Attached files
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EX-1.1 - China For-Gen Corp. | v208850_ex1-1.htm |
EX-23.1 - China For-Gen Corp. | v208850_ex23-1.htm |
As
filed with the Securities and Exchange Commission on January 24,
2011
|
Registration
No. 333-166868
|
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
AMENDMENT
NO. 7 TO
FORM
S-1/A
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
CHINA
FOR-GEN CORP.
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction of incorporation or organization)
800
(Primary
Standard Industrial Classification Code Number)
11-3840621
(IRS
Employer Identification No.)
Tengao
District, Haicheng City
Liaoning
Province, P.R.China 114000
+0412-2988160
( Address, including zip code, and
telephone number,
including area code, of
registrant’ s principal
executive offices )
Sherry
Li
c/o
China For-Gen Corp.
87
Dennis Street
Garden
City Park, NY 11040
(212)
240-0707
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
Copies to
:
|
Copies to
:
|
|
Barry
I. Grossman, Esq.
|
Mitchell
Nussbaum, Esq.
|
|
Adam
Mimeles, Esq.
|
Giovanni
Caruso, Esq.
|
|
Ellenoff
Grossman & Schole LLP
|
Loeb
& Loeb LLP
|
|
150
East 42 nd
Street
|
345
Park Avenue
|
|
New
York, NY 10017
|
New
York, NY 10154
|
|
Tel:
(212) 370-1300
|
Tel:
(212) 407-4159
|
|
Fax:
(212) 370-7889
|
Fax:
(212) 407-4990
|
Approximate date of commencement of
proposed sale to the public : As soon as practicable after the
Registration Statement has been 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. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
Indicate by check
mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated filer (Do not check if a smaller
reporting company) ¨
|
Smaller reporting company
x
|
CALCULATION OF REGISTRATION FEE
Title of each class of
securities to be registered
|
Amount to be
Registered(1)(4)
|
Proposed
maximum
offering
price per
share(1)
|
Proposed
maximum
aggregate
offering price
(1)
|
Amount of
registration
fee
|
||||||||||||
Common
stock, par value $0.001 per share
|
4,600,000
|
(2)
|
$
|
6.00
|
$
|
27,600,000
|
$
|
3,204.36
|
||||||||
Common
stock, par value $0.001 per share (3)
|
8,068,698
|
6.00
|
48,412,188
|
5,620.66
|
||||||||||||
Total
|
12,668,698
|
6.00
|
$
|
76,012,188
|
$
|
8,825.02
|
(5)
|
(1)
|
The registration fee for
securities to be offered by the Registrant is based on an estimate of the
Proposed Maximum Aggregate Offering Price of the securities, and such
estimate is solely for the purpose of calculating the registration fee
pursuant to Rule 457(o). Includes shares which the underwriter has
the option to purchase to cover
over-allotments.
|
(2)
|
Includes 600,000 shares of common
stock, which may be sold upon exercise of a 45-day option granted to the
Underwriter to cover over-allotments if
any.
|
(3)
|
Reflects shares of common stock
being registered for resale by the selling stockholders set forth
herein.
|
(4)
|
Pursuant to Rule 416, this
registration statement also covers such number of additional ordinary
shares to prevent dilution resulting from stock splits, stock dividends
and similar
transactions.
|
(5)
|
Previously
paid.
|
The
Registrant amends this registration statement on such date or dates as may be
necessary to delay its effective date until the Registrant shall file a further
amendment which specifically states that this registration statement shall
hereafter become effective in accordance with Section 8(a) of the Securities Act
of 1933, or until the registration statement shall become effective on such date
as the Securities and Exchange Commission, acting pursuant to Section 8(a),
may determine.
Explanatory
Note
This
Registration Statement contains two prospectuses, as set forth
below.
|
·
|
Public
Offering Prospectus
. A prospectus to be used for the public offering by the Registrant
of up to 4,000,000 shares of the Registrant’s common stock (in addition,
up to 600,000 shares of the Registrant’s common stock may be sold upon
exercise of the underwriters’ over-allotment option (the “Public Offering
Prospectus”) through the underwriter named on the cover page of the Public
Offering Prospectus.
|
|
·
|
Resale
Prospectus . A
prospectus to be used for the resale by the selling stockholders set forth
therein of an aggregate of 8,068,698 of the Registrant’s common stock, of
which 2,370,947 are currently issued and outstanding and 5,697,751 are
issuable upon (i) conversion of outstanding preferred stock and
convertible promissory notes and (ii) exercise of outstanding warrants
(the “Resale Prospectus”).
|
The
Resale Prospectus is substantively identical to the Public Offering Prospectus,
except for the following principal points:
|
·
|
they contain different outside
and inside front covers and back
covers;
|
|
·
|
they contain different offering
sections than in the Prospectus Summary section beginning on page 1 (page
SS-1);
|
|
·
|
they contain different Use of
Proceeds sections (page
SS-1);
|
|
·
|
a Selling Stockholders section is
included in the Resale Prospectus (page
SS-2);
|
|
·
|
references in the Public Offering
Prospectus to the Resale Prospectus will be deleted from the Resale
Prospectus;
|
|
·
|
the Underwriting section from the
Public Offering Prospectus on page 77 is deleted from the Resale
Prospectus and a Plan of Distribution is inserted in its place (page
SS-5); and
|
|
·
|
the Legal Matters section in the
Resale Prospectus on page SS-6 deletes the reference to counsel for the
underwriters.
|
The
Registrant has included in this Registration Statement a set of alternate pages
after the back cover page of the Public Offering Prospectus (the “Alternate
Pages”) to reflect the foregoing differences in the Resale Prospectus as
compared to the Public Offering Prospectus. The Public Offering Prospectus will
exclude the Alternate Pages and will be used for the public offering by the
Registrant. The Resale Prospectus will be substantively identical to the Public
Offering Prospectus except for the addition or substitution of the Alternate
Pages and will be used for the resale offering by the selling
stockholders.
2
The
information in this preliminary prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This preliminary prospectus is
not an offer to sell these securities and is not soliciting an offer to buy
these securities in any state where the offer or sale is not
permitted.
Preliminary
Prospectus
|
Subject
To Completion, Dated [ ],
2011
|
CHINA
FOR-GEN CORP.
4,000,000 SHARES OF COMMON STOCK
We are
offering 4,000,000 shares of common stock, $0.001 par value per
share. Prior to this offering, there has been no public market for our
securities. The public offering price of the shares was determined by
negotiation between us and the underwriters.
The
maximum public offering price of the common stock is expected to be not
less than $4 and not more than $6 per share. We intend to apply to
have our shares listed on the NYSE AMEX Stock Exchange concurrent with this
offering.
The
purchase of the securities involves a high degree of risk. See section
entitled “Risk Factors” beginning on page 8.
Per Share
|
Total
|
|||||||
Public
offering price
|
$
|
4.00
– 6.00*
|
$
|
16,000,000 – 24,000,000
|
||||
Underwriting
discounts and commissions
|
$
|
0.32
– 0.48
|
$
|
1,280,000
– 1,920,000
|
||||
Non-
accountable expense (1)
|
$
|
0.04
– 0.06
|
$
|
160,000
– 21,840,000
|
||||
Proceeds,
to China For-Gen Corp.
|
$
|
3.64
– 5.46
|
$
|
14,560,000
– 21,840,000
|
____________________________________
* The
range of the maximum offering price is based on bona fide estimate pursuant to
Item 501(b)(3) of Regulation S-K.
(1) The
non-accountable expense allowance of 1.0% of the gross proceeds of the offering
is not payable with respect to the shares sold upon exercise of the
underwriters’ over-allotment option.
The
underwriters have a 45-day option to purchase up to 600,000 additional
shares of common stock from us solely to cover over-allotments, if
any.
The
underwriters expect to deliver the shares to purchasers on or about [
], 2011.
Neither
the U.S. 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.
Maxim
Group LLC
The
date of this prospectus is [ ],
2011
3
TABLE
OF CONTENTS
Prospectus
Summary
|
6
|
The
Offering
|
9
|
Risk
Factors
|
12
|
Cautionary
Note Regarding Forward-Looking Statements and Other Information
Contained in this Prospectus
|
27
|
Use
of Proceeds
|
27
|
Dividend
Policy
|
28
|
Capitalization
|
29
|
Market
Price of and Dividends of Common Equity and Related Stockholder
Matters
|
30
|
Determination
of Offering Price
|
30
|
Dilution
|
31
|
Exchange
Rate Information
|
32
|
Selected
Consolidated Financial and Operating Data
|
33
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
34
|
Industry
Overview
|
43
|
Business
|
49
|
Facilities
|
51
|
Legal
Proceedings
|
56
|
Our
History and Corporate Structure
|
58
|
Directors
and Executive Officers
|
61
|
Executive
Compensation
|
64
|
Security
Ownership of Certain Beneficial Owners and Management
|
65
|
Certain
Relationships and Related Transactions
|
66
|
Description
of Our Securities
|
67
|
Shares
Eligible for Future Sale
|
69
|
Material
PRC Income Tax Considerations
|
70
|
Underwriting
|
72
|
Transfer
Agent and Registrar
|
76
|
Legal
Matters
|
76
|
Experts
|
76
|
Interests
of Named Experts and Counsel
|
76
|
Service
of Process and Enforcement of Judgments
|
76
|
Where
You Can Find More Information
|
77
|
Disclosure
of Commission Position on Indemnification for Securities Act
Liabilities
|
78
|
Index
to Financial Statements
|
F-1
|
4
ABOUT
THIS PROSPECTUS
You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with any information or to make any
representations about us, the securities or any matter discussed in this
prospectus, other than the information and representations contained in this
prospectus. 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.
The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of our common stock. Neither the delivery of this prospectus nor any
distribution of securities in accordance with this prospectus shall, under any
circumstances, imply that there has been no change in our affairs since the date
of this prospectus. This prospectus will be updated and updated prospectuses
made available for delivery to the extent required by the federal securities
laws.
5
PROSPECTUS
SUMMARY
This
summary highlights selected information appearing elsewhere in this prospectus.
While this summary highlights what we consider to be the most important
information about us, you should carefully read this prospectus and the
registration statement of which this prospectus is a part in their entirety
before investing in our securities, especially the risks of investing in our
securities, which we discuss later in the section of this prospectus
entitled “Risk Factors,” and our consolidated financial statements and
related notes beginning on page F-1.
Unless
otherwise specified or required by context, references to “we,” “our,” “us” and
the “Company” refer collectively to China For-Gen Corp., a Delaware corporation
(“China For-Gen”), and the subsidiaries of China For-Gen Corp., which are (i)
Liaoning Shengsheng Biotechnological Co., Ltd., a PRC company formerly known as
Anshan Xinfang Gardening Limited Company (“Liaoning Shengsheng” or the “WFOE”),
which is wholly owned by China For-Gen, and (ii) Karamai Pusheng Forest and Wood
Industry, LLC, a PRC limited liability company (“Pusheng”), which is wholly
owned by Liaoning Shengsheng Biotechnological Co., Ltd. For convenience, certain
amounts in Chinese Renminbi (“RMB”) have been converted to United States dollars
at an exchange rate in effect at the date of the related financial
statements. Assets and liabilities are translated at the exchange rate as
of balance sheet date. Income and expenditures are translated at the average
exchange rate of the period.
This
prospectus assumes the over-allotment has not been exercised, unless otherwise
indicated. Share numbers included herein reflect the 1:1.5 reverse stock
split of all of the Company’s outstanding common stock, which occurred on May
12, 2010, unless otherwise indicated.
Our
Company
China
For-Gen Corp. is a Delaware corporation formed on February 26, 2008 solely
for the purpose of acquiring all of the equity interests of Liaoning Shengsheng,
a company incorporated in the People’s Republic of China (“China” or the “PRC”)
on November 24, 2000. Since its inception, Liaoning Shengsheng has been an
agricultural and forestry company engaged in the breeding, cloning and sale of
plant seedlings and specialized transgenic plant seedlings, and the research and
development of seedling breeding technologies.
The
Company’s primary product is fast growing poplar saplings, which are grown in
the far northwest regions of China, in Xinjiang province near the city of
Karamai. The Company grows two distinct types of poplar saplings:
Shengsheng No. 1 and Shengsheng No. 2. Each product is separated into 5
different subcategories (1-5 years old trees) according to their age.
These varieties of poplar trees have been genetically modified for faster
growth, pest resistance, low water requirements and high fiber strength.
The poplar seedlings mature in 3-5 years instead of the normal maturation time
of 13-15 years. The saplings are sold primarily to distributors who then
resell our products to independent third parties for various uses, including
re-forestation in western China. As of December 31, 2009, our plantations
under management had an area of approximately 8,900 mu in Xinjiang
Province. Internally generated cash flow and the potential capital from
this offering are expected to finance the Company’s operations and future
business plans, all as set forth herein . For its 2009 fiscal year, the
Company’s two major clients were Karamai Teng Lin Farming Co., Ltd. and Liaoning
Dongran Landscape Engineering Co., Ltd. (each of which are independent third
party distributors), contributing 53.37% and 29.94%, respectively, of the
Company’s 2009 revenues. Through the first three quarters of the Company’s
fiscal 2010 year, these clients accounted for 62% and 30%, respectively, of the
Company’s revenues.
The
Company is growing in the forestry/lumber industry. The majority of revenues
currently come from the sale of poplar saplings. For the calendar year
ended 2009 the Company generated $23,615,957 in revenue and $12,795,675 in net
income versus 2008 revenue of $22,146,254 and net income of $6,688,771.
For the nine months ended September 30, 2010, the Company generated revenues of
$16,288,827 and net income of $9,833,662 versus $12,922,412 and $4,670,646,
respectively, during the first nine months of 2009.
Our
Industry
Due
to increasing demand, China can no longer rely on importing timber to meet its
needs. The “2009
National Forestry Economy Performance” from the State Forestry Administration
(SFA) of the PRC, estimated the value of China’s forestry industry output in
2009 amounted to RMB 1.58 trillion (approximately $2.3 billion), up
approximately 10% from 2008, but grew at a slower pace than in prior
years. According to Zhang Jianlong, deputy administrator of the SFA,
China’s total timber consumption will increase to between 457 and 477
million m 3 by
2020. Additionally, Mr. Zhang of the SFA believes it is urgent to
promote domestic timber supply, allocate new land areas for wood and timber
production and improve forest management.
According
to the latest national forest inventory released by the SFA of the PRC on
January 28, 2010, China’s total forest cover is 195 million hectares, accounting
for 20% of China’s total land area, with 13.7 billion m 3 standing
wood stock volume. In recent years, China has been aggressive in its
reforestation efforts and conversion of agricultural land to forests through the
implementation of its National Forest Protection Program.
6
Domestic
consumption of timber and wood products is expected to grow between 2010 and
2012 in line with social and economic development. The National Plan for
Conservation and Utilization of Forest Land projects China’s forestry area will
reach 223 million hectares and standing wood stock will reach 15.8 billion m
3 by
2020.
Competitive
Strengths
While the
Chinese forestry industry is highly competitive, we believe that the following
strengths give us a competitive edge:
|
·
|
our proprietary technology allows
us to breed faster growing, disease resistant
trees;
|
|
·
|
our ability to select, culture
and grow our nursery stock and to scale these processes as our production
capacity increases ;
|
|
·
|
we have strategically located
production bases;
|
|
·
|
our expansion strategy seeks to
create a vertically integrated operator in our industry , handling all
aspects of forest, lumber and wood production, from seedling production
and plantation, through growth management and harvesting, to lumber
processing and production and sale of MDF and other wood products ;
and
|
|
·
|
we have an experienced management
team.
|
Strategies
Our goal
is to become a vertically integrated operator in the lumber and wood products
industry. To achieve our goals, we intend to:
|
·
|
expand existing seedling
operations and plantations;
|
|
·
|
develop new
plantations;
|
|
·
|
enter the lumber processing and
manufacturing market through potential acquisitions;
and
|
|
·
|
enter into manufacturing and
production of medium density fiberboard
(MDF);
|
Funds
from this offering should accelerate our business strategy. We further
anticipate that internally generated cash flow over the next 18 months will help
complement and finance our growth plans. A more detailed description of
our business and strategy is located in the “Description of Business”
section.
Risks
and Challenges
Our
business is subject to numerous risks, as more fully described in the section
entitled “Risk Factors” immediately following this prospectus summary.
These include:
|
·
|
our dependence on poplar saplings
and trees;
|
|
·
|
extreme weather conditions,
natural disasters and potential impacts on our
plantations;
|
|
·
|
political issues associated with
doing business inside the
PRC;
|
|
·
|
inflationary pressures and
potential adverse impact on our prices inside the PRC;
and
|
|
·
|
our ability to comply with U.S.
public reporting requirements, including maintenance of an effective
system of internal controls over financial
reporting.
|
Structure
In
connection with the acquisition of the WFOE, certain officers and directors of
Lioaning Shengsheng (the “Call Option Stockholders”) entered into a call option
agreement (the “Call Option Agreement”) with Ms. Sherry Li (“Ms. Li”), then the
sole officer, director and shareholder of China For-Gen, wherein Ms. Li agreed
to transfer 12,000,000 shares of Company common stock to the Call Option
Stockholders after our initial public offering. The call option may be
exercised by the Call Option Stockholders for nominal consideration of $0.001
per share (the “Call Option”). The Call Option Agreement provides that Ms.
Li may not dispose of any China For-Gen shares owned by her without the prior
written consent of the Call Option Stockholders. The Call Option Agreement
was amended and restated in its entirety on May 12, 2010 to comply with PRC
laws, including, without limitation, laws with respect to acquisitions by
foreign entities and ownership by PRC citizens in a foreign enterprise (the
“Amended Call Option Agreement”). The percentage ownership of the Company
to be granted to the Call Option Stockholders remains unchanged. On
December 31, 2010, the Call Option Stockholders exercised their rights under the
Amended Call Option Agreement with respect to 50% of the shares an d they have
indicated that they intend to exercise their rights with respect to the
remaining 50% on or by December 31, 2011. Upon exercise of the Call
Option, neither the ownership structure of the Company nor the number of shares
of Company common stock outstanding changed or will change from the current
structure as the shares underlying the Call Option are currently issued and
outstanding and beneficially owned by the Call Option Stockholders. Please
see the section titled “ Security Ownership of Certa
in Beneficial Owners and
Management ” on page 59 for the percentage ownership of Company common
stock owned by the Call Option Stockholders.
7
Our post
initial public offering organization structure is summarized below:
8
Company
Information
Our
executive offices are located at Tengao District, Haicheng City, Liaoning
Province, PRC 114000 and our telephone number is 0412-2988160. The website of
our primary operating subsidiary is http://www.biosheng.com. Information
contained on or accessed through our website is not intended to constitute and
shall not be deemed to constitute part of this prospectus.
THE
OFFERING
Securities
offered:
|
4,000,000
shares of common stock, with an over-allotment option for an additional
600,000 shares, plus an additional 8,068,698 shares to be registered by
the selling stockholders listed herein.
|
|
Common
stock outstanding before the offering:
|
14,270,948
shares
|
|
Common
stock to be outstanding after the offering:
|
18,870,948
shares (1)
|
|
Offering
price:
|
The
maximum public offering price of the common stock is expected to be
not less than $4 and not more than $6 per
share.
|
|
Use
of proceeds:
|
We
intend to use the net proceeds from the offering substantially as
follows:
|
|
·
approximately $3.18 million to pay the remaining unpaid purchase price to
the original Liaoning Shengsheng shareholders (the “Shengsheng
Shareholders”) who shall immediately transfer such amount to Liaoning
Shengsheng for working capital purposes, which may include acquisitions in
the ordinary course of business; and
|
||
·
approximately $5.03 million to expand and construct our Karamai MDF
production facilities; and
|
||
·
approximately $3-$5 million to pay the balance for the acquisition of
Beijisong, with the final price to be determined by an appraisal of
Beijisong to be conducted in early 2011 (as set forth herein). This
estimate is based in part on our estimation that (i) Beijisong owns net
assets worth not more than $6.6 million, (ii) we are only purchasing 80%
of Beijisong, (iii) we have already paid $877,693 for such acquisition and
(iv) we may also purchase additional raw materials owned by Beijisong;
and
|
||
·
approximately $2.64 million to pay for the acquisition of Yuying (as set
forth herein); and
|
||
·
approximately $1.5 million to be used as working capital for Beijisong and
Yuying after their respective acquisitions; and
|
||
·
approximately $2.0 million for transaction expenses related to this
offering; and
|
||
·
approximately $1.0 million for an escrow account to fund the initial
expenses of being a public company; and
|
||
·
the remaining balance to expand our poplar seedling business and for
working capital and general corporate purposes.
|
||
The
amount and timing of our actual expenditures will depend on numerous
factors, including the status of our acquisition and development efforts,
sales and marketing activities, and the amount of cash generated or used
by our operations. We may find it necessary or advisable to use
portions of the proceeds for other purposes, and we will have broad
discretion in the application of the net proceeds. Additionally, we may
choose to expand our current business through acquisition of complimentary
businesses using cash or shares, as set forth herein. However, we
have not entered into any negotiations, agreements or commitments with
respect to any such acquisitions at this time. See the section of this
prospectus entitled “Use of Proceeds” for more information on
the use of proceeds.
|
||
The
$1,000,000 escrow account established to fund the initial expenses of
being a public company will be controlled by the Company and funds shall
be disbursed as and when needed for, among other things, legal and
accounting fees, insurance and directors’
compensation.
|
9
Risk
factors:
|
Investing
in our securities involves a high degree of risk. As an investor you
should be able to bear a complete loss of your investment. You should
carefully consider the information set forth in the section of this
prospectus entitled “Risk Factors.”
|
|
Listing
|
We
intend to apply to have our common stock listed on the NYSE AMEX under the
symbol CFG.
|
(1)
The number of shares of common stock to be outstanding immediately after this
offering is based on 14,270,948 shares of common stock outstanding as of January
24, 2011 and includes (i) 600,000 shares, which may be sold upon exercise of a
45-day option granted to the underwrit er to cover over-allotments and (ii)
416,667 shares issued in January, 2010 upon cashless exercise of the warrants
issued in our May 30, 2008 private placement, but excludes:
|
·
|
444,119 shares of our common
stock issuable upon conversion of Series A Convertible Preferred Stock
issued May 30, 2008;
|
|
·
|
5,186,965 shares of common
stock issuable upon the conversion of those certain convertible
promissory notes and warrants issued pursuant to the Note Purchase
Agreement between us and certain investors dated February 12, 2010 and
August 10, 2010; and
|
|
·
|
66,667 shares of common stock
issuable upon the conversion of warrant issued to an
investor.
|
10
SUMMARY
CONSOLIDATED FINANCIAL AND OPERATING DATA
The
following table is derived from and summarizes the relevant financial data for
our business and should be read in conjunction with our audited financial
statements and the related notes, which are included elsewhere in this
prospectus and which account for the 1:1.5 reverse stock split of all of the
Company’s outstanding common stock, which occurred on May 12, 2010.
Year ended
|
Year ended
|
Nine months
Ended
|
Nine months
Ended
|
|||||||||||||
December 31,
|
December 31,
|
September 30,
|
September 30,
|
|||||||||||||
2009
|
2008
|
2010
|
2009
|
|||||||||||||
Sales
revenues
|
$
|
23,615,957
|
$
|
22,146,254
|
$
|
16,288,827
|
$
|
12,922,412
|
||||||||
Cost
of goods sold
|
$
|
6,351,073
|
$
|
10,428,042
|
$
|
3,485,125
|
$
|
5,201,809
|
||||||||
Gross
profit
|
$
|
17,264,884
|
$
|
11,718,212
|
$
|
12,803,702
|
$
|
7,720,603
|
||||||||
Operating
expenses
|
||||||||||||||||
Selling
expense
|
$
|
3,561,550
|
$
|
4,206,849
|
$
|
1,729,768
|
$
|
2,562,828
|
||||||||
General
and administrative expenses
|
$
|
912,870
|
$
|
830,813
|
$
|
1,019,482
|
$
|
491,064
|
||||||||
Total
operating expenses
|
$
|
4,474,020
|
$
|
5,037,662
|
$
|
2,749,250
|
$
|
3,053,892
|
||||||||
Net
operating income
|
$
|
12,790,464
|
$
|
6,680,550
|
$
|
10,054,452
|
$
|
4,666,711
|
||||||||
Other
income (expense)
|
||||||||||||||||
Interest
income
|
$
|
5,211
|
$
|
8,221
|
$
|
7,793
|
$
|
4,180
|
||||||||
Gain
on change of fair value of derivative liabilities
|
$
|
149,644
|
-
|
|||||||||||||
Interest
expense
|
$
|
(376,623
|
)
|
-
|
||||||||||||
Other
expense
|
$
|
(1,514
|
)
|
(245
|
)
|
|||||||||||
Total
other income (expense)
|
$
|
5,211
|
$
|
8,221
|
$
|
(220,790
|
)
|
$
|
3,935
|
|||||||
Net
income before taxes
|
$
|
12,796,075
|
$
|
6,688,771
|
$
|
9,833,662
|
$
|
4,670,646
|
||||||||
Taxes
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||
Net
income
|
$
|
12,795,675
|
$
|
6,688,771
|
$
|
9,833,662
|
$
|
4,670,646
|
||||||||
Foreign
Currency Translation Adjustment
|
$
|
34,412
|
$
|
1,138,567
|
$
|
843,976
|
$
|
(3,026
|
)
|
|||||||
Comprehensive
Income
|
$
|
12,830,087
|
$
|
7,827,338
|
$
|
10,677,638
|
$
|
4,667,620
|
Balance Sheet Data (at end of Period)
|
December 31
|
September 30,
|
||||||||||
2009
|
2008
|
2010
|
||||||||||
Cash
|
$
|
843,358
|
$
|
612,971
|
$
|
8,689,839
|
||||||
Total
Current Assets
|
$
|
28,258,086
|
$
|
21,552,444
|
$
|
34,459,079
|
||||||
Total
Assets
|
$
|
30,981,287
|
$
|
24,529,932
|
$
|
40,293,467
|
||||||
Total
Liabilities
|
$
|
1,556,016
|
$
|
1,796,182
|
$
|
4,277,596
|
||||||
Total
Stockholder's Equity
|
$
|
29,424,671
|
$
|
22,733,750
|
$
|
36,015,871
|
||||||
Total
Liabilities & Shareholder's Equity
|
$
|
30,981,287
|
$
|
24,529,932
|
$
|
40,293,467
|
11
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information contained
in this prospectus before deciding to invest in our common stock. Our business,
financial condition or results of operations could be materially adversely
affected by any of these risks. The trading price of our securities could
decline due to any of these risks, and you may lose all or part of your
investment.
Risks
Associated With Our Business
Our
limited operating history may not serve as an adequate basis to judge our future
prospects and results of operations.
We have
only limited audited financial results on which you can evaluate us and our
operations. We have operated our business in our current corporate
structure only since April 2000 and are subject to, and may be
unable to address, the risks typically encountered by companies operating in a
rapidly evolving marketplace, including those risks relating to:
|
·
|
the failure to develop brand name
recognition and reputation;
|
|
·
|
the failure to achieve market
acceptance of our products;
|
|
·
|
an inability to grow and adapt
our business and technology to evolving consumer
demand.
|
If we are
unable to address any or all of these or related risks, our business and results
of operations may be materially and adversely affected.
Our operating
results may fluctuate, which makes our results difficult to predict and could
cause our results to fall short of expectations .
Our
operating results may fluctuate as a result of a number of factors, many outside
of our control. As a result, comparing our operating results on a
period-to-period basis may not be meaningful, and you should not rely on our
past results as an indication of our future performance. Our quarterly,
year-to-date and annual expenses as a percentage of our revenues may differ
significantly from our historical or projected rates. Because our business
is changing and evolving, our historical operating results may not be useful to
you in predicting our future operating results.
Our
operating results in future quarters may fall below expectations. Any of these
events could cause our stock price to fall. Each of the risk factors listed
in this prospectus, as well as the following factors, may affect
our operating results:
|
·
|
our ability to continue to
develop fast growing poplar
saplings;
|
|
·
|
the results of the implementation
of our intended business
plan;
|
|
·
|
the quality of our
products;
|
|
·
|
our ability to generate
revenue;
|
|
·
|
the amount and timing of
operating costs and capital expenditures related to the maintenance and
expansion of our businesses, operations and
infrastructure;
|
|
·
|
our focus on long-term goals over
short-term results; and
|
|
·
|
our ability to keep our
facilities operational at a reasonable
cost.
|
We
are dependent on a single product for substantially all of our
revenues.
Our
revenues are substantially dependent on our fast growing poplar saplings, which
account for 99% of our business revenue. These trees are grown in the far
northwest regions of China, in Xinjiang province near the city of Karamai and we
grow two distinct types of poplar saplings: Shengsheng No. 1 and Shengsheng No.
2. No assurances can be given that customers and potential customers will
continue to seek our genetically modified poplar saplings. For example,
other products may be introduced into the marketplace which our customers prefer
or there may be other reasons, many of which are expected to be beyond our
control, for a switch away from our products. In the event sales of our
saplings decrease, our revenue, results of operations and future growth
prospects can be expected to be materially harmed. Accordingly, unless and
until we diversify and expand our product offerings, our future success will
significantly depend upon our genetically modified poplar saplings.
12
Because
of the capital-intensive nature of our business, we may have to incur additional
indebtedness or issue new equity securities, and if we are not able to obtain
additional capital our ability to operate or expand our business may be impaired
and our results of operations could be adversely affected.
We
require significant levels of capital to acquire additional forest area, to
finance the development of our facilities and for the construction and
acquisition of new facilities, and we therefore expect we will need additional
capital, over and above what we raise in this offering, to fund our future
growth. If cash from available sources is insufficient or unavailable due
to restrictive credit markets, or if cash is used for unanticipated needs, we
may require additional capital sooner than anticipated. Our ability to obtain
additional capital on acceptable terms or at all is subject to a variety of
uncertainties, including:
|
·
|
investors’ perceptions of, and
demand for, companies in the Chinese timber
industry;
|
|
·
|
investors’ perceptions of, and
demand for, companies operating in
China;
|
|
·
|
conditions of the U.S. and other
capital markets in which we may seek to raise
funds;
|
|
·
|
our future results of operations,
financial condition and cash
flows;
|
|
·
|
governmental regulation of
foreign investment in China;
|
|
·
|
economic, political and other
conditions in the United States, China, and other countries;
and
|
|
·
|
governmental policies relating to
foreign currency borrowings.
|
|
·
|
In the event we are required or
choose to raise additional funds, we may be unable to do so on favorable
terms or at all.
|
We may be
required to pursue sources of additional capital through various means,
including joint venture projects and debt or equity financings. There is
no assurance we will be able to secure suitable financing in a timely fashion or
at all. In addition, there is no assurance we will be able to obtain the
capital we require by any other means. Future financings through equity
investments are likely to be dilutive to our existing stockholders. Also,
the terms of securities we may issue in future capital transactions may be more
favorable for our new investors. Newly issued securities may include
preferences, superior voting rights, the issuance of warrants or other
derivative securities, and the issuances of incentive awards under equity
employee incentive plans, which may have additional dilutive effects.
Further, we may incur substantial costs in pursuing future capital and/or
financing, including investment banking fees, legal fees, accounting fees,
printing and distribution expenses and other costs. We may also be
required to recognize non-cash expenses in connection with certain securities we
may issue, such as convertible promissory notes and warrants, which will
adversely impact our financial condition.
If we
cannot raise additional funds on favorable terms or at all, we may not be able
to carry out all or parts of our strategy to maintain our growth and
competitiveness or to fund our operations. If the amount of capital we are
able to raise from financing activities, together with our revenues from
operations, is not sufficient to satisfy our capital needs, even to the extent
that we reduce our operations accordingly, we may be required to cease
operations.
Our
revenues are highly dependent on a limited number of customers and the loss of
any one of our major customers could materially and adversely affect our growth
and our revenues.
During
the years ended December 31, 2009 and 2008, our two largest customers
collectively accounted for 87% and 69%, respectively, of our accounts receivable
and 81% and 94% of total sales, respectively. As a result of our
reliance on a limited number of customers, we may face pricing and other
competitive pressures which may have a material adverse effect on our growth and
our revenues. We do not have an exclusivity arrangement with any of our
customers. In addition, there are a number of factors, other than our
performance, that could cause the loss of a customer or a substantial reduction
in revenue from any single customer and that may not be predictable. For
example, the government could determine not to make utilization of forestry
resources a high priority or may reduce the sale and license of forestry
resources to private businesses. The loss of any one of our major
customers can be expected to result in a decrease in our sales volume and could
materially adversely affect our growth and our revenues. Moreover, the
loss of any one of our major customers could require us to layoff employees,
which in turn could make it more difficult for us to attract and retain
professionals in the future, which could further materially adversely affect our
growth and our revenues. If our customers seek to negotiate their
agreements on terms less favorable to us and we accept such unfavorable terms,
such unfavorable terms may have a material adverse effect on our business,
financial condition and results of operations. Accordingly, unless and
until we diversify and expand our customer base, our future success will
significantly depend upon the timing and volume of business from our largest
customers.
13
We
do not have any current sales contracts with our customers.
All of
our sales contracts are seasonal in nature and are generally valid for less than
nine months. We customarily execute contracts in the late summer or early
fall. Such contracts typically require performance by all parties not later than
May, at which time the contracts terminate. Accordingly, as of the
date hereof, we do not have sales contracts with any of our customers, and there
is no assurance that our customers will enter into new agreements with us in the
future. Failure to enter into any such contracts would significantly
reduce our revenue.
We
may not be able to attract and retain a sufficient number of clients to maintain
or expand our business.
Our
business depends on our ability to attract and retain clients, and we cannot
assure you that our marketing efforts will lead to more companies purchasing our
genetically modified saplings. In the event we are successful in acquiring
additional forest area, in developing our timber processing operations or in our
manufacturing of MDF, we will need to find substantial sources of revenue for
each of these business operations as well. There are numerous factors that
could lead to a decline in business or a failure to obtain clients for our
expanded operations, including general economic conditions, market maturity or
saturation, a decline in our ability to deliver quality products at a
competitive price, direct and indirect competition and a decline in the demand
for timber and manufactured wood products. Any decrease in our client base
or any failure to attract clients to our new businesses may adversely impact our
operating margins and future growth prospects.
If
we do not continue to develop new products or if our products do not continue to
appeal to the market, we may not remain competitive, and our revenues and
operating results could suffer.
