
and Commodities Authority of the UAE and/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 Financial Services Authority (the
"DFSA"), a regulatory authority of the Dubai International Financial Centre (the
"DIFC").
The offering 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 NASDAQ Dubai Listing Rules,
accordingly, or otherwise. The securities offered hereby may not be
offered to the public in the UAE and/or any of the free zones, including, in
particular, the DIFC.
The securities offered hereby may be
offered and 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, including, in particular, the DIFC.
75
The company represents and warrants
that the securities offered hereby 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."
Dubai
The
issuer is not licensed by the Dubai Financial Services Authority ("DFSA") to
provide financial services in the Dubai International Financial Centre
("DIFC"). The offering has not been approved or licensed by the
Central Bank of the United Arab Emirates (the "UAE"), Securities and Commodities
Authority of the UAE and/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 DFSA, a regulatory of the DIFC.
The offering 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 NASDAQ Dubai Listing Rules,
accordingly, or otherwise. The securities offered hereby may not be
offered to the public in the UAE and/or any of the free zones, including, in
particular, the DIFC.
The securities offered hereby may be
offered and 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, including, in particular, the DIFC.
The company represents and warrants
that the securities offered hereby 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.
Israel
The common stock offered by this
prospectus has not been approved or disapproved by the Israeli Securities
Authority (the ISA), or ISA, nor has such common stock been registered for sale
in Israel. The shares may not be offered or sold, directly or
indirectly, to the public in Israel, absent the publication of a
prospectus. The ISA has not issued permits, approvals or licenses in
connection with the offering or publishing the prospectus; nor has it
authenticated the details included herein, confirmed their reliability or
completeness, or rendered an opinion as to the quality of the common stock being
offered. Any resale, directly or indirectly, to the public of the
common stock offered by this prospectus is subject to restrictions on
transferability and must be effected only in compliance with the Israeli
securities laws and regulations.
Pakistan
The investors / subscribers in Pakistan
will be responsible for ensuring their eligibility to invest under the
applicable laws of Pakistan and to obtain any regulatory consents if required
for such purpose.
Saudi
Arabia
No offering of shares is being made in
the Kingdom of Saudi Arabia, and no agreement relating to the sale of the shares
will be concluded in Saudi Arabia. This document is provided at
the request of the recipient and is being forwarded to the address specified by
the recipient. Neither the agent nor the offering have been licensed
by the Saudi’s Securities and Exchange Commission or are otherwise regulated by
the laws of the Kingdom of Saudi Arabia.
Therefore, no services relating to the
offering, including the receipt of applications and/or the allotment of the
shares, may be rendered within the Kingdom by the agent or persons representing
the offering.
United
Kingdom
The content of this Memorandum has not
been issued or approved by an authorized person within the meaning of the United
Kingdom Financial Services and Markets Act 2000 ("FSMA"). Reliance on
this Memorandum for the purpose of engaging in any investment activity may
expose an Investor to a significant risk of losing all of the property or other
assets invested. This Memorandum does not constitute a Prospectus
within the meaning of the FSMA and is issued in reliance upon one or more of the
exemptions from the need to issue such a prospectus contained in section 86 of
the FSMA.
76
LEGAL
MATTERS
Certain legal matters as to certain
United States federal and New York law will be passed upon for us by Gusrae,
Kaplan, Bruno & Nusbaum PLLC. Certain legal matters will be passed
upon for the underwriters by Loeb & Loeb LLP, New York, New York.
Legal matters as to PRC law will be passed upon for us by B&D Law Firm.
Gusrae, Kaplan, Bruno & Nusbaum PLLC will rely upon B&D Law Firm
with respect to matters governed by PRC law.
EXPERTS
Our consolidated financial statements
as of December 31, 2008 and 2009 and Shandong’s financial statements for the
years ended December 31, 2008 and 2009 included in this prospectus and in the
registration statement have been audited by Bongiovanni & Associates,
C.P.A.'s, an independent registered public accounting firm, to the extent and
for the periods set forth in their reports appearing elsewhere herein and in the
registration statement, and are included in reliance on such reports, given the
authority of said firm as an expert in auditing and accounting.
The offices of Bongiovanni &
Associates, C.P.A.'s are located at 19720 Jetton Road, 3rd Floor, Cornelius,
North Carolina 28031.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a
registration statement on Form S-1 under the Securities Act with respect to
shares of common stock offered in this offering. This prospectus does
not contain all of the information set forth in the registration
statement. For further information with respect to us and the shares
of our common stock, we refer you to the registration statement and to the
attached exhibits. With respect to each such document filed as an
exhibit to the registration statement, we refer you to the exhibit for a more
complete description of the matters involved.
You may inspect our registration
statement and the attached exhibits and schedules without charge at the public
reference facilities maintained by the SEC at 100 F Street, N.E., Washington,
D.C. 20549. You may obtain copies of all or any part of our
registration statement from the SEC upon payment of prescribed
fees. You may obtain information on the operation of the public
reference room by calling the SEC at 1-800-SEC-0330.
Our SEC filings, including the
registration statement and the exhibits filed with the registration statement,
are also available from the SEC’s website at www.sec.gov, which contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC.
77
FINANCIAL
STATEMENTS
CHINA
SHANDONG INDUSTRIES, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(Audited)
Index
to Consolidated Financial Statements
Report
of Independent Registered Public Accounting Firm
|
F-1
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-2
|
Consolidated
Statements of Income and Comprehensive Income for the years
ended December 31, 2009 and 2008
|
F-3
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009 and
2008
|
F-4
|
Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2009
and 2008
|
F-5
|
Notes
to Audited Consolidated Financial Statements
|
F-6-F-23
|
CHINA
SHANDONG INDUSTRIES, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE NIINE MONTHS ENDED
SEPTEMBER
30, 2010 AND 2009
(Unaudited)
Index
to Financial Statements
Consolidated
Balance Sheets as of September 30, 2010 and December 31, 2009
(Unaudited)
|
F-24
|
Consolidated
Statements of Income and Comprehensive Income
(Unaudited)
|
F-25
|
Consolidated
Statements of Cash Flows (Unaudited)
|
F-26
|
Notes
to Consolidated Financial Statements (Unaudited)
|
F-27-F-36
|
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
|
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
|
Audited
Consolidated Financial Statements
|
For
The Years Ended December 31, 2009 And 2008
|
(With
Report of Independent Registered Public Accounting Firm
Thereon)
|
Index
to Audited Consolidated Financial Statements
Pages
|
||
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets
|
F-2
|
|
Consolidated
Statements of Income and Comprehensive Income
|
F-3
|
|
Consolidated
Statement of Cash flows
|
F-4
|
|
Consolidated
Statement of Stockholders’ Equity
|
F-5
|
|
Notes
to Audited Consolidated Financial Statements
|
F-6
– F-23
|
BONGIOVANNI
& ASSOCIATES, C.P.A.’s
19720
Jetton Road, 3rd
Floor
Cornelius,
North Carolina 28031 (USA)
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors of
China
Shandong Industries, Inc. (FKA Mobile Presence Technologies, Inc.)
We have
audited the accompanying consolidated balance sheets of China Shandong
Industries, Inc. and it wholly owned subsidiaries (FKA Mobile Presence
Technologies, Inc.) (“The Company”) as of December 31, 2009 and 2008, and
the consolidated statements of income, stockholders’ equity and comprehensive
income, and cash flows for the years ended December 31, 2009 and
2008. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have nor were we engaged to perform an audit of its internal control
over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness for the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of China Shandong
Industries, Inc. and its wholly owned subsidiaries (FKA Mobile Presence
Technologies, Inc.) as of December 31, 2009 and 2008, and the consolidated
results of its operations and its consolidated cash flows for the years ended
December 31, 2009 and 2008, in conformity with accounting principles generally
accepted in the United States of America.
/s/
Bongiovanni & Associates, C.P.A’s
Bongiovanni
& Associates, C.P.A’s
Certified
Public Accountants
Cornelius,
North Carolina
The
United States of America
January
22, 2010, except for Note 23,
for which
the date is April 13, 2010;
except
for Note 3, for which the date
is June
10, 2010 and except for the
1-for-2
reverse stock split, for which
the
date is September 1, 2010 and except for the
1-for-1.5
reverse stock split, for which
the
date is December
22, 2010
F-1
China
Shandong Industries, Inc. and Subsidiaries
|
(FKA
Mobile Presence Technologies, Inc.)
|
Consolidated
Balance Sheets
|
As
of December 31, 2009 and
2008
|
(Restated)
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$
|
2,185,839
|
$
|
1,751,997
|
||||
Trade
accounts receivable
|
16,833,798
|
6,339,459
|
||||||
Inventories
|
10,353,746
|
17,336,566
|
||||||
Prepaid
expenses
|
375,493
|
107,128
|
||||||
Deposits
|
767,204
|
-
|
||||||
Other
receivables
|
295,752
|
22,499
|
||||||
TOTAL
CURRENT ASSETS
|
30,811,832
|
25,557,649
|
||||||
FIXED
ASSETS
|
||||||||
Property,
plant, and equipment
|
10,656,454
|
10,276,060
|
||||||
Accumulated
depreciation
|
(3,309,354
|
)
|
(2,437,091
|
)
|
||||
NET
FIXED ASSETS
|
7,347,100
|
7,838,969
|
||||||
OTHER
ASSETS
|
||||||||
Land
occupancy rights, net
|
76,834
|
82,127
|
||||||
Construction
in progress
|
6,940,632
|
6,372
|
||||||
TOTAL
OTHER ASSETS
|
7,017,466
|
88,499
|
||||||
TOTAL
ASSETS
|
$
|
45,176,398
|
$
|
33,485,117
|
||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Short-term
borrowings
|
$
|
8,054,831
|
$
|
5,946,962
|
||||
Current
portion of notes payable
|
-
|
2,638,136
|
||||||
Accounts
payable
|
240,290
|
362,549
|
||||||
Other
payables and accrued liabilities
|
731,329
|
1,118,408
|
||||||
Deposits
received in advance
|
56,849
|
160,074
|
||||||
Taxes
payable
|
643,476
|
266,907
|
||||||
Deferred
tax liabilities
|
677,909
|
-
|
||||||
TOTAL
CURRENT LIABILITIES
|
10,404,684
|
10,493,036
|
||||||
TOTAL
LIABILITIES
|
10,404,684
|
10,493,036
|
||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Preferred
stock ($.0001 par value, 5,000,000 authorized, none issued and
outstanding)
|
-
|
-
|
||||||
Common
stock ($.0001 par value, 100,000,000 authorized, 8,575,000 issued and
outstanding)
|
858
|
772
|
||||||
Additional
paid in capital
|
7,799,142
|
7,799,228
|
||||||
Statutory
and discretionary surplus reserve
|
3,608,243
|
3,608,243
|
||||||
Accumulated
other comprehensive income (loss)
|
(25,022
|
)
|
216,500
|
|||||
Retained
earnings
|
23,388,493
|
11,367,338
|
||||||
TOTAL
STOCKHOLDERS' EQUITY
|
34,771,714
|
22,992,081
|
||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
45,176,398
|
$
|
33,485,117
|
See
accompanying notes to these consolidated financial statements and auditors'
report.
F-2
China
Shandong Industries, Inc. and Subsidiaries
|
(FKA
Mobile Presence Technologies, Inc.)
|
Consolidated
Statements of Income and Comprehensive Income
|
For
the years ended December 31, 2009 and
2008
|
(Restated)
|
||||||||
2009
|
2008
|
|||||||
Revenues
|
||||||||
Sales
|
$
|
69,435,044
|
$
|
42,197,393
|
||||
Cost
of goods sold (excluding depreciation and
amortization)
|
49,360,775
|
31,570,829
|
||||||
Operating
expenses
|
||||||||
Selling
and marketing
|
831,245
|
686,104
|
||||||
Research
and development expenses
|
502,584
|
403,339
|
||||||
General
and administrative
|
1,463,818
|
1,464,250
|
||||||
Total
Operating Expenses
|
2,797,647
|
2,553,693
|
||||||
Income
from operations
|
17,276,623
|
8,072,871
|
||||||
Other
income (expenses)
|
||||||||
Finance
income (expense)
|
(753,093
|
)
|
(751,865
|
)
|
||||
Other
income
|
202,851
|
367,099
|
||||||
Non-operating
income (expense)
|
(611,339
|
)
|
27,807
|
|||||
Total
other income (expense)
|
(1,161,581
|
)
|
(356,959
|
)
|
||||
Income
before income taxes
|
16,115,042
|
7,715,912
|
||||||
Income
taxes – current
|
3,415,978
|
1,953,918
|
||||||
Income
taxes - deferred
|
677,909
|
-
|
||||||
Net
income
|
12,021,155
|
5,761,994
|
||||||
Other
comprehensive income
|
||||||||
Foreign
currency translation adjustment
|
(241,522
|
)
|
746,119
|
|||||
Comprehensive
income
|
$
|
11,779,634
|
$
|
6,508,113
|
||||
Earnings
per common share
|
||||||||
Basic
|
$
|
1.47
|
$
|
0.75
|
||||
Fully
diluted
|
$
|
1.47
|
$
|
0.75
|
||||
Weighted
average common shares outstanding
|
||||||||
Basic
|
8,146,250
|
7,717,500
|
||||||
Fully
diluted
|
8,165,139
|
7,717,500
|
See
accompanying notes to these consolidated financial statements and auditors’
report.
