Attached files
file | filename |
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EX-99.1 - Granto, Inc. | v208268_ex99-1.htm |
EX-23.3 - Granto, Inc. | v208268_ex23-3.htm |
EX-23.1 - Granto, Inc. | v208268_ex23-1.htm |
As
filed with the Securities and Exchange Commission on January 18,
2011
Registration
No. 333-166758
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
PRE-EFFECTIVE
AMENDMENT NO. 3 TO
FORM
S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933
RONGFU AQUACULTURE,
INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
0273
|
98-0655634
|
(State or other jurisdiction of
incorporation or organization)
|
(Primary Standard Industrial
Classification Code Number)
|
(I.R.S. Employer
Identification Number)
|
Dongdu
Room 321, No. 475 Huanshidong Road, Guangzhou City, PRC 510075
011- 86-10-5170-9287
(Address,
including zip code, and telephone number,
including
area code, of registrant’s principal executive offices)
Vcorp
Services, LLC
20
Robert Pitt Drive, Suite 214
Monsey,
New York 10952
(845)425-0077
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Copies
to:
Darren
Ofsink, Esq.
Guzov
Ofsink, LLC
900
Third Avenue, 5th Floor
New
York, New York 10022
(212)
371-8008
Approximate
date of commencement of proposed sale to public: as soon as practicable after
this Registration Statement is declared 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. o __________
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. o_________
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 registration statement for the same
offering. o __________
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer
|
¨
|
|
Accelerated filer
|
¨
|
Non-accelerated filer
(Do not check if a smaller reporting
company)
|
¨
|
Smaller reporting company
|
x
|
The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
7,940,370
Shares of Common Stock
RONGFU
AQUACULTURE, INC.
Common
Stock
PROSPECTUS
__,
2011
The
information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is
not an offer to sell these securities and it is not soliciting offers to buy
these securities in any state where the offer is not permitted.
SUBJECT
TO COMPLETION, DATED JANUARY 18, 2011
PRELIMINARY
PROSPECTUS
7,940,370
Shares
Rongfu
Aquaculture, Inc.
Common
Stock
This
prospectus relates to the resale by the Selling Stockholders of up to 7,940,370
shares of our Common Stock, $.001 par value (“Common Stock”), including an
aggregate of 1,044,081 shares issued to certain Selling Stockholders pursuant to
or in connection with a Share Exchange Agreement dated as of March 29, 2010 (the
“Share Exchange Agreement”) and an aggregate of 6,896,289 shares of our Common
Stock issuable to the Selling Stockholders upon conversion of shares of our
Series A Preferred Stock and exercise of warrants to purchase our Common Stock
issued in a private placement (the “Private Placement”) pursuant to a Series A
Preferred Stock Purchase Agreement dated as of March 29, 2010 (the “Purchase
Agreement”).
All of
the shares of Common Stock issued to the Selling Stockholders may be sold by the
Selling Stockholders. It is anticipated that the Selling Stockholders will sell
these shares of Common Stock from time to time in one or more transactions, in
negotiated transactions or otherwise, at prevailing market prices or at prices
otherwise negotiated (see “Plan of Distribution” beginning on page 76. We will
not receive any proceeds from the sales by the Selling
Stockholders. Under the terms of the warrants, cashless exercise is
permitted in certain circumstances. We will not receive any proceeds from any
cashless exercise of the warrants, but would receive the exercise price of
warrants exercised on a cash basis. We will pay all of the registration expenses
incurred in connection with this offering, but the Selling Stockholders will pay
any selling commissions, brokerage fees and related expenses.
There is
a limited market in our Common Stock. The shares are being offered by the
Selling Stockholders in anticipation of the continued development of a secondary
trading market in our Common Stock. We cannot give you any assurance that an
active trading market in our Common Stock will develop, or if an active market
does develop, that it will continue.
Our
Common Stock is listed on the OTC Bulletin Board and trades under the symbol
RNFU.OB. On December 7, 2010, the date of the last reported trade of
our Common Stock, the closing sale price of our Common Stock was $4.00 per
share.
Investing
in our Common Stock involves risks. See “Risk Factors” on
page 9.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
The date
of this prospectus is ______, 2011
TABLE OF
CONTENTS
Page
|
|
Prospectus Summary
|
3
|
Risk Factors
|
9
|
Special
Note Regarding Forward-Looking Statements
|
22
|
Use
of Proceeds
|
23
|
Market for Common Equity and
Related Stockholder Matters
|
23
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
24
|
Organizational
History of the Company and its Subsidiaries
|
37
|
Business
|
41
|
Description
of Property
|
51
|
Directors,
Executive Officers, Promoters and Control Persons
|
53
|
Transactions
With Related Persons, Promoters and Control Persons; Corporate
Governance
|
55
|
Security
Ownership of Certain Beneficial Owners and Management
|
58
|
Selling
Stockholders
|
60
|
Description
of Securities
|
64
|
Shares
Eligible for Future Sale
|
69
|
Material
United States Federal Income Tax Considerations
|
70
|
Material
PRC Income Tax Considerations
|
73
|
Plan
of Distribution
|
76
|
Legal
Matters
|
78
|
Experts
|
78
|
Changes
in and Disagreements With Accountants
|
78
|
Where
You Can Find More Information
|
78
|
Index
to Consolidated Financial Statements
|
79
|
ABOUT
THIS PROSPECTUS
You should rely only on the information
contained in this prospectus and any free writing prospectus prepared by or on
behalf of us or to which we have referred you. We have not authorized anyone to
provide you with information that is different. This document may only be used
where it is legal to offer or sell these securities. This prospectus does not
constitute an offer to sell or the solicitation of an offer to buy these
securities in any jurisdiction in which such offer or solicitation may not be
legally made. If any other information or representation is given or made,
such information or representation may not be relied upon as having been
authorized by us or the underwriter, and neither we nor the underwriter accepts
any liability in relation thereto.
We obtained statistical data, market
data and other industry data and forecasts used throughout, or incorporated by
reference in, this prospectus from market research, publicly available
information and industry publications. Industry publications generally state
that they obtain their information from sources that they believe to be
reliable, but they do not guarantee the accuracy and completeness of the
information. Similarly, while we believe that the statistical data, industry
data and forecasts and market research are reliable, we have not independently
verified the data. We have not sought the consent of the sources to refer to
their reports appearing or incorporated by reference in this
prospectus.
2
PROSPECTUS
SUMMARY
This summary highlights information
contained elsewhere in this prospectus. This summary does not contain
all of the information you should consider before investing in our common stock.
You should read this entire prospectus carefully, especially the “Risk Factors”
section beginning on page 9 and our consolidated financial statements and
the related notes appearing at the end of this prospectus, before making an
investment decision. Unless the context otherwise requires, The
"Company", "we," "us," and "our," refer to (i) Rongfu Aquaculture, Inc.
(“Rongfu”), (iii) Flourishing Blessing (Hong Kong) Co., Ltd. (“Flourishing HK”)
and (iv) Guangzhou Flourishing Blessing Heng Seng Agriculture Technology
Limited (the “WOFE” or “Guangzhou Flourishing”). Certain references to ownership
and other rights of the Company in this prospectus include the rights
of Foshan Nanhai Ke Da Heng Sheng Aquatic Co., Ltd. and Hainan Ke Da Heng Sheng
Acquit Germchit Co., Ltd. which we are attributing to the Company by virtue of
the Contractual Agreements described below. All information contained herein for
the fiscal year ended December 31, 2010 and at December 31, 2010 is
unaudited.
Our
Business
Through our subsidiaries and the
Contractual Agreements described below, we are engaged in commercial freshwater
aquaculture in the People’s Republic of China (the “PRC”). Aquaculture is the
cultivation or farming of fish under controlled conditions (as contrasted with
the harvesting of fish in the wild). We cultivate fish in fresh water (not
marine (salt water) or brackish environments), sell fish and fish fry (juvenile
fish) and also act as a dealer of freshwater fish (generating trading profits
from the purchase of fish from third party farmers and the immediate re-sale of
such fish to wholesalers and processors).
During the fiscal year ended December
31, 2010 (“fiscal 2010”) we sold more than 38,000 tons of adult fish to frozen
fish processors and wholesalers in Guangdong Province and Hainan Province, PRC
and we sold approximately 370 million fry to distributors, which in turn sold
such fry to other farmers to cultivate.
Our
Industry
Aquaculture is the science, art, or
practice of cultivating and harvesting aquatic organisms, including fish,
mollusks, crustaceans, aquatic plants, and algae such as seaweed. Operating in
marine, brackish, and freshwater environments, aquaculture provides food for
people and in smaller amounts supplies fish for stocking lakes, bait for
fishing, and live specimens for home aquariums. According to a recent study by
the World Food and Agriculture Organization (“FAO”) published on March 2,
2009, world fisheries production reached a new high of 143.6 million metric
tons in 2006, including farmed and ocean caught product. The contribution of
aquaculture to the world fisheries production in 2006 was 51.7 million tons
of fish, which was 36 percent of world fisheries production in 2006, up from 3.6
percent in 1970. Global aquaculture accounted for 6 percent of the fish
available for human consumption in 1970. In 2006 global aquaculture accounted
for 47 percent of the fish available for human consumption according to the FAO.
The FAO report also describes that over half of the global aquaculture in 2006
was freshwater finfish. Based on the FAO’s projections, it is estimated that in
order to maintain the current level of per capita consumption, global
aquaculture production will need to reach in excess of 80 million tons of
fish by 2050.
Also according to the FAO, in 2006
China contributed approximately 67% of the total quantity and 49% of the total
value of worldwide aquaculture production. In China, approximately 90% of fish
production comes from aquaculture. China’s aquatic production for 2009 is
forecast to have reached 49.5 metric tons (“MMT”), an increase of approximately
two percent from the estimated 48.6 MMT of production in 2008.
Inland aquaculture is very important
part of China fishery industry. Freshwater aquaculture is carried out in fish
ponds, lakes, reservoirs, canals, pens, cages, and paddy fields. Freshwater
aquaculture production is dominated by finfish, particularly silver, grass and
other carps. Pond culture is the most important source of inland
aquaculture, with an estimated share of 73.9% in 1996. More than 4.5
million Chinese farmers are engaged in aquaculture, more than the rest of the
world combined.
3
In 2005, according to the American
Tilapia Association (“ATA”), tilapia production worldwide was second in volume
to carp, and it is projected by the ATA that tilapia will become the most
important aquaculture crop in the 21st
century. Commercial production of tilapia has become popular in many countries
around the world. Touted as the “new white fish” to replace the depleted ocean
stocks of cod, pollock, and hake, world tilapia production continues to rise and
at least 100 countries currently raise tilapia, with the PRC being the largest
producer. The American Tilapia Association further reports that world production
of tilapia products reached approximately 2.5 million metric tons in 2007,
of which China produced the dominant share of 45.0 percent.
Our
Principal Competitive Strengths
We
believe we have the following principal competitive strengths:
|
•
|
Quality
Products. We produce fish products and have developed a farming
system that avoids the use of potentially toxic chemicals, drugs,
pesticide residues, veterinary drug residues, heavy metals, pollutants and
other substances. We believe that we fully comply with the Law of PRC on
the Prevention and Control of Water Pollution. Our fish are raised in
ponds of pure rain water collected for aquaculture. We use high quality
fish food to comply with the safety rules and regulations in the
PRC.
|
|
•
|
Vertically
Integrated Operations. Vertical integration
of our operations allows us to control and monitor quality, as well as
reduce costs. Through our cooperative arrangements with local farmers, we
train them to our production methods, while monitoring constantly the
quality of production until
harvest.
|
|
•
|
Environmental
and Quality Assurances. We have adopted and implemented stringent
quality control measures and procedures throughout the production process,
in order to comply with the various environmental and quality standards.
In order to supply to food processing companies, we have complied with the
Food Safety Law of the PRC, which became effective on June 1, 2009. We use
advanced technologies in our farming, feed formulation and processing
operations. We have adopted modern and environmentally friendly and
responsible technology in our growing process of
fishes.
|
|
•
|
Strategic
Location in Guangdong
Province,
PRC.
Our processing facilities are geographically well-positioned in
Guangdong Province to leverage favorable climatic conditions, abundant
water supply, a pristine environment and a readily available source of
labor for our processing plant. Furthermore, our logistics center is
conveniently located near the farmers from whom we obtain our supply of
fish and it is also in close proximity to our new cooperative
fish farms.
|
|
•
|
Competitive
Cost Structure. We benefit from competitive cost structures due to
the lower labor costs in China and the streamline of the supply chain
transactions to increase the logistics efficiencies. We also believe
that we are able to trim our operating costs by procurement of fry and
fish food at relatively low cost and deployment of advanced methods for
cultivation.
|
|
·
|
Experienced
Management – The
senior management has extensive experience in fish farming in Guangdong
Province in China. Mr. Chen Zhisheng, our Chairman, has over 30 years
experience in the field of aquaculture. He also serves as the Chairman of
Foshan Nanhai Aquaculture Association and we believe that he has great
influence in the development of the industry in Guangdong
Province.
|
4
Our
Growth Strategies
|
•
|
Domestic
Sales and Marketing Efforts. The recent establishment of our sales
office in Hangzhou on May 2010 will help us further roll out our products
outside of Guangdong Province. Following the opening of our logistics
center in May 2010, we can explore new sales networks for other
regions to meet customer needs and thus advance our new branding and
marketing initiative around our “Ke Da Heng Sheng” brand
of our adult fish and fish fry
products.
|
|
•
|
Strong
Research and Development Team. We
have an established and strong research and development team to enhance
our growing technology and have close cooperation with leading research
institutes with the aim to develop new strains of fish. We plan to
add more breeding types of fish to meet the demand of farmers and to
deliver “all-season” fry (fry that are raised and grown all year long) to
smooth out our production cycle and enable us to minimize price
fluctuations and generate more consistent revenue throughout the
year.
|
|
•
|
Expansion
of Cooperative Farming. We plan to expand our cooperative farming
arrangements to increase the availability of our products to meet
anticipated growth in demand.
|
|
•
|
Expansion
of Production Facilities. We plan to expand our production
facilities to satisfy the anticipated growing demand for our
products.
|
Our
Corporate Structure
Our
current structure is set forth in the diagram below:
5
Company
Information
Our
principal executive offices are located at Dongdu Room 321, No. 475 Huanshidong
Road, Guangzhou City, PRC 510075, and our telephone number is
011-86-20-8762-1778.
THE
OFFERING
On March 29, 2010 the Company entered
into and consummated the Share Exchange Agreement with certain of the Selling
Stockholders. Pursuant to or in connection with the Share Exchange Agreement,
the Company issued to certain of the Selling Stockholders an aggregate of
1,044,081 shares of common stock of Rongfu Aquaculture, Inc. On March 29, 2010
the Company also entered into and consummated the Purchase Agreement with
certain of the Selling Stockholders, pursuant to which the Company issued to
those Selling Stockholders in exchange for an aggregate cash payment of
approximately $7,700,000 (a) an aggregate of 2,768,721 shares of its Series A
Preferred Stock, (b) five-year Series A Warrants to purchase an aggregate of
1,730,451 shares of its Common Stock for $3.47 per share and (c) five-year
Series B Warrants to purchase an aggregate of 1,730,451 shares of its Common
Stock for $4.17 per share. In connection with the consummation of the
Purchase Agreement and the Share Exchange Agreement the Company also issued to
certain of the Selling Stockholders (d) five-year Series C Warrants to purchase
an aggregate of 333,333 shares of its Common Stock for $2.44 per share and (e)
five-year Series D warrants to purchase an aggregate of 333,333 shares of its
Common Stock for $2.93 per share.
This prospectus relates to the resale
of the 7,940,370 shares of our Common Stock issued to the Selling Stockholders
and issuable to the Selling Stockholders upon conversion of the Series A
Preferred Stock and exercise of all of the warrants referred to in the preceding
paragraph.
Issuer
|
Rongfu
Aquaculture, Inc.
|
|
Common
Stock outstanding prior to the Offering
|
21,286,789
shares
|
|
Common
Stock offered by the Selling Stockholders
|
7,940,370
shares
|
|
Total
shares of Common Stock to be outstanding after the Offering assuming
conversion of all Series A Preferred Stock and exercise of all outstanding
warrants
|
28,183,078
shares
|
|
Use
of Proceeds
|
We
will not receive any proceeds from the sale of the shares of Common
Stock.
|
|
Our
OTC Bulletin Board Trading Symbol
|
RNFU.OB
|
|
Risk
Factors
|
You
should read the “Risk Factors” section beginning on page 7 of this
prospectus for a discussion of factors to consider carefully before
deciding to invest in shares of our Common
Stock.
|
The
number of shares of our Common Stock to be outstanding after this offering is
based on 21,286,789 shares of our Common Stock outstanding as of January 14,
2011 and gives effect to the issuance of an aggregate of 6,896,289 shares of
Common Stock to the Selling Stockholders upon conversion of all of the Series A
Preferred Stock and warrants to purchase our Common Stock held by
them.
6
SUMMARY
CONSOLIDATED FINANCIAL DATA
The
following tables summarize our consolidated financial data for the periods
presented. You should read these tables together with the consolidated financial
statements and related notes appearing at the end of this prospectus, as well as
“Capitalization,” “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and the other financial information included
elsewhere in this prospectus. We have derived the consolidated statement of
operations data for the nine months ended September 30, 2010 and 2009
from our unaudited consolidated financial statements included in this
prospectus. Our historical results are not necessarily indicative of
the results to be expected in any future period.
|
Nine months
ended September 30, 2010
|
Nine months
ended September 30, 2009
|
||||||
|
||||||||
Revenue
|
$ | 35,369,699 | $ | 21,731,927 | ||||
Cost
of goods sold
|
23,576,353 | 13,323,764 | ||||||
Gross
profit
|
11,793,346 | 8,408,163 | ||||||
Operating
expenses:
|
||||||||
Selling
expenses
|
1,299,046 | 491,112 | ||||||
General
and administrative expenses
|
1,956,142 | 1,336,945 | ||||||
Research
and development cost
|
104,255 | 56,437 | ||||||
Total
operating expenses
|
3,359,443 | 1,884,494 | ||||||
Net
income from operations
|
8,433,903 | 6,523,669 | ||||||
Other
income (expenses):
|
||||||||
Loss
on fair value of derivative liability
|
(6,251,254 | ) | - | |||||
Interest
income
|
10,584 | 35,510 | ||||||
Interest
expense
|
(35,678 | ) | (87,436 | ) | ||||
Total
other income (expense)
|
(6,276,348 | ) | (51,926 | ) | ||||
Net
income before income taxes
|
2,157,555 | 6,471,743 | ||||||
Income
taxes
|
790,416 | 446,572 | ||||||
Net
income
|
$ | 654,463 | $ | 5,021,462 | ||||
Deemed
dividend from beneficial conversion feature of Series A preferred
stock
|
(4,374,579 | ) | - | |||||
Dividends
paid or declared
|
$ | (838,577 | ) | - | ||||
Net
income (loss) available to common shareholders
|
$ | (3,846,017 | ) | $ | 6,025,171 | |||
Earnings
per share – basic and diluted
|
$ | (0.19 | ) | $ | 0.31 | |||
Weighted
average shares outstanding
|
20,756,854 | 19,623,889 | ||||||
Net
income
|
$ | 1,367,139 | $ | 6,025,171 | ||||
Other
comprehensive income
|
$ | 399,260 | $ | 18,092 | ||||
Comprehensive
income
|
$ | 1,766,399 | $ | 6,043,263 |
7
|
Year ended December 31, 2009
|
Year ended December
31, 2008
|
||||||
Revenue
|
$ | 43,842,407 | $ | 35,592,569 | ||||
Cost
of goods sold
|
26,708,361 | 20,043,897 | ||||||
Gross
profit
|
17,134,046 | 15,548,672 | ||||||
Operating
expenses:
|
||||||||
General
and administrative expenses
|
1,642,757 | 1,606,312 | ||||||
Selling
expenses
|
871,279 | 1,023,444 | ||||||
Research
and development cost
|
90,045 | 88,040 | ||||||
Total
operating expenses
|
2,604,081 | 2,717,796 | ||||||
Net
income from operations
|
14,529,965 | 12,830,876 | ||||||
Other
income (expenses):
|
||||||||
Interest
income
|
50,493 | 71,087 | ||||||
Interest
expense
|
(107,827 | ) | (12,733 | ) | ||||
Other
expenses
|
(415 | ) | (1,954 | ) | ||||
Total
other income (expense)
|
(57,749 | ) | 56,400 | |||||
Net
income before income taxes
|
14,472,216 | 12,887,276 | ||||||
Income
taxes
|
1,396,028 | 1,027,781 | ||||||
Net
income
|
$ | 13,076,188 | $ | 11,859,495 | ||||
Earnings
per share – basic
|
$ | 0.67 | $ | 0.60 | ||||
Earnings
per share – diluted
|
$ | 0.67 | $ | 0.60 | ||||
Weighted
average shares outstanding –basic
|
19,623,889 | 19,623,889 | ||||||
Weighted
average shares outstanding –diluted
|
19,623,889 | 19,623,889 | ||||||
Net
income
|
$ | 13,076,188 | $ | 11,859,495 | ||||
Other
comprehensive income
|
5,533 | 600,174 | ||||||
Comprehensive
income
|
$ | 13,081,721 | 12,459,669 |
8
Balance Sheet Data:
|
September 30, 2010
|
December 31, 2009
|
||||||
Cash
|
$ | 6,695,287 | $ | 3,194,248 | ||||
Accounts
receivable
|
$ | 1,604,553 | $ | 236,374 | ||||
Inventories
|
$ | 10,905,977 | $ | 2,979,753 | ||||
Due
from shareholders
|
$ | - | $ | 4,008,659 | ||||
Prepaid
expenses
|
$ | 653,372 | $ | 230,247 | ||||
Fixed
assets
|
$ | 868,448 | $ | 405,147 | ||||
Other
receivables
|
$ | 1,321,356 | $ | 21,208 | ||||
Trade
deposit
|
$ | - | $ | 121,224 | ||||
Biological
assets
|
$ | 248,811 | $ | 432,808 | ||||
Total
assets
|
$ | 22,297,804 | $ | 11,629,668 | ||||
Total
liabilities
|
$ | 15,409,405 | $ | 9,254,732 | ||||
Temporary
equity
|
$ | 7,700,00 | $ | - | ||||
Total
stockholders' equity
|
$ | (811,601 | ) | $ | 2,374,936 | |||
Total
liabilities and stockholders’ equity
|
$ | 22,297,804 | $ | 11,629,668 |
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below, together with all of the other
information included in this prospectus, before making an investment decision.
If any of the following risks actually occurs, our business, financial condition
or results of operations could suffer. In that case, the trading price of our
common stock could decline, and you may lose all or part of your
investment.
RISKS
RELATED TO OUR BUSINESS
We
may not be able to effectively control and manage our growth, and a failure to
do so could adversely affect our operations and financial
condition.
We plan
to expand our current production capacity. Planned expenditures for land,
equipment, acquisition of companies and market expansion are approximately $20
million over the next two years. Even if we are able to secure the funds
necessary to implement these expenditures (of which there is no assurance), we
will face management, resource and other challenges in expanding our current
facilities, integrating acquired assets or businesses with our own, and managing
expanding product offerings. Failure to effectively deal with increased demands
on our resources could interrupt or adversely affect our operations and cause
production backlogs, longer product development time frames and administrative
inefficiencies. Other challenges involved with expansion, acquisitions and
operation include:
●
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unanticipated
costs;
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●
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the
diversion of management’s attention from other business
concerns;
|
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|
potential
adverse effects on existing business relationships with suppliers and
customers;
|
●
|
obtaining
sufficient working capital to support
expansion;
|
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|
expanding
our product offerings and maintaining the high quality of our
products;
|
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maintaining
adequate control of our expenses and accounting
systems;
|
●
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successfully
integrating any future acquisitions;
and
|
9
●
|
anticipating
and adapting to changing conditions in the aquaculture industry, whether
from changes in government regulations, mergers and acquisitions involving
our competitors, technological developments or other economic, competitive
or market dynamics.
|
Even if
we do obtain benefits of expansion in the form of increased sales, there may be
a lag between the time when the expenses associated with an expansion or
acquisition are incurred and the time when we recognize such benefits, which
would affect our earnings.
The
new cooperative model we are developing will require substantial investment and
reliance upon independent farmers and there can be no assurance that the model
will be successful.
We are developing a new cooperative
business model which will rely more heavily on independent fish farmers to grow
fish for us to purchase and re-sell. The new model will require substantial
working capital from us because we intend to provide farmers fish fry to grow
and not receive payment for the fry at the time we provide the fry. The cost of
the fry provided to each farmer will be recorded as a receivable from such
farmer on our books and recouped by us when we purchase adult fish from the
farmer. A return on our investment will be dependent upon our success in
training farmers in our techniques and insuring uniform quality. Currently, most
of the independent farmers lack the necessary expertise and management
experience needed to economically produce healthy adult fish.
Any
actual contamination of our products resulting from processing, packaging or
transit of our products, or negative press from contamination experienced by
other companies in our industry may adversely affect our operations or reduce
our margins or profits.
We
actively seek to control the quality of our products and avoid risk of
contamination in the distribution of such products. However, no quality control
program is guaranteed to be completely effective. We are dependent on others for
the reliable processing, packaging and safe transportation of our products to
the market place and the quality of our final product as experienced by the
consumer may be impacted by disruptions in the processing, packaging and transit
process beyond our control. In addition, if our competitors experience problems
with contamination of their products, even if we do not concurrently suffer
similar adverse events, publicity of such problems could negatively impact our
reputation. Actual contamination or reports of industry problems with
contamination or poor quality may have a material adverse effect on our
operations, including an increase in product liability claims, higher quality
control and transport costs, reduced margins and decreased consumer interest in
our products.
We
may be adversely affected by the fluctuation in raw material prices and selling
prices of our products.
Neither
our products nor the raw materials we use have experienced any significant price
fluctuations since we began operation, but there is no assurance that they will
not be subject to future price fluctuations or pricing control. The products and
raw materials we use may experience price volatility caused by events such as
market fluctuations or changes in governmental programs. The market price of
these raw materials may also experience significant upward adjustment, if, for
instance, there is a material under-supply or over-demand in the market. These
price changes may ultimately result in increases in the selling prices of our
products, and may, in turn, adversely affect our sales volume, revenue and
operating profit.
We
could be adversely affected by the occurrence of natural disasters in Guangdong
and Hainan Provinces.
From time
to time, both Guangdong and Hainan Provinces experience typhoons, particularly
from June through September of any given year. Natural disasters could impede
operations, damage infrastructure necessary to our operations or adversely
affect the logistical services to and from such provinces. Even though we
currently have insurance against damage caused by natural disasters, including
typhoons, accidents or similar events, the occurrence of natural disasters in
Hainan and Guangdong Provinces could adversely affect our business, the results
of our operations, prospects and financial condition, through business
disruptions and/or any losses in excess of our policy limits.
10
We
do not presently maintain product liability insurance or business interruption
insurance, and our property and equipment insurance does not cover the full
value of our property and equipment, which leaves us with exposure in the event
of loss or damage to our properties or claims filed against us.
We
currently do not carry any product liability or other similar insurance or
business interruption insurance. Unlike in the United States and many other
countries, product liability claims and lawsuits in the PRC are rare. Product
liability exposures and litigation, however, could become more commonplace in
the PRC. Moreover, we could have more product liability exposure and liability
as we expand our sales into international markets, like the United States, where
product liability claims are more prevalent.
We
may be required from time to time to recall products entirely or from specific
co-packers, markets or batches. We do not maintain recall insurance. In
the event we do experience product liability claims or a product recall, or
suffer from natural or other unexpected disaster, business or government
litigation, or any uncovered risks of operation our financial condition and
business operations could be materially adversely affected.
We
may not have adequate or effective internal accounting controls.
The PRC has not adopted a Western style
of management and financial reporting concepts and practices. We may have
difficulty in hiring and retaining a sufficient number of qualified employees to
work in the PRC. As a result of these factors, we may experience difficulty in
establishing accounting and financial controls, collecting financial data,
budgeting, managing our funds and preparing financial statements, books of
account and corporate records and instituting business practices that meet
Western standards.
Rules adopted by the Securities and
Exchange Commission (the “Commission”) pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002 require annual assessment of our internal controls
over financial reporting. The requirement that management perform an assessment
of internal controls over financial reporting first applied to our Annual Report
on Form 10-K for the fiscal year ended December 31, 2008. The standards that
must be met for management to assess the internal controls over financial
reporting as effective are relatively new and complex, and require significant
documentation, testing and possible remediation to meet the detailed
standards.
Our lack
of familiarity with Western practices generally and Section 404 specifically may
unduly divert management’s time and resources, which could have a material
adverse effect on our operating results. Further, if material weaknesses in our
internal controls over financial reporting are identified or our external
auditors are unable to attest that our management’s report is fairly stated or
to express an opinion on the effectiveness of our internal controls, this could
result in a loss of investor confidence in our financial reports, have an
adverse effect on our stock price and/or subject us to sanctions or
investigation by regulatory authorities.
During the preparation of our financial
statements for the quarter ended September 30, 2010, we determined that
there existed deficiencies in controls relating to the following and that it was
necessary for the Company to restate its previously issued financial statements
for the quarters ended March 31, 2009 and March 31, 2010 and June 30, 2009 and
June 30, 2010 for the following reasons.
1. The
number of shares of the Company’s common stock outstanding as of December 31,
2008 and December 31, 2009 and the weighted average common shares outstanding
for the years ended December 31, 2009 and December 31, 2008 and for the quarters
ended March 31, 2009, June 30, 2009, March 31, 2010 and June 30, 2010 were
overstated in such financial statements and earnings per share for the fiscal
years ended December 31, 2009 and December 31, 2008 and for the quarters ended
March 31, 2009, June 30, 2009, March 31, 2010 and June 30, 2010 were understated
in such financial statements.
11
2. The
value attributed to shares of the Company’s common stock which were issued for
prior services on March 29, 2010 should have been expensed in the Company’s
income statements for the quarter ended March 31, 2010 and for the six months
ended June 30, 2010.
3.
$7,700,000 of Preferred Stock included under Stockholders’ Equity on the
Company’s balance sheets as of March 31, 2010 and June 30, 2010 should be
reclassified as Temporary Equity.
We have further concluded that such
deficiencies represented material weaknesses. As a result, we concluded that the
Company’s internal controls over financial reporting were not effective
at September 30, 2010.
The Company is in the process of
enhancing its financial reporting by implementation of stronger internal
controls through the recruitment of high caliber personnel with strong financial
reporting backgrounds and the establishment of effective checking and
reviewing procedures. In 2011 we plan to enrich the accounting knowledge of all
of our financial and accounting personnel by holding training to
increase the awareness and use of controls and transparency by all staff and by
redesigning document flows and establishing strong control
points.
Our
senior management lacks experience managing a public company and complying with
laws applicable to operating as a U.S. public company.
Prior to
the completion of this offering, subsidiaries of Rongfu have operated as private
companies located in China. None of Rongfu’s senior management has experience
managing a public company.
As a
result of the reverse merger on March 29, 2010, our company became subject to
laws, regulations and obligations that did not currently apply to it, and our
senior management currently has limited experience in complying with such laws,
regulations and obligations. Our senior management is currently experienced in
operating the business of Rongfu in compliance with Chinese law. Similarly, by
virtue of the reverse merger, Rongfu is required to file quarterly and annual
reports and to comply with U.S. securities and other laws, which did not apply
to subsidiaries of Rongfu prior to the merger. These obligations can be
burdensome and complicated, and failure to comply with such obligations could
have a material adverse effect on Rongfu. In addition, we expect that the
process of learning about such new obligations as a public company in the United
States will require senior management to devote time and resources to such
efforts that might otherwise be spent on the operation of the aquaculture
business.
Further,
because historically our operations have been in China, we have operated in
accordance with China GAAP and have not previously been required to comply with
U.S. GAAP. Our current CFO has experience with U.S. GAAP and our
Financial manager has limited experience with U.S. GAAP. We are
taking steps to increase our level of experience with U.S. accounting and SEC
requirements, as well as to improve our internal accounting
controls. Our annual financial statements are audited by our
independent registered public accounting firm for compliance with GAAP
standards. Yet, we cannot assure that our management has identified
or fully remedied all material weaknesses in our internal controls of financial
reporting pursuant to US GAAP. If deficiencies go undetected or
unremedied, our financial statements may not accurately reflect our financial
condition as required by U.S. GAAP.
We
may have violated Section 402 of the Sarbanes-Oxley Act of 2002 and Section
13(k) of the Exchange Act and may be subject to sanctions for such
violations.
Section
13(k) of the Exchange Act provides that it is unlawful for a company such as
ours, which has a class of securities registered under Section 12(g) of the
Exchange Act, to directly or indirectly, including through any subsidiary,
extend or maintain credit in the form of a personal loan to or for any director
or executive officer of the company. Issuers violating Section 13(k) of the
Exchange Act may be subject to civil sanctions, including injunctive remedies
and monetary penalties, as well as criminal sanctions. The imposition of any of
such sanctions on the Company may have a material adverse effect on our
financial position, results of operations or cash flows.
12
On March 29, 2010 pursuant to a Share
Exchange Agreement with the former stockholders of Rongfu Delaware we acquired
100% of the outstanding common stock of Rongfu Delaware. At the time, Chen
Zhisheng, who became our Chairman on such date, was indebted on account of a
previous loan of an aggregate of RMB 21,900,000 (approximately $3,220,588) made
by Foshan Nanhai Ke Da Heng Sheng Aquatic Co., Ltd
(“Nanhai Ke Da Heng Sheng”)., a PRC limited liability company with which one of
Rongfu’s subsidiaries has certain Contractual Agreements described
below.
The loan was repaid in full in the
second quarter of 2010. However, the existence of indebtedness of Mr. Chen to
Nanhai Ke Da Heng Sheng Ltd. at the time
the Company acquired Rongfu and the continuation of such indebtedness for a
period of time thereafter may have constituted a violation of Section 13(k) of
the Exchange Act (Section 402(a) of the Sarbanes-Oxley Act of
2002).
Partially in response to the matters
set forth above, in October 2010, our board of directors adopted a policy
regarding approval of related party transactions. Under the policy,
any related party transaction involving an aggregate amount that is expected to
exceed $50,000 must be approved by our board of directors or the audit committee
of the Board once it is established, and no director may participate in any
discussion or approval of a transaction that would be considered to be a related
party transaction in which such person is interested. See the section
of this prospectus entitled “Certain Relationships and Related Party
Transactions—Review, Approval or Ratification of Transactions with Related
Persons.”
Our revenue will
decrease if the aquaculture industry experiences a
downturn.
We are subject to the general changes
in economic conditions affecting many segments of the economy. Demand for
fish is typically affected by a number of economic factors, including, but not
limited to, fish supply, seasonal climates, government regulation and government
guidance.
Competition
in the aquaculture industry could adversely affect our results of
operations.
We operate in local and regional
markets in China, and many factors affect the competitive environments we face
in any particular market. These factors include the number of competitors in the
market, the pricing policies and financial strength of those competitors, the
total production capacity serving the market, the barriers to enter the market
and the proximity of natural resources, as well as general economic conditions
and demand for construction materials within the market. There is no assurance
that existing or new competitors may not receive contracts for which we compete
by reason of events and factors beyond our control.
Our
growth strategy is capital intensive; without additional capital on favorable
terms we may not accomplish our strategic plan.
Our expansion plans are premised upon
our raising sufficient capital. There can be no assurance that we will do so.
Our inability to raise sufficient capital or inability to raise capital on
acceptable terms to fund these new production plants would negatively impact our
projected revenues and our projected growth.
Long-term
collection of accounts receivable and potential bad debts may impose a threat to
our operations and expansion.
At certain times we may have a large
amount of accounts receivable, which account for over 2% of our total assets. A
substantial majority of our outstanding trade receivables are not secured by any
collateral or credit insurance. While we have procedures to monitor and limit
exposure to credit risk on our trade and non-trade receivables, there is no
assurance that such procedures will effectively limit our risks of bad debts and
avoid losses, which could have a material adverse effect on our financial
condition, operating results and business expansion.
13
We
depend heavily on key personnel, and turnover of key employees and senior
management could harm our business.
Our future business and results of
operations depend in significant part upon the continued contributions of our
key technical and senior management personnel, including Chen Zhisheng, our
Chairman and Kelvin Chan, our Chief Executive Officer and President. They
also depend in significant part upon our ability to attract and retain
additional qualified management, technical, marketing and sales and support
personnel for our operations. If we lose a key employee, or if we are not
able to attract and retain skilled employees as needed, our business could
suffer. We also depend on Professor Sifa Li and his team from Shanghai
Fisheries University to help us breed certain of our products. Significant
turnover in our senior management could significantly deplete our institutional
knowledge held by our existing senior management team. We depend on the
skills and abilities of these key employees in managing the production,
technical, marketing and sales aspects of our business, any part of which could
be harmed by turnover in the future. We also depend on Professor Sifa Li and his
team from Shanghai Fisheries University to help us breed certain of our
products.
Approximately
62% of our sales revenues was derived from our ten largest customers in
2010 and any reduction in revenues from any of these customers would reduce our
revenues and net income.
Based on unaudited information, in the
fiscal year ended December 31, 2010 we derived approximately 62% of our revenue
from our ten largest customers. In fiscal year 2009, we derived approximately
76% of our revenue from our ten largest customers. In fiscal year
2008, we derived approximately 75% from our ten largest
customers. We believe we are favorably diversifying our customer
base to put less reliance on any one customer; however, the loss of one of major
customers could materially decrease our revenues and net income.
We
may be unable to continue to take advantage of the seasonal pricing fluctuation
in sales of our products, and we may be adversely affected by the seasonal
fluctuation in the prices we earn for our products.
We have experienced seasonal
fluctuation in the prices we earn for our products, generally in the range of 15
to 20%. Pricing fluctuation occurs during the winter season when fish farms in
the northern part of the PRC suspend production due to cold weather conditions.
These weather related disruptions in supply permit us to increase the sales
prices of our tilapia products. However, there can be no assurance that such
premium pricing, benefiting our profitability, can be maintained in the future.
Other factors, such as an increase in the cost of feed, might also adversely
impact on the cost of fish and lessen our margins and
profitability.
Our
continuing rapid expansion could significantly strain our resources, management
and operational infrastructure which could impair our ability to meet increased
demand for our products and hurt our business results.
To accommodate our anticipated growth
and to build additional facilities, we will need to expend capital resources and
dedicate personnel to implement and upgrade our accounting, operational and
internal management systems and enhance our record keeping and contract tracking
system. If we cannot successfully implement these measures efficiently and
cost-effectively, we will be unable to satisfy the demand for our products,
which will impair our revenue growth and hurt our overall financial
performance.
14
Certain
of our existing stockholders have substantial influence over our company, and
their interests may not be aligned with the interests of our other
stockholders.
Mr. Kelvin Chan is the owner of
approximately 81.7% of our common stock. As more particularly described in
footnote 3 to the table contained in “Security Ownership,” Mr. Chan has granted
options to purchase an aggregate of 14,400,000 of his shares to certain persons,
including 9,000,000 shares to Chen Zhisheng, our Chairman. As a result, Mr. Chan
and Mr. Chen may have significant influence over our business, including
decisions regarding mergers, consolidations and the sale of all or substantially
all of our assets, election of directors and other significant corporate
actions. This concentration of ownership may also have the effect of
discouraging, delaying or preventing a future change of control, which could
deprive our stockholders of an opportunity to receive a premium for their shares
as part of a sale of our company and might reduce the price of our
shares.
Environmental
claims or failure to comply with any present or future environmental regulations
may require us to spend additional funds and may harm our results of
operations.
Our business is subject to
environmental, health and safety laws and regulations that affect our
operations, facilities and products in each of the jurisdictions in which we
operate. We believe that we are in compliance with all material environmental,
health and safety laws and regulations related to our products, operations and
business activities. Although we have not suffered material environmental claims
in the past, the failure to comply with any present or future 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. The enacting of new regulations could also require us to
acquire costly equipment or to incur other significant expenses.
Our
holding company structure may limit the payment of dividends.