The
genetically modified saplings that we offer are subject to changing customer
demands. Our future operational and financial performance depends on our ability
to develop and market new services and products and to enhance our existing
services and products, each on a timely basis to respond to new and evolving
customer demands, to achieve market acceptance and keep pace with new
developments. We may be unable to develop, introduce on a timely basis (or
at all) or market any new or enhanced services or products, and we cannot assure
you that any new or enhanced services or products will appeal to the
market. Our failure to develop new services and products and to enhance
our existing services and products or the failure of our services and products
to continue to appeal to the market could have an adverse impact on our
business, financial condition, results of operations and future operating
prospects.
We
may be unable to make acquisitions or enter into joint ventures, which could
impair our growth prospects, and we may be unable integrate, operate or realize
the anticipated benefits of such businesses.
As part
of our growth strategy, we intend to pursue selected acquisitions or joint
ventures. We cannot assure you we will be able to effect these transactions on
commercially reasonable terms, or at all. Any future acquisitions or joint
ventures may require access to additional capital, and we cannot assure you we
will have access to such capital on commercially reasonable terms, or at all.
Even if we enter into these transactions, we may not realize the benefits we
anticipate or we may experience difficulties in integrating any acquired
companies and products into our existing business; attrition of key personnel
from acquired businesses; significant charges or expenses; higher costs of
integration than we anticipate; or unforeseen operating difficulties that
require significant financial and managerial resources that would otherwise be
available for the ongoing development or expansion of our existing
operations.
Consummating
these transactions could also result in the incurrence of additional debt and
related interest expense, as well as unforeseen contingent liabilities, all of
which could have a material adverse effect on our business, financial condition
or results of operations. We may also issue additional equity in connection with
these transactions, which would dilute our existing stockholders.
We
may not obtain the government approvals necessary to build our planned
manufacturing facility in Karamai, which could impair our future growth
prospects.
Karamai,
China is located in Xinjiang Province. Local lumber supply is imported
from other provinces and countries and the resulting transportation costs makes
the final product very expensive. In order to reduce this cost, the
Karamai city government established a new fast-growing forest base of 100,000 mu
(one mu is equal to 1/6 of one acre) for industrial use located in Xinjiang
province. On November 1, 2005, the Karamai Developing Planning Commission
approved Pusheng to establish an MDF facility capable of producing 80,000 cubic
meters of MDF using poplar and other trees provided from this fast-growing
forest base. However, this government approval to build the plant has
expired. While we believe Pusheng will receive the proper government
approvals and permits necessary to build the facility at such time as we are
ready to do so, no assurances thereof can be given. In the event we are
unable to obtain the necessary government approvals, our expansion plans may be
harmed and accordingly, our future growth prospects may be more limited
than if we were to receive such approval.
14
We
face competition from other research and development companies and timber
processing companies which could erode our market share, brand recognition and
profitability.
We face
formidable competition in every aspect of our business, and particularly from
other timber processors and wood products manufacturers. Our competitors
may be better capitalized, have more experience and have more established or
deeper relationships with relevant government authorities, vendors, suppliers,
distributors or customers than us. Our competitors may make acquisitions
or invest more aggressively in marketing or product development. We cannot
assure you our competitors will not attempt to copy our business model, or
portions thereof, and that this will not erode our market share and brand
recognition, and impair our growth rate and profitability. If our
competitors are able to provide similar or better services and products than
ours, we could experience a significant decline in revenue. Any such
decline could negatively affect our profitability and future growth prospects.
Third
parties may infringe on our brand and other intellectual property rights, and we
may be unable to protect ourselves against such infringement for competitive and
legal reasons, any of which could have a material adverse impact on our
business.
We do not
currently hold any registered trademarks or patents for our products, names or
symbols. Moreover, intellectual property rights and related laws in China are
still developing, and there are uncertainties involved in the protection and the
enforcement of such rights. There is a risk that third parties may
infringe on, misappropriate or misuse our brand and other intellectual property
rights. If we are unable to protect or enforce our intellectual property
rights, the value of our brand, services and products could be diminished and
our business may suffer. Our precautions may not prevent misappropriation
of our intellectual property. Any legal action that we may bring to protect our
brand and other intellectual property may not achieve the desired results, may
be very expensive and could divert management’s attention from other business
concerns.
Our
failure to protect our intellectual property rights under applicable law could
lead to the loss of a competitive advantage that could not be compensated by our
damages award.
We
may be sued by third parties who claim that our products, and formulations,
methods of manufacture or methods of use infringe on their intellectual property
rights.
We may be
exposed to future litigation by third parties based on claims that our
technologies, processes, formulations, methods or products infringe the
intellectual property rights of others or that we have misappropriated the trade
secrets of others. Any litigation or claims against us, whether or not
valid, would result in substantial costs, could place a significant strain on
our financial and human resources and could harm our reputation. Such a
situation may force us to do one or more of the following:
|
·
|
incur significant costs in legal
expenses for defending against an intellectual property infringement
suit;
|
|
·
|
cease selling, making, importing,
incorporating or using one or more or all of our technologies and/or
formulations or products that incorporate the challenged intellectual
property, which would adversely affect our
revenue;
|
|
·
|
obtain a license from the holder
of the infringed intellectual property right, which license may be costly
or may not be available on reasonable terms, if at all;
or
|
|
·
|
redesign our formulations or
products, which would be costly and
time-consuming.
|
Moreover,
the possibility exists that a patent could be issued that would cover one or
more of our products, requiring us to defend a patent infringement suit or
necessitating a patent validity challenge that would be costly, time consuming
and possibly unsuccessful. If a lawsuit were to be filed against us for patent
infringement, we would incur significant legal costs to defend
ourselves.
If
we fail to effectively manage our anticipated growth, our business and operating
results could be adversely effected.
We intend
to pursue a strategy of growth and expansion that is expected to place strain on
our management personnel, systems and resources. To accommodate our
intended growth, we anticipate that we will need to implement a variety of new
and upgraded research and development, manufacturing and processing and other
operational facilities, as well as financial systems, procedures and
controls and the improvement of our accounting and other internal management
systems, all of which require substantial management efforts and financial
resources. We will also need to continue to expand, train, manage and
motivate our workforce, and develop and manage our relationships with our
existing and target client base. All of these endeavors will require
substantial management effort and skills, and the incurrence of additional
expenditures. We cannot assure you we will be able to efficiently or
effectively implement our growth strategies and manage the growth of our
operations, and any failure to do so may limit our future growth and hamper our
business strategy.
We
depend on key personnel and our business may be severely disrupted if we lose
the services of our key executives and employees.
Our
future prospects are heavily dependent upon the continued service of our key
executives, particularly Mr. Baoquan Wang, our President and Chairman, and a
major shareholder of our company. We rely on his expertise in our business
operations, and on the personal relationships he has with the relevant
regulatory authorities, customers and suppliers. On January 1, 2010
we renewed employment agreements with our key officers through December 31,
2012, but we have not entered into non-competition or non-solicitation
agreements with our officers. If one or more of our key executives and employees
are unable or unwilling to continue in their present positions, we may not be
able to replace them easily and our business may be severely disrupted. In
addition, if any of our key executives or employees joins a competitor or forms
a competing company, we may lose customers and suppliers and incur additional
expenses to recruit and train personnel. Further, we do not maintain key-man
life insurance for any of our key executives.
15
We
rely on highly skilled personnel and if we are unable to retain or motivate key
personnel or hire qualified personnel, we may not be able to grow
effectively.
Our
performance largely depends on the talents and efforts of highly skilled
individuals. Our continued ability to compete effectively depends on our
ability to attract, retain and motivate our existing personnel. The market
for highly skilled personnel is highly competitive as a result of the limited
availability of such personnel. The inability to hire or retain such qualified
personnel may hinder our ability to implement our business strategy and may harm
our business.
We
rely on third party service or product providers and research partners and the
failure of these third parties to deliver high level of service and support
required in our business or the loss of a relationship with them will adversely
impact our business and future operating prospects.
Our
ability to increase sales, retain current and future memberships and strengthen
our brand will depend in part upon our relationships with third parties,
including the various government agencies that purchase our services. The
termination of these relationships could lead to the loss of a competitive
advantage or even the loss of customers and revenue. Moreover, if such
third parties are unable to satisfy their commitments to us, our business would
also be adversely affected. Additionally, due to our association with such
third parties, poor performance by our strategic partners outside of their
relationship with us, a decline in the quality of the products supplied by them
or deterioration of their reputation or other negative publicity about them
could adversely impact our reputation and business performance.
Because
we may not be able to obtain business insurance in the PRC, we may not be
protected from risks that are customarily covered by insurance in the United
States.
Business
insurance is not readily available in the PRC and we may suffer a loss of a type
which would normally be covered by insurance in the United States, such as
business interruption insurance and third party liability insurance to cover
claims related to personal injury, or property damage arising from
accidents during our operations. We would incur significant expenses in both
defending any action and in paying any claims that result from a settlement or
judgment. We have not obtained fire or casualty insurance, and there is no
insurance coverage for our equipment, furniture and buildings in China.
Any losses incurred by us will have to be borne by us without any assistance,
and we may not have sufficient capital to cover material damage to, or the loss
of, our facility due to fire, severe weather, flood or other cause, and such
damage or loss would have a material adverse effect on our financial condition,
business and prospects.
We
could be subject to claims related to health or safety risks.
Our
timber harvesting, processing and manufacturing business, if and when entered
into, may pose potential health or safety risks to our employees and there is a
risk that claims will be asserted against us for injury or death. Personal
injury claims and lawsuits can result in significant legal defense costs,
settlement amounts and awards, and could have an adverse effect on our business,
financial condition and result of operations or cash flow. In addition to
the risks of liability exposure and increased costs of defense, claims may
produce publicity that could hurt our reputation and business.
If we fail to
establish and maintain an effective system of internal controls, we may not be
able to report our financial results accurately or to prevent fraud. Any
inability to report and file our financial results accurately and timely could
harm our business and adversely impact the trading price of our common
stock .
We are
required to establish and maintain internal controls over financial reporting,
disclosure controls, and to comply with other requirements of the Sarbanes-Oxley
Act of 2002 (the “Sarbanes-Oxley Act”) and the rules promulgated by the SEC
thereunder. Our management, including our Chief Executive Officer and Chief
Financial Officer, cannot guarantee that our internal controls and disclosure
controls will prevent all possible errors or all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. In
addition, the design of a control system must reflect the fact that there are
resource constraints and the benefit of controls must be relative to their
costs. Because of the inherent limitations in all control systems, no system of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within our company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Further, controls can
be circumvented by individual acts of some persons, by collusion of two or more
persons, or by management override of the controls. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time, a
control may become inadequate because of changes in conditions or the degree of
compliance with policies or procedures may deteriorate. Because of inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and may not be detected.
As of
September 30, 2010, our management has not conducted a comprehensive review to
determine whether our internal control over financial reporting has significant
deficiencies. However, we lack sufficient personnel with the appropriate
level of knowledge, experience and training in the application of US generally
accepted accounting principles (“GAAP”) standards, especially related to
complicated accounting issues. This could cause us to be unable to
fully identify and resolve certain accounting and disclosure issues that could
lead to a failure to maintain effective controls over preparation, review and
approval of certain significant account reconciliation from Chinese GAAP to US
GAAP and necessary journal entries. We have a relatively complicated corporate
structure, which consists of multiple facilities and subsidiaries. The
relatively small number of professionals we employ in our bookkeeping and
accounting functions prevents us from appropriate segregating duties within our
internal control system. The inadequate segregation of duties is a
weakness because it could lead to the untimely identification and resolution of
accounting and disclosure matters or could lead to a failure to perform timely
and effective reviews.
16
To date,
we have not determined whether our internal controls over financial reporting
are sufficient, nor have we undertaken any remedial steps to remedy the
deficiencies set forth above. In the event our review demonstrates further
internal control deficiencies, any remedial measures we undertake may be
insufficient to address our material weaknesses, and there can be no assurance
that significant deficiencies or material weaknesses in our internal controls
over financial reporting will not be identified or occur in the future. If
additional material weaknesses or significant deficiencies in our internal
controls are discovered or occur in the future, we may fail to meet our future
reporting obligations on a timely basis, our consolidated financial statements
may contain material misstatements, we may be required to again restate our
prior period financial results, we may be subject to litigation and/or
regulatory proceedings, and our business and operating results may be
harmed.
The
legal requirements associated with being a public company, including those
contained in and issued under the Sarbanes-Oxley Act, may make it difficult for
us to retain or attract qualified officers and directors, which could adversely
affect the management of our business and our ability to obtain or retain
listing of our common stock.
We may be
unable to attract and retain qualified officers, directors and members of our
board of directors and committees required to provide for our effective
management because of the rules and regulations that govern publicly held
companies, including, but not limited to, certifications by principal executive
officers. The actual and perceived personal risks associated with
compliance with the Sarbanes-Oxley Act and other public company requirements may
deter qualified individuals from accepting roles as directors and executive
officers. Further, the requirements for board or committee membership,
particularly with respect to an individual’s independence and level of
experience in finance and accounting matters, may make it difficult to attract
and retain qualified board members. If we are unable to attract and retain
qualified officers and directors, the management of our business and our ability
to obtain or retain the listing of our common stock on any stock exchange
(assuming we are able to obtain such listing) could be adversely
affected.
Our
business will suffer if we cannot obtain, maintain or renew necessary permits or
licenses.
All PRC
enterprises in the timber industry are required to obtain from various PRC
governmental authorities certain permits and licenses, including, without
limitation, a License of Forest Seed Distribution, a License of Forest Seed
Production and an Urban Landscaping Enterprise Qualification Certificate.
We have obtained permits and licenses required for Forest Seed Distribution and
Production and Urban Landscaping. Failure to obtain all necessary
approvals/permits may subject us to various penalties, such as fines or being
required to vacate from the facilities where we currently operate our business
or even cease operations.
These
permits and licenses are subject to periodic renewal and/or reassessment by the
relevant PRC government authorities and the standards of compliance required in
relation thereto may from time to time be subject to change. We intend to apply
for renewal and/or reassessment of such permits and licenses when required by
applicable laws and regulations; however, we cannot assure you we can obtain,
maintain or renew the permits and licenses or accomplish the reassessment of
such permits and licenses in a timely manner. Any changes in compliance
standards, or any new laws or regulations that may prohibit or render it more
restrictive for us to conduct our business or increase our compliance costs may
adversely affect our operations or profitability. Any failure by us to obtain,
maintain or renew the licenses, permits and approvals, may have a material
adverse effect on the operation of our business. In addition, we may not be able
to carry on business without such permits and licenses being renewed and/or
reassessed.
There
are unique risks in the MDF industry that we may not face in the seedling and
harvesting industries.
In
addition to investing in the construction of manufacturing facilities, there are
also other investments related to land acquisition, environmental impact
assessment, infrastructure construction, transportation, product and
environmental testing and quality assurance, among others. Accordingly,
entering the MDF processing industry involves financial risks and unique
obstacles than the other industries in which we are already active, i.e. the
forestry and seedling industries.
Risks
Relating to the Our Corporate Structure
We
are a holding company that depends on cash flow from its subsidiaries to meet
our obligations.
We are a
holding company with no material assets other than the stock of Liaoning
Shengsheng, which conducts all our operations. We currently expect that
the earnings and cash flow of Liaoning Shengsheng will primarily be retained and
used for their continued business operations.
17
Our
controlling shareholder has potential conflicts of interest with our company
which may adversely affect our business.
Mr.
Baoquan Wang is our primary controlling shareholder as well as our chairman and
president. Given his significant interest in our company, there is a risk
that when conflicts of interest arise, Mr. Wang will not act completely in the
best interests of our stockholders (as opposed to his personal interest) or that
conflicts of interests will be resolved in our favor.
Additionally,
in the event you believe your rights have been infringed under the securities
laws or otherwise as a result of any one of the circumstances described above,
it may be difficult or impossible for you to bring an action against us or our
officers or directors who reside within China. Even if you are successful
in bringing an action, the laws of the PRC may render you unable to enforce a
judgment against our assets and management, all of which are located in
China.
Risks
Associated With Doing Business in China
Our
operations and assets in China are subject to significant political and economic
uncertainties over which we have little or no control, and we may be unable to
alter our business practice in time to avoid the possibility of reduced
revenues.
Doing
business outside the United States, particularly in China, subjects us to
various risks including changing economic and political conditions, major work
stoppages, exchange controls, currency fluctuations, armed conflicts and
unexpected changes in United States and foreign laws relating to tariffs, trade
restrictions, transportation regulations, foreign investments and
taxation. Changes in the PRC laws and regulations, or their
interpretation, or the imposition of confiscatory taxation, restrictions on
currency conversion, imports and sources of supply, devaluations of currency or
the nationalization or other expropriation of private enterprises could have a
material adverse effect on our business, results of operations and financial
condition. Under its current leadership, the Chinese government has been
pursuing economic reform policies that encourage private economic activities and
greater economic decentralization. There is no assurance, however, that
the Chinese government will continue to pursue these policies, or that it will
not significantly alter these policies from time to time without notice. We have
no control over most of these risks and may be unable to anticipate changes in
international economic and political conditions. Therefore, we may be
unable to alter our business practice in time to avoid the possibility of
reduced revenues.
We
derive all of our sales in China and a slowdown or other adverse developments in
the PRC economy may materially and adversely affect our business.
All of
our assets are located in China and all of our revenue is derived from our
operations in China. We anticipate that our revenues generated in China will
continue to represent all of our revenues in the near future, including upon the
expansion of our business. Accordingly, our results of operations and
prospects are subject, to a significant extent, on the economic, political and
legal developments in China. We are therefore subject to the risks
associated with an economic slowdown or other adverse developments in the
PRC. Moreover, the industry in which we are involved in the PRC is growing
and transitioning from government-owned to privately owned so we cannot be sure
of the laws, rules, regulations, policies and processes the various PRC
government entities may impose as our industry evolves. In addition, the
Chinese government also exercises significant control over Chinese economic
growth through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies. Efforts by
the Chinese government to slow the pace of growth of the Chinese economy could
result in reduced demand for our services and products. A slowdown in
overall economic growth, an economic downturn or recession or other adverse
economic developments in the PRC may materially reduce the demand for our
products or otherwise materially and adversely affect our business, results of
operations and future growth prospects.
The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities.
We are
dependent on our relationship with the local governments in the provinces in
which we operate our business. The Chinese government has exercised and
continues to exercise substantial control over virtually every sector of the
Chinese economy through regulation and state ownership. Our ability to
operate in China may be harmed by changes in its laws and regulations, including
those relating to taxation, environmental regulations, land use rights, property
and other matters. The central or local governments of the various PRC
jurisdictions may impose new, stricter regulations or interpretations of
existing regulations that would require additional expenditures and efforts on
our part to ensure our compliance with such regulations or
interpretations. Accordingly, government actions in the future, including
any decision not to continue to support recent economic reforms and to return to
a more centrally planned economy or regional or local variations in the
implementation of economic policies, could have a significant effect on economic
conditions in China or particular regions thereof, and could require us to
divest ourselves of any interest we then hold in Chinese properties.
If
relations between the United States and China worsen, investors may be unwilling
to hold or buy our stock and our stock price may decrease.
At
various times during recent years, the United States and China have had
significant disagreements over political and economic issues. Controversies may
arise in the future between these two countries. Any political or trade
controversies between the United States and China, whether or not directly
related to our business, could reduce the price of our common
stock.
18
Inflation
in China may inhibit our ability to conduct business in China.
In recent
years, the Chinese economy has experienced periods of rapid expansion and high
rates of inflation. Rapid economic growth can lead to growth in the money
supply and rising inflation. If prices for our services and products
rise at a rate that is insufficient to compensate for the rise in the costs of
supplies, it may have an adverse effect on profitability. These factors
have led to the adoption by 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, and thereby
harm the market for our services and products.
Currency
fluctuations and restrictions on currency exchange may adversely affect our
business, including limiting our ability to convert Chinese Renminbi into
foreign currencies and, if Chinese Renminbi were to decline in value, reducing
our revenue in U.S. dollar terms.
Our
reporting currency is the U.S. dollar and our operations in China use their
local currency as their functional currencies. Substantially all of our revenue
and expenses are in Chinese Renminbi. We are subject to the effects of
exchange rate fluctuations with respect to these currencies. For example,
the value of the Renminbi depends to a large extent on Chinese government
policies and China’s domestic and international economic and political
developments, as well as supply and demand in the local market. Since 1994, the
official exchange rate for the conversion of Renminbi to the U.S. dollar had
generally been stable and the Renminbi had appreciated slightly against the U.S.
dollar. However, on July 21, 2005, the Chinese government changed its
policy of pegging the value of Chinese Renminbi to the U.S. dollar. Under
the new policy, Chinese Renminbi may fluctuate within a narrow and managed band
against a basket of certain foreign currencies. It is possible that the Chinese
government could adopt a more flexible currency policy, which could result in
more significant fluctuation of Chinese Renminbi against the U.S. dollar.
We can offer no assurance that Chinese Renminbi will be stable against the U.S.
dollar or any other foreign currency.
Our
financial statements are translated into U.S. dollars at the average exchange
rates in each applicable period. To the extent the U.S. dollar strengthens
against foreign currencies, the translation of these foreign currency
denominated transactions results in reduced revenue, operating expenses and net
income for our international operations. Similarly, to the extent the U.S.
dollar weakens against foreign currencies, the translation of these foreign
currency denominated transactions results in increased revenue, operating
expenses and net income for our international operations. We are also
exposed to foreign exchange rate fluctuations as we convert the financial
statements of our foreign consolidated subsidiaries into U.S. dollars in
consolidation. If there is a change in foreign currency exchange rates,
the conversion of the foreign consolidated subsidiaries’ financial statements
into U.S. dollars will lead to a translation gain or loss which is recorded as a
component of other comprehensive income. Changes in the functional
currency value of these assets and liabilities create fluctuations that will
lead to a transaction gain or loss. We have not entered into agreements or
purchased instruments to hedge our exchange rate risks, which could leave us
exposed to the potential adverse effects of currency fluctuations.
Moreover, the availability and effectiveness of any hedging transaction, should
such transactions be available to us on reasonable terms and should we choose to
engage in such transactions (of which no assurances can be given), may be
limited and we may not be able to hedge our exchange rate risks.
The
State Administration of Foreign Exchange (“SAFE”) restrictions on currency
exchange may limit our ability to receive and use our sales revenue effectively
and to pay dividends.
All of
our sales revenue and expenses are denominated in Chinese Renminbi. Under
PRC law, the Renminbi is currently convertible under the “current account,”
which includes trade and service-related foreign exchange transactions and
dividends, but not under the “capital account,” which includes foreign direct
investments and loans. Currently, our PRC operating subsidiaries may
purchase foreign currencies for settlement of current account transactions,
including for payment of dividends to us, without the approval of SAFE, by
complying with certain procedural requirements. However, the relevant PRC
government authorities may limit or eliminate our ability to purchase foreign
currencies in the future. Since a significant amount of our future revenue
will be denominated in Renminbi, any existing and future restrictions on
currency exchange may limit our ability to pay dividends or utilize revenue
generated in Renminbi to fund any business activities outside China that are
denominated in foreign currencies.
Foreign
exchange transactions by PRC operating subsidiaries under the capital account
continue to be subject to significant foreign exchange controls and require the
approval of or need to register with PRC government authorities, including
SAFE. These limitations could affect our PRC operating subsidiaries’
ability to obtain foreign exchange through debt or equity financing. If
the foreign exchange control system prevents us from obtaining foreign currency,
we may be unable to pay the interest and principal on any debentures we may
issue, pay dividends on our equity or meet obligations that may be incurred in
the future that require payment in foreign currency.
The PRC
government also may at its discretion restrict access in the future to foreign
currencies for current account transactions.
19
Because
our principal assets are located outside of the United States and a majority of
our directors and our officers will reside outside of the United States, it may
be difficult for you to enforce your rights based on the United States federal
securities laws against us and our officers and directors in the United States
or to enforce judgments of United States courts against us or them in the
PRC.
All of
our officers and directors reside outside of the United States. In addition, our
operating subsidiaries are located in the PRC and all of their assets are
located outside of the United States. China does not have a treaty with
United States providing for the reciprocal recognition and enforcement of
judgments of courts. It may therefore be difficult for investors in the
United States to enforce their legal rights based on the civil liability
provisions of the United States federal securities laws against us in the courts
of either the United States or the PRC, and even if civil judgments are obtained
in courts of the United States, to enforce such judgments in the PRC
courts. Further, it is unclear if extradition treaties now in effect
between the United States and the PRC would permit effective enforcement of
criminal penalties against us or our officers and directors under the United
States federal securities laws or otherwise.
Because
the assets of our wholly-owned subsidiaries are located overseas, stockholders
may not receive distributions that they would otherwise be entitled to if we
were declared bankrupt or insolvent.
Because
all of the assets of our wholly-owned subsidiaries are located in the PRC, they
may be outside of the jurisdiction of U.S. courts to administer if we are the
subject of an insolvency or bankruptcy proceeding. As a result, our stockholders
may not receive distributions on liquidation under U.S. Bankruptcy laws that
they would otherwise be entitled to if our assets were located
within the U.S.
The
PRC legal system contains uncertainties which could limit the legal protections
available to us and you, or could lead to penalties on us.
The PRC
legal system is a civil law system based on written statutes. Unlike common law
systems, it is a system in which decided legal cases have little precedential
value. In 1979, the PRC government began to promulgate a comprehensive
system of laws and regulations governing economic matters in general. Our PRC
operating subsidiaries are subject to laws and regulations applicable to foreign
investment in China. In addition, all of our subsidiaries are incorporated in
China and subject to all applicable Chinese laws and regulations. Because of the
relatively short period for enacting such a comprehensive legal system, it is
possible that the laws, regulations and legal requirements are relatively
recent, and their interpretation and enforcement involve uncertainties. These
uncertainties could limit the legal protections available to us and other
foreign investors, including you, and may lead to penalties imposed on us
because of the different understanding between the relevant authority and
us. In addition, we cannot predict the effect of future developments in
the PRC legal system, including the promulgation of new laws, changes to
existing laws or the interpretation or enforcement thereof, or the preemption of
local regulations by national laws.
We
may have limited legal recourse under the PRC laws if disputes arise under our
contracts with third parties.
The
Chinese government has enacted significant laws and regulations dealing with
matters such as corporate organization and governance, foreign investment,
commerce, taxation and trade. However, their experience in implementing,
interpreting and enforcing these laws and regulations is limited, and our
ability to enforce commercial claims or to resolve commercial disputes is
unpredictable. If our new business ventures are unsuccessful, or other
adverse circumstances arise from these transactions, we face the risk that the
parties to these ventures may seek ways to terminate the transactions, or may
hinder or prevent us from accessing important information regarding the
financial and business operations of these acquired companies. The
resolution of these matters may be subject to the exercise of considerable
discretion by agencies of the Chinese government, and forces unrelated to the
legal merits of a particular matter or dispute may influence their
determination. Any rights we may have to specific performance, or to seek an
injunction under the PRC laws, in either of these cases, are severely limited,
and without a means of recourse by virtue of the Chinese legal system, we may be
unable to prevent these situations from occurring. The occurrence of any
such events could have a material adverse effect on our business, financial
condition and results of operations. Although legislation in China over
the past 30 years has significantly improved the protection afforded to various
forms of foreign investment and contractual arrangements in China, these laws,
regulations and legal requirements are relatively new and their interpretation
and enforcement involve uncertainties, which could limit the legal protection
available to us, and foreign investors, including you. The inability to
enforce or obtain a remedy under any of our future agreements could result in a
significant loss of business, business opportunities or capital and could have a
material adverse impact on our operations.
PRC
regulations relating to acquisitions of PRC companies by foreign entities may
create regulatory uncertainties that could restrict or limit our ability to
operate.
In
November 2005, SAFE issued a public notice, known as Circular 75, concerning the
use of offshore holding companies in mergers and acquisitions in China. The
public notice provides that before an offshore company is established or
controlled by PRC residents for the purpose of seeking offshore equity financing
by using assets or interests owned by such PRC residents in onshore companies,
such overseas investment will be subject to registration with the relevant
foreign exchange authorities. The public notice also suggests that registration
with the relevant foreign exchange authorities is required for any sale or
transfer by the PRC residents of shares in an offshore holding company that owns
an onshore company. The PRC residents must each submit a registration form to
the local SAFE branch with respect to their ownership interests in the offshore
company, and must also file an amendment to such registration if the offshore
company experiences material events, such as changes in the share capital, share
transfer, mergers and acquisitions, spin-off transactions or use of assets in
China to guarantee offshore obligations.
20
Our
current PRC beneficial owners may fall within the ambit of Circular 75 and be
required to register with the local SAFE branch as required under Circular 75.
If so required, and if such PRC beneficial owners fail to timely register their
SAFE registrations pursuant to the Circular 75, 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 Circular 75, 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
(including using the proceeds from this offering) into our PRC subsidiaries,
limit our PRC subsidiaries’ ability to distribute dividends to our company, or
otherwise adversely affect our business.
On August
8, 2006, MOFCOM, joined by the State-owned Assets Supervision and Administration
Commission of the State Council, the State Administration of Taxation, the State
Administration for Industry and Commerce, the China Securities Regulatory
Commission and SAFE, released a substantially amended version of the Provisions
for Foreign Investors to Merge with or Acquire Domestic Enterprises (the
“Revised M&A Regulations”), which took effect September 8, 2006 and was
amended on June 22, 2009. These new rules significantly revised China’s
regulatory framework governing onshore-to-offshore restructurings and foreign
acquisitions of domestic enterprises. These new rules signify greater PRC
government attention to cross-border merger, acquisition and other investment
activities, by confirming MOFCOM as a key regulator for issues related to
mergers and acquisitions in China and requiring MOFCOM approval of a broad range
of merger, acquisition and investment transactions. Further, the new rules
establish reporting requirements for acquisition of control by foreigners of
companies in key industries, and reinforce the ability of the Chinese government
to monitor and prohibit foreign control transactions in key
industries.
Among
other things, the revised M&A Regulations include new provisions that
purport to require that an offshore special purpose vehicle, or SPV, formed for
listing purposes and controlled directly or indirectly by PRC companies or
individuals must obtain the approval of the CSRC prior to the listing and
trading of such SPV’s securities on an overseas stock exchange. On
September 21, 2006, the CSRC published on its official website procedures
specifying documents and materials required to be submitted to it by SPVs
seeking CSRC approval of their overseas listings. However, the application
of this PRC regulation remains unclear with no consensus currently existing
among the leading PRC law firms regarding the scope and applicability of the
CSRC approval requirement.
We were
advised by our PRC counsel that our restructuring is not subject to CSRC
approval. However, we cannot exclude the possibility that the CSRC or
another PRC regulatory agency subsequently determines that CSRC approval was
required for our restructuring. If the CSRC or another PRC regulatory
agency subsequently determines that CSRC approval was required for our
restructuring, we may face regulatory actions or other sanctions from the CSRC
or other PRC regulatory agencies. These regulatory agencies may impose fines and
penalties on our operations in the PRC, limit our operating privileges in the
PRC, or take other actions that could have a material adverse effect on our
business, financial condition, results of operations, reputation and prospects,
as well as the trading price of our common stock.
If later
the CSRC requires that we obtain its approval, we may be unable to obtain a
waiver of the CSRC approval requirements, if and when procedures are established
to obtain such a waiver. Any uncertainties and/or negative publicity regarding
this CSRC approval requirement could have a material adverse effect on the
trading price of our common stock. Furthermore, published news reports in China
recently indicated that the CSRC may have curtailed or suspended overseas
listings for Chinese private companies.
It is
uncertain how our business operations or future strategy will be affected by the
interpretations and implementation of Circular 75 and its internal implementing
guidelines and the Revised M&A Regulations. It is anticipated that
application of the new rules will be subject to significant administrative
interpretation, and we will need to closely monitor how MOFCOM and other
ministries apply the rules to ensure that our domestic and offshore activities
continue to comply with PRC law. Given the uncertainties regarding
interpretation and application of the new rules, we may need to expend
significant time and resources to maintain compliance.
Our
partial payment of the acquisition price for Liaoning Shengsheng creates
regulatory restrictions that limit Liaoning Shengsheng’s ability to pay
dividends to us and may result in other regulatory restrictions.
Generally
there is no SAFE approval required prior to remitting dividends of a foreign
invested enterprise. However, according to the Notice on Relevant
Issues concerning Improving Foreign Direct Investment Foreign Exchange
Administration by SAFE, effective as of April 1, 2003, before the acquisition
price of an acquisition of a PRC company by a foreign investor has been paid
off, any dividend remittance abroad by such PRC company may only be in
proportion to the actual payments made by such foreign investor. Since we
have only paid $1.28 million of $5.12 million consideration due to the
Shengsheng Shareholders, Liaoning Shengsheng can only remit 25% of its dividends
or profits to us until we have paid all the acquisition consideration. This
restriction is not affected by the timing of the exercise of the call option
granted from Sherry Li to the Shengsheng Shareholders pursuant to the Amended
and Restated Call Option Agreement dated May 12, 2010.
21
The
Company may not be allowed by PRC regulatory authorities to consolidate Liaoning
Shengsheng’s equity and assets into its consolidated financial statements before
the Company has paid the acquisition price in full.
According
to the Circular on
Strengthening the Administration of Approval, Registration, Foreign Exchange and
Taxation of Foreign Invested Enterprise (“Circular 575”), promulgated by
the PRC Ministry of Foreign Trade and Economic Cooperation (currently Ministry
of Commerce), State Administration of Taxation, State Administration for
Industry and Commerce and State Administration of Foreign Exchange, effective as
of January 1, 2003, in the event a foreign investor who purchases a controlling
equity interest in a PRC company has not paid the purchase price in full, such
investor shall not consolidate the equity and assets of the merged enterprise
into its financial statements. The financial statements forming a part of
this prospectus have been consolidated in accordance with GAAP. Since the
Company has only made partial payment of the purchase price to the Shengsheng
Shareholders, as per Circular 575, the Company may face a risk that it would not
be allowed by the PRC regulatory authorities to consolidate Liaoning
Shengsheng's equity and assets into the Company’s consolidated financial
statements. However, Circular 575 does not specify the legal consequences
of consolidation of the financial statements prior to full payment of the
purchase price, and there are no specific implementing rules concerning any
penalties or fines under current PRC laws. Accordingly, the legal effect
of the PRC regulatory authorities making a determination that the Company is not
in compliance with Circular 575 is unknown at this time.
Our
labor costs are likely to increase as a result of changes in Chinese labor
laws.