F-3
China
Shandong Industries, Inc. and Subsidiaries
|
(FKA
Mobile Presence Technologies, Inc.)
|
Consolidated
Statements of Cash Flows
|
For
the years ended December 31, 2009 and
2008
|
(Restated)
|
(Restated)
|
|||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
12,021,155
|
5,761,994
|
||||||
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
||||||||
Depreciation
|
808,101
|
656,700
|
||||||
Amortization
|
5,293
|
5,293
|
||||||
Loss
on disposal of property, plant and equipment
|
626,258
|
-
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Trade
accounts receivable
|
(10,498,909
|
)
|
(1,576,587
|
)
|
||||
Prepaid
expenses
|
(268,063
|
)
|
520,539
|
|||||
Inventories
|
6,969,737
|
(6,440,180
|
)
|
|||||
Other
receivables
|
(274,030
|
)
|
182,387
|
|||||
Deposits
|
(767,204
|
)
|
-
|
|||||
Accounts
payable
|
(121,932
|
)
|
(493,591
|
)
|
||||
Taxes
payable
|
376,615
|
592,864
|
||||||
Deferred
tax liabilities
|
677,909
|
-
|
||||||
Other
payables and accrued liabilities
|
(385,017
|
)
|
(303,540
|
)
|
||||
Deposits
received in advance
|
(103,060
|
)
|
153,666
|
|||||
NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
9,066,854
|
(940,455
|
)
|
|||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Disposals
of property, plant, and equipment
|
-
|
293,904
|
||||||
Expenditures
for property, plant, and equipment
|
(1,121,964
|
)
|
(1,094,614
|
)
|
||||
Additions
to construction in progress
|
(6,931,355
|
)
|
125,685
|
|||||
NET
CASH (USED IN) INVESTING ACTIVITIES
|
(8,053,319
|
)
|
(675,026
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Principal
repayments of short term borrowings
|
(3,676,471
|
)
|
(360,969
|
)
|
||||
Proceeds
from short term borrowings
|
5,787,983
|
1,754,245
|
||||||
Dividend
distribution
|
-
|
(224,755
|
)
|
|||||
Borrowings
of notes payable
|
-
|
6,359,126
|
||||||
Repayments
of notes payable
|
(2,635,020
|
)
|
(4,893,495
|
)
|
||||
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
(523,508
|
)
|
2,634,152
|
|||||
Foreign
currency adjustment
|
(56,185
|
)
|
156,751
|
|||||
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
433,842
|
1,175,422
|
||||||
CASH
AND CASH EQUIVALENTS:
|
||||||||
Beginning
of year
|
1,751,997
|
576,575
|
||||||
End
of year
|
$
|
2,185,839
|
$
|
1,751,997
|
||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||
Cash
paid during the year for:
|
||||||||
Interest
|
$
|
621,619
|
$
|
566,289
|
||||
Taxes
|
$
|
3,415,978
|
$
|
1,953,918
|
See
accompanying notes to these consolidated financial statements and auditors'
report.
F-4
China
Shandong Industries, Inc. and Subsidiaries
|
(FKA
Mobile Presence Technologies, Inc.)
|
Consolidated
Statements of Stockholders' Equity
|
For
the years ended December 31, 2009 and
2008
|
Statutory
|
Accumulated
|
|||||||||||||||||||||||||||||||||||
Common
Stock,
|
Preferred
Stock,
|
Additional
|
and
|
Other
|
Total
|
|||||||||||||||||||||||||||||||
$.0001
par value
|
$.0001
par value
|
Paid
in
|
Surplus
|
Income
|
Retained
|
Stockholders'
|
||||||||||||||||||||||||||||||
(Shares)
|
(Amount)
|
(Shares)
|
(Amount)
|
Capital
|
Reserve
|
(Loss)
|
Earnings
|
Equity
|
||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||
Balances
as of January 1, 2008 (Restated)
|
7,717,500 | $ | 772 | - | $ | - | $ | 7,799,228 | $ | 3,608,243 | $ | (529,618 | ) | $ | 5,605,344 | $ | 16,483,969 | |||||||||||||||||||
Net
income for the year ended December 31, 2008
|
- | - | - | - | - | - | - | 5,761,994 | 5,761,994 | |||||||||||||||||||||||||||
Foreign
currency translation gain for 2008
|
- | - | - | - | - | - | 746,118 | - | 746,118 | |||||||||||||||||||||||||||
Balances
as of December 31, 2008
|
7,717,500 | $ | 772 | - | $ | - | $ | 7,799,228 | $ | 3,608,243 | $ | 216,500 | $ | 11,367,338 | $ | 22,992,081 | ||||||||||||||||||||
Recapitalization
due to reverse acquisition
|
857,500 | 86 | - | - | (86 | ) | - | - | - | - | ||||||||||||||||||||||||||
Net
income for the year ended December 31, 2009
|
- | - | - | - | - | - | - | 12,021,155 | 12,021,155 | |||||||||||||||||||||||||||
Foreign
currency translation loss for 2009
|
- | - | - | - | - | - | (241,522 | ) | - | (241,522 | ) | |||||||||||||||||||||||||
Balances
as of December 31, 2009 (Restated)
|
8,575,000 | $ | 858 | - | $ | - | $ | 7,799,142 | $ | 3,608,243 | $ | (25,022 | ) | $ | 23,388,493 | $ | 34,771,714 |
See
accompanying notes to these consolidated financial statements and auditors'
report.
F-5
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
1.
ORGANIZATION AND BUSINESS BACKGROUND
China
Shandong Industries Inc. (the “Company”) was incorporated on February 13, 2007
under the laws of the State of Delaware as “Mobile Presence Technologies,
Inc”. On December 3, 2009, the Company changed its name to China Shandong
Industries, Inc.
On
October 22, 2009, the Company entered into a Stock Exchange and Reorganization
Agreement (the “Agreement”), by and among the Company, Tianwei International
Development Corporation, an Oregon Corporation (“TIDC”), CAOPU Enterprise
Limited, a company organized under the laws of the British Virgin Islands
(“Caopu”), London Financial Group Ltd., a company organized under the laws of
the British Virgin Islands (“LFG”), Phoebus Vision Investment Developing Group,
Ltd., a company organized under the laws of the British Virgin Islands ( “ Phoebus”), and Timothy
Lightman (“TL”), pursuant to which the Company acquired all of the issued and
outstanding capital stock of TIDC owned by each of CAOPU, LFG and Phoebus in
exchange for an issuance by the Company of an aggregate of 7,717,500 shares of
Common Stock of the Company, with a par value of $0.0001 per share (the “MBPI
Common Stock”), to Caopu, LFG and Phoebus. The shares of MBPI Common Stock were
issued pursuant to the exemption from registration provided under Section 4(2)
of the Securities Act of 1933, as amended, and Rule 506 promulgated
thereunder.
In
addition, TL, the owner of 4,875,000 shares of MBPI Common Stock (“TL’s
MBPI Shares”), representing approximately 93% of the 5,232,500 issued and
outstanding shares of the Company’s Common Stock, delivered a stock certificate
or stock certificates representing 4,375,000 of TL’s MBPI Shares to the
Company for cancellation.
On
November 5, 2009, pursuant to a separate Assignment and Assumption Agreement by
and between the Company and TL, the Company assigned, in fee simple absolute,
all of its assets of any kind whatsoever excepting only its rights under the
Agreement, including, but not limited to those assets related to its proposed
cellular telephone application to TL. TL assumed all of the indebtedness or
other obligations of the Company in existence on the date hereof, excluding only
its obligation to perform under the Agreement, including, but limited to any
obligations for attorney fees, accountant fees, taxes and transfer agent fees
and agreed to indemnify and hold the Company harmless against the same provided
the Company gave prompt notice of any claim for indemnification.
The
transaction was effectively completed on November 6, 2009, which has been
accounted for as a reverse acquisition and recapitalization of the Company,
through a wholly-owned subsidiary, TIDC, whereby TIDC is deemed to be the
ultimate accounting acquirer (legal acquiree) and the Company to be the ultimate
accounting acquiree (legal acquirer). The accompanying consolidated financial
statements for the fiscal year ended December 31, 2008 are in substance those of
TIDC, including the historical assets and liabilities, and the historical
results and operations of TIDC since it is prior to the date of the reverse
acquisition. The accompanying consolidated financial statements for the fiscal
year ended December 31, 2009 are in substance those of TIDC, with the assets and
liabilities, and revenues and expenses, of the Company being included effective
from the date of stock exchange transaction. The Company is deemed to be a
continuation of the business of TIDC, through its wholly-owned subsidiary,
Shandong Caopu Arts & Crafts Co., Ltd. (“SCAC”), a PRC-based company
incorporated on August 15, 2000 under the laws of the PRC. Accordingly, the
accompanying consolidated financial statements for the fiscal year ended
December 31, 2009 include the following:
(1)
|
the
balance sheet consists of the net assets of the accounting acquirer at
historical cost and the net assets of the accounting acquiree at
historical cost;
|
(2)
|
the
financial position, results of operations, and cash flows of the
accounting acquirer for all periods presented as if the recapitalization
had occurred at the beginning of the earliest period presented and the
operations of the accounting acquiree from the date of stock exchange
transaction.
|
F-6
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
1. ORGANIZATION AND
BUSINESS BACKGROUND (CONT’D)
On
November 6, 2009, concurrent with the Stock Exchange with TIDC, the Company
adopted the fiscal year end of SCAC, the wholly-owned subsidiary of TIDC,
thereby changing the fiscal year end from September 30 to December 31. The
consolidated audited financial statements for the new fiscal year will be
reflected in the Company’s Form 10-K for the year ending December 31,
2009.
China
Shandong Industries Inc., TIDC and SCAC are hereinafter referred to as (the
“Company”).
The
entities which were party to the reorganization were not related to each
other.
The
Company is located in the Cao Xian Development Zone, which is near the
Beijing-Kowloon railway with the DeShang Highway to the East and Qinghe Road to
the West. There are three production areas including sixteen production
workshops and staff who work on willow products, craft and wooden
furniture.
The
Company undertakes joint production with local farmers by purchasing the
processing products from them and then by proceeding to finish the products in
order to generate sales. The Company has numerous products, such as grass willow
products, wooden crafts, indoor/outdoor wooden furniture, office furniture,
different kinds of frames and craftwork. The Company also has numerous national
patterns for design and utility models.
The
Company’s products are sold in various countries and regions, including the
United States of America, Germany, the United Kingdom, the Netherlands, Italy,
Sweden, Japan, Canada, Denmark, Hong Kong and Taiwan.
The
Company’s business model is original equipment manufacturer (OEM) for North
American and European manufacturers.
A
majority of the Company’s sales were from exports. In order to adapt to the
international market, the Company passed the ISO9001 international quality
management system certification, ISO14001 environmental management system
certification, OHSMS18001 Occupational Health and Safety Management System
Certification, as well as the CE certification for access to the EU
market.
2. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation
The
accompanying consolidated financial statements of the Company have been prepared
in accordance with accounting principles generally accepted in the United States
of America under the accrual basis of accounting.
Use
of estimates
In
preparing consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the dates of
the consolidated financial statements, as well as the reported amounts of
revenues and expenses during the reporting periods. These accounts and estimates
include, but are not limited to, the valuation of trade receivables, other
receivables, inventories, income taxes and the estimation on useful lives of
property, plant and equipment. Actual results could differ from these
estimates.
F-7
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Concentrations
of credit risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents, and trade and
other receivables. As of December 31, 2009 and 2008, substantially all of the
Company’s cash and cash equivalents were held by financial institutions located
in the PRC, which the Company’s management believes are of high credit quality.
With respect to trade receivables, the Company extends credit based on an
evaluation of the customer’s financial condition. The Company generally does not
require collateral for trade and other receivables and maintains an allowance
for doubtful accounts of trade and other receivables.
Cash
and cash equivalents
The
Company’s cash equivalents are short-term, highly liquid investments that are
both readily convertible to known amounts of cash and that have insignificant
risk of change in value because of changes in interest rates. The Company’s cash
and cash equivalents, as of December 31, 2009 and 2008, were principally
denominated in Renminbi (“RMB”) and were placed with banks in the PRC. They are
not freely convertible into foreign currencies and the remittance of these
funds out of the PRC is subject to exchange control restrictions imposed by the
PRC government.
For
purposes of the Consolidated Statements of Cash Flows, the Company considers
highly liquid investments with an original maturity of three months or less to
be cash equivalents. In accordance with SFAS No. 95, the consolidated Statements
of Cash Flows are prepared based on the change in the RMB functional currency
for each account and converted into U.S. dollars at the various exchange rates
at the time.
Allowance
for doubtful accounts
The
Company establishes an allowance for doubtful accounts based on managements’
assessment of the trade receivables collectibles. Judgment is required in
assessing the amount of the allowance. The Company considers the historical
level of credit losses and applies percentages to different receivables
categories. The Company makes judgments about the creditworthiness of each
customer based on ongoing credit evaluations, and monitors current economic
trends that might impact the level of credit losses in the future. If the
financial condition of the customers were to deteriorate, resulting in their
inability to make payments, a larger allowance may be required.
Based on
the above assessment, during the reporting periods, management establishes the
general provisioning policy to make an allowance equivalent to 5% of the gross
amount of trade receivables. Additional specific provision is made against
trade receivables to the extent which they are considered to be
doubtful.
Bad debts
are written off when identified. The Company does not accrue interest on trade
receivables.
Historically,
losses from uncollectible accounts have not significantly deviated from the
general allowance estimated by management and no significant additional bad
debts have been written off directly to net income. This general provisioning
policy has not changed in the past since establishment and management considers
that the aforementioned general provisioning policy is adequate, not excessive
and does not expect to change this established policy in the near
future.
F-8
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Inventories
Inventories
(finished goods, work in process, raw materials and packaging materials) are
stated at the lower of cost or market. Cost is determined on a first in first
out basis which includes an appropriate share of production overheads based on
normal operating capacity and includes all expenditures incurred in bringing the
goods to the point of sale and putting them in a saleable condition. In
assessing the ultimate realization of inventories, management makes judgments as
to future demand requirements compared to current or committed inventory levels.
The Company estimates the demand requirements based on market conditions,
forecasts prepared by its customers, sales contracts and orders in
hand.
In
addition, the Company estimates net realizable value based on intended use,
current market value and contract terms. The Company writes down the inventories
for estimated obsolescence, slow moving or unmarketable inventories equal to the
difference between the cost of inventories and the estimated market value based
upon assumptions about future demand and market conditions.