We have no direct business operations,
other than our ownership of our subsidiaries. While we have no current
intention of paying dividends, should we decide in the future to do so, as a
holding company, our ability to pay dividends and meet other obligations depends
upon the receipt of dividends or other payments from our operating subsidiaries
and other holdings and investments. In addition, our operating
subsidiaries, from time to time, may be subject to restrictions on their ability
to make distributions to us, including as a result of restrictive covenants in
loan agreements, restrictions on the conversion of local currency into U.S.
dollars or other hard currency and other regulatory restrictions as discussed
below. If future dividends are paid in RMB, fluctuations in the exchange
rate for the conversion of RMB into U.S. dollars may reduce the amount received
by U.S. stockholders upon conversion of the dividend payment into U.S.
dollars.
Chinese regulations currently permit
the payment of dividends only out of accumulated profits as determined in
accordance with Chinese accounting standards and regulations. Our
subsidiaries in China are also required to set aside a portion of their after
tax profits according to Chinese accounting standards and regulations to fund
certain reserve funds. Currently, our subsidiaries in China are the only
sources of revenues or investment holdings for the payment of dividends.
If they do not accumulate sufficient profits under Chinese accounting
standards and regulations to first fund certain reserve funds as required by
Chinese accounting standards, we will be unable to pay any
dividends.
RISKS
RELATED TO DOING BUSINESS IN CHINA
Risks
Related to Doing Business in the PRC
The Company faces the risk that
changes in the policies of the PRC government could have a significant impact
upon the business that the Company may be able to conduct in the PRC and the
profitability of such business.
The PRC economy is in a transition from
a planned economy to a market oriented economy subject to five-year and annual
plans adopted by the government that set national economic development goals.
Policies of the PRC government can have significant effects on the economic
conditions of the PRC. The PRC government has confirmed that economic
development will follow the model of a market economy. Under this direction, the
Company believes that the PRC will continue to strengthen its economic and
trading relationships with foreign countries and business development in the PRC
will follow market forces. While the Company believes that this trend will
continue, there can be no assurance that this will be the case. A change
in policies by the PRC government could adversely affect the Company’s interests
by, among other factors: changes in laws, regulations or the interpretation
thereof, confiscatory taxation, restrictions on currency conversion, imports or
sources of supplies, or the expropriation or nationalization of private
enterprises. Although the PRC government has been pursuing economic reform
policies for more than two decades, there is no assurance that the government
will continue to pursue such policies or that such policies may not be
significantly altered, especially in the event of a change in leadership, social
or political disruption, or other circumstances affecting the PRC political,
economic and social life.
15
The
PRC laws and regulations governing the Company’s current business operations are
sometimes vague and uncertain. Any changes in such PRC laws and regulations may
have a material and adverse effect on the Company’s business.
There are substantial uncertainties
regarding the interpretation and application of PRC laws and regulations,
including but not limited to the laws and regulations governing the Company’s
business, or the enforcement and performance of the Company’s arrangements with
customers in the event of the imposition of statutory liens, death, bankruptcy
and criminal proceedings. The Company and any future subsidiaries are considered
foreign persons or foreign funded enterprises under PRC laws, and as a result,
the Company is required to comply with PRC laws and regulations. These laws and
regulations are sometimes vague and may be subject to future changes, and their
official interpretation and enforcement may involve substantial
uncertainty.
The effectiveness of newly enacted
laws, regulations or amendments may be delayed, resulting in detrimental
reliance by foreign investors. New laws and regulations that affect existing and
proposed future businesses may also be applied retroactively. The Company cannot
predict what effect the interpretation of existing or new PRC laws or
regulations may have on the Company’s businesses.
A
slowdown or other adverse developments in the PRC economy may materially and
adversely affect the Company’s customers, demand for the Company’s products and
the Company’s business.
All of the Company’s operations are
conducted in the PRC and all of its revenue is generated from sales in the PRC.
Although the PRC economy has grown significantly in recent years, the Company
cannot assure investors that such growth will continue. A slowdown in overall
economic growth, an economic downturn or recession or other adverse economic
developments in the PRC could materially reduce the demand for our products and
materially and adversely affect the Company’s business.
Inflation
in the PRC could negatively affect our profitability and growth.
In recent years, the Chinese economy
has experienced periods of rapid expansion and highly fluctuating rates of
inflation. During the past ten years, the rate of inflation in China has
been as high as 20.7% and as low as -2.2%. These factors have led to the
adoption by the Chinese government, from time to time, of various corrective
measures designed to restrict the availability of credit or regulate growth and
contain inflation. High inflation may in the future cause the Chinese
government to impose controls on credit and/or prices, or to take other action,
which could inhibit economic activity in China, reduce demand, materially
increase our costs, and thereby harm the market for our products and our
Company.
Governmental
control of currency conversion may affect the value of an investment in the
Company and may limit our ability to receive and use our revenues
effectively.
The Company receives all of its
revenues in Renminbi, which is currently not a freely convertible currency. The
PRC government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC. Any
future restrictions on currency exchanges may limit our ability to use revenue
generated in Renminbi to fund any future business activities outside China or to
make dividend or other payments in U.S. dollars. Although the Chinese
government introduced regulations in 1996 to allow greater convertibility of the
Renminbi for current account transactions, significant restrictions still
remain, including primarily the restriction that foreign-invested enterprises
may only buy, sell or remit foreign currencies after providing valid commercial
documents, at those banks in China authorized to conduct foreign exchange
business. In addition, conversion of Renminbi for capital account items,
including direct investment and loans, is subject to governmental approval in
China, and companies are required to open and maintain separate foreign exchange
accounts for capital account items. We cannot be certain that the Chinese
regulatory authorities will not impose more stringent restrictions on the
convertibility of the Renminbi.
16
The
fluctuation of the Renminbi may materially and adversely affect investments in
the Company and the value of our securities.
The value of the Renminbi against the
U.S. dollar and other currencies may fluctuate and is affected by, among other
things, changes in the PRC’s political and economic conditions. As the Company
relies principally on revenues earned in the PRC, any significant revaluation of
the Renminbi may materially and adversely affect the Company’s cash flows,
revenues and financial condition, and the price of our common stock may be
harmed. For example, to the extent that the Company needs to convert U.S.
dollars it receives from an offering of its securities into Renminbi for the
Company’s operations, appreciation of the Renminbi against the U.S. dollar could
have a material adverse effect on the Company’s business, financial condition
and results of operations. Conversely, if the Company decides to convert its
Renminbi into U.S. dollars for the purpose of making payments for dividends on
its common stock or for other business purposes and the U.S. dollar appreciates
against the Renminbi, the U.S. dollar equivalent of the Renminbi that the
Company converts would be reduced. In addition, the depreciation of significant
U.S. dollar denominated assets could result in a charge to the Company’s income
statement and a reduction in the value of these assets.
PRC
regulations relating to the establishment of offshore special purpose companies
by PRC residents may subject our PRC resident shareholders to penalties and
limit our ability to inject capital into our PRC subsidiaries, limit our PRC
subsidiaries’ ability to distribute profits to us, or otherwise adversely affect
us.
On October 21, 2005, the PRC State
Administration of Foreign Exchange, referred to as 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, which became effective as
of November 1, 2005. According to Notice 75, 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 such offshore company with assets or
equity interests in an onshore enterprise located in the PRC, or an offshore
special purpose company. 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 special
purpose company or overseas funds raised by such offshore company, or any other
material change involving a change in the capital of the offshore special
purpose company. Moreover, Notice 75 applies retroactively. As a result, PRC
residents who have established or acquired control of offshore special purpose
companies that have made onshore investments in the PRC in the past are required
to have completed the relevant registration procedures with the local SAFE
branch by March 31, 2006. To further clarify the implementation of Circular 75,
the SAFE issued Circular 106 on May 29, 2007. Under Circular 106, PRC
subsidiaries of an offshore special purpose company are required to coordinate
and supervise the filing of SAFE registrations by the offshore holding company’s
shareholders or beneficial owners who are PRC residents in a timely
manner.
Our current shareholders and/or
beneficial owners may fall within the ambit of the SAFE notice and be required
to register with the local SAFE branch as required under the SAFE notice. If so
required, and if such shareholders and/or beneficial owners fail to timely
register their SAFE registrations pursuant to the SAFE notice, or if future
shareholders and/or beneficial owners of our company who are PRC residents
fail to comply with the registration procedures set forth in the SAFE
notice, this may subject such shareholders, beneficial owners and/or our PRC
subsidiaries to fines and legal sanctions and may also limit our ability to
contribute additional capital into our PRC subsidiaries, limit our PRC
subsidiaries’ ability to distribute dividends to our company, or otherwise
adversely affect our business.
17
We
may be exposed to liabilities under the Foreign Corrupt Practices Act, and any
determination that we violated the Foreign Corrupt Practices Act could hurt our
business.
Although we are currently not subject
to these regulations, we anticipate to become subject to the Foreign Corrupt
Practices Act, or FCPA, and other laws that prohibit improper payments or offers
of payments to foreign governments and their officials and political parties by
U.S. persons and issuers as defined by the statute for the purpose of obtaining
or retaining business. Our activities in China create the risk of unauthorized
payments or offers of payments by one of the employees, consultants, sales
agents or distributors of our Company, even though these parties are not always
subject to our control. It is our policy to implement safeguards to discourage
these practices by our employees. However, our existing safeguards and any
future improvements may prove to be less than effective, and the employees,
consultants, sales agents or distributors of our Company may engage in conduct
for which we might be held responsible. Violations of the FCPA may result in
severe criminal or civil sanctions, and we may be subject to other liabilities,
which could negatively affect our business, operating results and financial
condition.
Because
the Company’s principal assets are located outside of the United States and the
Company’s officers and directors reside outside of the United States, it may be
difficult for investors to enforce their rights in the U.S. based on U.S.
federal securities laws against the Company and the Company’s officers and
directors or to enforce U.S. court judgments against the Company or them in the
PRC.
Rongfu Aquaculture, Inc. is
located in the PRC and substantially all of its assets are located outside of
the United States; it may therefore be difficult or impossible for investors in
the United States to enforce their legal rights based on the civil liability
provisions of the U.S. federal securities laws against the Company in the courts
of either the U.S. or the PRC and, even if civil judgments are obtained in U.S.
courts, to enforce such judgments in PRC courts. Further, it is unclear if
extradition treaties now in effect between the United States and the PRC would
permit effective enforcement against the Company or its officers and directors
of criminal penalties, under the U.S. federal securities laws or
otherwise.
PRC
regulations also involve complex procedures for acquisitions conducted by
foreign investors that could make it more difficult for us to grow through
acquisitions.
Pursuant to the Regulations on Mergers
and Acquisitions of Domestic Enterprises by Foreign Investors, effective as of
September 8, 2006 and revised as of June 22, 2009, additional procedures and
requirements were established that are expected to make merger and acquisition
activities in China by foreign investors more time-consuming and complex,
including requirements in some instances that the Ministry of Commerce of the
PRC (“MOFCOM”) be notified in advance of any change-of-control transaction in
which a foreign investor takes control of a PRC domestic enterprise, or that the
approval from MOFCOM be obtained in circumstances where overseas companies
established or controlled by PRC enterprises or residents acquire affiliated
domestic companies and special anti-monopoly submissions for parties meeting
certain reporting thresholds. We may grow our business in part by acquiring
other companies engaged in aquaculture in the PRC. Complying with the
requirements of the new regulations to complete such transactions could be
time-consuming, and any required approval processes, including approval from
MOFCOM, may delay or inhibit our ability to complete such transactions, which
could affect our ability to expand our business or maintain our market
share.
18
There
are substantial uncertainties regarding the interpretation and application of
PRC laws and regulations governing the validity and legality of call
options to purchase of our Common Stock which are held by our Chairman and
others and there can be no assurance that the call options held by such persons
are not in breach of such laws and regulations.
Certain persons, including our
Chairman, Chen Zhisheng, under certain call option agreements between Kelvin
Chan, our President and Chief Executive Officer, have options to purchase an
aggregate of 14,400,000 shares of our common stock held by Mr. Chan over the
course of approximately three years in installments upon achievement of certain
performance milestones by the Company. While we believe that this arrangement
shall not be governed by PRC laws and regulations and therefore is not in breach
of any PRC laws and regulations, there are substantial uncertainties regarding
the interpretation and application of current or future PRC laws and
regulations, including regulations governing the validity and legality of such
call options. Accordingly, we cannot assure you that PRC government authorities
will not ultimately take a view contrary to our view. If such certain call
option agreements are deemed to be governed by PRC laws and regulations, our
Chairman and other PRC residents under such call option agreements may be
required to register with the local SAFE branch for their overseas direct
investment in the Company. Failure to make such SAFE registration may subject
our Chairman and such PRC residents to fines and legal sanctions, and may also
limit their ability to receive dividends from our PRC subsidiaries and remit
their proceeds from their overseas investment into the PRC as a result of
foreign exchange control under PRC laws and regulations.
We
are subject to governmental regulations that may affect the use and development
of our properties.
On March 19, 2009, Ministry of Land and
Resource of PRC issued “Certain Opinions on the Promotion
of the Steady Development of Agriculture and Constant Increase of Income of the
Peasants and the Propelling of Coordinated Development of Rural and Urban Areas”
to strictly regulate the procedures for the use of agricultural land in
rural areas. These opinions provide that (a) for the use of agricultural
land for permanent auxiliary facilities (buildings constructed for
the purpose of management and residence, such as office buildings, dormitories
and canteens), the user thereof shall apply to planning administration, land and
resource authorities and other relevant governmental authorities for the
approval of conversion of agricultural use to construction use; and
(b) for the use of
agricultural land for simple auxiliary facilities constructed
for the purpose of agricultural production (such as breeding pools and
cultivation sheds), the user thereof shall apply to the government at
the city level for approval and such approval shall be reported and registered
with the provincial land and resource authorities.
We have constructed relevant auxiliary
buildings and houses on the collectively-owned land in Wanqinyang. Such
buildings are used as the headquarters of Nanhai Ke Da Heng Sheng However, we
have not obtained the approval for conversion from agricultural use to
construction use from competent authorities for the permanent buildings, such as
the office building, dormitories and canteen we built. Neither have we applied for the approval
and registration of the usage of agricultural land for simple auxiliary
facilities for the purpose of production of our fish pond. Without the said approval
and registrations, we cannot obtain our property ownership licenses from the
housing administration. Failing to obtain such approvals and registrations, we
may be subject to sanctions, including fines, and could be required to
restructure our operations or cease to provide certain services, which may have
an adverse effect on our operations.
In addition, the change of existing
land use rules and regulations that govern our development and use of our
properties may restrict our ability to develop or use our properties in a
desired manner and we may be subject to more severe penalties.
We
rely on contractual arrangements with the two operating companies
which conduct our operations in the PRC, which may not be as
effective in providing control over such companies as direct
ownership.
We have no equity ownership interest in
Nanhai Ke Da Heng Sheng or Hainan Ke Da Heng Sheng Aquit Germchit Co., Ltd.
(“Hainan Ke Da Heng Sheng”), and rely on contractual arrangements (“Contractual
Agreements”) between our indirectly wholly owned subsidiary, Guangzhou
Flourishing Blessing Heng Seng Agriculture Technology Limited (the “WOFE”), with
Nanhai Ke Da Heng Sheng (which owns 70% of the equity interests in Hainan Ke Da
Heng Sheng) and its sole shareholder, Chen Zhisheng (who is also our Chairman of
the Board) to control and operate these companies. We describe these
Contractual Agreements in more detail in the section of this prospectus entitled
“Organizational History of the Companies and its
Subsidiaries.” Although we have received an opinion of Global Law
Office, a lawfirm located in Beijing, PRC, that the Contractual Agreements are
valid, lawful and enforceable under PRC laws and regulations and do not in any
way contravene and violate any PRC laws and regulations, these Contractual
Agreements may not be as effective in providing control over the operating
companies as direct ownership would be. For example, the operating companies
could fail to take actions required for our business despite the fact that the
operations and management of the business of Nanhai Ke Da Heng Sheng has been
contractually entrusted to the WOFE. If Nanhai Ke Da Heng Sheng, or its sole
shareholder, Chen Zhisheng, fails to perform their respective obligations under
agreements with us, we may have to incur substantial costs and resources to
enforce such agreements and may have to rely on legal remedies under PRC law,
including seeking specific performance or injunctive relief, and claiming
damages, which may not be effective. Our Contractual Agreements with Nanhai Ke
Da Heng Sheng and Chen Zhisheng are governed by PRC law. Accordingly, these
contracts would be interpreted in accordance with PRC law and any disputes would
be resolved in accordance with PRC legal procedures. The legal environment in
the PRC is not as developed as in the United States and uncertainties in the
Chinese legal system could limit our ability to enforce these Contractual
Agreements. In the event that we are unable to enforce the Contractual
Agreements, our business, financial condition and results of operations could be
materially and adversely affected.
19
Our
Chairman of the Board may have a conflict of interest with regard to the
enforcement of our contractual arrangements with the two operating companies
which conduct our operations in the PRC.
Chen Zhisheng is the Chairman of the
Company and has been granted an option to purchase 9,000,000 shares of our
outstanding shares of Common Stock (approximately 42.3% of the outstanding
shares of Common Stock) for a nominal price subject to the satisfaction of
certain conditions (see “Security Ownership of Certain Beneficial Owners and
Management”). Chen Zhisheng also owns 100% of the equity of Nanhai Ke Da Heng
Sheng which entered into the Contractual Agreements with the Company’s indirect
subsidiary, the WOFE, referred to in the immediately preceding Risk Factor. As a
result of his position as Chairman of the Board of the Company and his potential
stock ownership of the Company, even though Chen Zhisheng is not the legal
representative or an officer of the WOFE, by virtue of his power to cause the
Company to remove existing management of the Company’s direct and indirect
subsidiaries, he may be able to exert significant influence over actions taken
by the WOFE with respect to the Contractual Agreements. These actions include
deciding whether and when the WOFE shall exercise its option to acquire from
Chen Zhisheng all of Nanhai Ke Da Heng Sheng’s equity as discussed in the next
Risk Factor as well as negotiating the terms of the purchase, if the option is
exercised. In addition, Chen Zhisheng may exert significant influence in
determining whether the WOFE will vigorously enforce the terms of the other
Contractual Agreements, including the extent to which the WOFE shall manage the
operations of Nanhai Ke Da Heng Sheng and Hainan Ke Da Heng Sheng and control
the cash flow of such companies. In this regard, it is possible that despite
being a director, officer and potentially significant stockholder of the
Company, Chen Zsisheng’s interests may not be aligned with those of other
stockholders of the Company since Chen Zsisheng also currently owns all of the
equity of Nanhai Ke Da Heng Sheng.
The
option we have to acquire Nanhai Ke Da Heng Sheng’s equity from Chen Zhisheng
provides that the purchase price will be determined by the parties in the
future; such arrangement leaves open the possibility that the parties will not
be able to agree upon a price and that we may not be able to acquire such
equity.
As part of the Contractual Agreements,
Chen Zhisheng, the WOFE and Nanhai Ke Da Heng Sheng have entered into an
exclusive option agreement under which Chen Zhisheng has granted the WOFE an
irrevocable and exclusive purchase option (the “Option”) to acquire Nanhai Ke Da
Heng Sheng’s equity and Nanhai Ke Da Heng Sheng has granted the WOFE
an Option to purchase Nanhai Ke Da Heng Sheng’s assets and business, but only to
the extent that the acquisition does not violate limitations imposed by PRC law
on such transactions. The consideration for the exercise of the Option is to be
determined by the parties and memorialized in future, definitive agreements
setting forth the kind and value of such consideration. To the extent that Chen
Zhisheng receives any of such consideration, the Option requires him to transfer
(and not retain) the same to the WOFE. However, if the parties cannot agree upon
the consideration to be paid for purchasing Nanhai Ke Da Heng Sheng’s equity, we
may not be able to complete the purchase of Nanhai Ke Da Heng Sheng and we would
have to rely on the other Contractual Agreements to provide us the same rights
and benefits as we would have if we purchased such company. For a discussion of
certain risks we are subject to in relying on the Contractual Agreements to
provide us benefits equivalent to ownership of Nanhai Ke Da Heng Sheng see the
two preceding risk factors and the next risk factor.
20
If
the PRC government determines that the contractual arrangements that establish
the structure for operating our business do not comply with applicable
regulations, our business could be adversely affected.
The government of the PRC restricts
share exchanges between PRC companies and offshore entities. Consequently, we
acquired our business in the PRC through contractual arrangements with Nanhai Ke
Da Heng Sheng. Although we believe we comply with current regulations of the
PRC, we cannot assure you that our current ownership and operating structure
would not be found to be in violation of any current or future PRC laws or
regulations or other regulatory requirements and policies. If the PRC government
determines that our structure or operating arrangements do not comply with
applicable law, it could:
|
–
|
revoke
our business and operating licenses, require us to discontinue or restrict
our operations;
|
|
–
|
restrict
our right to collect revenues;
|
|
–
|
require
us to restructure our operations;
|
|
–
|
impose
additional conditions or requirements with which we may not be able to
comply;
|
|
–
|
impose
restrictions on our business operations or on our customers;
or
|
|
–
|
take
other regulatory or enforcement actions against us that could be harmful
to our business.
|
RISKS
RELATED TO THE MARKET FOR OUR STOCK
Our
common stock is quoted on the OTC Bulletin Board which may have an unfavorable
impact on our stock price and liquidity.
Our common stock is quoted on the
Over-the-Counter Bulletin Board (the “OTCBB”). The OTCBB is a
significantly more limited market than the New York Stock Exchange or NASDAQ.
The quotation of our shares on the OTCBB may result in a less liquid
market available for existing and potential stockholders to trade shares of our
common stock, could depress the trading price of our common stock, could cause
high volatility and price fluctuations, and could have a long-term adverse
impact on our ability to raise capital in the future.
There is currently limited trading
market for our common stock and we cannot ensure that one will ever develop or
be sustained.
There is currently limited trading
market on the OTCBB for our common stock, and there is no assurance that one
will develop or be sustained.
The
elimination of monetary liability against the Company’s directors and officers
under the Nevada law and the existence of indemnification rights to the
Company’s directors, officers and employees may result in substantial
expenditures by the Company and may discourage lawsuits against the Company’s
directors and officers.
Under Nevada law, a corporation may
indemnify its directors, officers, employees and agents under certain
circumstances, including indemnification of such persons against liability under
the Securities Act of 1933, as amended. In addition, a corporation may purchase
or maintain insurance on behalf of its directors, officers, employees or agents
for any liability incurred by him in such capacity, whether or not the
corporation has the authority to indemnify such person.
21
The effect of these provisions may be
to eliminate the rights of the Company and its stockholders (through
stockholder’s derivative suits on behalf of the Company) to recover
monetary damages against a director, officer, employee or agent for breach of
fiduciary duty. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be provided for directors, officers,
employees, agents or persons controlling an issuer pursuant to the foregoing
provisions, the opinion of the Commission is that such indemnification is
against public policy as expressed in the Securities Act of 1933, as amended,
and is therefore unenforceable.
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of outstanding stock in the
public marketplace could reduce the price of our common stock.
As of January 14, 2011, there were
issued and outstanding (i) 21,286,789 shares of our common stock, (ii)
immediately exercisable warrants to purchase an aggregate of 4,437,879 shares of
our common stock, (iii) 2,768,721 shares of our Series A Preferred Stock which
are immediately convertible into an aggregate of 2,768,721 shares of our common
stock. We currently have obligation to register the resale of an
aggregate of 7,940,370 shares of our common stock, including shares issuable
upon conversion of the Series A Preferred Stock and exercise of warrants. Future
sales of substantial amounts of our common stock in the trading market could
adversely affect market price of our common stock.
Provisions in our Articles of
Incorporation could prevent or delay stockholders’ attempts to replace or remove
current management or otherwise adversely affect the rights of the holders of
our common stock.
Under our
Articles of Incorporation, our Board of Directors is authorized to issue “blank
check” preferred stock, with designations, rights and preferences as they may
determine. Any shares of preferred stock that are issued are likely to have
priority over our common stock with respect to dividend or liquidation
rights. In the event of issuance, the preferred stock could be
utilized under certain circumstances as a method of discouraging, delaying or
preventing a change in control, which could have the effect of discouraging bids
to acquire us and thereby prevent shareholders from receiving the maximum value
for their shares. We have no present intention to issue any
additional shares of preferred stock in order to discourage or delay a change of
control or for any other reason. However, there can be no assurance
that preferred stock will not be issued at some time in the future.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains certain forward-looking statements (as such term is defined
in Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934), which are based on the beliefs of our
management as well as assumptions made by and information currently available to
our management. All statements other than statements of historical
facts contained in this prospectus, including statements regarding our future
results of operations and financial position, business strategy and plans and
objectives of management for future operations, are forward-looking
statements. In many cases, you can identify forward-looking
statements by terms such as “may,” “will,” “should,” “expects,” “plans,”
“anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,”
“believes,” “estimates,” “predicts,” “potential” or “continue” or the negative
of these terms or other similar words.
These
forward-looking statements are only predictions. These statements
relate to future events or our future financial performance and involve known
and unknown risks, uncertainties and other important factors that may cause our
actual results, levels of activity, performance or achievements to materially
differ from any future results, levels of activity, performance or achievements
expressed or implied by these forward-looking statements. We have
described in the “Risk Factors” section and elsewhere in this prospectus the
principal risks and uncertainties that we believe could cause actual results to
differ from these forward-looking statements. Because forward-looking
statements are inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified, you should not rely on these forward-looking
statements as guarantees of future events.
22
The
forward-looking statements in this prospectus represent our views as of the date
of this prospectus. We anticipate that subsequent events and
developments will cause our views to change. However, while we may
elect to update these forward-looking statements at some point in the future, we
undertake no obligation to update any forward-looking statement to reflect
events or developments after the date on which the statement is made or to
reflect the occurrence of unanticipated events except to the extent required by
applicable law. You should, therefore, not rely on these
forward-looking statements as representing our views as of any date after the
date of this prospectus.
This
prospectus also contains estimates and other statistical data prepared by
independent parties and by us relating to market size and growth and other data
about our industry. These estimates and data involve a number of assumptions and
limitations, and you are cautioned not to give undue weight to these estimates
and data. We have not independently verified the statistical and other industry
data generated by independent parties and contained in this prospectus, and,
accordingly, we cannot guarantee their accuracy or completeness. In addition,
projections, assumptions and estimates of our future performance and the future
performance of the industries in which we operate are necessarily subject to a
high degree of uncertainty and risk.
USE
OF PROCEEDS
We will
not receive any proceeds from the sale of the shares of Common Stock. To the
extent the warrants are exercised for cash, if at all, the Company will receive
the exercise price for those warrants. Under the terms of the warrants, cashless
exercise is permitted in certain circumstances. The Company intends to use any
proceeds received from the exercise of warrants for working capital and other
general corporate purposes. The Company cannot assure that any of the warrants
will ever be exercised for cash or at all. If all of the warrants for which the
resale of our common stock is covered by this prospectus are exercised for cash,
the Company would receive aggregate gross proceeds of $15,010,645.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
Common Stock is listed on the OTC Bulletin Board under the symbol “RNFU.OB.” Our
Common Stock was approved for unpriced quotation by FINRA in July 2008, but
there were no reported quotations for our Common Stock during calendar years
2008 and 2009.
The following table sets forth the high
and low inter-dealer prices, without retail mark-up, mark-down or commission,
involving our Common Stock during each calendar quarter in the fiscal year
ending December 31, 2010, and may not represent actual
transactions.
Fiscal Year 2010
|
|
High
|
|
|
Low
|
|
||
First
quarter
|
$
|
N/A
|
$
|
N/A
|
||||
Second
quarter
|
$
|
3.50
|
$
|
3.00
|
||||
Third
quarter
|
$
|
4.00
|
$
|
3.40
|
||||
Fourth
quarter
|
$
|
4.00
|
3.60
|
At
January 14, 2011, there were 21,286,789 shares of our Common Stock outstanding.
Our shares of Common Stock are held by approximately 45 stockholders of record.
The number of record holders was determined from the records of our transfer
agent and does not include beneficial owners of Common Stock whose shares are
held in the names of various security brokers, dealers, and registered clearing
agencies.
Securities
Authorized for Issuance under Equity Compensation Plans
We do not have any equity compensation
plans.
23
Dividend
Policy
There are no restrictions in our
Articles of Incorporation or By-laws that prevent us from declaring
dividends. The Nevada Revised Statutes, however, do prohibit us from
declaring dividends where after giving effect to the distribution of the
dividend:
1.
|
we would not be able to pay our
debts as they become due in the usual course of business,
or;
|
2.
|
our total assets would be less
than the sum of our total liabilities plus the amount that would be needed
to satisfy the rights of shareholders who have preferential rights
superior to those receiving the
distribution.
|
Because
we are a holding company, we rely entirely on dividend payments from our various
direct and indirect subsidiaries, who may, from time to time, be subject to
certain restrictions on their ability to make distributions to us. For example,
although none of our direct or indirect subsidiaries is currently contractually
restricted from paying dividends, one or more of such subsidiaries may in the
future enter into contracts, including loan agreements or securities purchase
agreements, which restrict their ability to pay dividends. In
addition, the Company is required to transfer 10% of its net income, as
determined in accordance with the PRC’s accounting rules and regulations, to a
statutory surplus reserve fund until such reserve balance reaches 50% of the
Company’s registered capital. (As of December 31, 2010 the reserve balance
equalled 50% of the Company’s registered capital). The statutory reserves
include the surplus reserve fund, the common welfare fund and the enterprise
fund. Our inability to receive all of the revenues from our subsidiaries’
operations may in turn provide an additional obstacle to our ability to pay
dividends on our Common Stock in the future. Additionally, because the PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of the PRC, shortages in
the availability of foreign currency may occur, which could restrict our ability
to remit sufficient foreign currency to pay dividends.
We
currently intend to retain any future earnings to finance the development and
growth of our business and do not anticipate paying cash dividends on our Common
Stock in the foreseeable future, but will review this policy as circumstances
dictate. If in the future we are able to pay dividends and determine it is in
our best interest to do so, such dividends will be paid at the discretion of the
Board of Directors after taking into account various factors, including our
financial condition, operating results, capital requirements, restrictions
contained in any future financing instruments and other factors the Board deems
relevant.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of the consolidated financial condition and
results of operations should be read in conjunction with the consolidated
financial statements and related notes of Rongfu Aquaculture, Inc. appearing
elsewhere in this report. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Actual results may
differ materially from those anticipated in these forward-looking
statements.
Overview
The Company is engaged in commercial
freshwater aquaculture in the PRC. It sells fish and fish fry and also acts as a
freshwater fish dealer (generating trading profits from the purchase of fish
from third party farmers and the immediate sale of such fish to
wholesalers).
The Company operates 14 adult fish
breeding farms, covering a total area of 24,085 mu. Three of the Company’s farms
are located in Hainan Province, two in the town of Wenchang and one in Nanling.
The other 9 farms are located in Guangdong Province in the towns or
villages of Nanhai, Qinyuan, Taishan, Yangdong, Gaoyao and
Zengcheng. The other 2 farms are located in Shanxi Province and Hubei
Province. 7 of the farms consist of a series of man-made ponds. Each pond
is outfitted with one or more oxygen aeration machines which float on the
surface and one or more feeding machines which provide food to the fish twice
per day. The aeration machines provide oxygen to the fish and enable the natural
removal of fish wastes so that the water does not become toxic for the
fish.
24
7 of the Company’s farms are comprised
of a single lake created by damming a river. Oxygen aeration equipment is not
needed since the lakes have a much larger area than the ponds dug by the
Company. The land on which the farms are located is leased by the Company from
the village under leases for terms of 4 to 30 years.
In addition to its adult fish breeding
farms, the Company operates a breeding farm in Wenchang, Hainan Province in
which tilapia fry are produced from brood stock.
To facilitate the distribution of the
adult fish, since May 2010, the Company has operated a logistics center in
Shunde, Guangdong Province from where adult fish are transported to Hangzhou
city and Tianjin city besides the long term established sales network
in Guangdong Province.
At its facilities in Nanhai (at which
the Company’s fish clinic is also located) and Wenchang, the Company also has
constructed and maintains concrete tanks where the Company incubates tilapia.
The Company also incubates snakehead and crucian carp fry in its tank in Nanhai.
After the incubation period the Company sells approximately 95% of the fry to
distributors.
Comparison
of three months ended September 30, 2010 and September 30, 2009
The following table presents the
Company’s consolidated net sales for its lines of business for the three months
ended September 30, 2010 and three months ended September 30, 2009,
respectively:
Three Months Ended September 30, 2010 and 2009
|
%
|
|||||||||||
|
2010
|
2009
|
Change
|
|||||||||
Farm
growing
|
$
|
7,112,859
|
$
|
2,230,948
|
219
|
%
|
||||||
Breeding
|
$
|
1.107,114
|
$
|
837,051
|
32
|
%
|
||||||
Trading
|
$
|
4,596,302
|
$
|
1,695,651
|
171
|
%
|
||||||
Consolidated
|
$
|
12,816,275
|
$
|
4,763,650
|
169
|
%
|
Revenue for the three months ended
September 30, 2010 were $12,816,275, an increase of $8,052,625 or 169%, when
compared to the same period in 2009. Such increase was attributed to the
increase in sales of the trading business of adult fish by $2.9 million,
particularly snakehead which contributed an increasing proportion of
revenues of the trading business (60%) for the current quarter, and the increase
in farm growing of adult fish by $4.9 million attributable to the increase in
farm growing of snakehead compared to the same period of 2009. The opening in
May 2010 of our logistics center greatly facilitated the distribution of
snakehead to Guangzhou Province and other regions in the PRC. For the
three months ended September 30, 2010, sales of fish fry increased
$270,063 compared to the same period of the prior year, due to sales of fry of
our two new fish – yellow catfish and California perch.
Cost of goods sold for the three months
ended September 30, 2010 were $9,129,968, an increase of $5,994,211 or 191%,
when compared to the same sales period of the prior year, which consisted of an
increase of $3,380,015 for breeding adult fish , an increase of $2,563,000 for
the trading business, and a slight increase of $51,196 for breeding fish fry.
The percentage increase in cost of goods sold is higher than that of the
percentage increase in revenue mainly because the revenues of the farm growing
segment, with relatively higher costs of sales increased proportionately more
than revenues of the breeding segment.
25
Gross profit for the three months ended
September 30, 2010 was $3,686,307, an increase of $2,058,414 or 126%, when
compared to the same period in 2009. The increase in gross profit is
comprised of an increase of $1,501,897 for breeding adult fish, an increase of
$337,650 for the Company’s trading business and an increase of $218,867 for
breeding fish fry. The percentage increase in gross profit for the three months
ended September 30, 2010 over the three months ended September 30, 2009 is lower
than the percentage increase in revenues for the same periods due to higher
costs of goods sold in the three months ended September 30, 2010 as a result of
changes in the product mix.
Selling, general and administrative
expenses for the three months ended September 30, 2010 were $1,473,963, an
increase of $1,010,787 or 218%, when compared to the same period in 2009, mainly
attributable to the increase in selling expenses of $256,284 relating to the
increase in sales and the increase in general and administrative expenses of
$754,503 mainly due to an increase in professional fees associated with being a
public company, expenses associated with the expansion of our business and the
accrual for liquidated damages to certain investors who hold registration rights
as a result of the failure to have a registration statement related to the
resale of our common stock underlying the Series A Preferred Stock and warrants
held by such investors declared effective by October 25, 2010.
Research and development expenses for
the three months ended September 30, 2010 were $65,612, an increase of $44,317
or 208%, when compared with $21,295 in the same period in 2009.
Income from operations for the three
months ended September 30, 2010 was $2,147,002, an increase of $1,003,310 or
88%, when compared to the same period in 2009. The main reason for the increase
in income from operations was the increase in revenues, offset by the increase
in selling, general and administrative expenses.
Interest income for the three months
ended September 30, 2010 was $3,970, a decrease of $10,700 or 73%, when compared
to the same period in 2009, primarily because the Company used a part of its
interest earning funds to pay dividends and income tax in the fourth quarter in
2009, which decreased the Company’s interest income as a
consequence. Interest expense for the three months ended September
30, 2010 was $837, a decrease of $86,149 due to the repayment of the Company’s
short term bank loans, when compared to the same period in 2009.
Income taxes for the three months
ended September 30, 2010 was $301,832, an increase of $234,165, or 346%, when
compared to the same period in 2009. In 2010 less proportion of fry
was sold and fry was tax exempt while farmed fish was subject to a 12.5% income
tax. Trading revenue from grown fish was taxed at a rate of 25%. In 2010 more
revenue was contributed by farming and trading and therefore the income taxes
were higher than that of 2009.
The Company recorded a loss on fair
value of derivative liability of $943,266 for the three months ended
September 30, 2010.
Net
income for the three months ended September 30, 2010 was $905,037 as compared to
net income of $1,003,709 for the three months ended September 30, 2009 due to
the increase in revenue offset by the increase in selling, general and
administrative expenses and the non-cash item of loss on fair value of
derivative liability of $943,266 in the third quarter of fiscal year
2010. On March 29, 2010, the Company completed a private placement of
its preferred stock and five year warrants to purchase an aggregate of 4,127,268
shares of common stock. The warrants are required to be recorded as a derivative
instrument liability, carried at fair value and marked-to-market at the end of
each period, with changes in the fair value each period charged or credited to
net income on the income statement.
Comparison
of nine months ended September 30, 2010 and September 30, 2009
The following table presents the
Company’s consolidated net sales for its lines of business for the nine months
ended September 30, 2010 and nine months ended September 30, 2009,
respectively:
26
Nine Months Ended September 30, 2010 and 2009
|
%
|
|||||||||||
|
2010
|
2009
|
Change
|
|||||||||
Farm
growing
|
$
|
21,128,289
|
$
|
13,407,185
|
58
|
%
|
||||||
Breeding
|
$
|
5,094,679
|
$
|
4,369,794
|
17
|
%
|
||||||
Trading
|
$
|
9,146,731
|
$
|
3,954,949
|
131
|
%
|
||||||
Consolidated
|
$
|
35,369,699
|
$
|
21,731,927
|
63
|
%
|
Revenue for the nine months ended
September 30, 2010 were $35,369,699, an increase of $13,637,772 or 63%, when
compared to the same period in 2009. Such increase was mainly attributed to the
increase in sales of adult fish purchased by farmers, which increased
$5,191,782, and the sales of adult fish from farm growing, which increased
$7,721,705 compared to the same period of 2009 following the opening in May,
2010 of our logistics center which facilitated the distribution of snakehead to
Guangzhou Province and other regions in the PRC. For the
nine months ended September 30, 2010, sales of fish fry increased
$724,885 compared to the same period of the prior year, due to sales of fry of
our two new fish – yellow catfish and California perch.
Cost of goods sold for the nine months
ended September 30, 2010 were $23,576,353, an increase of $10,252,589 or 77%,
when compared to the same sales period of the prior year, which consisted of an
increase of $5,551,304 for breeding adult fish, an increase of $4,595,380 for
trading business, and an increase of $105,905 for breeding fish fry The
percentage increase in cost of goods sold is higher than that of the percentage
increase in revenue mainly because the revenues of the farm growing segment,
with relatively higher costs of sales, increased proportionately more than
revenues of the breeding segment.
Gross profit for the nine months ended
September 30, 2010 was $11,793,346, an increase of $3,385,183 or 40%, when
compared to the same period in 2009. The increase in gross profit is
comprised of an increase of $2,169,801 for breeding adult fish, an increase of
$596,402 for the Company’s trading business, and an increase of $618,980 for
breeding fish fry. The percentage increase in gross profit for the nine months
ended September 30, 2010 over the nine months ended September 30, 2009 is lower
than the percentage increase in revenues for the same periods due to higher
costs of goods sold in the nine months ended September 30, 2010 as a result of
changes in the product mix.
Selling, general and administrative
expenses for the nine months ended September 30, 2010 were $3,255,188, an
increase of $1,427,131 or 78%, when compared to the same period in
2009. The increase was mainly attributed to the increase of selling
expenses of $807,934 for the expansion of our business and the increase in
general and administrative expenses by $619,196, mainly due to increases in
professional fees associated with our being a public company, the expenses
associated with the expansion of our business and the accrual for liquidated
damages to certain investors who hold registration rights as a result of the
failure to have a registration statement related to the resale of our common
stock underlying the Series A Preferred Stock and warrants held by such
investors declared effective by October 25, 2010.
Income from operations for the nine
months ended September 30, 2010 was $8,433,903, an increase of $1,910,234 or
29%, when compared to the same period in 2009. The increase was attributable to
the increase in gross profit of $3,385,183 due to the expansion in sales of
adult fish, fish fry and trading business, offset by the increase in selling,
general and administrative expenses by $1,427,131.