We expect
to experience an increase in our cost of labor due to recent changes in Chinese
labor laws which are likely to increase costs further and impose restrictions on
our relationship with our employees. In June 2007, the National People’s
Congress of the PRC enacted new labor law legislation called the Labor Contract
Law and more strictly enforced existing labor laws. The new law, which
became effective on January 1, 2008, amended and formalized workers’ rights
concerning overtime hours, pensions, layoffs, employment contracts and the role
of trade unions. In addition, under the new law, employees who either have
worked for a company for 10 years or more or who have had two consecutive
fixed-term contracts should be given an “open-ended employment contract” upon
the request of such employee that, in effect, constitutes a long term contract
which is only terminable under certain limited circumstances. Should we
become subject to such open-ended employment contracts, our employment related
risks could increase significantly and we may be limited in our ability to
downsize our workforce in the event of an economic downturn. No assurance can be
given that we will not in the future be subject to labor strikes or that it will
not have to make other payments to resolve future labor issues caused by the new
laws. Furthermore, there can be no assurance that the labor laws will not
change further or that their interpretation and implementation will vary, which
may have a negative effect upon our costs and results of
operations.
We
must comply with the Foreign Corrupt Practices Act.
We are
required to comply with the United States Foreign Corrupt Practices Act, which
prohibits U.S. companies from engaging in bribery or other prohibited payments
to foreign officials for the purpose of obtaining or retaining business.
Foreign companies, including some of our competitors, are not subject to these
prohibitions. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices occur from time to time in China. If our competitors
engage in these practices, they may receive preferential treatment or other
advantage in securing business or from government officials who might give them
priority in obtaining new licenses, which would put us at a disadvantage.
Such disadvantage can be expected to have a material adverse impact on our
business, growth prospects and results of operations. Although we inform
our personnel that such practices are illegal, we do not yet have an official
policy in place and, even once such a policy is implemented, we cannot assure
you that our employees or other agents will not engage in such conduct for which
we might be held responsible. If our employees or other agents are found
to have engaged in such practices, we could suffer severe penalties, which could
be expected to have a material adverse effect on our reputation, share price and
future operating prospects.
If
we make equity compensation grants to persons who are PRC citizens, they may be
required to register with SAFE. We may also face regulatory uncertainties
that could restrict our ability to adopt equity compensation plans for our
directors and employees and other parties under PRC laws.
On April
6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic
Individuals Participating in the Employee Stock Ownership Plan or Stock Option
Plan of An Overseas Listed Company, also know as “Circular 78.” It is not
clear whether Circular 78 covers all forms of equity compensation plans or only
those which provide for the granting of stock options. For any plans which are
so covered and are adopted by a non-PRC listed company, such as our company,
after April 6, 2007, Circular 78 requires all participants who are PRC citizens
to register with and obtain approvals from SAFE prior to their participation in
the plan. In addition, Circular 78 also requires PRC citizens to register
with SAFE and make the necessary applications and filings if they participated
in an overseas listed company’s covered equity compensation plan prior to April
6, 2007. We believe that the registration and approval requirements
contemplated in Circular 78 will be burdensome and time consuming.
22
The Call
Option Agreement signed by and among the Shengsheng Shareholders and Sherry
Li could be regarded by SAFE as an equity incentive plan. However, we
do not believe the Call Option Agreement is required to be filed with SAFE, as
the Company is not recognized as a "listed company" under Circular 78 as of the
date hereof and the Shengsheng Shareholders have not exercised their rights
under the Call Option Agreement. In the future, we may adopt an equity
incentive plan and make numerous stock option grants under the plan to our
officers, directors and employees, some of whom are PRC citizens and may be
required to register with SAFE. If it is determined that any of our equity
compensation plans are subject to Circular 78, failure to comply with such
provisions may subject us and participants of our equity incentive plan who are
PRC citizens to fines and legal sanctions and prevent us from being able to
grant equity compensation to our PRC employees. In that case, our ability to
compensate our employees and directors through equity compensation would be
hindered and our business operations may be adversely affected.
Due
to various restrictions under PRC laws on the distribution of dividends by our
PRC operating companies, we may not be able to pay dividends to our
shareholders.
The
Wholly-Foreign Owned Enterprise Law (1986), as amended and the Wholly-Foreign
Owned Enterprise Law Implementing Rules (1990), as amended and the Company Law
of the PRC (2006) contain the principal regulations governing dividend
distributions by wholly foreign owned enterprises. Under these regulations,
wholly foreign owned enterprises (“WFOE”) may pay dividends only out of their
accumulated profits, if any, determined in accordance with PRC accounting
standards and regulations. Additionally, a WFOE is required to set aside a
certain amount of their accumulated profits each year, if any, to fund certain
reserve funds. These reserves are not distributable as cash dividends
except in the event of liquidation and cannot be used for working capital
purposes.
Furthermore, if our consolidated subsidiaries in China incur debt
on their own in the future, the instruments governing the debt may restrict its
ability to pay dividends or make other payments. If we or our consolidated
subsidiaries are unable to receive all of the revenues from our operations due
to these contractual or dividend arrangements, we may be unable to pay dividends
on our common stock. In addition, under current PRC law, we must retain a
reserve equal to 10 percent of net income after taxes each year, with the total
amount of the reserve not to exceed 50 percent of registered capital.
Accordingly, this reserve will not be available to be distributed as dividends
to our shareholders. We presently do not intend to pay dividends in the
foreseeable future. Our management intends to follow a policy of retaining all
of our earnings to finance the development and execution of our strategy and the
expansion of our business.
As
all of our operations and personnel are in the PRC, we may have difficulty
establishing adequate western style management, legal and financial
controls.
The PRC
historically has been deficient in western style management and financial
reporting concepts and practices, as well as in modern banking, and other
control systems. 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, and especially given that we expect to be a publicly listed
company in U.S. and subject to regulation as such, we may experience difficulty
in establishing management, legal and financial controls, collecting financial
data and preparing financial statements, books of account and corporate records
and instituting business practices that meet western standards. We may
have difficulty establishing adequate management, legal and financial controls
in the PRC. Therefore, we may, in turn, experience difficulties in
implementing and maintaining adequate internal controls as required under
Section 404 of the Sarbanes-Oxley Act and other applicable laws, rules and
regulations. This may result in significant deficiencies or material
weaknesses in our internal controls which could impact the reliability of our
financial statements and prevent us from complying with SEC rules and
regulations and the requirements of the Sarbanes-Oxley Act. Any such
deficiencies, weaknesses or lack of compliance could have a materially adverse
effect on our business and the public announcement of such deficiencies could
adversely impact our stock price.
An
outbreak of a pandemic avian influenza, SARS or other contagious disease may
have an adverse effect on the Chinese economy which may adversely affect our
results of operations.
During
the past four years, large parts of Asia experienced unprecedented outbreaks of
avian influenza. Currently, no fully effective avian flu vaccines have
been developed and there is evidence that the H5N1 virus is evolving. An
effective vaccine may not be discovered in time to protect China against an
avian flu pandemic. Also, in the first half of 2003, certain countries in Asia
experienced an outbreak of severe acute respiratory syndrome, or SARS, a highly
contagious form of atypical pneumonia, which seriously interrupted the economic
activities in the affected regions.
An
outbreak or perceived outbreak of avian flu, SARS, swine flu or other contagious
disease may seriously interrupt our operations, which may have a materially
adverse effect on our financial results.
Our
bank accounts are not insured or protected against loss.
We
maintain our cash with various banks and trust companies located in China. Our
cash accounts are not insured or otherwise protected. Should any bank or trust
company holding our cash deposits become insolvent, or if we are otherwise
unable to withdraw funds, we would lose the cash on deposit with that particular
bank or trust company.
23
Under
the PRC EIT Law, we may be classified as a “resident enterprise” of the PRC.
Such classification could result in PRC tax consequences to us and our non-PRC
resident enterprise shareholders.
On March
16, 2007, the National People’s Congress approved and promulgated a new tax law,
the PRC Enterprise Income Tax Law, or “EIT Law,” which took effect on January 1,
2008. Under the EIT Law, enterprises are classified as resident enterprises and
non-resident enterprises. An enterprise established outside of China with “de
facto management bodies” within China is considered a “resident enterprise,”
meaning that it can be treated in a manner similar to a Chinese enterprise for
enterprise income tax purposes. The implementing rules of the EIT Law define “de
facto management bodies” as a managing body that in practice exercises
“substantial and overall management and control over the production and
operations, personnel, accounting, and properties” of the enterprise; however,
it remains unclear whether the PRC tax authorities would deem our managing body
as being located within China. Due to the short history of the EIT Law and
lack of applicable legal precedents, the PRC tax authorities determine the PRC
tax resident treatment of a foreign (non-PRC) company on a case-by-case
basis.
If the
PRC tax authorities determine we are a “resident enterprise” for PRC enterprise
income tax purposes, a number of PRC tax consequences could follow. First, we
may be subject to the enterprise income tax at a rate of 25 percent on our
worldwide taxable income, as well as PRC enterprise income tax reporting
obligations. Second, under the EIT Law and its implementing rules, dividends
paid between “qualified resident enterprises” are exempt from enterprise income
tax. As a result, if we are treated as a “qualified resident enterprise,” all
dividends that we receive from Liaoning Shengsheng (assuming such dividends are
considered sourced within the PRC) should be exempt from PRC tax. If we are
treated as a “non-resident enterprise” under the EIT Law, then dividends that we
receive from Liaoning Shengsheng (assuming such dividends are considered sourced
within the PRC) may be subject to a 10 percent PRC withholding tax. Any such tax
on dividends could materially reduce the amount of dividends, if any, we could
pay to our shareholders.
Finally,
the new “resident enterprise” classification could result in a situation in
which a 10 percent PRC tax is imposed on dividends we pay to our enterprise, but
not individual, investors that are not tax residents of the PRC (“non-resident
investors”) and gains derived by them from transferring our common stock, if
such income is considered PRC-sourced income by the relevant PRC tax
authorities. In such event, we may be required to withhold a 10 percent PRC tax
on any dividends paid to our non-resident investors. Our non-resident investors
also may be responsible for paying PRC tax at a rate of 10 percent on any gain
realized from the sale or transfer of our common stock in certain circumstances.
We would not, however, have an obligation to withhold PRC tax with respect to
such gain under the PRC tax laws.
Moreover,
the State Administration of Taxation (“SAT”) released Circular Guoshuihan No.
698 (“Circular 698”) on December 10, 2009 that reinforces the taxation of
certain equity transfers by non-resident investors through overseas holding
vehicles. Circular 698 addresses indirect equity transfers as well as other
issues. Circular 698 is retroactively effective from January 1, 2008. According
to Circular 698, where a non-resident investor who indirectly holds an equity
interest in a PRC resident enterprise through a non-PRC offshore holding company
indirectly transfers an equity interest in a PRC resident enterprise by selling
an equity interest in the offshore holding company, and the latter is located in
a country or jurisdiction where the actual tax burden is less than 12.5 percent
or where the offshore income of its residents is not taxable, the non-resident
investor is required to provide the PRC tax authority in charge of that PRC
resident enterprise with certain relevant information within 30 days of the
execution of the equity transfer agreement. The tax authorities in
charge will evaluate the offshore transaction for tax purposes. In the event
that the tax authorities determine that such transfer is abusing forms of
business organization and a reasonable commercial purpose for the offshore
holding company other than the avoidance of PRC income tax liability is lacking,
the PRC tax authorities will have the power to re-assess the nature of the
equity transfer under the doctrine of substance over form. A reasonable
commercial purpose may be established when the overall international (including
U.S.) offshore structure is set up to comply with the requirements of
supervising authorities of international (including U.S.) capital markets. If
the SAT’s challenge of a transfer is successful, it may deny the existence of
the offshore holding company that is used for tax planning purposes and subject
the seller to PRC tax on the capital gain from such transfer. Since Circular 698
has a short history, there is uncertainty as to its application. We (or a
non-resident investor) may become at risk of being taxed under Circular 698 and
may be required to expend valuable resources to comply with Circular 698 or to
establish that we (or such non-resident investor) should not be taxed under
Circular 698, which could have a material adverse effect on our financial
condition and results of operations (or such non-resident investor’s investment
in us).
If any
PRC tax applies to a non-resident investor, the non-resident investor may be
entitled to a reduced rate of PRC tax under an applicable income tax treaty
and/or a deduction for such PRC tax against such investor’s domestic taxable
income or a foreign tax credit in respect of such PRC tax against such
investor’s domestic income tax liability (subject to applicable conditions and
limitations). Investors are urged to consult their own tax advisors regarding
the applicability of any such taxes, the effects of any applicable income tax
treaties, and any available deductions or foreign tax credits. For a
further discussion of these issues, see the section of this prospectus captioned
“Material PRC Income Tax Considerations,” below.
Risks
Associated With Our Common Stock
Shares
of our common stock lack a significant trading market.
We will
seek to list our common stock on the NYSE AMEX under the symbol CFG. There
can be no assurance that an active trading market in our common stock will
develop, or if such a market develops, that it will be sustained. The
price at which investors purchase shares of our common stock may not be
indicative of the price that will prevail in the trading market. Investors may
be unable to sell their shares of common stock at or above their purchase price,
which may result in substantial losses.
24
The
market price for our stock may be volatile.
The
market price for our stock may be volatile and subject to wide fluctuations in
response to factors including the following:
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liquidity of the market for the
shares;
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actual or anticipated
fluctuations in quarterly operating
results;
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Sales of substantial amounts of
our common stock, or the perception such sales might
occur;
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changes in financial estimates by
securities research
analysts;
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conditions in PRC and
international timber and wood processing
markets;
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changes in the economic
performance or market valuations of other companies in the
industry;
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announcements by us or our
competitors of new products, acquisitions, strategic partnerships, joint
ventures or capital
commitments;
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addition or departure of key
personnel;
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fluctuations of exchange rates
between RMB and the U.S.
dollar;
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intellectual property
litigation;
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our dividend policy;
and
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general economic or political
conditions in China.
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In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our stock.
The
future sale of a substantial amount of outstanding stock in the public
marketplace could reduce the price of our common stock.
We cannot
predict the effect, if any, that market sales of shares of our common stock or
the availability of shares of common stock for sale will have on the market
price prevailing from time to time. Sales of shares of our common stock in the
public market covered under an effective registration statement, or the
perception that those sales may occur, could cause the trading price of our
common stock to decrease or to be lower than it might be in the absence of those
sales or perceptions.
We may
issue additional shares of our capital stock or debt securities to raise capital
or complete acquisitions, which would reduce the equity interest of our
stockholders .
Our
certificate of incorporation authorizes the issuance of up to 50,000,000 shares
of common stock, $.001 par value per share, and 2,000,000 shares of preferred
stock, $.001 par value per share. There are currently 14,270,948 shares of
our common stock, and 500,000 shares of our preferred stock, outstanding.
An additional 5,697,751 shares of common stock are reserved for issuance upon
the exercise of outstanding warrants, conversion of the Series A Convertible
Preferred Stock and conversion of outstanding convertible promissory
notes. As a result, there are approximately 35,729,052 authorized and
unissued shares of our common stock and 1,500,000 shares of our preferred stock
which have not been reserved and are available for future issuance. Although we
have no commitments as of the date of this offering to issue our securities
other than as set forth herein, we may issue a substantial number of additional
shares of our securities to complete a business combination or to raise
capital. We registered many shares under the registration statement of
which this prospectus is a part for the benefit of certain selling stockholders,
many of which are shares of common stock underlying convertible promissory
notes, preferred stock and warrants. Accordingly, such shares are not yet
issued and outstanding, but the registration of such shares may make it more
likely such securities will be converted or exercised (as applicable) and such
additional shares of common stock issued to such investors. The issuance
of additional shares of our securities may cause economic and percentage
dilution to our stockholders and may adversely affect prevailing market prices
for our common stock.
25
As of
August 10, 2010, those investors who purchased convertible promissory notes and
warrants in our February 2010 private placement exercised their right to
purchase up to an additional $2,500,000 of notes on terms identical to those in
the February 2010 offering. See “Description of Our Securities – February
2010 Private Placement” included herein for a complete description of the
February 2010 Private Placement.
We
currently plan to raise a majority of the funds required for our future growth,
if any, from the capital markets; however there can be no assurances
thereof. If we raise these funds by issuing additional securities, the
newly issued securities can be expected to result in substantial dilution of our
stockholders.
Our management
and directors own a significant amount of our common stock or options to
purchase a significant amount of our common stock, giving them influence or
control in corporate transactions and other matters, and their interests could
differ from those of other stockholders .
As of the
date of this prospectus, our management and directors as a group have the right
to control 86.61% of our outstanding common stock. As a result, they are
in a position to significantly influence the outcome of matters requiring a
stockholder vote, including the election of directors, the adoption of any
amendment to our articles of incorporation or bylaws, and the approval of
significant corporate transactions. Their control may delay or prevent a change
of control on terms favorable to our other stockholders and may adversely affect
your voting and other stockholder rights.
Risks
Related to an Investment in Our Securities
No
cash dividends on our common stock are expected to be paid in the foreseeable
future.
While we
do pay dividends on our Series A Preferred Stock at a rate of 11% per annum, we
do not anticipate paying cash dividends on our common stock in the foreseeable
future and we may not have sufficient funds legally available to pay dividends
in the event we choose to do so. Even if the funds are legally available
for distribution, we may nevertheless decide not to pay any dividends.
Furthermore, the terms of our Series A Preferred Stock prohibit the payment of
dividends on our common stock while any Series A Preferred Stock is
outstanding. We intend to retain all earnings for our operations. As
a result, investors in our common stock should not rely on an investment in our
securities if they require the investment to produce dividend income. Capital
appreciation, if any, of our shares may be investors’ sole source of gain for
the foreseeable future. Moreover, investors may not be able to resell
their shares of the Company at or above the price they paid for
them.
Volatility
in our common share price may subject us to securities litigation.
The
market for our common stock may be characterized by significant price
volatility, and we expect that our share price will continue to be more volatile
than a seasoned issuer for the indefinite future. In the past, plaintiffs
have often initiated securities class action litigation against a company
following periods of volatility in the market price of its securities. We
may, in the future, be the target of similar litigation. Securities litigation
could result in substantial costs and liabilities and could divert management's
attention and resources.
Our
common stock may be thinly traded and you may be unable to sell at or near ask
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
We intend
to apply to have our common stock listed on the NYSE AMEX. Our common
stock may be “thinly-traded”, meaning that the number of persons interested in
purchasing our common stock at or near bid prices at any given time may be
relatively small or non-existent. This situation may be attributable to a
number of factors, including the fact that we are a small company which is
relatively unknown to stock analysts, stock brokers, institutional investors and
others in the investment community that generate or influence sales volume, and
that even if we came to the attention of such persons, they tend to be
risk-averse and might be reluctant to follow an unproven company such as ours or
purchase or recommend the purchase of our shares until such time as we became
more seasoned. As a consequence, there may be periods of several days or
more when trading activity in our shares is minimal or non-existent, as compared
to a seasoned issuer which has a large and steady volume of trading activity
that will generally support continuous sales without an adverse effect on share
price. We cannot give you any assurance that a broad or active public
trading market for our common stock will develop or be sustained.
The
elimination of liability of our directors, officers and employees under Delaware
law and the existence of indemnification rights to our directors, officers and
employees may result in substantial expenditures by our company and may
discourage lawsuits against our directors, officers and employees.
Our
certificate of incorporation contains provisions that eliminate the liability of
our directors to our company and stockholders to the extent allowed under
Delaware law, and we are prepared to give such indemnification to our directors
and officers to the extent provided by Delaware law. The foregoing
indemnification obligations could result in our company incurring substantial
expenditures to cover the cost of settlement or damage awards against directors
and officers, which we may be unable to recoup. These provisions and
resultant costs may also discourage our company from bringing a lawsuit against
directors and officers for breaches of their fiduciary duties, and may similarly
discourage the filing of derivative litigation by our stockholders against our
directors and officers even though such actions, if successful, might otherwise
benefit our company and stockholders.
26
Shares
eligible for future sale may adversely affect the market.
From time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144 of the Securities Act, subject to certain
limitations. In general, pursuant to amended Rule 144, non-affiliate
stockholders may sell freely after six months subject only to the current public
information requirement (which disappears after one year). Affiliates may
sell after six months subject to the Rule 144 volume, manner of sale (for equity
securities), current public information and notice requirements. Any
substantial sale of our common stock pursuant to Rule 144 or pursuant to any
resale prospectus may have a material adverse effect on the market price of our
common stock. In addition we are registering for resale 8,068,698 shares
of common stock from our private placements on the Registration Statement
relating to this prospectus. Such shares will be freely tradable with no
restrictions after registration.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
AND
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS
This
prospectus contains forward-looking statements. Forward-looking statements give
our current expectations or forecasts of future events. You can identify
these statements by the fact that they do not relate strictly to historical or
current facts. Forward-looking statements involve risks and uncertainties.
Forward-looking statements include statements regarding, among other things, (a)
our projected sales, profitability and cash flows, (b) our growth strategies,
(c) anticipated trends in our industries, (d) our future financing plans and (e)
our anticipated needs for working capital. They are generally identifiable by
use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,”
“potential,” “projects,” “continuing,” “ongoing,” “expects,” “management
believes,” “we believe,” “we intend” or the negative of these words or other
variations on these words or comparable terminology. In particular, these
include statements relating to future actions, future performance, sales
efforts, expenses, the outcome of contingencies such as legal proceedings, and
financial results.
Any or
all of our forward-looking statements in this prospectus may turn out to be
inaccurate. They can be affected by inaccurate assumptions we might make or by
known or unknown risks or uncertainties. Consequently, no forward-looking
statement can be guaranteed. Actual future results may vary materially as a
result of various factors, including, without limitation, the risks outlined
under “Risk Factors” and matters described in this prospectus generally. In
light of these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this filing will in fact occur and you
should not place undue reliance on these forward-looking statements.
USE
OF PROCEEDS
We
estimate that the net proceeds from the sale of the 4,000,000 shares
of common stock in the offering at an assumed offering price of $5.00 per
share (the midpoint of the offering range) will be approximately $20
million after deducting the underwriting discounts and commissions and estimated
offering expenses. Our net proceeds will be approximately $23 million
if the underwriter exercises its over-allotment option to purchase
additional shares of common stock from us in full.
We intend
to use the net proceeds from the offering for the following purposes subject to
our application for and obtaining of applicable registrations and approvals
under PRC laws and regulations:
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approximately $3.18 million to
pay the remaining unpaid purchase price to the Shengsheng Shareholders who
shall immediately transfer such amount to Liaoning Shengsheng (with the
amount of cash as reflected in the balance sheet as of the end of the
corresponding fiscal period increasing by $3.84 million as does total
shareholder’s equity) for working capital purposes, which may include
acquisitions in the ordinary course of business;
and
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approximately $5.03 million to
expand and construct our Karamai MDF production facilities/capabilities.
The total investment for such expansion is anticipated to be approximately
$9.5 million. The remaining $4.5 million required is expected to be
financed from the Company’s then-existing cash
flow;
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approximately $3-$5 million to
pay the balance for the acquisition of Beijisong, with the final price to
be determined by an appraisal of Beijisong to be conducted in early 2011
(as set forth herein). This estimate is based in part on our estimation
that (i) Beijisong owns net assets worth not more than $6.6 million, (ii)
we are only purchasing 80% of Beijisong, (iii) we have already paid
$877,693 for such acquisition and (iv) we may also purchase additional raw
materials owned by Beijisong;
and
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approximately $2.64 million to
pay for the acquisition of Yuying (as set forth herein);
and
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approximately $1.5 million to be
used as working capital for Beijisong and Yuying after their respective
acquisitions; and
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27
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approximately $1.0 million for an
escrow account to fund the initial expenses of being a public
company;
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approximately $2.0 million for
transaction expenses related to this offering;
and
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the remaining balance to expand
our poplar seedling business and for working capital and general corporate
purposes.
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The
amount and timing of our actual expenditures will depend on numerous factors,
including the status of our acquisition and development efforts, sales and
marketing activities, and the amount of cash generated or used by our
operations. We may find it necessary or advisable to use portions of the
proceeds for other purposes, and we will have broad discretion in the
application of the net proceeds. Additionally, we may choose to expand our
current business through acquisition of complimentary businesses using cash
or shares, as set forth herein. Except as set forth herein, we have not
entered into any negotiations, agreements or commitments with respect to any
such acquisitions at this time.
The
$1,000,000 escrow account established to fund the initial expenses of being a
public company will be controlled by the Company and funds shall be disbursed as
and when needed for, among other things, legal and accounting fees, insurance
and directors’ compensation.
DIVIDEND
POLICY
Although
we will continue paying required dividends of 11% per annum with respect to our
outstanding Series A Preferred Stock, we have not paid, and do not currently
intend to pay, cash dividends on our common stock in the foreseeable
future. Liaoning Shengsheng, the Company’s subsidiary, declared a one
time dividend in the amount of $6,139,166 in 2008 (prior to our acquisition of
Liaoning Shengsheng), and paid such dividends to the Shengsheng Shareholders in
2009.
On
January 20, 2010, Liaoning Shengsheng, the Company’s subsidiary, declared a
dividend to the Shengsheng Shareholders in the amount of $8,091,017 (RMB
55,300,000). This dividend was based on Liaoning Shengsheng’s profit for
its 2009 fiscal year, which was not finally determined until completion of the
audit of its 2009 financial statements. RMB 34,557,800 ($5,056,198) of
such dividend was paid in May 2010 to the non-management Shengsheng
Shareholders. On June 28, 2010, the remaining Shengsheng Shareholders agreed to
waive their right to obtain their dividends, in a total amount equal to
$3,046,471 (RMB 20,742,200), in order to assist the Company’s future
developments.
Our
policy is to retain all earnings, if any, to provide funds for operation and
expansion of our business. We are a holding company incorporated in the State of
Delaware and do not have any assets or conduct any business operations other
than our investments in our subsidiaries. As a result of our holding
company structure, we rely entirely on dividend payments from our PRC
subsidiaries. PRC accounting standards and regulations currently permit
payment of dividends only out of accumulated profits, a portion of which is
required to be set aside for certain reserve funds. Our inability to
receive all of the revenues from our PRC subsidiaries' operations may provide an
additional obstacle to our ability to pay dividends if we so decide in the
future. The declaration of dividends, if any, will be subject to the
discretion of our board of directors, which may consider such factors as our
results of operations, financial condition, capital needs and acquisition
strategy, among others.
Generally
there is no prior SAFE approval required for remitting dividends of a foreign
invested enterprise. However, according to Notice on Relevant Issues
concerning Improving Foreign Direct Investment Foreign Exchange
Administration by
SAFE , effective as of April 1, 2003, before the acquisition price of an
acquisition of a PRC company by a foreign investor has been paid off, any
dividend remittance abroad by such PRC company may only be in proportion to the
actual payments made by such foreign investor. Since we have only paid
$1.28 million of $5.12 million consideration due to the Liaoning shareholders,
Liaoning Shengsheng can only remit 25% of its dividends or profits to us until
we have paid all the acquisition consideration. This restriction is not
affected by the timing of the exercise of the call option granted from Sherry Li
to the Shengsheng Shareholders pursuant to the Amended and Restated Call Option
Agreement dated May 12, 2010.
28
CAPITALIZATION
On May
11, 2010, the Company effected a 1:1.5 reverse split of the Company’s issued and
outstanding common stock (the “Reverse Split”). The following table
summarizes our capitalization as of September 30, 2010, after taking into
account the Reverse Split, on an actual basis and as adjusted basis to reflect
our receipt of estimated net proceeds from the sale
of 4,000,000 shares of common stock (excluding
the 600,000 shares of common stock which the underwriter has the
option to purchase to cover over-allotments, if any) in this offering at an
assumed offering price of $5 per share (the midpoint of the offering
range), and after deducting estimated underwriting discounts and commissions and
estimated offering expenses of approximately $4.55 per share.
You
should read this table in conjunction with the sections of this prospectus
entitled “Use of Proceeds,” “Summary Consolidated Financial Information,”
“Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our consolidated financial
statements and related notes included elsewhere in this
prospectus.
September 30, 2010 (1)
|
||||||||
Actual
|
As Adjusted
|
|||||||
Stockholders’
equity:
|
||||||||
Common
stock, $0.001 par value, 50,000,000 shares authorized, 14,270,948 and
18,870,948 shares outstanding at September 30, 2010(1) actual and as
adjusted, respectively
|
$
|
14,271
|
$
|
18,871
|
||||
Preferred
stock, $0.001 par value, 2,000,000 shares authorized, 500 ,000 issued and
outstanding at September 30, 2010
|
500
|
500 | ||||||
Additional
paid-in capital
|
9,439,394
|
26,950,032 | (2) | |||||
Statutory
reserves
|
—
|
- | ||||||
Accumulated
other comprehensive income
|
3,439,698
|
3,439,698 | ||||||
Retained
earnings (accumulated deficit)
|
23,122,008
|
23,122,008 | ||||||
Total
stockholders’ equity (deficiency)
|
36,015,871
|
53,531,109 | ||||||
Total
capitalization
|
$
|
40,293,467
|
$
|
57,808,705
|
(1)
|
The table above excludes, as of
September 30, 2010:
|
|
·
|
shares of our common stock
issuable upon the conversion of Series A Convertible Preferred Stock at a
one to one conversion ratio pursuant to the Securities Purchase Agreement
between us and Professional Offshore Opportunity Fund, Ltd. in May
2008;
|
|
·
|
shares of common stock issuable
upon the conversion of those certain convertible promissory notes and
warrants issued pursuant to the Note Purchase Agreement between us and
certain investors in February and August 2010;
and
|
|
·
|
66,667 shares of common stock
issuable upon the conversion of warrant issued to an
investor.
|
(2) Pro
forma adjusted for IPO additional paid in capital reflects the net proceeds we
expect to receive, after deducting a 8% underwriting discount, a 1%
non-accountable expense allowance and approximately $175,000 in expenses, less
the par value of the shares offered. We expect to receive net proceeds of
$17,515,238 ($20,000,000 offering, less underwriting discount of $1,637,760,
non-accountable expense allowance of $200,000, offering expenses of $175,000 and
fair value of options granted to Maxim Group LLC of $472,002), of which
$17,510,638 would be attributable to additional paid in capital after deducting
$4,600 in aggregate par value amount.
29
MARKET
PRICE OF COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market
Information
There is
currently no public market for our common stock. We intend to apply to
have our common stock listed on the NYSE AMEX under the symbol
CFG.
Holders
As of
January 24, 2011, there were 13 holders of record of our common
stock.
Equity
Compensation Plan Information
As of
September 30, 2010 and January 24, 2011, we did not have any equity compensation
plan in effect.
DETERMINATION
OF OFFERING PRICE
The
representative has advised us that the underwriters propose to offer the common
stock directly to the public at the public offering price that appears on the
cover page of this prospectus. Prior to this offering, there was no public
market for any of our securities. The public offering price of our common stock
was determined by negotiation between us and the underwriters. The principal
factors considered in determining the public offering price of the common stock
included:
|
·
|
the information in this
prospectus and otherwise available to the
underwriters;
|
|
·
|
the history and the prospects for
the industry in which we
compete;
|
|
·
|
the ability of our
management;
|
|
·
|
the prospects for our future
earnings;
|
|
·
|
the present state of our
development and our current financial
condition;
|
|
·
|
the general condition of the
economy and the securities markets in the United States at the time of
this offering;
|
|
·
|
the recent market prices of, and
the demand for, publicly-traded securities of generally comparable
companies; and
|
|
·
|
other factors as were deemed
relevant.
|
We cannot
be sure the public offering price will correspond to the price at which our
common stock will trade in the public market following this offering or that an
active trading market for our common stock will develop or continue after this
offering.
30
DILUTION
If you
invest in our securities, your investment will be diluted immediately to the
extent of the difference between the public offering price per share of common
stock you pay in this offering, and the pro forma net tangible book value per
share of common stock immediately after this offering.
Pro
forma net tangible book value represents the amount of our total tangible assets
reduced by our total liabilities after giving effect to the sale of four million
shares of common stock in this offering. Tangible assets equal our total assets
less goodwill and intangible assets. Pro forma net tangible book value per share
represents our pro forma net tangible book value divided by the number of shares
of common stock outstanding after giving effect to the conversion of 500 ,000
shares of Series A Convertible Preferred Stock. As of September 30, 2010,
our pro forma net tangible book value was approximately $36.02 million and our
pro forma net tangible book value per share was $2.52.
After
giving effect to the sale of 4,000,000 shares of common stock in the offering at
a public offering price of $5.00 per share, and after deducting the underwriting
discount and commission and estimated offering expenses, our adjusted pro forma
net tangible book value as of September 30, 2010 would have been approximately
$53.53 million, or $2.84 per share. This represents an immediate increase in pro
forma net tangible book value of $0.31 per share to existing stockholders and
immediate dilution of $2.16 per share to new investors purchasing shares in this
offering.
The
following table illustrates this per share dilution:
As of September 30,
2010
|
As Adjusted
|
|||||||
Public
offering price per share
|
$
|
5.00
|
|
|||||
Pro
forma net tangible book value per share as of September 30,
2010
|
$
|
2.52
|
|
|||||
Increase
in pro forma net tangible book value per share attributable to new
investors
|
0.31
|
|
||||||
Adjusted
pro forma net tangible book value per share after the
offering
|
2.84
|
|
||||||
Dilution
in net tangible book value per share to new investors
|
$
|
2.16
|
|
The
information above is as of September 30, 2010 and excludes the
following:
|
·
|
444,119 shares of common stock
(as adjusted pursuant to both its terms and the Reverse Split) issuable
upon the conversion of Series A Convertible Preferred Stock owned by a
single investor, as such investor’s ownership of our common stock would
have exceeded the cap of 4.9% if such shares of Series A Convertible
Preferred Stock were also converted to common stock. According to the
terms of our Preferred Stock, holders of our Series A Convertible
Preferred Stock are restricted from converting to common stock if the
number of shares of common stock to be issued pursuant to such conversion
would cause the number of shares of common stock owned by such holder and
its affiliates at such time to equal or exceed 4.9% of our then issued and
outstanding common stock;
and
|
|
·
|
2,216,667 shares of common stock
issuable upon the exercise of warrants outstanding at September 30, 2010
with a weighted average exercise price of $2.29 per
share;
|
|
·
|
2,970,298 shares of common stock
issuable upon the conversion of convertible promissory notes issued
pursuant to the Note Purchase Agreement between us and certain investors
dated February 2010 and August 2010;
and
|
|
·
|
66,667 shares of common stock
issuable upon the conversion of warrant issued to an
investor.
|
Our
adjusted pro forma net tangible book value after the offering, and the dilution
to new investors in the offering, will change from the amounts shown above if
the underwriters’ over-allotment option is exercised.