Property,
plant and equipment
Property,
plant and equipment are comprised of buildings, machinery, equipment and
furniture. Property, plant and equipment are stated at cost less accumulated
depreciation. Cost represents the purchase price of the respective fixed asset
and other costs incurred to bring the fixed asset into its existing use.
Depreciation is computed over the estimated useful lives of the respective fixed
assets utilizing the straight-line basis method. Buildings are depreciated
over a period of twenty years with a residual value of 10%. Machinery, equipment
and furniture are depreciated over a period of ten years with a residual
value of 10%. Maintenance or repairs are charged to expense as incurred.
Upon sale or disposition, the applicable amounts of the fixed asset’s cost and
related accumulated depreciation are removed from the accounts and the net
amount less proceeds from the disposal is charged or credited to
operations.
The
Company recognizes an impairment loss on property, plant and equipment when
evidence, such as the sum of expected future cash flows (undiscounted and
without interest charges), indicates that future operations will not produce
sufficient revenue to cover the related future costs, including depreciation,
and when the carrying amount of the asset cannot be realized through sale.
Measurement of the impairment loss is based on the fair value of the
assets.
Land
occupancy right, net
Land use
right is recorded at cost less accumulated amortization. Amortization is
provided over the term of the land use right agreement on a straight-line basis
over the term of the agreement, which is 20 years.
Impairment
of long-lived assets
The
Company evaluated the recoverability of its property, plant, equipment, and
other assets in accordance with FASB Accounting Standards Codification 360
“Property, Plant and Equipment” (formerly SFAS 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”), which requires recognition of
impairment of long-lived assets in the event the net book value of such assets
exceed the estimated future undiscounted cash flows attributable to such assets
or the business to which such intangible assets relate.
F-9
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Earnings
per share
The
Company reports earnings (loss) per share in accordance with FASB Accounting
Standards Codification 260 “Earnings per Share” (formerly SFAS 128, “Earnings
per Share”). This statement requires dual presentation of basic and diluted
earnings (loss) with a reconciliation of the numerator and denominator of the
loss per share computations. Basic earnings per share amounts are based on the
weighted average shares of common outstanding. If applicable, diluted earnings
per share assume the conversion, exercise or issuance of all common stock
instruments such as options, warrants and convertible securities, unless the
effect is to reduce a loss or increase earnings per share. Accordingly, this
presentation has been adopted for the periods presented. There were no
adjustments required to net income for the period presented in the computation
of diluted earnings per share. There were no common stock equivalents (CSE)
necessary for the computation of diluted loss per share.
Construction
in progress
Construction
in progress is recorded using the cost method, which later transfers to fixed
assets in achieving the expected usable condition. Interest costs on borrowings
related to construction in progress are capitalized before achieving the
expected usable condition.
Dividends
The
Company has not yet adopted any policy regarding payment of dividends. $224,755
in dividends was paid in 2008.
Revenue
recognition
Revenue
is recognized when the risks and rewards of ownership and title to the product
have transferred to the customers, the selling price is fixed or determinable,
and collection is reasonable assured. The Company generally records revenues
when shipments clear the Chinese customs department. The Company
offers varying payment terms for its customers and is generally responsible
for paying the delivery cost of its products.
Cost
of goods sold (exclusive of depreciation and amortization)
Cost of
goods sold consists primarily of costs of raw materials and direct labor, and
other costs directly attributable to the production of products. Write-down of
inventories to lower of cost or market is also recorded in cost of goods
sold.
The
depreciation and amortization expenses, shipping and handling expenses,
inspection costs, and the other costs of our distribution network are excluded
from cost of goods sold.
Selling
expenses
Selling
expenses mainly consist of advertising, shipping and handling costs, exhibition
expenses, inspection costs, and the other costs of our distribution network
which are expensed as incurred during the selling activities.
General
and administrative expenses
General
and administrative expenses consist of depreciation and amortization expenses,
office expenses, staff welfare, utilities, labor protection and salaries which
are expensed as incurred at the administrative level.
F-10
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Income
taxes
The
Company adopts the ASC Topic 740, “Income Taxes” regarding
accounting for uncertainty in income taxes which prescribes the recognition
threshold and measurement attributes for financial statement recognition and
measurement of tax positions taken or expected to be taken on a tax return. In
addition, the guidance requires the determination of whether the benefits of tax
positions will be more likely than not sustained upon audit based upon the
technical merits of the tax position. For tax positions that are determined to
be more likely than not sustained upon audit, a company recognizes the largest
amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement in the financial statements. For tax positions that are not
determined to be more likely than not sustained upon audit, a company does not
recognize any portion of the benefit in the financial statements. The guidance
provides for de-recognition, classification, penalties and interest, accounting
in interim periods and disclosure.
For the
years ended December 31, 2009 and 2008, the Company did not have any interest
and penalties associated with tax positions. As of December 31, 2009 and 2008,
the Company did not have any significant unrecognized uncertain tax
positions.
The
Company conducts major business in the PRC and is subject to tax in that
jurisdiction. As a result of its business activities, the Company files tax
returns that are subject to examination by the foreign tax
authority.
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to be
applied to taxable income in the years in which those temporary differences are
expected to reverse. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the statement of income in the period that
includes the enactment date. A valuation allowance is provided for deferred tax
assets if it is more likely than not these items will either expire before the
Company is able to realize their benefits, or that future deductibility is
uncertain. Also see Note 16.
Comprehensive
income
The
Company adopted FASB Accounting Standards Codification 220 “Comprehensive
Income” (formerly SFAS No. 130, Reporting Comprehensive income”, which
establishes standards for reporting and display of comprehensive income, and its
components in the consolidated financial statements. Components of comprehensive
income include net income and foreign currency translation adjustments. The
Company has presented consolidated statements of income which includes other
comprehensive income or loss.
Fair
value of financial instruments
The
carrying values of the Company’s financial instruments, including cash and cash
equivalents, trade accounts and other receivables, inventories, prepaid
expenses, accounts payable, other payables and accrued liabilities, deposits
received in advance, dividends payable, taxes payable, short term borrowings and
current portion of notes payable approximate their fair values due to the
short-term maturity of such instruments.
It is
managements’ opinion that the Company is not exposed to significant price,
credit, foreign currency or interest rate risks arising from these financial
instruments.
F-11
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Advertising
expense
Advertising
is charged to expense as incurred. The Company does not incur any
direct-response costs.
Advertising
expenses were $-0- for the two years ended December 31, 2009 and 2008,
respectively.
Commitments
and contingencies
Liabilities
for loss contingencies arising from claims, assessments, litigation, fines and
penalties and other sources, if applicable, are recorded when it is probable
that a liability has been incurred and the amount of the assessment can be
reasonably estimated.
Foreign
currency translation
The
functional currency of the Company is the Renminbi (“RMB”) and RMB is not freely
convertible into foreign currencies. The Company maintains its consolidated
financial statements in the functional currency. Monetary assets and liabilities
denominated in currencies other than the functional currency are translated into
the functional currency at rates of exchange prevailing at the balance sheet
date. Transactions denominated in currencies other than the functional currency
are translated into the functional currency at the exchanges rates prevailing at
the dates of the transaction. Exchange gains or losses arising from foreign
currency transactions are included in the determination of net income for the
respective periods.
For
financial reporting purposes, the consolidated financial statements of the
Company, which are prepared using the functional currency, have been translated
into United States dollars. Current assets and liabilities are translated at the
exchange rates at the balance sheet dates and revenue and expenses are
translated at the average exchange rates while fixed assets and stockholders’
equity is translated at historical exchange rates. Any translation
adjustments resulting are not included in determining net income but are
included in foreign exchange adjustment to other comprehensive income, a
component of stockholders’ equity. The exchange rates in effect as of
December 31, 2009 and 2008 were RMB1 for $0.1465 and $0.1466, respectively.
The average exchange rates for the two years ended December 31, 2009 and
2008 were RMB1 for $0.1464 and $0.1439, respectively. There is no significant
fluctuation in exchange rate for the conversion of RMB to US dollars after the
balance sheet date.
Off-balance
sheet arrangements
The
Company does not have any off-balance sheet arrangements.
Recent
Accounting Pronouncements
The
Company has reviewed all recently issued, but not yet effective, accounting
pronouncements and do not believe the future adoption of any such pronouncements
may be expected to cause a material impact on its financial condition or the
results of its operations.
F-12
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Recent
Accounting Pronouncements (cont’d)
FASB
Accounting Standards Codification
(Accounting
Standards Update (“ASU”) 2009-01)
In
June 2009, FASB approved the FASB Accounting Standards Codification (“the
Codification”) as the single source of authoritative nongovernmental GAAP. All
existing accounting standard documents, such as FASB, American Institute of
Certified Public Accountants, Emerging Issues Task Force and other related
literature, excluding guidance from the Securities and Exchange Commission
(“SEC”), have been superseded by the Codification. All other non-grandfathered,
non-SEC accounting literature not included in the Codification has become
nonauthoritative. The Codification did not change GAAP, but instead introduced a
new structure that combines all authoritative standards into a comprehensive,
topically organized online database. The Codification is effective for interim
or annual periods ending after September 15, 2009, and impacts the
Company’s consolidated financial statements as all future references to
authoritative accounting literature will be referenced in accordance with the
Codification. There have been no changes to the content of the Company’s
financial statements or disclosures as a result of implementing the Codification
during the fiscal year ended December 31, 2009.
As a
result of the Company’s implementation of the Codification during the fiscal
year ended December 31, 2009, previous references to new accounting standards
and literature are no longer applicable. In the current annual consolidated
financial statements, the Company will provide reference to both new and old
guidance to assist in understanding the impacts of recently adopted accounting
literature, particularly for guidance adopted since the beginning of the current
fiscal year but prior to the Codification.
Subsequent Event
(Included
in Accounting Standards Codification (“ASC”) 855 “Subsequent Events”, previously
SFAS No. 165 “Subsequent Events”)
SFAS
No. 165 established general standards of accounting for and disclosure of
events that occur after the balance sheet date, but before the consolidated
financial statements are issued or available to be issued (“subsequent events”).
An entity is required to disclose the date through which subsequent events have
been evaluated and the basis for that date. For public entities, this is the
date the consolidated financial statements are issued. SFAS No. 165 does
not apply to subsequent events or transactions that are within the scope of
other GAAP and did not result in significant changes in the subsequent events
reported by the Company. SFAS No. 165 became effective for interim or
annual periods ending after June 15, 2009 and did not impact the
Company’s consolidated financial statements. The Company evaluated for
subsequent events through the issuance date of the Company’s consolidated
financial statements. No recognized or non-recognized subsequent events were
noted.
Determination
of the Useful Life of Intangible Assets
(Included
in ASC 350 “Intangibles — Goodwill and Other”, previously FSP SFAS
No. 142-3 “Determination of the Useful Lives of Intangible
Assets”)
FSP SFAS
No. 142-3 amended the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under previously issued goodwill and intangible
assets topics. This change was intended to improve the consistency between the
useful life of a recognized intangible asset and the period of expected cash
flows used to measure the fair value of the asset under topics related to
business combinations and other GAAP. The requirement for determining useful
lives must be applied prospectively to intangible assets acquired after the
effective date and the disclosure requirements must be applied prospectively to
all intangible assets recognized as of, and subsequent to, the effective date.
FSP SFAS No. 142-3 became effective for consolidated financial statements
issued for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years. The adoption of FSP SFAS No. 142-3 did not
impact the Company’s consolidated financial statements.
F-13
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Recent
Accounting Pronouncements (cont’d)
Noncontrolling
Interests
(Included
in ASC 810 “Consolidation”, previously SFAS No. 160 “Noncontrolling
Interests in Consolidated Financial Statements an amendment of ARB
No. 51”)
SFAS
No. 160 changed the accounting and reporting for minority interests such
that they will be recharacterized as noncontrolling interests and classified as
a component of equity. SFAS No. 160 became effective for fiscal years
beginning after December 15, 2008 with early application prohibited. The
Company implemented SFAS No. 160 at the start of fiscal 2009 and no longer
records an intangible asset when the purchase price of a noncontrolling interest
exceeds the book value at the time of buyout. The adoption of SFAS No. 160
did not have any other material impact on the Company’s financial
statements.
Consolidation
of Variable Interest Entities — Amended
(To
be included in ASC 810 “Consolidation”, SFAS No. 167 “Amendments to FASB
Interpretation No. 46(R)”)
SFAS
No. 167 amends FASB Interpretation No. 46(R) “Consolidation of
Variable Interest Entities regarding certain guidance for determining whether an
entity is a variable interest entity and modifies the methods allowed for
determining the primary beneficiary of a variable interest entity. The
amendments include: (1) the elimination of the exemption for qualifying
special purpose entities, (2) a new approach for determining who should
consolidate a variable-interest entity, and (3) changes to when it is
necessary to reassess who should consolidate a variable-interest entity. SFAS
No. 167 is effective for the first annual reporting period beginning after
November 15, 2009, with earlier adoption prohibited. The Company will adopt
SFAS No. 167 in fiscal 2010 and does not anticipate any material impact on
the Company’s financial statements.
3. RESTATEMENTS
OF FINANCIAL STATEMENTS
Revenue
On
June 17, 2010, the Company’s management concluded that the Company’s audited
financial statements for the year ended December 31, 2009 and the Company’s
unaudited quarterly financial statements for the quarter ended March 31, 2010
should no longer be relied upon. Specifically, the Company’s revenues
were understated by $9,885,472 for the year ended December 31, 2009 and
overstated by $54,831 for the quarter ended March 31, 2010 with an overstatement
of inventories by $7,173,838 as of December 31, 2009 and $7,150,617 as of March
31, 2010. In addition, the Company’s basic and fully diluted net income per
common share for the year ended December 31, 2009 increased to $1.47 per share
from original $1.17 per share. The impact of the corrections on the Company’s
basic and fully diluted net income per common share for the three months ended
March 31, 2010 was immaterial. The facts underlying the Company’s original
conclusion is that all of such revenues are not recognized until the Company
physically receives the clearance paper from Chinese customs department
(“Customs”). However, there exists a time lag between the receiving date and the
approval date by the Customs, which typically takes a couple of weeks. The
Company believes the approval date by Chinese Customs generally represents the
date that the title of the goods being passed onto to buyers and should be
appropriate and persuasive evidence for revenue recognition. Accordingly, all
the financial statements for the year ended December 31, 2009 and for the
quarter ended March 31, 2010 are restated. The Company did not find any
understatement in revenues for the comparative year ended December 31, 2008 and
the comparative quarter ended March 31, 2009.