Interest income for the nine months
ended September 30, 2010 was $10,584, a decrease of $24,926 or 70%, when
compared to the same period in 2009, primarily because the Company used a part
of its interest earning funds to pay dividends and income tax of the fourth
quarter in 2009, which decreased the Company’s interest income as a
consequence. Interest expense for the nine months ended September 30,
2010 was $35,678, a decrease of $51,758 or 59% due to the repayment of the
Company’s short term bank loans, when compared to the same period in
2009.
27
Income taxes for the nine months ended
September 30, 2010 were $790,416, an increase of $343,844, or 77%, when compared
to the same period in 2009. In 2010 less proportion of fry was sold
and fry was tax exempt while farmed fish was subject to a 12.5% income tax.
Trading revenue from grown fish was taxed at a rate of 25%. In 2010 more revenue
was contributed by farming and trading and therefore the income taxes were
higher than that of 2009.
The Company recorded a loss on fair
value of derivative liability of $6,251,254 for the nine months ended September
30, 2010.
Net income for the nine months ended
September 30, 2010 was $1,498,039 as compared to net income of $6,025,171 for
the nine months ended September 30, 2009 due to the increase in revenue offset
by the increase in selling, general and administrative expenses and the non-cash
item of loss on fair value of derivative liability of $6,251,254 in the first
three quarters in fiscal year 2010 and the professional fee in connection with
the services rendered in reverse merger for the issuance of shares in the first
quarter in 2010. On March 29, 2010, the Company completed a private
placement of its preferred stock and five year warrants to purchase an aggregate
of 4,127,268 shares of common stock. The warrants are required to be recorded as
a derivative instrument liability, carried at fair value and marked-to-market at
the end of each period, with changes in the fair value each period charged or
credited to net income on the income statement.
During the nine months ended September
30, 2010, total assets increased by $10,668,136, or 92%, from $11,629,668 at
December 31, 2009 to $22,297,804 at September 30, 2010. The majority
of the increase was in cash, accounts receivable, advance payment and
prepayment, and inventories, which was partially offset by a decrease in
amount due from shareholders.
During the nine months ended September
30, 2010, cash increased by $3,501,039, or 110%, to $6,695,287 as compared to
$3,194,248 at December 31, 2009. This is mainly attributed to the funding from
investors of net proceeds amounting to $6,561,077 in second quarter this year,
offset by the increase in inventories, payment of dividends to shareholders in
2009.
At September 30, 2010, the accounts
receivable balance increased by $1,368,179, or 579%, from the balance at
December 31, 2009. The increase is due to the increase in revenue in the
nine months ended September 30, 2010. In addition, we have granted our customers
a longer credit period as a strategy to increase our market share.
At September 30, 2010, the other
receivables increased by $1,300,148, or 6,130%, from the balance at December 31,
2009. The increase is mainly due to the advance payment of $1,194,000 for fish
nets.
At September 30, 2010, there were
no amounts due from shareholders, as compared to due from shareholders of
$4,008,659 at December 31, 2009. This is attributed to the repayment from
shareholders during the first quarter of 2010.
The Company’s inventory
at September 30, 2010 was $10,905,977, an increase of $7,926,224, or 266%,
compared to inventory at December 31, 2009. Inventories mainly consists of adult
tilapia, snakehead, crucian carp and other varieties of freshwater fish. The
main reason of the increase of inventory is the Company increased its breeding
capacity in the nine months ended September 30, 2010.
At September 30, 2010 fixed assets
were $868,448, mainly consisting of aerators, feeding machine and other
equipments used in fish farms, representing an increase of $463,301, or 114%,
compared to fixed assets at December 31, 2009.
28
At September 30, 2010 biological assets
were $248,811, a decrease of $183,997, or 43%, compared to biological
assets at December 31, 2009. The decrease in biological assets was due to the
amortization for the nine months in 2010, offset by the procurement of certain
breeding fish during the 2010. Biological assets consist of tilapia,
snakehead, crucian carp, yellow catfish and black bass.
At September 30, 2010 accounts payable
were $5,036,460, as compared to $0 at December 31, 2009. The increase in
accounts payable was due to the procurement of fish food used in fish farm and
fish fry breeding mainly from related parties.
At September 30, 2010 other payables
were $552,475, a decrease of $2,743,960, or 80%, compared to other payables at
December 31, 2009. The main item included in other payables is personal income
tax payable, and the high personal income tax payable was due to the dividend
payable in the fiscal year ended December 31, 2009, which was paid in
the first quarter of 2010. On the other hand, at September 30, 2010, there is an
accrual of $207,900 for the liquidated damages to warrant holders for the
Registration Statement not declared effective by October 25, 2010.
At September 30, 2010, there was
no advance from clients, as compared to the advance from clients of $498,785 at
December 31, 2009. Because goods were distributed to clients in the first
quarter of 2010, there was no advance from clients as of September 30,
2010.
At September 30, 2010, there was
no bank loan, as compared to current portion of bank loan of $380,273 at
December 31, 2009. The loan was fully repaid prior
to September 30, 2010.
At September 30, 2010, there was no
dividend payable, as compared to a dividend payable of $3,466,331 at December
31, 2009 since the dividend was fully paid in the nine months ended
September 30, 2010.
At September 30, 2010 income tax
payable was $301,419, a decrease of $693,894, or 70%, compared to income tax
payable at December 31, 2009. This is mainly because the fourth quarter is
the peak season of sales normally, and therefore the income tax for the nine
months ended September 30, 2010 is lower than the income tax for the whole 2009
fiscal year.
Fiscal
Year Ended December 31, 2009 as Compared to Fiscal Year Ended December 31,
2008
The following table presents the
Company’s consolidated revenue for its lines of business for the fiscal years
ended December 31, 2009 and 2008, respectively:
Fiscal Year Ended December 31,
|
||||||||||||
|
2009
|
2008
|
%
Change
|
|||||||||
Farm
growing
|
32,449,057 | 23,577,694 | 37.6 | % | ||||||||
Breeding
|
5,378,578 | 6,928,674 | -22.4 | % | ||||||||
Trading
|
6,014,772 | 5,086,201 | 18.3 | % | ||||||||
Consolidated
|
$ | 43,842,407 | $ | 35,592,569 | 32.2 | % |
Revenue for the
fiscal year ended December 31, 2009 was $43,842,407, an increase of
$8,249,838 or 23.2%, when compared to the same period in 2008. Such increase was
mainly attributed to the increase in sales of adult fish, which increased
$8,871,362, due to our enhancement of breeding capacity, particularly for
snakehead fish. The Company generated approximately $3,102,000 in revenue from
the sale of snakehead fish in fiscal 2009 as compared to none in fiscal
2008. In addition, in fiscal 2009 we were able to increase our sales
through our existing distributor and add new distributors to our sales network.
For the fiscal year ended December 31, 2009, the sales of fish fry
decreased $1,550,095 compared to the same period of the prior
year. Sale of fry was high in 2008 because the cold winter in
Southern China killed some grown fish and farmers needed to re-grow their fish
and as a result more fry was purchased in the later months of 2008. In 2009, the
sale of fry was back to normal levels. For the fiscal year ended
December 31, 2009, the sales of trading business increased $928,571 compared to
the prior year, because the Company expanded its markets and attracted several
new clients.
29
Cost of goods sold for the
fiscal year ended December 31, 2009 were $26,708,361, an increase of
$6,664,464 or 33.2%, when compared to the same sales period of the prior year.
For the fiscal year ended December 31, 2009, cost of goods sold for
breeding adult fish was $20,658,053,
an increase of $5,802,229 or 39.1%, compared to the same
sales period of the prior year. The main reason for the increase was the higher
sales of breeding adult fish. For the fiscal year ended December 31,
2009, cost of goods sold for the Company’s trading business was $5,314,102,
an increase of $870,756 or 19.6%, compared to the same sales period of the prior
year, due to the expanded sales of the trading business in 2009. For the
fiscal year ended December 31, 2009, cost of goods sold for breeding
fish fry was $736,205,
a
decrease of $8,521 or 1.1%, compared to the prior year. The rate of the decrease
was lower than the rate of decrease in sales. Cost of goods sold for breeding
fish fry consists of the amortization of biological assets, the food for fish
fry and the food for parent fish. The amortization of biological assets and food
for parent fish were at the same level as in 2008 and although fish fry sales
were higher in 2008, the fish that were sold required relatively less
food.
Selling, general and administrative
expenses for the fiscal year ended December 31, 2009 were $2,514,036,
a decrease of $115,720 or 4.4%, when compared to the same period in 2008. The
decrease was attributable to the decrease in selling expenses of $152,165 which
were partially offset by an increase in general and administrative expenses of
$36,445.
For the fiscal year ended
December 31, 2009, selling expenses of breeding fish fry were $376,780, a
decrease of $330,164 or 46.7%, when compared to the same sales period of the
prior year. The decrease is mainly attributable to a $161,024 decrease in
commissions paid to distribution agents and a reduction in transportation costs
and other selling expenses as a result of decreased sales. General
and administrative expenses of breeding fish fry in fiscal 2009 were $376,230, a
decrease of $101,123 or 23%, when compared to fiscal 2008. The decrease in
general and administrative expenses of breeding fish fry were the result of a
$151,282 decrease in security costs which was partially offset by a $58,688
increase in salaries of employees. The decrease in security costs was due to the
incurrence of expenses in fiscal 2008 for installation of security equipment
which expenses did not recur in fiscal 2009.
For the fiscal year ended
December 31, 2009, selling expenses of breeding adult fish were $331,068, an
increase of $226,107 or 215%, when compared to the same sales period of the
prior year. Transportation costs, workers’ salaries and advertising
costs as a result of increased sales contributed to the increase in
selling expenses. General and administrative expenses of breeding adult fish in
fiscal 2009 were $90,045, a decrease of $2,005 or 2.3%, when compared to fiscal
2008.
For the fiscal year ended
December 31, 2009, selling expenses of the Company’s trading business were
$163,459, a decrease of $48,108 or 22.7%, when compared to the same sales period
of the prior year. The major item of expenses were transportation
costs, which decreased by $38,081 or 38.6%, compared to the same period of the
prior year, because a portion of the costs incurred in the fourth quarter of
2009 were deferred to settle in 2010. Due to the insignificant amount involved,
no accrual was made in 2009.
General and administrative expenses of
the trading business were $99,048, an increase of $29,089 or 41.6%, when
compared to the same sales period of the prior year. The major reasons for this
increase were the increase in welfare cost by $40,744, and the other costs
incurred in travelling, gifts and other activities
for staff of the Company.
For the fiscal year ended
December 31, 2009, research and development expenses were $783,169, an increase
of $18,889 or 2.5% when compared to fiscal 2008. The increase was principally
the result of a $92,115 increase in amortization of biological assets which was
partially offset by a $75,231 decrease in food costs for breeding
fish.
30
Income from operations for the
fiscal year ended December 31, 2009 was $14,529,965, an increase of
$1,699,089 or 13.2%, when compared to the same period in 2008. The mainly reason
for the increase in income from operations was that income from operations
income from operations generated by the adult fish business increased
$2,938,649, which increase was partially offset by a $1,112,291decrease in
income from operations generated by the fish fry business.
Interest income for the
fiscal year ended December 31, 2009 was $50,493, a decrease of $20,594
or 28.9%, when compared to the same period in 2008, primarily because the
Company used a part of its interest earning funds to pay dividends, which
decreased the Company’s interest income as a consequence. Interest
expense the fiscal year ended December31, 2009 was $107,827, an
increase of $95,094 or 746.8% due to the increase in the Company’s short term
bank loans, when compared to the same period in 2008. Other expense
for the fiscal year ended December 31, 2009 was $415 as compared to
other expense of $1,954 for the same period in 2008.
Provision for income taxes for the
fiscal year ended December 31, 2009 was $1,396,028, an increase of
$368,247, or 35.8% when compared to the same period in 2008. In 2009 less fry
was sold and fry was tax exempt while farmed fish was subject to a 12.5% income
tax. Trading revenue from grown fish was taxed at a rate of 25%. In 2009, more
revenue was contributed by farming and trading and therefore the provision for
income taxes was higher than that of 2008. Income for the
fiscal year ended December 31, 2009 was $13,076,188, an increase of
$1,216,693 or 10.2%, when compared to the same period in 2008 because of the
increase in income from the adult fish business.
During the fiscal year ended
December 31, 2009, total assets decreased by $18,115,880, or 60.9%, from
$29,745,548 at December 31, 2008 to $11,629,668 at December 31,
2009. The majority of the decrease was in cash, accounts receivable
and inventory, which decreases were partially offset by an increase in due from
shareholders.
During the fiscal year ended
December 31, 2009, cash decreased by $11,629,498, or 78.4%, to $3,194,248 as
compared to $14,823,746 as of December 31, 2008. This is mainly attributed to
the payment of dividends to shareholders.
At
December 31, 2009, the accounts receivable balance decreased by $4,176,582, or
94.6%, from the balance at December 31, 2008. The decrease was due to
decreased sales made on credit in December 2009 compared to the same period in
2008.
The
Company’s inventory as of December 31, 2009 was $2,979,753, a decrease of
$5,913,158, or 66.5%, compared to inventory at December 31, 2008. Inventory
mainly consists of adult tilapia, snakehead, crucian carp and other varieties of
freshwater fish. The main reason for the decrease of inventory is that the
fourth quarter is the Company’s highest sales quarter and the Company sold most
of its inventory in this quarter.
At
December 31, 2009 fixed assets were $405,147, mainly consisting of aerators,
feeding machines and other equipment used in fish farms, representing a decrease
of $40,718, or 9.1%, compared to fixed assets as of December 31,
2008.
At
December 31, 2009 biological assets were $432,808, a decrease of $408,817, or
48.5%, compared to biological assets as of December 31, 2008. The decrease in
biological assets was due to the annual amortization of biological assets.
Biological assets consist of tilapia, snakehead and crucian carp.
At
December 31, 2009 accounts payable were $0, as compared to accounts payable of
$1,081,645 as of December 31, 2008.The items included in accounts payable
as of December 31, 2008 are fish food used in fish farming and fish fry
breeding.
At
December 31, 2009 other payable was $2,743,960, an increase of $1,870,559, or
214.2%, compared to other payable as of December 31, 2008. The main item
included in other payable is personal income tax payable, and the increase of
personal income tax payable was due to the higher dividend payable in the
fiscal year ended December 31, 2009. Personal income tax payable is
required to be withheld by the distributor of dividends. The Company
forwards the amount withheld to the tax authority. According to PRC law, the
Company is required to withhold 20% of tax related dividends that are paid out
the shareholders. The amount withheld is included in other
payables.
31
At
December 31, 2009 due to shareholder was $0, as compared to due to
shareholder of $8,519,146 as of December 31, 2008, which consisted entirely of
advances made to the Company during the period from 2007 to 2009 by Chen
Zhisheng, the Company’s Chairman, for working capital and construction of
Company facilities. The Company repaid all of such advances to Mr. Chen during
the year ended December 31, 2009.
At
December 31, 2009 advance from clients was $498,785 as compared to no advance
from clients as of December 31, 2008. This increase came from several clients in
the Company’s fish farming operations.
At
December 31, 2009 current portion of bank loan was $380,273 as compared to no
current portion of bank loan as of December 31, 2008 since there were no bank
loans as of December 31, 2008.
At
December 31, 2009 dividend payable was $3,466,331, a decrease of $27,272, or
0.8%, compared to dividend payable of $3,493,603 as of December 31,
2008.
At
December 31, 2009 income tax payable was $995,313, an increase of $215,261, or
27.6%, compared to income tax payable of $780,052 as of December 31, 2008,
because of the increased sales in the adult fish business in the fourth quarter
of 2009.
At
December 31, 2009 long-term bank loan was $1,170,070 as compared to no long term
bank loan as of December 31, 2008, because the Company successfully obtained a
long term bank loan in the fiscal year ended December 31,
2009.
Fiscal
Year Ended December 31, 2008 as Compared to Fiscal Year Ended December 31,
2007
The following table presents the
Company’s consolidated revenue for its lines of business for the fiscal years
ended December 31, 2008 and 2007, respectively:
Fiscal
Year Ended December 31,
|
|
|||||||||||
2008
|
2007
|
%
Change
|
||||||||||
Farm
growing
|
23,577,694 | 18,509,803 | 27.4 | % | ||||||||
Breeding
|
6,928,674 | — | — | |||||||||
Trading
|
5,086,201 | 4,484,126 | 13.4 | % | ||||||||
Consolidated
|
$ | 35,592,569 | $ | 22,993,929 | 54.8 | % |
Revenue for the fiscal year ended
December 31, 2008 (“fiscal 2008”) were $35,592,569, an increase of $12,598,640
or 54.8%, when compared to revenue for the fiscal year ended December 31, 2007
(“fiscal 2007”). This increase was the result of the $6,928,674 increase of
sales of fish fry, as there were no sale of fish fry in fiscal 2007, a
$5,067,890 increase of sales of adult fish over fiscal 2007 and a $602,075
increase in trading over fiscal 2007 as a result of the expansion of the
Company’s business.
Cost of goods sold for fiscal
2008 were $20,043,897, which amount consisted of $744,727 in cost of
sales of fish fry , $14,855,824 in costs of sales of adult fish and
$4,443,346 in costs of sales of the trading business. The aggregate
costs of goods sold in fiscal 2008 increased by $3,566,878 or
21.6%, compared to fiscal 2007. The cost of goods sold did not
increase proportionately with the increase in sales mainly because the fish fry
business, which contributed most to the increase in sales, did not require
corresponding increases in cost of goods sold.
32
Gross profit for fiscal 2008 was
$15,548,672, an increase of $9,031,762 or 138.6%, when compared to fiscal 2007.
The increase consisted of an increase of $2,716,994 for breeding
adult fish, an increase of $130,821 for our trading business, and an increase of
$6,183,947 for breeding fish fry as the result of increases in revenues of
breeding adult fish and trading by 27.4% and 13.4%, respectively. Sales of fish
fry in 2007 were $0.
Selling, general and administrative
expenses for fiscal 2008 were $2,217,796, an increase of $1,079,101 or 65.9%,
when compared to fiscal 2007 due to the expansion of the Company’s business. For
the fiscal year ended December 31, 2008, selling expenses of breeding
fish fry were $706,944, compared with zero cost in 2007 since the fish fry
business was not conducted in fiscal 2007.
For the fiscal year ended
December 31, 2008, general and administrative expenses of breeding fish fry were
$525,393, an increase of $65,167 or 14.2%, when compared to fiscal 2007.
Management and protection costs of the fish farm in fiscal 2008 increased by
$167,303, offset by a decrease in fuel costs of $115,842, when compared to
fiscal 2007. There was no management and protection costs in 2007 because the
fish fry business had not operated in 2007. Certain expenses, such as
fuel costs were incurred in 2007 in connection with construction of the
Company’s facility in Hainan Province which costs did not recur in
2008.
For the fiscal year ended
December 31, 2008 selling expenses of breeding adult fish were $104,961, an
increase of $71,592 or 214%, when compared to fiscal 2007. Increases in
transportation costs and labor costs as a result of the expansion of sales
comprised $53,370 of the increase.
General and administrative expenses of
breeding adult fish in fiscal 2008 were $1,098,972, an increase of $250,542 or
29.5%, when compared to fiscal 2007. The major reason for the increase was the
rise in maintenance costs to protect adult fish farm by $166,518.
For the fiscal year ended
December 31, 2008, selling expenses of the trading business were $211,567, a
decrease of $44,864 or 17.5%, when compared to fiscal 2007. Ice cost and
transportation cost in fiscal 2008 decreased by a total of $42,197
compared to fiscal 2007, since a part of these costs occurred in the fourth
quarter of 2008 and were deferred to settle in 2009.
General and administrative expenses of
the trading business in fiscal 2008 were $69,959, an increase of $29,718 or
73.9%, when compared to fiscal 2007.
Income from operations for fiscal 2008
was $12,830,876, an increase of $7,952,661 or 163.0%, when compared to fiscal
2007 as a result of increase of sales of fish fry and sales of adult fish
simultaneously.
Interest income for fiscal 2008 was
$71,087, an increase of $29,824 or 72.3%, when compared to fiscal 2007 as a
result of increase of cash and deposits in banks. Interest
expense for fiscal 2008 was $12,733, and there was no interest expense in fiscal
2007; Other expense, which is bank charge, for fiscal 2008 was $1,954, a
decrease of $1,216 as compared to other expense in fiscal 2007.
Provision for income taxes for fiscal
2008 was $1,027,781, an increase of $958,255, or 1378.3% when compared to fiscal
2007. Commencing January 1, 2008, the Company is entitled to the new PRC tax
policy for agricultural enterprises. The Company’s income is derived from three
general categories, including fish breeding, fish cultivation and selling adult
fish. For income from fish breeding, the Company is entitled to a complete
exemption from income taxation. For income from fish cultivation, the enterprise
income tax is at a discounted rate of 12.5% (which is half of the general
enterprise tax rate). For income from selling adult fish, the enterprise income
tax is a rate of 25%.
Net income for fiscal 2008 was
$11,859,495, an increase of $7,012,712 or 144.7%, when compared to fiscal
2007.
33
During
fiscal 2008, total assets increased by $12,230,000, or 69.8%, from $17,515,548
at December 31, 2007 to $29,745,548 at December 31, 2008. The
majority of the increase was in cash, accounts receivable, with additional
increases in inventories, fixed assets and biological assets.
During fiscal 2008, cash increased by
$9,020,117, or 155.4%, to $14,823,746 as compared to $5,803,629 as of December
31, 2007, which is mainly attributed to the development of our
business.
At
December 31, 2008, the accounts receivable balance increased by $1,735,697, or
64.8%, from the balance at December 31, 2007 due to the increase of
sales.
The
Company’s inventory as of December 31, 2008 was $8,892,911, an increase of
$401,280, or 4.7%, compared to inventory at December 31, 2007. Inventory
consists of tilapia, bream, crucian carp, grass carp and other varieties of
freshwater fish. The main reason of the increase of inventory is to meet the
needs of expanding of business.
At
December 31, 2008 fixed assets was $434,927, an increase of $298,817, or 219.5%,
compared to fixed assets as of December 31, 2007, primarily due to the new
equipments the Company purchased for fish fry business . Fixed assets consist of
aerators, feeding machine, variety of equipments used in fish farms and office
equipments.
At
December 31, 2008 biological assets was $841,625. There were no biological
assets as of December 31, 2007 Biological assets, consisting of the
parent fish of tilapia, snakehead and crucian carp fry, are used in
the Company’s fish fry business.
At
December 31, 2008 accounts payable were $1,081,645, an increase of $380,939, or
54.4% as a result of business expansion, compared to accounts payable as of
December 31, 2007.
At
December 31, 2008 other payable was $873,401, consisting of the personal income
tax payable. There was no other payable as of December 31, 2007. Personal income
tax payable is required to be withheld by the distributor of
dividends. The Company forwards the amount withheld to the tax
authority. According to PRC law, the Company is required to withhold 20% of tax
related dividends that are paid out the shareholders. The amount
withheld is included in other payables.
At
December 31, 2008 due to shareholders was $8,519,146, a decrease of $1,883,047,
or 18.1%, compared to due to shareholders as of December 31, 2007, this was
attributed to the repayment to shareholders.
At
December 31, 2008 dividends payable was $3,493,603 as compared to no dividends
payable as of December 31, 2007, since the Company believed it was
appropriate to pay dividends to shareholders for fiscal 2008.
At
December 31, 2008 income tax payable was $780,052, an increase of $708,086, or
983.9% as compared to income tax payable as of December 31, 2007. The Company
was entitled to an income tax free policy for its fish farming business for
fiscal 2007. Commencing January 1,
2008, the Company is entitled to the new PRC tax policy for agricultural
enterprises. The Company’s income is derived from three general categories,
including fish breeding, fish cultivation and selling adult fish. For income
from fish breeding, the Company is entitled to a complete exemption from income
taxation. For income from fish cultivation, the enterprise income tax is at a
discounted rate of 12.5% (which is half of the general enterprise tax rate). For
income from selling adult fish, the enterprise income tax is a rate of
25%.
Liquidity
and Capital Resources
The Company has typically financed its
operations and expansion from cash flows from operations and loans from our
shareholders and banks. We consummated the reverse merger transaction and raise
approximately $7.7 million in gross proceeds in a private placement financing on
March 29, 2010.
34
Nanhai Ke Da Heng Sheng has entered
into two credit line agreements with Foshan Nanhai Allied Rural Credit Union
Danzhao Credit Association with credit lines of RMB 7,000,000 (approximately $
1,044,605 based on the conversion rate as of September 30, 2010) and RMB
5,000,000 (approximately $746,146 based on the conversion rate as of September
30, 2010), respectively. The two credit lines are secured by real estate owned
by the sister-in-law of Chen Zhisheng, our Chairman of the Board. The
agreements were entered into on January 14, 2009 and January 13, 2009,
respectively, for two-year terms expiring in January 2011. Outstanding loans
under the two credit lines bear interest at a rate of 5.4% per year. Interest is
payable monthly. As of September 30, 2010, there were no outstanding loans
payable
For the nine months ended
September 30, 2010, net cash provided by operating activities was $2,914,734, a
decrease of $4,596,282, when compared to the nine months ended September 30,
2009. The decrease in net cash provided by operating activities was primarily
due to a $1,823,822 increase in operating income after adjusting for non-cash
items (mainly the change in derivative liability value of $6,251,254) and
increased cash generated by the increase in accounts payable by $3,916,362 as a
result of a reduction in cash payments of accounts payable and advances from
shareholders of $10,088,755, offset by the reduction of cash by increasing
accounts receivable by $5,669,977 and the increase in inventory by
$5,192,919.
For the nine months ended September 30,
2010, net cash used by investing activities was $727,072, while net cash used by
investing activities for the nine months ended September 30, 2009 was
$69,205, since the Company purchased more fixed assets and biological assets in
the first three quarters of 2010.
For the nine months ended
September 30, 2010, net cash provided by financing activities was $705,217,
compared with the net cash used by financing activities of $20,732,263 for the
same period in the preceding year. For the nine months ended September 30, 2010,
there were net proceeds from issuance of preferred stock of $6,561,077 offset by
the payment of dividends of $4,305,517 and the repayment of bank loans of
$2,284,611. For the nine months ended September 30, 2009, the repayment to
directors was $8,520,267 and the dividend payment was $14,024,570, which amounts
were partially offset by the Company’s drawdown on its bank credit lines of
$1,812,574.
For the fiscal year ended
December 31, 2009, net cash provided by operating activities was $21,127,418, an
increase of $8,326,651, when compared to fiscal 2008. The increase in net cash
provided by operating activities was primarily due to a $1,216,693 increase in
operating income and increased cash generated by collections of accounts
receivable (reducing the accounts receivable balance as of December 31, 2009 by
$5,685,933 compared to December 31, 2008) and a $5,760,435 reduction in
inventories as of December 31, 2009 compared to December 31, 2008, since the
Company sold most of its inventory in the fourth quarter 2009.
For the fiscal year ended
December 31, 2009, net cash used by investing activities was $55,832, while net
cash used by investing activities for the fiscal year ended December
31, 2008 was $1,518,209, since the Company purchased less fixed assets and
biological assets in 2009.
For the fiscal year ended
December 31, 2009, net cash used by financing activities was $32,705,227,
compared with $2,064,936 for the preceding year. The substantial increase in net
cash used by financing activities is mainly attributable to the payment of
dividends of $25,763,903 to shareholders, the repayment to directors of
$8,520,541 and the net loan repayment of $1,549,508 in 2009. In fiscal 2008 the
repayment to directors was $2,489,354, which amount was partially offset by the
capital contribution of $424,418. There were no dividends and loan repayments in
2008.
The amounts repaid to directors in
fiscal 2009 were for advances made by directors during the period from 2007 to
2009 in order to finance construction of our facilities in Hainan, our purchases
of biological assets (breeding fish) and the payment of operational expenses,
including maintenance expenses, purchases of fish food and purchases of fish
fry. The Company has the obligation to repay the directors when the cash from
operating activities was available.
35
Critical
Accounting Policies and Estimates
Management's discussion and analysis of
its financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. Our financial
statements reflect the selection and application of accounting policies which
require management to make significant estimates and judgments. See note 2 to
our consolidated financial statements, "Summary of Significant Accounting
Policies." Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. We believe that the following reflect the more
critical accounting policies that currently affect our financial condition and
results of operations.
Principles of
Consolidation
The consolidated financial statements
include the accounts of Rongfu Aquaculture, Inc (formerly, Granto, Inc.) and its
wholly owned subsidiaries, Flourishing HK, the WOFE, Nanhai Ke Da
Heng Sheng, and Hainan Ke Da Heng Sheng (collectively referred to herein as the”
Company”). All material inter-company accounts, transactions and profits
have been eliminated in consolidation. The Company has adopted the Consolidation
Topic of the FASB Accounting Standards Codification which requires a variable
interest entity (“VIE”) to be consolidated by a company if that company is
subject to a majority of the risk of loss for the VIE or is entitled to receive
a majority of the VIE’s residual returns.
Use of
Estimates
The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Inventories
Inventories are valued at the lower of
cost (determined on a weighted average basis) or market, if lower.
Derivative
Liability
The Company issued warrants in
connection with the Purchase Agreement dated March 29, 2010 with certain reset
exercise price provisions.
Adoption of the Derivative and Hedging
Topic of the FASB Accounting Standards Codification (“ASC 815”), the Company
determined that the warrants did not qualify for a scope exception under ASC 815
as they were determined to not be indexed to the Company’s stock as prescribed
by ASC 815. The warrants, under ASC 815, were classified as
derivative liability for the then relative fair market value of $3,267,797 and
marked to market. Under ASC 815, the warrants will be carried at fair
value and adjusted at each reporting period.
Fair Value of Financial
Instruments
The Financial Instrument Topic of the
Codification requires that the Company disclose estimated fair values of
financial instruments. The carrying amounts reported in the statements of
financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.
36
Revenue
Recognition
The Company’s revenue recognition
policies are in compliance with the Revenue Recognition Topic of the
Codification. Sales revenue is recognized at the date of shipment to customers
when a formal arrangement exists, the price is fixed or determinable, the
delivery is completed, no other significant obligations of the Company exist and
collectability is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as unearned
revenue.
Income
Taxes
The Company utilizes the accounting
guidance, “Accounting for Income Taxes,” which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred income taxes are recognized for the tax consequences in
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each period end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be
realized.
It is the Company’s intention to
permanently reinvest earnings from activity with china. And thereby indefinitely
postpone repatriation of these funds to the U.S. Accordingly, no domestic
deferred income tax provision has been made for U.S. income tax which could
result from paying dividends to the Company.
Concentration of Credit
Risk
Financial instruments that potentially
subject the Company to concentrations of credit risk are cash, accounts
receivable and other receivables arising from its normal business activities.
The Company places its cash in what it believes to be credit-worthy financial
institutions. The Company has a diversified customer base, all are in China. The
Company controls credit risk related to accounts receivable through credit
approvals, credit limits and monitoring procedures. The Company routinely
assesses the financial strength of its customers and, based upon factors
surrounding the credit risk, establishes an allowance, if required, for
uncollectible accounts and, as a consequence, believes that its accounts
receivable credit risk exposure beyond such allowance is limited.
Off-Balance
Sheet Arrangements
The Company does not have any
off-balance sheet arrangements.
ORGANIZATIONAL
HISTORY OF THE COMPANY AND ITS SUBSIDIARIES
Rongfu Aquaculture, Inc. was
incorporated in Nevada on February 29, 2008 under the name Granto, Inc. The
Company was initially engaged in the business of developing, manufacturing, and
selling a chalk dust-eliminating blackboard eraser (the “Product”) specifically
for teachers and professionals in the Philippines. However, the Company
discontinued such business in December 2009. Pursuant to a Share Exchange
Agreement, dated as of March 29, 2010, all of the shareholders and
warrantholders of Rongfu Aquaculture, Inc., a Delaware corporation (“Rongfu
Delaware”), exchanged all of their shares of common stock and warrants to
purchase common stock of Rongfu Delaware for shares of Common Stock of the
Company and warrants to purchase shares of Common Stock of the Company and the
Company became the owner of 100% of the outstanding equity securities
of Rongfu Delaware.
On May 19, 2010, Rongfu Delaware merged
with and into the Company, In connection with the merger the name of the Company
was changed from Granto, Inc. to Rongfu Aquaculture, Inc. The merger
became effective on May 26, 2010. In connection with the change of
the Company’s name the Company applied to the Financial Industry Regulatory
Authority (“FINRA”) for a new ticker symbol to reflect its new name. FINRA
approved the name change and assigned the new ticker symbol “RNFU.OB” to the
Company’s common stock and on June 1, 2010 the Company’s Common Stock began
trading under such symbol.
37
Pursuant to a Share Exchange Agreement,
dated as of December 29, 2009 (the “December 2009 Agreement”), all of the
shareholders of HK, exchanged all of the outstanding shares of Flourishing HK
for shares of common stock of Rongfu Delaware and Rongfu Delaware became the
owner of 100% of the outstanding capital stock of Flourishing HK.
Flourishing HK owns 100% of the capital stock of Guangzhou
Flourishing. Guangzhou
Flourishing is a wholly foreign-owned enterprise, or “WFOE,” under the laws of
the PRC by virtue of its status as a wholly-owned subsidiary of a non-PRC
company, Flourishing HK. In connection with the closing of the
December 2009 Agreement, Guangzhou Flourishing entered into and consummated a
series of agreements (the “Contractual Agreements”), with Chen Zhisheng and
Nanhai Ke Da Heng Sheng. Under the Contractual Agreements, Guangzhou
Flourishing agreed to assume control of the operations and management of Nanhai
Ke Da Heng Sheng in exchange for a management fee equal to Nanhai Ke Da Heng
Sheng’s earnings before taxes. As a result, the business of Nanhai Ke Da Heng
Sheng and Hainan Ke Da Heng Sheng , a PRC corporation 70% of the
outstanding stock of which is owned by Nanhai Ke Da Heng Sheng, will
be conducted by Guangzhou Flourishing. We anticipate that Nanhai Ke Da Heng
Sheng and Hainan Ke Da Heng Sheng will continue to be the contracting parties
under their customer contracts, bank loans and certain other assets until such
time as those may be transferred to Guangzhou Flourishing. We have
received an opinion from Global Law Office law firm located in Beijing, PRC,
that the Contractual Agreements have been duly executed and are legally binding
on each of the parties thereto under PRC law and do not violate or breach any
current statute, rule or regulation of the PRC that is applicable to the
transactions contemplated by the Contractual
Agreements. Nevertheless, such arrangements are subject to
certain risks we discuss in the “Risk Factors” section of this prospectus.
Nevertheless, such arrangements are subject to certain risks we discuss in the
“Risk Factors” section of this prospectus.
Nanhai Ke Da Heng Sheng was formed in
the PRC on April 30, 2003 as a limited liability company (a company solely owned
by a natural person). Hainan Ke Da Heng Sheng was formed in the PRC on August 6,
2007 as a limited liability company. Guangzhou Flourishing was incorporated in
the PRC on January 9, 2009 as a wholly owned foreign
enterprise.
The
following is a summary of the material terms of each of the Contractual
Agreements, the English translation of each of which is annexed hereto as an
exhibit. All references to the Contractual Agreements and other agreements in
this prospectus are qualified, in their entirety, by the text of those
agreements. Certain references to ownership and other rights of the Company in
this prospectus include the rights of Nanhai Ke Da Heng Sheng and Hainan Ke Da
Heng Sheng, which we are attributing to the Company by virtue of the Contractual
Agreements.
Entrusted Management
Agreement. Pursuant to the entrusted management agreement among Nanhai Ke
Da Heng Sheng, Chen Zhisheng, a director of the Company and the owner of 100% of
the outstanding stock of Nanhai Ke Da Heng Sheng, and Guangzhou
Flourishing (the "Entrusted Management Agreement"), Nanhai Ke Da Heng
Sheng and Chen Zhisheng agreed to entrust the operations and management of
Nanhai Ke Da Heng Sheng to Guangzhou Flourishing Under the Entrusted
Management Agreement, Guangzhou Flourishing will manage Nanhai Ke Da
Heng Sheng ‘s operations and assets, control all of Nanhai Ke Da Heng Sheng ‘s
cash flow through an entrusted bank account, will be entitled to Nanhai Ke Da
Heng Sheng ‘s earnings before taxes as a management fee, and will be obligated
to pay all Nanhai Ke Da Heng Sheng’s payables and expenses, operating expenses,
payment of employee salaries and the purchase price for assets. The Entrusted
Management Agreement will remain in effect until Guangzhou
Flourishing acquires all of the assets or equity of Nanhai Ke Da Heng
Sheng (as more fully described below under “Exclusive Option Agreement”). We
anticipate that Nanhai Ke Da Heng Sheng and Hainan Ke Da Heng Sheng will
continue to be the contracting parties under their customer contracts, bank
loans and certain other assets until such time as those may be transferred to
Guangzhou Flourishing.
38
Shareholders’ Voting Proxy
Agreement. Under the shareholders' voting proxy agreement among Chen
Zhisheng and Guangzhou Flourishing, Chen Zhisheng irrevocably and exclusively
appointed the members of Guangzhou Flourishing’s board of directors as his
proxies to vote on all matters that require approval by the shareholders of
Nanhai Ke Da Heng Sheng.
Exclusive Option Agreement.
Under the exclusive option agreement among Chen Zhisheng, Guangzhou Flourishing
and Nanhai Ke Da Heng Sheng (the “Exclusive Option Agreement”), Chen Zhisheng
has granted Guangzhou Flourishing an irrevocable and exclusive purchase option
(the “Option”) to acquire Nanhai Ke Da Heng Sheng’s equity and Nanhai Ke Da Heng
Sheng has granted Guangzhou Flourishing an Option to purchase Nanhai
Ke Da Heng Sheng’s assets and business, but only to the extent that the
acquisition does not violate limitations imposed by PRC law on such
transactions. The consideration for the exercise of the Option is to be
determined by the parties and memorialized in future, definitive agreements
setting forth the kind and value of such consideration. To the extent that Chen
Zhisheng receives any of such consideration, the Option requires him to transfer
(and not retain) the same to Guangzhou Flourishing.
Shares Pledge Agreement. Under
the shares pledge agreement among Chen Zhisheng, Guangzhou Flourishing and
Nanhai Ke Da Heng Sheng (the "Share Pledge Agreement"), Chen Zhisheng has
pledged to Guangzhou Flourishing all of the equity interests in Nanhai Ke Da
Heng Sheng, including the proceeds thereof, to guarantee all of Nanhai Ke Da
Heng Sheng ‘s rights and benefits under the other Contractual Agreements. Prior
to termination of the Share Pledge Agreement, the pledged equity interests
cannot be transferred without Guangzhou Flourishing’s prior written
consent.