A
$1.00 increase or decrease in the assumed public offering price per share would
increase or decrease our adjusted pro forma net tangible book value per share
after this offering by approximately $0.19, and dilution per share to new
investors by approximately $0.81, after deducting the underwriting discount and
estimated offering expenses payable by us.
31
EXCHANGE
RATE INFORMATION
Our
business is primarily conducted in China and all of our revenues are denominated
in RMB. Capital accounts of our consolidated financial statements are translated
into United States dollars from RMB at their historical exchange rates when the
capital transactions occurred. Assets and liabilities are translated at
the exchange rates as of the balance sheet date. Income and expenditures
are translated at the average exchange rate of the period. RMB is not
freely convertible into foreign currency and all foreign exchange transactions
must take place through authorized institutions. No representation is made
that the RMB amounts could have been, or could be, converted into United States
dollars at the rates used in translation.
The
following table sets forth information concerning exchange rates between the RMB
and the United States dollar for the periods indicated.
Year Ended December 31 ,
|
Year End
(1)
|
Yearly
Average
(2)
|
||||||
2007
|
7.2946
|
7.5806
|
||||||
2008
|
6.8225
|
6.9193
|
||||||
2009
|
6.8282
|
6.8314
|
||||||
2010
|
6.6023
|
6.7842
|
|
(1)
|
The exchange rates reflect the
noon buying rates as reported by the Federal Reserve Bank of New
York.
|
|
(2)
|
Annual averages are calculated
from month-end rates. Monthly averages are calculated using the average of
the daily rates during the relevant
period.
|
32
SELECTED
CONSOLIDATED FINANCIAL AND OPERATING DATA
The
selected consolidated statement of income data for the fiscal years ended
December 31, 2009 and 2008 and the consolidated balance sheet data as of
December 31, 2009 and 2008 have been derived from our audited consolidated
financial statements of included elsewhere in this prospectus. The results
of operations for past accounting periods are not necessarily indicative of the
results to be expected for any future periods.
Year ended
|
Year ended
|
Nine months
ended
|
Nine months
ended
|
|||||||||||||
December 31,
|
December 31,
|
September 30,
|
September 30,
|
|||||||||||||
2009
|
2008
|
2010
|
2009
|
|||||||||||||
Sales
revenues
|
$
|
23,615,957
|
$
|
22,146,254
|
$
|
16,288,827
|
$
|
12,922,412
|
||||||||
Cost
of goods sold
|
$
|
6,351,073
|
$
|
10,428,042
|
$
|
3,485,125
|
$
|
5,201,809
|
||||||||
Gross
profit
|
$
|
17,264,884
|
$
|
11,718,212
|
$
|
12,803,702
|
$
|
7,720,603
|
||||||||
Operating
expenses
|
||||||||||||||||
Selling
expense
|
$
|
3,561,550
|
$
|
4,206,849
|
$
|
1,729,768
|
$
|
2,562,828
|
||||||||
General
and administrative expenses
|
$
|
912,870
|
$
|
830,813
|
$
|
1,019,482
|
$
|
491,064
|
||||||||
Total
operating expenses
|
$
|
4,474,020
|
$
|
5,037,662
|
$
|
2,749,250
|
$
|
3,053,892
|
||||||||
Net
operating income
|
$
|
12,790,464
|
$
|
6,680,550
|
$
|
10,054,452
|
$
|
4,666,711
|
||||||||
Other
income (expense)
|
||||||||||||||||
Interest
income
|
$
|
5,211
|
$
|
8,221
|
$
|
7,793
|
$
|
4,180
|
||||||||
Gain
on change of fair value of derivative liabilities
|
$
|
149,644
|
-
|
|||||||||||||
Interest
expense
|
$
|
(376,623
|
)
|
-
|
||||||||||||
Other
expense
|
$
|
(1,514
|
)
|
(245
|
)
|
|||||||||||
Total
other income (expense)
|
$
|
5,211
|
$
|
8,221
|
$
|
(220,790
|
)
|
$
|
3,935
|
|||||||
Net
income before taxes
|
$
|
12,796,075
|
$
|
6,688,771
|
$
|
9,833,662
|
$
|
4,670,646
|
||||||||
Taxes
|
$
|
-
|
$
|
-
|
$
|
$
|
-
|
|||||||||
Net
income
|
$
|
12,795,675
|
$
|
6,688,771
|
$
|
9,833,662
|
$
|
4,670,646
|
||||||||
Foreign
Currency Translation Adjustment
|
$
|
34,412
|
$
|
1,138,567
|
$
|
843,976
|
$
|
(3,026
|
)
|
|||||||
Comprehensive
Income
|
$
|
12,830,087
|
$
|
7,827,338
|
$
|
10,677,638
|
$
|
4,667,620
|
Balance Sheet Data (at end of Period)
|
December 31
|
September 30,
|
||||||||||
2009
|
2008
|
2010
|
||||||||||
Cash
|
$
|
843,358
|
$
|
612,971
|
$
|
8,689,839
|
||||||
Total
Current Assets
|
$
|
28,258,086
|
$
|
21,552,444
|
$
|
34,459,079
|
||||||
Total
Assets
|
$
|
30,981,287
|
$
|
24,529,932
|
$
|
40,293,467
|
||||||
Total
Liabilities
|
$
|
1,556,016
|
$
|
1,796,182
|
$
|
4,277,596
|
||||||
Total
Stockholder's Equity
|
$
|
29,424,671
|
$
|
22,733,750
|
$
|
36,015,871
|
||||||
Total
Liabilities & Shareholder's Equity
|
$
|
30,981,287
|
$
|
24,529,932
|
$
|
40,293,467
|
33
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The
following discussion and analysis of financial condition and results of
operations relates to the operations and financial condition reported in the
consolidated financial statements of the Company for the two years ended
December 31, 2009 and 2008, and the nine months ended September 30, 2010 and
2009, and should be read in conjunction with such financial statements and
related notes included in this prospectus. Those statements in the
following discussion that are not historical in nature should be considered to
be forward looking statements that are inherently uncertain. Actual results and
the timing of the events may differ materially from those contained in these
forward looking statements due to a number of factors, including those discussed
in the “Cautionary Note on Forward Looking Statements” set forth elsewhere in
this prospectus.
Overview
We were
incorporated under the laws of the State of Delaware on February 26, 2008.
The core activities of our business include the sale of transgenic poplar
seedlings and trees, and the planting, harvesting, processing, forestation, and
cloning of such seedlings and trees. We are based in Anshan City of
Liaoning Province, China.
Through
joint research with specialized universities, we have developed transgenic
poplar seedlings that are fast-growing, highly pest and drought-resistant and
high in fiber density. As a result, our seedlings are ultimately
purchased by government departments and other organizations responsible for tree
planting.
Operating
Results
The
following selected comparative financial information for the nine months ended
September 30, 2010 and 2009, and the years ended December 31, 2009 and 2008 have
been derived from and should be read in conjunction with the financial
statements of the Company for the nine months ended September 30, 2010 and 2009,
and the fiscal years ended December 31, 2009 and 2008 included as exhibits to
this prospectus. Because the Company is categorized as in a farm and
forest industry, it is entitled to participate in a government subsidy program
for its sapling business. Under the program, the Company collects value
added tax (VAT) from customers in an amount equal to 3% of sales during the year
ended December 31, 2009 and 6% of sales during the year ended December 31, 2008.
This amount is not required to be remitted to the government. VAT, which is
included in revenue, was $682,735 and $1,251,786 for the years ended December
31, 2009 and 2008 respectively.
Comparison
of Nine and Three Months Ended September 30, 2010 and 2009
Nine Months ended
September 30,
|
Three months ended
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Sales
revenues
|
$
|
16,288,827
|
$
|
12,922,412
|
$
|
45,552
|
$
|
6,094
|
||||||||
Cost
of goods sold
|
3,485,125
|
5,201,809
|
9,957
|
4,483
|
||||||||||||
Gross
profit
|
12,803,702
|
7,720,603
|
35,595
|
1,611
|
||||||||||||
Operating
expenses
|
||||||||||||||||
Selling
expense
|
1,729,768
|
2,562,828
|
7,625
|
628
|
||||||||||||
General
and administrative expenses
|
1,019,482
|
491,064
|
211,762
|
114,349
|
||||||||||||
Total
operating expenses
|
2,749,250
|
3,053,892
|
219,387
|
114,977
|
||||||||||||
Operating
income
|
10,054,452
|
4,666,711
|
(183,792
|
)
|
(113,366
|
)
|
||||||||||
Other
income (expense)
|
||||||||||||||||
Interest
income
|
7,793
|
4,180
|
3,613
|
531
|
||||||||||||
Gain
on change of fair value of derivative liabilities
|
149,644
|
-
|
68,726
|
-
|
||||||||||||
Interest
expense
|
(376,623
|
)
|
-
|
(166,708
|
)
|
-
|
||||||||||
Other
expense
|
(1,514
|
)
|
(245
|
)
|
(741
|
)
|
(476
|
)
|
||||||||
Total
other income (expenses)
|
(220,790
|
)
|
3,935
|
(95,110
|
)
|
55
|
||||||||||
Net
income
|
9,833,662
|
4,670,646
|
(278,902
|
)
|
(113,311
|
)
|
||||||||||
Foreign
Currency Translation Adjustment
|
843,976
|
(3,026
|
)
|
742,056
|
30,396
|
|||||||||||
Comprehensive
Income
|
$
|
10,677,638
|
$
|
4,667,620
|
$
|
463,154
|
(82,915
|
)
|
34
The
Company experiences strong seasonality in the sales of poplar saplings, its main
product. The majority of sales are executed in April, May, October and November
each year. During the first quarter, the Company’s sales
revenue was derived from sales of vegetables and flowers. The revenue
from sales of vegetables and flowers historically does not account for more than
1% of total revenue of the Company each year. The price of vegetables and
flowers sold and the related expenses have been relatively stable over the
past several years. The sale of vegetables and flowers does not have a
substantial impact on the Company’s operating results.
Sales
Revenue
Total
revenues increased $3,366,415 or 26% during the nine months ended September 30,
2010, compared to the same period of 2009. This is primarily due to the
sales of Sapling No. 2, a product we began selling in 2010.
Cost
of Goods Sold
Cost of
goods sold decreased $1,716,684 or 33% during the nine months ended September
30, 2010, compared to the same period of 2009. This is primarily due to the fact
that we used saplings bred and cultivated in house with lower costs in 2010,
compared to saplings outsourced from third parties in 2009.
Gross
Profit
Gross
profit increased $5,083,099 or 66% and $33,984 during the nine and three months
ended September 30, 2010, respectively, compared to the same periods of 2009.
This was primarily due to the aforementioned increase in sales and decrease in
cost of goods sold.
The gross
profit margin (gross profit as a percent of total revenues) increased 19% to
78.6% in the nine months ended September 30, 2010 from 60% in the nine months
ended September 30, 2009. This was primarily due to new products introduced in
2010 and the use of self-bred and cultivated saplings in 2010.
Selling
Expenses
Selling
expenses decreased by $833,059, or 33% during the nine months ended September
30, 2010, compared to the same period of 2009. This was mainly due to the
fact that the Company sold more saplings in 2009 and the size of saplings sold
in 2010 have been typically larger than those sold in 2009, resulting in lower
unit variable cost for each sapling.
General
and Administration Expenses
General
and administration expenses increased by $528,418 or 108% and $97,413 or 85%
during the three and nine months ended September 30, 2010, respectively,
compared to the same periods of 2009. This was mainly due to increased
professional fees, entertainment fees and building maintenances
fees.
Gain
on the change of fair value of warrants liabilities
The
Company used the Black-Scholes model to estimate the fair value of warrants then
outstanding as of September 30, 2010. There were 1,108,334 Series A warrants and
1,108,333 Series B warrants outstanding as of September 30, 2010, which were
valued at $500,876 and $410,333, respectively for the nine months ended
September 30, 2010, resulting in a gain on change of fair value of warrant
liability of $68,726 and $149,644 for the three and nine months ended September
30, 2010, respectively.
Interest
Expense
On
February 12, 2010, the Company issued five-year convertible promissory notes
with a face amount of $2,000,000 and a maturity date of February 11, 2015.
These notes bear interest at a rate of 10% per annum accrued monthly in kind for
the first 12 months and shall be payable in cash on the 10 th day of
each month following the initial 12 months, at the election of the note
holders. As of September 30, 2010, the Company recorded accrued interest
of $64,067 and $25,627 on the convertible promissory notes for the three and
nine months ended September 30, 2010, respectively.
On August
10, 2010, the investors exercised their right and purchased an additional
$2,500,000 face value of convertible promissory notes. As of September 30, 2010,
the Company recorded accrued interest of $17,758 on the convertible promissory
notes for the three and nine months ended September 30, 2010.
35
The
conversion feature of the convertible promissory notes provides for a rate of
conversion that is below market value. This feature is characterized as a
beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a
debt discount pursuant to ASC Topic 470-20. The Company recorded an amortization
expense of $108,741 and $43,497 of BCF related to the convertible promissory
notes for the three and nine months ended September 30, 2010.
Net
Income
For the
three months ended September 30, 2010, net loss was $278,092 compared to
$113,311 for the corresponding period of 2009, a decrease of $165,592 or
41%. For the nine months ended September 30, 2010, net income was
$9,833,662 compared to $4,670,646 for the corresponding period of 2009, an
increase of 111%. The increases in net incomes for the three and nine
months ended September 30, 2010 were mainly due to the aforementioned higher
revenues and lower cost of goods sold and selling and general and administrative
expenses.
Taxes
The
Company incurred no income taxes during the three and nine months ended
September 30, 2010 since income from the sale of tree saplings is tax exempt in
the PRC.
Foreign
Currency Translation Adjustment
The
accompanying financial statements are presented in U.S. Dollars. The Company's
functional currency is the Renminbi ("RMB") of the PRC. The financial
statements are translated into U.S. Dollars from RMB at period-end exchange
rates for assets and liabilities, and weighted average exchange rates for
revenues and expenses. Capital accounts are translated at their historical
exchange rates when the capital transactions occurred. The Company recognized
$843,976 foreign currency translation gain and $3,026 foreign currency loss for
the nine months ended September 30, 2010 and 2009, respectively. For the
three months ended September 30, 2010, the Company recognized $742,056 foreign
currency translation gain, compared to a gain of $30,396 for the three months
ended September 30, 2009.
Comprehensive
income
For the
three months ended September 30, 2010, comprehensive income (loss) was $463,154
compared to $(82,915) for the corresponding period of 2009, an increase of
$380,239. For the nine months ended September 30, 2010, comprehensive
income was $10,677,638 compared to $4,667,620 for the corresponding period of
2009, an increase of $6,010,017 or 132%. The increases in comprehensive
income for the three and nine months ended September 30, 2010 were mainly due to
changes in foreign currency adjustments.
Comparison
of Fiscal Years Ended December 31, 2009 and 2008
Year ended
December 31, 2009
|
Year ended
December 31, 2008
|
|||||||
Sales
revenues
|
$
|
23,615,957
|
$
|
22,146,254
|
||||
Cost
of goods sold
|
$
|
6,351,073
|
$
|
10,428,042
|
||||
Gross
profit
|
$
|
17,264,884
|
$
|
11,718,212
|
||||
Operating
expenses
|
||||||||
Selling
expense
|
$
|
3,561,550
|
$
|
4,206,849
|
||||
General
and administrative expenses
|
$
|
912,870
|
$
|
830,813
|
||||
Total
operating expenses
|
$
|
4,474,020
|
$
|
5,037,662
|
||||
Net
operating income
|
$
|
12,790,464
|
$
|
6,680,550
|
||||
Other
income
|
||||||||
Interest
income
|
$
|
5,211
|
$
|
8,221
|
||||
Total
other income
|
$
|
5,211
|
$
|
8,221
|
||||
Net
income before taxes
|
$
|
12,795,675
|
$
|
6,688,771
|
||||
Taxes
|
$
|
-
|
$
|
-
|
||||
Net
income
|
$
|
12,795,675
|
$
|
6,688,771
|
||||
Foreign
Currency Translation Adjustment
|
$
|
34,412
|
$
|
1,138,567
|
||||
Comprehensive
Income
|
$
|
12,830,087
|
$
|
7,827,338
|
36
Sales
Revenue
Sales for
the year ended December 31, 2009 and 2008 were $23,615,957 and $22,146,254
respectively, an increase of $1,469,703 or 6.64%. The increase was primarily due
to the fact that approximately 9 million more saplings were sold than in the
prior year.
Cost
of Goods Sold
Cost of
goods sold in 2009 and 2008 was $6,351,073 and $10,428,042 respectively.
The cost of goods sold in 2009 showed a decrease of approximately $4,076,969, or
39.1%. Our sales include both saplings grown internally and semi-mature
saplings (e.g. year old saplings) purchased from other suppliers. The cost
of internally grown saplings is lower than semi-mature saplings purchased for
growing and resale. In 2009, our sales included a majority of
internally grown saplings, lowering the cost of sales.
Gross
Profit
Gross
profit increased from $11,718,212 in 2008 to $17,264,884 in 2009, an increase of
$5,546,672, or 47.33%. This increase was primarily due to the decrease in cost
of goods sold.
Selling
Expenses
Selling
expenses were $4,206,849 in 2008 and $3,561,550 in 2009. This decrease of
$645,299, or 15.34%, is primarily due to a decrease in labor costs because
younger saplings were sold in year 2009 compared to year 2008.
General
and Administrative Expenses
General
and administrative expenses were $830,813 in 2008 and $912,870 in 2009.
This increase of $82,057, or 9.88%, reflects a proportionate increase in
administrative expenses, such as utilities, as business activity
increased.
Government
Subsidies
Because
the Company is categorized as in a farm and forest industry, it is entitled to
participate in a government subsidy program for its sapling business.
Under the program, the Company collects value added tax (VAT) from customers in
an amount equal to 3% of sales during the year ended December 31, 2009 and 6% of
sales during the year ended December 31, 2008. This amount is not required to be
remitted to the government. VAT, which is included in revenue, was $682,735 and
$1,251,786 for the years ended December 31, 2009 and 2008 respectively.
The subsidy rate is applicable on qualified revenues, which for us includes the
sale of the saplings, but not landscaping projects.
Net
Income Before Taxes
Net
income was $12,795,675 in 2009 and $6,688,771 in 2008. This increase of
$6,106,904, or 91.3%, in net income before taxes was mainly attributed to the
increase in gross profit.
Taxes
Taxes
were zero in 2009 and in 2008. According to the PRC income tax regulations, our
income from the sale of tree saplings is tax exempt in the PRC.
Net
Income
Net
income was $12,795,675 in 2009 and $6,688,771 in 2008. This increase of
$6,106,904, or 91.3%, was primarily due to the increase in gross
profit.
37
Foreign
Currency Translation Adjustment
The
accompanying financial statements are presented in U.S. Dollars. The Company's
functional currency is the Renminbi ("RMB") of the PRC. The financial statements
are translated into U.S. Dollars from RMB at year-end exchange rates for assets
and liabilities, and weighted average exchange rates for revenues and expenses.
Capital accounts are translated at their historical exchange rates when the
capital transactions occurred. During the fiscal period ended December 31, 2009,
the RMB steadily appreciated against the U.S. dollar, and we recognized a
foreign currency translation gain of $34,412.
Comprehensive
Income
Comprehensive
income was $12,830,087 in 2009 and $7,827,338 in 2008. The primary reason for
this increase of $ 5,002,749, or 63.9%, is due to the combined effect of higher
revenues, slightly lower operating expenses, and, most importantly, a
significant decrease in cost of sales that led to a higher gross
profit.
Liquidity
and Capital Resources
The
Company experiences strong seasonality in the sales of poplar saplings, its main
product. The majority of sales are executed in April, May, October and November
of each year. 11.26%, 41.87%, 47.24% and 8.69% of the sales were made in April,
May, October and November, respectively, in 2009. Mainly because of the
seasonality in its current business, the Company has relatively higher than
average accounts receivable on its year-end balance sheets. All
outstanding accounts receivables are expected to be received from customers
within a year after the delivery date of the products specified in the relevant
sales contracts. The Company has experienced no bad debts in its history and
expects all of its customers to make their required payments. All sales made
within the first half of fiscal year 2009 were collected within a year of the
date of product delivery.
The
Company’s current and long-term liquidity is very high as its current poplar
sapling business requires relatively low investment in fixed assets.
Short-term liquidity continues to improve as the Company’s current ratio has
increased year-over-year since 2007, from 5.34 in 2007 to 12.76 in 2008 and
19.49 in 2009. The MDF business the Company intends to enter requires a
relatively high investment in fixed assets, such as manufacturing facilities,
land and machinery. The Company expects the impact would be insignificant as it
believes there is very high demand in China for MDF. The Company expects
to develop good relationships with its MDF customers and suppliers, and expects
timely payments from its customers.
On March
26, 2009, the Company entered into an acquisition agreement with Liaoning
Shengsheng. Pursuant to the terms of such agreement, the Company acquired
Liaoning Shengsheng in consideration for $5.12 million. In February, 2010, the
Company paid $1.28 million to the Shengsheng Shareholders. The Company’s
long-term payable is $3.84 million for this transaction and is expected to be
satisfied using the proceeds of this offering.
On May
13, 2009, Liaoning Shengsheng and Tuqiang Forestry Bureau of Daxinganling (the
“Tuqiang Forestry Bureau”) entered into an acquisition agreement pursuant to
which Liaoning Shengsheng has the right to acquire up to 80% of the outstanding
equity of Beijisong for total consideration equal to 80% of the appraised value
of Beijisong. Liaoning Shengsheng has made payments of $877,693
for the Beijisong acquisition. No further payments are due until an
appraisal of Beijisong has been completed and a final purchase price has been
determined. We anticipate such appraisal will be concluded in 2010, although no
assurances thereof can be given. A portion of the proceeds of this offering are
intended to be used for such remaining payment following completion of the
appraisal of Beijisong. We cannot determine the full extent of our
short-term or long-term payables as the appraisal of Beijisong has not yet been
completed. The timing and result of such appraisal can be expected to impact the
timing and amount of our current and future payables.
We expect
to source a majority of the funds required for our future growth, if any, from
the capital markets; however there can be no assurances thereof. We intend
to enter into the business of manufacturing MDF by making strategic acquisitions
in the northeast areas of China. We also intend to expand our existing
plantation base in Xihuangdi Village, Dongsi Fangtai Town, and acquire new
plantation bases to support our anticipated growth. However, we have not
identified any acquisition candidates nor made a comprehensive assessment of the
benefits, risks or costs involved in such undertakings.
The
following table summarizes our liquidity and capital resources for the periods
presented:
|
September 30,
2010
|
December 31, 2009
|
||||||
Cash
|
$
|
8,689,839
|
$
|
843,358
|
||||
Working
capital
|
$
|
33,993,267
|
$
|
26,808,395
|
||||
Stockholders'
equity
|
$
|
36,015,871
|
$
|
29,424,671
|
38
The
following table shows the movements of our cash for the periods
presented.
|
Nine Months Ended September 30,
|
|||||||
2010
|
2009
|
|||||||
Net
cash provided by (used in) operating activities
|
$
|
8,779,501
|
$
|
(114,794
|
)
|
|||
Net
cash used in investing activities
|
$
|
(108,776
|
)
|
$
|
(1,149
|
)
|
||
Net
cash used in financing activities
|
$
|
(910,281
|
)
|
$
|
(70,553
|
)
|
||
Effect
of exchange rate changes on cash
|
|
$
|
86,037
|
$
|
(223
|
)
|
||
Net
increase (decrease) in cash
|
$
|
7,846,481
|
$
|
(186,719
|
)
|
Operating
Activities
Net cash
provided by operating activities for the nine months ended September 30, 2010
was $8,779,501. This is primarily due to net income of $9,833,662,
adjusted by non-cash related expenses, including depreciation and amortization
of $155,504, a gain on the change of fair value of derivative liabilities
of $149,644, amortization of discount convertible notes of $242,438 and
amortization of deferred financing costs of $28,983, offset by a net increase in
working capital of $1,330,562. The net increase in working capital items
was mainly due to an increase in accounts receivable, prepaid expenses,
long term deposits and advances to suppliers. The net increase in working
capital items was partially offset by the decrease in inventory, income tax
receivable and advances from customers.
The
Company paid $2,643,716 to Karamai Gas
Company for large-scale forestation projects (30,000 mu) during the
nine months ended September 30, 2010.
Net cash
used in operating activities for the nine months ended September 30, 2009 was
$114,794. This is primarily due to a net income of $4,670,646, adjusted by
non-cash related expenses, including depreciation and amortization, of $149,015,
offset by a net decrease in working capital of $4,934,455. The net
decrease in working capital was mainly due to increases in accounts receivable,
advances to suppliers and income tax receivable. The decrease in accounts
payable, other receivables and accrued expenses also contributed to the net
decrease in working capital items.
Investing
Activities
Net cash
used in investing activities for the nine months ended September 30, 2010 was
$1,149. This is primarily due to $1,149 of capital expenditures
for plant and office equipment.
Financing
Activities
Net cash
used in financing activities for the nine months ended September 30, 2010 was
$910,281. This is primarily due to net proceeds of $4,052,500 from the
issuance of convertible promissory notes and gross proceeds of $4,500,000 offset
by financial costs of $447,500, short-term loans of $93,417 from a shareholder
of the Company who advanced certain expenses on behalf of the Company, an
$8,091,017 dividend paid and $3,034,819 in capital contributions. The
$93,167 payable due to such shareholder has no stated interest.
On January
20, 2010, Liaoning Shengsheng, the Company’s subsidiary, declared a dividend to
the Shengsheng Shareholders in the amount of $8,091,017 (RMB 55,300,000).
RMB 34,557,800 ($5,056,198) of such dividend was paid in May 2010 to the
non-management Shengsheng Shareholders. On June 28, 2010, the remaining
Shengsheng Shareholders agreed to waive their right to obtain their dividends,
in a total amount equal to $3,046,471 (RMB 20,742,200), in order to assist the
Company’s future developments.
Net cash
used in financing activities for the nine months ended September 30, 2009 was
$70,533, representing funds borrowed from one of our stockholders.
For
the Year Ended December 31, 2009 and 2008
Years Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Net
cash provided by operating activities
|
$
|
6,419,755
|
$
|
648,988
|
||||
Net
cash (used in) investing activities
|
$
|
(2,923
|
)
|
$
|
(106,146
|
)
|
||
Net
cash (used in) financing activities
|
$
|
(6,187,557
|
)
|
$
|
(
749,506
|
)
|
39
Operating
Activities
Our net
operating cash flow for 2009 was $6,419,755 and $648,988 for 2008. This
was primarily attributable to a significant increase in net income, $12,795,675
compared to $6,688,771 in 2008. The rise in net income was mainly due to
the increase in gross profit as our cost of sales decreased.
Investing
Activities
Cash used
in investing activities in 2009 was $2,923 compared to $106,146 in 2008. The
primary reason for this decrease was because there were no significant purchases
of plant or equipment in 2009. No additional land purchases, leases or
construction was made.
Financing
Activities
Cash used
in financing activities in 2009 was $6,187,557, compared to $749,506 in 2008.
The primary reason for the increase was an increase in dividends paid. No
additional funds were provided from bank financing.
Liaoning
Shengsheng, the Company’s subsidiary, declared a one time dividend in the amount
of $6,139,166 in 2008 (prior to our acquisition of Liaoning Shengsheng), and
paid such dividends to the Shengsheng Shareholders in 2009.
Capital
Expenditures
Capital
expenditures were approximately $2,923 in 2009 and $106,146 in 2008, reflecting
a decrease of $103,223, or 97.2%. Rent paid for real estate was a major
component of our capital expenditures in 2008, accounting for approximately 92%
of total capital expenditures. The main reason for the decrease is that
such rent was prepaid in 2008 for both 2008 and 2009. Accordingly, no rent
payments were made in 2009.
Contractual
Obligations
We have
one contractual obligation for the purchase of equipment. We engaged an
MDF equipment manufacturer in April 2009 to design, build and install an MDF
production line for us in Karamai. The total cost is approximately
$9,004,392 and 80% of the total has been paid. Contract terms allow the
Company to pay the remaining balance as follows: 15% upon completion of
installation and 5% to be retained by the Company as maintenance and support
fees. Currently we are surveying suitable land space for the production line and
equipment.
Market
Risks
We are
exposed to various types of market risks, including changes in foreign exchange
rates, commodity prices and inflation in the normal course of
business.
Interest
rate risk
We are
subject to risks resulting from fluctuations in interest rates on our bank
balances. A substantial portion of our cash is held in China in interest
bearing bank deposits and denominated in RMB. To the extent we may need to
raise debt financing in the future, upward fluctuations in interest rates will
increase the cost of new debt. We do not currently use any derivative
instruments to manage our interest rate risk.
Commodity
price risk
We are
not exposed to any commodity price risk. We do not speculate on commodity
prices. We did not have any commodity price derivatives or hedging
arrangements outstanding at September 30, 2010 and did not employ any commodity
price derivatives during the three and nine months ended September 30,
2010.
Foreign
exchange risk
We carry
out all of our transactions in Renminbi. Therefore, we have limited exposure to
foreign exchange fluctuations. A substantial portion of our cash is held
in China in interest bearing bank deposits and denominated in RMB. The
Renminbi is not a freely convertible currency. The PRC government may take
actions that could cause future exchange rates to vary significantly from
current or historical exchange rates. Fluctuations in exchange rates may
adversely affect the value of any dividends we declare.
40
Inflation
risk
In recent
years, China has not experienced significant inflation or deflation and thus
inflation and deflation have not had a significant effect on our business during
the past three years. According to the National Bureau of Statistics of
China, inflation as measured by the consumer price index in China was -0.7%,
5.9% 4.8% and 1.5% in 2009, 2008,2007 and 2006, respectively.
Seasonality
The
majority of our sales occur in the months of April, May, October and
November. Accordingly, the Company has extreme seasonal fluctuations in
its revenue, operating income and cash flows.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to our
investors.
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 U.S. GAAP. Our financial statements reflect the selection and
application of accounting policies, which require management to make significant
estimates and judgments. We believe the following paragraphs reflect the
more critical accounting policies that currently affect our financial condition
and results of operations.
Accounts
receivable
The
Company collected accounts receivables incurred in 2008 more quickly than those
incurred in 2009, resulting in less accounts receivable outstanding as of
December 31, 2008, as compared to December 31, 2009. This is the primary reason
accounts receivable increased faster than sales in 2009 than 2008. We did
not accrue allowance on trade receivables because we have not previously
incurred any loss on trade receivables. We are confident we can collect
all accounts receivable outstanding. We expect to collect all accounts
receivable within a year. All accounts receivable outstanding as of
December 31, 2009 were collected in 2010.
Impairment
We
account for impairment of long-lived assets including property, plant and
equipment, and amortizable intangible assets in accordance with SFAS No.144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which requires
an impairment loss to be recognized when the carrying amount of a long-lived
asset or asset group exceeds its fair value and is not recoverable (when
carrying amount exceeds the gross, undiscounted cash flows from use and
disposition). The impairment loss is measured as the excess of the carrying
amount over the assets’ (or asset groups) fair value.
Revenue
recognition
Our
revenues consist of sales of genetically modified saplings. Sales are recognized
in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104 included in the
codification as ASC 605, Revenue Recognition, when the following four revenue
criteria are met: persuasive evidence of an arrangement exists, delivery has
occurred, the selling price is fixed or determinable and collectability is
reasonably assured. No return allowance is made as products are normally not
returnable upon acceptance by the customers.
The price
at which we sell fast-growing poplar seedlings is based on numerous factors,
including: market price changes of fast-growing poplar seedlings; regional
supply of fast-growing poplar seedlings; seasonal availability of seedlings and
demand for fast-growing poplar seedlings. Generally, it takes 20 days for a
single transaction to be consummated. This time frame includes negotiation of
terms, execution of contract, preparation, delivery, transportation, planting of
products and receipt of payment. For larger transactions, it can take up to one
year for the last payment to be made.
Our
revenue recognition policies are in compliance with Staff accounting bulletin
(SAB) 104, included in the Codification as ASC 605, Revenue Recognition . Sales
revenue is recognized at the date of shipment or delivery to customers when a
formal arrangement exists, the price is fixed or determinable, 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. No return allowance
is made as products are normally not returnable upon acceptance by the
customers.
Because
the Company is categorized as in a farm and forest industry, it is entitled to
participate in a government subsidy program for its sapling business. Under the
program, the Company collects value added tax (VAT) from customers in an amount
equal to 3% of sales during the year ended December 31, 2009 and 6% of sales
during the year ended December 31, 2008. This amount is not required to be
remitted to the government. VAT, which is included in revenue, was $682,735 and
$1,251,786 for the years ended December 31, 2009 and 2008
respectively.
41
Foreign
currency translation
The
reporting currency of the Company is United States Dollars. All assets and
liabilities accounts have been translated into United States Dollars using the
current exchange rate at the balance sheet date. Capital stock is recorded
at historical rates. Revenue and expenses are translated using the average
exchange rate in the year. The resulting gain and loss has been reported
as other comprehensive income (loss) within the shareholder’s
equity.
Use
of estimates
The
preparation of consolidated 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,
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. Because of the use of estimates inherent in the financial
reporting process, actual results could differ from those estimates. Significant
estimates include estimates of accruals and inventory valuation.
The fair
value of the Warrants was determined using the Black-Scholes option pricing
method with the following assumptions (not accounting for the Reverse Split and
any adjustment in the exercise price such Warrants as a result
thereof):
Nine Months Ended
September 30,
|
Year Ended December 31,
|
|||||||||||
2010
|
2009
|
2008
|
||||||||||
Estimated
dividends
|
11 | % | 11 | % | 11 | % | ||||||
Expected
volatility
|
54 | % | 54 | % | 54 | % | ||||||
Risk-free
interest rate
|
1.72 | % | 3 | % | 3 | % | ||||||
Expected
term
|
4.4years
|
3.3
years
|
4.3
years
|
Stock
based compensation
We
adopted SFAS No. 123R effective January 1, 2006, and are using the modified
prospective method, in which compensation cost is recognized beginning with the
effective date based on the requirements of SFAS No. 123R for all share-based
payments granted after the effective date that remain unvested on the effective
date. We account for stock option and warrant grants issued and vesting to
non-employees in accordance with EITF No. 96-18: “Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services” and EITF No. 00-18 “Accounting
Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees” whereas the value of the stock compensation is based upon
the measurement date as determined at either a) the date at which a performance
commitment is reached, or b) at the date at which the necessary performance to
earn the equity instruments is complete.