The
following table sets forth all the accounts in the original amounts and restated
amounts, respectively.
F-14
CHINA SHANDONG INDUSTRIES, INC. AND
SUBSIDIARIES
(FKA MOBILE PRESENCE TECHNOLOGIES,
INC.)
NOTES TO AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND
2008
|
3. RESTATEMENT OF FINANCIAL STATEMENTS
(CONT’D)
As of
December 31, 2009
(Original)
|
(Restated)
|
|||||||
Trade
accounts receivable, net
|
$
|
6,948,326
|
$
|
16,833,798
|
||||
Inventories
|
17,527,584
|
10,353,746
|
||||||
Deferred
tax liabilities
|
-
|
677,909
|
||||||
Retained
earnings
|
$
|
21,354,768
|
$
|
23,388,493
|
For the
year ended December 31, 2009
(Original)
|
(Restated)
|
|||||||
Sales
|
$
|
59,549,572
|
$
|
69,435,044
|
||||
Cost
of goods sold (exclusive of depreciation and
amortization)
|
42,186,937
|
49,360,775
|
||||||
Income
taxes - deferred
|
-
|
677,909
|
||||||
Net
income
|
9,987,430
|
12,021,155
|
||||||
Basic
and fully diluted net income per common share
|
$
|
1.17
|
$
|
1.47
|
Payment of
dividends
The
Company’s management concluded that the payment of dividends of $224,755 to the
Company’s shareholders in 2008 should be classified in the 2008 Statements of
Cash Flows as cash outflow from financing activities, which was misclassified as
cash flow from investing activities in the original 2008 Statements of Cash
Flow. The dividends error was merely a clerical error and not systematic or
representative of the internal control system. There was no impact on net income
as the result of this reclassification.
4.
RESTRICTED CASH AND CASH EQUIVALENTS
According
to the contract between the Company and the bank in which it has loans payable
to, $-0- and $1,407,006 at December 31, 2009 and 2008, respectively,
is invested into certain designated accounts related to guarantees for
notes payable.
5. TRADE
ACCOUNTS RECEIVABLE
Trade
accounts receivable is comprised of the following amounts at the respective
dates:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
(Restated)
|
||||||||
Gross
trade accounts receivable from customers
|
$
|
17,204,380
|
$
|
6,673,115
|
||||
Allowance
for doubtful customer accounts
|
(370,582
|
)
|
(333,656
|
)
|
||||
$
|
16,833,798
|
$
|
6,339,459
|
Bad debt
expense of $36,926 and $99,506 was recognized during the years ended
December 31, 2009 and 2008, respectively, in the accompanying consolidated
income statements.
F-15
CHINA SHANDONG INDUSTRIES, INC. AND
SUBSIDIARIES
(FKA MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES TO AUDITED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND
2008
|
6. INVENTORIES
Inventories
are comprised of the following amounts at the respective
dates:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
(Restated)
|
||||||||
Raw
materials
|
1,462,682
|
$
|
546,420
|
|||||
Packaging
materials
|
23,813
|
23,316
|
||||||
Work
in process
|
2,191,570
|
1,529,163
|
||||||
Finished
goods
|
6,675,681
|
15,237,667
|
||||||
10,353,746
|
17,336,566
|
|||||||
Provision
for obsolete inventories
|
-0-
|
-0-
|
||||||
$
|
10,353,746
|
$
|
17,336,566
|
7. PROPERTY,
PLANT AND EQUIPMENT
Property,
plant and equipment are comprised of the following amounts at the respective
dates:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
(Restated)
|
(Restated)
|
|||||||
Cost:
|
||||||||
Buildings
|
$
|
6,158,887
|
$
|
6,898,918
|
||||
Machinery,
equipment and furniture
|
4,497,567
|
3,377,142
|
||||||
10,656,454
|
10,276,060
|
|||||||
Accumulated
depreciation
|
(3,309,354
|
)
|
(2,437,091
|
)
|
||||
Net
|
$
|
7,347,100
|
$
|
7,838,969
|
During
the reporting periods, depreciation expense is included in the following
accounts on the accompanying consolidated income statements:
Years ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(Restated)
|
(Restated)
|
|||||||
General
and administrative expenses
|
$
|
808,101
|
$
|
656,700
|
||||
$
|
808,101
|
$
|
656,700
|
F-16
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
8.
LAND OCCUPANCY RIGHTS
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
(Restated)
|
(Restated)
|
|||||||
Land
occupancy rights
|
98,887
|
98,887
|
||||||
Less:
Accumulated amortization
|
(22,053
|
)
|
(16,760
|
)
|
||||
Land
occupancy rights, net
|
$
|
76,834
|
$
|
82,127
|
During
the reporting periods, amortization expense is included in the following
accounts on the accompanying consolidated income statements:
Years ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(Restated)
|
(Restated)
|
|||||||
General
and administrative expenses
|
$
|
5,293
|
$
|
5,293
|
||||
$
|
5,293
|
$
|
5,293
|
9.
SHORT-TERM BORROWINGS
The
Company’s outstanding principal balances on its short-term borrowings are
payable as follows:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Puliangji
Credit Cooperative, .9% interest rate, due August 31,
2009
|
$
|
-0-
|
$
|
278,470
|
||||
Bank
of China, 5.832% to 6.372% interest rates, due no later than November 17,
2010
|
3,514,835
|
4,423,010
|
||||||
Commercial
Bank (Heze branch), 7.965% interest rate, due no later than September 28,
2010
|
4,539,996
|
1,172,505
|
||||||
Various
other loans, interests rates ranging from .612% to 1.1826%, due in various
dates within upcoming 12 month operating cycle
|
-0-
|
72,977
|
||||||
$
|
8,054,831
|
$
|
5,946,962
|
As of
December 31, 2009, a portion of short-term borrowings from Bank of China are
secured by certain assets of the Company. Specifically, $1,523,092 in short-term
borrowings is secured by the Company’s property with a net book value of
$5,211,871, and $234,321 in short-term borrowings is secured by the Company’s
equipment with a net book value of $1,870,903.
The
effects of imputed interest on the aforementioned below market interest rates
are immaterial to the consolidated financial statements taken as a
whole.
F-17
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
10.
NOTES PAYABLE
The
Company’s outstanding principal balances for its notes payable are payable
as follows:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
ICBC
Caoxian branch, .684% interest rate, due September 27,
2009
|
$
|
-0-
|
$
|
1,758,757
|
||||
CCB
Caoxian branch, .612% interest rate, due March 10,
2009
|
-0-
|
879,379
|
||||||
$
|
-0-
|
$
|
2,638,136
|
The
effects of imputed interest on the aforementioned below market interest rates
are immaterial to the consolidated financial statements taken as a
whole.
11. OTHER PAYABLES AND ACCRUED
LIABILITIES
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Salary and welfare payable
|
$
|
105,246
|
$
|
304,675
|
||||
Accrued
expenses
|
21,818
|
12,308
|
||||||
Other
payables
|
604,265
|
801,425
|
||||||
$
|
731,329
|
$
|
1,118,408
|
Staff
welfare payable represents accrued staff medical, industry injury claims; labor
and unemployment insurances, all of which are third parties insurance and the
insurance premiums are based on certain percentage of salaries. The obligations
of the Company are limited to those premiums contributed by the
Company.
12. REGISTERED
AND PAID UP CAPITAL
The
Company is a Sino-foreign joint enterprise and therefore the capital stock,
consistent with most of the PRC enterprises, is not divided into a specific
number of shares having a stated nominal amount.
The
Company’s registered capital of $7,800,000 was fully paid up on April 28,
2008.
13. STATUTORY
AND DISCRETIONARY SURPLUS RESERVE
In
accordance with the relevant laws and regulations of the PRC and articles of
association, the Company is required to appropriate 10% and a certain other
percentage of the net profit as reported in the Company’s PRC statutory
consolidated financial statements to the statutory reserve fund and the
discretionary surplus reserve fund, respectively, after offsetting prior year’s
losses.
When the
balance of the statutory reserve fund reaches 50% of the registered capital, and
further appropriation is optional. Upon approval from the board of directors or
members, the statutory reserve can be used to offset accumulated losses or to
increase registered capital.
F-18
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
14. COST
OF GOODS SOLD (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION)
Cost of
goods sold consists primarily of costs of raw materials and direct labor, and
other costs directly attributable to the production of products. Write-down of
inventories to lower of cost or market is also recorded in cost of goods
sold.
The
following table sets forth the breakdown of our cost of goods sold for the years
ended December 31, 2009 and 2008, respectively.
Years ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Direct
Materials
|
$
|
38,147,336
|
$
|
24,722,362
|
||||
Indirect
Materials
|
8,053,710
|
4,769,082
|
||||||
Direct
Labor
|
2,484,139
|
1,614,503
|
||||||
Inbound
Freights
|
675,589
|
464,882
|
||||||
Cost
of Goods Sold
|
$
|
49,360,774
|
$
|
31,570,829
|
The
depreciation and amortization expenses, shipping and handling expenses,
inspection costs are excluded from cost of goods sold, the amount of which for
the years ended December 31, 2009 and 2008, respectively, are set forth in the
following table.
Years ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Depreciation
expenses
|
$
|
808,101
|
$
|
656,700
|
||||
Amortizations
|
5,293
|
5,293
|
||||||
Shipping
and handling expenses
|
416,811
|
311,258
|
||||||
Inspection
costs
|
76,132
|
50,466
|
These
excluded expenses are included under Selling, General and Administrative
expenses in the accompanying financial statements.
15.
SELLING AND MARKETING EXPENSES
Selling
and marketing expenses were $831,245 and $686,104 for the years ended December
31, 2009 and 2008, respectively, including $416,811 and $311,258 in shipping and
handling expenses for the years, respectively. Selling and marketing expenses
mainly consist of advertising, shipping and handling costs, exhibition expenses,
inspection costs, and the other costs of our distribution network which are
expensed as incurred during the selling activities.
F-19
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
16. INCOME
TAXES
The
Company is subject to the foreign investment enterprise income tax at the
statutory rate of 15% on the profits as reported in the Company’s PRC statutory
consolidated financial statements as adjusted by profit and loss items that are
not taxable or deductible before 2008.
PRC’s
legislative body, the National People’s Congress, adopted the unified EIT Law on
March 16, 2007. This new tax law replaces the existing separate income tax
laws for domestic enterprises and foreign-invested enterprises and became
effective on January 1, 2008. Under the new tax law, a unified income tax
rate is set at 25% for both domestic enterprises and foreign-invested
enterprises. Thus, the Company is subject to corporate income tax at the
statutory rate of 25% commencing in 2008.
Income
taxes in the accompanying consolidated statements of income for the reporting
periods represent provision for EIT for the Company’s continuing operations in
the PRC.
Year ended December 31
|
||||||||
2009
|
2008
|
|||||||
(restated)
|
||||||||
EIT
rate in effect for the year
|
25
|
%
|
25
|
%
|
||||
Profits
before income tax
|
$
|
16,115,042
|
$
|
7,715,912
|
||||
Income
tax
|
$
|
4,093,887
|
$
|
1,953,918
|
The
effective income taxes differ from the above PRC statutory EIT rates as
follows:
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(restated)
|
||||||||
Provision
for income taxes at statutory EIT rate
|
$
|
4,028,760
|
$
|
1,928,978
|
||||
Non-deductible
items for tax purposes
|
65,127
|
24,940
|
||||||
Income
taxes
|
$
|
4,093,887
|
$
|
1,953,918
|
Income
tax expense is summarized as follows:
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(restated)
|
||||||||
Current
|
$
|
3,415,978
|
$
|
1,953,918
|
||||
Deferred
change
|
677,909
|
-
|
||||||
Income
taxes expense
|
$
|
4,093,887
|
$
|
1,953,918
|
The tax
effects of temporary differences that give rise to the Company’s net deferred
tax assets and liabilities are as follows:
Current portion:
|
Years ended December 31,
|
|||||||
2009
|
2008
|
|||||||
(restated)
|
||||||||
Sales
cut-off
|
$
|
(677,909
|
)
|
$
|
-
|
|||
Total
deferred tax liabilities
|
$
|
(677,909
|
)
|
$
|
-
|
|||
Net
deferred tax liabilities
|
$
|
(677,909
|
)
|
$
|
-
|
F-20
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
17. DEFINED
CONTRIBUTION PLAN
The
Company has a defined contribution plan for all of its qualified employees in
the PRC. The employer and the employees are each required to make contributions
to the plan at the rates specified in the plan. The obligation of the Company
with respect to retirement is to make the required contributions under the plan.
No forfeited contributions are available to reduce the contribution payable
in the future years. The defined contribution plan contributions were charged to
expense in the accompanying consolidated statements of income. The Company
contributed $153,624 and $460,307 for the years ended December 31, 2009 and
2008, respectively, which are included in general and administrative expenses in
the accompanying consolidated income statements.
18. CONTINGENCIES
The
Company had no contingencies existing as of December 31, 2009 and
2008.
19. RELATED
PARTY TRANSACTIONS
The Company had no material
transactions carried out with its related parties during 2009 and
2008.
20. INCOME
PER SHARE
The basic
earnings per share were calculated using the net income and the weighted average
number of shares outstanding during the reporting periods. All share and per
share data have been adjusted to reflect the recapitalization of the Company in
the Exchange, the forward stock split and the reverse stock split.