Series
A Preferred Stock Purchase Agreement
On March 29, 2010 we entered into and
consummated a Series A Preferred Stock Purchase Agreement (the “Purchase
Agreement”) with 18 investors pursuant to which the investors agreed to and did
purchase for an aggregate of $7.7 million an aggregate of (a) 2,768,721 shares
of our Series A Stock, (b) five year warrants to purchase an aggregate of
1,730,451 shares of our Common Stock for $3.47 per share and (c) five year
warrants to purchase an aggregate of 1,730,451shares of our Common Stock for
$4.17 per share. Each share of Series A Stock will automatically convert into
one share of our Common Stock (subject to adjustment in certain circumstances to
protect the holder against dilution) immediately upon all of the following being
satisfied:
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·
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a registration statement covering
the resale of the shares of Common Stock to be issued upon conversion
shall have been filed by the Company and declared effective by the
Commission and such registration statement continues to be effective up
through and including the date of the
conversion;
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·
|
our shares of Common Stock are
eligible for trading on one of the following exchanges: the Nasdaq
SmallCap Market, the American Stock Exchange, the New York Stock Exchange,
the Nasdaq National Market or the OTC Bulletin
Board;
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·
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the daily volume weighted average
price of the Common Stock for ten consecutive trading days immediately
preceding the conversion is greater than or equal to $5.56 per share (as
adjusted for any stock dividends, combinations, splits, recapitalizations
and the like with respect to such shares) on the primary trading market on
which the Common Stock is then listed or quoted;
and
|
|
·
|
the average daily dollar volume
of the Common Stock on the primary trading market on which the Common
Stock is then listed or quoted is greater than or equal to $100,000 for
ten consecutive trading days at any time before the
conversion.
|
At the closing, Kelvin Chan, our
President and Chief Executive Officer, delivered to an escrow agent 2,768,721
shares of our Common Stock. If our consolidated net income and net income
per share for the year ended December 31, 2009 is less than $13.0 million and
$.54 per share, respectively (the “Fiscal 2009 Performance Threshold”), or our
consolidated net income and net income per share for the fiscal year ending
December 31, 2010 is less than $14.8 million and $.62 per share, respectively
(the “Fiscal 2010 Performance Threshold”), then:
39
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·
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If the Company does not achieve
at least 50% of either amount set forth in the Fiscal Year 2009
Performance Threshold, the escrow agent shall transfer 100% of the
escrowed shares to the investors pro rata based on the number of shares of
Series A Stock purchased by the investors under the Purchase Agreement and
still beneficially owned by such investor at such
date;
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·
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If the Company achieves at least
50%, but less than 100% of either amount set forth in the Fiscal Year 2009
Performance Threshold, the escrow agent shall transfer an amount of the
escrowed shares to the investors equal to the product obtained by
multiplying (i) two times the shortfall by (ii) the total number of
escrowed shares. Such shares will be transferred pro rata based
on the number of shares of Series A Stock purchased under the Purchase
Agreement by the investors and still beneficially owned by such investors
at such date;
|
|
·
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If the Company does not achieve
at least 50% of either amount set forth in the Fiscal Year 2010
Performance Threshold, the escrow agent shall transfer 100% of
the escrowed shares to the investors pro rata based on the number of
shares of Series A Stock purchased by the investors under the Purchase
Agreement and still beneficially owned by such investor at such
date;
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|
·
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If the Company achieves at least
50%, but less than 100% of either amount set forth in the Fiscal Year 2010
Performance Threshold, then the escrow agent shall transfer an amount of
the escrowed shares to the investors equal to the product obtained by
multiplying (i) two times the shortfall by (ii) the total number of
escrowed shares.. Such shares will be transferred pro rata based on the
number of shares of Series A Stock purchased under the Purchase Agreement
by the investors and still beneficially owned by such investors at such
date.
|
For purposes of the Purchase Agreement,
net income for any period means the consolidated net income of the Company and
its subsidiaries calculated in accordance with United States generally accepted
accounting principles consistently applied, plus, to the extent such amounts
were deducted in the calculation of consolidated net income, the amount of any
non-cash extraordinary charges relating solely to (a) the release of the shares
from escrow or (b) the value of the beneficial conversion feature of the Series
A Stock of the Company issued pursuant to the Purchase Agreement. Net
income for any period shall also not include any charges or additions to net
income of the Company in any period as a result of any fluctuation in the value
of the Company’s Common Stock.
Our
Corporate Structure
Our current structure is set forth in
the diagram below:
40
BUSINESS
Overview
Through our subsidiaries and the
Contractual Agreements described above, we are engaged in commercial freshwater
aquaculture in the PRC. Aquaculture is the cultivation or farming of fish under
controlled conditions (as contrasted with the harvesting of fish in the wild).
The Company cultivates its fish in fresh water (not marine (salt water) or
brackish environments), sells fish and fish fry (juvenile fish) and also acts as
a dealer of freshwater fish (generating trading profits from the purchase of
fish from third party farmers and the immediate re-sale of such fish to
wholesalers and processors).
During fiscal 2010 (all information for
fiscal 2010 presented herein is unaudited), the Company sold more than 38,000
tons of adult fish to frozen fish processors and wholesalers in Guangdong
Province and Hainan Province, People’s Republic of China (“PRC”) and the Company
sold approximately 370 million fry to distributors, which in turn sold such fry
to other farmers to cultivate.
Approximately 67% of the Company’s
revenues for fiscal 2010 were from the sale of adult fish farmed by the Company,
approximately 24% of the Company’s 2010 revenues were from the re-sale of fish
purchased by the Company from farmers and approximately 9% of the Company’s 2010
revenues were generated from the sale of fish fry. Approximately 69% of the
Company’s net income for fiscal 2010 was from the cultivation and sale of adult
fish, approximately 26% of the Company’s 2010 net income were from the breeding,
incubation and sale of fish fry and approximately 5% of the Company’s 2010 net
income was profit from the Company’s trading of freshwater adult fish. The
Company believes that currently it is one of the three largest sellers of
tilapia fry in the PRC.
The Company operates 14 adult fish
breeding farms, covering a total area of 24,085 mu (a mu is a measure of land
area used in China equivalent to approximately 1/6 of an acre). Three of the
Company’s farms are located in Hainan Province, two in the town of Wenchang and
one in Nanling. The other 9 farms are located in Guangdong Province in the
towns or villages of Nanhai, Qinyuan, Taishan, Yangdong, Gaoyao and Zengcheng..
The other 2 farms are located in Shanxi Province and Hubei Province. 7 of
the farms consist of a series of man-made ponds dug to a depth of approximately
2 meters with a surface area of 10-20 mu. A pond can be dug in two days and is
filled with fresh filtered water from local sources. Each pond is outfitted with
one or more oxygen aeration machines which float on the surface and one or more
feeding machines which provide food to the fish twice per day. The aeration
machines provide oxygen to the fish and enable the natural removal of fish
wastes so that the water does not become toxic for the
fish.
41
7 of the Company’s farms are comprised
of a single lake created by damming a river. Oxygen aeration equipment is not
needed since the lakes have a much larger area than the ponds dug by the
Company. The land on which the farms are located is leased by the Company from
the village under leases for terms of 4 to 30 years.
To facilitate the distribution of adult
fish, since May 2010, the Company operates a logistic center in Shunde,
Guangdong Province from where the adult fish are transported to the regions of
Hangzhou city and Tianjin city besides the long term established sales network
in Guangdong Province.
For additional information concerning
the location and area of each of the Company’s fish farms and the terms under
which the real estate for each farm is leased, see “Description of
Property.”
In addition to its adult fish breeding
farms, the Company operates a breeding farm in Wenchang, Hainan Province in
which tilapia fry are produced from brood stock. (The warm climate in Hainan is
more conducive to the breeding of tilapia fry than the climate in Guangdong
Province.) The tilapia fry breeding farm in Wenchang covers an area of
approximately 1,800 mu. The Company breeds snakehead and crucian carp fry at its
facility in Nanhai.
At its facility in Nanhai (at which the
Company also maintains a fish clinic), the Company also has constructed and
maintains concrete tanks with a surface area of approximately 8,000 square
meters containing approximately 40 compartments where the Company incubates
tilapia, snakehead and crucian carp fry for approximately 10-25 days after such
fry is initially produced or purchased by the Company. Most of the tilapia fry
breeded by the Company in Wenchang is promptly flown by commercial air carrier
to Guangzhou (which is approximately 300 miles from Nanhai) and thereafter
transported by automobile to Nanhai. The Company also maintains an approximately
4,500 square meter incubation tank in Wenchang for tilapia fry that it will
incubate and sell in Hainan Province.
The
incubation tanks in Nanhai and Wenchang are lined with concrete as compared to
the Company’s adult fish breeding ponds and lakes, which are not. The concrete
lining of the incubation tank enables the Company to maintain better water
quality for the fry in the tank and also makes it easier for the small fry to be
seen and caught when it is time to harvest them. After the incubation period the
Company sells approximately 95% of the fry to distributors.
Approximately 41% of the Company’s
revenues from the sale of Company grown adult fish in fiscal 2010 were from the
sale of snakehead, approximately 20% was from the sale of bighead, approximately
18% was from the sale of tilapia, approximately 12% was from the sale of grass
carp, and the balance of the Company’s revenues from the sale of
Company grown adult fish during fiscal 2010 were from sales of other varieties
of freshwater fish, including catfish, bream, black carp and crucian
carp.
Approximately 52%, 27%, 8%, 5% and 5%
of the Company’s revenues during fiscal 2010 from sales of fish fry were from
the sale of tilapia, snakehead yellow bone ,bass and crucian carp fry,
respectively. The Company does not breed or incubate fry of the other adult fish
that it cultivates. Rather, it purchases the fry for such fish from
distributors.
In conjunction with Professor Sifa Li
and his team from Shanghai Fisheries University, during the period from 2006 to
2009 the Company developed a strain of Nile tilapia called “New Jifu” which has
received the approval and recommendation the PRC Ministry of Agriculture. New
Jifu tilapia is fatty and fleshy, and compared to other strains of Nile tilapia
is faster growing (taking 4 to 5 months rather than 6 months to grow to a
saleable size), more disease resistant and more suitable to be raised in a warm
climate such as that of Hainan Province. The Company currently sells
approximately 17,000 tons of tilapia per year, approximately 60% of which is of
the New Jifu variety and 40% of which is oreochromis tilapia. Oreochromis
tilapia are more tolerant of lower temperatures, which enables the fish to be
cultivated in northern climates. However, such tilapia are slower to grow to a
saleable size, limiting production to at most three crops in two
years.
42
The Company sells approximately 90% of
its tilapia to the owners of 28 processing plants in Guangdong and Hainan
Provinces. The processors generally require that the tilapia be of a standard
weight of .75 kilograms. (Because of such weight requirement, the Company
generally sells most of its tilapia in the fourth quarter since the growing
season of approximately 6 months commences in March of each year.) The
processors freeze the tilapia and sell the frozen product for distribution
domestically in China and internationally. The balance of the Company’s tilapia,
as well as all of the other fish the Company sells, is sold under the Company’s
Hengshen brand name to fish brokers located in wholesale markets in Guangdong,
Hainan, Fujian and Xinjiang Provinces which brokers in turn market
the fresh fish nationwide in China though other wholesalers or at retail. In
2010 the top ten customers (including processors and wholesalers) for the
Company’s adult fish accounted for approximately 62% of the Company’s total
sales of adult fish. Hanhai Global Aquaculture Market, Hainan Ahe Food, Zhu
Zheng Jun from Hangzhou distributor market accounted for16%, 9% and 8%,
respectively, of total purchases from the Company of adult fish in
2010.
The Company is developing technology to
breed new strains of yellow catfish and California perch and anticipates making
sales of the fry of such fish strains in 2010. In January 2010 the Company
purchased for approximately $87,000 50,000 yellow catfish and 6,000 California
perch to use as brood stock to breed new strains based on a method of population
genetics using selective criteria to continually enhance the quality and
quantity of fry produced from the breeding process in cooperation with experts
from Shanghai Fisheries University led by Professor Sifa Li. The Company
anticipates spending approximately $75,000 per year on the cultivation of brood
stock, including breeding and disease prevention costs. Regarding yellow
catfish, the Company is seeking to determine the best period for mating of
mature parent fish and how to facilitate such mating. Regarding California
perch, the Company will seek to determine the most suitable kind of nest for
hatching the perch to facilitate egg laying and then the Company can relocate
the nest for fertilization.
The Company has constructed a facility
in Nanhai, to breed yellow catfish and California perch fry. The facility was
completed in May 2010 at a total cost of approximately $500,000 and is now in
use. This facility consists of a one-floor building with a floor area of
approximately 6,000 square meters.
The Company also intends to use some of
the proceeds from the March 29, 2010 sale of its Series A Stock and Warrants to
increase both the production capacity of and productivity at its breeding farms,
to develop new breeds of fry and to change its business model in certain
respects.
The new business model is a type of
co-op model in which the Company and the farmers closely cooperate in a manner
to enhance production quantities and qualities. This model is popular in Chinese
agriculture. Under the new model the Company will provide farmers with a full
range of products and services, including fish fry, fish food, fish drugs, and
expertise in the growing of healthy fish and the farmers manage their own
ponds. In harvesting season the Company will purchase the adult fish
from the farmers at either a fixed market price set at the time that an
agreement between the Company and the farmer is signed or at the prevailing
floating market price when the adult fish is repurchased. The farmers
will bear the costs of the fish fry, fish food and fish drugs, but the Company
will assist and educate the farmers on the best techniques at no cost to the
farmers.
For example, instead of selling most of
its snakehead fry to distributors which in turn sell the fry to local third
party farmers, the Company intends to retain such third party farmers as
subcontractors to grow adult snakehead from fry supplied directly to them by the
Company. In such new business model the farmers will receive a fixed payment
from the Company for their service and, the Company will supply at its own cost
or reimburse the farmer for fish food and medicines. The Company anticipates
that this business model will generate greater profits to the Company than would
be the case if the Company merely sold snakehead fry to distributors because the
model will substantially increase the ability of farmers to cultivate high
quality fish and therefore substantially increase the Company’s capacity to
produce adult fish. The Company may also use this cooperative farmer business
model grow and sell other fish in addition to snakehead.
43
Farming
Operations
The various steps in the process of
producing adult fish for sale are described below:
Brood
stock production
The Company currently owns
approximately 400 to 600 male-female pairs of tilapia brood stock
(“grandparent fish”), of which 200-300 pair are of the “New Jifu”
strain and 200-300 pair are oreochromis tilapia. Grandparent fish are either
purchased by the Company or developed from ancestors by the Company in
conjunction with breeding experts such as personnel in academic institutions.
The grandparent fish are held at the Company’s headquarters in
Nanhai. Grandparent fish generally produce offspring (“parent fish”)
for a period of 5 to 8 years and each pair of grandparent fish generally will
produce approximately 600 pair of parent fish per year.
Parent
fish production
The parent tilapia are maintained at
the Company’s facility in Wenchang, Hainan Province. The warm climate in Hainan
Province is conducive to the production of tilapia fry. (The parent generation
of the other fish that the Company cultivates are maintained at the Company’s
facility in Nanhai.) The Company owns approximately 80,000 parent fish (one male
fish for each three female fish) of the New Jifu strain. The New Jifu parent
fish generally produce approximately 6,000-8,000 offspring (fry) per year for a
period of three years. The Company has a capacity to produce approximately 500
million “New Jifu” fry per year. The Company has a capacity to produce
approximately 300 million oreochromis tilapia fry per year.
Within 3 days after the tilapia fry is
first produced, using commercial air carrier transportation, the Company
transports the fry produced in Hainan to the Company’s facility in Nanhai,
Guangdong Province where the tilapia fry are incubated for up to 20 days before
being sold to distributors of moved by the Company to one of its adult breeding
farms. The Company also purchases fry for the growing of the other fish (except
tilapia) it grows. The Company also incubates snakehead and crucian carp fry at
its Nanhai facility.
Adult
fish production
Approximately 95% of the fry produced
by the Company are sold to distributors and 5% of the fry are raised to adults
by the Company. The Company cultivates the fry it does not sell at one of the 13
adult fish breeding farms the Company maintains. The fry are transported to such
farms from the Nanhai incubation facility by Company trucks. The Company
generally sells its tilapia when the tilapia has grown to a weight of 0.75 kg as
that is the size desired by the Company’s frozen fish processor customers. For
New Jifu , it takes 5 to 6 months to reach 0.75 kilograms (‘kg”) and for
oreochromis tilapia it takes about 7 to 8 months to reach 0.75kg. The
Company generally raises its grass carp and snakehead to weights of .50kg or
more (up to as much as 5 kg) before sale of such fish to wholesalers. The larger
the weight the longer the fish takes to grow. The Company may therefore
cultivate fish for a year or more before sale.
Approximately 80-85% of the variable
costs of producing adult fish is the cost of fish food. The other variable costs
include medicine and the cost of fry for those fish for which the Company does
not breed its own fry. The other significant costs borne by the Company in its
operations are of the rental of farmland, salaries of production personnel and
utilities and transportation costs.
44
Fish
clinic and educational services
At its Nanhai facility, the Company
maintains a clinic supported by the Agriculture Bureau of Guangdong Province.
Farmers may bring diseased fish to the clinic where Company personnel as well as
experts from the Agriculture Bureau (who are periodically present at the clinic
or available for consultation by telephone or internet) can diagnose problems
and determine courses of treatment.
At such facility the Company also
offers free classes to train farmers in the cultivation of fish. Classes are
generally given for three days twice a month. The Company’s cost for providing
such training is approximately $7,500 per year.
By offering such clinical services and
free training, the Company has been able to build a database of approximately
100,000 farmers who are or may become interested in purchasing fry, who may
become subcontractors for the Company in growing fry to adult fish or who may
sell fish to the Company for immediate resale by the Company to tilapia
processors or wholesalers.
Trading
Operations
The Company acts as an intermediary in
the sale of fish to tilapia processors and fish wholesalers. Such entities place
orders with the Company which the Company fills by dealing with farmers in the
Company’s data base. The processors and wholesalers rely on the Company, rather
than dealing directly with farmers, due to the Company’s reputation for quality
and the Company’s contacts with numerous sources of supply, which serve to
reduce the administrative costs of the processor or wholesaler. The Company
generally arranges for transactions, pays the farmer, assists the processor,
wholesaler and farmer in delivery operations (the cost of transportation is
generally borne by the processor of wholesaler) and receives payment from the
processor or wholesaler at a mark up over the Company’s purchase cost
(approximately 10% of the sales price).
Industry
Background
Aquaculture is the science, art, or
practice of cultivating and harvesting aquatic organisms, including fish,
mollusks, crustaceans, aquatic plants, and algae such as seaweed. Operating in
marine, brackish, and freshwater environments, aquaculture provides food for
people and in smaller amounts supplies fish for stocking lakes, bait for
fishing, and live specimens for home aquariums. According to a recent study by
the World Food and Agriculture Organization (“FAO”) published on March 2,
2009, world fisheries production reached a new high of 143.6 million metric
tons in 2006, including farmed and ocean caught product. The contribution of
aquaculture to the world fisheries production in 2006 was 51.7 million tons
of fish, which was 36 percent of world fisheries production in 2006, up from 3.6
percent in 1970. Global aquaculture accounted for 6 percent of the fish
available for human consumption in 1970. In 2006 global aquaculture accounted
for 47 percent of the fish available for human consumption according to the FAO.
The FAO report also describes that over half of the global aquaculture in 2006
was freshwater finfish. Based on the FAO’s projections, it is estimated that in
order to maintain the current level of per capita consumption, global
aquaculture production will need to reach in excess of 80 million tons of
fish by 2050.
Also according to the FAO, in 2006
China contributed approximately 67% of the total quantity and 49% of the total
value of worldwide aquaculture production. In China, approximately 90% of fish
production comes from aquaculture.
China has a long history of
aquaculture. However, large-scale production only began after the founding of
the PRC in 1949. More recently, after China opened up to the outside world in
the 1980's, the sector has been growing dramatically, becoming one of the
fastest growing sectors among the agriculture industries in China. In 2003 China
registered a total amount of 30.28 million tons of farmed fish, accounting for
64.34% of national fishery production . China’s total aquaculture production is
dominated by carp raised in inland ponds for local consumption. The four major
carp species — silver carp, grass carp, common carp, and bighead carp — account
for more than one third of world aquaculture production — nearly all of it in
China.
45
China’s aquatic production for 2009 is
forecast to have reached 49.5 metric tons (“MMT”), an increase of
approximately two percent from the estimated 48.6 MMT of production
in 2008. China remains the world’s largest aquaculture producer. The rise in
aquatic production is attributed to the country’s rapid economic growth, rising
disposable incomes and greater consumption of aquatic products, together with
strong growth of aquatic exports. While official statistics are not yet
available, the 2008 aquatic production is estimated to have increased by
approximately two percent over the 47.5 MMT of production in 2007. According to
China’s Ministry of Agriculture (“MOA”), aquatic production for the first five
months of 2008 reached 15.6 MMT, up more than four percent over the previous
year to date figure. MOA expected a normal production growth for the remainder
of 2008. Industry sources also showed that total aquatic production in the first
eight months of 2008 reached 26.5 MMT, up three percent over the previous year.
The production growth is mainly attributable to freshwater production at 12.5
MMT, up seven percent over the same period in 2007, while sea catch production
stood at 6.9 MMT, down more than two percent. Another official media source
reported that total aquatic production for 2008 is expected to have reached 48.9
MMT and the total freshwater aquatic production reached 17.4 MMT as of the end
of October 2008. The devastating winter storms that hit south China from January
through February of 2008 had some impact on aquaculture production. However,
official data on damage is not available. Some industry sources reported losses
of more than 4,000 MT of tilapia and 48 million tilapia fingerlings in Guangdong
and Hainan provinces. MOA reported that the industry quickly
recovered.
Inland aquaculture is very important
part of China fishery industry. Freshwater aquaculture is carried out in fish
ponds, lakes, reservoirs, canals, pens, cages, and paddy fields. Freshwater
aquaculture production is dominated by finfish, particularly silver, grass and
other carps. Pond culture is the most important source of inland
aquaculture, with an estimated share of 73.9% in 1996. More than 4.5
million Chinese farmers are engaged in aquaculture, more than the rest of the
world combined.
In 2005, according to the American
Tilapia Association (“ATA”), tilapia production worldwide was second in volume
to carp, and it is projected by the ATA that tilapia will become the most
important aquaculture crop in the 21st
century. Commercial production of tilapia has become popular in many countries
around the world. Touted as the “new white fish” to replace the depleted ocean
stocks of cod, pollock, and hake, world tilapia production continues to rise and
at least 100 countries currently raise tilapia, with the PRC being the largest
producer. The American Tilapia Association further reports that world production
of tilapia products reached approximately 2.5 million metric tons in 2007,
of which China produced the dominant share of 45.0 percent.
The species of tilapia most commonly
grown as food fish in aquacultures are Nile tilapia, blue tilapia and Mozambique
tilapia). Today, hybrids of these species – sometimes with genetic material from
other species as well – are popular as well. Over 95 percent of the global
tilapia supply is imported to the United States where tilapia is an appreciated
food fish. The United States has its own domestic production as well, but it is
much too small to satisfy consumer demands. The rising standard of living and
fast-changing lifestyle in China have resulted in dramatically increasing
domestic demand for processed frozen Tilapia products.
Tilapias are also among the easiest and
most profitable fish to farm. This is due to their omnivorous diet, mode of
reproduction (the fry do not pass through a planktonic phase), tolerance of high
stocking density, and rapid growth.
The simplest system for raising fish is
in ponds or irrigation ditches. Fry are put into a pond and fed until they reach
market size. The fish are caught, either by draining the pond or by using large
nets. Food can be from natural sources—commonly zooplankton feeding on pelagic
algae, or benthic animals, such crustaceans and mollusks. Tilapia species feed
directly on phytoplankton, making higher production possible.
There are a number of factors that
determine the amount of fish that any given pond can produce. The first is the
size of the pond, which determines the amount of water available for the fish,
which in turn determines the amount of oxygen available for the fish. If there
are too many fish in the pond, there will not be enough oxygen, and the fish
will become stressed and begin to die. Another factor is the capacity of the
pond to digest waste from the fish and the uneaten feed. The waste that is toxic
to fish is mostly in the form of ammonia, nitrites, and nitrates.
46
The pond environment provides natural
ways to eliminate waste. For example, in one waste processing cascade, the
initiating bacteria convert available ammonia to available nitrites, which a
second bacteria converts to the available nitrates that plants and algae consume
as a growth nutrient. The viable density of fish in a pond is determined by the
balance between the amount of waste generated and natural processes for waste
elimination. If the fish release too much waste into the pond, the natural
processes cannot keep up and the fish will become stressed.
Fish density can be increased if fresh
water can be introduced to the pond to flush out wastes or if the pond can be
aerated, either with compressed air or mechanically by using paddle wheels.
Adding oxygen to the water not only increases the amount of oxygen in the water
available for the fish, it also improves the processes involved in removing the
wastes.
Advantages of pond culture include its
simplicity, and relatively low labor requirements (apart from the harvesting of
the fish). It also has low energy requirements. A major disadvantage is that the
farm operation is more dependent on weather and other natural factors that are
beyond the farmer’s control. Another disadvantage concerns the marketing of the
fish. Generally, ponds are only harvested when most of the fish are at market
size. This means the farmer has many fish to market at the same time, requiring
a market that can absorb large quantities of fish at a time and still give a
good price to the farmer. Usually this means there is a need for some kind of
processing and large-scale marketing, with several fish farms in the same area
to provide the processing plant with a constant supply of fish. If this kind of
marketing infrastructure is not available, then it is difficult for the fish
farmer.
Raw
Materials and Suppliers
Approximately 80-85% of the cost of
sales of fish is for fish food. The balance is for fish medicine and the cost of
fry for fish for which the Company does not breed its own fry. The Company
purchases over 90% of its food for the feeding of adult fish from Ke Da Heng
Sheng Fish Food Factory, a company which is wholly owned by the sister of the
Company’s Chairman, Zhisheng Chen. The Company also purchases over 60% of its
food for the feeding of fry from Ke Da Heng Sheng Fish Food Factory. In 2010 the
Company spent approximately $25.1 million and $412,000 for the purchase of adult
and fry food, respectively. The Company believes that there are adequate other
sources of supply of fish food, other than Ke Da Heng Sheng Fish Food
Factory.
Marketing,
Sales and Distribution
The Company has a staff of 13 employees
who take orders and provide customer service to processors and wholesalers in
assigned geographical areas. The Company sells fry to approximately 110
distributors, sells tilapia to 28 frozen tilapia processors and sells fish to
approximately 50-60 fish brokers in wholesale markets. Sales of fish fry are
mainly made in Guangdong, Hainan and Guangxi provinces, while sales
of adult fish are mainly made in Guangdong and Hainan provinces. Since May 2010
we have also sold fish to distributors in Zhejiang, Chongqin
and Shandong provinces and we intend to explore the possibility of
expanding our sales to additional regions.
The Company promotes its Hengshen brand
to farmers by advertisements in newspapers and magazines. The purpose of such
promotion is to attract potential purchasers of fry, as well as potential
subcontractors for the Company in growing snakehead and also potential sources
for the Company’s fish trading operations. The Company also conducts free
training sessions for farmers to build a database for the same
purposes.
47
Employees
As of December 31, 2010 Rongfu had 188
full-time employees, including 40 management and supervisory personnel, 98
production workers, 21 sales and marketing personnel and 29 technological
support, training and operations personnel. Over 100 of the Company’s
employees hold at least a junior college degree. The Company also had 65
part-time employees, of which 53 were interns from various colleges. Interns are
not paid but Rongfu gives interns a subsidy in a nominal amount and provides
food and housing for such interns without charge.
Seasonality
Approximately 50% of the Company’s
sales of fry are made in the second quarter as fish produce most of the fry in
March of each year. The Company’s sale of fry are lowest in the fourth quarter.
The Company’ s sales of adult fish are greatest in the fourth quarter. The first
quarter is the next busiest. Sales of grown fish follow the pattern of fry
production in the spring and then a six month growing season to maturity and
sale.
Competition
The aquaculture industry is intensely
competitive and highly fragmented. Our direct competitors are small size farmers
in the sale of adult fish and smaller scale breeding farms in the sale of fry.
In the Guangdong area (South China), we have not identified any competitors with
sizable operations or who produce or market similar categories of fish to the
fish we breed, produce and market.
There are more than 2 million fish
farmers in the PRC. Most farmers grow fish on a small scale. We believe that we
have competitive advantages over most of our competition by virtue of our
capital, technology and research and development. The Company competes against
smaller scale breeding farms in the sale of fry.
The principal methods of competition in
the aquaculture industry are in the quality of the fish which are sold and in
the ability of sellers to control and reduce their costs.
We believe we have the following
principal competitive strengths:
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Quality
Products. We produce fish products and have developed a farming
system that avoids the use of potentially toxic chemicals, drugs,
pesticide residues, veterinary drug residues, heavy metals, pollutants and
other substances. We believe that we fully comply with the Law of PRC on
the Prevention and Control of Water Pollution. Our fish are raised in
ponds of pure rain water collected for aquaculture. We use high quality
fish food to comply with the safety rules and regulations in the
PRC.
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Vertically
Integrated Operations. Vertical integration
of our operations allows us to control and monitor quality, as well as
reduce costs. Through our cooperative arrangements with local farmers, we
train them to our production methods, while monitoring constantly the
quality of production until
harvest.
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Environmental
and Quality Assurances. We have adopted and implemented stringent
quality control measures and procedures throughout the production process,
in order to comply with the various environmental and quality standards.
In order to supply to food processing companies, we have complied with the
Food Safety Law of the PRC, which became effective on June 1, 2009. We use
advanced technologies in our farming, feed formulation and processing
operations. We have adopted modern and environmentally friendly and
responsible technology in our growing process of
fishes.
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Strategic
Location in Guangdong
Province,
PRC.
Our processing facilities are geographically well-positioned in
Guangdong Province to leverage favorable climatic conditions, abundant
water supply, a pristine environment and a readily available source of
labor for our processing plant. Furthermore, our logistics center is
conveniently located near the farmers from whom we obtain our supply of
fish and it is also in close proximity to our new cooperative
fish farms.
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48
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Competitive
Cost Structure. We benefit from competitive cost structures due to
the lower labor costs in China and the streamline of the supply chain
transactions to increase logistics efficiencies. We also believe that
we are able to trim our operating costs by procurement of fry and fish
food at relatively low cost and deployment of advanced methods for
cultivation.
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Experienced
Management – The
senior management has extensive experience in fish farming in Guangdong
Province in China. Mr. Chen Zhisheng, our Chairman, has over 30 years
experience in the field of aquaculture. He also serves as the Chairman of
Foshan Nanhai Aquaculture Association and we believe that he has great
influence in the development of the industry in Guangdong
Province.
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We do not believe that there currently
exist any factors which adversely affect our competitive position.
Research
and Development
Research and development expenses
include pond rental expense and medicine for fish the Company is attempting to
genetically develop; and wages for employees and payments made to independent
contractors such as Professor Sifa Li on development projects. Research and
development expenses in fiscal years 2009 and 2010 aggregated $90,045 and
$184,380, respectively.
The Company has its own technicians to
research fish growing technologies, including methods to grow fish faster, and
to maintain water quality and use appropriate fish foods. The Company maintains
a big database for fish diseases and cures for the most commonly raised
fishes.
In 2006, the Company focused on
research of tilapia brood stock, with the cooperation of Sifa Li, During the
period from 2006 to 2009, the Company’s R&D team developed a strain of Nile
tilapia called “New Jifu”, which has received the approval and recommendation
the PRC Ministry of Agriculture. In 2008 the Company began research into
breeding snakehead fish. In 2009 the Company began research into
breeding yellow catfish and California perch.
We paid Professor Sifa Li approximately
$15,000 in each of fiscal 2009 and 2010 in connection with projects led by him.
A project team was jointly formed by our designated technical personnel and the
specialists from the Shanghai Fisheries University led by Professor Li. In the
process of conducting project management for the tilapia breeding
project, we have not only bred a new strain of tilapia, but have also
enhanced the skills and experience of our technical team regarding breeding new
strains of fish.
Our research activities have been in
applied fish nutrition, physiology and nutrients required or utilized by aquatic
animals. Our major research efforts have been in the areas of stability,
efficacy, and effects upon fish health with respect to resistance to bacterial
and viral diseases. We also been active in research methods, technology transfer
and cooperation with leading research institutes to develop improvements in
methods of fish culture.
None of our research and development
expenses are borne directly by any of our customers.
Intellectual
Property
The Company does not own any
patents.
In conjunction with Professor Sifa Li
and his team from Shanghai Fisheries University, from 2006 the Company developed
a new strain of tilapia called “New Jifu” which has received the
approval and recommendation the PRC Ministry of Agriculture. Based on the
agreement between Professor Li and Nanhai Ke Da Heng Sheng Heng Sheng, Nanhai Ke
Da Heng Sheng may exclusively use the technology of “New Jifu” in Hainan
Province and use the technology on a non-exclusive basis
elsewhere.
49
Nanhai Ke Da Heng Sheng has a trademark
“Ke Da Heng Sheng” registered with the PRC Trademark bureau. The term of the
trademark is from October 28, 2004 to October 27, 2014.
Regulation
According to the Law of the PRC on the
Prevention and Control of Water Pollution, effective on June 1, 2008, to engage
in the aquaculture industry, a business owner shall be responsible for
protecting the waters and the ecological environment. In complying with such law
the Company takes into account the impact on the environment in regard to any
new construction or renovation of buildings and sewage disposal facilities. In
connection with aquaculture operations performed directly by the Company, we
forward necessary documents to the relevant department for approval. In deciding
the location of a site for our aquaculture operations, we consider geographical
conditions for water pollution prevention. In building and reconstructing sites
for its aquaculture operations, the Company builds waste water disposal
facilities and water circulation and filtering facilities that are in compliance
with applicable law and regulations.
As a food processing business, the
Company must be in compliance with the Food Safety Law of the PRC, effective on
June 1, 2009, which lists several enforceable mandatory standards as food safety
standards. Based on the law, an aquaculture business should have suitable
production and management facility to protect aquatic food from being harmfully
affected. To comply with the Food Safety Law, the Company trains all of its
employees for at least one week to familiarize them with the applicable laws
and regulations. Secondly, the Company’s
personnel regularly assesses the quality of the Company’s adult fish.
In addition, the Company ha established internal rules and regulations to
restrict the use of drugs which are harmful to human health, such as pesticide
residues, veterinary drug residues, heavy metals, pollutants and other
substances. All on-site employees are subject to pre-employment and annual
health checks and must obtain a valid health certificate before they can work on
site. The Company has also established a system for daily production records to
highlight healthy conditions and fatality rates of the Company’s fish. The
reports are examined regularly by management. The Inspection and Quarantine
Bureau will regularly inspect the Company’s products in accordance with
applicable export rules and regulations.
According to Regulations of Quality and
Safety of Aquaculture of the Ministry of Agriculture, effective on September 1,
2003, water used in aquaculture should be consistent with requested standards of
Ministry of Agriculture. Aquaculture can not violate relevant national or local
specifications of cultivation, which include equipment placement, sales of
farmed aquatic products, as well as the use of feed materials and aquaculture
drugs.
Additionally, the aquaculture industry
is also subject to the control and management of the Fishery Law of the PRC, the
Management Methods of Pollution-Free Agriculture Products, and the Aquatic
Germchit Managing Regulations.
To comply with the above laws, the
Company has hired more employees to examine the site environment, to test the
health of adult fish, to record the cultivation process to check for abnormal
conditions, and to operate waste water prevention and handling facilities. The
Company believes that the hiring of such personnel and the construction and
operation of waste water prevention and handling facilities will increase the
Company’s total operating costs in the fiscal year ending December 31, 2010 by
approximately $520,000 or 20% over the Company’s total operating costs for
fiscal 2009.
The Company believes that it is
compliance with all of the PRC laws and regulations
regarding control of water pollution and food safety, although it has
not received an opinion of PRC counsel as to such matters.
50
Legal
Proceedings
As of the date of this prospectus, the
Company is not a party to any material legal proceedings nor is it aware that
any person or governmental entity intends or has threatened to institute any
proceedings against the Company.
DESCRIPTION
OF PROPERTY
Set forth below is a table containing
certain information concerning the location and are of each of the Company’s
fish farms and the terms under which such properties are leased.
Name of
Farm
|
Area
(Mu)/(Square
Meters)
|
Location
|
Landlord
|
Tenant
|
Lease
Commencement
Date
|
Lease
Expiration
Date
|
Rent per Year ($)
|
|||||||||||
Lugang
Pond
|
85.00/56,666.95 |
Hengling,
Shagang village, Nanhai, Guangdong
|
Xuehao
Tu
|
Nanhai
Keda
Hengsheng
Aquiculture Co., Ltd.
|
1/1/2006
|
12/31/2012
|
$ | 16,750 | ||||||||||
Lugang
Pond
|
98.00/65,333.66 |
Xianliao
Village, Nanhai, Guangdong
|
Santuan
Villager Group of Xianliao Village of Heshun Town
|
Nanhai
Keda
Hengsheng
Aquiculture
Co.,Ltd.
|
1/1/2002
|
12/31/2011
|
$ | 11,529.41 | ||||||||||
Nanzhou
Pond
|
71.33/47,553.57 |
Jianshui,Tantou,
Nanhai, Guangdong
|
Sanhong
Village Economic Cooperative of Xianliao Village of Heshun
Town
|
Nanhai
Keda
Hengsheng
Aquiculture Co., Ltd.
|
1/1/2005
|
12/31/2014
|
$ | 13,426.82 | ||||||||||
Nanzhou
Pond
|
803.04/535,362.68 |
Dapu,
Nanhai, Guangdong
|
Xianliao
Village of Heshun Town
|
Nanhai
Keda Hengsheng Aquiculture Co., Ltd.
|
1/1/2005
|
12/312014 | $ | 101,560.94 | ||||||||||
Qingyuan
Artificial Lake
|
500.00/333,335 |
Laohuchong
Artificial Lake, Qingyuan, Guangdong
|
Zhishen
Luo
|
Nanhai
Keda
Hengsheng
Aquiculture Co., Ltd.
|
3/1/2006
|
12/31/2013
|
$ | 33,823.53 | ||||||||||
Taishan
Artificial
Lake
|
1,000.00/666,670 |
Guanchong
Artificial Lake, Shenjing Town, Taishan, Guangdong
|
Weiqiang
Fan, Weiqiang Hu
|
Nanhai
Keda
Hengsheng
Aquiculture Co., Ltd.
|
10/20/2005
|
12/31/2016
|
1,691.18 |
51
Yangdong
Artificial
Lake
|
2,500.00/1,666,675 |
Shawan
Artificial Lake, Yangdong County, Guangdong
|
Huazhan
Zhuo
|
Nanhai
Keda Hengsheng Aquiculture Co., Ltd.
|
1/13/2007
|
12/31/2014
|
$ | 5,698.53 | |||||||||
Gaoyao
Artificial
Lake
|
30.00/20,000.1 |
Shangdong
Village, Baizhu Town, Gaoyao City, Guangdong
|
Xinlong
Villager Group of Shangdong village committee of Baizhu Town
in Gaoyao City
|
Nanhai
Keda
Hengsheng
Aquiculture Co., Ltd.
|
1/10/2007
|
1/10/2013
|
$ | 5,264.71 | |||||||||
Hainan
Adult Fish Pond
|
375.00/250,001.25 |
Fupo
Village, Baoluo Town, Wenchang City, Hainan
|
Jianzhong
Fan
|
Nanhai
Keda
Hengsheng
Aquiculture Co., Ltd.
|
2/28/2005
|
2/28/2015
|
$ | 24,816.18 | |||||||||
Hainan
Adult
Fish
Pond
|
200.00/133,334 |
Nanling
Artificial Lake, Hainan
|
Maoshan
Village Economic Cooperative of Wengtian Town in Wenchang
City
|
Nanhai
Keda Hengsheng Aquiculture Co., Ltd.
|
1/12/2005
|
1/11/2020
|
$ | 514.71 | |||||||||
Hainan
Adult
Fish
Pond
|
1,600.00/1,066,672 |
Wenglong
Artificial Lake,Wenchang, Hainan
|
People’s
Government of Wengtian Town of Wenchang City
|
Nanhai
Keda Hengsheng Aquiculture Co., Ltd.
|
1/1/2005
|
12/31/2035
|
$ | 5,882.35 | |||||||||
Wenchang
Fish Fry Pond
|
1,800.00/1,200,006 |
Wenchang,
Hainan
|
Kuangshan
Group of Shandong Province
|
Nanhai
Keda Hengsheng Aquiculture Co., Ltd.
|
10/13/2006
|
12/15/2018
|
$ | 44,117.65 | |||||||||
Zeng
Cheng Lian He Lake
|
5,000.00/3,333,350 |
Zengcheng,
Guangdong
|
Hui
Zhou City ZengBo Lian He Lake Contract Administration
Office
|
Guangzhou
Flourishing Blessing Hengsheng Agricul Ture Technology
Co.,Ltd.
|
08/01/2010
|
07/30/2025
|
$ | 16,180 | |||||||||
Ying
Hu Lake, Shanxi Province
|
10,000.00/6, 666,667 |
Langao
Shanxi
|
Nan
Gao County Water Authority
|
Guangzhou
Flourishing Blessing Hengsheng Agricul Ture Technology
Co.,Ltd
|
10/01/2010
|
09/30/2025
|
$ | 7,350 |
52
No.4,
Wan Mao Agricultural Demo. District, Nan Nong Village, Xing Yun Town,
Shunde City
|
10.00/6,670 |
Shunde
Guangdong
|
Liangjionghong
|
Nanhai
Keda Hengsheng Aquiculture Co., Ltd.
|
07/01/2010
|
06/30/2015
|
$ | 26,470 | |||||||||
South
of Tu Ming Huan Village Road , Ji You Village, Xing Yun Town, Shunde
City
|
12.50/8,337 |
Shunde
Guangdong
|
Representatives
from Ji You Village, Xing Yun Town, Shunde City
|
Nanhai
Keda Hengsheng Aquiculture Co., Ltd.
|
01/01/2010
|
08/31/2029
|
$ | 11,570 | |||||||||
Total
|
24,084.87/16,056,634.21
|
$ | 397,950.26 |
The Company leases from Guangzhou
Chuangshi Trading Co., Ltd approximately 50 square meters of administrative
office space at No.329 Qingnian Road 301-17, Economic Development District,
Guangzhou City, PRC for a monthly rental of 3,000 RMB (approximately $442 based
on the conversion rate as of December 31, 2010) for a three year term expiring
in January 2012. The rental includes water, electricity and administrative fees.