Recently
issued accounting pronouncements
In June
2009, the FASB issued authoritative guidance on accounting standards
codification and the hierarchy of generally accepted accounting principles
effective for interim and annual reporting periods ending after September 15,
2009. The FASB accounting standards codification (“ASC, “Codification”)
has become the source of authoritative accounting principles recognized by the
FASB to be applied by nongovernmental entities in the preparation of financial
statements in accordance with GAAP. All existing accounting standard documents
are superseded by the Codification and any accounting literature not included in
the Codification will not be authoritative. However, rules and interpretive
releases of the SEC issued under the authority of federal securities laws will
continue to be sources of authoritative GAAP for SEC registrants. The
Codification does not change or alter existing GAAP and, therefore, it does not
have an impact on our financial position, results of operations and cash
flows.
We also
adopted authoritative guidance issued by the FASB on business combinations. The
guidance retains the fundamental requirements that the acquisition method of
accounting (previously referred to as the purchase method of accounting) be used
for all business combinations, but requires a number of changes, including
changes in the way assets and liabilities are recognized and measured as a
result of business combinations. It also requires the capitalization of
in-process research and development at fair value and requires the expensing of
acquisition-related costs as incurred. We will apply this guidance to
business combinations completed after July 1, 2009. Adoption of the new
guidance did not have a material impact on our financial
statements.
42
In
June 2009, the FASB made an update to consolidation of variable
interest entities. Among other things, the update replaces the calculation
for determining which entities, if any, have a controlling financial interest in
a VIE from a quantitative based risks and rewards calculation, to a qualitative
approach that focuses on identifying which entities have the power to direct the
activities that most significantly impact the VIE’s economic performance and the
obligation to absorb losses of the VIE or the right to receive benefits from the
VIE. The update also requires ongoing assessments as to whether an entity is the
primary beneficiary of a VIE (previously, reconsideration was only required upon
the occurrence of specific events), modifies the presentation of consolidated
VIE assets and liabilities, and requires additional disclosures about a
company’s involvement in VIEs. This update will be effective for fiscal
years beginning after November 15, 2009. The Company does not currently
believe the adoption of this update will have any effect on its consolidated
financial position and results of operations.
In
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective for us beginning July 1, 2010, with earlier adoption
permitted. Under the new guidance on arrangements that include software
elements, tangible products that have software components that are essential to
the functionality of the tangible product will no longer be within the scope of
the software revenue recognition guidance, and software-enabled products will
now be subject to other relevant revenue recognition guidance. Additionally, the
FASB issued authoritative guidance on revenue arrangements with multiple
deliverables that are outside the scope of the software revenue recognition
guidance. Under the new guidance, when vendor specific objective evidence or
third party evidence for deliverables in an arrangement cannot be determined, a
best estimate of the selling price is required to separate deliverables and
allocate arrangement consideration using the relative selling price method. The
new guidance includes new disclosure requirements on how the application of the
relative selling price method affects the timing and amount of revenue
recognition. We believe the adoption of this new guidance will not
have a material impact on our financial statements.
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
INDUSTRY
OVERVIEW
The
global forestry industry provides timber resources and processed wood products
for numerous industries. The industry is generally divided into upstream
and downstream activities. Upstream activities focus on forest resource
management, including forest planning, planting, stand tending and/or management
of the forest, as well as harvesting and transportation of logs. The wood-based
downstream activities consist of processing of logs into products such as sawn
timber, plywood, reconstituted panel products, pulp and paper, as well as
further value-added processing activities, including production of housing and
building materials, including flooring and furniture.
In China,
the State Forestry Administration of the PRC, or the SFA, is the state bureau in
charge of the national forestry industry. Its principal functions include the
formulation of policies and regulations for the national forestry industry,
forest management and forestry resources protection and the supervision of their
implementation. Under the PRC Forest Law, the PRC strictly implements a
quota system for the logging of forest wood. The forestry bureaus at the
provincial level are responsible for compiling annual logging quotas. The annual
quota is reviewed by the local government at the same level and is submitted to
the PRC State Council for approval. Domestic log supply in China is
ultimately determined by the planted area and standing volume of resources
inside China. Increases in planted area and standing volume are ultimately going
to affect allowable quotas.
According
to the FAO’s Global Forest Resources Assessment 2005 and the website of the
State Forestry Administration Bureau of the PRC, China ranks fifth in the world
with approximately 195 million hectares of forest. However, China’s forest
area per capita is approximately 0.145 hectare, only about 22.2% of the
global average. China’s forest area, in terms of percentage of land
area, is approximately 18.21%, which is lower than the world average of 30.3%.
The forest growing stock in China is, by area, 67 m3 per
hectares, which is only about 60.9% of the global average. As a result,
China has become the second largest timber-importer in the world.
According
to a report published by China’s National Development and Reform Commission, the
development target of China in its 11th Five-year Plan (2006-2010) was
to raise the comprehensive utilization rate of timber from 60% to 70%.
Increasing the comprehensive utilization rate of timber, especially by utilizing
MDF, not only increases the comprehensive utilization rate of timber and saves
forest resources, but it also provides various high value-added wood products,
with large-size, multiple specifications and wide application.
FORESTRY
POLICIES IN THE PRC
The
following is a brief overview of certain recent forestry policies in the
PRC:
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·
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According to the Guiding
Catalogue for Industry Restructuring promulgated by NDRC which took effect
on December 2, 2005, reforestation falls within the category of industries
encouraged by the PRC government. The PRC government also has
formally encouraged foreign investment in the business of
reforestation.
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·
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According to the Outline of
Policy on Forest Industry promulgated by seven state bureaus of the PRC
including the SFA on August 10, 2007, (1) development of essential
technology, equipment and products which could speed the improvement of
the forest industrial structure are encouraged; (2) forest resource
development and international cooperation are encouraged; (3) non-public
ownership within the forest industry is encouraged; (4) preferential tax
policies on forestry were implemented; and (5) government support policies
on forestry insurance were
established.
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43
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·
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According to the Opinion on
Comprehensively Promoting the Reform of the System of Collectively-owned
Forestry Rights (the “Opinion”) issued by the Central Committee of the
Communist Party of China and the State Council on June 8, 2008, the PRC
government will promote the reform of the system of collectively-owned
forestry rights. The reform does not change the ownership of the forest
land and the collectively-owned forest land will continue to be owned by
the collectives, while the ownership of forest trees and the use right of
forest land with a period of 70 years should be granted with clearly
established ownership and rights. The Opinion also provides that those who
are entitled to the forestry rights have the right to dispose of these
rights in accordance with PRC laws, including by way of subcontracting,
lease, transfer, mortgage and using them for contributing to the capital
of a company, provided that the use of the forestry land remains
unchanged. Furthermore, the PRC will simplify the legal formalities for
management of logging activities and the approval procedures, and will
support the establishment of leading forestry enterprises and promote
large-scale forestry production and standardization of forestry
management. On December 26, 2008, the SFA promulgated the Notice about the
Pilot Implementation of Forestry Deforestation Management Reform,
according to which, the SFA will gradually reform the forestry
deforestation system, simplify the approval procedures, establish a
convenient and efficient deforestation approval system, and ultimately
change the current standards-based control system to a sustainable
operation management system.
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·
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In addition to reducing the
Forest Maintenance Fee (a fee required to be paid when a logging permit is
applied for in the PRC) from 20% of relevant sales value to less than 10%,
the PRC government will expand both domestic and international markets,
accelerate technological innovation, strengthen brand construction, assist
in the expansion of leading enterprises, support the small and medium
enterprises and promote forestry
reform.
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Forest
management
All
forest land in the PRC is either owned by the state or rural collective economic
organizations. Ownership of forestry land is not transferable in the PRC.
However, forest land use rights, forest trees use rights and forest trees
ownership rights are transferable as long as the transfer is conducted in
accordance with PRC law (including the requirement that a forest land cannot be
converted into a non-forest land).
Forests
are divided into the following five categories:
(1)
Forests for special uses: forests and trees mainly aimed at national defense,
environmental protection and scientific experiments.
(2)
Protection forests: forests, trees and bushes mainly aimed at protection,
inclusive of water source storage forests, forests for water and soil
conservation, wind protection and sand bind forests, forests for farmland and
grassland protection, river bank protective belts and road protection
belts;
(3)
Timber stands: forests and trees mainly aimed at timber production, inclusive of
bamboo groves mainly aimed at bamboo production;
(4)
Economic forests: trees mainly aimed at the production of fruits; edible oils,
soft drinks and ingredients; industrial raw materials; and medicinal materials;
and
(5)
Firewood forests: trees mainly aimed at the production of fuels.
Only the
timber stands, economic forests and firewood forests and the forest land use
right thereof and the forest land use right of other forests, trees and other
woodlands stipulated by the State Council, are transferable under the PRC laws.
Moreover, according to the PRC laws, they can be priced and converted into
shares or used as capital contribution for equity joint ventures or cooperation
conditions for cooperative joint ventures. However, forest lands may not be
converted into non-forest lands.
According
to the PRC Forestry Law enacted by SCNPC on September 20, 1984 and amended on
April 29, 1998, and the Implementation Regulations of PRC Forestry Law effective
as of January 29, 2000, the State adopted a registration system of forest,
forest wood and forest land. All forest, forest wood or forest land is to be
registered by local governments at or above the county level and records
maintained and certificates issued confirming the ownership or right to
use.
Logging
in forests is strictly regulated in the PRC under its forestry laws and
regulations. Forestry bureaus at the national, provincial, municipal, county and
township levels are responsible for checking and organizing the forestry
resources, formulating forestry operation plans, and compiling annual logging
quotas in their area based on these forestry resources and forestry operation
plans.
44
Logging
quotas
Under the
PRC Forestry Law, the PRC government strictly implements a quota system for
logging of forest wood, to uphold the overriding principle that the amount of
consumption of timber must be less than that grown.
Each
year, the forestry bureaus at the lower levels of government (mainly the county
level), based on their regular check on conditions (including the maturity of
trees and the forestry resources) and the forestry operation plans of all
forestry lands within their respective area, prepare proposed annual logging
quotas. The annual quota is reviewed by the local governments at the same level
and submitted to the forest bureau at the provincial level. The forestry bureaus
at the provincial level are then responsible for compiling annual logging quotas
by adjusting the proposed logging quotas submitted by the lower level forestry
bureaus and submitting them to the PRC State Council for final
approval.
According
to the Implementation Regulations, the annual quota for certain key forest zones
will be approved by the PRC State Council and the quota will be set every five
years. The Implementation Regulations of the PRC Forestry Law (which was enacted
on September 20, 1984 and amended on 29 April 1998) further stipulate that the
logging of a foreign-invested timber forest up to a certain scale is subject to
the approval of the forestry bureaus at the provincial level within the annual
forest logging quota approved by the PRC State Council and is to be listed
separately in respect of the logging quota.
Annual
logging quotas are subject to review and strictly implemented by the different
levels of forestry bureaus. In order to ensure logging quotas are strictly
implemented: (1) before logging, forestry operators are required to obtain the
pre-approval and logging permits from the relevant forest bureaus; (2) during
logging, the local forest bureaus selectively conduct on-site investigation and
supervise the logging activities of the forest operators; (3) after logging, the
transportation of the timber out of the forestry zone requires a separate
transportation permit from the forestry bureau; and (4) in respect of
transportation, timber inspection posts are set up along the roads heading out
from the forestry zones to inspect the timber transport and stop the transport
of timber without permit.
Logging
permits
The PRC
Forestry Law provides that logging of trees requires logging permits. When a
state-owned forestry enterprise or institution applies for a logging permit, it
is required to develop a logging area survey, design document and logging and
renewal verification proof of the previous year. For non-state-owned forestry
operators, they must apply for a logging permit with a document that contains
contents such as logging objectives, location, tree species, tree situation,
area, stock, approach and reforestation measures.
Upon
receipt of an application of logging permit from a forest operator, the
respective forestry bureau at the county level will examine the application and
assess whether the accumulated area/volume of timber to be harvested will exceed
the logging quota for the year initially allocated to the specific piece of
forestry land based on its own annual assessment reports on the relevant
forestry land, or the aggregate logging quota for the year allocated to the
whole county.
Logging
permits will not be issued to the applicant:
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if the applicant has not
replanted forest wood logged in the previous year;
or
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if there were any large scale
forest fires, significant unlawful logging or large scale destruction
caused by pests in the previous year and the applicant has not adopted
appropriate preventive measures or improved measures to prevent such
occurrences.
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The
logging permits usually contain details of logging, including the location, the
species of trees, its origin, ownership, logging method, intensity of logging,
area for logging, the amount of timber and the term of validity of the
permit. Forestry operators must carry out the harvesting activities
pursuant to such details specified on the logging permits. After logging,
the forestry bureaus which issued the logging permits examine and inspect
whether the logging activities comply with the terms of the logging
permits. If it is found that the relevant forestry operator has not
conducted logging activities or the re-plantation in accordance with the
requirements of the logging permits, the forestry bureau will not approve
further applications for logging permits.
Violations
Illegal
logging, or logging in excess of timber production plans or logging permits, is
punishable by fines and the confiscation of illegally logged timber and the
proceeds from sales thereof. Illegal loggers may be asked to replant trees. If
any logging unit or individual logger fails to fulfill reforestation tasks
pursuant to the prescribed provisions, the department issuing the logging permit
has the power to stop issuing such permits. In the case of serious violations,
the relevant forestry bureaus may impose fines and administrative
sanctions.
Processing
of timber in forest zones
Timber
processing in forest areas must be approved by the forestry bureau at the county
or higher level. The current PRC Forestry Law and its implementation regulations
do not stipulate detailed requirements for timber processing in forest zones.
Generally, anyone who is engaged in timber processing can apply for approval by
submitting the application form and relevant documents. However, there is
a limit, depending on the volume of the local forestry resources, for the total
number of approved timber processors within a forest. Any unapproved timber
processing in a forest zone will be subject to penalties including the
confiscation of illegal proceeds generated therefrom and a fine of not more than
2 times the proceeds.
45
Transportation
of timber
Other
than the logging quotas and logging permits, timber transportation permit is
another measure implemented by the PRC government to further monitor the logging
activities in the PRC.
According
to the PRC Forestry Law and its implementation regulations, transportation of
timber (unless the timber is uniformly allocated and transferred by the state)
out of forestry zones to destination points requires a transportation permit to
be issued by the forestry bureau at the county level or above. No entity or
individual carrier may transport any timber without a timber transportation
permit. To apply for a timber transportation permit, the applicant must submit
the relevant forest logging permit, the quarantine certificate and other
documents as may be required by the forestry bureau at the provincial level. The
competent forestry bureau shall, within 3 days after it has received an
application, issue to the applicant a timber transportation permit which
specifies the total volume of timber permitted to be transported.
The local
forestry bureau sets up timber inspection stations in forest zones for the
inspection of timber transportation. For any timber transportation without any
permit, the timber inspection station must stop it, and may temporarily detain
the timber not covered by a transportation permit and immediately report it to
the competent forestry bureau at the county or higher level. When anyone
transports any timber without any permit or using a forged or altered timber
transportation permit or in excess of the approved timber amount stated in the
timber transportation permit, the law provides that (i) the timber may be
confiscated; (ii) a fine of up to 50% of the price of the timber may be imposed
on the owner; (iii) the transportation fee paid to the carrier may be
confiscated; and (iv) a fine up to one to three times of the transportation fee
may be imposed on the carrier.
Environmental
impact assessment
According
to the PRC Environmental Protection Law, the PRC Environmental Impact Assessment
Law and other relevant regulations, if an entity performs clear logging, an
environmental impact report must be prepared to provide a comprehensive
assessment of the resulting environmental impact; if an entity plants in the
environmental non-sensitive area, an environmental impact registration form must
be filled in and submitted to the relevant environmental bureau.
Environmentally
sensitive areas include the following:
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the areas stipulated under the
national and local laws that need special protection, such as water source
protection areas, scenic spots, nature reserves, forest parks, key
national heritage, historical and cultural preservation areas, soil
erosion protection areas and basic farmland protection
areas;
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the ecologically sensitive and
vulnerable areas, such as key soil erosion areas that need special
governance and supervision, natural wetlands and habitats of rare or
special ecological environment and naturally regenerated forests, tropical
rain forests, mangroves, coral reefs, spawning grounds, fisheries and
other important ecosystems;
and
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the areas of social concern, such
as cultural and educational areas, resorts, hospitals and other protection
areas with regional and historical, scientific, national or cultural
significance.
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An
environmental impact report generally is required to cover the
following:
1. a
brief introduction to the construct project;
2. the
existing environment of the construction project;
3. an
analysis, prediction and assessment of the environmental effects from the
construction project;
4. the
protective measures for the environment of the construction project, and the
technical and economic demonstrations of such measures;
5. an
analysis of the environmental effects from the economic losses and benefits of
the construction project;
6. a
proposal for monitoring the environment of the construction project;
and
46
7. a
conclusion on the evaluation of environmental effects.
According
to the contents and format promulgated by SFA, the environmental impact report
form must contain the following contents:
1. the
project name, location, types of industry and total investment
amount;
2. the
main targets of the environmental protection which may be the resident area, the
school, hospital, cultural relic, landscape area, water resources or other
sensitive points;
3. the
analysis of the impact and suggestions or measures to protect the environment;
and
4. the
conclusion on the evaluation of environmental effects.
An
environmental impact report is for a construction project which may have more
significant environmental impact and therefore is required to contain a more
comprehensive assessment of the environmental impact. The environmental
impact report is to be submitted by an enterprise which is engaged in
construction activity, (1) if a feasibility study of the relevant construction
project is required by PRC laws and regulation, at the time it conducts such
feasibility study; and (2) if such feasibility study is not required by PRC laws
and regulations, before it commences the construction or obtains the business
license (if required).
Pusheng
has conducted environmental impact assessments for its MDF project (as described
below) and same was approved by the Environmental Protection Bureau of the
Karamai municipality. Additional government approvals are still required
in order to continue with its MDF project.
Reforestation
In order
to protect forests, the PRC Forestry Law and the Implementation Regulations of
PRC Forestry Law provide that entities and individuals that have harvested the
forest must, according to the area, number of trees, tree species and period of
time specified in the logging permits, plant a number of trees equal to the ones
logged. After the planting of saplings is completed, the forestry bureaus
which issue logging permits examine the area and quality of reforestation and
issue an Acceptance Certificate of Reforestation.
Should
forest logging entities or individuals fail to finish the reforestation task in
compliance with the relevant requirements, the authorities which have issued the
logging permit may stop issuing further logging permits to them until they have
completed their reforestation tasks. Under any of the following circumstances,
the local forestry bureau may order the forest logging entities or individuals
to complete the reforestation task within a prescribed period, and if they fail
to do so, a fine of not more than 2 times the expenses required for completing
the uncompleted reforestation task, may be imposed: (1) the forest logging
entities or individuals fail to complete the reforestation in two consecutive
years; (2) the reforestation area completed within the current year is less than
50% of the area of reforestation required; (3) except for the arid or semi-arid
areas as specially provided for by the state, the reforestation survival rate of
the year is less than 85%; or (4) the forest logging entities or individuals
fail to complete the reforestation task as scheduled in accordance with
applicable requirements. The poplar saplings grown by the Company
regenerate after harvesting if they are cut at the base, rather then removed at
the root level. The Company plans to meet the reforestation requirements
by doing the last harvest as cut trees so no additional costs are expected to be
incurred for reforestation.
Taxation
According
to the PRC EIT Law and its implementing rules, both domestic and
foreign-invested enterprises are now subject to a uniform enterprise income tax
rate of 25%. Income generated from the cultivation of forest trees and the
gathering of forest products, however, is exempt from the enterprise income tax
pursuant to relevant PRC EIT Law, which became effective in 2008.
Therefore we paid this income tax for 2008 and will be reimbursed by the Chinese
government in 2011.
In
addition, under the EIT Law, an enterprise incorporated outside of the PRC may
be deemed to be a “non-resident enterprise” or “resident enterprise” according
to their definitions thereunder. If that enterprise is deemed to be a
“non-resident enterprise” without an establishment or place of business in the
PRC, a withholding tax at the rate of 10% may be applicable to any dividends it
receives from a resident enterprise, unless it is entitled to reduction or
exemption of such tax, for example, pursuant to relevant tax treaties. On
the other hand, if that enterprise has “de facto management bodies” located
within the PRC territory, it may be considered a “resident enterprise” under the
EIT Law, and: (i) its worldwide taxable income will normally be subject to the
enterprise income tax at the rate of 25%; and (ii) any dividends it pays to its
non-PRC resident shareholders and any gains realized by such shareholders from
the sale or other transfer of the shares of that enterprise may be regarded as
China-sourced income, and as a result, be subject to a PRC income tax at a rate
up to 10%.
Because
the Company is categorized as in a farm and forest industry, it is entitled to
participate in a government subsidy program for its sapling business. Under the
program, the Company collects value added tax (VAT) from customers in an amount
equal to 3% of sales during the year ended December 31, 2009 and 6% of sales
during the year ended December 31, 2008. This amount is not required to be
remitted to the government. VAT, which is included in revenue, was $682,735 and
$1,251,786 for the years ended December 31, 2009 and 2008
respectively.
47
MDF
MDF
and particleboard are wood products produced from sub-quality and small fuel
wood, a process encouraged as part of the government’s national timber industry
policy. Pursuant to the MDF sector investment outlook forecast for 2010 to
2015 published by the Chinese government, it is estimated that in 2010, the
demand for MDF in China will be 27 million m3 but the
production will only be 24 million m3.
In 2015, the annual demand for MDF in China is expected to be 35 million m3.
Since 2000, China has been importing more than 1 million m 3 of MDF
each year.
MDF in
China is widely used in the following industries:
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1.
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65% of total MDF is used in
furniture industry;
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2.
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15% is used in
building;
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3.
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8% is used in floor
board;
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4.
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5% is used in packaging;
and
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5.
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7% is used in household
appliances, vehicles, ships and musical
instruments.
|
We
believe access to raw timber is critical to the success of any MDF
manufacturer. Some MDF producers have been forced to stop production, and
some have had to declare bankruptcy due to a shortage of raw materials.
The Company has been creating the raw materials planting base for the last 5
years through plantings of its genetically modified saplings. Even with so
many competitors in the current domestic market, there is only one MDF
manufacturing plant in Xinjiang Province which has its own raw materials
planting base. Once our planting base matures to the point where we can harvest
and utilize the timber, and once our MDF manufacturing facilities are
operational, we believe we will have a competitive advantage in Xinjiang
Province as we expect our raw material costs to be 10% to 15% lower than our
competitors who do not have their own supply of raw materials.
Demand
of Real Estate Market and Building Decoration Industry
The
annual timber consumption of China’s building industry is 65 million m3, which
is 21.3% of the total national timber consumption. Currently, MDF is used
in for approximately 25% of the Chinese building industry’s timber
needs.
We
believe that in order to be successful in the MDF industry in China, companies
must, among other things, increase production capacity and improve product
quality. With the overall development of the Chinese economy, increases in
national per capita income level and urban and rural residents’ increasing
improved housing conditions, we believe there will continue to be increasing
demand for MDF.
We
believe the key for rapid development of the MDF processing industry is the
accessing of raw materials. However, as a result of the Chinese
government’s strict controls on logging, the development of the MDF processing
industry may be slowed for those companies who do not own and control the raw
materials and who are not well capitalized. For those that are, they have
the ability to more successfully develop and profit from large scale MDF
production capabilities.
We
believe establishing an annual production capacity of 15,000 m3 MDF
requires a more than RMB 20 million Yuan (approximately $3.03 million as of
January 5, 2011) investment in equipment and other ancillary facilities, and an
additional RMB 50 million Yuan (approximately $7.57 million as of January 5,
2011) for the improvement of conditions in these facilities. Although we
seek to construct such a facility in the future, we have not made any material
efforts in this regard to date.
New and
larger production lines must be built to support the expected increase in
demand. Further, existing MDF facilities are located primarily other than
in Western China where we are focusing our efforts. We believe this gives
us a unique opportunity to establish a modern facility designed to meet MDF
production needs.
With the
rapid economic and social development and increase in people’s living standards,
China's demand for wood products continues to grow. We believe raw
materials supply, production scale, product quality and management will be the
key elements in establishing our competitiveness.
48
Competition
in the MDF industry in China is mainly reflected in the purchase of raw
materials, particularly by the large-scale production lines. We expect
this pattern to continue in the future, as the demand for raw materials by the
wood processing industry continues to outpace supply. In short, we believe
the continuous and stable supply of raw materials will be key to survival of any
company involved in MDF production.
Another
key competitive factor in China's MDF industry is the quality of the products.
In 2009, the Comprehensive Medium Density Fiberboard Quality Integrated pass
rate in China was approximately 79%. This is a large difference compared
with foreign advanced technology. In particular, many of China's MDF exports
cannot meet the quality certification standards in European countries. The
increase in environmental standards around the world has presented challenges to
existing Chinese MDF manufacturers as they must expend resources getting their
facilities and products up to international quality certification
standards. We feel we will have a distinct advantage over existing
competitors in this regard as our facilities are intended to be built in order
to comply with ever-stricter international standards.
BUSINESS
Overview
China
For-Gen is a Delaware corporation formed on February 26, 2008 solely for
the purpose of acquiring all of the equity interests of Liaoning Shengsheng, a
company incorporated in the People’s Republic of China (“China” or the “PRC”) on
November 24, 2000. Since its inception, Liaoning Shengsheng has been an
agricultural and forestry company engaged in the breeding, cloning and sale of
plant seedlings and specialized transgenic plant seedlings, and the research and
development of seedling breeding technologies.
The
majority of our operations are located in western China. The primary
technologies used in our business are tissue culture technology and transgenic
seedling technology. This is a popular type of cell breeding technology
utilized in agriculture which takes advantage of cell division of a plant’s
branches and leaves. By the appropriate control of temperature and
humidity, we can increase the dividing speed of plant cells, thereby
cultivating a large amount of plant seedlings in the shortest possible
time. Our core products are transgenic poplar seedlings, which require
less water and are disease free and insect and pest resistant. The poplar
seedlings are characterized by fast growth, maturing in 3-5 years, instead of
the normal maturation time of 13-15 years for regular poplar seedlings. Through
our intended business model expansion, we also seek to become a leading
supplier of wood products (including MDF and particleboard) and plant seedlings
in China. An overwhelming majority of our revenues are derived from transgenic
poplar seedlings.
From
September 25, 2001 through September, 2003 and through October 2002 to June
2004, Liaoning Shengsheng conducted research projects together with Dalian
Technology University (“DTU”), pursuant to various Technology Development
Contracts, regarding transgenic poplar research, including cellulose syntheses
transgenic research. As a result of such cooperation, the Company was able
to develop Shengsheng No.1 and No.2 transgenic poplar seedlings. The
resulting technology is co-owned by both parties. Liaoning Shengsheng and
DTU are entitled to 70% and 30% of the profit, respectively, resulting from the
use of the patent received on such technology by either party. However, as
no patent was ever applied for, the Company has not paid, and is not obligated
to make any payment to, DTU for any profit received. DTU is not currently
commercializing this technology and, to our knowledge, has no plans to do
so. The Company now markets and sells Shengsheng No. 1 and No. 2
transgenic seedlings as a result of such development efforts. Pursuant to a
confirmation letter issued by DTU dated May 28, 2010, DTU has waived its right
to apply for any intellectual property protection of such research results, as
well as its rights in any products resulting from this cooperative
project.
Liaoning
Shengsheng also entered into a Technology Development Contract with Shenyang
Agriculture University Biotechnology Co., Ltd. (“SAU”) regarding cloning and
insect and pest resistant transgenic poplar research project, providing that SAU
would provide complete information (including research data and materials)
relating to the transgenic seedling technology and Liaoning Shengsheng would
reimburse SAU’s research in consideration. The agreement provides that
Liaoning Shengsheng would own all technologies and intellectual properties
produced from the project and would have the exclusive right to commercialize
and transfer such intellectual properties. On March 31, 2010, the Plant
Tissue Culture Laboratory of Shenyang Agriculture University, an affiliate of
SAU, issued a confirmation letter stating that Liaoning Shengsheng has the sole
right to commercialize the technical achievements and is entitled to all of the
economic benefit generated thereafter.
Transgenic
poplar seedlings collectively researched and developed by Shengsheng with DTU
and SAU won the National Gold Invention Award in 2003, an award given by the
Technology Exposition Committee of the Ministry of Science and Technology.
Plants developed by the Company are used for forestation in western China.
Major clients include departments in the Chinese government (at the provincial
and local levels) and other social organizations responsible for tree planting
in China
49
Recent
Developments
On May
10, 2009, Liaoning Shengsheng and Tuqiang Forestry Bureau of Daxinganling (the
“Tuqiang Forestry Bureau”) entered into an acquisition agreement (the “Beijisong
Agreement”) pursuant to which Liaoning Shengsheng has the right to acquire
67.74% of the outstanding equity of Daxinganling Tuqiang Beijisong Wooden Boards
Industry Co., Ltd. (“Beijisong”), a manufacturer of MDF, in exchange for 21
million RMB, or approximately $3.09 million. On May 13, 2009, the Company
and Tuqiang Forestry Bureau executed an amendment to the Beijisong Agreement
pursuant to which Liaoning Shengsheng has the right to acquire up to 80% of the
outstanding equity of Beijisong for a total consideration equal to 80% of the
appraised valuation of Beijisong. Liaoning Shengsheng has made payments of
$877,693 for the Beijisong acquisition. No further payments are due at
this time and a portion of the proceeds of this offering are intended to be used
for such remaining payment when the appraisal of Beijisong has been
completed. We anticipate such appraisal will be concluded in early 2011,
although no assurances thereof can be given.
Products
The
Company’s primary product is fast growing poplar saplings, which are grown in
the far northwest regions of China, in Xinjiang province near the city of
Karamai. Our current major product is its Shengsheng Fast-Growing Poplar
Seedlings. We
have different types of cloned seedlings (bottle seedlings), seedlings, one-year
old seedlings, one-year old cutting seedlings, two-year old seedlings and
three-year old seedlings. Our transgenic fast-growing poplar seedlings
have important features such as drought tolerant, disease resistant and a dense
fiber plant (limited water requirements). The Company grows two distinct
types of poplar saplings: Shengsheng No. 1 and Shengsheng No. 2. These
varieties of poplar trees have been genetically modified for faster growth, pest
resistance, low water requirements and high fiber strength. The poplar
seedlings mature in 3-5 years instead of the normal maturation time of 13-15
years. The saplings are sold primarily to distributors who then resell our
products to independent third parties for various uses, including re-forestation
in western China. Each product is separated into 5 different subcategories
(1-5 years old trees) according to their age. The characteristics of the
two types of trees are as follows:
|
·
|
Shengsheng No. 1: the distinct
features of these saplings are that they are highly pest and drought
resistant, with a growth period of 5 years, which is very short for
saplings of this kind. According to the National Weather Service
Bureau, the annual rainfall of the western region is less than 10% of that
in eastern China, and as a result many types of trees cannot survive in
the region, with poplar being a major exception. The survival rate
of Shengsheng No.1 is very high, at over 96%, in the western regions of
China.
|
|
·
|
Shengsheng No. 2: the distinct
feature is large plant fiber density. Under normal circumstances, poplar
fiber is very loose, and therefore is generally used only in low quality
paper making and as firewood. However, the genetically modified
fast-growing poplar trees have high fiber density. As a result, the
paper making utilization rate is higher, and the wood can also be used in
other commercial applications. The growth period is also only 5 years for
this variety, and the survival rate is also high, at over 96% in the
western regions of China.
|
In 2002,
we co-developed anti-insect-and-disease poplar seedlings and dense plant fiber
seedlings in conjunction with SAU and DTU, respectively. We began pilot
planting of these new seedlings in 2003 in Xinjiang Province. We clone and
cultivate the seedlings in a greenhouse environment for transplantation into the
ground. Each seedling can be cut into about 10 pieces, and each piece can
be cultivated as a new seedling.
Resources
and Raw Material Supply
We do not
need to purchase large amounts of raw materials. The seedlings, being the
critical material, are cloned in a greenhouse and can be mass cultivated at our
headquarters in Dongsifangtai, Haicheng City, or at a project site according to
demands. Other major production costs include irrigation (twice a year),
labor costs such as planting, cutting, digging, watering and leveling off the
site, and lease expenses.
According
to the PRC Agriculture Network published by the State Agriculture Department in
2001, the primary resources needed for our business are land and water.
Land is used mainly for nursery purposes. For every mu, 6,000-8,000
saplings can be planted. A “mu” is a measurement of area used in the PRC
and is equal to 1/15 of a hectare. For greenhouses, 20,000-28,000 plants
(seedlings) can be planted for every mu. Other raw materials include
fertilizer, chemicals, nutrient solutions and general agricultural production
materials. These are all ordinary agricultural production materials that
are generally available and there are numerous suppliers we can turn to in the
event of disruption in business with our current suppliers for any reason.
Land can be rented privately or the Company can choose to rent land offered by
the government.
Research
and Product Development
We
currently have limited resources to conduct the development of new
products. We have only 2 employees engaged in research and development,
and we are dependent on our relationships with third party research and
development institutes such as DTU and SAU to perform research and development
for us. There were no research and development expenses incurred in 2008 or 2009
because we did not conduct any R&D activities in year 2008 or 2009. There
were general administrative expenses in the amount of $711,507.54 and
$775,570.86, respectively, for fiscal years 2008 and 2009, constituting 3.33%
and 3.36% of the year end revenue. We plan on allocating additional
resources to new product development that we raise from our intended
financing.
At
present, provinces in northern China mainly plant fast-growing poplar trees like
Xinjiang poplar, Beijing poplar 107 and 108, and other Chinese poplar. All
these poplar types have large leaves, a short growth cycle and high survival
rate. Their characteristics make them popular and the best choices for
ecological and economic forests. However, ordinary fast-growing poplar
trees are victims of diseases and pests and have low plant fiber
density.
50
Proceeds
from this offering may be used to further this research, including obtaining the
necessary government approvals. In the event we are able to successfully
develop this gene and commercialize the resulting seedlings, we believe such
seedlings will quickly become one of the more purchased seedlings throughout
China, and will have the added benefit of relatively stable pricing.
Facilities
Tree
Plantations
We
seek to acquire forestry rights by entering into co-forestation agreements with
local governments in provinces throughout western China and then cultivating,
processing and manufacturing those resources. In our plantation model, we
assess the suitability of land where trees have been recently harvested.