The
fully diluted earnings per share were calculated using the net income and the
weighted average number of shares outstanding on the fully diluted basis during
the reporting periods. The denominator for fully diluted earnings per share
calculation for the year of 2009 includes 100,000 warrants granted for services
rendered during the fourth quarter of 2009. All share and per share data have
been adjusted to reflect the recapitalization of the Company in the Exchange,
the forward stock split and the reverse stock split.
21. CAPITAL
TRANSACTIONS
1) On November 6,
2009, the Company completed a stock exchange transaction with the equity owners
of TIDC. 7,717,500 shares of common stock were issued by the Company in
exchange for 100% interest in TIDC, representing 90.0% of the Company’s
outstanding common stock.
2) On November 6, 2009,
Timothy Lightman, the owner of 4,875,000 shares of the Company’s Common
Stock delivered a stock certificate or stock certificates representing
4,375,000 shares of the Company’s Common Stock to the Company for
cancellation.
3) On
November 20, 2009, the Board of Directors of the Company adopted a resolution
approving a one for fifteen forward split of the Company’s Common Stock.
Accordingly, the Company’s outstanding Common Stock on the basis of 1
outstanding share being changed to 15 outstanding shares. Each
shareholder’s percentage ownership in the Company (and relative voting power)
will remain essentially unchanged as a result of the forward split. The forward
split took effective on December 3, 2009, and the shares disclosed hereto have
been adjusted to reflect the forward stock split.
The
consolidated statement of equity and the earnings per share numbers in the
financial statements have been restated per FASB 128 paragraph
134.
F-21
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
22. CONCENTRATIONS
AND RISKS
The
Company's operations are carried out in the People’s Republic of China (“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 and Western Europe. The
Company's results may be 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.
(a) Major
customers
For the
years ended December 31, 2009 and 2008, 100% of the Company’s assets were
located in the PRC, and certain customers accounted for greater than 5% in
revenues.
The
following tables set forth our top three customers individually comprising 42%
and 32% of net revenue for the years ended December 31, 2009 and 2008,
respectively.
As of
December 31, 2009
Customers
|
Revenues
|
Accounts
Receivable
|
||||||||||||
Customer A
|
$ | 20,103,933 | 29 | % | $ | 2,144,925 | ||||||||
Customer B
|
4,825,926 | 7 | % | 887,619 | ||||||||||
Customer
C
|
4,238,290 | 6 | % | 1,309,762 | ||||||||||
Total:
|
$ | 29,168,149 | 42 | % |
Total:
|
$ | 4,342,306 |
As of
December 31, 2008
Customers
|
Revenues
|
Accounts
Receivable
|
||||||||||||
Customer
D
|
$ | 6,919,456 | 16 | % | $ | - | ||||||||
Customer
E
|
3,276,227 | 8 | % | - | ||||||||||
Customer
F
|
3,322,859 | 8 | % | 867,347 | ||||||||||
Total:
|
$ | 13,518,542 | 32 | % |
Total:
|
$ | 867,347 |
(b)
Credit risk
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and trade accounts receivable. The
Company performs ongoing credit evaluations of its customers' financial
condition, but does not require collateral to support such
receivables.
F-22
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
(FKA
MOBILE PRESENCE TECHNOLOGIES, INC.)
NOTES
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
|
23. SUBSEQUENT
EVENTS
Subsequent
to year end, the Company entered into an agreement to issue 300,000 warrants
among other items and recorded a related expense of $334,702, equal to the
estimated fair value of the warrants at the date of the grant to an unrelated
shareholder of the Company. The fair market value was calculated using the
Black-Scholes options pricing model, assuming approximately 5.15% risk-free
interest, 0% dividend yield, 65% volatility, and a life of two
years.
Subsequent
to year end, the Company entered into an engagement agreement with Rodman &
Renshaw, LLC (“Rodman”) to provide services with respect to a registered public
offering of the Company. The features of the registered payment arrangement
include a term which expires on July 6, 2010 and a proposed issuance of a common
stock instrument and related options conditional upon market acceptance, due
diligence and execution of a definitive underwriting agreement by both parties.
The registered public offering will consist of the sale of approximately $20
million of the common stock of the Company. The actual size of the offering, the
precise number of common shares, and the offering price per share will be the
subject of negotiations between the aforementioned parties among other factors.
The underwriting agreement will grant Rodman an option, exercisable within 45
days after the closing of the offering, to acquire up to an additional 15% of
the total number of shares to be offered by the Company in the offering, solely
for the purpose of covering over-allotments. The Company will pay Rodman an
underwriting commission of 7% of the public offering. The Company paid a $25,000
advance to Rodman which shall be applied against the non-accountable expense
allowance. As additional compensation for Rodman’s services, the Company shall
issue to Rodman or its designees at the closing options to purchase that number
of shares of common stock equal to 5% of the aggregate number of shares sold in
the offering (excluding the over-allotment option). These options will be
exercisable at any time during the 4 year period commencing from one year from
the closing, at a price per share equal to 125% of the public offering price per
share of common stock at the offering. The maximum potential undiscounted amount
of consideration that the Company would be required to be issue is $23 million
including the above mentioned over-allotment.
Although
transfers considerations are not contemplated within the registration rights
agreements, the potential for a registration payment arrangement does exist if
the parties to the registration rights agreement mutually agree to address and
add the transfer considerations if the Registration Statement is not declared
effective or does not maintain effectiveness. At the time of this filing, the
terms and conditions of the potential payment arrangement are unknown because
transfer considerations have not been contemplated.
On
July 30, 2010, Mr. Jinliang Li, the Chairman and Chief Executive Officer of the
Company authorized the effectuation of a 1-for-2 reverse split pursuant to the
majority consent on July 1, 2010. The reverse split combines the Company’s
outstanding Common Stock on the basis of 2 outstanding shares being changed to 1
outstanding share. Each shareholder’s percentage ownership in the Company (and
relative voting power) will remain essentially unchanged as a result of the
reverse split. All options, warrants, and any other similar instruments
convertible into, or exchangeable or exercisable for, shares of common
stock will be proportionally adjusted.
The
Reverse Split took effective upon the Company filed a Certificate of Amendment
to the Certificate of Incorporation with the Secretary of State of the State of
Delaware on August 3, 2010.
On December
22, 2010, the Board of Directors of the Company adopted a resolution approving a
1-for-1.5 reverse split (the “Reverse Split”) of the Company’s Common
Stock. Accordingly, the Reverse Split combines the Company’s outstanding Common
Stock on the basis of 1.5 outstanding shares being changed to 1 outstanding
share. Each shareholder’s percentage ownership in the Company (and relative
voting power) will remain essentially unchanged as a result of the Reverse
Split. All options, warrants, and any other similar instruments convertible
into, or exchangeable or exercisable for, shares of Common Stock will be
proportionally adjusted. Effective on or about January 18, 2011, we
will effectuate a 1 for 1.5 reverse split of our shares of Common
Stock.
The
consolidated statement of equity and the earnings per share numbers in the
financial statements have been restated per FASB 128 paragraph
134.
24. SEGMENTS
The
Company determined that it do not operate in any material, separately reportable
operating segments as of December 31, 2009 and 2008.
F-23
China
Shandong Industries, Inc. and Subsidiaries
Unaudited
Consolidated Balance Sheets
As
of September 30, 2010 and December 31, 2009
|
|
September 30,
2010
|
|
|
December 31,
2009
|
|
||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
and cash equivalents
|
$
|
5,987,670
|
$
|
2,185,839
|
||||
Trade
accounts receivable
|
18,457,442
|
16,833,798
|
||||||
Inventories
|
13,221,788
|
10,353,746
|
||||||
Prepaid
expenses
|
337,233
|
375,493
|
||||||
Deposits
|
-
|
767,204
|
||||||
Other
receivables
|
320,443
|
295,752
|
||||||
TOTAL
CURRENT ASSETS
|
38,324,576
|
30,811,832
|
||||||
FIXED
ASSETS
|
||||||||
Property,
plant, and equipment
|
11,437,399
|
10,656,454
|
||||||
Accumulated
depreciation
|
(3,927,396
|
)
|
(3,309,354
|
)
|
||||
NET
FIXED ASSETS
|
7,510,003
|
7,347,100
|
||||||
OTHER
ASSETS
|
||||||||
Land
occupancy rights, net
|
72,868
|
76,834
|
||||||
Construction
in progress
|
10,901,681
|
6,940,632
|
||||||
TOTAL
OTHER ASSETS
|
10,974,549
|
7,017,466
|
||||||
TOTAL
ASSETS
|
$
|
56,809,128
|
$
|
45,176,398
|
||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Short-term
borrowings
|
$
|
8,953,754
|
$
|
8,054,831
|
||||
Accounts
payable
|
470,603
|
240,290
|
||||||
Other
payables and accrued liabilities
|
563,182
|
731,329
|
||||||
Received
in advance
|
59,190
|
56,849
|
||||||
Common
Stock to be issued
|
178,325
|
-
|
||||||
Taxes
payable
|
368,054
|
643,476
|
||||||
Deferred
tax liabilities
|
-
|
677,909
|
||||||
TOTAL
CURRENT LIABILITIES
|
10,593,108
|
10,404,684
|
||||||
TOTAL
LIABILITIES
|
10,593,108
|
10,404,684
|
||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Preferred
stock ($.0001 par value, 5,000,000 authorized, none issued and outstanding
as of September 30, 2010 and December 31, 2009,
respectively)
|
-
|
-
|
||||||
Common
stock ($.0001 par value, 100,000,000 authorized, 8,575,00 issued and
outstanding as of September 30, 2010 and December 31, 2009,
respectively)
|
858
|
858
|
||||||
Additional
paid in capital
|
8,133,844
|
7,799,142
|
||||||
Statutory
and discretionary surplus reserve
|
3,608,243
|
3,608,243
|
||||||
Accumulated
other comprehensive income (loss)
|
798,140
|
(25,022
|
)
|
|||||
Retained
earnings
|
33,674,935
|
23,388,493
|
||||||
TOTAL
STOCKHOLDERS' EQUITY
|
46,216,020
|
34,771,714
|
||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
56,809,128
|
$
|
45,176,398
|
See
accompanying notes to these financial statements and auditors'
report.
F-24
China
Shandong Industries, Inc. and Subsidiaries
Unaudited
Consolidated Statements of Income and Comprehensive Income
For
the Three and Nine Months ended September 30, 2010 and 2009
For the three months ended
|
For the nine months ended
|
|||||||||||||||
September
30,
2010
|
September
30,
2009
|
September
30,
2010
|
September
30,
2009
|
|||||||||||||
Revenues
|
||||||||||||||||
Sales
|
$
|
22,746,574
|
$
|
14,725,112
|
$
|
62,181,727
|
$
|
46,201,117
|
||||||||
Cost
of goods sold (exclusive of depreciation and
amortization)
|
16,462,614
|
10,924,422
|
45,206,191
|
34,516,927
|
||||||||||||
Operating
expenses
|
||||||||||||||||
Selling
and marketing
|
215,692
|
158,118
|
608,729
|
455,413
|
||||||||||||
Research
and Development expenses
|
111,923
|
99,642
|
501,642
|
358,813
|
||||||||||||
General
and administrative
|
276,555
|
337,296
|
884,730
|
727,611
|
||||||||||||
Professional
and consulting fee
|
157,303
|
-
|
492,005
|
-
|
||||||||||||
Total
Operating Expenses
|
761,473
|
595,057
|
2,487,106
|
1,541,838
|
||||||||||||
Income
from operations
|
5,522,487
|
3,205,633
|
14,488,430
|
10,142,353
|
||||||||||||
Other
income (expenses)
|
||||||||||||||||
Finance
income (expense)
|
(131,218
|
)
|
(149,308
|
)
|
(722,966
|
)
|
(439,823
|
)
|
||||||||
Other
operating income(expense)
|
2,079
|
13
|
4,977
|
140,612
|
||||||||||||
Non-operating
income
|
3,700
|
466
|
108,817
|
6,815
|
||||||||||||
Total
other income (expense)
|
(125,439
|
)
|
(148,829
|
)
|
(609,172
|
)
|
(292,396
|
)
|
||||||||
Income
before income taxes
|
5,397,048
|
3,056,804
|
13,879,257
|
9,849,956
|
||||||||||||
Income
taxes - current
|
1,388,588
|
764,198
|
3,592,816
|
2,433,631
|
||||||||||||
Net
income
|
$
|
4,008,460
|
$
|
2,292,606
|
$
|
10,286,442
|
$
|
7,416,325
|
||||||||
Other
comprehensive income
|
||||||||||||||||
Foreign
currency translation adjustment
|
371,886
|
9,088
|
823,162
|
6,157
|
||||||||||||
Comprehensive
income
|
$
|
4,380,346
|
$
|
2,301,694
|
$
|
11,109,604
|
$
|
7,422,482
|
||||||||
Earnings
per common share
|
||||||||||||||||
Basic
|
$
|
0.47
|
$
|
0.29
|
$
|
1.20
|
$
|
0.92
|
||||||||
Fully
diluted
|
$
|
0.45
|
$
|
0.29
|
$
|
1.17
|
$
|
0.92
|
||||||||
Weighted
average common shares outstanding
|
||||||||||||||||
Basic
|
8,575,000
|
8,146,250
|
8,575,000
|
8,146,250
|
||||||||||||
Fully
diluted
|
8,775,000
|
8,146,250
|
8,741,676
|
8,146,250
|
See
accompanying notes to these financial statements and auditors'
report.