The Company also leases from Guangzhou Dongdu Big World Co., Ltd. approximately
240 square meters of office space at Dongdu Room 321, No.475 Huanshidong Road,
Guangzhou City, PRC for a monthly rental of 16,500 RMB (approximately $2,430
based on the conversion rate as of December 31, 2010)for a three year term
expiring on December 15, 2012. The rental includes water, electricity and
administrative fees. Nanhai Ke Da Heng Sheng leases from Tangcun Group Co., Ltd.
approximately 11,307 square meters of office space used for its headquarters for
an annual rental of 484,869 RMB (approximately $7,363 based on the conversion
rate as of December 31, 2010) for a ten year term expiring February 10, 2015.
Hainan Ke Da Heng Sheng leases from Shandong Kuangshan Group approximately
720,000 square meters of land (including a building located on the land which
covers an area of 8,170 square meters) for an annual rental of 50,000 RMB for a
15 year term expiring December 31, 2018. In addition, the Company leases a
logistics center with an area of approximately 10 mu or 6,667 square meters
located at Bai On Highway, Leliu District, Shunde, Foshan City, PRC for 15 years
commencing from May 2010 for an annual rental of 180,000 RMB (approximately
$26,506 based on the conversion rate as of December 31, 2010).
The Company believes that the foregoing
properties are adequate for its present needs.
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors
and Executive Officers
The following table sets forth the name
and position of each of our current executive officers and
directors.
Name
|
Age
|
Position
|
||
Chen
Zhisheng
|
48
|
Chairman
of the Board and Director
|
||
Kelvin
Chan
|
37
|
Chief
Executive Officer, President and Director
|
||
Keith
Hor
|
46
|
Chief
Financial Officer
|
53
Chen Zhisheng, became our Chairman and
director on March 29, 2010. Mr. Chen is the CEO of Hainan Ke Da Heng Sheng since
August, 2007. He is also the Chairman and CEO of Nanhai Ke Da Heng
Sheng since April, 2003. Mr. Chen is an expert in the aquaculture industry, who
has been engaged in this area for almost 30 years, which the Company believes
qualifies him for his present positions with the Company. Due to his
achievements and contributions to the aquaculture industry, he is in charge of
the Foshan Nanhai Aquaculture Association as the Chairman. Mr. Chen got his MBA
in Agriculture Administration from the Continue Education School of Qinghua
University on July, 2006.
Ying Shan (Kelvin) Chan became our
director, President and CEO on March 29, 2010. Mr. Chan is the Chairman of
Flourishing Blessing (Hong Kong) Co., Ltd. since August, 2008. He is
also a consultant to Nanhai Ke Da Heng Sheng since September 2005 and in such
position acquired substantial experience in the aquaculture industry which the
Company believes qualifies him for his present positions with the Company. Mr.
Chan was a managing director of SUPERBRAND Company from September, 2002 to
August, 2005, where he was responsible for the company’s strategic development
and operational management. From July, 1998 to August, 2002, Mr. Chan was the
manager of the Greater China District of Applied Biosystem, a NASDAQ listed
company. Mr. Chan got his bachelor’s degree in biology from the Biology
Department of Hong Kong University of Science and Technology in June
1998.
Keith Hor became our Chief Financial
Officer on July 1, 2010. Mr. Hor’s specific areas of expertise include financial
management, mergers and acquisitions, auditing, investor relations, tax
planning, risk controls, SOX 404 compliance and SEC reporting. From March 2007
to June 2010 he was Chief Financial Officer of Diguang International Development
Co., Ltd., a Nevada corporation specializing in the production of sale of
backlights and backlight technologies whose common stock is quoted on the OTC
Bulletin Board. He was Diguang’s financial controller from October 2006 to March
2007. From April 2004 to September 2006, he was the group financial controller
of and company secretary for Asia Tiger Group Ltd, a company listed in the
Mainboard of Singapore Stock Exchange Ltd. and principally engaged in the
trading and manufacturing of office equipment products and digital cameras with
manufacturing facilities in Shenzhen, China. Prior to that, Mr. Hor had
been the Vice President-Finance and Administration (Hong Kong & China)
for five years in Jardine Logistics (HK) Ltd., a company principally engaged in
air and sea forwarding services, warehouse, supply chain, inventory management
and third party logistics services. He was a certified practicing
accountant in Price Waterhouse from 1988 to 1993. Mr. Hor obtained his
Master of Finance from the Bernard M. Baruch College, the City University of New
York and his Professional Diploma of Accountancy from the Hong Kong Polytechnic
University. He is a fellow member of the Chartered Association of Accountants,
UK and an associate member of Hong Kong Society of Accountants.
Employment
Agreements
The Company has not entered into
employment agreements with any of its officers or other key
employees.
Compensation
of Officers and Directors
Our
executive officers do not receive any compensation for serving as executive
officers for Rongfu. However, our executive officers are compensated by and
through Nanhai Ke Da Heng Sheng. The following table sets forth information
concerning cash and non cash compensation paid by Nanhai Ke Da Heng Sheng. to
our named executive officers for 2010. Neither of such named executive officers
were employed by the Company or any of its subsidiaries in fiscal 2009. No
executive officer of ours received compensation in excess of $100,000 for either
fiscal 2010 or fiscal 2009. .
54
Name and
Principal
Position
|
Year
Ended
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-
Equity
Incentive
Plan
Compen-
sation
($)
|
Non-
Qualified
Deferred
Compen-
sation
Earnings
($)
|
All
Other
Compen-
sation ($)
|
Total ($)
|
|||||||||||||||||||||||||
Kelvin
Chan,
CEO
|
12/31/2010
|
90,000 | — | — | — | — | — | — | $ | 90,000 | ||||||||||||||||||||||||
Keith
Hor, CFO
|
12/31/2010
|
$ | 60,000 | — | — | — | — | — | — | $ | 60,000 |
Since 2004 Chen Zhisheng, our Chairman
of the Board, has received a salary of 60,000 RMB (approximately $8,784 based on
the exchange rate as of March 29, 2010) per year from Nanhai Ke Da Heng
Sheng.
Kelvin Chan was appointed as Chief
Executive Officer of the Company on March 29, 2010 and temporarily served as the
Chief Financial Officer of the Company from March 29, 2010 until Keith Hor was
appointed as Chief Financial Officer of the Company on July 1, 2010. Commencing
March 29, 2010, Mr. Chan is being paid a salary at the rate of $120,000 per year
and commencing July 1, 2010, Mr. Hor is being paid a salary at the rate of
$120,000 per year.
The Company does not currently pay any
compensation to its non-officer directors.
TRANSACTIONS
WITH RELATED PERSONS, PROMOTERS AND CONTROL PERSONS;
CORPORATE
GOVERNANCE
Transactions
with Related Persons
During the fourth quarter of 2009,
Nanhai Ke Da Heng Sheng loaned an aggregate of RMB 21,900,000 (approximately
$3,220,588) to Mr. Chen Zhisheng, the Company’s Chairman of the
Board. Mr. Chen invested the entire proceeds of the loan in the
construction of Foshan Nanhai Guanyao Processing Industrial Park, which has a
total area of 108,000 square meters with the construction area of 85,000 square
meters. The loan proceeds constitute only a portion of the construction costs,
which will total RMB 120,000,000 (approximately $17,647,058). Out of the total
construction cost, about RMB 25,000,000 (approximately $3,676,470) has not yet
been funded. The loan made to Mr. Chen did not bear any interest and was paid
off in full by deducting the entire principal of the loan from Chen Zhisheng’s
allocation of shareholders’ dividends that had been declared. After the
construction has been completed, Nanhai Ke Da Heng Sheng has a first option to
rent Foshan Nanhai Guanyao Processing Industrial Park on terms to be
determined.
Nanhai Ke Da Heng Sheng has entered
into two credit line agreements with Foshan Nanhai Allied Rural Credit Union
Danzhao Credit Association with credit lines of RMB 7,000,000
(approximately $1.044,605 based on the conversion rate as of September 30, 2010)
and RMB 5,000,000 (approximately $746,146 based on the conversion rate as of
September 30, 2010), respectively. The credit lines are secured by real estate
owned by Zheng Yanchang, the sister-in-law of Chen Zhisheng, our Chairman of the
Board, and are for two year terms expiring in January 2011. Outstanding loans
under the credit lines bear interest at a rate of 5.4% per annum. Interest is
payable monthly. As of September 30, 2010, no loans were outstanding under the
credit lines.
55
Since January 1, 2007 Foshan Nanhai Ke
Da Heng Sheng and Hainan Ke Da Heng Sheng have been purchasing fish food under a
verbal agreement from Ke Da Heng Sheng
Fish Food Factory, a company owned by Chen Meiru, the sister of the Company’s
Chairman of the Board, Chen Zhisheng. Under the arrangement Foshan Nanhai Ke Da
Heng Sheng and Hainan Ke Da Heng Sheng place orders approximately 1 week before
delivery and pay for such purchases within 60 days. During the year ended
December 31, 2010 purchases by Foshan Nanhai Ke Da Heng Sheng and Hainan Ke Da
Heng Sheng from Ke Da Heng Sheng Fish Food Factory of adult fish food and fish
fry food aggregated approximately $8,315,000 and $186,000, respectively. The
Company’s purchases from Ke Da Heng Sheng Fish Food Factory accounted for
approximately 33% and 45%, respectively, of the Company’s total adult and fish
fry food purchases during the year ended December 31, 2010. The Company believes
that the amounts paid to Ke Da Heng Sheng Fish Food Factory for the purchases of
fish food are equal to or better than the amounts that would have been charged
for the same sales by persons not affiliated with the Company. There are no
written agreements between the Company and Ke Da Heng Sheng Fish Food Factory
concerning the Company’s purchases of fish food.
Director
Independence
We currently do not have any
independent directors, as the term “independent” is defined by the rules of the
Nasdaq Stock Market.
Board
Composition and Committees
The Company’s board of directors is
currently composed of two members, Chen Zhisheng, and Kelvin
Chan.
Neither of such persons has the
attributes or has had the educational or professional experiences (including
experience in preparing and/or auditing financial statements prepared in
accordance with U.S. Generally Accepted Accounting Principles and evaluating the
effectiveness of internal control over financial reporting) which would qualify
him as an audit committee financial expert.
We currently do not have standing
audit, nominating or compensation committees. Currently, our entire board
of directors is responsible for the functions that would otherwise be handled by
these committees. We intend, however, to establish an audit committee, a
nominating committee and a compensation committee of the board of directors as
soon as practicable.
We envision that the audit committee
will be primarily responsible for reviewing the services performed by our
independent auditors, evaluating our accounting policies and our system of
internal controls. The nominating committee would be primarily responsible
for nominating directors and setting policies and procedures for the nomination
of directors. The nominating committee would also be responsible for
overseeing the creation and implementation of our corporate governance policies
and procedures. The compensation committee will be primarily responsible
for reviewing and approving our salary and benefit policies (including stock
options), including compensation of executive officers.
Review,
Approval or Ratification of Transactions with Related Persons
On
October 26, 2010, our board of directors approved a statement of policies
and procedures with respect to related party transactions which requires the
Board of Director, or audit committee when an audit committee of the Board of
Directors is established, to review the material facts of all interested
transactions, as further described below, unless an exception applies, and
either approve or disapprove of our entry into an interested
transaction. If the advance approval by the Board or audit committee
of an interested transaction is not feasible, then such interested transaction
shall be considered at the next regularly scheduled meeting of the Board or
audit committee and, if the Board or audit committee determines it to be
appropriate, then such interested transaction shall be ratified.
56
In
determining whether to approve or ratify an interested transaction, the Board or
audit committee will take into account, among other factors it deems
appropriate, whether the interested transaction is on terms no less favorable
than terms generally available to an unaffiliated third party under the same or
similar circumstances and the extent of the related party’s interest in the
transaction, as described below. Pursuant to the statement of
policies and procedures with respect to related party transactions, no director
shall participate in any discussion or approval of an interested transaction for
which he or she is a related party, except that such director shall provide all
material information concerning the interested transaction to the Board or audit
committee. If an interested transaction is ongoing, the Board or
audit committee may establish guidelines for our management to follow in our
ongoing dealings with the related party. Thereafter, the Board or
audit committee, on at least an annual basis, shall review and assess ongoing
relationships with the related party to see
that such related party is in compliance with the audit committee’s guidelines
and that the interested transaction remains appropriate.
For
purposes of the statement of policies and procedures with respect to related
party transactions:
|
·
|
an
“interested transaction” is any transaction, arrangement or relationship
or series of similar transactions, arrangements or relationships,
including any indebtedness or guarantee of indebtedness, in which
(1) the aggregate amount involved will or may be expected to exceed
$50,000 in any calendar year, (2) we are a participant and
(3) any related party has or will have a direct or indirect interest
other than solely as a result of being a director or a less than 10%
beneficial owner of another entity;
and
|
|
·
|
a
“related party” is any (a) person who is or was, since the beginning
of the last year for which we filed a Form 10-K and proxy statement,
even if he or she does not presently serve in that role, an executive
officer, director or nominee for election as a director, (b) greater
than 5% beneficial owner of our Common Stock or (c) immediate family
member of any of the foregoing. Immediate family member
includes a person’s spouse, parents, stepparents, children, stepchildren,
siblings, mothers and fathers-in-law, sons and daughters-in-law, and
brothers and sisters-in-law and anyone residing in such person’s home
other than a tenant or employee.
|
Notwithstanding
the foregoing, each of the following interested transactions shall be deemed to
be pre-approved by the audit committee, even if the aggregate amount involved
exceeds $50,000:
|
·
|
Employment of executive
officers. Any employment of an executive officer if
either (i) the related compensation is required to be reported in our
proxy statement under Item 402 of the Commission’s compensation
disclosure requirements generally applicable to “named executive officers”
or (ii) the executive officer is not an immediate family member of
another executive officer or director, the related compensation would be
reported in our proxy statement under Item 402 of the Commission’s
compensation disclosure requirements if the executive officer was a “named
executive officer” and our compensation committee approved or recommended
that the board of directors approve such
compensation.
|
|
·
|
Director
compensation. Any compensation paid to a director if the
compensation is required to be reported in our proxy statement under
Item 402 of the Commission’s compensation disclosure
requirements.
|
|
·
|
Certain transactions with
other companies. Any transaction with another company at
which a related party’s only relationship is as an employee other than an
executive officer, director or beneficial owner of less than 10% of that
company’s shares, if the aggregate amount involved does not exceed 2% of
that company’s total annual
revenue.
|
|
·
|
Certain charitable
contributions. Any charitable contribution, grant or
endowment by us to a charitable organization, foundation or university at
which a related party’s only relationship is as an employee other than an
executive officer or a director, if the aggregate amount involved does not
exceed the lesser of $50,000, or 2% of the charitable organization’s total
annual receipts.
|
|
·
|
Transactions where all
shareholders receive proportional benefits. Any
transaction where the related party’s interest arises solely from the
ownership of our Common Stock and all holders of our Common Stock received
the same benefit on a pro rata basis, such as
dividends.
|
57
|
·
|
Transactions involving
competitive bids. Any transaction involving a related
party where the rates or charges involved are determined by competitive
bids.
|
|
·
|
Regulated
transactions. Any transaction with a related party
involving the rendering of services as a common or contract carrier or
public utility, at rates or charges fixed in conformity with law or
governmental authority.
|
|
·
|
Certain banking-related
services. Any transaction with a related party involving
services as a bank depositary of funds, transfer agent, registrar, trustee
under a trust indenture or similar
services.
|
Code
of Ethics
Our board of directors will adopt a new
code of ethics that applies to all of our directors, officers and employees,
including our principal executive officer, principal financial officer and
principal accounting officer. The new code will address, among other things,
honesty and ethical conduct, conflicts of interest, compliance with laws,
regulations and policies, including disclosure requirements under the federal
securities laws, confidentiality, trading on inside information, and reporting
of violations of the code.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth
information regarding beneficial ownership of our Common Stock as
of January 14, 2011 (i) by each person who is known by us to beneficially
own more than 5% of our Common Stock; (ii) by each of the officers and directors
of the Company and (iii) by all of officers and directors of the Company as a
group.
Address of
Beneficial Owner (1)
|
Positions with the
Company
|
Title of Class
|
Amount and
Nature
of Beneficial
Ownership (2)
|
Percent of
Class (2)
|
||||||||
Officers and Directors
|
||||||||||||
Kelvin
Chan
(3)(4)
|
Director, CEO, and
President
|
Common
stock, $0.001 par value
|
17,400,556 | 81.7 | % | |||||||
Chen
Zhisheng
(3)
|
Director and Chairman
of
the Board
|
Common stock, $0.001
par value
|
0 | 0 | ||||||||
Keith
Hor
|
Chief
Financial Officer
|
Common
Stock,$0.001 par value
|
0 | 0 | ||||||||
All
officers and directors as a group (3 persons named above)
|
|
Common
stock, $0.001 par value
|
17,400,556 | 81.7 | % | |||||||
5%
Securities Holders
|
||||||||||||
Hua-Mei
21st
Century Partners, L.P.
237
Park Avenue, 9th
Floor
New
York, New York 10017
|
|
Common
stock, $0.001 par value
|
2,025,520 | (5) | 8.7 | % | ||||||
Guerilla
Partners, L.P.
237
Park Avenue, 9th
Floor
New
York, New York 10017
|
Common
stock, $.001 par value
|
1,267,410 | (6) | 5.6 | % |
58
(1) Unless
otherwise provided, the address of each person is Dongdu Room 321, No. 475
Huanshidong Road, Guangzhou City, PRC 510075.
(2) Beneficial
Ownership is determined in accordance with the rules of the Commission and
generally includes voting or investment power with respect to securities. The
percent of class has also been determined in accordance with rules of the
Commission. For purposes of computing such percentage, as of January 14,
2011, there were 21,286,789 shares of our Common Stock
outstanding.
(3)
Pursuant to certain Call Option Agreements between Mr. Chan and the following
persons, each of the following persons has been granted an option, subject to
the satisfaction of certain conditions, to purchase from Mr. Chan over the
course of approximately three years for $.001 per share, the total number of
shares of our Common Stock held by Mr. Chan set forth after the name of the
person: Chen Zhisheng - 9,000,000; Pan Haicheng – 2,700,000; Zhao Ping –
1,800,000; and Zheng Songkui – 900,000. The conditions and the percentage of the
total number of shares subject to the option that would vest upon satisfaction
of the condition are as follows:
|
·
|
entry by the person and the
Company into a binding employment agreement for a term of not less than
five years for the person to serve as an officer of the Company
– 50%;
|
|
·
|
the Company and its subsidiaries
achieving not less than $1,000,000 in after-tax net income, as determined
under United States Generally Accepted Accounting Principles consistently
applied (“US GAAP”) for the fiscal year ending December 31, 2010 -
20%;
|
|
·
|
the Company and its subsidiaries
achieving not less than $1,500,000 in after-tax profits, as determined
under US GAAP, for the fiscal year ending December 31, 2011 –
20%;
|
|
·
|
the Company and its subsidiaries
achieving not less than $2,000,000 in after-tax profits, as determined
under US GAAP, for the fiscal year ending December 31, 2012 –
10%.
|
(4) Mr.
Chan has deposited 2,768,721 shares of our Common Stock in escrow with The Crone
Law Group, as escrow agent under an Escrow Agreement dated as of March 29, 2010
between Mr. Chan and The Crone Law Group. The terms of the Escrow Agreement are
summarized in the section of this prospectus entitled “Organizational History of
the Company and its Subsidiaries – Series A Preferred Stock Purchase
Agreement.”
(5) Includes
855,787 shares of Common Stock which may be issued upon conversion of Series A
Stock, 534,867 shares of Common Stock which may be issued upon exercise of Class
A Warrants, 534,867 shares of Common Stock which may be issued upon exercise of
Class B Warrants, 33,333 shares of Common Stock which may be issued upon
exercise of Class C Warrants and 33,333 shares of Common Stock which may be
issued upon exercise of Class D Warrants held by Hua-Mei 21st Century
Partners, L.P.
(6) Includes
539,361 shares of Common Stock which may be issued upon conversion of Series A
Stock, 337,101 shares of Common Stock which may be issued upon exercise of Class
A Warrants, 337,101 shares of Common Stock which may be issued upon exercise of
Class B Warrants, 17,949 shares of Common Stock which may be issued upon
exercise of Class C Warrants and 17,949 shares of Common Stock which may be
issued upon exercise of Class D Warrants held by Guerilla Partners,
L.P.
59
Changes
in Control
Except for the Call Option Agreements
described in footnote (3) to the table contained in the section of this
prospectus entitled “Security Ownership of Certain Beneficial Owners and
Management,” there are currently no arrangements which may result in a change in
control of the Company.
SELLING
STOCKHOLDERS
This
prospectus relates to the offering by the Selling Stockholders of shares of our
Common Stock issuable to the Selling Stockholders identified in the table
below.
On March 29, 2010 the Company entered
into and consummated the Purchase Agreement with certain of the Selling
Stockholders - James Fuld, Jayhawk Private Equity Fund II, LP, Straus Partners,
LP, Kensington Partners, LP, Kevin Kotler, Eastern Management & Financial,
LLC, Fagan Capital Inc., Hua-Mei 21st Century
Partners, L.P., Guerilla Partners, L.P., Roth Capital Partners, LLC, Ardsley
Partners Fund II, L.P., Ardsley Partners Institutional Fund, L.P., Marion
Lynton, Stuart Lilien, Robert Stephenson, Gordon Roth, John Weber and Aaron
Gurewitz - pursuant to which the Company issued to such persons in exchange for
an aggregate cash payment of approximately $7,700,000 (a) an aggregate of
2,768,721 shares of its Series A Preferred Stock, (b) five-year warrants to
purchase an aggregate of 1,730,451 shares of its Common Stock for $3.47 per
share and (c) five-year warrants to purchase an aggregate of 1,730,451 shares of
its Common Stock for $4.17 per share.
All of
the Selling Stockholders are “accredited investors” within the meaning of Rule
501 of Regulation D promulgated under the Securities Act.
The table
set forth below lists the names of the Selling Stockholders as well as the
number of shares of Common Stock which are being offered by the Selling
Stockholders hereby. Except as noted below, none of the Selling Stockholders is
a broker-dealer or an affiliate of a broker-dealer. Excepted as noted below,
none of the Selling Stockholders has or has had within the past three years any
position, office, or other material relationship with the Company or any of its
predecessors or affiliates.
Each
Selling Stockholder may offer for sale all or part of the shares from time to
time. The table below assumes that the Selling Stockholders will sell all of the
shares offered for sale. A selling stockholder is under no obligation, however,
to sell any shares immediately pursuant to this prospectus, nor is a selling
stockholder obligated to sell all or any portion of its shares at any
time.
60
Name of Selling Stockholder
|
Total Number and Percentage of
Shares of Common Stock
Beneficially Owned Prior to the
Offering (1) (2)
|
Maximum
Number
of Shares
to be Sold
|
Total Number and
Percentage of Shares
Beneficially Owned
After the
Offering (2)(3)
|
|||||||||||||||||
Hua-Mei
21st
Century
Partners,
L.P. (4)
|
2,025,520
|
(5)
|
8.7
|
%
|
2,025,520
|
0
|
0
|
|||||||||||||
Guerilla
Partners, L.P. (6)
|
1,267,410
|
(7)
|
5.6
|
%
|
1,267,410
|
0
|
0
|
|||||||||||||
Ardsley
Partners Fund II, L.P. (8)
|
618,760
|
(9)
|
2.8
|
%
|
618,760
|
0
|
0
|
|||||||||||||
Straus
Partners, LP (10)
|
582,509
|
(11)
|
2.7
|
%
|
582,509
|
0
|
0
|
|||||||||||||
Hua
Jun Lai
|
540,000
|
2.5
|
%
|
540,000
|
0
|
0
|
||||||||||||||
Jayhawk
Private Equity Fund II, LP (12)
|
530,179
|
(13)
|
2.4
|
%
|
530,179
|
0
|
0
|
|||||||||||||
Ardsley
Partners Institutional Fund, LP (14)
|
494,100
|
(15)
|
2.3
|
%
|
494,100
|
0
|
0
|
|||||||||||||
Kensington
Partners, LP (16)
|
404,521
|
(17)
|
1.9
|
%
|
404,521
|
0
|
0
|
|||||||||||||
Silver
Rock II, Ltd. (18)
|
384,615
|
(19)
|
1.8
|
%
|
384,615
|
0
|
0
|
|||||||||||||
Zhou
Xiu Jun
|
328,607
|
1.5
|
%
|
328,607
|
0
|
0
|
||||||||||||||
Roth
Capital Partners, LLC (20)
|
323,619
|
(21)
|
1.5
|
%
|
323,619
|
0
|
0
|
|||||||||||||
Wu
Shao Feng
|
318,217
|
1.5
|
%
|
318,217
|
0
|
0
|
||||||||||||||
James
Fuld
|
161,809
|
(22)
|
*
|
161,809
|
0
|
0
|
||||||||||||||
Fagan
Capital Inc. (23)
|
97,085
|
(24)
|
97,085
|
0
|
0
|
|||||||||||||||
The
Burke Family Trust
|
76,923
|
(25)
|
*
|
76,923
|
0
|
0
|
||||||||||||||
The
Bosphorous Group, Inc. (26)
|
76,923
|
(27)
|
*
|
76,923
|
0
|
0
|
||||||||||||||
Eastern
Management & Financial, LLC (28)
|
40,453
|
(29)
|
*
|
40,453
|
0
|
0
|
||||||||||||||
Robert
Stephenson (30)
|
24,271
|
(31)
|
.*
|
24,271
|
0
|
0
|
||||||||||||||
Kevin
Kotler
|
24,271
|
(32)
|
*
|
24,271
|
0
|
0
|
||||||||||||||
Gordon
Roth (33)
|
20,225
|
(34)
|
.*
|
20,225
|
0
|
0
|
||||||||||||||
John
Weber (35)
|
20,225
|
(36)
|
*
|
20,225
|
0
|
0
|
||||||||||||||
Stuart
Lilien
|
20,225
|
(37)
|
*
|
20,225
|
0
|
0
|
||||||||||||||
Marion
Lynton
|
19,800
|
(38)
|
*
|
19,800
|
0
|
0
|
||||||||||||||
Aaron
Gurewitz (39)
|
16,179
|
(40)
|
*
|
16,179
|
0
|
0
|
(1) As of
January 14, 2011, we had outstanding 21,286,789 shares of Common Stock. Under
applicable Commission rules, a person is deemed to beneficially own securities
which he has the right to acquire within 60 days through the exercise of any
option or warrant or through the conversion of another security, and also is
deemed to be the “beneficial owner” of a security with regard to which he
directly or indirectly has or shares (a) voting power (which includes the power
to vote or direct the voting of the security), or (b) investment power (which
includes the power to dispose, or direct the disposition, of the security), in
each case irrespective of the person’s economic interest in the security. Each
Selling Stockholder has the sole investment and voting power with respect to all
shares of Common Stock shown as beneficially owned by such Selling Stockholder,
except as otherwise indicated in the table.
(2) In
determining the percent of Common Stock beneficially owned by a Selling
Stockholder on January 14, 2011, (a) the numerator is the number of shares of
Common Stock beneficially owned by such Selling Stockholder, including shares
the beneficial ownership of which may be acquired within 60 days through the
conversion of convertible securities and the exercise of warrants, if any, held
by that Selling Stockholder, and (b) the denominator is the sum of (i) the
21,286,789 shares of Common Stock outstanding on January 14, 2011, and (ii) the
aggregate number of shares of Common Stock that may be acquired by such Selling
Stockholder within 60 days upon the conversion of convertible securities and the
exercise of warrants held by the Selling Stockholder.
(3)
Assumes the sale of all shares offered by the Selling Stockholders.
(4) Peter
Siris and Leigh Curry share the voting and investment power over all of the
shares held by Hua-Mei 21st Century
Partners, L.P.
61
(5)
Includes 855,787 shares of Common Stock which may be issued upon conversion of
Series A Stock, 534,867 shares of Common Stock which may be issued upon exercise
of Class A Warrants, 534,867 shares of Common Stock which may be issued upon
exercise of Class B Warrants, 33,333 shares of Common Stock which may be issued
upon exercise of Class C Warrants and 33,333 shares of Common Stock which may be
issued upon exercise of Class D Warrants held by Hua-Mei 21st Century
Partners, L.P.
(6) Peter
Siris and Leigh Curry share the voting and investment power over all of the
shares held by Guerilla Partners, LP.
(7)
Includes 539,361 shares of Common Stock which may be issued upon conversion of
Series A Stock, 337,101 shares of Common Stock which may be issued upon exercise
of Class A Warrants, 337,101 shares of Common Stock which may be issued upon
exercise of Class B Warrants, 17,949 shares of Common Stock which may be issued
upon exercise of Class C Warrants and 17,949 shares of Common Stock which may be
issued upon exercise of Class D Warrants held by Guerilla Partners,
LP.
(8)
Philip J. Hempleman has the voting and investment power over all of the shares
held by Ardsley Partners Fund II, L.P.
(9) Includes
275,004 shares of Common Stock which may be issued upon conversion of Series A
Stock, 171,808 shares of Common Stock which may be issued upon exercise of Class
A Warrants and 171,808 shares of Common Stock which may be issued upon exercise
of Class B Warrants held by Ardsley Partners Fund II, L.P.
(10)
Melville Straus has the voting and investment power over all of the shares held
by Straus Partners, LP.
(11) Includes
258,893 shares of Common Stock which may be issued upon conversion of Series A
Stock, 161,808 shares of Common Stock which may be issued upon exercise of Class
A Warrants and 161,808 shares of Common Stock which may be issued upon exercise
of Class B Warrants held by Straus Partners, LP.
(12) Kent
C. McCarthy has the voting and investment power over all of the shares held by
Jayhawk Private Equity Fund II, LP.
(13)
Includes 98,883 shares of Common Stock which may be issued upon conversion of
Series A Stock, 61,802 shares of Common Stock which may be issued upon exercise
of Class A Warrants, 61,802 shares of Common Stock which may be issued upon
exercise of Class B Warrants, 102,564 shares of Common Stock which may be issued
upon exercise of Class C Warrants and 102,564 shares of Common Stock which may
be issued upon exercise of Class D Warrants held by Jayhawk Private Equity Fund
II, LP.
(14)
Philip J. Hempleman has the voting and investment power over all of the shares
held by Ardsley Partners Institutional Fund, LP.
(15) Includes
219,600 shares of Common Stock which may be issued upon conversion of Series A
Stock, 137,250 shares of Common Stock which may be issued upon exercise of Class
A Warrants and 137,250 shares of Common Stock which may be issued upon exercise
of Class B Warrants held by Ardsley Partners Institutional Fund,
LP.
(16)
Richard Klein has the voting and investment power over all of the shares held by
Kensington Partners, LP.
(17)
Includes 179,787 shares of Common Stock which may be issued upon conversion of
Series A Stock, 112,367 shares of Common Stock which may be issued upon exercise
of Class A Warrants and 112,367 shares of Common Stock which may be issued upon
exercise of Class B Warrants held by Kensington Partners, LP.
62
(18) Rima
Salam has the voting and investment power over all of the shares held by Silver
Rock II, Ltd.
(19)
Includes 128,205 shares of Common Stock which may be issued upon exercise of
Class C Warrants and 128,205 shares of Common Stock which may be issued upon
exercise of Class D Warrants held by Silver Rock II, Ltd.
(20) Byron
Roth and Gordon Roth share the voting and investment power over all of the
shares held by Roth Capital Partners, LLC. Roth Capital Partners, LLC
is an affiliate of a broker-dealer and certified to us that it bought the
above mentioned securities in the ordinary course of business, and at the time
of the purchase of these securities, it had no agreements or understandings,
directly or indirectly, with any person to distribute these
securities.
(21) Includes
143,831 shares of Common Stock which may be issued upon conversion of Series A
Stock, 89,894 shares of Common Stock which may be issued upon exercise of Class
A Warrants and 89,894 shares of Common Stock which may be issued upon exercise
of Class B Warrants held by Roth Capital Partners, LLC.
(22) Includes
71,915 shares of Common Stock which may be issued upon conversion of Series A
Stock, 44,947 shares of Common Stock which may be issued upon exercise of Class
A Warrants and 44,947 shares of Common Stock which may be issued upon exercise
of Class B Warrants held by James Fuld.
(23)
William S. Fagan has the voting and investment power over all of the shares held
by Fagan Capital Inc.
(24) Includes
43,149 shares of Common Stock which may be issued upon conversion of Series A
Stock, 26,968 shares of Common Stock which may be issued upon exercise of Class
A Warrants and 26,968 shares of Common Stock which may be issued upon exercise
of Class B Warrants held by Fagan Capital Inc.
(25)
Includes 25,641 shares of Common Stock which may be issued upon exercise of
Class C Warrants and 25,641 shares of Common Stock which may be issued upon
exercise of Class D Warrants held by The Burke Family Trust.
(26)
Daniel J. McClory has the voting and investment power over all of the shares
held by The Bosphorous Group, Inc. The Bosphorous Group, Inc. is an affiliate
of a broker-dealer and certified to us that it bought the above mentioned
securities in the ordinary course of business, and at the time of the purchase
of these securities, it had no agreements or understandings, directly or
indirectly, with any person to distribute these securities.
(27)
Includes 128,205 shares of Common Stock which may be issued upon exercise of
Class C Warrants and 128,205 shares of Common Stock which may be issued upon
exercise of Class D Warrants held by The Bosphorous Group, Inc.
(28)
Michael D. Aufrecht has the voting and investment power over all of the shares
held by Eastern Management & Financial, LLC.
(29) Includes
17,979 shares of Common Stock which may be issued upon conversion of Series A
Stock, 11,237 shares of Common Stock which may be issued upon exercise of Class
A Warrants and 11,237 shares of Common Stock which may be issued upon exercise
of Class B Warrants held by Eastern Management & Financial,
LLC.
(30)
Robert Stephenson is an affiliate of a broker-dealer and certified to us
that it bought the above mentioned securities in the ordinary course of
business, and at the time of the purchase of these securities, he had no
agreements or understandings, directly or indirectly, with any person to
distribute these securities.
63
(31) Includes
10,787 shares of Common Stock which may be issued upon conversion of Series A
Stock, 6,742 shares of Common Stock which may be issued upon exercise of Class A
Warrants and 6,742 shares of Common Stock which may be issued upon exercise of
Class B Warrants held by Robert Stephenson.
(32) Includes
10,787 shares of Common Stock which may be issued upon conversion of Series A
Stock, 6,742 shares of Common Stock which may be issued upon exercise of Class A
Warrants and 6,742 shares of Common Stock which may be issued upon exercise of
Class B Warrants held by Kevin Kotler.
(33)
Gordon Roth is an affiliate of a broker-dealer and certified to us that it
bought the above mentioned securities in the ordinary course of business, and at
the time of the purchase of these securities, he had no agreements or
understandings, directly or indirectly, with any person to distribute these
securities.
(34) Includes
8,989 shares of Common Stock which may be issued upon conversion of Series A
Stock, 5,618 shares of Common Stock which may be issued upon exercise of Class A
Warrants and 5,618 shares of Common Stock which may be issued upon exercise of
Class B Warrants held by Gordon Roth.
(35) John
Weber is an affiliate of a broker-dealer and certified to us that it bought
the above mentioned securities in the ordinary course of business, and at the
time of the purchase of these securities, he had no agreements or
understandings, directly or indirectly, with any person to distribute these
securities.
(36) Includes
8,989 shares of Common Stock which may be issued upon conversion of Series A
Stock, 5,618 shares of Common Stock which may be issued upon exercise of Class A
Warrants and 5,618 shares of Common Stock which may be issued upon exercise of
Class B Warrants held by John Weber.
(37) Includes
8,989 shares of Common Stock which may be issued upon conversion of Series A
Stock, 5,618 shares of Common Stock which may be issued upon exercise of Class A
Warrants and 5,618 shares of Common Stock which may be issued upon exercise of
Class B Warrants held by Stuart Lilien.
(38) Includes
8,800 shares of Common Stock which may be issued upon conversion of Series A
Stock, 5,500 shares of Common Stock which may be issued upon exercise of Class A
Warrants and 5,500 shares of Common Stock which may be issued upon exercise of
Class B Warrants held by Marion Lynton.
(39)
Aaron Gurewitz is an affiliate of a broker-dealer and certified to us that
it bought the above mentioned securities in the ordinary course of business, and
at the time of the purchase of these securities, he had no agreements or
understandings, directly or indirectly, with any person to distribute these
securities.
(40) Includes
7,191 shares of Common Stock which may be issued upon conversion of Series A
Stock, 4,494 shares of Common Stock which may be issued upon exercise of Class A
Warrants and 4,494 shares of Common Stock which may be issued upon exercise of
Class B Warrants held by Aaron Gurewitz.
DESCRIPTION
OF SECURITIES
Our authorized capital stock consists
of 90,000,000 shares of common stock, with a par value of $0.001 per share, and
10,000,000 shares of preferred stock, with a par value of $0.001 per share. As
of January 14, 2011, there were 21,286,789 shares of our Common Stock issued and
outstanding and 2,768,721 shares of our Series A Preferred Stock
outstanding. Our shares of Common Stock are held by 58 stockholders
of record and our shares of Series A Preferred Stock are held by 18 stockholders
of record.
64
Common
Stock
Our Common Stock is entitled to one
vote per share on all matters submitted to a vote of the stockholders, including
the election of directors. Except as otherwise required by law or provided in
any resolution adopted by our board of directors with respect to any series of
preferred stock, the holders of our common stock will possess all voting power.
Generally, all matters to be voted on by stockholders must be approved by a
majority (or, in the case of election of directors, by a plurality) of the votes
entitled to be cast by all shares of our Common Stock that are present in person
or represented by proxy, subject to any voting rights granted to holders of any
preferred stock. Holders of our common stock representing fifty percent (50%) of
our capital stock issued, outstanding and entitled to vote, represented in
person or by proxy, are necessary to constitute a quorum at any meeting of our
stockholders. A vote by the holders of a majority of our outstanding
shares is required to effectuate certain fundamental corporate changes such as
liquidation, merger or an amendment to our Articles of Incorporation. Our
Articles of Incorporation do not provide for cumulative voting in the election
of directors.
Subject to any preferential rights of
any outstanding series of preferred stock created by our board of
directors from time to time, the holders of shares of our common stock will be
entitled to such cash dividends as may be declared from time to time by our
board of directors from funds available therefore.
Subject to any preferential rights of
any outstanding series of preferred stock created from time to time by our board
of directors, upon liquidation, dissolution or winding up, the holders of shares
of our common stock will be entitled to receive pro rata all assets available
for distribution to such holders.
In the event of any merger or
consolidation with or into another company in connection with which shares of
our Common Stock are converted into or exchangeable for shares of stock, other
securities or property (including cash), all holders of our common stock will be
entitled to receive the same kind and amount of shares of stock and other
securities and property (including cash). Holders of our Common Stock have no
pre-emptive rights, no conversion rights and there are no redemption provisions
applicable to our Common Stock.