If we find the land to be suitable, we seek to lease the land under long term
lease agreements. For replanting and conversion into fast-growing
high-yielding plantations, we cultivate trees using improved silviculture
techniques and sell the trees as standing timber. We choose to plant trees in
strategically located areas and operate our commercial plantations using
advanced, environmentally prudent plantation management practices. We believe
our advanced plantation management techniques are a competitive advantage in
China, where the commercial tree plantation industry is comparatively
underdeveloped and where there are currently limited large-scale plantations
using advanced plantation management practices. We have leased and will continue
to lease land from the original plantation rights holders and pay the land lease
rent. We started operating our first planted plantation in Karamai in
2002. Our planted plantations consist primarily of poplar trees in
Xinjiang Province. As of December 31, 2009, our planted plantations under
management consisted of approximately 8,900 mu.
Plantation
Base
The
Company has leased 128 mu (approximately 85,332.48 sq. meters) of land in
Xihuang Village, Dongsi Fangtai Town, from 48 villagers living in Xihuang
Village, as a plantation base at a current rent of RMB 420 per mu per year
(approximately $63.61 as of January 5, 2011), where the Company has established
eleven greenhouses and several warehouses as production facilities. The
term of the lease runs from November 15, 2000 to November 15, 2030. The
initial rent is RMB 300/mu/year (approximately $45.44 as of January 5, 2011)
from year 2000 to 2005 and market rate increases occur every five years.
For 2005 through 2010, rent is RMB 420/mu/year (approximately $63.61 as of
January 5, 2011).
On
January 23, 2010, Liaoning Shengsheng, as the lessee, and Karamai Yongheng
Industry Development Co., Ltd., as the lessor, entered into a lease agreement to
rent land in Karamai with total area of 700 mu (about 466,662 sqm) at a rent of
RMB 160/mu/year (approximately $24.23 as of January 5, 2011) from January 1,
2010 to December 31, 2011. This land is used as a nursery for the
Company’s poplar seedlings.
Land Use
Rights
We
currently maintain the following assigned land use right certificates for four
pieces of land located in Xihuang Village, Dongsi Fangtai Town, issued by the
Land Administration Bureau of Haicheng City:
|
·
|
an assigned industrial land use
right certificate issued on April 26, 2001 and valid until April 18, 2031
for a piece of land with an area of 12,033 m 2 . This land currently is used
for production, greenhouse and growing seedlings and there is no permanent
building on this land;
|
|
·
|
an assigned industrial land use
right certificate issued on April 26, 2001 and valid until October 30,
2051 for a piece of land with the area of 616m 2 , which is the Company’s tissue
culture research building;
|
|
·
|
an assigned business service land
use right certificate issued on January 8, 2000 and valid until January 8,
2030 for a piece of land with an area of 1,306 m 2 , where the Company’s dormitory
building is located; and
|
|
·
|
an assigned industry land use
right certificate issued on December 26, 2001 and valid until October 30,
2051 for a piece of land with an area of 715m 2 , the Company’s office
building.
|
Real Property
Ownership
We
currently own, and maintain the following House Ownership Certificate for, three
real properties located in Xihuang Village, Dongsi Fangtai Town issued by Urban
and Rural Construction Administration Bureau of Haicheng City:
|
·
|
a house ownership certificate
issued on November 7, 2001 of our office building for a construction area
of 2,285.17 m 2
;
|
51
|
·
|
a house ownership certificate
issued on November 7, 2001 of our tissue culture research building for a
construction area of 1,506.82 m 2 ;
and
|
|
·
|
a house ownership certificate
issued on January 9, 2001 for our dormitory building for a construction
area of 2,614 m 2
.
|
Customers
The
Company’s major clients are distributors who then resell our products to
independent third parties without our knowledge or participation. Sales
are made pursuant to seasonal contracts that are generally valid for no more
than a few months.
We had
two major distributors, Karamai Teng Lin Farming Co., Ltd., and Liaoning Dongran
Landscape Engineering Co., Ltd., that accounted for 81% and 94% of total sales
for our fiscal year ended December 31, 2009 and 2008, respectively.
Karamai Teng Lin was responsible for 53.37% of our 2009 total sales and Liaoning
Dongran was responsible for 29.94% of our total sales. Although we do not
currently have any contracts or orders in place with such distributors, we
believe our relationship with these (and our other) distributors is
strong.
Sales
and Marketing
We are
engaged in the forestry industry and focused on the construction of ecologically
sustainable and economically profitable forest area through the provision of
quality seedling products and services. We are in an expanding industry
that benefits from the support of many favorable government policies. We
do not utilize mass advertising or conduct general public outreach.
We do not
sell our products directly to end users, but rather use a network of independent
sales agents. The major agents are separated by region, primarily from
Xinjiang, Gansu, Sichuan and Shanxi. Most of them have long-standing
relationships with the Company. The Company evaluates its agents based on their
ability to coordinate buyers, as well as expected timing of funds collection,
which is usually based on standard practice in the region in which the agent
operates. The Company believes it saves a significant amount on sales and
marketing infrastructure by using this agency system, and the Company believes
it is the most efficient way to match buyers with their products across
China. Most of the Company’s agents operate under an exclusivity clause
whereby they are not allowed to sell similar varieties of fast-growing
poplars. Agent agreements are renewed each year, usually immediately after
the Chinese New Year in the first part of the calendar year. This is due
to the fact there are little to no sales in the winter months. The Company
customarily executes contracts in the late summer or early fall, and such
contracts require performance by all parties in May, at which time the contracts
terminate. Sales revenue is recognized at the date of shipment or delivery
to sales agents as the sales price is either fixed or determinable and
management deems no other significant obligations, such as warrants or product
returns of the Company, exist.
We have
four full-time personnel working in sales and marketing, including our project
team. Employees in our project, marketing and sales department are
provided with incentives of up to 3% of the size of new projects
signed.
Pricing
and Payment
The price
at which we sell fast-growing poplar seedlings is based on numerous factors,
including: market price changes of fast-growing poplar seedlings; regional
supply of fast-growing poplar seedlings; seasonal availability of seedlings and
demand for fast-growing poplar seedlings. Generally, it takes 20 days for
a single transaction to be consummated. This time frame includes
negotiation of terms, execution of contract, preparation, delivery,
transportation, planting of products and receipt of payment. For larger
transactions, it can take up to one year for the last payment to be
made.
Transportation
Distributors
that purchase our products are responsible for all aspects of the transportation
of such products. Soil is the only thing needed when transporting the
seedlings. Long distance transportation does not materially adversely
affect the survival rate of seedlings.
Intellectual
Property
We do not
have any patents, trademarks or other intellectual property protection.
Our cell breeding processes can be mastered by ordinary agricultural
technicians. Accordingly, we do not rely on any such protection, but
rather on our experience, our management team and our local contacts to provide
products and services we believe are superior to our competitors.
The
seedling products use the brand names of “Shengsheng No.1” and “Shengsheng
No.2.” However, these product names have not been
trademarked.
52
Liaoning
Shengsheng was formerly known as Anshan Xinfang Gardening Co., Ltd., which was
incorporated in April 1997 as a limited liability company with a registered
capital of RMB 10 million (approximately $1.515 million as of January 5, 2011 )
(“Anshan Xinfang”). Liaoning Shengsheng held the trademark “Xin Fang”,
registered with PRC Trademark Bureau under the State Administration for Industry
and Commerce, from June 21, 1999 through November 21, 2010. The Company is
currently not planning to renew this trademark.
As of
today, the Company is not aware of:
|
(i)
|
any challenges or disputes
relating to any intellectual property rights owned or used by the Company,
including any challenges to the validity, subsistence or ownership of such
rights including details of any claims or threatened claims by employees
for compensation in respect of any intellectual
property;
|
|
(ii)
|
any actual, prospective or
alleged infringement by third parties of any intellectual property rights
owned or used by the
Company;
|
|
(iii)
|
any circumstances which might
affect the intellectual property rights owned or used by the Company or
the validity, enforceability or registration of such intellectual
property; or
|
|
(iv)
|
any suspected or alleged
infringement of third party intellectual property rights by the
Company.
|
Business
Secrets
According
to the Counter Unfair
Competition Law of the PRC , business secrets refer to the technical
and/or operational information which is practical and not known to the public
and can bring economic benefits to the owners, and the owners have taken
measures to keep them confidential. A business operator may not infringe
on business secrets of others via any of (1) obtaining business secrets by
stealing, seduction, threats or other illegal means; (2) disclosing, using or
allowing others to use the business secrets by the means mentioned in the
preceding item (1); (3) disclosing, using or allowing others to use business
secrets by breaching confidential requirements or obligations. Where a
third party obtains, uses or discloses the business secrets of others,
acknowledging or should have acknowledged the illegal acts above mentioned, the
breaching party is deemed to have infringed on such business secrets too. Where
any party infringes on business secrets, the relevant authority is required to
order it to stop the illegal acts and may, according to circumstances,
impose on the breaching party a fine ranging from RMB 10,000 to RMB 200,000
(from approximately $1,515 to $30,292 as of January 5, 2011 ). We
currently neither own nor rely on any business secrets to protect our products
or services, but rather on our experienced management team and local contacts to
provide products and services we believe are superior to our
competitors.
Competition
The
Chinese forestry industry is very competitive, but maintains high barriers to
entry. Ever since the implementation of the national policy of encouraging
forestation, market entry restrictions and price controls have been
lifted. Currently, non-state capital investment accounts for 80% of the
yearly total investment. There are approximately five enterprises in China that
have fast-growing poplar seedling capacity of over 10 million seedlings.
Though they have the ability to produce more than 10 million fast-growing poplar
seedlings, we do not believe these are their main products. However, there
is no company in China to our knowledge that engages in both the seedling
breeding and planting aspects of the forestry industry. Further, our
research indicates there is no domestic forestry enterprise that has a nursery
capacity over 1,000 mu (166.7 acres). Assuming the maximum production of
each mu is 8,000 plants, no single company has a production capacity over 10
million plants. Additionally, while there are companies similar to ours
throughout China, logistical issues prevent companies such as ours from
competing on a national scale.
In the
fast-growing poplar seedling market, we believe our main competitors are Beijing
Forestry University, the National Forestry Academy, Northeastern Forestry
University and Shenyang Agriculture University. However, they are
primarily forestry science and research entities, not production entities, so
the breeding and selling of fast-growing poplar seedlings are not their primary
focus. They have a very low market share of fast-growing poplar
seedlings. We do not believe there are any competitors in the provinces in
which we conduct business regarding fast-growing poplar seedlings.
There are
numerous other companies engaged in various other aspects of the planting,
harvesting, processing and sale of timber and wood products. Due to both
the expected increase in demand for timber and numerous wood products across a
multitude of industries and the government encouragement of the development of
the domestic forestry industry, we expect to face a growing number of
competitors both within and outside of China.
53
Competitive
Advantages
Our
business model relies on the fact that seedlings for large-scale forestation
projects (more than 10,000 mu) can be bred in a relatively short period of
time. Although we are not the only company that can produce fast-growing
poplar seedlings on a large-scale using tissue culture technology, there are
only a few that have been successful in securing contracts for forestation
projects of more than 10,000 mu.
We
believe we also have a built-in competitive advantage due to the genetic make-up
of our fast-growing poplar seedlings. Further, we utilize our currently
existing facilities or the facilities of others with which we enter into
research agreements, which reduces the need for us to construct or lease
additional space.
While
the Chinese forestry industry is highly competitive, we believe that the
following strengths give us a competitive edge:
|
·
|
our
proprietary technology allows us to breed faster growing, disease
resistant trees;
|
·
|
our
ability to select, culture and grow our nursery stock and to scale these
processes as our production capacity increases ;
|
|
·
|
we
have strategically located production bases;
|
|
·
|
our
expansion strategy seeks to create a vertically integrated operator in our
industry , handling all aspects of forest, lumber and wood production,
from seedling production and plantation, through growth management and
harvesting, to lumber processing and production and sale of MDF and other
wood products ; and
|
|
·
|
we
have an experienced management
team.
|
We
believe our production bases are strategically located, in part, due to the
local demand for poplar trees, but also because Xinj iang Province is primarily
a dry, arid region. Accordingly, the province has benefitted from several
national preferential policies put in place by the PRC aimed at establishing and
sustaining forest production. For example, the National Forest Conserva t
ion Program adopted in China seeks the expansion of natural forests and
increasing the productivity of forest plantations. Xinjiang Province was
designated a first priority province, and, together with other first
priority provinces and regions, receives the highest level of financial support
from the central government to plant forests for soil and water protection and
to increase timber production from forest plantations.
Additionally,
our planned expansion into the Daxinganling Forest through the Beijisong acqui
sition, as discussed above, is expected to provide us with additional abundant
forest resources, as well as potential acquisition opportunities due to the
presence there of other lumber producers, both of which could help us to expand
our business. Othe r than as described in this prospectus, we have not
identified any acquisition candidates nor made a comprehensive assessment of the
benefits, risks or costs involved in such undertakings.
Employees
Substantially
all of our employees are located in China. As of January 24, 2011, we had 56
employees, including four sales representatives. There are no collective
bargaining contracts covering any of our employees. We believe our relationship
with our employees is satisfactory.
We have
signed standard employment agreements in a form provided by the Labour and
Social Security Bureau of Anshan Municipal with all employees, including our
directors and senior executives, but excluding interns and temporary
workers.
Insurance
We are
required to contribute a portion of our employees’ total salaries to the Chinese
government’s social insurance funds, including medical insurance, unemployment
insurance and job injuries insurance, and a housing assistance fund, in
accordance with relevant regulations. The insurance rate of each type of
insurance is as follows:
Insurance Type
|
Percentage
Payable by
Employer
|
Percentage
Payable
Employee
|
Total
Percentage of
the Salary
|
|||||||||
Pension
|
20
|
8
|
28
|
|||||||||
Unemployment
Insurance
|
2
|
1
|
3
|
|||||||||
Medical
Insurance
|
N/A
|
N/A
|
N/A
|
|||||||||
Occupational
Injury Insurance
|
0.5
|
0
|
0.5
|
|||||||||
Maternity
Insurance
|
0.8
|
0
|
0.8
|
We have
purchased social insurance for all our full-time employees. In the last three
years, we contributed approximately $83,683, $111,549 and $126,430 for the
fiscal years ended December 31, 2007, 2008 and 2009, respectively. We expect the
amount of contribution to the government’s social insurance funds to increase in
the future as we expand our work force and operations.
As of
today, we are not aware of any investigations, prosecutions, disputes, claims or
other proceedings in respect of insurance made by any insurance authority of the
PRC.
54
The
Company is currently not paying medical insurance for its employees. Currently,
China has not instituted a planned national medical insurance reform. In
accordance of the Decision on
Establishing the Basic Medical Insurance System for Urban Employees by
the State Council and the Tentative Program for Reforming
Basic Medical Insurance System for Urban Employees of Haicheng City , it
is not a compulsive duty for enterprises in Haicheng City where Liaoning
Shengsheng is located to buy medical insurance for its employees.
Environmental
Matters
The
Company is not aware of any investigations, prosecutions, disputes, claims or
other proceedings in respect of environmental protection made by any
environmental administration authorities of the PRC.
Pusheng
has conducted environmental impact assessments for its proposed MDF project (as
described below) which was approved by the Environmental Protection Bureau of
the Karamai municipality. Additional government approvals are still
required in order to proceed with the MDF project, as discussed
herein.
Tree
Plantations
As
disclosed in the Risk Factors section hereof, our tree plantations are subject
to certain environmental laws and regulations, particularly with respect to air
emissions and discharges of wastewater and other pollutants into land, water and
air, and the use, disposal and remediation of hazardous substances and
contaminants. We may be required to incur significant expenditures to comply
with applicable environmental laws and regulations. Moreover, some or all of the
environmental laws and regulations to which we are subject in our tree
plantations and manufacturing plants could become more stringent in the future,
which could affect our production costs and results of operations. Any failure
by us to comply with applicable environmental laws and regulations could result
in civil or criminal fines or penalties or enforcement actions, including a
requirement to install pollution control equipment or other mandated actions. As
a result, environmental laws and regulations may adversely affect our business,
financial condition and results of operations.
Government
Approval and Regulation of Our Principal Products or Services
Preferential
policies of Afforestation in Karamai
According
to the Several Policies for
Encouraging Investment and Improving Industry Structure Adjustment in
Karamai and Implementary Rules for Several Policies for Encouraging
Investment and Improving Industry Structure Adjustment in Karamai ,
enterprises and individuals who develop and plant ecological-public-interest
forest (including farmland protecting forest), water-maintaining forest, water
and soil maintaining forest, and wind-proof and sand fixing forest, are entitled
to a one-time subsidy of RMB 500/mu (approximately $73.56) and maintenance
subsidy of RMB 50/mu (approximately $7.36) per year for five years, subject to
approval of relevant Karamai government authorities. Enterprises and individuals
enjoy a subsidy of 80% of the water fee for five years after the trees are
planted in an ecological-public-interest forest and 50% of the water fee for
five years after the trees are planted in farmland protecting the forest,
subject to approval of relevant local government authorities. We pay
reduced water fees as a result of our participation in the Karamai project
described below and will continue to pay reduced fees for as long as we operate
the project. We pay RMB 6 Yuan (approximately $0.15) per m³ less than what
we would otherwise be charged.
On
October 26, 2000, the State Council promulgated the Circular regarding Several Policy
Measures for China’s Western Development Program and on January 15, 2004,
the People’s Government of Xinjiang Province promulgated the Opinion concerning Further Improve
and Implement State Land Preferential Policies to Promote the Social and
Economic Sustainable Development in Xinjiang.
According
to the above two regulations with regard to planting forests and grassland on
barren hills and wasteland, and to restoring forests and grassland from
cultivated land of the western regions, local government has implemented a
policy that whoever restores, plants or operates the forest land has the right
to the use of land and the ownership of the forests and grassland.
Corporations and individuals may apply to use barren hills and wasteland owned
by the state and conduct environment protection construction like restoring
vegetation of trees and grasses, on the condition that if such construction
investment and afforestation work be completed, such corporation or individual
has the timber rights for cultivation of state-owned land by paying an assigned
fee to the local government, which may be reduced or exempted. Such right to the
use of land is valid for 25 years subject to renewal upon application and is
transferable by inheritance or contract with consideration. We have
cultivated approximately 11,000 mu and as a result we are entitled to 25 years
of timber rights. Currently, we have 19 years left on this
right.
Preferential
policies of Afforestation in Liaoning
On
September 1, 2009, Liaoning Provincial People’s Government issued the Notice of
Construction Plan of Large-scale Afforestation Projects in Liaoning Province,
with a valid term from 2010 to 2012. According to such notice, financial
subsidies for afforestation are as follows: planting trees on barren hills and
wasteland, RMB 450/mu (approximately $66.20); planting shrubbery, RMB 350/mu
(approximately $51.49); enclosing a hill for afforestation, RMB 100/mu
(approximately $14.71); aerial seeding, RMB 80/mu (approximately $11.77);
afforestation projects with foreign investment, RMB 500/mu (approximately
$73.56); replant open forest land, shrub land and defective transformation of
silkworm field, RMB 200/mu (approximately $29.42); street trees planning in
rural area, RMB 1.5 (approximately 0.22) per tree; non-forest plantation, RMB
350/mu (approximately $51.49). We have not yet begun participation in this
program but intend to do so.
55
A new PRC
farm subsidized government program provides subsidies of 4,000 RMB
(approximately $588.44) per 1 mu to those involved in pesticide and pollution
free vegetable farming. We intend to begin participation in this program
during our fiscal year 2010, although the extent of such participation has yet
to be determined.
Legal
Proceedings
We may be
subject to legal proceedings, investigations and claims incidental to the
conduct of our business from time to time. We are not currently a party to any
legal proceedings. We are also not aware of any legal proceeding, investigation
or claim, or other legal exposure that could have a material adverse effect on
our business, financial condition or results of operations.
Business
Strategy
We seek
to continue to sell our transgenic poplar seedlings to third parties and are
continuing our research and development in order to further enhance the benefits
of fast-growing poplar seedlings. We also seek to continue the expansion
of our cultivation, manufacturing and production businesses. Through the
Beijisong acquisition, we believe we can establish a stronger presence in the
Daxinganling Forest, which is one of a few forests the Chinese government has
allocated for private corporations. We believe the following key
initiatives will allow us to successfully execute our strategy:
|
·
|
expand our geographical locations
by investing in additional tree plantations to gain market share in the
PRC;
|
|
·
|
improve the yields of our tree
plantations and reduce production costs through continuing investment in
research and development and application of advanced forestry management
techniques;
|
|
·
|
practice sustainable and
environmentally responsible forestry and
manufacturing;
|
|
·
|
build integrated manufacturing
operations to supply value-added, wood-based products to the PRC market
and further increase our revenue
streams;
|
|
·
|
strengthen management processes
and information systems to support the growth of our businesses;
and
|
|
·
|
maintain strategic alignment with
the PRC government‘s
plans.
|
56
The
Karamai Project
Karamai,
China is located in Xinjiang Province. Currently, Xinjiang province does
not have an established lumber industry. Local supply is imported from
other provinces and countries and the resulting transportation costs makes the
final product very expensive.
The
Karamai city government established a new fast-growing forest base (the “Forest
Base”) of 100,000 mu (one mu is equal to 1/6 of one acre) for industrial use
located in Xinjiang province. Liaoning Shengsheng established its wholly
foreign owned subsidiary, Karamai Pusheng Forest and Wood Industry, LLC
(“Pusheng”), a limited liability company organized under the laws of the PRC, on
January 25, 2005 in order to engage in timber cultivation and wood processing in
the Karamai region.
On
November 1, 2005, the Karamai Developing Planning Commission approved Pusheng to
establish an MDF facility capable of producing 80,000 cubic meters of MDF using
poplar and other trees provided from the fast-growing forest base. The
total investment required in order to get the plant operational is anticipated
to be RMB 64,800,000 (approximately $9,814,762 as of January 5, 2011 ).
Although the government approval to build this plant has expired, the Company
believes it will have the proper authority to build this facility at such time
as it is ready to do so. Because there are few trees that are adaptive in
the western area of China, the Company plans to develop the business of Pusheng
as part of its development plan for penetrating into Gansu Province and the
Inner Mongolia area. Based on its prior experience working with the local
government and the third parties that would be necessary to complete the tasks,
the Company expects to re-obtain government approval for this project and
complete all required applications and assessment work within 45 days following
the consummation of this offering and to begin the first phase of
construction shortly thereafter. It is likely that construction will not
begin until March, 2011, at the earliest, due to weather-related factors.
In addition to the $5 million of proceeds from this offering, the Company
anticipates the remaining $4.5 million required to get the plant operational
will be financed from the Company’s then-existing cash flow.
A portion
of the proceeds raised in this offering may be used to prepare the first phase
of construction and execution of the Karamai Project in Karamai Petrochemical
Industry Park, including:
|
·
|
purchasing the land rights and
building the manufacturing
plant;
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·
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equipment
purchasing;
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working capital;
and
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·
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purchasing the rights for logging
a portion of the forest from the Chinese
government.
|
6,300mu Ownership of Trees
and Timber
On
January 5, 2007, Pusheng, as the purchaser, and Karamai Pulin Ecology and
Technology Co., Ltd. (“Pulin”), as the seller, entered into a Forestry Right
Purchase Agreement for Pusheng to buy 11,000 mu (about 7,333,260 sq. meters) of
forest for consideration of RMB 55 million (approximately $8.33 million as of
January 5, 2011). Pusheng has paid RMB 43 million to date
(approximately $6,512,882 as of January 5, 2011 ). However, due to the
national reform of forestry rights, Pulin could not fulfill its obligations to
sell the forestry right to Pusheng. Therefore, Pusheng and Pulin entered
into a new agreement on February 25, 2009, pursuant to which Pulin refunded RMB
8,350,000 (approximately $1,264,711 as of January 5, 2011 ) to Pusheng and
granted Pusheng ownership of trees and timber growing in 6,300 mu (about
4,199,958 sq. meters) forest land within 10 years as compensation for failure to
transfer the initial 11,000 mu of forestry rights to Pusheng. Pusheng is
responsible for maintenance and plantation of forest in such land and intends to
sell the timber from these forests consistent with its prior operating
history.
Beijisong
Acquisition
The Company seeks to expand its
business capabilities through the acquisition of Beijisong. Daxinganling
Forest is located in the northern part of Heilongjiang Province, which is
China's northernmost province. Daxinganling Forest is China's most
resource-rich forest area and, through The Forestry Administration of
Daxinganling, is one of the few forests in China planning for state owned
enterprises and private corporations to work together. The Forestry
Administration of Daxinganling, together with the national Forestry Bureau, has
the authority over the forest. The 11 counties under the Forestry
Administration of Daxinganling each have their own County Forestry Department,
each of which controls several state-owned wood processing enterprises.
One of the county forestry departments is the Tuqiang Forestry Bureau, which
owns and operates Beijisong. Beijisong is a limited liability company
incorporated in the PRC on March 25, 2008. Beijisong has an annual production
capacity of 80,000 cubic meters of MDF and 2008 revenues of more than RMB 35
million ($5.147 Million US Dollars). Its advanced facility covers an area
of about 70,000 square meters. The manufacturing facility is composed of a
main plant, polishing plant, urea plant and power systems, buildings, plants and
a 15,000 square meter construction complex, including a particleboard production
plant with annual production capacity of 15,000 cubic meters. Beijisong
has raw materials inventory of approximately 50,000 cubic meters of wood.
The Company intends to use the gross proceeds of this offering to complete its
acquisition of Beijisong.
57
On May
13, 2009, the Company and Tuqiang Forestry Bureau executed an amendment to the
Beijisong Agreement pursuant to which Liaoning Shengsheng has a right of first
refusal to purchase 80% of the outstanding equity of Daxinganling Yuying Wood
Industry Co., Ltd. (“Yuying”) and Daxinganling Chengyu Wood Industry Co., Ltd.
(“Chengyu”), entities owned by Tuqiang Forestry Bureau, for RMB equal to 80% of
the appraised valuation of Yuying and Chengyu. Yuying is a wood processing
company with annual revenue of RMB 50 Million Yuan ($7.352 million) that
produces a variety of wood lathe board and wood plat side, and also reprocess
wood residues.
The
Company seeks to consummate the acquisition of Beijisong, as well as acquire
Yuying, in an effort to increase its production, manufacturing and sales
capabilities. The proceeds of this offering are intended to be used for
such payments. The Company anticipates acquiring Beijisong following
completion of the appraisal of Beijisong. The Company anticipates such
appraisal will be concluded in earl y 2011, although no assurances thereof can
be given. Proceeds of this offering are also intended to be used for the
acquisition of Yuying as soon as reasonably practicable following this
offering. The Company anticipates the cost of Yuying to be approximately
$2.6 million, but the final price will be determined based on Yuying’s net
assets at that time. The Company does not expect to require additional
sources of funds other than the offering proceeds in order to acquire
Yuying. The Company does not intend to acquire Chengyu at this time.
OUR
HISTORY AND CORPORATE STRUCTURE
Organizational
History of China For-Gen.
We were
originally incorporated under the laws of the State of Delaware under the name
China For-Gen Corp. on February 26, 2008. Our principal office is located in the
Tengao District, Haicheng City, Liaoning Province, P.R.China
114000.
Pursuant
to the Share Transfer Agreement entered into on March 26, 2009 (the “Share
Transfer”) between the shareholders of Liaoning Shengsheng and the Company, we
acquired all of the outstanding equity securities of Liaoning Shengsheng (the
“Shengsheng Shares”) from all of the Shengsheng Shareholders in
consideration for $5.12 million, equivalent to RMB 35,000,000 (the “Purchase
Price”) and the Shengsheng Shareholders transferred and contributed all of their
Shengsheng Shares to us. The closing of the Share Transfer (the “Closing”)
took place on May 6, 2009. In February, 2010, we paid $1.28 million to the
Shengsheng Shareholders and the remaining $3.18 million will be paid to the
Shengsheng Shareholders from a portion of the proceeds of this offering upon
receipt thereof. As a result of the Closing, Liaoning Shengsheng became a
wholly foreign-owned subsidiary (“WFOE”) of China For-Gen. On February 12,
2010, Liaoning Shengsheng and the shareholders of Liaoning Shengsheng entered
into an agreement providing that the Purchase Price would be transferred from
the Shengsheng Shareholders to Liaoning Shengsheng for working capital and
general corporate purposes.
In
connection with the acquisition of the WFOE, certain officers and directors of
Lioaning Shengsheng (the “Call Option Stockholders”) entered into a call option
agreement (the “Call Option Agreement”) with Ms. Sherry Li (“Ms. Li”), then the
sole officer, director and shareholder of China For-Gen, wherein Ms. Li agreed
to transfer 12,000,000 shares of Company common stock to the Call Option
Stockholders after our initial public offering. The call option may be
exercised by the Call Option Stockholders for nominal consideration of $0.001
per share (the “Call Option”). The Call Option Agreement provides that Ms.
Li may not dispose of any China For-Gen shares owned by her without the prior
written consent of the Call Option Stockholders. The Call Option Agreement
was amended and restated in its entirety on May 12, 2010 to comply with PRC
laws, including, without limitation, laws with respect to acquisitions by
foreign entities and ownership by PRC citizens in a foreign enterprise (the
“Amended Call Option Agreement”). The percentage ownership of the Company
to be granted to the Call Option Stockholders remains unchanged. On
December 31, 2010, the Call Option Stockholders exercised their rights under the
Amended Call Option Agreement with respect to 50% of the shares and they have
indicated they intend to exercise their rights with respect to the remaining 50%
on or by December 31, 2011. Upon exercise of the Call Option,
neither the ownership structure of the Company nor the number of shares of
Company common stock outstanding changed or will change from the current
structure as the shares underlying the Call Option are currently issued and
outstanding and beneficially owned by the Call Option Stockholders. Please
see the section titled “ Security Ownership of Certain Beneficial Owners and
Management ” on page 59 for the percentage ownership of Company common
stock owned by the Call Option Stockholders. The Call Option Agreement was
executed as part of, and in connection with, the initial acquisition of Liaoning
Shengsheng by the Company. Accordingly, the sale of all of the shares of
Liaoning Shengsheng to the Company was the consideration paid by the Shengsheng
shareholders for the Option Shares held by Sherry Li on their behalf pursuant to
the Amended Call Option.
58
The Call
Option Stockholders are subject to a lockup agreement providing that they shall
not, until the 24 month anniversary of the effectiveness of this registration
statement, without the prior written consent of T Squared Investments LLC,
directly or indirectly: (i) offer, sell, assign, transfer, pledge, contract to
sell, or otherwise dispose of, any shares of Common Stock, securities
convertible into or exercisable or exchangeable for Common Stock (including,
without limitation, shares of Common Stock or any such securities which may be
deemed to be beneficially owned by the undersigned in accordance with the rules
and regulations promulgated under the Securities Act of 1933, as the same may be
amended or supplemented from time to time (such shares or securities, the
“Beneficially Owned Shares”); (ii) establish or increase any “put equivalent
position” or liquidate or decrease any “call equivalent position” (in each case
within the meaning of Section 16 of the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder) with respect to
any Beneficially Owned Shares, or otherwise enter into any swap, derivative or
other transaction or arrangement that transfers to another, in whole or in part,
any economic consequence of ownership of any Beneficially Owned Shares, Common
Stock or securities convertible into or exercisable or exchangeable for Common
Stock, whether or not such transaction is to be settled by delivery of
Beneficially Owned Shares, other securities, cash or other consideration; or
(iii) engage in any short selling of any Beneficially Owned Shares, Common Stock
or securities convertible into or exercisable or exchangeable for Common
Stock. Notwithstanding the foregoing, during such 24 month period, an
aggregate of 300,000 shares shall be released from lock-up and shall be allowed
to be disposed of beginning on the one year anniversary of the effectiveness of
this registration statement and an additional 300,000 shares shall be released
from lock-up and shall be allowed to be disposed of beginning on the date that
is the eighteen (18) month anniversary of the effectiveness of this registration
statement. The remaining Beneficially Owned Shares shall continue to be
subject to the lock-up until the 24 month anniversary of the date of
effectiveness of this registration statement.
Mr.
Baoquan Wang was appointed as our President and Chairman of Board and Ms.
Lanfeng Wu was appointed as our Treasurer and Secretary, effective as of May 13,
2010.
Liaoning
Shengsheng Biotechnology Co., Ltd.
Liaoning
Shengsheng is a limited liability company organized under the laws of the PRC,
which is wholly owned by China For-Gen. Liaoning Shengsheng is engaged in
the hi-tech forestry industry (excluding scarce species restricted by national
laws and regulations), including producing vegetables, flowers and fruit,
researching and developing applications of biotechnology; producing edible fungi
and its products (except as otherwise provided by laws and regulations); and
landscaping.
The
predecessor of Liaoning Shengsheng is Anshan Xinfang Gardening Co., Ltd., which
was incorporated in April 1997 as a limited liability company with a registered
capital of RMB 10 million (approximately $1.515 million as of January 5, 2011
) (“Anshan Xinfang”). Baoquan Wang and Zhao Yaomei contributed funds
of RMB 7.8 million (approximately $1.181 million as of January 5, 2011 ) and RMB
0.2 million (approximately $30,292.47 as of January 5, 2011), respectively, and
Shen Xiaoyang and Na Ningxin contributed their patent of soilless culture
technology at an appraised value of RMB 2 million. In September 2000,
Anshan Xinfang increased it registered capital to RMB 12.5 million
(approximately $1.89 million as of January 5, 2011 ), which was verified by
Liaoning Zhenghe Certified Public Accountants Co., Ltd. The patent for
soilless culture technology expired on February 18, 2005.
On
November 13, 2000, the People’s Government of Liaoning Province (“Liaoning
Government”) approved the incorporation of the Company as a limited liability
company limited by shares through the restructuring of Anshan Xinfang. The
name of the Company changed to “Anshan Shengsheng High-tech Planting Technology
Application Co., Ltd.” The Company obtained its business license from Liaoning
Administration of Industry and Commerce on November 24, 2000. The
registered capital of Anshan Shengsheng was RMB 24 million (approximately $3.64
million as of January 5, 2011 ), which was verified by Dalian North Certified
Public Accountants Co., Ltd.
On June
26, 2002, the People’s Government of Liaoning Province approved the increase of
the Company’s registered capital from RMB 24 million (approximately $3.64
million as of January 5, 2011 ) to RMB 35 million
(approximately $5.30 million as of January 5, 2011 ) and the issuance of
11 million shares to two new shareholders, and the Company changed its name to
the current “Liaoning Shengsheng Biotechnology Co., Ltd.” The
increased contribution was verified by Liaoning Pan-China Certified Public
Accountants Co., Ltd.
On April
20, 2009, the Foreign Trade and Economic Cooperation Department of Liaoning
Province approved the acquisition of all share equity of Liaoning Shengsheng by
China For-Gen Corp. Liaoning Shengsheng obtained a Certificate of Approval
to become a WFOE on April 20, 2009 and obtained a new business license on May 6,
2009.