F-25
China
Shandong Industries, Inc. and Subsidiaries
Unaudited
Consolidated Statements of Cash Flows
For
the Nine Months ended September 30, 2010 and 2009
|
For the Nine months ended
|
|||||||
|
September 30,
2010
|
September 30,
2009
|
||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
10,286,442
|
7,416,325
|
||||||
Loss
of disposal of fixed assets(loss of net value of fixed
assets)
|
||||||||
Adjustments
to reconcile net income to net cash provided by
|
||||||||
(used
in) operating activities:
|
||||||||
Depreciation
|
618,042
|
539,012
|
||||||
Amortization
|
3,965
|
3,951
|
||||||
Warrants
granted for services, non-cash
|
334,702
|
-
|
||||||
Stock
based compensation, non-cash
|
178,325
|
-
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Trade
accounts receivable
|
(1,623,644
|
)
|
(2,023,893
|
)
|
||||
Prepaid
expense
|
38,260
|
87,849
|
||||||
Inventories
|
(2,868,042
|
)
|
1,409,893
|
|||||
Other
receivables
|
(24,691
|
)
|
(109,495
|
)
|
||||
Accounts
payable
|
230,313
|
(49,460
|
)
|
|||||
Taxes
payable
|
(953,331
|
)
|
(94,645
|
)
|
||||
Other
payables and accrued liabilities
|
599,057
|
(645,958
|
)
|
|||||
Deposits
received in advance
|
2,341
|
10,216
|
||||||
NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
6,821,740
|
6,543,795
|
||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchase
for property, plant, and equipment
|
(780,945
|
)
|
(803,038
|
)
|
||||
Additions
to construction in progress
|
(3,961,049
|
)
|
(1,106,355
|
)
|
||||
NET
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
(4,741,994
|
)
|
(1,909,393
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from short term borrowings
|
11,568,813
|
7,245,104
|
||||||
Principal
repayments to short-term borrowings
|
(10,669,890
|
)
|
(9,254,138
|
)
|
||||
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
898,923
|
(2,009,034
|
)
|
|||||
Foreign
currency adjustment
|
823,162
|
(309
|
)
|
|||||
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
3,801,831
|
2,625,059
|
||||||
CASH
AND CASH EQUIVALENTS:
|
||||||||
Beginning
of period
|
2,185,839
|
1,751,997
|
||||||
End
of period
|
$
|
5,987,670
|
$
|
4,377,056
|
||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||
Cash
paid during the three quarters for:
|
||||||||
Interest
|
$
|
562,882
|
$
|
341,693
|
||||
Taxes
|
$
|
3,894,449
|
$
|
2,095,797
|
See accompanying notes to these
financial statements and auditors' report.
F-26
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2010
|
1.
|
BASIS
OF PRESENTATION
|
The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with both
generally accepted accounting principles for interim financial information, and
the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (consisting of normal recurring accruals) that are, in the opinion
of management, considered necessary for a fair presentation of the results for
the interim periods presented. Interim results are not necessarily indicative of
results for a full year.
The unaudited condensed consolidated
financial statements and related disclosures have been prepared with the
presumption that users of the interim financial information have read or have
access to the Company’s annual audited consolidated financial statements for the
preceding fiscal year. Accordingly, these unaudited condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and the related notes for the years ended December 31, 2009
and 2008 thereto contained in the Annual Report on Form 10-K for the year ended
December 31, 2009.
2.
|
ORGANIZATION
AND BUSINESS BACKGROUND
|
China
Shandong Industries Inc. (the “Company”) was incorporated on February 13, 2007
under the laws of the State of Delaware as “Mobile Presence Technologies,
Inc”. On December 3, 2009, the Company changed its name to China Shandong
Industries, Inc.
On
October 22, 2009, the Company entered into a Stock Exchange and Reorganization
Agreement (the “Agreement”), by and among the Company, Tianwei International
Development Corporation, an Oregon Corporation (“TIDC”), CAOPU Enterprise
Limited, a company organized under the laws of the British Virgin Islands
(“Caopu”), London Financial Group Ltd., a company organized under the laws of
the British Virgin Islands (“LFG”), Phoebus Vision Investment Developing Group,
Ltd., a company organized under the laws of the British Virgin Islands (“Phoebus”), and Timothy
Lightman (“TL”), pursuant to which the Company acquired all of the issued and
outstanding capital stock of TIDC owned by each of CAOPU, LFG and Phoebus in
exchange for an issuance by the Company of an aggregate of 7,717,500 shares of
Common Stock of the Company, with a par value of $0.0001 per share (the “MBPI
Common Stock”), to Caopu, LFG and Phoebus. The shares of MBPI Common Stock were
issued pursuant to the exemption from registration provided under Section 4(2)
of the Securities Act of 1933, as amended, and Rule 506 promulgated
thereunder.
In
addition, TL, the owner of 4,875,000 shares of MBPI Common Stock (“TL’s MBPI
Shares”), representing approximately 93% of the 5,232,500 issued and outstanding
shares of the Company’s Common Stock, delivered a stock certificate or stock
certificates representing 4,375,000 of TL’s MBPI Shares to the Company for
cancellation.
On
November 5, 2009, pursuant to a separate Assignment and Assumption Agreement by
and between the Company and TL, the Company assigned, in fee simple absolute,
all of its assets of any kind whatsoever excepting only its rights under the
Agreement, including, but not limited to those assets related to its proposed
cellular telephone application to TL. TL assumed all of the indebtedness or
other obligations of the Company in existence on the date hereof, excluding only
its obligation to perform under the Agreement, including, but limited to any
obligations for attorney fees, accountant fees, taxes and transfer agent fees
and agreed to indemnify and hold the Company harmless against the same provided
the Company gave prompt notice of any claim for
indemnification.
F-27
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2010
|
2. ORGANIZATION
AND BUSINESS BACKGROUND (CONT’D)
The
transaction was effectively completed on November 6, 2009, which has been
accounted for as a reverse acquisition and recapitalization of the Company,
through a wholly-owned subsidiary, TIDC, whereby TIDC is deemed to be the
ultimate accounting acquirer (legal acquiree) and the Company to be the ultimate
accounting acquiree (legal acquirer). The accompanying consolidated financial
statements for the fiscal year ended December 31, 2008 are in substance those of
TIDC, including the historical assets and liabilities, and the historical
results and operations of TIDC since it is prior to the date of the reverse
acquisition. The accompanying consolidated financial statements for the fiscal
year ended December 31, 2009 are in substance those of TIDC, with the assets and
liabilities, and revenues and expenses, of the Company being included effective
from the date of stock exchange transaction. The Company is deemed to be a
continuation of the business of TIDC, through its wholly-owned subsidiary,
Shandong Caopu Arts & Crafts Co., Ltd. (“SCAC”), a PRC-based company
incorporated on August 15, 2000 under the laws of the PRC. Accordingly, the
accompanying consolidated financial statements for the fiscal year ended
December 31, 2009 include the following:
|
(1)
|
the
balance sheet consists of the net assets of the accounting acquirer at
historical cost and the net assets of the accounting acquiree at
historical cost;
|
|
(2)
|
the
financial position, results of operations, and cash flows of the
accounting acquirer for all periods presented as if the recapitalization
had occurred at the beginning of the earliest period presented and the
operations of the accounting acquiree from the date of stock exchange
transaction.
|
On
November 6, 2009, concurrent with the Stock Exchange with TIDC, the Company
adopted the fiscal year end of SCAC, the wholly-owned subsidiary of TIDC,
thereby changing the fiscal year end from September 30 to December 31. The
consolidated audited financial statements for the new fiscal year will be
reflected in the Company’s Form 10-K for the year ending December 31,
2009.
China
Shandong Industries Inc., TIDC and SCAC are hereinafter referred to as (the
“Company”).
The
entities which were party to the reorganization were not related to each
other.
The
Company is located in the Cao Xian Development Zone, which is near the
Beijing-Kowloon railway with the DeShang Highway to the East and Qinghe Road to
the West. There are three production areas including sixteen production
workshops and staff who work on willow products, craft and wooden
furniture.
The
Company undertakes joint production with local farmers by purchasing the
processing products from them and then by proceeding to finish the products in
order to generate sales. The Company has numerous products, such as grass willow
products, wooden crafts, indoor/outdoor wooden furniture, office furniture,
different kinds of frames and craftwork. The Company also has numerous national
patterns for design and utility models.
The
Company’s products are sold in various countries and regions, including the
United States of America, Germany, the United Kingdom, the Netherlands, Italy,
Sweden, Japan, Canada, Denmark, Hong Kong and Taiwan.
The
Company’s business model is original equipment manufacturer (OEM) for North
American and European manufacturers.
A
majority of the Company’s sales were from exports. In order to adapt to the
international market, the Company passed the ISO9001 international quality
management system certification, ISO14001 environmental management system
certification, OHSMS18001 Occupational Health and Safety Management System
Certification, as well as the CE certification for access to the EU
market.
F-28
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2010
|
3.
|
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
|
Fair Value Measurements and
Disclosures
(Accounting
Standards Update (“ASU”) 2010-06)
In January 2010, the FASB issued ASU
No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) -
Improving Disclosures about Fair Value Measurements.” ASU 2010-06 requires new
disclosures regarding transfers in and out of the Level 1 and 2 and activity
within Level 3 fair value measurements and clarifies existing disclosures of
inputs and valuation techniques for Level 2 and 3 fair value measurements. ASU
2010-06 also includes conforming amendments to employers’ disclosures about
postretirement benefit plan assets. The new disclosures and clarifications of
existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosure of activity
within Level 3 fair value measurements, which is effective for fiscal years
beginning after December 15, 2010, and for interim periods within those
years. The adoption of this statement is not expected to have a material impact
on our consolidated financial position or results of operation.
4.
|
TRADE
ACCOUNTS RECEIVABLE
|
Trade
accounts receivable is comprised of the following amounts at the respective
dates:
As of
|
||||||||
9/30/10
|
12/31/09
|
|||||||
Gross
trade accounts receivable from customers
|
$
|
18,885,302
|
$
|
17,204,380
|
||||
Allowance
for doubtful customer accounts
|
(427,860
|
)
|
(370,582
|
)
|
||||
$
|
18,457,442
|
$
|
16,833,798
|
Bad debt
expense of $57,278 was recognized during the nine months ended September 30,
2010 in the accompanying consolidated income statements.
5.
|
INVENTORIES
|
Inventories
are comprised of the following amounts at the respective dates:
As of
|
||||||||
9/30/10
|
12/31/09
|
|||||||
Raw
materials
|
$
|
4,770,641
|
$
|
1,462,682
|
||||
Packaging
materials
|
29,456
|
23,813
|
||||||
Work
in process
|
4,295,327
|
2,191,570
|
||||||
Finished
goods
|
4,126,364
|
6,675,681
|
||||||
13,221,788
|
10,353,746
|
|||||||
Provision
for obsolete inventories
|
-0-
|
-0-
|
||||||
$
|
13,221,788
|
$
|
10,353,746
|
F-29
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2010
|
6.
|
PROPERTY,
PLANT AND EQUIPMENT
|
Property,
plant and equipment are comprised of the following amounts at the respective
dates:
As of
|
||||||||
9/30/10
|
12/31/09
|
|||||||
Cost:
|
||||||||
Buildings
|
$
|
6,208,306
|
$
|
6,158,887
|
||||
Machinery,
equipment and furniture
|
5,229,093
|
4,497,567
|
||||||
11,437,399
|
10,656,454
|
|||||||
Accumulated
depreciation
|
(3,927,396
|
)
|
(3,309,354
|
)
|
||||
Net
|
$
|
7,510,003
|
$
|
7,347,100
|
During
the reporting periods, depreciation expense is included in the following
accounts on the accompanying consolidated income statements:
Three months ended
|
Nine months ended
|
|||||||||||||||
9/30/10
|
9/30/09
|
9/30/10
|
9/30/09
|
|||||||||||||
General
and administrative expenses
|
$
|
213,908
|
$
|
179,703
|
$
|
618,042
|
$
|
539,012
|
||||||||
$
|
213,908
|
$
|
179,703
|
$
|
618,042
|
$
|
539,012
|
7.
|
LAND
OCCUPANCY RIGHTS
|
As of
|
||||||||
9/30/10
|
12/31/09
|
|||||||
Land
occupancy rights
|
98,887
|
98,887
|
||||||
Less:
Accumulated amortization
|
(26,019
|
)
|
(22,053
|
)
|
||||
Land
occupancy rights, net
|
$
|
72,868
|
$
|
76,834
|
During
the reporting periods, amortization expense is included in the following
accounts on the accompanying consolidated income statements:
Three months ended
|
Nine months ended
|
|||||||||||||||
9/30/10
|
9/30/09
|
9/30/10
|
9/30/09
|
|||||||||||||
General
and administrative expenses
|
$
|
1,328
|
$
|
1,317
|
$
|
3,965
|
$
|
3,951
|
||||||||
$
|
1,328
|
$
|
1,317
|
$
|
3,965
|
$
|
3,951
|
F-30
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2010
|
8.
|
SHORT-TERM
BORROWING
|
The
Company’s outstanding principal balances on its short-term borrowings are
payable as follows:
As of
|
||||||||
9/30/10
|
12/31/09
|
|||||||
Bank
of China, 6.372% interest rates, due no later than February 3,
2011
|
1,790,751
|
3,514,835
|
||||||
Laishang
Bank (aka Commercial Bank (Heze branch)), 7.965% interest rate, due no
later than November 4, 2011
|
2,686,126
|
4,539,996
|
||||||
Construction
Bank of China (Cao County branch), 4.86% interest rate per annum, due no
later than November 3, 2010
|
4,476,877
|
-
|
||||||
$
|
8,953,754
|
$
|
8,054,831
|
As of September 30, 2010, a portion of
short-term borrowings from Bank of China are secured by certain assets of the
Company. Specifically, $732,257 in short-term borrowings is secured by the
Company’s property with a net book value of approximately
$5,153,028.
Subsequent
to the end of the third quarter of 2010, the loan of $447,688 from Laishang Bank
was paid in full.
The effects of imputed interest on the
aforementioned below market interest rates are immaterial to the consolidated
financial statements taken as a whole.
9.
|
OTHER
PAYABLES AND ACCRUED LIABILITIES
|
As of
|
||||||||
9/30/10
|
12/31/09
|
|||||||
Salary
and welfare payable
|
$
|
324,803
|
$
|
105,246
|
||||
Accrued
expenses
|
39,563
|
21,818
|
||||||
Other
payables
|
198,816
|
604,265
|
||||||
$
|
563,182
|
$
|
731,329
|
Staff welfare payable represents
accrued staff medical, industry injury claims; labor and unemployment
insurances, all of which are third parties insurance and the insurance premiums
are based on certain percentage of salaries. The obligations of the Company are
limited to those premiums contributed by the Company.