Preferred
Stock
Our board of directors is authorized by
our articles of incorporation to divide the authorized shares of our preferred
stock into one or more series, each of which must be so designated as to
distinguish the shares of each series of preferred stock from the shares of all
other series and classes. Our board of directors is authorized, within any
limitations prescribed by law and our Articles of Incorporation, to fix and
determine the designations, rights, qualifications, preferences, limitations and
terms of the shares of any series of preferred stock including, but not limited
to, the following:
|
1.
|
The number of shares constituting
that series and the distinctive designation of that series, which may be
by distinguishing number, letter or
title;
|
|
2.
|
The dividend rate on the shares
of that series, whether dividends will be cumulative, and if so, from
which date(s), and the relative rights of priority, if any, of payment of
dividends on shares of that
series;
|
|
3.
|
Whether that series will have
voting rights, in addition to the voting rights provided by law, and, if
so, the terms of such voting
rights;
|
|
4.
|
Whether that series will have
conversion privileges, and, if so, the terms and conditions of such
conversion, including provision for adjustment of the conversion rate in
such events as the Board of Directors
determines;
|
|
5.
|
Whether or not the shares of that
series will be redeemable, and, if so, the terms and conditions of such
redemption, including the date or date upon or after which they are
redeemable, and the amount per share payable in case of redemption, which
amount may vary under different conditions and at different redemption
dates;
|
|
6.
|
Whether that series will have a
sinking fund for the redemption or purchase of shares of that series, and,
if so, the terms and amount of such sinking
fund;
|
|
7.
|
The rights of the shares of that
series in the event of voluntary or involuntary liquidation, dissolution
or winding up of the corporation, and the relative rights of priority, if
any, of payment of shares of that
series;
|
65
|
8.
|
Any other relative rights,
preferences and limitations of that
series.
|
Series
A Preferred Stock
Our board of directors has designated 3
million shares of our preferred stock as Series A Preferred Stock. The following
is a summary of the rights and preferences:
Dividends:
The Series A Preferred Stock, in preference to the holders of Common Stock,
shall be entitled to receive, when and as declared by the Board of Directors out
of funds that are legally available therefor, cumulative dividends at the rate
of six percent (6%) per annum of the Original Series A Issue Price of $2.78 on
each outstanding share of Series A Preferred (as adjusted for any stock
dividends, combinations, splits, recapitalizations and the like with respect to
such shares) payable semi-annually on each February 28 and August 31 on which
any shares of Series A Preferred Stock are outstanding. Payment of
dividends on the Series A Preferred Stock shall be made at the Company’s
election in cash or in shares of Common Stock.
Voting
Rights: Each holder of Series A Preferred Stock shall have full
voting rights and powers equal to the voting rights and powers of the holders of
Common Stock. Each holder of shares of Series A Preferred Stock shall be
entitled to one (1) vote for each whole share of Common Stock into which such
shares of Series A Preferred Stock could be converted on the record date for the
determination of stockholders entitled to vote on such matters or, if no such
record date is established, on the date such vote is taken or any written
consent of the stockholders is solicited.
Liquidation
Preference. On liquidation the holders are entitled to receive an amount
per share (out of available assets) equal to the Series A Issue Price plus any
declared and unpaid dividends on the Series A Preferred Stock before any
distribution or payment can be made to the holders of any junior
securities.
Conversion at
Option of Holder. Each share of Series A Preferred Stock is convertible
at any time into Common Stock at the option of the holder. The
initial conversion rate (which is subject to adjustment upon the occurrence of
certain events) is one share of Common Stock for one share of Series A Preferred
Stock.
Automatic
Conversion. Each outstanding
share of Series A Preferred automatically shall be converted into fully-paid and
nonassessable shares of Common Stock pursuant to the conversion ratio then in
effect if:
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a
registration statement covering the resale of the shares of Common Stock
to be issued upon conversion shall have been filed by the Company and
declared effective by the Commission, and such registration statement
continues to be effective up through and including the date of the
conversion;
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the
shares of Common Stock are eligible for trading on one of the following
exchanges on which the Common Stock is listed or quoted for trading on the
date in question: the Nasdaq SmallCap Market, the American Stock Exchange,
the New York Stock Exchange, the Nasdaq National Market or the OTC
Bulletin Board;
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the
daily volume weighted average price of the Common Stock for ten
consecutive trading days immediately preceding the conversion is greater
than or equal to $5.56 per share (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like with respect to such
shares) on the primary trading market on which the Common Stock is then
listed or quoted;
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the
average daily dollar volume of the Common Stock on the primary trading
market on which the Common Stock is then listed or quoted is greater than
or equal to $100,000 for ten consecutive trading days immediately
preceding the conversion; and
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after
giving effect to such conversion, the holder (together with the holder’s
affiliates) would beneficially own less than 9.99% of the number of shares
of the Common Stock outstanding immediately after giving effect to such
conversion, unless such holder has waived such
limitation.
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66
Mandatory
Redemption. On March 29, 2015 the Company shall redeem any shares of
Series A Preferred Stock then outstanding for cash at a price per share of
Series A Preferred Stock equal to the sum of $2.78 plus any declared and unpaid
dividends on the Series A Preferred Stock.
Provisions
in Our Articles of Incorporation and By-Laws That Would Delay, Defer or Prevent
a Change in Control
Our articles of incorporation authorize
our board of directors to issue a class of preferred stock commonly known as a
"blank check" preferred stock. Specifically, the preferred stock may be issued
from time to time by the board of directors as shares of one (1) or more classes
or series. Our board of directors, subject to the provisions of our Articles of
Incorporation and limitations imposed by law, is authorized to adopt
resolutions; to issue the shares; to fix the number of shares; to change the
number of shares constituting any series; and to provide for or change the
following: the voting powers; designations; preferences; and relative,
participating, optional or other special rights, qualifications, limitations or
restrictions, including the following: dividend rights, including whether
dividends are cumulative; dividend rates; terms of redemption, including sinking
fund provisions; redemption prices; conversion rights and liquidation
preferences of the shares constituting any class or series of the preferred
stock.
In each such case, we will not need any
further action or vote by our shareholders. One of the effects of undesignated
preferred stock may be to enable the board of directors to render more difficult
or to discourage an attempt to obtain control of us by means of a tender offer,
proxy contest, merger or otherwise, and thereby to protect the continuity of our
management. The issuance of shares of preferred stock pursuant to the board of
director's authority described above may adversely affect the rights of holders
of Common Stock. For example, preferred stock issued by us may rank prior to the
common stock as to dividend rights, liquidation preference or both, may have
full or limited voting rights and may be convertible into shares of common
stock. Accordingly, the issuance of shares of preferred stock may discourage
bids for the common stock at a premium or may otherwise adversely affect the
market price of the common stock.
Dividend
Policy
We currently intend to retain future
earnings, if any, to finance the expansion of our business. As a result, we do
not anticipate paying any cash dividends in the foreseeable future.
Before the Contractual Agreements were
entered into in December 2009, Nanhai Ke Da Heng Sheng paid dividends to its
shareholders. During the year ended December 31, 2008 Nanhai Ke Da Heng Sheng
declared and paid to its shareholders an aggregate of $4,227,069 in dividends.
During the year ended December 31, 2009 Nanhai Ke Da Heng Sheng declared and
paid to its shareholders an aggregate of $25,704,486 in dividends. The Company
did not declare or pay any dividends to its stockholders in 2010.
Common
Stock Purchase Warrants
On March 29, 2010 we issued five-year
warrants to purchase our Common Stock at various exercise prices as set forth
below:
Title of Warrant
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Exercise Price
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Total Number of Shares of
Common Stock Subject to
Issuance Upon Exercise
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Series
A
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$ | 3.47 | 1,730,451 | |||||
Series
B
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$ | 4.17 | 1,730,451 | |||||
Series
C
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$ | 2.44 | 333,333 | |||||
Series
D
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$ | 2.93 | 333,333 | |||||
Placement
Agent
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$ | 1.95 | 33,333 | |||||
Placement
Agent
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$ | 2.78 | 276,978 |
67
Cashless
Exercise. Subject to certain exceptions, the holders may make
a cashless exercise if a registration statement covering the resale of the
shares of Common Stock issuable upon exercise of the Warrants is not in effect
on March 29, 2011 or effective any time for a period of two years after the
effective date of such registration statement (or until all of then shares of
Common Stock which may be issued upon exercise of the Warrant may be sold under
Rule 144).
Maximum Exercise;
9.9%
Limitation. The
holder is not permitted to exercise the warrant to the extent that on the date
of exercise the exercise would result in beneficial ownership by the holder and
its affiliates of more than 9.9% of the outstanding shares of Common Stock on
such date. This provision may not be waived or amended.
Adjustment for
Stock Splits, Stock Dividends, Recapitalizations, Etc. The exercise price of the
warrants and the number of shares of common stock issuable on exercise of the
warrants will be appropriately adjusted to reflect any stock dividend, stock
split, stock distribution, combination of shares, reverse split,
reclassification, recapitalization or other similar event affecting the number
of outstanding shares.
Adjustment for
Reorganization, Consolidation, Merger, Etc. If we merge or consolidate
with or into any other person, or are a party to any other corporate
reorganization, and we are not the continuing or surviving entity, then, in each
case, the holder of the warrant (on exercise at any time after the consummation
of such transaction) will be entitled to receive, the stock and other securities
and property (including cash) which the holder would have been entitled to
receive if the holder had exercised the warrant immediately prior to the
effectiveness of the transaction.
Sales of Common
Stock at less than the Exercise Price; Weighted Average Adjustment. Subject to certain
exceptions (including certain exempt issuances), if we sell or issue any Common
Stock at a per share price, or warrants, options, convertible debt or equity
securities with an exercise or conversion price per share, which is less than
the current exercise price of the Warrant, the exercise price will be adjusted
concurrently with such issue or sale, to according to a weighted average
formula.
Options
We have not issued and do not have
outstanding any options to purchase shares of our Common Stock.
Convertible
Securities
Except for our Series A Preferred
Stock, we have not issued and do not have outstanding any securities convertible
into shares of our Common Stock or any rights convertible or exchangeable into
shares of our common stock.
Nevada
Anti-Takeover Laws
Nevada Revised Statutes sections 78.378
to 78.379 provide state regulation over the acquisition of a controlling
interest in certain Nevada corporations unless the articles of incorporation or
bylaws of the corporation provide that the provisions of these sections do not
apply. Our Articles of Incorporation and By-laws do not state that
these provisions do not apply. The statute creates a number of
restrictions on the ability of a person or entity to acquire control of a Nevada
company by setting down certain rules of conduct and voting restrictions in any
acquisition attempt, among other things. The statute is limited to corporations
that are organized in the state of Nevada and that have 200 or more
stockholders, at least 100 of whom are stockholders of record and residents of
the State of Nevada; and does business in the State of Nevada directly or
through an affiliated corporation. Because of these conditions, the statute
currently does not apply to our company.
68
Transfer
Agent and Registrar
The
registrar and transfer agent for the Company’s capital stock is Empire Stock
Transfer, Inc., 1859 Whitney Mesa Drive, Henderson, Nevada 89014 and its main
telephone number is 702-818-5898.
SHARES
ELIGIBLE FOR FUTURE SALE
As of January 14, 2011, there were
issued and outstanding (i) 21,286,789 shares of our Common Stock, (ii) warrants
to purchase an aggregate of 4,437,879 shares of our Common Stock and (iii)
2,768,721 shares of our Series A Preferred Stock which were convertible at the
option of the holders thereof into an aggregate of 2,768,721 shares of our
Common Stock. All of the 2,768,721 shares of our Common Stock
issuable upon conversion of our outstanding Series A Preferred Stock became
eligible for resale under Rule 144 on September 30, 2010. In addition to these
shares, we currently have obligation to register for resale by the holders
thereof an aggregate of 4,437,879 shares of our Common Stock issuable upon
exercise of warrants.
Shares
Covered by this Prospectus
All of the 7,940,370 shares being
registered in this offering may be sold without restriction under the Securities
Act, so long as the registration statement of which this prospectus is a part
is, and remains, effective.
Rule
144
The Commission has recently adopted
amendments to Rule 144 which became effective on February 15, 2008 and apply to
securities acquired both before and after that date. Under these amendments, a
person who has beneficially owned restricted shares of our common stock or
warrants for at least six months is entitled to sell its securities provided
that (1) 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, (2) we are
subject to the reporting requirements under the Securities Exchange Act of 1934
(the “Exchange Act”) for at least 90 days before the sale and (3) if the sale
occurs prior to satisfaction of a one-year holding period, we provide current
information at the time of 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:
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1%
of the total number of securities of the same class then outstanding,
which will equal approximately 212,868 shares immediately after this
offering; or
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the
average weekly trading volume of such securities during the four calendar
weeks preceding the filing of a notice on Form 144 with respect to such
sale.
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provided, in each case, that
we are subject to the Exchange Act periodic reporting requirements for at least
three months before the sale.
Such sales by affiliates must also
comply with the manner of sale, current public information and notice provisions
of Rule 144. The selling stockholders will not be governed by the foregoing
restrictions when selling their shares pursuant to this
prospectus.
69
MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a general summary of
certain material U.S. federal income tax consequences to an investor of the
acquisition, ownership and disposition of the Common Stock purchased by the
investor pursuant to this offering. As used in this discussion, “we”, “our” and
“us” refers to Rongfu Aquaculture, Inc. This discussion assumes that an investor
will hold each share of our Common Stock issued and purchased pursuant to this
offering as a “capital asset” within the meaning of Section 1221 of the Internal
Revenue Code of 1986, as amended (the “Code”). This discussion does not address
all aspects of U.S. federal income taxation that may be relevant to an investor
in light of that investor’s particular circumstances. In addition, this
discussion does not address (a) U.S. federal non-income tax laws, such as estate
or gift tax laws, (b) state, local or non-U.S. tax consequences, or (c) the
special tax rules that may apply to certain investors, including, without
limitation, banks, insurance companies, financial institutions, broker-dealers,
taxpayers that have elected mark-to-market accounting, taxpayers subject to the
alternative minimum tax provisions of the Code, tax-exempt entities, governments
or agencies or instrumentalities thereof, regulated investment companies, real
estate investment trusts, persons whose functional currency is not the U.S.
dollar, U.S. expatriates or former long-term residents of the United States, or
investors that acquire, hold, or dispose of our common stock as part of a
straddle, hedge, wash sale, constructive sale or conversion transaction or other
integrated transaction. Additionally, this discussion does not consider the tax
treatment of entities treated as partnerships or other pass-through entities for
U.S. federal income tax purposes or of persons who hold our common stock through
such entities. The tax treatment of a partnership and each partner thereof will
generally depend upon the status and activities of the partnership and such
partner. Thus, partnerships, other pass-through entities and persons holding our
common stock through such entities should consult their own tax
advisors.
This discussion is based on current
provisions of the Code, its legislative history, U.S. Treasury regulations
promulgated under the Code, judicial opinions, and published rulings and
procedures of the U.S. Internal Revenue Service (“IRS”), all as in effect on the
date of this prospectus. These authorities are subject to differing
interpretations or to change, possibly with retroactive effect. We have not
sought, and will not seek, any ruling from the IRS or any opinion of counsel
with respect to the tax consequences discussed below, and there can be no
assurance that the IRS will not take a position contrary to the tax consequences
discussed below or that any position taken by the IRS would not be
sustained.
As used in this discussion, the term
“U.S. person” means a person that is, for U.S. federal income tax purposes, (i)
an individual citizen or resident of the United States, (ii) a corporation (or
other entity treated as a corporation for U.S. federal income tax purposes)
created or organized (or treated as created or organized) in or under the laws
of the United States or of any state thereof or the District of Columbia, (iii)
an estate the income of which is subject to U.S. federal income taxation
regardless of its source, or (iv) a trust if (A) a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more U.S. persons have the authority to control all substantial
decisions of the trust, or (B) it has in effect a valid election to be treated
as a U.S. person under applicable U.S. Treasury regulations. As used in this
discussion, the term “U.S. holder” means a beneficial owner of our common stock
that is a U.S. person, and the term “non-U.S. holder” means a beneficial owner
of our common stock (other than an entity that is treated as a partnership or
other pass-through entity for U.S. federal income tax purposes) that is not a
U.S. person.
THIS
DISCUSSION IS ONLY A SUMMARY OF CERTAIN 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
TREATY.
70
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 dividend paid on
the shares of our Common Stock. A distribution on such shares will be treated as
a dividend for U.S. federal income tax purposes to the extent paid from our
current or accumulated earnings and profits, as determined under U.S. federal
income tax principles. Distributions in excess of current and accumulated
earnings and profits generally 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 generally will be treated as
gain from the sale or other disposition of the common stock and will be treated
as described under “Gain or Loss on Sale, Taxable Exchange or Other Taxable
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
generally 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 generally will constitute “qualified
dividends” that will be subject to tax at the maximum tax rate accorded to
long-term capital gains for tax years beginning on or before December 31, 2010,
after which the tax rate applicable to dividends is scheduled to return to the
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.
Gain
or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Common
Stock
In general, a U.S. holder must treat
any gain or loss recognized upon a sale, taxable exchange, or other taxable
disposition of our common stock as capital gain or loss. Any such capital gain
or loss will be long-term capital gain or loss if the U.S. holder’s holding
period for the common stock so disposed of exceeds one year. In general, a U.S.
holder will recognize gain or loss in an amount equal to the difference between
(i) the sum of the amount of cash and the fair market value of any property
received in such disposition and (ii) the U.S. holder’s adjusted tax basis in
the common stock so disposed of. Long-term capital gain recognized by a
non-corporate U.S. holder generally will be subject to a maximum tax rate of 15
percent for tax years beginning on or before December 31, 2010, after which the
maximum long-term capital gains tax rate is scheduled to increase to 20 percent.
The deduction 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.
Non-U.S.
Holders
Taxation
of Distributions
In general, any 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 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, generally 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). Any distribution not constituting
a dividend will be treated 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 “Gain on Sale, Taxable Exchange or Other Taxable Disposition of
Common Stock” below.
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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 generally will not be subject to U.S. federal withholding tax. You
should consult with your own tax advisors regarding the amount of any such
dividend subject to withholding tax in this circumstance.
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) generally 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
generally 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, 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).
Gain
on Sale, Taxable Exchange or Other Taxable Disposition of Common
Stock
A non-U.S. holder generally will not be
subject to U.S. federal income tax in respect of gain recognized on a sale,
exchange or other disposition of common stock, unless:
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the gain is effectively connected
with the conduct of a trade or business by the non-U.S. holder within the
United States (and, under certain income tax treaties, is attributable to
a U.S. permanent establishment or fixed base maintained by the non-U.S.
holder);
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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
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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
the common stock disposed of, 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.
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Unless an applicable tax treaty
provides otherwise, gain described in the first and third bullet points above
generally 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) generally will
be subject to a flat 30 percent U.S. federal income tax (or a lower applicable
tax treaty rate).
72
In connection with the third bullet
point above, we generally will be classified as a USRPHC if 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 believe that we currently
are not 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).
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 U.S. 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, generally 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:
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fails to provide an accurate
taxpayer identification
number;
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is notified by the IRS that
backup withholding is required;
or
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in certain circumstances, fails
to comply with applicable certification
requirements.
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A non-U.S. holder generally 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.
MATERIAL
PRC INCOME TAX CONSIDERATIONS
The following discussion summarizes the
material PRC income tax considerations relating to the ownership of our Common
Stock following the consummation of this offering.
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%
enterprise income tax rate on global 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.
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The EIT Law and the interpretation of
many of its provisions, including the definition of “resident enterprise,” are
unclear. It is also uncertain how the PRC tax authorities would interpret and
implement the EIT Law and its implementing rules. Our management is
substantially based in the PRC and expected to be based in the PRC in the
future, although two of our executive officers and one of our directors are not
PRC nationals. It remains uncertain whether the PRC tax authorities would
determine that we are a “resident enterprise” or a “non-resident
enterprise.”
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 treatment of a non-PRC company
such as us. If the PRC tax authorities determine that we are a “resident
enterprise” for PRC enterprise income tax purposes, a number of tax consequences
could follow. First, we could be subject to the enterprise income tax at a rate
of 25% on our global taxable income. Second, the EIT Law provides that dividend
income between “qualified resident enterprises” is exempt from income tax. It is
unclear whether the dividends we receive would constitute dividend income
between “qualified resident enterprises” and would therefore qualify for tax
exemption.
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. However, since it is not anticipated
that we would receive dividends or generate other income in the near future, we
are not expected to have any income that would be subject to the 25% enterprise
income tax on global income in the near future. We will consult with the PRC tax
authorities and make any necessary tax payment if we (based on future clarifying
guidance issued by the PRC), or the PRC tax authorities, determine that we are a
resident enterprise under the EIT Law, and if we were to have income in the
future.
Dividends
From PRC Operating Companies
If we are not treated as resident
enterprises under the EIT Law, then dividends that we receive 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% will normally be applicable to
investors that are “non-resident enterprises,” or non-resident investors, which
(i) have establishments or premises of business inside the PRC, and (ii) the
income in connection with their establishment or premises of business is sourced
from the PRC or the income is earned outside the PRC but has actual connection
with their establishments or places of business inside the PRC, and (B) an
income tax rate of 10% will normally be applicable to dividends payable to
investors that are “non-resident enterprises,” or 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
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 are a
holding company and substantially all of our income may be derived from
dividends. Thus, if we are considered as a “non-resident enterprise” under the
EIT Law and the dividends paid to us are considered income sourced within the
PRC, such dividends received may be subject to the income tax 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. As indicated above, however, we are not
expected to be paid any dividends in the near future. We will consult with the
PRC tax authorities and make any necessary tax withholding if, in the future, we
were to be paid any dividends and we (based on future clarifying guidance issued
by the PRC), or the PRC tax authorities, determine that we are a non-resident
enterprise under the EIT Law.
74
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 PRC tax laws.
Under the EIT Law and the implementing
rules of the EIT Law, PRC income tax at the rate of 10% is applicable to
dividends payable to investors that are “non-resident enterprises,” or
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 common stock by
such investors is also subject to 10% 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 sale or the 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%. In such event, we also may be required to withhold a 10% 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% on any gain realized from the sale or transfer of our common stock after the
consummation of the offering 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 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 from and after the consummation of this offering.
If we were to pay any dividends in the
future, we would again consult with the PRC tax authorities 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) realized 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% 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 from and after the consummation of this offering.
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% 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.
75
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
non-resident investors from the sale or transfer of our common stock is subject
to any income tax in the PRC, and such non-resident investors fail to file any
tax return or pay tax in this regard pursuant to the Tax Related Laws, they 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% of the overdue
amount, beginning from the day the deferral begins), and a fine ranging from 50%
to 500% 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%
to 500% 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 their legal representative
from leaving the PRC.
PLAN
OF DISTRIBUTION
The
Selling Stockholders identified in this prospectus may offer and sell up to an
aggregate of 7,940,370 shares of our Common Stock. The Selling Stockholders may
sell all or a portion of their shares through public or private transactions at
prevailing market prices or at privately negotiated prices.
The
Selling Stockholders may sell all or a portion of the shares of Common Stock
beneficially owned by them and offered hereby from time to time directly or
through one or more underwriters, broker-dealers or agents. If the shares of
Common Stock are sold through underwriters or broker-dealers, the Selling
Stockholders will be responsible for underwriting discounts or commissions or
agent’s commissions. The shares of Common Stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated prices.
These sales may be effected in transactions, which may involve crosses or block
transactions,
·
on any national securities exchange or
quotation service on which the securities may be listed or quoted at the time of
sale;
· n the over-the-counter
market;
· in transactions otherwise than on these
exchanges or systems or in the over-the-counter
market;
· through the writing of options, whether
such options are listed on an options exchange or
otherwise;
· ordinary brokerage transactions and
transactions in which the broker-dealer solicits
purchasers;
· block trades in which the broker-dealer
will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the
transaction;
· purchases by a broker-dealer as
principal and resale by the broker-dealer for its
account;
· an exchange distribution in accordance
with the rules of the applicable exchange;
· privately negotiated
transactions;
· short
sales;
· sales pursuant to Rule
144;
· broker-dealers may agree with the
selling securityholders to sell a specified number of such shares at a
stipulated price per share; and
· a combination of any such methods of
sale.
76
If the
Selling Stockholders effect such transactions by selling shares of Common Stock
to or through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of discounts,
concessions or commissions from the Selling Stockholders or commissions from
purchasers of the shares of common stock for whom they may act as agent or to
whom they may sell as principal (which discounts, concessions or commissions as
to particular underwriters, broker-dealers or agents may be in excess of those
customary in the types of transactions involved). In connection with sales of
the shares of common stock or otherwise, the Selling Stockholders may enter into
hedging transactions with broker-dealers, which may in turn engage in short
sales of the shares of common stock in the course of hedging in positions they
assume. The Selling Stockholders may also sell shares of common stock short and
deliver shares of common stock covered by this prospectus to close out short
positions and to return borrowed shares in connection with such short sales. The
Selling Stockholders may also loan or pledge shares of common stock to
broker-dealers that in turn may sell such shares.
The
Selling Stockholders and any broker-dealer participating in the distribution of
the shares of common stock may be deemed to be “underwriters” within the meaning
of the Securities Act, and any commission paid, or any discounts or concessions
allowed to, any such broker-dealer may be deemed to be underwriting commissions
or discounts under the Securities Act. At the time a particular offering of the
shares of common stock is made, a prospectus supplement, if required, will be
distributed which will set forth the aggregate amount of shares of common stock
being offered and the terms of the offering, including the name or names of any
broker-dealers or agents, any discounts, commissions and other terms
constituting compensation from the Selling Stockholders and any discounts,
commissions or concessions allowed or re-allowed or paid to
broker-dealers.
Under the
securities laws of some states, the shares of common stock may be sold in such
states only through registered or licensed brokers or dealers. In addition, in
some states the shares of common stock may not be sold unless such shares have
been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
There can
be no assurance that any Selling Stockholder will sell any or all of the shares
of common stock registered pursuant to the shelf registration statement of which
this prospectus is a part.
The
Selling Stockholders and any other person participating in such distribution
will be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Regulation M of the
Exchange Act, which may limit the timing of purchases and sales of any of the
shares of common stock by the Selling Stockholders and any other participating
person. Regulation M may also restrict the ability of any person engaged in the
distribution of the shares of common stock to engage in market-making activities
with respect to the shares of common stock. All of the foregoing may affect the
marketability of the shares of Common Stock and the ability of any person or
entity to engage in market-making activities with respect to the shares of
Common Stock.
We have
agreed to pay all expenses of the registration of the shares of common stock
including, without limitation, Commission filing fees and expenses of compliance
with state securities or “blue sky” laws; provided, however, that a Selling
Stockholder will pay all underwriting discounts and selling commissions, if any.
We will indemnify the Selling Stockholders against liabilities, including some
liabilities under the Securities Act, in accordance with our agreement to
register the shares, or the Selling Stockholders will be entitled to
contribution. We may be indemnified by the Selling Stockholders against civil
liabilities, including liabilities under the Securities Act that may arise from
any written information furnished to us by the Selling Stockholder specifically
for use in this prospectus, in accordance with the related registration rights
agreements, or we may be entitled to contribution.
Once sold
under the registration statement of which this prospectus is a part, the shares
of common stock will be freely tradable in the hands of persons other than our
affiliates.
77
LEGAL
MATTERS
The
validity of the shares of Common Stock offered by this prospectus will be passed
upon for us by Guzov Ofsink, LLC, New York, New York. With respect to certain
matters involving the Contractual Agreements, Global Law Office, Beijing, PRC,
has given us a legal opinion.
The
financial statements appearing in this prospectus and registration statement
have been audited by Acquavella, Chiarelli, Shuster, Berkower & Co., LLP, an
independent registered public accounting firm, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
We
changed our independent registered public accounting firm effective April 14,
2010 from Maddox Ungar Silberstein, PLLC (“Maddox”) to Acquavella, Chiarelli,
Shuster, Berkower & Co., LLP. Information regarding the change in the
independent registered public accounting firm was disclosed in our Current
Report on Form 8-K filed with the Commission on April 19,
2010. There were no disagreements with Maddox or any reportable
events requiring disclosure under Item 304(b) of
Regulation S-K.
WHERE
YOU CAN FIND MORE INFORMATION
We have
filed with the Commission a registration statement on Form S-1 (File
No. 333-166758) under the Securities Act, as amended, with respect to the
shares of Common Stock being offered by this prospectus. This prospectus does
not contain all of the information included in the registration statement. For
further information pertaining to us and our Common Stock, you should refer to
the registration statement and the exhibits and schedules filed with the
registration statement. Whenever we make reference in this prospectus to any of
our contracts, agreements or other documents, the references are not necessarily
complete, and you should refer to the exhibits attached to the registration
statement for copies of the actual contract, agreement or other
document.
The
registration statement and any other material we may file with the Commission
may be read and copied at the Commission’s Public Reference Room at 100 F
Street, NE, Washington, D.C. 20549, on official business days during the
hours of 10:00 am to 3:00 pm. The public may obtain information on the operation
of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The
Commission maintains a web site (HTTP://WWW.SEC.GOV) that contains the
registration statements, reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
such as us.
We file
periodic reports (Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K) with the Commission. We are not required to
file proxy statements or information statements with the Commission or to
deliver an annual report to security holders and we do not undertake to
voluntarily send annual reports to our security holders.
You
may read and copy any reports, statements or other information that we have
filed with the Commission at the addresses indicated above and you may also
access them electronically at the web site set forth above. These Commission
filings are also available to the public from commercial document retrieval
services.
78
INDEX
TO FINANCIAL STATEMENTS
Page
|
||||||
1.
|
Consolidated
Financial Statements of the Company for the nine months ended September
30, 2010 and 2009
|
|||||
i
|
Consolidated
Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009
(audited and restated)
|
F-1
|
||||
iii.
|
Consolidated
Statements of Income for the nine months ended September 30, 2010 and
2009 (unaudited)
|
F-2
|
||||
iv.
|
Consolidated
Statements of Cash Flows for the nine months ended September 30, 2010 and
2009 (unaudited)
|
F-3
|
||||
v.
|
Consolidated
Statements of Stockholders’ Equity for the nine months ended September 30,
2010 (unaudited) and the year ended December 31, 2009 (audited and
restated)
|
F-4
|
||||
vi.
|
Notes
to Consolidated Financial Statements (unaudited)
|
F-5
|
||||
2.
|
Audited
Consolidated Financial Statements of the Company for the Years ended
December 31, 2009 and 2008
|
|||||
i.
|
Report
of Independent Registered Public Accounting Firm
|
F-18
|
||||
ii.
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-19
|
||||
iii.
|
Consolidated
Statements of Income for the Years Ended December 31, 2009 and
2008
|
F-20
|
||||
iv.
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2009 and
2008
|
F-21
|
||||
v.
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended December 31, 2009
and 2008
|
F-22
|
||||
vi.
|
Notes
to Consolidated Financial Statements
|
F-23
|
79
RONGFU
AQUACULTURE, INC
CONSOLIDATED
BALANCE SHEETS
AS
OF SEPTEMBER 30, 2010 AND DECEMBER 31, 2009
9/30/2010
|
12/31/2009
|
|||||||
|
(unaudited)
|
(audited
&
restated)
|
||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
|
$ | 6,695,287 | $ | 3,194,248 | ||||
Accounts
receivable
|
1,604,553 | 236,374 | ||||||
Inventories
|
10,905,977 | 2,979,753 | ||||||
Due
from shareholders
|
- | 4,008,659 | ||||||
Other
receivable
|
1,321,356 | 21,208 | ||||||
Trade
deposit
|
121,224 | |||||||
Prepaid
expenses
|
653,372 | 230,247 | ||||||
Total
Current Assets
|
21,180,545 | 10,791,713 | ||||||
Fixed
assets
|
868,448 | 405,147 | ||||||
Biological
assets
|
248,811 | 432,808 | ||||||
Total
Assets
|
$ | 22,297,804 | $ | 11,629,668 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$ | 5,036,460 | $ | - | ||||
Other
payable
|
552,475 | 2,743,960 | ||||||
Advance
from clients
|
- | 498,785 | ||||||
Short-term
bank loan
|
- | 380,273 | ||||||
Dividend
payable
|
- | 3,466,331 | ||||||
Income
tax payable
|
301,419 | 995,313 | ||||||
Derivative
liability
|
9,519,051 | - | ||||||
Total
Current Liabilities
|
15,409,405 | 8,084,662 | ||||||
Long-term
bank loan
|
- | 1,170,070 | ||||||
Total
liabilities
|
15,409,405 | 9,254,732 | ||||||
Temporary
equity:
|
||||||||
Redeemable
preferred stock, par value $0.001 per share, 2,768,721 issued at September
30, 2010 and 0 at December 31, 2009
|
7,700,000 | - | ||||||
Stockholders'
Equity
|
||||||||
Common
stock, par value, $0.001 per share, 90,000,000 shares authorized,
21,286,789 and 19,623,889 shares issued and outstanding at September 30,
2010 and December 31, 2009, respectively
|
21,287 | 19,624 | ||||||
Additional
paid in capital
|
1,056,365 | 797,808 | ||||||
Statutory
reserve
|
1,076,310 | 1,051,089 | ||||||
Other
comprehensive income
|
1,265,959 | 866,699 | ||||||
Accumulated
deficit
|
(4,231,522 | ) | (360,284 | ) | ||||
Total
Stockholders' Equity
|
(811,601 | ) | 2,374,936 | |||||
Total
Liabilities and Stockholders' Equity
|
$ | 22,297,804 | $ | 11,629,668 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-1
RONGFU
AQUACULTURE, INC.
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
Nine
Months Ended September 30,
|
Three
Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenue,
net
|
$ | 35,369,699 | $ | 21,731,927 | $ | 12,816,275 | $ | 4,763,650 | ||||||||
Cost
of goods sold
|
23,576,353 | 13,323,764 | 9,129,968 | 3,135,757 | ||||||||||||
Gross
profit
|
11,793,346 | 8,408,163 | 3,686,307 | 1,627,893 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling
expenses
|
1,299,046 | 491,112 | 457,315 | 201,031 | ||||||||||||
General
and administrative expenses
|
1,956,142 | 1,336,945 | 1,016,378 | 261,875 | ||||||||||||
Research
and development cost
|
104,255 | 56,437 | 65,612 | 21,295 | ||||||||||||
Total
operating expenses
|
3,359,443 | 1,884,494 | 1,539,305 | 484,201 | ||||||||||||
Net
income from operations
|
8,433,903 | 6,523,669 | 2,147,002 | 1,143,692 | ||||||||||||
Other
income (expenses)
|
||||||||||||||||
Loss
on Fair value of derivative liability
|
(6,251,254 | ) | - | (943,266 | ) | - | ||||||||||
Interest
income
|
10,584 | 35,510 | 3,970 | 14,670 | ||||||||||||
Interest
expense
|
(35,678 | ) | (87,436 | ) | (837 | ) | (86,986 | ) | ||||||||
Total
other (expenses) income
|
(6,276,348 | ) | (51,926 | ) | (940,133 | ) | (72,316 | ) | ||||||||
Net
income before income taxes
|
2,157,555 | 6,471,743 | 1,206,869 | 1,071,376 | ||||||||||||
Income
taxes
|
790,416 | 446,572 | 301,832 | 67,667 | ||||||||||||
Net
income
|
1,367,139 | 6,025,171 | 905,037 | 1,003,709 | ||||||||||||
Deemed
dividend from beneficial conversion feature of
|
||||||||||||||||
Series
A preferred stock
|
(4,374,579 | ) | - | - | - | |||||||||||
Dividends
paid or declared
|
(838,577 | ) | - | (78,477 | ) | - | ||||||||||
Net
income (loss) available to common shareholders
|
$ | (3,846,017 | ) | $ | 6,025,171 | $ | 826,560 | $ | 1,003,709 | |||||||
Net
income for common share
|
||||||||||||||||
Earnings
per share – Basic
|
$ | (0.19 | ) | $ | 0.31 | $ | 0.04 | $ | 0.05 | |||||||
Earnings
per share – Diluted
|
$ | (0.19 | ) | $ | 0.31 | $ | 0.04 | $ | 0.05 | |||||||
Weighted
average common shares outstanding
|
||||||||||||||||
Basic
|
20,756,854 | 19,623,889 | 21,286,789 | 19,623,889 | ||||||||||||
Diluted
|
20,756,854 | 19,623,889 | 21,286,789 | 19,623,889 | ||||||||||||
Net
income
|
$ | 1,367,139 | $ | 6,025,171 | $ | 905,037 | $ | 1,003,709 | ||||||||
Other
comprehensive income
|
399,260 | 18,092 | 497,756 | 195,901 | ||||||||||||
Comprehensive
income
|
$ | 1,766,399 | $ | 6,043,263 | $ | 1,402,793 | $ | 1,199,610 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-2
RONGFU
AQUACULTURE INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net Income
|
$
|
1,367,139
|
$
|
6,025,171
|
||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
|
63,818
|
69,050
|
||||||
Amortization
of biological assets
|
350,084
|
306,613
|
||||||
Change
in Derivative liability value
|
6,251,254
|
-
|
||||||
Professional
fee in connection with the issuance of shares
|
192,361
|
|||||||
(Increase)
/ decrease in assets:
|
||||||||
Accounts
receivables
|
(1,350,580
|
)
|
4,319,397
|
|||||
Inventories
|
(7,791,868
|
)
|
(2,598,949
|
)
|
||||
Prepaid
expense and other receivables
|
(4,967,738
|
)
|
74,559
|
|||||
Trade
deposit
|
122,525
|
-
|
||||||
Due
from shareholder
|
4,051,681
|
(2,120,712
|
)
|
|||||
Increase
/ (decrease) in current liabilities:
|
||||||||
Accounts
payable
|
4,989,183
|
1,072,821
|
||||||
Other
payable
|
848,419
|
444,127
|
||||||
Advances
from clients
|
(504,138
|
)
|
507,756
|
|||||
Income
taxes payable
|
(707,406
|
)
|
(588,817
|
)
|
||||
Net
cash provided by operating activities
|
2,914,734
|
7,511,016
|
||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchased
fixed assets
|
(560,985
|
)
|
(69,205
|
)
|
||||
Purchased
biological assets
|
(166,087
|
)
|
-
|
|||||
Net
cash used by investing activities
|
(727,072
|
)
|
(69,205
|
)
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Due
to shareholder
|
-
|
(8,520,267
|
)
|
|||||
Borrowings
of short-term bank loan
|
734,268
|
643,171
|
||||||
Payment
of short-term bank loan
|
(1,114,541
|
)
|
-
|
|||||
Borrowings
of long-term bank loan
|
-
|
1,169,403
|
||||||
Payment
of long-term bank loan
|
(1,170,070
|
)
|
-
|
|||||
Dividend
paid
|
(4,305,517
|
)
|
(14,024,570
|
)
|
||||
Proceeds
from issuance of preferred stock
|
6,561,077
|
-
|
||||||
Net
cash provided (used) by financing activities
|
705,217
|
(20,732,263
|
)
|
|||||
Effect
of exchange rate changes on cash and cash equivalents
|
608,160
|
56,062
|
||||||
Net
change in cash and cash equivalents
|
3,501,039
|
(13,234,390
|
)
|
|||||
Cash
and cash equivalents, beginning balance
|
3,194,248
|
14,823,476
|
||||||
Cash
and cash equivalents, ending balance
|
$
|
6,695,287
|
$
|
1,589,086
|
||||
SUPPLEMENTAL
DISCLOSURES:
|
||||||||
Cash
paid during the period for:
|
||||||||
Income
tax payments
|
$
|
1,725,765
|
$
|
1,236,816
|
||||
Interest
payments
|
$
|
70,519
|
$
|
87,102
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
RONGFU
AQUACULTURE, INC.