China
For-Gen operates its business through Liaoning Shengsheng.
Karamai
Pusheng Forest and Wood Industry, LLC
On
January 25, 2005, Baoquan Wang and Lanfeng Wu established Karamai Pusheng Forest
and Wood Industry, LLC (“Pusheng”), a limited liability company organized under
the laws of the PRC, with registered capital of RMB 10 million (approximately
$1.515 million as of January 5, 2011 ). On September 28, 2007, Liaoning
Shengsheng acquired all of the share equity of Pusheng from Baoquan Wang and
Lanfeng Wu, and currently owns 100% of the share equity of Pusheng.
Pusheng currently does not conduct any business operations but is expected to be
used as the primary vehicle for the Company to expand into the
manufacturing of MDF in the future.
59
Our post
initial public offering organization structure is summarized below:
60
DIRECTORS
AND EXECUTIVE OFFICERS
Our
current executive officers and directors as of the date of this prospectus are
as follows:
Directors and Executive Officers
|
Position/Title
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Age
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||
Baoquan
Wang
|
President
and Chairman of the Board
|
44
|
||
Lanfeng
Wu
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Treasurer
and Secretary
|
35
|
||
Jia
Yu
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Director
|
39
|
||
Zhang
Daoxu
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Director
|
70
|
||
Gang
Xu
|
Vice
President and Director
|
53
|
||
Jun
Fang
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Vice
President
|
50
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||
Scott
Ogilvie
|
Director
|
56
|
||
Kevin
Randolph
|
Director
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61
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||
Marc
Klee
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Director
|
56
|
The
following is a summary of the biographical information of our directors and
officers. Any gap in employment background of an individual indicates that
during the gap, the individual did not obtain work experience relevant to his or
her role as an officer or director.
Baoquan Wang.
Mr. Wang is our Chief Executive Officer. In 1997 Mr. Wang
founded Anshan Xinfang Horticulture Co., Ltd., a Chinese company that provides
services to landscape construction and project contracting in the PRC, and has
been the Chief Executive Officer since that time. In 2000, Mr. Wang restructured
the former Xinfang Horticulture Co., Ltd. into Liaoning Shengsheng and has
served as its chairman and president since that time. Mr. Wang received
his master degree in Business Administration from the Chinese University of Hong
Kong in 2000. Mr. Wang has been chosen as a director because he is one of
the founders of our company and we believe his knowledge of our company and
years of experience in our industry give him the ability to guide our company as
a director.
Lanfeng Wu.
Ms. Wu graduated from Liaoning University of Science and
Technology with a bachelor’s degree in International Trading and
Economics. Ms. Wu has been working for the Company since 2000 as the
assistant to Baoquan Wang. Ms. Wu has been chosen as a director because we
believe we can benefit from her intimate knowledge of the business and
operations of Liaoning Shengsheng and her leadership skills.
Jia Yu. Mr.
Yu joined our Board of Directors in 2010. Since 2003, Mr. Yu has worked for
Huaying Rongtong Investment Consulting Co., Ltd. as CEO, a consulting service
company that provides services in valuation, investment advisory services and
general practice surveying. Mr. Yu served as CFO and COO of Oriental Real
Ventures Management Ltd. from 2002 to 2008, and served as vice president of Yihe
Financial Investment Consulting Co. from 2001 to 2003, and served as manager of
government relations of Andersen (Shanghai) Business Consulting Co., Ltd. from
2002 to 2003. Mr. Yu received a bachelors and masters degree in public
relations from the Southern California State University, College of
Communication in 1993 and 1995, respectively. Mr. Yu has been chosen as a
director because we believe we can benefit from his leadership skills and
management experience.
Zhang Daoxu.
Mr. Zhang joined our Board of Directors in 2010. Since 1961,
Mr. Zhang has served as a research scientist for Shenyang Agriculture and
Science Research Institute. Mr. Zhang received a bachelor’s and a masters degree
in biology and plantation from Shenyang Agriculture University and Jilin
University in 1960 and 1961, respectively. Mr. Zhang has been chosen as a
director because we believe we can benefit from his leadership skills and
management experience.
Gang Xu. Mr. Xu has served as Liaoning
Shengsheng’s Vice President of Operations since 2003 and a director since
2010. Mr. Xu is responsible for the production, marketing and sale of our
products. Mr. Xu served as General Manager and Discipline Secretary of
Anshan Cooler Manufacturer from 2000 to 2003, and CEO and director of Anshan
Transportation Equipment Factory from 1996 to 1998. Mr. Xu received his
bachelor’s degree in economics and management in 1986 from the Liaoning Radio
and Television University. Mr. Xu has been chosen as a director because he
is one of the key employees of our company and we believe we can benefit from
his management experience and marketing skills.
61
Jun Fang. Mr. Fang has served
as Liaoning Shengsheng’s Vice President of Finance since 2003. Mr. Fang is
responsible for project development, financing and business strategy
planning. Mr. Fang served as deputy manager and vice general manager of
the investment department of Anshan Trust and Investment Co., Ltd. from 1997 to
2002. Mr. Fang served as vice general manager for the investment banking and
business department of ZhongShan Securities, Inc. from 2002 to 2003. Mr. Fang
received his bachelor’s degree in mathematics in 1978 from the Liaoning
University. Mr. Fang has been chosen as a director because we believe we can
benefit from his capital markets experience .
Scott Ogilvie. Mr. Ogilvie has
served as our director since June, 2010. Mr. Ogilvie is the founder and
since 2006 has been the President of AFin International, Inc., an international
advisory and development company focused in U.S. and international markets in
areas including infrastructure, renewable energy, IT, energy, entertainment,
healthcare and real estate. Mr. Ogilvie is also the President and CEO of
Gulf Enterprises International, Ltd. (“GEI”), a position he has held since
2006. GEI is an international advisory and development company that brings
Persian Gulf, U.S. and international expertise, investment capital and operating
platforms to Middle East and North Africa markets in areas such as
infrastructure, renewable energy, IT, energy, entertainment, healthcare and real
estate. From 2000 through 2008, Mr. Ogilvie was the Chief Operating
Officer for the CIC Group of companies. During Mr. Ogilvie’s tenure, CIC
sponsored and managed international investment funds across public equity,
private equity and real estate asset classes. CIC had over $1 billion in
assets under management. Mr. Ogilvie oversaw the company’s investment
management group in New York City, as well as its Kuwait based staff. He
also served on the boards of directors and investment committees of each of
CIC’s funds. Mr. Ogilvie is currently a director of Neuralstem, Inc., a
publicly-traded biotherapeutics company whose mission is to apply stem cell
research and its patented human neural stem cell technology to treat diseases of
the central nervous system. Mr. Ogilvie is also currently a director
of GenSpera, Inc., a publicly traded development stage oncology company focused
on therapeutics that deliver a potent, unique and patented drug directly to
tumors. Mr. Ogilvie received a B.S.B.A. from the University of Denver and
a J.D. from University of California-Hastings College of Law. Mr. Ogilvie
has been chosen as a director because we believe we can benefit from his
investment and management experience.
Kevin Randolph.
Mr. Randolph, age 61, joined our Board of Directors in June,
2010. Mr. Randolph is currently the President and CEO of Randolphs.com,
LLC, a company that provides interim management, strategic/market/product
planning and other services, positions he has held since founding Randolps.com
in 1992. From 1998 to 2000, he was President and CEO of Asia Online, Ltd.,
headquartered in Hong Kong. Asia Online provided Internet service, web
development, web hosting and systems integration services in 12 countries
throughout Asia. He is a graduate of Washington State University with a
degree in Business Administration, majoring in marketing and electrical
engineering. Mr. Randolph has been chosen as a director because we believe
we can benefit from his leadership skills and management
experience.
Marc H. Klee Mr. Klee has
served as a member of the Company's board of directors since September,
2010. Mr. Klee was the vice president of American Fund Advisors from
January 1981 until May 1984, its senior vice president from May 1984 until March
2000 and has been its executive vice president since March 2000. He has also
been a director of American Fund Advisors since May 1984. From June 2007-August
2009, Mr. Klee served as president, chief financial officer and secretary of
North Shore Acquisition Corp., a blank check company formed for the purpose of
effecting a merger, capital stock exchange, asset acquisition or other similar
business combination with an operating business. From November 2004 until
February 2007, Mr. Klee was the president, chief financial officer, secretary
and a member of the board of directors of Ardent Acquisition Corporation. Mr.
Klee was the vice president of the John Hancock Technology Series, Inc. from May
1981 until May 1987 and was co-portfolio manager of the John Hancock Technology
Fund from January 1983 to March 2005. Since September 1999, Mr. Klee has been
secretary and a director of BlueStone AFA Management, LLC and since January
2000, has been a director of the AFA Private Equity Fund 1. Mr. Klee was also
the president of the New Jersey Cardinals from February 1990 until April 2006
and vice president of the Norwich Navigators from March 1991 until April 2005.
Mr. Klee received his Bachelor of Arts degree from the State University of New
York at Stony Brook (Phi Beta Kappa) and his Master of Business Administration
from the Wharton School of Business at the University of Pennsylvania. Mr. Klee
is a chartered financial analyst. Mr. Klee has been chosen as a director because
of his financial acumen and experience in running both public and private
companies.
All of
our directors will hold their positions on the board until our next annual
meeting of the stockholders and until their respective successors have been
elected or appointed. Officers serve at the discretion of the board of
directors.
There are
no family relationships among our directors and executive officers. There
is no arrangement or understanding between or among our executive officers and
directors pursuant to which any director or officer was or is to be selected as
a director or officer, and there is no arrangement, plan or understanding as to
whether non-management stockholders will exercise their voting rights to
continue to elect the current board of directors.
Our
directors and executive officers have not, during the past ten years:
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·
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filed a petition under the
Federal bankruptcy laws or any state insolvency law by or against, or a
receiver, fiscal agent or similar officer was appointed by a court for the
business or property of such person, or any partnership in which he was a
general partner at or within two years before the time of such filing, or
any corporation or business association of which he was an executive
officer at or within two years before the time of such
filing;
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62
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been convicted in a criminal
proceeding or is a named subject of a pending criminal proceeding
(excluding traffic violations and other minor
offenses);
|
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·
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been subject to any order,
judgment, or decree, not subsequently reversed, suspended or vacated, of
any court of competent jurisdiction, permanently or temporarily enjoining
him from, or otherwise limiting, the following
activities:
|
|
·
|
Acting as a futures commission
merchant, introducing broker, commodity trading advisor, commodity pool
operator, floor broker, leverage transaction merchant, any other person
regulated by the Commodity Futures Trading Commission, or an associated
person of any of the foregoing, or as an investment adviser, underwriter,
broker or dealer in securities, or as an affiliated person, director or
employee of any investment company, bank, savings and loan association or
insurance company, or engaging in or continuing any conduct or practice in
connection with such
activity;
|
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·
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Engaging in any type of business
practice; or
|
|
·
|
Engaging in any activity in
connection with the purchase or sale of any security or commodity or in
connection with any violation of Federal or State securities laws or
Federal commodities laws;
|
|
·
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been subject to any order,
judgment or decree, not subsequently reversed, suspended or vacated, of
any Federal or state authority barring, suspending or otherwise limiting
for more than 60 days the right of such person to engage in any activity
described in paragraph (f)(3)(i) of this section, or to be associated with
persons engaged in any such
activity;
|
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·
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been found by a court of
competent jurisdiction in a civil action or by the SEC to have violated
any Federal or State securities law, and the judgment in such civil action
or finding by the SEC has not been subsequently reversed, suspended,
or vacated;
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found by a court of competent
jurisdiction in a civil action or by the Commodity Futures Trading
Commission to have violated any Federal commodities law, and the judgment
in such civil action or finding by the Commodity Futures Trading
Commission has not been subsequently reversed, suspended or
vacated;
|
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been the subject of, or a party
to, any Federal or state judicial or administrative order, judgment,
decree, or finding, not subsequently reversed, suspended or vacated,
relating to an alleged violation
of:
|
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Any Federal or state securities
or commodities law or
regulation;
|
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Any law or regulation respecting
financial institutions or insurance companies including, but not limited
to, a temporary or permanent injunction, order of disgorgement or
restitution, civil money penalty or temporary or permanent
cease-and-desist order, or removal or prohibition
order;
|
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Any law or regulation prohibiting
mail or wire fraud or fraud in connection with any business entity;
or
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been the subject of, or a party
to, any sanction or order, not subsequently reversed, suspended or
vacated, of any self-regulatory organization (as defined in Section
3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered
entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7
U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or
organization that has disciplinary authority over its members or persons
associated with a member.
|
Corporate
Governance
Board
of Directors
We
currently have seven members serving on our Board of Directors, four of which
are considered “independent directors” as defined under the Section 803 of the
NYSE Amex Company Guide. All actions of the Board of Directors require the
approval of either a majority of the directors in attendance at a meeting, duly
called and noticed, at which a quorum is present or the unanimous written
consent of all of the members of the Board of Directors. During the fiscal
year ended December 31, 2009, the Board did not meet but took action by
unanimous written consent twice.
63
Board
Committees
Prior to
the consummation of this offering, the Board of Directors will form an audit
committee, a nominating committee and a compensation committee and adopt
charters for all of such committees.
Code
of Ethics
Prior to
the consummation of this offering, the Board of Directors of the Company intends
to adopt a code of ethics that applies to our officers, directors and employees,
including our chief executive officer, senior executive officers, principal
accounting officer, and other senior financial officers. A copy of our
code of ethics will also be provided to any person without charge, upon written
request sent to us at our offices located at Tengao District, Haicheng City,
Liaoning Province, P.R.China 114000. A printed copy of the code of
ethics, once adopted, may be obtained free of charge by writing to us
at China For-Gen Corp., Tengao District, Haicheng City, Liaoning Province,
114000, People’s Republic of China.
EXECUTIVE
COMPENSATION
The
following summary compensation table indicates the cash and non-cash
compensation earned for years ended December 31, 2010 and 2009 by our Chief
Executive Officer and each of our other two highest paid executives, whose total
compensation exceeded $100,000 (if any) for the years ended December 31, 2010
and 2009.
SUMMARY COMPENSATION TABLE
|
||||||||||||||||||||||||||||||||||
Name and
Principal
Position
|
Year
|
Salary
($) (1)
|
Bonus
($) (1) (2)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
Baoquan
Wang,
|
2010
|
13,328 | 122,987 | — | — | — | — | — | 136,316 | |||||||||||||||||||||||||
President
and Chairman
|
2009
|
12,305 | 119,534 | — | — | — | — | — | 131,839 | |||||||||||||||||||||||||
Gang
Xu,
|
2010
|
9,997 | 27,869 | — | — | — | — | — | 37,866 | |||||||||||||||||||||||||
Vice
President and Director
|
2009
|
9,668 | 26,954 | — | — | — | — | — | 36,622 | |||||||||||||||||||||||||
Jun
Fang,
|
2010
|
9,997 | 27,869 | — | — | — | — | — | 37,866 | |||||||||||||||||||||||||
Vice
President
|
2009
|
9,668 | 26,954 | — | — | — | — | — | 36,622 |
(1)
|
All compensation for the years
shown was paid in RMB which, for reporting purposes, has been converted to
U.S. dollars at the conversion rate of 6.6023 RMB U.S. dollar for 2010 and
6.8225 RMB to one U.S. dollar for
2009.
|
(2)
|
Bonuses to its executive officers
are determined by the Company’s Board of Directors and are awarded as a
percentage of net revenue.
|
Outstanding
Equity Awards at Fiscal Year End
We have
not granted any stock options to our executive officers or directors from
inception through the date hereof.
Director
Compensation
Employee
directors and non-voting observers do not receive any compensation for their
services. Non-employee directors are entitled to receive a cash payment of
$5,000 quarterly. In addition, non-employee directors are entitled to
receive compensation for their actual travel expenses for each Board of
Directors meeting attended. Independent directors also receive fifty thousand
(50,000) warrants to purchase Common Stock, vesting quarterly over a two year
period at an exercise price equal to the initial public offering price of the
Common Stock, as set forth herein. The chairman of the audit committee
will receive an additional $1,250 per quarter and the chairman of each of the
compensation and nominating committees will receive $250 per quarter.
Other members of the audit committee receive $625 per quarter and other members
of the compensation and nominating committees receive $125 per
quarter.
Executives
Employment Contracts
Except as
described below, we currently have no employment agreements with any of our
executive officers, nor any compensatory plans or arrangements resulting from
the resignation, retirement or any other termination of any of our executive
officers, from a change-in-control, or from a change in any executive officer’s
responsibilities following a change-in-control.
64
Liaoning
Shengsheng has entered into employment agreements with each of Baoquan Wang,
Gang Xu and Jun Fang. Each of these employment agreements provides for a
three-year term valid until 2012. Under Chinese law, Liaoning Shengsheng
is obligated to pay an employee compensation equal to one month’s salary for
each year Liaoning Shengsheng has employed such employee, up to twelve years,
upon termination (or upon expiration of any applicable employment agreement),
except where (1) the employee has committed a crime or the employee’s actions or
inactions have resulted in a material adverse effect to Liaoning Shengsheng; (2)
the employee is then-receiving a pension; (3) the employee dies or is declared
missing; and (4) Liaoning Shengsheng offers to renew the employment agreement at
equal or higher consideration and the employee does not accept it. If
Liaoning Shengsheng terminates an employment agreement before expiration and
without cause, an employee has the right to either enforce the employment
agreement or require Liaoning Shengsheng to pay twice the compensation due
thereunder.
Indemnification
of Officers and Directors
We are a
Delaware corporation, and accordingly, we are subject to the corporate laws
under the Delaware General Corporation Law. Article Sixth of our second
amended and restated certificate of incorporation contains the following
indemnification provision for our directors and officers:
“The
Corporation shall have the power to indemnify any director, officer, employee or
agent of the Corporation or any other person who is serving at the request of
the Corporation in any such capacity with another corporation, partnership,
joint venture, trust or other enterprise (including, without limitation, any
employee benefit plan) to the fullest extent permitted by the General
Corporation Law of the State of Delaware as it exists on the date hereof or as
it may hereafter be amended, and any such indemnification may continue as to any
person who has ceased to be director, officer, employee or agent and may inure
to the benefit of the heirs, executors and administrators of such a
person.”
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information with respect to the beneficial
ownership of our common stock by (i) any person or group owning more than 5% of
each class of voting securities, (ii) each director, (iii) each executive
officers and (iv) all executive officers and directors as a group, as of January
24, 2011.
Name and Address
of Beneficial Owners (1)(2)
|
Amount
of Beneficial
Ownership
|
Percent
of Class
(3)
|
||||||
Baoquan
Wang, President and Chairman
|
3,456,000
|
24.22
|
%
|
|||||
Jia
Yu, Director
|
2,400,000
|
16.82
|
%
|
|||||
Zhang
Daoxu, Independent Director
|
*
|
—
|
||||||
Scott
Ogilvie, Independent Director
|
*
|
—
|
||||||
Kevin
Randolph, Independent Director
|
*
|
—
|
||||||
Marc
Klee, Independent Director
|
*
|
—
|
||||||
Gang
Xu, Vice President and Director
|
2,933,300
|
20.55
|
%
|
|||||
Jun
Fang, Vice President
|
2,397,900
|
16.80
|
%
|
|||||
Lanfeng
Wu, Secretary and Treasurer
|
812,800
|
5.71
|
%
|
|||||
T
Squared Investments LLC(4)
|
2,645,099
|
15.90
|
%
|
|||||
Silver
Rock II, Ltd.(5)
|
1,296,741
|
8.33
|
%
|
|||||
All
directors and officers as a group (9 individuals)
|
12,000,000
|
84.09
|
%
|
* less
than 1%
(1)
|
Unless otherwise noted, the
address for each of the named beneficial owners is: Tengao District,
Haicheng City, Liaoning Province, 114000, People’s Republic of
China.
|
(2)
|
The Call Option Agreement, as
amended and restated, entered into between Ms. Sherry Li and the Call
Option Stockholders results in Ms. Sherry Li not being the beneficial
owner of such Option Shares under Rule 13d-3 of the Securities Exchange
Act of 1934, as amended (the “Act”), pursuant to
which:
|
(a) Ms.
Li has transferred 50 % of the 12 million Option Shares and is expected to
transfer the remaining 50% within the next year to the Call Option
Stockholders for nominal consideration of $0.001/share;
(b) Ms.
Li is not permitted to dispose of any of the Option Shares without the Call
Option Stockholders’ prior written consent and may not transfer the Option
Shares to anyone except the Call Option Stockholders; and
65
(3) The
Call Option Stockholders have sole voting and dispositive power over, and sole
pecuniary interest in, the Option Shares.
(3)
|
Unless otherwise noted, the
number and percentage of outstanding shares of our common stock is based
upon 14,270,948 shares outstanding as of January 24,
2011.
|
(4)
|
The business address of the
named beneficial owner is 1325 Sixth Avenue, New York, NY 10019. The
2,645,099 shares of common stock include: (i) 283,200 shares of common
stock issued and outstanding as of the date hereof; (ii) 1,314,357 shares
of common stock issuable upon conversion of such holder’s convertible
promissory notes; (iii) 980,875 shares of common stock issuable upon
conversion of such holder’s common stock purchase warrants; and (iv)
66,667 shares of common stock issuable upon conversion of such holder’s
common stock purchase warrant. Mark Jensen and Thomas Suave have voting
and investment control over such securities. Please see the section titled
“Description of Our Securities” for a thorough description of such
promissory notes and
warrants.
|
(5)
|
The business address of the named
beneficial owner is Sable Trust Road, Tortola, BVI. The 1,296,741 shares
of common stock include: (i) 742,574 shares of common stock issuable upon
conversion of such holder’s Note; and (ii) 554,167 shares of common stock
issuable upon conversion of such holder’s common stock purchase
warrants. Ezzat Jallad has voting and investment control over
such securities. Please see the section titled “Description of
Our Securities” for a thorough description of such promissory notes
and warrants.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
As part
of the Share Transfer, on June 8, 2009, the Call Option Stockholders entered
into the Call Option Agreement with Ms. Li, then the sole shareholder officer,
director and shareholder of China For-Gen, wherein she agreed to transfer a
number of shares of the Company equal to 60% (now approximately 55% as the
additional investment right has been exercised by those investors who
participated in the 2010 private placement) of the issued and outstanding shares
of common stock after our initial public offering. The Call Option
Agreement became effective upon the closing of the Share
Transfer. The Call Option Agreement was amended and restated in its
entirety on May 12, 2010 to be in full compliance with PRC laws, including,
without limitation, laws with respect to acquisitions by foreign entities and
ownership by PRC citizens in a foreign enterprise.
Pursuant
to the Call Option Agreement, as amended and restated, the option may be
exercised by the Call Option Stockholders for nominal consideration of
$0.001/share. The Amended Call Option Agreement provides that Ms. Li
may not dispose of any China For-Gen shares held for the benefit of the Call
Option Stockholders without their prior written consent. On December
31, 2010, the Call Option Stockholders exercised their rights under the Amended
Call Option Agreement with respect to 50% of the shares and they have indicated
that they intend to exercise their rights with respect to the remaining 50% on
or by December 31, 2011.
In the
first quarter of 2009, Mr. Baoquan Wang, our President and Chairman, made a loan
to the Company in the amount of $968,131. In the first quarter of
2010, Mr. Wang made a loan to the Company in the amount of $63,400. These loans
are pursuant to oral agreements, do not bear interest and are payable on
demand.
Except
for the aforementioned transactions, since January 1, 2007, we have not engaged
in any material transactions with our directors, executive officers, holders of
more than five percent (5%) of our voting securities, and affiliates of our
directors, executive officers and five percent stockholders. We are not a
subsidiary of any company.
Procedures
for Approval of Related Party Transactions
Our board
of directors is charged with reviewing and approving all potential related party
transactions. All such related party transactions must then be
reported under applicable SEC rules. We have not adopted other
procedures for review, or standards for approval, of such transactions, but
instead review them on a case-by-case basis.
66
DESCRIPTION
OF OUR SECURITIES
The
following is a summary description of our capital stock and certain provisions
of our certificate of incorporation and by-laws, copies of which have been filed
as exhibits to this prospectus. The following discussion is qualified in its
entirety by reference to such exhibits.
General
We are
authorized to issue 50,000,000 shares of common stock, par value $0.001 per
share, and 2,000,000 shares of preferred stock, par value $0.001 per
share.
As of
January 24, 2011, we had 14,270,948 shares of common stock, and 500,000 shares
of preferred stock (consisting entirely of Series A Convertible Preferred
Stock), issued and outstanding.
The
following is a summary of the material terms of our capital stock.
Common
Stock
Voting: The holders of common
stock are entitled to one vote per share on all matters to be voted on by the
stockholders. Our common stock has no cumulative voting
rights.
Dividends : The holders of
our common stock are entitled to receive such dividends, if any, as may be
declared from time to time by our Board of Directors, in its discretion, from
funds legally available therefor.
Liquidation: In the event of
liquidation or dissolution of the Company, the holders of our common stock are
entitled to receive, pro rata, assets remaining available for distribution to
stockholders.
No Preemptive
Rights: Our common stock has no cumulative voting, preemptive
or subscription rights and is not subject to any future calls.
Preferred
Stock
We are
authorized to issue 2,000,000 shares of preferred stock. Other than
with respect to the Series A Preferred Stock (the “Series A Stock”), which is
described below, our board of directors is expressly authorized to provide for
the issuance of all or any of the remaining shares of the preferred stock in one
or more series, and to fix the number of shares and to determine or alter, for
each such series, such voting powers, full or limited, or no voting powers, and
such designations, preferences, and relative, participating optional, or other
rights and such qualifications, limitations, or restrictions thereof, as shall
be stated and expressed in the resolution or resolutions adopted by the board of
directors providing for the issuance of such shares and as may be permitted by
the Delaware General Corporation Law. The board of directors is also
expressly authorized to increase or decrease (but not below the number of shares
of such series then outstanding) the number of shares of any series subsequent
to the issue of shares of that series. In case the number of shares
of any such series shall be so decreased, the shares constituting such decrease
shall resume the status that they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
On May
30, 2008, we designated all such shares of preferred stock as Series A
Convertible Preferred Stock (the “Series A Stock”) by filing a certificate of
designation with the Secretary of State of Delaware. The Series A
Stock is convertible into shares of our common stock at any time by the holder
at an initial conversion price of $.91 per share.
The
Company has the right at any time to repurchase the Series A Stock at a price of
$1.14 per share. In lieu of exercising such repurchase option, the
Company may make annual distributions to holders of Series A Stock in an amount
equal to two percent (2%) of the net income of the Company, if any.
The
Series A Stock shall be entitled to a dividend in the amount of 11% per annum,
payable monthly. No dividends are permitted to be paid on our common
stock while the Series A Stock is outstanding. The Company is further
prohibited from redeeming or repurchasing any common stock or any other class of
Company securities which is junior to or on parity with the Series A Stock while
the Series A Stock is outstanding.
The
Series A Stock has no voting rights, however, so long as any Series A Stock is
outstanding, the Company shall not, without the prior approval of the holders of
the Series A Stock then outstanding, (a) alter the powers, preferences or rights
of the Series A Stock, (b) authorize or create any class of securities ranking
senior to the Series A Stock as to dividends or distributions of assets, (c)
amend its certificate of incorporation or other charter documents in breach of
any of the provisions of the certificate of designation, (d) increase the
authorized number of shares of Series A Stock or (e) enter into any agreement
with respect to the foregoing.
67
The
Company shall not effect any conversion of the Series A Stock if after giving
effect to such conversion, such holder would beneficially own in excess of 4.9%
of the number of shares of our common stock outstanding immediately following
such conversion.
Holders
of Series A Stock may be entitled to an additional number of shares of our
common stock under certain circumstances in the event the Company issues common
stock, warrants, options or convertible debt or equity with an exercise or
conversion price that places a valuation of less than $42,500,000.
Warrants
May
2008 Private Placement
On May
30, 2008, the Company conducted a private placement of 500,000 shares of its
newly created Series A Convertible Preferred Stock convertible into 333,333
shares of our common stock and a five-year common stock purchase warrant to
purchase up to 666,667 post-reverse split shares of common stock at an
exercise price of $1.88 post-reverse split per warrant (equivalent to $1.25
pre-reverse split per warrant) or 416,667 post-reverse split shares of
common stock upon cashless exercise of such warrants (in either event equivalent
to 1,000,000 pre-reverse split shares) (the “2008 Warrant”). The
Company received gross proceeds of $455,000 from the private
placement. The 2008 Warrant was exercised in January, 2010 on a
cashless basis for 416,667 shares of our common stock. Following the
Reverse Split and the February 2010 private placement, the Series A Convertible
Preferred Stock is convertible into 444,119 shares of common stock at a
conversion price of $0.91 per share. The securities were offered
pursuant to exemptions from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, Regulation D and Rule 506.
In
connection with the May 2008 private placement, we entered into a registration
rights agreement to have the shares of common stock underlying the preferred
stock and 2008 Warrant registered for public resale. The filing of
the registration statement of which this prospectus is a part is intended to
satisfy certain of our obligations under that registration rights
agreement.
February
2010 Private Placement
On
February 12, 2010, the Company received gross proceeds of $2,000,000 from the
sale of five year convertible promissory notes, bearing interest at ten percent
(10%) per annum (the “Notes” or the “2010 Notes”) and Common Stock Purchase
Warrants A and B (each, the “A Warrants” and “B Warrants” and collectively, the
“Warrants” or the “2010 Warrants”) to various accredited and institutional
investors. Following the Reverse Split, these Notes are convertible
into 1,320,133 shares of our common stock. Additionally, such
investors have, as of August 10, 2010, exercised their right to purchase up to
an additional $2,500,000 of Notes on terms identical to the Notes purchased in
February 2010, which such Notes are convertible into 1,650,165 post-Reverse
Split shares of common stock. Accordingly, such investors have
outstanding Notes convertible into an aggregate of 2,970,298 shares of common
stock. The Notes are convertible at any time at the option of the
Note holder.
Holders
of the Notes and Warrants are not entitled to convert their Notes or any
Warrants into such number of shares of our common stock which, when added to the
number of shares of common stock beneficially owned by such holder and its
affiliates immediately prior to conversion of such Note or Warrant, would result
in beneficial ownership by such holder and its affiliates of more than 4.99% of
the outstanding shares of our common stock. For the purposes of the
immediately preceding sentence, “beneficial ownership” is determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Rule 13d-3 thereunder. This restriction may be waived or
amended only with the consent of the applicable Note holder and the consent of
holders of a majority of the shares of our outstanding common stock who are not
affiliates of the Company. The securities were offered pursuant to
exemptions from registration provided by Section 4(2) of the Securities Act of
1933, as amended, Regulation D and Rule 506.
The A
Warrants were exercisable for five years at an exercise price of $1.35 per
share, for up to an aggregate of 1,662,500 shares of our common
stock. The B Warrants were exercisable for five years at an exercise
price of $1.70 per share, for up to an aggregate of an additional 1,662,500
shares of our common stock. Following the Reverse Split, the A
Warrants are exercisable for 1,108,334 shares of common stock at an exercise
price of $2.03 per share and the B Warrants are exercisable for 1,108,333 shares
of common stock at an exercise price of $2.55 per share. There were
no adjustments to the exercise price as a result of the Company’s financial
position as of December 31, 2009.
The
exercise price of the A Warrants is subject to further adjustment in the event
the Company fails to meet certain earnings per share projections. In
the event the Company’s net income for the year ended December 31, 2010 is less
than $.6163 per share on a fully-diluted basis, then the exercise price shall be
reduced by the percentage shortfall (where net income on a fully diluted basis
shall always be defined as earnings from continuing operations before any
non-cash items on a pre-taxed fully diluted basis (including dilution from any
options, warrants and convertible securities) as reported for the fiscal year
ended December 31, 2010). The A Warrant exercise price shall be reduced
proportionately by 0% if the earnings are $.6163 per share and by 75% if the
earnings are $.1541 per share. For example, if the Company earns
$.4930 per share, or 20% below $.6163 per share, then the A Warrant exercise
price shall be reduced by 20%. Such reduction shall automatically be
in effect at the time the December 31, 2010 financial results are reported or at
any other time that the initial investor in the Note and the Company have a
written and executed agreement stating otherwise, and shall be made from the
starting exercise price of the warrants being the exercise price of the warrants
at that time, and shall be cumulative upon any other changes to the exercise
price of the warrant that may already have been made.
68
The
exercise price of the B Warrants is also subject to further adjustment in the
event the Company fails to meet certain earnings per share
projections. In the event the Company’s net income for the year ended
December 31, 2010 is less than $.6163 per share on a fully-diluted basis, then
the B Warrant exercise price shall be reduced by the percentage shortfall (where
net income on a fully diluted basis shall always be defined as earnings from
continuing operations before any non-cash items on a pre-taxed fully diluted
basis (including dilution from any options, warrants and convertible securities)
as reported for the fiscal year ended December 31, 2010). The warrant exercise
price shall be reduced proportionately by 0% if the earnings are $.6163 per
share and by 75% if the earnings are $.1541 per share. For example, if the
Company earns $0.4930 per share, or 20% below $.6163 per share, then the B
Warrant exercise price shall be reduced by 20%. Such reduction shall
automatically be in effect at the time the December 31, 2010 financial results
are reported or at any other time that the initial investor in the Note and the
Company have a written and executed agreement stating otherwise, and shall be
made from the starting exercise price of the warrants being the exercise price
of the warrants at that time, and shall be cumulative upon any other changes to
the exercise price of the warrant that may already have been made.
SHARES
ELIGIBLE FOR FUTURE SALE
As of
the closing of this offering, we will have 18,870,948 shares of common stock
issued and outstanding, assuming full exercise of the underwriter over-allotment
option .
Approximate Number
of Shares Eligible for
Future Sale (1)
|
Date
|
||
12,068,298
|
(1) |
After
the date of this prospectus, freely tradable shares sold or registered in
this
offering.
|
(1) Assumes
the underwriter’s over-allotment option to purchase additional shares is not
exercised.
As of
January 24, 2011, there were (i) 14,270,948 shares of common stock outstanding,
(ii) 10% senior convertible notes convertible into 2,970,298 shares of common
stock, (ii) shares of Series A Convertible Preferred Stock convertible into
444,119 shares of common stock and (iii) warrants to purchase an aggregate of
2,283,334 shares of common stock. Assuming conversion of all of the
10% senior convertible notes, conversion of the Series A Convertible
Preferred Stock and the exercise of all of the warrants, there will be
24,568,699 shares of common stock outstanding. 8,068,698 of these
shares have been registered for resale in the registration statement of which
this prospectus forms a part. Many of our shares (including all of
the shares underlying the Preferred Stock) are currently eligible for resale
under Rule 144, subject to the restrictions set forth therein.