10.
|
STATUTORY
AND DISCRETIONARY SURPLUS RESERVE
|
In
accordance with the relevant laws and regulations of the PRC and articles of
association, the Company is required to appropriate 10% and a certain other
percentage of the net profit as reported in the Company’s PRC statutory
consolidated financial statements to the statutory reserve fund and the
discretionary surplus reserve fund, respectively, after offsetting prior year’s
losses.
When the
balance of the statutory reserve fund reaches 50% of the registered capital, and
further appropriation is optional. Upon approval from the board of directors or
members, the statutory reserve can be used to offset accumulated losses or to
increase registered capital.
F-31
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2010
|
11.
|
COST
OF GOODS SOLD (EXCLUSIVE OF DEPRECIATION AND
AMORTIZATION)
|
Cost of
goods sold consists primarily of costs of raw materials and direct labor, and
other costs directly attributable to the production of products. Write-down of
inventories to lower of cost or market is also recorded in cost of goods
sold.
The
following table sets forth the breakdown of our cost of goods sold for the three
and nine months ended September 30, 2010 and 2009, respectively.
Three months ended
|
Nine months ended
|
|||||||||||||||
9/30/10
|
9/30/09
|
9/30/10
|
9/30/09
|
|||||||||||||
Direct
Materials
|
12,514,310
|
8,259,398
|
34,567,595
|
26,791,399
|
||||||||||||
Indirect
Materials
|
2,859,429
|
1,866,140
|
7,532,652
|
5,394,240
|
||||||||||||
Direct
Labor
|
854,917
|
629,905
|
2,491,066
|
1,815,129
|
||||||||||||
Inbound
Freights
|
233,958
|
168,979
|
614,878
|
516,159
|
||||||||||||
Cost
of Goods Sold
|
16,462,614
|
10,924,422
|
45,206,191
|
34,516,927
|
The
depreciation and amortization expenses, shipping and handling expenses,
inspection costs are excluded from cost of goods sold, the amount of which for
the three and nine months ended September 30, 2010 and 2009, respectively, are
set forth in the following table.
Three months ended
|
Nine months ended
|
|||||||||||||||
9/30/10
|
9/30/09
|
9/30/10
|
9/30/09
|
|||||||||||||
Depreciation
expenses
|
$
|
213,908
|
$
|
179,703
|
$
|
618,042
|
$
|
539,012
|
||||||||
Amortizations
|
$
|
1,328
|
$
|
1,317
|
$
|
3,965
|
$
|
3,951
|
||||||||
Shipping
and handling expenses
|
$
|
76,782
|
$
|
101,410
|
$
|
344,071
|
$
|
328,708
|
||||||||
Inspection
costs
|
$
|
7,615
|
$
|
6,742
|
$
|
39,863
|
$
|
43,578
|
These
excluded expenses are included under Selling, General and Administrative
expenses in the accompanying financial statements.
12.
|
SELLING
AND MARKETING EXPENSES
|
Selling
and marketing expenses were $215,692 and $608,729 for the three and nine months
ended September 30, 2010, respectively, including $76,782 and $344,071 in
shipping and handling expenses for three-month and nine-month periods,
respectively. Selling and marketing expenses mainly consist of advertising,
shipping and handling costs, exhibition expenses, inspection costs, and the
other costs of our distribution network which are expensed as incurred during
the selling activities.
13.
|
NON-OPERATING
INCOME
|
Non-operating income were $3,700 and
$108,817 for the three and nine months ended September 30, 2010, respectively,
representing subsidies provided by the local government to support exporting
manufacturers. Such amounts are recognized in the financial statements when the
subsidies are received.
14.
|
INCOME
TAXES
|
The
Company is subject to the foreign investment enterprise income tax at the
statutory rate of 15% on the profits as reported in the Company’s PRC statutory
consolidated financial statements as adjusted by profit and loss items, which
are not taxable or deductible before 2008.
PRC’s
legislative body, the National People’s Congress, adopted the unified EIT Law on
March 16, 2007. This new tax law replaces the existing separate income tax
laws for domestic enterprises and foreign-invested enterprises and became
effective on January 1, 2008. Under the new tax law, a unified income tax
rate is set at 25% for both domestic enterprises and foreign-invested
enterprises. Thus, the Company is subject to corporate income tax at the
statutory rate of 25% commencing in 2008.
F-32
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2010
|
14.
|
INCOME
TAXES (CONT’D)
|
Income
taxes in the accompanying consolidated statements of income for the reporting
periods represent provision for EIT for the Company’s continuing operations in
the PRC.
The
effective income taxes differ from the above PRC statutory EIT rates as
follows:
Three months ended
|
Nine months ended
|
|||||||||||||||
9/30/10
|
9/30/09
|
9/30/10
|
9/30/09
|
|||||||||||||
EIT
rate in effect for the year
|
25
|
%
|
25
|
%
|
25
|
%
|
25
|
%
|
||||||||
Profits
before income tax
|
5,397,048
|
3,056,804
|
13,879,257
|
9,849,956
|
||||||||||||
Income
tax
|
1,388,588
|
764,198
|
3,592,816
|
2,433,631
|
Three months ended
|
Nine months ended
|
|||||||||||||||
9/30/10
|
9/30/09
|
9/30/10
|
9/30/09
|
|||||||||||||
Provision
for income taxes at statutory EIT rate
|
1,349,262
|
764,198
|
3,469,814
|
2,462,489
|
||||||||||||
Non-deductible
and other various items for tax purposes
|
39,326
|
0
|
123,002
|
(28,858
|
)
|
|||||||||||
Income
taxes
|
1,388,588
|
764,198
|
3,592,816
|
2,433,631
|
The Company had no deferred tax
liabilities as of September 30, 2010.
15.
|
INCOME
PER SHARE
|
The following table sets forth the
computation of basic and fully diluted earnings per share for the three and nine
months ended September 30, 2010 and 2009 indicated:
Three months ended
|
Nine months ended
|
|||||||||||||||
9/30/10
|
9/30/09
|
9/30/10
|
9/30/09
|
|||||||||||||
Numerator:
|
||||||||||||||||
Net
income
|
4,008,460
|
2,292,606
|
10,286,442
|
7,416,325
|
||||||||||||
Denominator:
|
||||||||||||||||
Weighted
average number of shares outstanding
|
||||||||||||||||
Basic
|
8,575,000
|
8,146,250
|
8,575,000
|
8,146,250
|
||||||||||||
Fully
diluted
|
8,775,000
|
8,146,250
|
8,741,676
|
8,146,250
|
||||||||||||
Earnings
per common share
|
||||||||||||||||
Basic
|
$
|
0.47
|
$
|
0.29
|
$
|
1.20
|
$
|
0.92
|
||||||||
Fully
diluted
|
$
|
0.45
|
$
|
0.29
|
$
|
1.17
|
$
|
0.92
|
The basic
earnings per share were calculated using the net income and the weighted average
number of shares outstanding during the reporting periods. All share and per
share data have been adjusted to reflect the recapitalization of the Company in
the Exchange, the forward stock split and the reverse stock split.
The
fully diluted earnings per share were calculated using the net income and the
weighted average number of shares outstanding on the fully diluted basis during
the reporting periods. The denominator for fully diluted earnings per share
calculation includes 100,000 warrants granted for services rendered during the
second quarter of 2010. All share and per share data have been adjusted to
reflect the recapitalization of the Company in the Exchange, the forward stock
split and the reverse stock split.
F-33
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2010
|
16.
|
STOCK
BASED COMPENSATION
|
During
the second quarter of 2010, the Company entered into an agreement (the
“Agreement”) to issue 100,000 warrants among other items and recorded a related
expense of $334,702, equal to the estimated fair value of the warrants at the
date of the grant to an unrelated shareholder of the Company. The fair market
value was calculated using the Black-Scholes options pricing model, assuming
approximately 5.15% risk-free interest, 0% dividend yield, 60% volatility, and a
life of two years.
Pursuant
to the Agreement, the Company agreed to issue 21,467 shares of the Company’s
common stock to a consultant to reimburse expenses of $161,000 advanced by the
consultant. The fair value of the shares was determined using the fair value of
the Company’s common stock on the grant date, at a market quoted price of $7.50.
The shares have not been issued as of the date of this
prospectus.
On
July 1, 2010, the Company provided three independent directors with Offer
Letters, respectively, pursuant to which, the Company agreed to issue total
2,500 shares, or 833 shares per person, as compensations to the independent
directors for the third quarter of 2010. The fair value of the shares was
$17,325 determined using the fair value of the Company’s common stock on the
grant date, at a market quoted price of $6.93. The 1,666 shares were issued on
October 29, 2010, and the remaining 833 shares have not been issued as of the
date of this prospectus.
17.
|
REVERSE
STOCK SPLIT
|
On July
30, 2010, Mr. Jinliang Li, the Chairman and Chief Executive Officer of the
Company authorized the effectuation of a 1-for-2 reverse split (the “Reverse
Split”) pursuant to the majority consent on July 1, 2010. The reverse split
combines the Company’s outstanding Common Stock on the basis of 2 outstanding
shares being changed to 1 outstanding share. Each shareholder’s percentage
ownership in the Company (and relative voting power) will remain essentially
unchanged as a result of the Reverse Split. All options, warrants, and any other
similar instruments convertible into, or exchangeable or exercisable
for, shares of common stock will be proportionally adjusted.
The
Reverse Split took effective upon the Company filed a Certificate of Amendment
to the Certificate of Incorporation with the Secretary of State of the State of
Delaware on August 3, 2010.
The
consolidated statement of equity and the earnings per share numbers in the
financial statements have been restated per FASB 128 paragraph
134.
18.
|
DEFINED
CONTRIBUTION PLAN
|
The
Company has a defined contribution plan for all of its qualified employees in
the PRC. The employer and the employees are each required to make contributions
to the plan at the rates specified in the plan. The obligation of the Company
with respect to retirement is to make the required contributions under the plan.
No forfeited contributions are available to reduce the contribution payable in
the future years. The defined contribution plan contributions were charged
to expense in the accompanying consolidated statements of income. The Company
contributed $0 for both three and nine months ended September 30, 2010 and
2009, respectively. The contribution, if any, is included in general and
administrative expenses in the accompanying consolidated income
statements.
19.
|
CONTINGENCIES
|
The
Company had no contingencies existing as of September 30, 2010.
F-34
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2010
|
20.
|
RELATED
PARTY TRANSACTIONS
|
The
Company had no material transactions carried out with its related parties during
the three and nine months ended September 30, 2010 and 2009.
21.
|
CONCENTRATIONS
AND RISKS
|
The Company's operations are carried
out in the People’s Republic of China (“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 and Western Europe. The Company's results may be
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.
(a)
|
Major
customers
|
For the nine months ended September 30,
2010 and 2009, 100% of the Company’s assets were located in the PRC, and certain
customers accounted for greater than 5% in revenues.
The following tables set forth our top
three customers individually comprising 21.67% and 27.30% of net revenue for the
nine months ended September 30, 2010 and 2009, respectively.
For the nine months ended September 30,
2010
Customers
|
Revenues
|
Accounts
Receivable
|
||||||||||
Customer
A
|
$
|
6,981,450
|
11.23
|
%
|
$
|
1,318,517
|
||||||
Customer
B
|
3,735,989
|
6.01
|
%
|
846,681
|
||||||||
Customer
C
|
2,757,307
|
4.43
|
%
|
1,447,690
|
||||||||
Total:
|
$
|
13,474,746
|
21.67
|
%
|
$
|
3,612,888
|
For the nine months ended September 30,
2009
Customers
|
Revenues
|
Accounts
Receivable
|
||||||||||
Customer
D
|
$
|
6,687,341
|
14.47
|
%
|
$
|
1,202,206
|
||||||
Customer
E
|
3,280,581
|
7.10
|
%
|
712,953
|
||||||||
Customer
F
|
2,644,206
|
5.72
|
%
|
549,870
|
||||||||
0
|
||||||||||||
Total:
|
12,612,128
|
27.30
|
%
|
2,465,029
|
F-35
CHINA
SHANDONG INDUSTRIES, INC. AND SUBSIDIARIES
|
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2010
|
21.
|
CONCENTRATIONS
AND RISKS (CONT’D)
|
(b) Credit
risk
Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash and trade accounts receivable. The Company performs ongoing
credit evaluations of its customers' financial condition, but does not require
collateral to support such receivables.
22.
|
SEGMENTS
|
The Company determined that it do not
operate in any material, separately reportable operating segments as of
September 30, 2010 and 2009.
23.
|
SUBSEQUENT
EVENTS
|
On
July 1, 2010, the Company provided three independent directors with Offer
Letters, respectively, pursuant to which, the Company agreed to issue total
2,500 shares, or 833 shares per person, as compensations to the independent
directors for the third quarter of 2010. The fair value of the shares was
$17,325 determined using the fair value of the Company’s common stock on the
grant date, at a market quoted price of $6.93. The 1,666 shares were issued on
October 29, 2010, and the remaining 833 shares have not been issued as of the
date of this prospectus.
On December
22, 2010, the Board of Directors of the Company adopted a resolution approving a
1-for-1.5 reverse split (the “Reverse Split”) of the Company’s Common
Stock. Accordingly, the Reverse Split combines the Company’s outstanding Common
Stock on the basis of 1.5 outstanding shares being changed to 1 outstanding
share. Each shareholder’s percentage ownership in the Company (and relative
voting power) will remain essentially unchanged as a result of the Reverse
Split. All options, warrants, and any other similar instruments convertible
into, or exchangeable or exercisable for, shares of Common Stock will be
proportionally adjusted. Effective on or about January 18, 2011, we
will effectuate a 1 for 1.5 reverse split of our shares of Common
Stock.