CONSOLIDATED STATEMENT
OF STOCKHOLDERS' EQUITY
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND THE YEAR ENDED DECEMBER
31, 2009
(UNAUDITED)
Additional
|
Other
|
Total
|
||||||||||||||||||||||||||
Common
Stock
|
Paid-in
|
Comprehensive
|
Statutory
|
Accumulated
|
Stockholders
|
|||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Income
|
Reserves
|
Deficit
|
Equity
|
||||||||||||||||||||||
Balance
December 31, 2009
|
19,623,889
|
$
|
19,624
|
$
|
797,808
|
$
|
866,699
|
$
|
1,051,089
|
$
|
(360,284
|
)
|
$
|
2,374,936
|
||||||||||||||
Foreign
currency translation adjustments
|
399,260
|
399,260
|
||||||||||||||||||||||||||
Issuance
of warrants
|
(3,267,797
|
)
|
(3,267,797
|
)
|
||||||||||||||||||||||||
Syndication
costs associated with preferred stock purchase agreement
|
(1,038,923
|
)
|
(1,038,923
|
)
|
||||||||||||||||||||||||
Stock
based compensation –issued in conjunction with professional services
rendered
|
191,174
|
191,174
|
||||||||||||||||||||||||||
Stock
based compensation –issued in conjunction with financing
|
1,662,900
|
1,663
|
927,872
|
929,535
|
||||||||||||||||||||||||
Syndication
costs associated with financing
|
(928,348
|
)
|
(928,348
|
)
|
||||||||||||||||||||||||
Dividends
Paid or Declared
|
(838,577
|
)
|
(838,577
|
)
|
||||||||||||||||||||||||
Transferred
to Statutory reserve
|
25,221
|
(25,221
|
)
|
-
|
||||||||||||||||||||||||
Deemed dividend
|
4,374,579
|
(4,374,579
|
)
|
-
|
||||||||||||||||||||||||
Income
for the nine months ended September 30, 2009
|
1,367,139
|
1367,139
|
||||||||||||||||||||||||||
Balance
September 30, 2010
|
21,286,789
|
$
|
21,287
|
$
|
1,056,365
|
$
|
1,265,959
|
$
|
1,076,310
|
$
|
(4,231,522
|
)
|
$
|
(811,601
|
)
|
|||||||||||||
Balance
December 31, 2008
|
19,623,889
|
$
|
19,624
|
$
|
797,808
|
$
|
861,166
|
$
|
665,852
|
$
|
12,653,251
|
$
|
14,997,701
|
|||||||||||||||
Foreign
currency translation adjustments
|
5,533
|
5,533
|
||||||||||||||||||||||||||
Transferred
to Statutory reserve
|
385,237
|
(385,237
|
)
|
-
|
||||||||||||||||||||||||
Dividend
paid or declared
|
(25,704,486
|
)
|
(25,704,486
|
)
|
||||||||||||||||||||||||
Income
for the year ended December 31, 2009
|
13,076,188
|
13,076,188
|
||||||||||||||||||||||||||
Balance
December 31, 2009
|
19,623,889
|
$
|
19,624
|
$
|
797,808
|
$
|
866,699
|
$
|
1,051,089
|
$
|
(360,284
|
)
|
$
|
2,374,936
|
The
accompanying notes are an integral part of these consolidated financial
statements
F-4
RONGFU
AQUACULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
1 - ORGANIZATION
Rongfu
Aquaculture, Inc., formerly named Granto, Inc (the “Company”) was incorporated
in Nevada on February 29, 2008. On March 29, 2010, the Company entered into a
Share Exchange Agreement with Rongfu Aquaculture, Inc. (“Rongfu”), certain
stockholders and warrant holders of Rongfu (the “Rongfu Stockholders”) and
a stockholder of Granto (the “Share Exchange Agreement”). Pursuant to the
Share Exchange Agreement, on March 29, 2010, 9 Rongfu Stockholders transferred
100% of the outstanding shares of common stock and 100% of the warrants to
purchase common stock of Rongfu held by them, in exchange for an aggregate of
18,623,889 newly issued shares of our Common Stock held by them (the “Share
Exchange Transaction”). In addition the shareholders received warrants to
purchase an aggregate of 666,666 shares of our Common Stock. In connection with
the closing of the Share Exchange Agreement, the former principal stockholder
agreed to and did cancel 1,150,000 of the 1,200,000 shares of Granto, Inc.
Common Stock held by her.
On March
29, 2010, the Company completed its merger with Rongfu in accordance with the
Share Exchange Agreement. The Share Exchange Transaction is being
accounted for as a reverse acquisition. In accordance with the Accounting and
Financial Reporting Interpretations and Guidance prepared by the staff of the
U.S. Securities and Exchange Commission, the Company (the legal acquirer) is
considered the accounting acquiree and Rongfu (the legal acquiree) is considered
the accounting acquirer for accounting purposes. Subsequent to the Share
Exchange Transaction, the financial statements of the combined entity will in
substance be those of Rongfu. The assets, liabilities and historical operations
prior to the share exchange transaction will be those of Rongfu. Subsequent to
the date of the Share Exchange Transaction, Rongfu is deemed to be a
continuation of the business of the Company. Therefore post-exchange financial
statements will include the combined balance sheet of the Company and Rongfu,
the historical operations of Rongfu and the operations of the Company and Rongfu
from the closing date of the Share Exchange Transaction forward.
Rongfu
was incorporated in Delaware on January 13, 2009. Flourishing Blessing (Hong
Kong) Co., Ltd. (“Hong Kong Rongfu”) was incorporated on November 11, 2008.
Pursuant to a Share Exchange Agreement, dated as of December 29, 2009,
(the “December 2009 Agreement") all of the shareholders of Hong Kong Rongfu
exchanged all of the outstanding shares of Hong Kong Rongfu for shares of common
stock of Rongfu and Rongfu became the owner of 100% of the outstanding capital
stock of Hong Kong Rongfu. Hong Kong Rongfu owns 100% of the capital stock of
Guangzhou Flourishing Blessing Hansen Agriculture Technology Limited (“Guangzhou
Flourishing”). Guangzhou Flourishing is a wholly foreign-owned enterprise, or
“WFOE,” under the laws of the People’s Republic of China (“PRC”) by virtue
of its status as a wholly-owned subsidiary of a non-PRC company, Hong Kong
Rongfu. In connection with the closing of the December 2009
Agreement, Guangzhou Flourishing entered into and consummated a
series of agreements (the "Contractual Agreements”),with Chen Zhisheng and
Foshan Nanhai Ke Da Heng Sheng Aquatic Co., Ltd. (“Nanhai Ke Da Heng
Sheng”). Under the Contractual Agreements, Guangzhou Flourishing
agreed to assume control of the operations and management of Nanhai Ke Da Heng
Sheng in exchange for a management fee equal to Nanhai Ke Da Heng Sheng’s
earnings before taxes. As a result, the business of Nanhai Ke Da Heng
Sheng and Hainan Ke Da Heng Sheng Aquit Germchit Co., Ltd.,
a PRC corporation (“Hainan Ke Da Heng Sheng”) , 70% of the outstanding
stock of which is owned by Nanhai Ke Da Heng Sheng, will be conducted
by Guangzhou Flourishing. We anticipate that Nanhai Ke Da Heng Sheng and Hainan
Ke Da Heng Sheng will continue to be the contracting parties under their
customer contracts, bank loans and certain other assets until such time as those
may be transferred to Guangzhou Flourishing. Nanhai Ke Da Heng Sheng
was formed in the PRC on April 30, 2003 as a limited liability company (a
company solely owned by a natural person). Hainan Ke Da Heng Sheng was formed in
the PRC on August 6, 2007 as a limited liability company. Guangzhou Flourishing
was incorporated in the PRC on January 9, 2009 as a WFOE.
The
Contractual Agreements completed in December 2009 provide that Guangzhou
Flourishing has controlling interest in Nanhai Ke Da Heng Sheng under FASB
Accounting Standards Codification “Consolidation of Variable Interest Entities”,
an Interpretation of an Accounting Research Bulletin, which requires Guangzhou
Flourishing to consolidate the financial statements of Nanhai Ke Da Heng Sheng
and Hainan Ke Da Heng Shen and ultimately consolidate with its parent company,
Rongfu Aquaculture, Inc.
F-5
RONGFU
AQUACULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,
2010
(UNAUDITED)
Note
1 – ORGANIZATION –(CONTINUED)
The
Company, through its subsidiaries, and Contractual Agreements, is engaged in
integrated business of aquaculture including Tilapia brood stock, Tilapia fry,
Tilapia farming, and marketing for Tilapia. It is specializing in the production
of the Hengsheng Brand Nile Tilapia and the new licensed New Jifu
Tilapia.
In the
opinion of the management of the Company, the accompanying consolidated interim
financial statements contain all material adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the consolidated financial
position of the Company at September 30, 2010 and the results of its operations
for the nine and three month periods ended September 30, 2010 and 2009 and its
cash flows for the nine month periods September 30, 2010 and 2009. Actual
results may differ from these estimates as a result of different assumptions or
conditions.
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
and represent the pro forma historical results of the consolidated group. The
Company adopted the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (the “Codification”) on July 1, 2009. For the nine months
ended September 30, 2010, all reference for periods subsequent to January
1, 2010 is based on the Codification. The Company's functional currency is the
Chinese Renminbi, however the accompanying consolidated financial statements
have been translated and presented in United States Dollars.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Rongfu
Aquaculture, Inc. and its wholly owned subsidiaries, Hong Kong Rongfu,
Guangzhou Flourishing, Nanhai Ke Da Heng Sheng, and Hainan Ke Da Heng Sheng
(collectively referred to herein as the” Company”). All material
inter-company accounts, transactions and profits have been eliminated in
consolidation. The Company has adopted the Consolidation Topic of the FASB
Accounting Standards Codification which requires a variable interest entity
(“VIE”) to be consolidated by a company if that company is subject to a majority
of the risk of loss for the VIE or is entitled to receive a majority of the
VIE’s residual returns.
Translation
Adjustment
As of
September 30, 2010 and December 31, 2009, the accounts of the Company were
maintained, and its financial statements were expressed, in Chinese Yuan
Renminbi (“CNY”). Such financial statements were translated into U.S. Dollars
(“USD”) in accordance with the Foreign Currency Matters Topic of the
Codification, with the CNY as the functional currency. According to the
Codification, all assets and liabilities were translated at the current exchange
rate, stockholders’ equity are translated at the historical rates and income
statement items are translated at the average exchange rate for the period. The
resulting translation adjustments are reported under other comprehensive income
in accordance with the Comprehensive Income Topic of the Codification, as a
component of shareholders’ equity. Transaction gains and losses are reflected in
the income statement.
Statement
of Cash Flows
In
accordance with the Statement of Cash Flows Topic of the Codification, cash
flows from the Company’s operations are based upon the local currencies. As a
result, amounts related to assets and liabilities reported on the statement of
cash flows will not necessarily agree with changes in the corresponding balances
on the balance sheet.
F-6
RONGFU
AQUACULTURE, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Comprehensive
Income
The
Company follows the Comprehensive Income Topic of the Codification.
Comprehensive income is a more inclusive financial reporting methodology that
includes disclosure of certain financial information that historically has not
been recognized in the calculation of net income.
Risks and
Uncertainties
The
Company’s operations are carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC, by the general state of
the PRC’s economy. The Company’s business may be influenced by changes in
governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.
Contingencies
Certain
conditions may exist as of the date the financial statements are issued, which
may result in a loss to the Company but which will only be resolved when one or
more future events occur or fail to occur. The Company’s management and legal
counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to
legal proceedings that are pending against the Company or unasserted claims that
may result in such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be sought. There
were no contingencies of this type as of September 30, 2010 and December 31,
2009.
If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial statements. If
the assessment indicates that a potential material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material would be
disclosed. There were no contingencies of this type as of September 30,
2010 and December 31, 2009.
Loss
contingencies considered to be remote by management are generally not disclosed
unless they involve guarantees, in which case the guarantee would be
disclosed.
Cash and
Cash Equivalents
Cash and
cash equivalents include cash in hand and cash in time deposits, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
F-7
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts
Receivable
The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Reserves are recorded primarily on a specific
identification basis. There were no allowances for doubtful accounts as of
September 30, 2010 and December 31, 2009.
Inventories
Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market. As of September 30, 2010 and December 31, 2009, inventories consist of
the following:
9/30/2010
|
12/31/2009
|
|||||||
Raw
materials
|
$ | 20,643 | $ | 47,185 | ||||
Work
in process and finished goods
|
10,885,334 | 2,932,568 | ||||||
Total
|
$ | 10,905,977 | $ | 2,979,753 |
Property,
Plant & Equipment
Property
and equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. Depreciation of
property and equipment is provided using the straight-line method for
substantially all assets with estimated lives of:
Buildings
|
10-20
years
|
Fishing
gear
|
5-10 years
|
Transportation
equipment
|
5-10
years
|
Office
equipment
|
3-5
years
|
F-8
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
As of
September 30, 2010 and December 31, 2009, Property, Plant & Equipment
consist of the following:
9/30/2010
|
12/31/2009
|
|||||||
Buildings
|
$
|
214,466
|
$
|
73,631
|
||||
Fishing
gear
|
758,351
|
424,938
|
||||||
Transportation
equipment
|
37,330
|
37,330
|
||||||
Office
equipment
|
126,840
|
40,102
|
||||||
Total
|
1,136,987
|
576,001
|
||||||
Accumulated
depreciation
|
(268,539
|
)
|
(170,854
|
)
|
||||
$
|
868,448
|
$
|
405,147
|
Depreciation
expense for the nine months ended September 30, 2010 and 2009 was $63,818 and
$69,050, respectively.
Long-Lived
Assets
The
Company adopted the Property, Plant and Equipment Topic of the Codification,
which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes previous accounting guidance,
“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of,” and “Reporting the Results of Operations for a Disposal of a
Segment of a Business.” The Company periodically evaluates the carrying value of
long-lived assets to be held and used, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets carrying amounts. In that event, a loss is
recognized based on the amount by which the carrying amount exceeds the fair
market value of the long-lived assets. Loss on long-lived assets to be disposed
of is determined in a similar manner, except that fair market values are reduced
for the cost of disposal. Based on its review, the Company believes
that, as of September 30, 2010, there were no impairments of its long-lived
assets.
Derivative
Liability
The
Company issued warrants in connection with the Share Exchange Agreement and
Series A Preferred Stock Purchase Agreement dated March 29, 2010 (the
“Stock Purchase Agreement”).
The
Company determined that the warrants did not qualify for a scope exception under
ASC 815 as they were determined to not be indexed to the Company’s stock as
prescribed by ASC 815. The warrants, under ASC 815, were classified
as derivative liability for the then relative fair market value of $3,267,797
and marked to market. For the nine months ended September 30, 2010,
the Company recorded a loss on change in fair value of derivative liability of
$6,251,254 to mark to market for the increase in fair value of the warrants
through September 30, 2010. Under ASC 815, the warrants will be
carried at fair value and adjusted at each reporting period.
F-9
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair
Value of Financial Instruments
In
accordance with FASB ASC 820, fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability (i.e., the “exit
price”) in an orderly transaction between market participants at the measurement
date.
In
determining fair value, the Company uses various valuation
approaches. In accordance with GAAP, a fair value hierarchy for
inputs is used in measuring fair value that maximizes the use of observable
inputs and minimizes the use of unobservable inputs by requiring that the most
observable inputs be used when available. Observable inputs are those
that market participants would use in pricing the asset or liability based on
market data obtained from sources independent of the
Company. Unobservable inputs reflect the Company’s assumptions about
the inputs market participants would use in pricing the asset or liability
developed based on the best information available in the
circumstances. The fair value hierarchy is categorized into three
levels based on the inputs as follows:
|
·
|
Level 1 — inputs to the valuation
methodology are quoted prices (unadjusted) for identical assets or
liabilities in active
markets.
|
|
·
|
Level 2 — inputs to the valuation
methodology include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the assets or
liability, either directly or indirectly, for substantially the full term
of the financial
instruments.
|
|
·
|
Level 3 — inputs to the valuation
methodology are unobservable and significant to the fair
value.
|
As of
September 30, 2010 and December 31, 2009, the derivative liabilities amounted to
$9,519,051 and $0. In accordance with the accounting standards, the Company
determined that the carrying value of these derivatives approximated the fair
value using the level 1 inputs.
Revenue
Recognition
The
Company records revenues for goods shipped at the time of
shipment. For goods delivered by the Company to a customer’s site,
revenues are recognized at time of delivery.
The
Company believes that recognizing revenue at these times is appropriate because
the Company’s sales policies meet the four criteria of the SEC’s staff
Accounting Bulletin No. 104, which are: (i) persuasive evidence that an
arrangement exists, (ii) service has occurred, (iii) the seller’s price to the
buyer is fixed and determinable and (iv) collection is reasonably
assured.
Research
and development cost
Research
and development costs are expensed in the period when they are incurred. During
the nine months ended September 30, 2010 and 2009, research and development
costs were $104,255 and $56,437, respectively. During the three months ended
September 30, 2010 and 2009, research and development costs were $65,612 and
$21,295, respectively.
Advertising
Advertising
expense consists primarily of costs of promotion for corporate image and product
marketing and costs of direct advertising. The Company expenses all advertising
costs as incurred. Advertising expense for the nine months ended September 30,
2010 and 2009 was $34,537 and $41,106, respectively. Advertising
expense for the three months ended September 30, 2010 and 2009 was $18,849
and $32,470, respectively.
F-10
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Shipping
and handling fees
The
Company follows ASC 605-45, “Handling Costs, Shipping Costs”. The
Company does not charge its customers for shipping and handling. The Company
classifies shipping and handling costs as part of general and administrative
expense. Shipping and handling fees for the nine months
ended September 30, 2010 and 2009 were $442,591 and $118,035, respectively.
Shipping and handling fees for the three months ended September 30, 2010
and 2009 were $198,997 and $70,449, respectively.
Advances
from Clients
The
Company records deposits received by customers prior to the completion of the
sale as deferred revenues and included as a component of advances from
clients. At such time as the revenue cycle is complete, these monies
will be recognized into revenues.
Income
Taxes
The
Company utilizes the accounting guidance, “Accounting for Income Taxes,” which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. It is the Company’s intention to
permanently reinvest earnings from activity with PRC. And thereby indefinitely
postpone repatriation of these funds to the US. Accordingly, no domestic
deferred income tax provision has been made for US income tax which could
result from paying dividend to the Company.
There
were no deferred taxes at September 30, 2010 and December 31,
2009.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk are cash, accounts receivable and other receivables arising from its normal
business activities. The Company places its cash in what it believes to be
credit-worthy financial institutions. The Company has a diversified customer
base, all are in China. The Company controls credit risk related to accounts
receivable through credit approvals, credit limits and monitoring procedures.
The Company routinely assesses the financial strength of its customers and,
based upon factors surrounding the credit risk, establishes an allowance, if
required, for uncollectible accounts and, as a consequence, believes that its
accounts receivable credit risk exposure beyond such allowance is
limited.
Note
3 –OTHER RECEIVABLES
Other
receivables mainly consist of prepayment of fish equipment amounting to
$1,194,030. As of September 30, 2010 and December 31, 2009, the other
receivables excluding the prepayment of fish equipment were $127,326 and
$21,208, respectively.
F-11
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note 4 – BIOLOGICAL ASSETS
As of
September 30, 2010 and December 31, 2009, Biological assets at cost consist of
the following:
9/30/2010
|
12/31/2009
|
|||||||
Carp
|
$
|
28,101
|
$
|
20,562
|
||||
Tilapia
|
959,561
|
959,561
|
||||||
Yellow
bone fish
|
55,385
|
-
|
||||||
California
bass
|
15,999
|
-
|
||||||
Snakeheads
|
265,368
|
178,204
|
||||||
Total
|
1,324,414
|
1,158,327
|
||||||
Accumulated
amortization
|
(1,075,603
|
)
|
(725,519
|
)
|
||||
$
|
248,811
|
$
|
432,808
|
Amortization
expense for the nine months ended September 30, 2010 and 2009 was $ 350,084 and
$ 306,613 respectively.
Biological
assets are amortized using the straight-line method over their estimated period
of benefit, ranging from three to five years. Management evaluate the
recoverability of biological assets periodically and take into account events or
circumstances that warrant revised estimates of useful lives or that indicate
that any changes exists. All of the Company’s biological assets are subject to
amortization with estimated lives of:
Carp
|
5
years
|
Tilapia
|
3
years
|
Snakeheads
|
3
years
|
California
bass
|
3
years
|
Yellow
bone fish
|
3
years
|
Note
5 – RELATED PARTIES
One of
the Company’s vendors is a related party. As of and for the nine months ended
September 30, 2010, such vendor accounted for approximately 19% of the Company’s
purchases and 38% of accounts payable. As of and for the nine months
ended September 30, 2009, such vendor accounted for approximately 53% of the
Company’s purchases and 87% of accounts payable.
For the
nine months ended September 30, 2010, the Company collected all amounts
previously due from the shareholder.
Note
6 – DUE FROM/TO SHAREHOLDER
As of
September 30, 2010, due from shareholder was $0.
During
the fourth quarter of 2009, the Company loaned an aggregate of RMB 21,900,000
($3,201,343 translated at $1=RMB 6.8372) to a shareholder. The shareholder
invested the entire proceeds of the loan in the construction of Foshan Nanhai
Guanyao Processing Industrial Park, which has a total area of 108,000 square
meters with the construction area of 85,000 square meters. The loan bears
interest and may be paid off by deducting the shareholder’s allocation of
shareholders’ dividends or other means. After the construction has been
completed, the Company has a first option to rent Foshan Nanhai Guanyao
Processing Industrial Park on terms to be determined. This amount is included in
the Due from shareholders of $4,008,659 as of December 31, 2009. During the nine
months ended September 30, 2010 this loan was repaid.
No
interest was levied from the related transaction. The facilities are constructed
in progress and third parties have rented part of the facilities. The Company
has not rented the facilities yet.
Note
7 – CONCENTRATIONS
As of
September 30, 2010, three customers accounted for 65% of accounts
receivable. As of September 30, 2009, two customers accounted for 99% of
accounts receivable.
For the
nine months ended September 30, 2010, the Company had three vendors who
accounted for 56% of total purchases. As of December 31, 2009, two customers
accounted for 20% of accounts receivable. For the nine months ended
September 30, 2009, the Company had two vendors who accounted for 66% of
total purchases and one related party vendor who accounted for 60%. For the
three months ended September 30, 2009, the Company had two vendors who accounted
for 39% of total purchases and one related party vendor who accounted for 16%.
At September 30, 2010, 87% of accounts payable was due to related parties. For
the three months ended September 30, 2009, the Company had two vendors who
accounted for 77% of total purchases and one related party vendor who accounted
for 70% of total purchases.
F-12
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
8 – COMPENSATED ABSENCES
Regulation
45 of the local labor law of PRC entitles employees to annual vacation leave
after 1 year of service. In general, all leave must be utilized annually, with
proper notification. Any unutilized leave is cancelled. The management estimated
that there is insignificant unutilized leave as at September 30, 2010 and
September 30, 2009.
Note
9 – COMMON STOCK
On March
29, 2010, the Company entered into the Share Exchange Agreement. Pursuant to the
Share Exchange Agreement, on March 29, 2010, 9 Rongfu Stockholders transferred
100% of the outstanding shares of common stock and 100% of the warrants to
purchase common stock of Rongfu held by them, in exchange for an aggregate of
18,623,889 newly issued shares of our Common Stock and warrants to purchase an
aggregate of 666,666 shares of our Common Stock. In connection with the closing
of the Share Exchange Agreement, the former principal stockholder agreed to and
did cancel 1,150,000 of the 1,200,000 shares of Rongfu Aquaculture, Inc. Common
Stock held by her.
F-13
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
10 – SERIES A CONVERTIBLE PREFERRED STOCK AND WARRANTS
On March
29, 2010, the Company entered into the Stock Purchase Agreement with eighteen
investors. The Company authorized and issued to Investors $7,700,000, of the
Company’s convertible, redeemable Series A Preferred Stock, $0.001 par value per
share (the “Series A Stock”) at a price of $2.78 per share (the “Series A Issue
Price”). The shares are convertible into shares of the Company’s common stock,
par value $0.001 per share. In connection with the Stock Purchase Agreement the
Company incurred offering costs of $1,038,923, which are subtracted from the
total proceeds and recorded in additional paid in capital.
The
Series A Stock, in preference to the holders of common stock, shall be entitled
to receive, when and as declared by the Board of Directors out of funds that are
legally available therefore, cumulative dividends at the rate of six percent
(6%) per annum of the original Series A Issue Price on each outstanding of
Series A Preferred payable semi-annually on each February 28 and August
31. Payment of these dividends shall be made, at the Company’s
option, in cash or shares of common stock. Each holder of the Series
A Stock shall be entitled to one vote for each whole share of common stock into
which such shares of Series A Stock could be converted in accordance with the
agreement.
The
Company has agreed to pay liquidated damages to its warrant holders if the
Registration Statement is not filed by May 13, 2010 and/or not declared
effective by the SEC on or before October 25, 2010. The liquidated damages are
equal to 1% of the purchase price of the purchased shares owned by investors.
The maximum aggregate liquidated damages payable to the investors under this
Agreement shall be 6% of the aggregated purchase price paid by the investors
pursuant to this Purchase Agreement. The Company must pay the liquidated damages
in cash. Liquidated damages of $207,900 have been accrued as a component of
other payables.
Pursuant
to the Purchase Agreement the holders of Series A Stock also received 3,460,902
5 year warrants to purchase common shares. The warrants have an exercise price
of $3.47 for 1,730,451 warrants and $4.17 for the remaining 1,730,451
warrants.
Assuming
a valuation of $3.10 per share and the conversion of the Series A Stock into
4,221,389 shares of common stock at an effective conversion price of
approximately $1.52 per share which is obtained by dividing the amount to be
allocated to the BCF by the 2,768,721 common shares.
The
Company measured and recognized an aggregate of $3,267,797 of the fair value of
warrants to additional paid in capital upon issuance of these warrants. The
terms of the warrants provide for an adjustment to the exercise price of these
warrants if the company closes on the sale or issuance of common stock at a
price which is less than the exercise price then in effect for these
warrants. The Company determined that the warrants did not qualify
for a scope exception under SFAS No. 133 as they were determined to not be
indexed to the Company’s stock. On March 29, 2010, the warrants were classified
as a derivative liability for the then fair market value and marked to
market.
Aggregate
|
|||||||||||
Exercise
|
Remaining
|
Intrinsic
|
|||||||||
Total
|
Price
|
Life
|
Value
|
||||||||
Outstanding,
December 31, 2009
|
- | ||||||||||
Granted
in 2010
|
|||||||||||
-
in connection with exchange agreement
|
666,666 | $ | 2.44-2.93 |
4.5
years
|
|||||||
-
in connection with Series A preferred
|
3,460,902 | $ | 3.47-4.17 |
4.5
years
|
|||||||
Exercised
in 2010
|
|||||||||||
Outstanding,
September 30, 2010
|
4,127,568 |
Note
11-DERIVATIVE FINANCIAL INSTRUMENTS
The
balance sheet caption derivative liabilities consist of warrants to purchase
4,127,568 shares of the Company’s common stock, issued to consultants and
investor relations in connection with the merger agreements and in connection
with the Stock Purchase Agreement. These derivative financial instruments are
indexed to an aggregate of 2,768,721 and 0 shares of the Company’s common stock
as of September 30, 2010 and December 31, 2009, respectively, and are carried at
fair value. The following tabular presentations sets forth information about the
derivative instruments for the periods September 30, 2010 and December 31,
2009:
Derivative income (expense)
|
Nine Months Ended
September 30, 2010
|
Three Months Ended
September 30, 2010
|
||||||
Warrant
derivative
|
$ | (6,251,054 | ) | $ | (943,266 | ) |
Liabilities
|
September 30, 2010
|
December 31, 2009
|
|||
Warrant
derivative
|
9,519,051
|
0-
|
Freestanding
derivative instruments, consisting of warrants are valued using the
Black-Scholes-Merton valuation methodology because that model embodies all of
the relevant assumptions that address the features underlying these instruments.
Significant assumptions used in the Black Scholes models included: conversion or
strike prices ranging from $2.44-$4.17; volatility 73.27% based upon
forward terms of instruments; terms-remaining life of 4.5 years ; and a risk
free rate ranging from 1.79%-2.5%.
Note
12 - INCOME TAXES
The
Company operates in more than one jurisdiction with complex regulatory
environments subject to different interpretations by the taxpayer and the
respective governmental taxing authorities, we evaluate our tax positions and
establish liabilities, if required. For uncertain tax position which may be
challenged by local tax authorities and may not be fully sustained despite our
belief that the underlying tax positions maybe be fully supportable. At this
time the Company is not able to make a reasonable estimate of the impact on
the effective tax rate related these items which could be
challenged.
F-14
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
12 - INCOME TAXES – (CONTINUED)
Pursuant
to the PRC Income Tax Laws, the Enterprise Income Tax (“EIT”) is at a statutory
rate of 25%. The Company is an agriculture enterprise and under PRC Income Tax
Laws, it is entitled to have new PRC tax policy for the agriculture enterprise.
The Company’s derived from three areas including fish breeding, fish
cultivation and selling adult fish. For income from fish breeding, it is
entitled to an exemption. For income from fish cultivation, EIT is a discount
rate of 12.5%. For income from selling adult fish, EIT is a rate of
25%.
The
following is a reconciliation of income tax expense:
September
30, 2010
|
International
|
Total
|
||||||
Current
|
$
|
790,416
|
$
|
790,416
|
||||
September
30, 2009
|
International
|
Total
|
||||||
Current
|
$
|
446,572
|
$
|
446,572
|
Nine Months Ended September 30,
|
Three Months Ended September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Reconciliation
of Effective tax rate
|
||||||||||||||||
Statutory
tax rate
|
25 | % | 25 | % | 25 | % | 25 | % | ||||||||
Non
deductibility of permanent items
|
26 | % | 0 | % | 9 | % | 0 | % | ||||||||
Tax
benefits from discounts and exemption
|
(18 | )% | (18 | )% | (20 | )% | (54 | )% | ||||||||
Others
|
4 | % | 0 | % | 11 | % | 35 | % | ||||||||
Effective
tax rate
|
37 | % | 7 | % | 25 | % | 6 | % |
If the
Company were subject to the standard 25% EIT, it would have incurred $1,587,300
and $1,193,111 of income tax expense for the nine months ended September 30,
2010 and 2009, respectively. The standard income tax rate would have
caused the Company to incur an additional expense of $0.08 and $0.06 per share
for the nine months ended September 30, 2010 and 2009,
respectively.
If the
Company were subject to the standard 25% EIT, it would have incurred $422,316
and $577,110 of income tax expense for the three months ended September 30, 2010
and 2009, respectively. The standard income tax rate would have
caused the Company to incur an additional expense of $0.02 and $0.03 per share
for the three months ended September 30, 2010 and 2009,
respectively.
Note
13– COMMITMENTS & CONTINGENCIES
The
Company leases facilities under operating leases, which expire on different
dates. It pays for on an annual basis and accrues for throughout the year. For
the nine months ended September 30, 2010 and 2009, rent expense was $ 232,379
and $ 315,059. Future payments under these leases are as follows as
of September 30:
2011
|
$
|
382,899
|
||
2012
|
$
|
365,660
|
||
2013
|
$
|
334,234
|
||
2014
|
$
|
268,287
|
||
2015
|
$
|
111,825
|
||
Thereafter
|
$
|
439,246
|
||
Total
|
$
|
1,902,151
|
F-15
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
14– EARNINGS PER SHARE
In
accordance with FASB ASC Topic 260-1-50, “Earnings per Share”, and SEC Staff
Accounting Bulletin No. 98, basic net income or loss per common share is
computed by dividing net income or loss for the period by the weighted - average
number of common shares outstanding during the period. Under
FASB ASC 260-10-50, diluted income or loss per share is computed by dividing net
income or loss for the period by the weighted - average number of common and
common equivalent shares, such as stock options, warrants and convertible
securities outstanding during the period.
The
following table sets forth the computation of basic and diluted earnings per
share of common stock:
Nine Months Ended
September 30,
|
Three Months Ended
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Basic
and diluted earnings per share:
|
||||||||||||||||
Numerator:
|
||||||||||||||||
(Loss)/Income used
in computing
|
$ | (3,846,017 | ) | $ | 6,025,171 | $ | 826,560 | $ | 1,003,709 | |||||||
Denominator:
|
||||||||||||||||
Weighted
average common shares outstanding
|
20,756,854 | 19,623,889 | 21,286,789 | 19,623,889 | ||||||||||||
Basic and
diluted earnings per
share
|
$ | (0.19 | ) | $ | 0.31 | $ | 0.04 | $ | 0.05 |
Note
15 – STATUTORY RESERVE
In
accordance with the laws and regulations of the PRC, a WFOE’s income, after
the payment of the PRC income taxes, shall be allocated to the statutory surplus
reserves and statutory public welfare fund. Prior to January 1, 2006 the
proportion of allocation for reserve was 10 percent of the profit after tax to
the surplus reserve fund and additional 5-10 percent to the public affair fund.
The public welfare fund reserve was limited to 50 percent of the registered
capital. Effective January 1, 2006, there is now only one fund requirement. The
reserve should be 10 percent of income after tax, not to exceed 50 percent of
registered capital. Statutory Reserve funds are restricted for set off against
losses, expansion of production and operation or increase in register capital of
the respective company. Statutory public welfare fund is restricted to the
capital expenditures for the collective welfare of employees.
These reserves are not transferable to the Company in the form of cash
dividends, loans or advances. These reserves are therefore not available for
distribution except in liquidation. As of September 30, 2010 and December 31,
2009, the Company had allocated $1,076,310 and $1,051,089, to these
non-distributable reserve funds.
F-16
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2010
(UNAUDITED)
Note
16- OTHER COMPREHENSIVE INCOME
Balances
of related after-tax components comprising accumulated other comprehensive
income, included in stockholders’ equity, at September 30, 2010 and
December 31, 2009, are as follows:
Foreign
Currency
Translation
Adjustment
|
Accumulated
Other
Comprehensive
Income
|
|||||||
Balance
at December 31, 2008
|
$
|
861,166
|
$
|
861,166
|
||||
Change
for 2009
|
5,533
|
5,533
|
||||||
Balance
at December 31, 2009
|
$
|
866,699
|
$
|
866,699
|
||||
Change
for nine months ended 9/30/2010
|
399,260
|
399,260
|
||||||
Balance
at September 30, 2010
|
$
|
1,265,959
|
1,265,959
|
Note
17- RESTATEMENT
The
accompanying consolidated balance sheet and statement of stockholders’ equity as
of, and for the year ended, December 31, , 2009 have been restated for the
following matter:
The
number of shares of the Company’s common stock outstanding at December 31, 2009
was overstated in such financial statements.
Therefore,
we have restated the financial statements to correct this error. The net effect
of this reclassification is as follows:
A
decrease in the Company’s common stock by $1,187 from $20,811 to $19,624 and an
increase of additional paid in capital by the same amount.
Note
18- SUBSEQUENT EVENTS
For the
nine months ended September 30, 2010, the Company has evaluated subsequent
events for potential recognition and disclosure through the date of
issuance of these financial statements.. Based upon this evaluation management
has concluded that no subsequent events requiring recognition or disclosure
existed.
F-17
ACSBAcquavella, Chiarelli,
Shuster, Berkower & Co., LLP
517
Route one
|
1
Penn Plaza
|
Iselin,
New Jersey, 08830
|
36th Floor
|
732.855.9600
|
New
York, NY 10119
|
Report of Independent
Registered Public Accounting Firm
Board of
Directors and Stockholders of
Rongfu
Aquaculture, Inc.
We have
audited the accompanying consolidated balance sheets of Rongfu Aquaculture, Inc.
as of December 31, 2009 and 2008, and the related consolidated statements of
income, stockholders’ equity and comprehensive income, and cash flows for each
of the years in the two-year period ended December 31, 2009. Rongfu Aquaculture,
Inc.’s management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that out audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Rongfu Aquaculture
Inc. as of December 31, 2009 and 2008, and the consolidated results of its
operations and its cash flows for each of the years in the two-year period ended
December 31, 2009 in conformity with accounting principles generally accepted in
the United States of America.
Certified
Public Accountants
New York,
N.Y.
April 30,
2010
Except
for Note 1 as to which the date is October 5, 2010
F-18
RONGFU
AQUACULTURE, INC
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31,
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
|
$ | 3,194,248 | $ | 14,823,746 | ||||
Accounts
receivable
|
236,374 | 4,412,956 | ||||||
Inventories
|
2,979,753 | 8,892,911 | ||||||
Due
from shareholder
|
4,008,659 | - | ||||||
Other
receivable
|
21,208 | 21,193 | ||||||
Trade
deposit
|
121,224 | - | ||||||
Prepaid
expenses
|
230,247 | 307,252 | ||||||
Total
Current Assets
|
10,791,713 | 28,458,058 | ||||||
Fixed
assets
|
405,147 | 445,865 | ||||||
Biological
assets
|
432,808 | 841,625 | ||||||
Total
Assets
|
$ | 11,629,668 | $ | 29,745,548 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$ | - | $ | 1,081,645 | ||||
Other
payable
|
2,743,960 | 873,401 | ||||||
Due
to shareholder
|
- | 8,519,146 | ||||||
Advance
from clients
|
498,785 | - | ||||||
Short-term
bank loan
|
380,273 | - | ||||||
Dividend
payable
|
3,466,331 | 3,493,603 | ||||||
Income
tax payable
|
995,313 | 780,052 | ||||||
Total
Current Liabilities
|
$ | 8,084,662 | $ | 14,747,847 | ||||
Long-term
Liabilities
|
||||||||
Long-term
bank loan
|
1,170,070 | - | ||||||
Total
liabilities
|
9,254,732 | 14,747,847 | ||||||
Stockholders'
Equity
|
||||||||
Common
stock, par value, $0.001 per share, 90,000,000 shares authorized,
19,623,889 shares issued and outstanding at December 31, 2009 and
2008
|
19,624 | 19,624 | ||||||
Additional
paid in capital
|
797,808 | 797,808 | ||||||
Statutory
reserve
|
1,051,089 | 665,852 | ||||||
Other
comprehensive income
|
866,699 | 861,166 | ||||||
Retained
earnings
|
(360,284 | ) | 12,653,251 | |||||
Total
Stockholders' Equity
|
2,374,936 | 14,997,701 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 11,629,668 | $ | 29,745,548 |
The
accompanying notes are an integral part of these financial
statements.
F-19
RONGFU
AQUACULTURE, INC.
CONSOLIDATED
STATEMENTS OF INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
2009
|
2008
|
|||||||
Revenue
|
$ | 43,842,407 | $ | 35,592,569 | ||||
Cost
of goods sold
|
26,708,361 | 20,043,897 | ||||||
Gross
profit
|
17,134,046 | 15,548,672 | ||||||
Operating
expenses:
|
||||||||
Selling,
general and administrative expenses
|
2,514,036 | 2,629,756 | ||||||
Research
and development cost
|
90,045 | 88,040 | ||||||
Total
operating expenses
|
2,604,081 | 2,717,796 | ||||||
Net
income from operations
|
14,529,965 | 12,830,876 | ||||||
Other
income (expense)
|
||||||||
Interest
income
|
50,493 | 71,087 | ||||||
Interest
expense
|
(107,827 | ) | (12,733 | ) | ||||
Other
expense
|
(415 | ) | (1,954 | ) | ||||
Total
other income (expense)
|
(57,749 | ) | 56,400 | |||||
Net
income before income taxes
|
14,472,216 | 12,887,276 | ||||||
Income
taxes
|
1,396,028 | 1,027,781 | ||||||
Net
income
|
$ | 13,076,188 | $ | 11,859,495 | ||||
Net
income for common share
|
||||||||
Earnings
per share – Basic and diluted
|
$ | 0.66 | $ | 0.60 | ||||
Weighted
average common stock outstanding Basic and diluted
|
19,623,889 | 19,623,889 | ||||||
Net
income
|
13,076,188 | 11,859,495 | ||||||
Other
comprehensive income
|
5,533 | 600,174 | ||||||
Comprehensive
income
|
13,081,721 | 12,459,669 |
The
accompanying notes are an integral part of these financial
statements.
F-20
RONGFU
AQUACULTURE, INC
CONSOLDIATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
Income
|
$ | 13,076,188 | $ | 11,859,495 | ||||
Adjustments
to reconcile net income to net cash
|
||||||||
provided
by operating activities:
|
||||||||
Depreciation
|
99,012 | 52,572 | ||||||
Amortization
of biological assets
|
408,817 | 316,702 | ||||||
(Increase)
/ decrease in assets:
|
||||||||
Accounts
receivables
|
4,177,432 | (1,508,501 | ) | |||||
Inventories
|
5,916,217 | 155,782 | ||||||
Prepaid
expense
|
77,179 | 74,694 | ||||||
Trade
deposit
|
(121,159 | ) | ||||||
Due
from shareholder
|
(4,006,502 | ) | ||||||
Increase
/ (decrease) in current liabilities:
|
||||||||
Accounts
payable
|
(1,081,822 | ) | 323,825 | |||||
Other
payable
|
1,868,940 | 845,414 | ||||||
Advances
from clients
|
498,517 | - | ||||||
Income
taxes payable
|
214,599 | 680,784 | ||||||
Net
cash provided by operating activities
|
21,127,418 | 12,800,767 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchased
fixed assets
|
(55,832 | ) | (351,389 | ) | ||||
Biological
assets
|
- | (1,158,327 | ) | |||||
Construction
in progress
|
- | (8,493 | ) | |||||
Net
cash used by investing activities
|
(55,832 | ) | (1,518,209 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Due
to shareholder
|
(8,520,541 | ) | (2,489,354 | ) | ||||
Borrowings
(payment) of short-term loan, net
|
380,068 | |||||||
Borrowings
from long-term bank loan
|
1,754,160 | |||||||
Payment
of long-term bank loan
|
(584,720 | ) | ||||||
Dividend
paid
|
(25,734,194 | ) | ||||||
Capital
contribution
|
- | 424,418 | ||||||
Net
cash used by financing activities
|
(32,705,227 | ) | (2,064,936 | ) | ||||
Effect
of exchange rate changes on cash and cash equivalents
|
4,143 | (197,505 | ) | |||||
Net
change in cash and cash equivalents
|
(11,629,498 | ) | 9,020,117 | |||||
Cash
and cash equivalents, beginning balance
|
14,823,746 | 5,803,629 | ||||||
Cash
and cash equivalents, ending balance
|
$ | 3,194,248 | $ | 14,823,746 | ||||
SUPPLEMENTAL
DISCLOSURES:
|
||||||||
Cash
paid during the year for:
|
||||||||
Income
tax payments
|
$ | 1,181,429 | $ | 346,997 | ||||
Interest
payments
|
$ | 107,827 | $ | 12,733 |
The
accompanying notes are an integral part of these financial
statements.
F-21
RONGFU
AQUACULTURE, INC
CONSOLIDATED STATEMENT
OF STOCKHOLDERS' EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Additional
|
Other
|
Total
|
||||||||||||||||||||||||||
Common Stock
|
Paid-in
|
Comprehensive
|
Statutory
|
Retained
|
Stockholders
|
|||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Income
|
Reserves
|
Earnings
|
Equity
|
||||||||||||||||||||||
Balance
December 31, 2007
|
19,623,889 | $ | 19,624 | $ | 394,201 | $ | 260,992 | $ | 200,666 | $ | 5,486,011 | $ | 6,361,494 | |||||||||||||||
Foreign
currency translation adjustments
|
600,174 | 600,174 | ||||||||||||||||||||||||||
Capital
contribution
|
424,418 | 424,418 | ||||||||||||||||||||||||||
Transferred
to Statutory reserve
|
465,186 | (465,186 | ) | - | ||||||||||||||||||||||||
Dividend
paid or declared
|
(4,227,069 | ) | (4,227,069 | ) | ||||||||||||||||||||||||
Recapitalization
|
(20,811 | ) | (20,811 | ) | ||||||||||||||||||||||||
Income
for the year ended December 31, 2008
|
11,859,495 | 11,859,495 | ||||||||||||||||||||||||||
Balance
December 31, 2008
|
19,623,889 | $ | 19,624 | $ | 797,808 | $ | 861,166 | $ | 665,852 | $ | 12,653,251 | $ | 14,997,701 | |||||||||||||||
Foreign
currency translation adjustments
|
5,533 | 5,533 | ||||||||||||||||||||||||||
Transferred
to Statutory reserve
|
385,237 | (385,237 | ) | |||||||||||||||||||||||||
Dividend
paid or declared
|
(25,704,486 | ) | (25,704,486 | ) | ||||||||||||||||||||||||
Income
for the year ended December 31, 2009
|
13,076,188 | 13,076,188 | ||||||||||||||||||||||||||
Balance
December 31, 2009
|
19,623,889 | $ | 19,624 | $ | 797,808 | $ | 866,699 | $ | 1,051,089 | $ | (360,284 | ) | $ | 2,374,936 |
The
accompanying notes are an integral part of these financial
statements
F-22
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Note
1 - ORGANIZATION
Rongfu
Aquaculture, Inc.(the Company) was incorporated in Nevada on February 29, 2008.
The Company changed its name from Granto, Inc. to Rongfu Aquaculture, Inc on May
19, 2010. On March 29, 2010, the Company entered into a Share Exchange Agreement
with Rongfu Aquaculture, Inc. (Rongfu), certain stockholders and
warrant holders of Rongfu (the “Rongfu Stockholders”) and a stockholder of
Granto (the “Share Exchange Agreement”). Pursuant to the Share Exchange
Agreement, on March 29, 2010, 9 Rongfu Stockholders transferred 100% of the
outstanding shares of common stock and 100% of the warrants to purchase common
stock of Rongfu held by them, in exchange for an aggregate of 18,623,889 newly
issued shares of our Common Stock. In addition the shareholders received
warrants to purchase an aggregate of 666,666 shares of our Common Stock. In
connection with the closing of the Share Exchange Agreement, the former
principal stockholder agreed to and did cancel 1,150,000 of the 1,200,000 shares
of Granto, Inc. Common Stock held by her.
On March
29, 2010, the Company completed its’ merger with Rongfu in accordance with the
share Exchange Agreement. The Share Exchange Transaction is being
accounted for as a reverse acquisition. In accordance with the Accounting and
Financial Reporting Interpretations and Guidance prepared by the staff of the
U.S. Securities and Exchange Commission, the Company (the legal acquirer) is
considered the accounting acquiree and Rongfu (the legal acquiree) is considered
the accounting acquirer for accounting purposes. Subsequent to the Share
Exchange Transaction, the financial statements of the combined entity will in
substance be those of Rongfu. The assets, liabilities and historical operations
prior to the share exchange transaction will be those of Rongfu. Subsequent to
the date of the Share Exchange Transaction, Rongfu is deemed to be a
continuation of the business of the Company. Therefore post exchange financial
statements will include the combined balance sheet of the Company and Rongfu,
the historical operations of Rongfu and the operations of the Company and Rongfu
from the closing date of the Share Exchange Transaction forward.
Rongfu
was incorporated in Delaware on January 13, 2009. Flourishing Blessing (Hong
Kong) Co., Ltd. (“Hong Kong Rongfu”) was incorporated on November 11, 2008.
Pursuant to a Share Exchange Agreement, dated as of December 29, 2009, (the”
December 2009 Agreement") all of the shareholders of Hong Kong Rongfu exchanged
all of the outstanding shares of Hong Kong Rongfu for shares of common stock of
Rongfu and Rongfu became the owner of 100% of the outstanding capital stock of
Hong Kong Rongfu. Hong Kong Rongfu owns 100% of the capital stock of Guangzhou
Flourishing Blessing Hansen Agriculture Technology Limited (“Guangzhou
Flourishing”). Guangzhou Flourishing is a wholly foreign-owned enterprise, or
“WFOE,” under the laws of the PRC by virtue of its status as a wholly-owned
subsidiary of a non-PRC company, Hong Kong Rongfu. In connection with
the closing of the December 2009 Agreement, Guangzhou
Flourishing entered into and consummated a series of agreements, (the
"Contractual Agreements ”),with Chen Zhisheng and Foshan Nanhai Ke Da Heng Sheng
Aquatic Co., Ltd. (“Nanhai Ke Da Heng Sheng”). Under the Contractual
Agreements, Guangzhou Flourishing agreed to assume control of the operations and
management of Nanhai Ke Da Heng Sheng in exchange for a management fee equal to
Nanhai Ke Da Heng Sheng’s earnings before taxes. As a result, the business of
Nanhai Ke Da Heng Sheng and Hainan Ke Da Heng Sheng Aquit Germchit
Co., Ltd., a PRC corporation (“Hainan Ke Da Heng Sheng”) , 70% of the
outstanding stock of which is owned by Nanhai Ke Da Heng Sheng, will
be conducted by Guangzhou Flourishing. We anticipate that Nanhai Ke Da Heng
Sheng and Hainan Ke Da Heng Sheng will continue to be the contracting parties
under their customer contracts, bank loans and certain other assets until such
time as those may be transferred to Guangzhou Flourishing. Nanhai Ke Da Heng
Sheng was formed in the PRC on April 30, 2003 as a limited liability company (a
company solely owned by a natural person). Hainan Ke Da Heng Sheng was formed in
the PRC on August 6, 2007 as a limited liability company. Guangzhou Flourishing
was incorporated in the PRC on January 9, 2009 as a wholly owned foreign
enterprise.
F-23
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Note
1 – ORGANIZATION
(CONTINUED)
The
Contractual Agreements completed in December 2009 provide that Guangzhou
Flourishing has controlling interest in Nanhai Ke Da Heng Sheng under FASB
Accounting Standards Codification “Consolidation of Variable Interest Entities”,
an Interpretation of an Accounting Research Bulletin, which requires
Guangzhou Flourishing to consolidate the financial statements
of Nanhai Ke Da Heng Sheng and Hainan Ke Da
Heng Shen and ultimately consolidate with its parent company, Rongfu
Aquaculture, Inc.
The
Company, through its subsidiaries, and Contractual Agreements, is engaged in
integrated business of aquaculture including Tilapia brood stock, Tilapia fry,
Tilapia farming, and marketing for Tilapia. It is specializing in the production
of the Hengsheng Brand Nile Tilapia and the new licensed New Jifu
Tilapia.
These
consolidated Financial Statements have been prepared on a historical pro-forma
basis.
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
and represent the pro forma historical results of the consolidated group. The
Company adopted the new accounting guidance (“Codification”) on July 1, 2009.
For the year ended December 31, 2009, all reference for periods subsequent to
January 1, 2009 are based on the codification. The Company's functional currency
is the Chinese Renminbi, however the accompanying consolidated financial
statements have been translated and presented in United States
Dollars.
Principles of
Consolidation
The
consolidated financial statements include the accounts of the Company, its
subsidiary and variable interest entity (“VIE”) for which the Company is the
primary beneficiary. All inter-company accounts and transactions have
been eliminated in consolidation. The Company has adopted the
Consolidation Topic of the FASB Accounting Standards Codification which requires
a VIE to be consolidated by a company if that company is subject to a majority
of the risk of loss for the VIE or is entitled to receive a majority of the
VIE’s residual returns.
.
Translation
Adjustment
As of
December 31, 2009 and 2008, the accounts of the Company were maintained, and its
financial statements were expressed, in Chinese Yuan Renminbi
(“CNY”). Such financial statements were translated into U.S. Dollars
(“USD”) in accordance with the Foreign Currency Matters Topic of the
Codification, with the CNY as the functional currency. According to
the Codification, all assets and liabilities were translated at the current
exchange rate, stockholders’ equity are translated at the historical rates and
income statement items are translated at the average exchange rate for the
period. The resulting translation adjustments are reported under other
comprehensive income in accordance with the Comprehensive Income Topic of the
Codification, as a component of shareholders’ equity. Transaction
gains and losses are reflected in the income statement.
Statement of Cash
Flows
In
accordance with the Statement of Cash Flows Topic of the Codification, cash
flows from the Company’s operations are based upon the local currencies. As a
result, amounts related to assets and liabilities reported on the statement of
cash flows will not necessarily agree with changes in the corresponding balances
on the balance sheet.
F-24
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Comprehensive
Income
The
Company follows the Comprehensive Income Topic of the Codification.
Comprehensive income is a more inclusive financial reporting methodology that
includes disclosure of certain financial information that historically has not
been recognized in the calculation of net income.
Risks and
Uncertainties
The
Company’s operations are carried out in the PRC. Accordingly, the
Company’s business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC, by the
general state of the PRC’s economy. The Company’s business may be
influenced by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.
Contingencies
Certain
conditions may exist as of the date the financial statements are issued, which
may result in a loss to the Company but which will only be resolved when one or
more future events occur or fail to occur. The Company’s management and legal
counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to
legal proceedings that are pending against the Company or unasserted claims that
may result in such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be sought. There
were no contingencies of this type on December 31, 2009.
If the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial statements. If
the assessment indicates that a potential material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material would be
disclosed.
There
were no contingencies of this type on December 31, 2009.
Loss
contingencies considered to be remote by management are generally not disclosed
unless they involve guarantees, in which case the guarantee would be
disclosed.
F-25
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and Cash
Equivalents
Cash and
cash equivalents include cash in hand and cash in time deposits, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
Accounts
Receivable
The
Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts
receivable and analyzes historical bad debts, customer concentrations, customer
credit worthiness, current economic trends and changes in customer payment
patterns to evaluate the adequacy of these reserves. Reserves are
recorded primarily on a specific identification basis. There were no
allowances for doubtful accounts as of December 31, 2009 and 2008.
Inventories
Inventory
includes breeding and growing cost; these costs include feed, direct cost and
fixed and variable overhead costs. Inventories are valued at the lower of cost
(determined on a weighted average basis) or market, if lower. As of December 31,
2009 and 2008, inventories consist of the following:
12/31/2009
|
12/312008 | |||||||
Raw
materials
|
$ | 47,185 | $ | 27,725 | ||||
Work
in process and
finished
goods
|
2,932,568 | 8,865,186 | ||||||
Total
|
$ | 2,979,753 | $ | 8,892,911 |
F-26
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, Plant &
Equipment
Property
and equipment are stated at cost. Expenditures for maintenance and repairs are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. Depreciation of
property and equipment is provided using the straight-line method for
substantially all assets with estimated lives of:
Buildings
|
10-20
years
|
Fishing
gear
|
5-10years
|
Transportation
equipment
|
5-10
years
|
Office
equipment
|
3-5
years
|
As of
December 31, 2009 and 2008, Property, Plant & Equipment consist of the
following:
12/31/2009
|
12/31/2008
|
|||||||
Buildings
|
$ | 73,631 | $ | 60,230 | ||||
Fishing
gear
|
424,938 | 408,197 | ||||||
Transportation
equipment
|
37,330 | 37,155 | ||||||
Office
equipment
|
40,102 | 1,187 | ||||||
Construction
in progress
|
- | 10,938 | ||||||
Total
|
576,001 | 517,707 | ||||||
Accumulated
depreciation
|
(170,854 | ) | (71,842 | ) | ||||
$ | 405,147 | $ | 445,865 |
Depreciation
expense for the years ended December 31, 2009 and 2008 was $99,012 and $52,572,
respectively.
Long-Lived
Assets
Since
April 30, 2003, the Company adopted the Property, Plant and Equipment Topic of
the Codification, which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes previous accounting
guidance, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of,” and “Reporting the Results of Operations for a
Disposal of a Segment of a Business.” The Company periodically evaluates the
carrying value of long-lived assets to be held and used, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets carrying amounts. In
that event, a loss is recognized based on the amount by which the carrying
amount exceeds the fair market value of the long-lived assets. Loss on
long-lived assets to be disposed of is determined in a similar manner, except
that fair market values are reduced for the cost of disposal. Based on its
review, the Company believes that, as of December 31, 2009, there were no
impairments of its long-lived assets.
F-27
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial
Instruments
The
Financial Instrument Topic of the Codification requires that the Company
disclose estimated fair values of financial instruments. The carrying amounts
reported in the statements of financial position for current assets and current
liabilities qualifying as financial instruments are a reasonable estimate of
fair value.
.
Revenue
Recognition
The
Company records revenues for goods shipped at the time of
shipment. For goods delivered by the Company to a customer’s site,
revenues are recognized at time of delivery.
Research and development
cost
Research
and development costs are expensed in the period when they are incurred. During
the years ended December 31, 2008 and December 31, 2009, research and
development costs were $90,045 and $ 88,040, respectively. These
amounts have been reclassified from selling, general and administrative expenses
to be shown as a separate line item.
Advertising
Advertising
expenses consist primarily of costs of promotion for corporate image and product
marketing and costs of direct advertising. The Company expenses all advertising
costs as incurred. Advertising expense for the years ended December 31, 2009 and
2008 were $40,795 and $ 28,801, respectively.
Shipping and handling
fees
The
Company follows ASC 605-45, “Handling Costs, Shipping Costs”. The
Company does not charge its customers for shipping and handling. The Company
classifies shipping and handling costs as part of Selling, general and
administrative expense. Shipping and handling fees for the years ended December
31, 2009 and 2008 were $269,632 and $295,971, respectively.
Advances from
Clients
The
Company records deposits received by customers prior to the completion of the
sale as deferred revenues and included as a component of advances from
clients. At such time as the revenue cycle is complete, these monies
will be recognized into revenues.
F-28
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income
Taxes
The
Company utilizes the accounting guidance, “Accounting for Income Taxes,” which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax bases of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
It is the
Company’s intention to permanently reinvest earnings from activity with china.
And thereby indefinitely postpone repatriation of these funds to the US.
Accordingly, no domestic deferred income tax provision has been made fro US
income tax which could result from paying dividend to the Company.
There
were no deferred tax difference in 2009 and 2008
Concentration of Credit
Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk are cash, accounts receivable and other receivables arising from its normal
business activities. The Company places its cash in what it believes to be
credit-worthy financial institutions. The Company has a diversified customer
base, all are in China. The Company controls credit risk related to accounts
receivable through credit approvals, credit limits and monitoring procedures.
The Company routinely assesses the financial strength of its customers and,
based upon factors surrounding the credit risk, establishes an allowance, if
required, for uncollectible accounts and, as a consequence, believes that its
accounts receivable credit risk exposure beyond such allowance is
limited.
Recent Accounting
Pronouncements
In May
2009, the FASB issued accounting guidance for “Subsequent Events”, which is
included in ASC Topic 855, Subsequent Events. ASC Topic 855 established
principles and requirements for evaluating and reporting subsequent events and
distinguishes which subsequent events should be recognized in the financial
statements versus which subsequent events should be disclosed in the financial
statements. ASC Topic 855 also required disclosure of the date through which
subsequent events are evaluated by management. ASC Topic 855 was
effective for interim periods ending after June 15, 2009 and applies
prospectively. Because ASC Topic 855 impacted the disclosure
requirements, and not the accounting treatment for subsequent events, the
adoption of ASC Topic 855 did not impact our results of operations or financial
condition.
Effective
July 1, 2009, the Company adopted the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting
Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards
Codification (the “Codification”) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with U.S.
GAAP. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative U.S. GAAP for SEC registrants.
All guidance contained in the Codification carries an equal level of authority.
The Codification superseded all existing non-SEC accounting and reporting
standards.
F-29
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Note
2 - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
All other
non-grandfathered, non-SEC accounting literature not included in the
Codification is non-authoritative. The FASB will not issue new standards in the
form of Statements, FASB Staff Positions or Emerging Issues Task Force
Abstracts. Instead, it will issue Accounting Standards Updates (“ASUs”). The
FASB will
not consider ASUs as authoritative in their own right. ASUs will serve only to
update the Codification, provide background information about the guidance and
provide the bases for conclusions on the change(s) in the Codification.
References made to FASB guidance throughout this document have been updated for
the Codification.
In
August 2009, the FASB issued, Measuring Liabilities at Fair
Value, which provides additional guidance on how companies should measure
liabilities at fair value under ASC 820. The ASU clarifies that the quoted price
for an identical liability should be used. However, if such information is not
available, an entity may use, the quoted price of an identical liability when
traded as an asset, quoted prices for similar liabilities or similar liabilities
traded as assets, or another valuation technique (such as the market or income
approach). The ASU also indicates that the fair value of a liability is not
adjusted to reflect the impact of contractual restrictions that prevent its
transfer and indicates circumstances in which quoted prices for an identical
liability or quoted price for an identical liability traded as an asset may be
considered level 1 fair value measurements. This ASU is effective
October 1, 2009. The Company is currently evaluating the impact of this
standard, but would not expect it to have an impact on the Company’s
consolidated results of operations or financial condition.
Note
3 –OTHER
RECEIVABLES
Other
receivables mainly consist of cash advances to rent deposit. As of December 31,
2009 and 2008, the other receivables were $21,208 and $21,193,
respectively.
Note 4 – BIOLOGICAL
ASSETS
Biological
assets are amortized using the straight-line method over their estimated period
of benefit, ranging from three to five years. Management evaluate the
recoverability of biological assets periodically and take into account events or
circumstances that warrant revised estimates of useful lives or that indicate
that any changes exists. All of the Company’s biological assets are subject to
amortization with estimated lives of:
Carp
|
5 years
|
Tilapia
|
3
years
|
Snakeheads
|
3
years
|
As of
December 31, 2009 and 2008, Biological assets at cost consist of the
following:
12/31/2009
|
12/312008 | |||||||
Carp
|
$ | 20,562 | $ | 20,562 | ||||
Tilapia
|
959,561 | 959,561 | ||||||
Snakeheads
|
178,204 | 178,204 | ||||||
Total
|
1,158,327 | 1,158,327 | ||||||
Accumulated
amortization
|
(725,519 | ) | (316,702 | ) | ||||
$ | 432,808 | $ | 841,625 |
Amortization
expense for the years ended December 31, 2009 and 2008 was $408,817 and
$316,702, respectively.
F-30
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Note
5 – RELATED PARTY
TRANSACTIONS
The
Company buys fish feed from a related party supplier. The Company also lent
money to a shareholder of the Company.
Note
6 – DUE FROM/TO
SHAREHOLDER
The
Company has a receivable due from shareholder. As of December 31, 2009, due to
shareholder was $ 4,008,659. Amount due are receivable upon demand with no
stated interest.
During
the fourth quarter of 2009, the Company loaned an aggregate of $3,201,343 to a
shareholder. This amount is included in $ 4,008,659 as of December 31,
2009. He invested the entire proceeds of the loan in the construction
of Foshan Nanhai Guanyao Processing Industrial Park, which has a total area of
108,000 square meters with the construction area of 85,000 square meters. The
loan does not bear any interest and may be paid off by deducting the
shareholder’s allocation of shareholders’ dividends or other means. After the
construction has been completed, the Company has a first option to rent Foshan
Nanhai Guanyao Processing Industrial Park on terms to be
determined.
The
Company had a payable due to a shareholder. At December 31, 2008, due
to a shareholder was $8,519,146. The note was paid in
2009.
Note
7 – CONCENTRATIONS
As of
December 31, 2009, two customers accounted for 20% of accounts receivable. For
the year ended December 31, 2009, the Company had one related party vendor who
accounted for 73% of total purchases. At December 31, 2008, 78% of accounts
payable were due to one related party vendor. For the year ended December 31,
2008, the Company had one related party vendor who accounted for 93% of total
purchases.
Note
8 – COMPENSATED
ABSENCES
Regulation
45 of the local labor law of the PRC entitles employees to annual vacation leave
after 1 year of service. In general, all leave must be utilized
annually, with proper notification. Any unutilized leave is
cancelled
Note
9- DEBT
As of
December 31, 2009, the Company had debt as follows:
Credit Union –Foshan
Naihai Branch
|
Amount
|
Interest rate
|
Due
|
|||||||
Short
tem bank loan
|
$ | 380,273 | 4.425 | % |
Feb 13,2010
|
|||||
Long
term bank loan
|
$ | 1,170,070 | 4.50 | % |
Feb 13 and 14, 2011
|
The
Company is using these loans for working capital purposes and secured by certain
real estate and property insurance.
F-31
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Note
10 - INCOME
TAXES
The
Company operates in more than one jurisdiction with complex regulatory
environments subject to different interpretations by the taxpayer and the
respective governmental taxing authorities. We evaluate our tax positions and
establish liabilities, if required. For uncertain tax position which may be
challenged by local tax authorities and may not be fully sustained despite our
belief that the underlying tax positions maybe be fully supportable. At this
time the Company is not able to make a reasonable estimate of the impact on the
effective tax rate related these items which could be challenged.
Pursuant
to the PRC Income Tax Laws, the Enterprise Income Tax (“EIT”) through December
31, 2007 is at a
statutory rate of 33%, which is comprised of 30% national income tax and 3%
local income tax. As of January
1, 2008, the EIT is at a statutory rate of 25%. The Company is an
agricultural enterprise and under PRC Income Tax Laws, it is entitled to an
exemption for 2006. Starting from January 1, 2008, it is entitled to
have the new PRC tax policy for the agricultural enterprises applied to it. The
Company’s income come from three general categories including fish
breeding, fish cultivation and selling adult fish. For income from fish
breeding, the Company is entitled to an exemption from taxation. For income from
fish cultivation, EIT is a discount rate of 12.5%. For income from selling adult
fish, EIT is a rate of 25%.
The
following is a reconciliation of income tax expense:
12/31/2009
|
United States
|
International
|
Total
|
|||||||||
Total
|
$ | - | $ | 1,396,028 | $ | 1,396,028 | ||||||
12/31/2008
|
United
States
|
International
|
Total
|
|||||||||
Current
|
$ | - | $ | 1,027,781 | $ | 1,027,781 |
Note
11– COMMITMENTS &
CONTINGENCIES
The
Company leases facilities under operating leases, which expire on different
dates For the years ended December 31, 2009 and 2008, rent expense was $ 362,320
and $ 334,705. Future payments under these leases are as
follows: 2010 - $75,280; 2011 - $65,925; 2012 - $65,925; 2013 -
$46,979.
Note
12 – STATUTORY
RESERVE
In
accordance with the laws and regulations of the PRC, a wholly-owned Foreign
Invested Enterprises income, after the payment of the PRC income taxes, shall be
allocated to the statutory surplus reserves and statutory public welfare fund.
Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent
of the profit after tax to the surplus reserve fund and additional 5-10 percent
to the public affair fund. The public welfare fund reserve was limited to 50
percent of the registered capital. Effective January 1, 2006, there
is now only one fund requirement. The reserve should be 10 percent of income
after tax, not to exceed 50 percent of registered capital. Statutory Reserve
funds are restricted for set off against losses, expansion of production and
operation or increase in register capital of the respective company. Statutory
public welfare fund is restricted to the capital expenditures for the collective
welfare of employees. These reserves
are not transferable to the Company in the form of cash dividends, loans or
advances. These reserves are therefore not available for distribution except in
liquidation. As of December 31, 2009 and 2008, the Company had allocated $
1,051,089 and $ 665,852, to these non-distributable reserve
funds.
F-32
RONGFU
AQUACULTURE, INC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
Note
13- OTHER
COMPREHENSIVE INCOME
Balances
of related after-tax components comprising accumulated other comprehensive
income, included in stockholders’ equity, at December 31, 2009 and 2008, are as
follows:
Foreign
Currency
Translation
Adjustment
|
Accumulated
Other
Comprehensive
Income
|
|||||||
Balance
at December 31, 2008
|
$ | 861,166 | $ | 861,166 | ||||
Change
for 2009
|
5,533 | 5,533 | ||||||
Balance
at December 31, 2009
|
$ | 866,699 | $ | 866,699 |
Note
14- SUBSEQUENT
EVERNTS
The
Company evaluated subsequent events through the time of filing this registration
statement for items affecting the two-year period ended December 31, 2009 and
2008.
On
January 5, 2010, the Company entered into a Securities Purchase Agreement to
sell to investors: (1)124,113 shares of its common stock; (2) Series A common
stock purchase warrants to purchase 124,113 shares of the Company’s common stock
with an exercise of $3.53 per share; and(3) Series B common stock purchase
warrants to purchase 124,113 shares of the Company’s common stock at an exercise
price of $4.23 per share. The Company received gross proceeds
of $ 350,000 from the sale of securities pursuant to this
agreement.
On
January 12, 2010, the Company entered into a Securities Purchase
Agreement to sell to investors: (1)70,922 shares of its common stock; (2) Series
A common stock purchase warrants to purchase 70,922 shares of the Company’s
common stock with an exercise of $3.53 per share; and(3) Series B common stock
purchase warrants to purchase 70,922 shares of the Company’s common stock at an,
exercise price of $4.23 per share. The company received gross proceeds of $
200,000 from the sale of securities pursuant to this this
agreement.
On
January 21, 2010, the Company entered into a Securities Purchase Agreement to
sell to investors: (1)35,461 shares of its common stock; (2) Series A common
stock purchase warrants to purchase 35,461 shares of the Company’s common stock
with an exercise of $3.53 per share; and (3) Series B common stock purchase
warrants to purchase 35,461 shares of the Company’s common stock at an exercise
price of $4.23 per share. The Company received gross proceeds
of $ 100,000 from the sale of securities pursuant this
agreement.
F-33
Dealer
Prospectus Delivery Obligation
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.
81
Part
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution.
The expenses payable by us in connection
with this offering are as follows:
Amount
|
||||
Securities
and Exchange Commission Registration fee
|
$ | 1,886 | ||
Accountants’
fees and expenses
|
$ | * | ||
Legal
fees and expenses
|
$ | * | ||
Blue
Sky fees and expenses
|
$ | * | ||
Transfer
Agent’s fees and expenses
|
$ | * | ||
Total
Expenses
|
$ | * |
* To be included by amendment.
All expenses are estimated except for
the Securities and Exchange Commission fee. None of the expenses from the
offering will be borne by the selling stockholders.
Item
14. Indemnification of Directors and Officers.
Nevada law allows us to indemnify our
directors, officers, employees, and agents, under certain circumstances, against
attorney's fees and other expenses incurred by them in any litigation to which
they become a party arising from their association with or activities on our
behalf, and under certain circumstances to advance the expenses of such
litigation upon securing their promise to repay us if it is ultimately
determined that indemnification will not be allowed to an individual in that
litigation.
Our By-laws provide that we will
indemnify our directors and officers to the fullest extent not prohibited by
Nevada law; provided, however, that we may modify the extent of such
indemnification by individual contracts with our directors and officers; and,
provided, further, that we shall not be required to indemnify any director or
officer in connection with any proceeding (or part thereof) initiated by such
person unless:
|
1.
|
such indemnification is expressly
required to be made by law;
|
|
2.
|
the proceeding was authorized by
our Board of Directors;
|
|
3.
|
such indemnification is provided
by us, in our sole discretion, pursuant to the powers vested us
under Nevada law; or;
|
|
4.
|
such indemnification is required
to be made pursuant to the
bylaws.
|
Our By-laws provide that we will
advance to any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was a director or officer, of the Company, or is or was serving at the
request of the Company as a director or executive officer of another company,
partnership, joint venture, trust or other enterprise, prior to the final
disposition of the proceeding, promptly following request therefore, all
expenses incurred by any director or officer in connection with such proceeding
upon receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not entitled
to be indemnified under our bylaws or otherwise.
82
Our By-laws provide that no advance
shall be made by us to an officer of the company, except by reason of the fact
that such officer is or was a director of the company in which event this
paragraph shall not apply, in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, if a determination is reasonably and
promptly made: (a) by the board of directors by a majority vote of a quorum
consisting of directors who were not parties to the proceeding, or (b) if such
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, that
the facts known to the decision-making party at the time such determination is
made demonstrate clearly and convincingly that such person acted in bad faith or
in a manner that such person did not believe to be in or not opposed to the best
interests of the company.
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 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 us of expenses incurred or
paid by a director, officer or controlling person 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, we will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by us is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
Item
15. Recent Sales of Unregistered Securities.
On March 29, 2010, we consummated a
Share Exchange Agreement with Rongfu and 9 stockholders and warrantholders of
Rongfu (the “Rongfu Stockholders”) (the “Share Exchange Agreement”).
Pursuant to the Share Exchange Agreement, the Rongfu Stockholders transferred
100% of the outstanding shares of common stock and 100% of the warrants to
purchase shares of common stock of Rongfu held by them, in exchange for an
aggregate of 18,623,889 and warrants to purchase an aggregate of 666,666
shares of our Common Stock. The shares of our Common Stock and warrants to
purchase our Common Stock were issued in accordance with a safe harbor from the
registration requirements of the Securities Act under Regulation S thereunder
because they were issued to investors who were not U.S. Persons and the sale
occurred outside of the U.S. or were issued pursuant to an exemption from the
registration requirements of the Securities Act under Section 4(2) by virtue of
compliance with the provisions of Regulation D under the Securities Act because
all of the persons acquiring the securities were accredited investors and the
securities were not offered or sold by means of general advertising or other
general solicitation and a Form D pertaining to such transaction was filed with
the Commission.
On March 29, 2010 we consummated the
sale to 18 investors of an aggregate of (a) 2,768,721 shares of our Series A
Stock, (b) five year Series A Warrants to purchase an aggregate of 1,730,451
shares of our Common Stock for $3.47 per share and (c) five year Series B
Warrants to purchase an aggregate of 1,730,451 shares of our Common Stock for
$4.17 per share, for an aggregate purchase price of $7.7 million.
The shares of Series A Stock, Series A
Warrants and Series B Warrants were either issued in accordance with a safe
harbor from the registration requirements of the Securities Act under Regulation
S thereunder because they were purchased by investors who were not
U.S. Persons and the sale occurred outside of the U.S. or an exemption from the
registration requirements of the Securities Act under Section 4(2) by virtue of
compliance with the provisions of Regulation D under the Securities Act because
all of the investors were accredited investors, the securities were not offered
sold by means of general advertising or other general solicitation and a Form D
pertaining to such offering was filed with the Commission.
In March 2008 we issued an aggregate of
2,150,000 shares of common stock to approximately 40 persons, none of whom
was a U.S. Person in a transaction occurring outside of the U.S.. These shares
were issued pursuant to Regulation S of the Securities Act at a price of $0.02
per share, for total proceeds of $31,000.
83
Item
16.
|
Exhibits
and Financial Statement Schedules.
|
(a)
Exhibits.
The
exhibits to the registration statement are listed in the Exhibit Index to
this registration statement and are incorporated herein by
reference.
Item
17.
|
Undertakings.
|
The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i)
To include any prospectus
required by Section 10(a)(3) of the Securities Act of 1933;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective registration statement;
and
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement;
(2) That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering;
(4) 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 provisions described in this registration statement, 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.
(5) 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.
84
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Guangzhou, PRC on this
18th
day of January, 2011.
RONGFU
AQUACULTURE, INC.
|
||
By:
|
/s/ Kelvin Chan
|
|
Chief
Executive Officer (Principal Executive
Officer)
and Director
|
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
was signed by the following persons in the capacities and on the dates
indicated.
Name
and Title
|
Date
|
|
/s/ Kelvin Chan
|
January
18, 2011
|
|
Kelvin
Chan
|
||
Chief
Executive Officer and Director
|
||
(Principal
Executive Officer)
|
||
/s/ Chen Zhisheng
|
January
18, 2011
|
|
Chen
Zhisheng, Director
|
||
/s/
Keith Hor
|
||
Keith
Hor, Chief Financial Officer
(Principal
Financial and Accounting Officer)
|
January
18,
2011
|
85
Exhibit
Index
Number
|
Description
|
|
2.1
|
Share
Exchange Agreement by and among Granto, Inc., Rongfu Aquaculture, Inc.,
the Rongfu Stockholders and Janet Gargiulo, dated March 29, 2010.
Incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K
filed with the Commission on March 31, 2010 (the March 2010
8-K”).
|
|
3.1
|
Articles
of Incorporation of the Company. Incorporated by reference to Exhibit 3.1
to our Registration Statement on Form S-1 (File No. 333-150388)(the “2008
S-1”).
|
|
3.2
|
By-laws
of the Company. Incorporated by reference to Exhibit 3.2 to the 2008
S-1.
|
|
3.3
|
Certificate
of Designations, Preferences and Rights of Series A Preferred Stock of the
Company. Incorporated by reference to Exhibit 3.1 to the March
2010 8-K.
|
|
4.1
|
Series
A Preferred Stock Purchase Agreement between the Company and certain
investors, dated March 29, 2010. Incorporated by reference to Exhibit 4.1
to the March 2010 8-K.
|
|
4.2
|
Form
of Class A Warrant of the Company issued on March 29, 2010 pursuant to
Series A Preferred Stock Purchase Agreement. Incorporated by reference to
Exhibit 4.2 to the March 2010 8-K.
|
|
4.3
|
Form
of Class B Warrant of the Company issued on March 29, 2010 pursuant to
Series A Preferred Stock Purchase Agreement. Incorporated by reference to
Exhibit 4.3 to the March 2010 8-K.
|
|
4.4
|
Escrow
Agreement between the Company, certain officers of the Company and The
Crone Law Group, dated March 29, 2010. Incorporated by reference to
Exhibit 4.4 to the March 2010 8-K.
|
|
4.5
|
Form
of Class C Warrant issued on March 29, 2010 pursuant to Share Exchange
Agreement. Incorporated by reference to Exhibit 4.5 to the March 2010
8-K.
|
|
4.6
|
Form
of Class D Warrant issued on March 29, 2010 pursuant to Share Exchange
Agreement. Incorporated by reference to Exhibit 4.6 to the March 2010
8-K.
|
|
4.7
|
Specimen
of Common Stock certificate**
|
|
5.1
|
Opinion
of Guzov Ofsink, LLC.***
|
|
10.1
|
Form
of Call Option Agreement between Kelvin Chan and various call optionees,
dated as December 29, 2009 and Amendment No. 1 thereto dated March 29,
2010. Incorporated by reference to Exhibit 10.1 to the March 2010
8-K.
|
|
10.2
|
Memorandum
between Zhisheng Chen and Nanhai Ke Da Heng Sheng dated December 2009.
Incorporated by reference to Exhibit 10.2 to the March 2010
8-K.
|
|
10.3
|
Technological
Cooperation Agreement Regarding the Propogation of Fish Fry of Nile
Tilapia between Nanhai Ke Da Heng Sheng and Sifa Li dated December 18,
2009. Incorporated by reference to Exhibit 10.3 to the March 2010
8-K.
|
|
10.4
|
Entrusted
Management Agreement dated December 26, 2009 among Chen Zhisheng, Nanhai
Ke Da Heng Sheng and Guangzhou Flourishing. Incorporated by reference to
Exhibit 10.4 to the March 2010 8-K.
|
|
10.5
|
Exclusive
Option Agreement dated December 26, 2009 among Chen Zhisheng, Nanhai Ke Da
Heng Sheng and Guangzhou Flourishing. Incorporated by reference to Exhibit
10.5 to the March 2010 8-K.
|
|
10.6
|
Shareholder’s
Voting Proxy Agreement between Chen Zhisheng and Guangzhou Flourishing.
Incorporated by reference to Exhibit 10.6 to the March 2010
8-K.
|
|
10.7
|
Shares
Pledge Agreement between Chen Zhisheng, Nanhai Ke Da Heng Sheng and
Guangzhou Flourishing. Incorporated by reference to Exhibit 10.7 to the
March 2010 8-K.
|
|
10.8
|
Call
Option Agreement between Kelvin Chan and Chen Zhisheng dated as of
December 29, 2009 and Amendment No.1 thereto dated March 29,
2010.***
|
|
10.9
|
Call
Option Agreement between Kelvin Chan and Chen Pan Haicheng dated as of
December 29, 2009 and Amendment No.1 thereto dated March 29,
2010.***
|
|
10.10
|
Call
Option Agreement between Kelvin Chan and Zhao Ping dated as of December
29, 2009 and Amendment No.1 thereto dated March 29,
2010.***
|
86
10.11
|
Call
Option Agreement between Kelvin Chan and Zheng Songkui dated as of
December 29, 2009 and Amendment No.1 thereto dated March 29,
2010.***
|
|
10.12
|
Pledge
and Loan Agreement dated January 14, 2009 among Foshan Nanhai Ke Da Heng
Sheng Aquatic Co. Ltd., Foshan Nanhai Agricultural Credit Union-Danzao
Branch and Zheng Yan Chang.****
|
|
10.13
|
Pledge
and Loan Agreement dated January 13, 2009 among Foshan Nanhai Ke Da Heng
Sheng Aquatic Co. Ltd., Foshan Nanhai Agricultural Credit Union-Danzao
Branch and Zheng Yan Chang.****
|
|
10.14
|
Description
of oral contract between Ke Da Heng Sheng Fish Food Factory and the
Company’s PRC operating subsidiaries.****
|
|
15.1
|
Letter
from Acquavella, Chiarelli, Shuster, Berkower & Co., LLP re unaudited
interim financial information.****
|
|
16.1
|
Letter
of Maddox Ungar Silberstein, PLLC to the Commission dated April 15, 2010.
Incorporated by reference to Exhibit 16.1 to our Current Report on Form
8-K filed with the Commission on April 19, 2010.
|
|
21.1
|
List
of Subsidiaries**
|
|
23.1
|
Consent
of Acquavella, Chiarelli, Shuster, Berkower & Co., LLP
*
|
|
23.2
|
Consent
of Guzov Ofsink LLC (contained in Exhibit 5.1)***
|
|
23.3
|
Consent
of Global Law Office*
|
|
99.1
|
Opinion
of Global Law Office.*
|
*Filed
herewith
** Filed
on May 12, 2010 as part of the initial filing of this registration
statement.
***Filed
on August 13, 2010 as part of Amendment No.1 to this registration
statement.
****
Filed on October 6, 2010 as part of Amendment No.2 to this registration
statement.
87