The
consolidated statement of equity and the earnings per share numbers in the
financial statements have been restated per FASB 128 paragraph
134.
F-36
__________
Shares of Common Stock
PROSPECTUS
Rodman
& Renshaw, LLC
Until
, 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.
PART
II – INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the
Registrant are as follows. All amounts, other than the SEC registration fee, the
Nasdaq Capital Market fee and FINRA filing fee, are estimates.
Amount to
|
||||
Be Paid
|
||||
SEC
registration fee
|
$
|
1,729.03
|
||
Nasdaq
Capital Market listing fee
|
$
|
5,000.00
|
||
FINRA
filing fee
|
$
|
2,925.00
|
||
Printing
and engraving expenses
|
$
|
5,000.00
|
||
Legal
fees and expenses
|
$
|
250,000.00
|
||
Accounting
fees and expenses
|
$
|
200,000.00
|
||
Transfer
agent and registrar fees
|
$
|
50,000.00
|
||
Blue
Sky Fees and Expenses
|
$
|
25,000.00
|
||
Miscellaneous
|
$
|
50,000.00
|
||
Total
|
$
|
589,654.03
|
ITEM
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Certificate of
Incorporation provides indemnification to the fullest extent permitted by
Delaware law, that our directors or officers shall not be personally liable to
us or our stockholders for damages for breach of such director’s or officer’s
fiduciary duty. The effect of this provision of our Certificate of
Incorporation, as amended, is to eliminate the right of us and our stockholders
(through stockholders’ derivative suits on behalf of our company) to recover
damages against a director or officer for breach of the fiduciary duty of care
as a director or officer (including breaches resulting from negligent or grossly
negligent behavior, except under certain situations defined by
statute. We believe that the indemnification provisions in
our Certificate of Incorporation, as amended, are necessary to attract and
retain qualified persons as directors and officers.
Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to our directors,
officers and controlling persons pursuant to the foregoing provisions, or
otherwise, we have been advised 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. 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,
suite or proceeding) is asserted by such director officer or controlling person
in connection with the securities being registered, we willfulness 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.
ITEM
15. RECENT SALES OF UNREGISTERED SECURITIES
Following are all issuances of
securities by the registrant during the past three years which were not
registered under the Securities Act of 1933, as amended (the “Securities
Act”). All of the following shares of our common stock issued by us
were issued to accredited investors pursuant to the exemption from the
registration requirement of Section 5 of the Securities Act, pursuant to Section
4(2) of the Securities Act and Rule 506 promulgated thereunder. In
each of these issuances the recipient represented that he was acquiring the
shares for investment purposes only, and not with a view towards distribution or
resale except in compliance with applicable securities laws. No
general solicitation or advertising was used in connection with any transaction,
and the certificate evidencing the securities that were issued contained a
legend restricting their transferability absent registration under the
Securities Act or the availability of an applicable exemption therefrom. Unless
specifically set forth below, no underwriter participated in the transaction and
no commissions were paid in connection with the transactions.
On February, 2007, we issued an
aggregate of 5,000,000 shares of our common stock to our founders as follows:
(i) 4,925,000 shares to Timothy Lightman, our Chief Executive Officer and
director at that time; and (ii) 75,000 shares to Frank J. Hariton, our counsel
at that time. The sale price to such persons was an aggregate of
$100.
For the period from June 5, 2007
through September 12, 2007, we sold 222,500 shares of our common stock in a
private placement for an aggregate purchase price of $44,500 to 39
individuals.
II-1
For the period from October 16,
2007 through October 27, 2007, we sold 10,000 shares of our common stock for an
aggregate purchase price of $2,000 to two (2) individuals.
For the period from September 1,
2008 to September 30, 2009, we issued 300,000 shares of our common stock
for legal and consulting services to certain services
providers.
On November 6, 2009, pursuant to a
Stock Exchange and Reorganization Agreement, dated as of October 22, 2009, by
and among us, TIDC, CAOPU, LFG, Phoebus, and Timothy Lightman, we
acquired from CAOPU, LFG and Phoebus all of the issued and outstanding capital
stock of TIDC solely in exchange for 7,717,500 shares of our common
stock.
We entered into an Amendment No. 1
to China Research Group Investor Relations Consulting Agreement, dated April 13,
2010 but made effective as of October 22, 2009, pursuant to which we agreed to
issue to China Research Group Investor Relations (i) 50,000 shares of our common
stock, and (ii) a 2 year warrant to purchase 100,000 shares of our common stock
(“Warrant Shares”) at an exercise price equal to the greater of (a) the per
share public offering price of a share of our common stock in this public
offering, or (b) $6.6 per share. The number of warrant shares and
exercise price should be adjusted proportionately for any stock splits. The
warrant shall is presently exercisable.
On April 13, 2010, pursuant to an
Amended and Restated Agreement, which superseded the original agreement by and
among us and Linear Capital Asia Limited, Inc. (“Linear”), dated October 7,
2008, we agreed to issue to Linear (i) 21,467 shares of our common stock (was
derived based upon $161,000, the amount of funds advanced by Linear to the
Company, of our common stock valued at $7.50 per share), and (ii) a 2 year
warrant to purchase 100,000 shares of common stock at an exercise price equal to
the greater of (a) the per share public offering price of a share of our common
stock in this public offering, and (b) $7.50 per share if this public offering
is not completed. The number of warrant shares and the exercise price
will be adjusted proportionately for any stock splits. The warrant shall is
presently exercisable.
On July 1, 2010, we granted to our
Chairman and Chief Executive Officer a Stock Option to purchase 666,667 shares
of our common stock at an exercise price equal to the per share price each share
of our common stock is sold to the public in this public
offering. The stock option is exercisable for a period of 10
years commencing on July 2, 2011.
ITEM 16. EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
1.1
|
Form
of Underwriting Agreement between Rodman & Renshaw, LLC and us
(as amended after originally filed). (12)
|
|
3.1
|
Certificate
of Incorporation. (1)
|
|
3.1(a)
|
Certificate
of Amendment of Certificate of Incorporation. (2)
|
|
3.1(b)
|
Certificate
of Amendment of Certificate of Incorporation, filed with Secretary of
State of State of Delaware on August 3, 2010. (9)
|
|
3.1(c)
|
Certificate
of Amendment of Certificate of Incorporation, filed with Secretary of
State of State of Delaware on December 23, 2010
(13)
|
|
3.2
|
Bylaws.
(1)
|
|
3.2(a)
|
Bylaws
adopted on June 30, 2010. (8)
|
|
4.1
|
Form
of Underwriter’s Option. (13)
|
|
5.1
|
Legal
Opinion of Gusrae, Kaplan, Bruno & Nusbaum PLLC. *
|
|
10.1
|
Stock
Exchange and Reorganization Agreement dated October 22, 2009.
(3)
|
|
10.2
|
Assignment
and Assumption Agreement dated November 5, 2009, by and between
Mobile Presence Technologies, Inc. and Timothy Lightman.
(3)
|
II-2
10.3
|
Form
of Share Holding Agreement, dated September 14, 2009, between CAOPU
Enterprise Limited and each of nine other shareholders.
(5)
|
|
10.4
|
Maximum
Mortgage Contract dated May 15, 2008, by and between Shandong Caopu Arts
and Crafts Co., Ltd. and Cao County Branch, Bank of China.
(3)
|
|
10.5
|
Maximum
Amount Guarantee Contract (No. Year 2009 Di Xie Zi 001), dated August 25,
2009, by and between Shandong Caopu Arts & Crafts Co., Ltd. and Bank
of China, Cao Country Branch. (7)
|
|
10.6
|
Maximum
Amount Guarantee Contract (No. Year 2009 Di Xie Zi 002), dated November
11, 2009, by and between Shandong Caopu Arts & Crafts Co., Ltd. and
Bank of Chin, Cao Country Branch. (7)
|
|
10.7
|
Employment
Agreements dated January 17, 2002, by and between Shandong Caopu Arts
& Crafts Co., Ltd and each of Zhiyu Wang and Zhiqiang Zhong.
(3)
|
|
10.8
|
Form
of Lock-Up Agreement included within the From of Underwriting Agreement.
(12)
|
|
10.9
|
Stock
Option Agreement, dated July 1, 2010, by and between us and Mr. Jinliang
Li. (8)
|
|
10.10
|
China
Shandong Industries, Inc. 2010 Omnibus Securities and Incentive Plan,
adopted on July 1, 2010. (8)
|
|
10.11
|
Exclusive
Patent License Agreement, dated July 2, 2010, between Shandong Caopu
Arts & Crafts Co., Ltd. and Mr. Jinliang Li. (8)
|
|
10.12
|
Authorization
Letter to Use Shandong Caopu Arts & Crafts Co., Ltd. Poplar Furniture
& Paint Line Expansion Projects Feasibility Study Report dated as of
March 30, 2008. (6)
|
|
10.13
|
Authorization
Letter to Use Patents, dated as of April 19, 2010. (6)
|
|
10.14
|
Form
of Loan Agreement with Bank of China, Cao County Branch.
(8)
|
|
10.15
|
Form
of Loan Agreement with Laishang Bank (A/K/A Commercial Bank (Heze Branch).
(8)
|
|
10.16
|
Form
of Loan Agreement with China Construction Bank, Cao County Branch.
(10)
|
|
10.17
|
China
Research Group Investor Relations Consulting Agreement, dated October 21,
2009, by and between China Research Group, Inc. and Shandong Caopu Arts
& Crafts Co., Ltd. (10)
|
|
10.18
|
Amendment
No. 1 to China Research Group Investor Relations Consulting Agreement,
dated April 13, 2010. (8)
|
|
10.19
|
Engagement
Letter with Linear Capital Asia Limited, dated October 7, 2008.
(10)
|
|
10.20
|
Amended
and Restated Agreement with Linear Capital Asia Limited, Inc., dated April
13, 2010. (8)
|
|
10.21
|
Employment
Agreement dated January 1, 2010, by and between Tianwei International
Development Corporation and Jinliang Li. (8)
|
|
10.22
|
Employment
Agreement dated January 1, 2010, by and between Shandong Caopu Arts &
Crafts Co., Ltd. and Jiawei Li. (8)
|
|
10.23
|
Employment
Agreement dated March 30, 2010, by and between China Shandong Industries,
Inc. and Aihua Li. (8)
|
|
10.24
|
Employment
Agreement dated March 30, 2010, by and between China Shandong Industries,
Inc. and Yuhong Lei. (4)
|
II-3
10.25
|
Form
of Offer Letter with each of the three independent directors dated July 1,
2010. (11)
|
|
14
|
Code
of Ethics. (8)
|
|
21.1
|
List
of Subsidiaries. (3)
|
|
23.1
|
Consent
of Independent Certified Auditor.
|
|
23.2
|
Consent
of Gusrae, Kaplan, Bruno & Nusbaum PLLC (included in Exhibit 5.1)
*
|
*
to be filed by Amendment.
(1)
Incorporated by reference to registration statement on Form SB-2 filed with the
SEC on November 28, 2007.
(2)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC
on January 6, 2010.
(3)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC
on November 12, 2009.
(4)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC
on March 30, 2010.
(5)
Incorporated by reference to our Current Report on Form 10-K filed with the SEC
on April 15, 2010.
(6)
Incorporated by reference to our Current Report on Form S-1 filed with the SEC
on April 20, 2010.
(7)
Incorporated by reference to Amendment No.1 to our Annual Report on Form 10-K/A
filed with the SEC on June 28, 2010.
(8)
Incorporated by reference to Amendment No. 1 to Registration Statement on Form
S-1 filed with the SEC on July 2, 2010.
(9)
Incorporated by reference to our Current Report on Form 8-K filed with the SEC
on August 5, 2010.
(10)
Incorporated by reference to Amendment No. 2 to Registration Statement on Form
S-1 filed with the SEC on August 6, 2010.
(11)
Incorporated by reference to our Current Report on Form 10-Q filed with the SEC
on November 12, 2010.
(12)
Incorporated by reference to Amendment No. 5 to Registration Statement on Form
S-1 filed with the SEC on November 22, 2010, and as amended filed with this
Amendment No. 6 to the Registration Statement.
(13) Filed
herewith.
ITEM
17. UNDERTAKINGS
Insofar as indemnification for
liabilities arising under the Securities Act of 1933 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 Securities and Exchange Commission such indemnification is
against public policy as expressed in the 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 Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby
undertakes that:
(1) For purposes of determining any
liability under the Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any
liability under the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus 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.
II-4
SIGNATURES
Pursuant
to the requirements of the Securities Act, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned on December
22, 2010.
CHINA
SHANDONG INDUSTRIES, INC.
|
||
By:
|
/s/ Jinliang Li
|
|
Name:
Jinliang Li
|
||
Title: Chief Executive Officer and Chairman
|
||
By:
|
/s/ Yuhong Lei
|
|
Name: Yuhong
Lei
|
||
Title: Chief Financial Officer
(Principal Accounting and Financial
Officer)
|
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
By:
|
/s/
Jinliang Li
|
December
22, 2010.
|
|
Name:
Jinliang Li
|
|
||
Title:
Chief Executive Officer and Chairman (Principal
Executive Officer)
|
|||
By:
|
/s/
Yuhong Lei
|
December
22, 2010.
|
|
Name:
Yuhong Lei
|
|
||
Title:
Chief Financial Officer (Principal Accounting and Financial
Officer)
|
|||
By:
|
/s/
Jiawei Li
|
December
22, 2010.
|
|
Name:
Jiawei Li
|
|
||
Title:
Director
|
|||
By:
|
/s/
Yvonne Zhang
|
December
22, 2010.
|
|
Name:
Yvonne Zhang
|
|
||
Title:
Independent Director
|
|||
By:
|
/s/
Man Zhang
|
December
22, 2010.
|
|
Name:
Man Zhang
|
|
||
Title:
Independent Director
|
|||
By:
|
/s/
Fuhua Wu
|
December
22, 2010.
|
|
Name:
Fuhua Wu
|
|
||
Title:
Independent Director
|
SIGNATURE
PAGE