Rule
144
Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rule 144 promulgated under the
Securities Act. In general, under Rule 144 as currently in effect, a
person or persons whose shares are aggregated, who has beneficially owned shares
of our common stock for at least six months, including the holding period of any
prior owner, except if the prior owner was one of our affiliates, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
|
·
|
1% of the number of shares of our
common stock then outstanding (which will equal approximately
188,709 shares immediately after this offering);
or
|
|
·
|
the average weekly trading volume
of our common stock during the four calendar weeks preceding the filing of
a notice on Form 144 with respect to the sale, assuming that our common
stock is trading at such
time.
|
Sales by
a person deemed to be our affiliate under Rule 144 are also subject to manner of
sale provisions and notice requirements and to the availability of current
public information about us.
Registration
Rights
We are
obligated to register an aggregate of 5,697,751 shares of common stock issuable
upon conversion of our Series A Convertible Preferred Stock, the Notes and the
Warrants pursuant to multiple Registration Rights Agreements executed in
connection with the private placement of such shares, notes and
warrants. The registration rights agreements require us to register
such shares at such time as we undertake a reverse merger. The
agreement with respect to the Series A Convertible Preferred Stock also requires
there be a simultaneous financing providing gross proceeds to us of not less
than $9,500,000 before we are required to register such shares. As we
do not intend to effectuate a reverse merger, we are not obligated to register
any of such shares at this time. However, we have determined to
include all of such shares in the registration statement of which this
prospectus forms a part. Accordingly, the registration statement, of
which this prospectus forms a part, registers 5,697,751 shares for resale in a
separate resale prospectus.
69
Lock-Up
Agreements
All Call
Option Stockholders have entered into a lockup agreement requiring that all such
shares shall be held by such stockholders until the 24 month anniversary of the
effectiveness of this registration statement. Notwithstanding the foregoing,
during such 24 month period, an aggregate of 300,000 shares shall be released
from lock-up and shall be allowed to be disposed of beginning on the one year
anniversary of the effectiveness of this registration statement and an
additional 300,000 shares shall be released from lock-up and shall be allowed to
be disposed of beginning on the date that is the eighteen (18) month anniversary
of the effectiveness of this registration statement. The remaining
shares shall continue to be subject to the lock-up until the 24 month
anniversary of the effectiveness of this registration statement.
All other
current stockholders of the Company, including the Selling Stockholders, have
agreed not to sell or otherwise dispose of their shares of Common Stock until
the three month anniversary of the effectiveness of this Registration
Statement.
MATERIAL
PRC INCOME TAX CONSIDERATIONS
The
following discussion summarizes the material PRC income tax considerations
relating to the acquisition, ownership and disposition of our common stock
following the consummation of this offering. As used in this
discussion, references to “we,” “our” and “us” refer only to China
For-Gen.
Resident
Enterprise Treatment
On March
16, 2007, the Fifth Session of the Tenth National People’s Congress passed the
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 the PRC whose “de facto management bodies” are located in
the PRC are considered “resident enterprises” and subject to the uniform 25%
enterprise income tax rate on their worldwide taxable income. According to the
implementing rules of the EIT Law, “de facto management body” refers to a
managing body that in practice exercises overall management control over the
production and business, personnel, accounting and assets of an
enterprise.
On April
22, 2009, the State Administration of Taxation issued the Notice on the Issues
Regarding Recognition of Enterprises that are Domestically Controlled as PRC
Resident Enterprises Based on the De Facto Management Body Criteria, which was
retroactively effective as of January 1, 2008. This notice provides that an
overseas incorporated enterprise that is controlled domestically will be
recognized as a “tax-resident enterprise” if it satisfies all of the following
conditions: (i) the senior management responsible for daily production/business
operations are primarily located in the PRC, and the location(s) where such
senior management execute their responsibilities are primarily in the PRC; (ii)
strategic financial and personnel decisions are made or approved by
organizations or personnel located in the PRC; (iii) major properties,
accounting ledgers, company seals and minutes of board meetings and stockholder
meetings, etc., are maintained in the PRC; and (iv) 50 percent or more of the
board members with voting rights or senior management habitually reside in the
PRC.
Given the
short history of the EIT law and lack of applicable legal precedent, it remains
unclear how the PRC tax authorities will determine the resident enterprise
status of a company organized under the laws of a foreign (non-PRC)
jurisdiction, such as us. If the PRC tax authorities determine we are a
“resident enterprise” under the EIT Law, a number of tax consequences could
follow. First, we could be subject to the enterprise income tax at a rate of 25%
on our worldwide taxable income as well as PRC enterprise income tax reporting
obligations. Second, the EIT Law provides that dividend income
between “qualified resident enterprises” is exempt from enterprise income tax.
As a result, if we are treated as a “qualified resident enterprise,” all
dividends we receive from Liaoning Shengsheng (assuming such dividends are
considered sourced within the PRC) should be exempt from PRC tax.
As of the
date of this prospectus, there has not been a definitive determination as to our
“resident enterprise” or “non-resident enterprise” status. 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 worldwide taxable income in the near
future. We will 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.
Enterprise
Income Tax
According
to article 27 of the Enterprise Income Law of the PRC, effective as of January
1, 2008, and article 86 of the Implementary Rules of the Enterprise Income Law
of the PRC, we are exempted from enterprise income tax derived from seedlings
and plantation of trees and we receive a 50% deduction on enterprise income tax
from profit derived from planting flowers.
70
Dividends
From Liaoning Shengsheng
If we are
not treated as a resident enterprise under the EIT Law, then dividends we
receive from Liaoning Shengsheng 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 “non-resident enterprises,” which (i)
have an establishment or place of business inside the PRC, and (ii) the income
in connection with their establishment or place of business is sourced from the
PRC or is earned outside the PRC but has actual connection with their
establishment or place of business inside the PRC, and (B) a PRC withholding tax
at a rate of 10% will normally be applicable to dividends payable to
“non-resident enterprises”, which (i) do not have an establishment or place of
business in the PRC or (ii) have an establishment or place of business in the
PRC, but the relevant income is not effectively connected with such
establishment or place of business, to the extent such dividends are derived
from sources within the PRC.
As
described above, the PRC tax authorities may determine the resident enterprise
status of entities organized under the laws of foreign jurisdictions, on a
case-by-case basis. We are a holding company and substantially all of
our income may be derived from dividends. Thus, if we are considered
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 PRC withholding tax described in the foregoing paragraph.
As of the
date of this prospectus, there has not been a definitive determination as to our
“resident enterprise” or “non-resident enterprise” status. We will
make any necessary tax withholding if, in the future, Liaoning Shengsheng were
to pay 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.
Dividends
that Non-PRC Resident Enterprise Investors Receive From Us; Gain on the Sale or
Transfer of Our common stock
If
dividends payable to (or gains realized by) our enterprise, but not individual,
investors that are not tax residents of the PRC (the “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 derived by such
investors on the sale or transfer of our common stock, may be subject to tax
under PRC tax laws.
Under the
PRC tax laws, PRC withholding tax at the rate of 10% is applicable to dividends
payable to non-resident investors that (i) do not have an establishment or place
of business in the PRC or (ii) have an establishment or place of business in the
PRC but the relevant income is not effectively connected with the establishment
or place of business, to the extent that such dividends have their sources
within the PRC. Similarly, any gain realized on the transfer of our
common stock by such investors is also subject to 10% PRC income tax if such
gain is regarded as income derived from sources within the PRC.
The
dividends paid by us to non-resident investors with respect to our common stock,
or gain non-resident investors may realize from the sale or transfer of our
common stock, may be treated as PRC-sourced income and, as a result, may be
subject to PRC tax at a rate of 10%. In such event, we 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 this offering
if such non-resident investors and the gain satisfy the requirements under the
PRC tax laws. However, under the PRC tax laws, 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.
If we
were to pay any dividends in the future and if we (based on future clarifying
guidance issued by the PRC), or the PRC tax authorities, determine that we must
withhold PRC tax on any dividends payable by us under the PRC tax laws, we will
make any necessary tax withholding on dividends payable to our non-resident
investors. If non-resident investors as described under the PRC tax laws
(including U.S. investors) realize any gain from the sale or transfer of our
common stock and if such gain were considered as PRC-sourced income, such
non-resident investors would be responsible for paying 10% PRC income tax on the
gain from the sale or transfer of our common stock. As indicated above, under
the PRC tax laws, 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.
On
December 10, 2009, the SAT released Circular Guoshuihan No. 698 (“Circular 698”)
that reinforces the taxation of certain equity transfers by non-resident
investors through overseas holding vehicles. Circular 698 addresses indirect
equity transfers as well as other issues. Circular 698 is retroactively
effective from January 1 2008. According to Circular 698, where a non-resident
investor who indirectly holds an equity interest in a PRC resident enterprise
through a non-PRC offshore holding company indirectly transfers an equity
interest in a PRC resident enterprise by selling an equity interest in the
offshore holding company, and the latter is located in a country or jurisdiction
where the actual tax burden is less than 12.5 percent or where the offshore
income of its residents is not taxable, the non-resident investor is required to
provide the PRC tax authority in charge of that PRC resident enterprise with
certain relevant information within 30 days of the execution of the equity
transfer agreement. The tax authorities in charge will evaluate the
offshore transaction for tax purposes. In the event that the tax authorities
determine that such transfer is abusing forms of business organization and a
reasonable commercial purpose for the offshore holding company other than the
avoidance of PRC income tax liability is lacking, the PRC tax authorities will
have the power to re-assess the nature of the equity transfer under the doctrine
of substance over form. A reasonable commercial purpose may be established when
the overall international (including U.S.) offshore structure is set up to
comply with the requirements of supervising authorities of international
(including U.S.) capital markets. If the SAT’s challenge of a transfer is
successful, it may deny the existence of the offshore holding company that is
used for tax planning purposes and subject the seller to PRC tax on the capital
gain from such transfer. Since Circular 698 has a short history, there is
uncertainty as to its application. We (or a non-resident investor) may become at
risk of being taxed under Circular 698 and may be required to expend valuable
resources to comply with Circular 698 or to establish that we (or such
non-resident investor) should not be taxed under Circular 698, which could have
a material adverse effect on our financial condition and results of operations
(or such non-resident investor’s investment in us).
71
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 PRC tax laws, as described above.
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 Securities 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 (approximately $302.92 as of Jan uary 5, 2011
) , and in egregious cases, may impose a fine ranging from RMB 2,000
(approximately $302.92 as of Jan uary 5, 2011 ) to RMB 10,000
(approximately $1,515 as of Jan uary 5, 2011 ); (2) if a non-resident investor
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.
Value-Added
Tax
According
to article 15 of the Value-Added Tax Interim Regulation and article 35 the
Implementary Rules for Value-Added Tax Interim Regulation, we are exempt from
value-added tax for sales of agriculture products (including flowers, grass,
tress and seedlings) we produce as agricultural producers (including plantation
and forestry).
Because
the Company is categorized as in a farm and forest industry, it is entitled to
participate in a government subsidy program for its sapling business. Under the
program, the Company collects value added tax (VAT) from customers in an amount
equal to 3% of sales during the year ended December 31, 2009 and 6% of sales
during the year ended December 31, 2008. This amount is not required
to be remitted to the government. VAT, which is included in revenue, was
$682,735 and $1,251,786 for the years ended December 31, 2009 and 2008
respectively.
UNDERWRITING
Subject
to the terms and conditions in the underwriting agreement, dated
[ ],
2011, by and between us and Maxim Group LLC, who is acting as the representative
of the underwriters of this offering, each underwriter named below has severally
agreed to purchase from us, on a firm commitment basis, the number of shares of
common stock set forth opposite its name below, at the public offering price,
less the underwriting discount set forth on the cover page of this
prospectus.
Underwriter
|
Number of Shares
|
|||
Maxim
Group LLC
|
[ | ] | ||
Total
|
[ | ] |
72
The
underwriting agreement provides for the purchase of a specific number of shares
of common stock by each of the underwriters. The underwriters’
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the commitment
of any other underwriter to purchase shares.
The
underwriters have agreed to purchase all of the shares offered by this
prospectus (other than those covered by the over-allotment option described
below) if any are purchased. Under the underwriting agreement, if an
underwriter defaults in its commitment to purchase shares, the commitments of
non-defaulting underwriters may be increased or the underwriting agreement may
be terminated, depending on the circumstances. The underwriting
agreement provides that the obligations of the underwriters to pay for and
accept delivery of the shares are subject to the passing upon certain legal
matters by counsel and certain conditions such as confirmation of the accuracy
of representations and warranties by us about our financial condition and
operations.
The
shares should be ready for delivery on or about
[ ],
2011 against payment in immediately available funds. The underwriters
may reject all or part of any order.
We intend
to apply to have our common stock listed on the NYSE AMEX under the
symbol CFG, which listing is expected to be effective concurrent with the
closing of this offering.
Commissions
and Discounts
The
following table provides information regarding the amount of the discount to be
paid to the underwriters by us:
Total
|
||||||||||||
Per Share
|
Without
Over-Allotment
|
With
Over-Allotment
|
||||||||||
Public
offering price
|
$ | 4.00 – 6.00 | * | $ | 16,000,000 – 24,000,100 | $ | 18,400,000 – 27,600,100 | |||||
Underwriting
discount
|
$ | 0.32 – 0.48 | $ | 1,280,000 – 1,920,000 | $ | 1,472,000 – 2,208,000 | ||||||
Non-accountable
expense allowance (1)
|
$ | 0.04 – 0.06 | $ | 160,000 – 240,000 | $ | 160,000 – 240,000 | ||||||
Proceeds
to us
|
$ | 3.64 – 5.46 | $ | 14,560,000, – 21,840,100 | $ | 16,928,000 – 25,152,100 | ||||||
(without
over-allotment)
3.68 – 5.52
(with
over-allotment)
|
* The
range of the maximum offering price is based on bona fide estimate pursuant to
Item 501(b)(3) of Regulation S-K.
(1)
|
The non-accountable expense
allowance of 1.0% of the gross proceeds of the offering is not payable
with respect to the shares of common stock sold upon exercise of the
underwriters’ over-allotment
option.
|
We
estimate that the total expense of this offering excluding the underwriters’
discount and the non-accountable expense allowance, will be approximately
$[ ].
We have
agreed to sell the shares of common stock to the underwriters at the initial
public offering price less the underwriting discount set forth on the cover page
of this prospectus. The underwriting agreement also provides that
Maxim Group LLC the representative of the underwriters, will be paid a
non-accountable expense allowance equal to 1.0% of the gross proceeds from the
sale of the shares of common stock offered by this prospectus
($[ ] of which has
been previously advanced to Maxim Group LLC), exclusive of any common stock
purchased on exercise of the underwriters’ over-allotment option.
Pricing
of Securities
The
representative has advised us that the underwriters propose to offer the shares
directly to the public at the public offering price that appears on the cover
page of this prospectus. In addition, the representative may offer
some of the shares to other securities dealers at such price less a concession
of $[ ] per
share. The underwriters may also allow, and such dealers may reallow,
a concession not in excess of
$[ ] per share
to other dealers. After the shares are released for sale to the
public, the representatives may change the offering price and other selling
terms at various times.
73
Prior to
this offering, there was no public market for our securities. The public
offering price of our common stock was determined by negotiation between us and
the underwriters. The principal factors considered in determining the public
offering price of the shares included:
|
·
|
the information in this
prospectus and otherwise available to the
underwriters;
|
|
·
|
the history and the prospects for
the industry in which we
compete;
|
|
·
|
the ability of our
management;
|
|
·
|
the prospects for our future
earnings;
|
|
·
|
the present state of our
development and our current financial
condition;
|
|
·
|
the general condition of the
economy and the securities markets in the United States at the time of
this offering; and
|
|
·
|
other factors we deemed
relevant.
|
We can
offer no assurances that the public offering price in this offering will
correspond to the price at which our shares will trade in the public market
following this offering or that an active trading market for our shares will
develop and continue after this offering.
Over-allotment
Option
We have
granted the underwriters an over-allotment option. This option, which
is exercisable for up to 45 days after the date of this prospectus, permits the
underwriters to purchase a maximum of 600,000 additional shares from us to cover
over-allotments. If the underwriters exercise all or part of this
option, they will purchase shares covered by the option at the public offering
price that appears on the cover page of this prospectus, less the underwriting
discount. If this option is exercised in full, the total price to the
public will be
$[ ]
million and the total proceeds to us will be
$[ ]
million. The underwriters have severally agreed that, to the extent
the over-allotment option is exercised, they will each purchase a number of
additional shares proportionate to the underwriter’s initial amount reflected in
the foregoing table.
Right
of First Refusal
We have
granted the representative of the underwriters a right of first refusal to act
as our lead underwriter or placement agent in any and all of our future public
and private equity offerings for a period of 24 months from the closing of this
offering.
Lock-Up
The Call
Option Stockholders have entered into a lockup agreement requiring that all such
shares be held by such stockholders until the 24 month anniversary of the
effectiveness of this registration statement. Notwithstanding the foregoing,
during such 24 month period, an aggregate of 300,000 shares shall be released
from lock-up and shall be allowed to be disposed of beginning on the one year
anniversary of the effectiveness of this registration statement and an
additional 300,000 shares shall be released from lock-up and shall be allowed to
be disposed of beginning on the date that is the eighteen (18) month anniversary
of the effectiveness of this registration statement. The remaining shares shall
continue to be subject to the lock-up until the 24 month anniversary of the date
of effectiveness of this registration statement. This means that, during the
applicable lock-up period following the date of this prospectus, such persons
may not offer, sell, pledge or otherwise dispose of these securities without the
prior written consent of T Squared Investments LLC, who may also waive the terms
of these lock-ups. See “Shares Eligible for Future Sale.” T Squared
Investments LLC has no present intention to waive or shorten the lock-up
period; however, the terms of the lock-up agreements may be waived in its
discretion. In determining whether to waive the terms of the lock-up agreements,
T Squared Investments LLC may base its decision on its assessment of the
relative strengths of the securities markets and companies similar to ours in
general, and the trading pattern of, and demand for, our securities in
general.
74
All other
current stockholders of the Company, including the Selling Stockholders, have
agreed not to sell or otherwise dispose of their shares of Common Stock until
the three month anniversary of the effectiveness of this Registration
Statement.
Representation
on the Board of Directors
Upon
execution of the underwriting agreement, Maxim Group will have the right to
designate one member of our Board of Directors and have one additional Maxim
Group representative attend all meetings of our Board of
Directors. This obligation will continue for three
years. In addition, the Maxim Group designee and representative will
receive the same compensation as the highest paid non-employee director on the
Board of Directors other than the Chairman of the Audit Committee and be
entitled to have expenses reimbursed. The Maxim Group designee is Marc
Klee.
Other
Matters
The
underwriting agreement provides for indemnification between us and the
underwriters against specified liabilities, including liabilities under the
Securities Act, and for contribution by us and the underwriters to payments that
may be required to be made with respect to those liabilities. We have
been advised that, in the opinion of the Securities and Exchange Commission,
indemnification liabilities under the Securities Act is against public policy as
expressed in the Securities Act, and is therefore, unenforceable.
A
prospectus in electronic format may be made available on a website maintained by
the representatives of the underwriters and may also be made available on a
website maintained by other underwriters. The underwriters may agree
to allocate a number of shares to underwriters for sale to their online
brokerage account holders. Internet distributions will be allocated
by the representatives of the underwriters to underwriters that may make
Internet distributions on the same basis as other allocations. In
connection with the offering, the underwriters or syndicate members may
distribute prospectuses electronically. No forms of electronic
prospectus other than prospectuses that are printable as Adobe® PDF will be used
in connection with this offering.
The
underwriters have informed us that they do not expect to confirm sales of shares
of common stock offered by this prospectus to accounts over which they exercise
discretionary authority.
Stabilization
Until the
distribution of the shares of common stock offered by this prospectus is
completed, rules of the SEC may limit the ability of the underwriters to bid for
and to purchase our shares of common stock. As an exception to these
rules, the underwriters may engage in transactions effected in accordance with
Regulation M under the Securities Exchange Act of 1934 that are intended to
stabilize, maintain or otherwise affect the price of our common
stock. The underwriters may engage in over-allotment sales,
syndicate covering transactions, stabilizing transactions and penalty bids in
accordance with Regulation M.
|
·
|
Stabilizing transactions permit
bids or purchases for the purpose of pegging, fixing or maintaining the
price of the common stock, so long as stabilizing bids do not exceed a
specified maximum.
|
|
·
|
Over-allotment involves sales by
the underwriters of shares of common stock in excess of the number of
shares of common stock the underwriters are obligated to purchase, which
creates a short position. The short position may be either a covered short
position or a naked short position. In a covered short position, the
number of shares of common stock over-allotted by the underwriters is not
greater than the number of shares of common stock that they may purchase
in the over-allotment option. In a naked short position, the number of
shares of common stock involved is greater than the number of shares in
the over-allotment option. The underwriters may close out any covered
short position by either exercising their over-allotment option or
purchasing shares of our common stock in the open
market.
|
|
·
|
Covering transactions involve the
purchase of securities in the open market after the distribution has been
completed in order to cover short positions. In determining the source of
securities to close out the short position, the underwriters will
consider, among other things, the price of securities available for
purchase in the open market as compared to the price at which they may
purchase securities through the over-allotment option. If the underwriters
sell more shares of common stock than could be covered by the
over-allotment option, creating a naked short position, the position can
only be closed out by buying securities in the open market. A naked short
position is more likely to be created if the underwriters are concerned
that there could be downward pressure on the price of the securities in
the open market after pricing that could adversely affect investors who
purchase in this
offering.
|
75
|
Penalty bids permit the
underwriters to reclaim a selling concession from a selected dealer when
the shares of common stock originally sold by the selected dealer are
purchased in a stabilizing or syndicate covering
transaction.
|
These
stabilizing transactions, covering transactions and penalty bids may have the
effect of raising or maintaining the market price of our common stock or
preventing or retarding a decline in the market price of our common
stock. As a result, the price of our common stock may be higher
than the price that might otherwise exist in the open market.
Neither
we nor the underwriters make any representation or prediction as to the effect
that the transactions described above may have on the prices of our common
stock. These transactions may occur on the NYSE AMEX Stock Exchange
or on any other trading market. If any of these transactions are
commenced, they may be discontinued without notice at any time.
Foreign
Regulatory Restrictions on Purchase of Shares
We have
not taken any action to permit a public offering of the shares outside the
United States or to permit the possession or distribution of this prospectus
outside the United States. Persons outside the United States who come
into possession of this prospectus must inform themselves about and observe any
restrictions relating to this offering of ordinary shares and the distribution
of the prospectus outside the United States.
TRANSFER
AGENT AND REGISTRAR
The
Transfer Agent and Registrar for shares of our common stock and preferred stock
is Continental Stock Transfer & Trust Company. Our Transfer Agent and
Registrar’s telephone number is (212) 509-4000.
LEGAL
MATTERS
The
validity of the securities offered hereby has been passed upon for us by
Ellenoff Grossman & Schole LLP, New York, New York. In addition, legal
matters relating to the PRC in connection with this offering will be passed upon
for us by Global Law Offices, Beijing, PRC. Loeb & Loeb, LLP, New
York, New York is acting as counsel to the underwriters in this
offering.
EXPERTS
Our
financial statements for the years ended December 31, 2008 and December 31, 2009
have been included in this prospectus and in the registration statement in
reliance upon the report of Paritz & Company, independent registered public
accounting firm, appearing elsewhere in this prospectus and upon the authority
of that firm as experts in auditing and accounting.
INTERESTS
OF NAMED EXPERTS AND COUNSEL
No
“expert” or “counsel” as defined by Item 509 of Regulation S-K promulgated under
the Securities Act, whose services were used in the preparation of this Form
S-1, was hired on a contingent basis or will receive a direct or indirect
interest in us or our parents or subsidiaries, nor was any of them a promoter,
underwriter, voting trustee, director, officer or employee of the
Company.
SERVICE
OF PROCESS AND ENFORCEMENT OF JUDGMENTS
Some of
our directors and officers reside in the PRC and substantially all of our assets
are located in the PRC. In addition, certain “experts” named in this
prospectus are located in the PRC. As a result, it may be difficult or
impossible for you to effect service of process on our officers and directors or
those experts within the United States.
Global
Law Offices, our counsel as to PRC law, has advised us there is uncertainty as
to whether the courts of the PRC would (1) recognize or enforce judgments
of United States courts obtained against our officers or directors or the
experts named in this prospectus based on the civil liability provisions of the
securities laws of the United States or any state in the United States, or
(2) entertain original actions brought in the PRC against our officers or
directors or the experts named in this prospectus based on the securities laws
of the United States or any state in the United States.
76
WHERE
YOU CAN FIND MORE INFORMATION
We have
filed with the United States Securities and Exchange Commission, 100 F.
Street, N.E., Washington, D.C. 20549, a registration statement on Form S-1 under
the Securities Act for the common stock offered by this prospectus. We have not
included in this prospectus all the information contained in the registration
statement and you should refer to the registration statement and its exhibits
for further information.
The
registration statement and other information may be read and copied at the SEC's
Public Reference Room at 100 F. Street N.E., Washington, D.C. 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC 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 SEC such as us.
You may
also read and copy any reports, statements or other information that we have
filed with the SEC at the addresses indicated above and you may also access them
electronically at the web site set forth above. These SEC filings are also
available to the public from commercial document
retrieval services.
77
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our
bylaws provide that we will indemnify our directors and officers to the extent
required by the Delaware General Corporation Law and shall indemnify such
individuals to the extent permitted by Delaware law.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons, we have been
informed that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by 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.
78
INDEX
TO FINANCIAL STATEMENTS
INDEX
Page
|
|||
Report
of Independent Registered Public Accounting Firm
|
F-2
|
||
Financial
Statements (audited):
|
|||
Consolidated
Balance Sheets for the Fiscal Years Ended December 31, 2009 and
2008
|
F-3
|
||
Consolidated
Statements of Income and Comprehensive Income for the Fiscal Years Ended
December 31, 2009 and 2008
|
F-4
|
||
Consolidated
Statements of Cash Flows for the Fiscal Years Ended December 31, 2009 and
2008
|
F-5
|
||
Consolidated
Statements of Changes in Stockholders' Equity
|
F-6
|
||
Notes
to Financial Statements for the Fiscal Year Ended December 31,
2009
|
F-7
|
||
Financial
Statements (unaudited):
|
|||
Consolidated
Balance Sheets for the Nine Months Ended September 30, 2010 and the Fiscal
Year Ended December 31, 2009
|
F-13
|
||
Consolidated
Statements of Income and Comprehensive Income for the Three and Nine
Months Ended September 30, 2010 and 2009
|
F-14
|
||
Consolidated
Statements of Cash Flows for the Nine Months Ended September 30, 2010 and
2009
|
F-15
|
||
Consolidated
Statements of Changes in Stockholders' Equity
|
F-16
|
||
Notes
to Financial Statements for the Nine Months Ended September 30,
2010
|
F-17
|
F-1
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors
China
For-Gen Corp.
We have
audited the accompanying consolidated balance sheets of China For-Gen Corp. and
Subsidiary as of December 31, 2009 and 2008 and the related consolidated
statements of income and comprehensive income, changes in stockholders’ equity
and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with 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 is
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 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 our audit provides a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of China For-Gen Corp. and
Subsidiary as of December 31, 2009 and 2008, and the results of its operations
and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/S/
Paritz & Company, P.A.
Hackensack,
New Jersey
May 6,
2010
F-2
CHINA
FOR-GEN CORP.
CONSOLIDATED
BALANCE SHEETS
December 31,
|
||||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 843,358 | $ | 612,971 | ||||
Accounts
receivable
|
10,895,902 | 7,403,788 | ||||||
Deposits
|
7,581,584 | 6,703,051 | ||||||
Income
tax receivables
|
2,962,539 | 823,779 | ||||||
Inventories
|
5,963,585 | 5,984,432 | ||||||
Other
receivables
|
11,118 | 24,423 | ||||||
Total
current assets
|
28,258,086 | 21,552,444 | ||||||
Property,
plant and equipment
|
2,723,201 | 2,977,488 | ||||||
Total
assets
|
$ | 30,981,287 | $ | 24,529,932 | ||||
Liabilities
and stockholders' equity
|
||||||||
Current
liabilities
|
||||||||
Trade
accounts payable
|
$ | 309 | $ | 1,157,621 | ||||
Loan
payable stockholder
|
- | 71,933 | ||||||
Accrued
expenses and other payables
|
409,984 | 459,703 | ||||||
Advance
from customer
|
1,039,398 | - | ||||||
Total
current liabilities
|
1,449,691 | 1,689,257 | ||||||
Warrant
liabilities
|
106,925 | 106,925 | ||||||
Stockholders'
equity
|
||||||||
Preferred
stock: par value $0.001; 2,000,000 shares authorized, 500,000 shares
issued and authorized
|
500 | 500 | ||||||
Common
stock: par value $0.001; 50,000,000 shares authorized, 13,854,281 and
13,854,281 shares issued and outstanding at December 31, 2009 and 2008,
respectively
|
13,854 | 13,854 | ||||||
Additional
paid in capital
|
5,435,232 | 5,435,232 | ||||||
Retained
earnings
|
21,379,363 | 14,722,854 | ||||||
Accumulated
other comprehensive income
|
2,595,722 | 2,561,310 | ||||||
Total
stockholders' equity
|
29,424,671 | 22,733,750 | ||||||
Total
Liabilities and stockholders' equity
|
$ | 30,981,287 | $ | 24,529,932 |
F-3
CHINA
FOR-GEN CORP.
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Sales
|
$ | 23,615,957 | $ | 22,146,254 | ||||
Cost
of goods sold
|
$ | 6,351,073 | $ | 10,428,042 | ||||
Gross
profit
|
$ | 17,264,884 | $ | 11,718,212 | ||||
Operating
expenses
|
||||||||
Selling
expense
|
$ | 3,561,550 | $ | 4,206,849 | ||||
General
and administrative expenses
|
$ | 912,870 | $ | 830,813 | ||||
Total
operating expenses
|
$ | 4,474,420 | $ | 5,037,662 | ||||
Operating
income
|
$ | 12,790,464 | $ | 6,680,550 | ||||
Other
income
|
||||||||
Interest
income
|
$ | 5,211 | $ | 8,221 | ||||
Total
other income
|
$ | 5,211 | $ | 8,221 | ||||
Net
income
|
$ | 12,795,675 | $ | 6,688,771 | ||||
Foreign
Currency Translation Adjustment
|
$ | 34,412 | $ | 1,138,567 | ||||
Comprehensive
Income
|
$ | 12,830,087 | $ | 7,827,338 | ||||
Net
income from common share
|
||||||||
Earnings
per share – Basic
|
$ | 0.92 | 0.48 | |||||
Earnings
per share Diluted
|
0.92 | 0.48 | ||||||
Weighted
average common share outstanding
|
||||||||
Basic
|
13,854,281 | 13,854,281 | ||||||
Diluted
|
13,854,281 | 13,854,281 |
F-4
CHINA
FOR-GEN CORP.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 12,795,675 | $ | 6,688,771 | ||||
Adjustments
to reconcile net income to net cash provided by
operations:
|
||||||||
Depreciation
and amortization
|
259,509 | 391,905 | ||||||
Changes
in operating liabilities and assets:
|
||||||||
Trade
accounts receivable
|
(3,430,109 | ) | 389,119 | |||||
Advance
to suppliers
|
(1,002,110 | ) | (1,366,031 | ) | ||||
Inventories
|
26,406 | (4,728,944 | ) | |||||
Other
receivables
|
13,305 | |||||||
Trade
accounts payable
|
(1,157,311 | ) | 1,136,396 | |||||
Advance
from customer
|
1,039,398 | |||||||
Accrued
expenses
|
(49,720 | ) | 203,422 | |||||
Income
tax receivable
|
(2,078,882 | ) | (2,065,650 | ) | ||||
Net
cash provided by operating activities
|
6,419,755 | 648,988 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchases
of plant and equipment
|
(2,923 | ) | (8,476 | ) | ||||
Prepaid
leased land
|
- | (97,670 | ) | |||||
Net
cash used in investing activities
|
(2,923 | ) | (106,146 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from issued shares
|
- | 455,000 | ||||||
Related
party payable
|
(48,391 | ) | (1,204,506 | ) | ||||
Dividend
paid
|
(6,139,166 | ) | - | |||||
Net
cash used in financing activities
|
(6,187,557 | ) | (749,506 | ) | ||||
Effect
of rate changes on cash
|
1,112 | 46,437 | ||||||
Increase
(decrease) in cash and cash equivalents
|
230,387 | (160,227 | ) | |||||
Cash
and cash equivalents, beginning of period
|
612,971 | 773,198 | ||||||
Cash
and cash equivalents, end of period
|
$ | 843,358 | 612,972 | |||||
Supplemental
disclosures of cash flow information:
|
||||||||
Income
taxes paid in cash
|
$ | 2,137,989 | $ | 2,091,470 |
F-5
CHINA
FOR-GEN CORP.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Series
A
Preferred
Stock
|
Common
Stock
|
Registered
|
Additional
Paid
in
|
Retained
|
Other
Comprehensive
|
|||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Capital
|
Earnings
|
Income
|
Totals
|
||||||||||||||||||||||||||||
Balance:
December 31, 2007
|
- | $ | - | - | $ | - | $ | 4,228,841 | $ | 872,671 | $ | 8,034,083 | $ | 1,422,743 | $ | 14,558,338 | ||||||||||||||||||||
Sale
of 500,000 preferred shares
|
500,000 | $ | 500 | 347,575 | 348,075 | |||||||||||||||||||||||||||||||
Reverse
acquisition
|
13,854,281 | 13,854 | (4,576,415 | ) | 4,562,561 | - | ||||||||||||||||||||||||||||||
Foreign
currency translation adjustments
|
1,138,567 | 1,138,567 | ||||||||||||||||||||||||||||||||||
Net
income
|
6,688,771 | 6,688,771 | ||||||||||||||||||||||||||||||||||
Balance:
December 31, 2008
|
500,000 | $ | 500 | 13,854,281 | $ | 13,854 | 0 | 5,435,232 | 14,722,854 | 2,561,310 | $ | 22,733,750 | ||||||||||||||||||||||||
Dividend
paid
|
(6,139,166 | ) | (6,139,166 | ) | ||||||||||||||||||||||||||||||||
Foreign
currency translation adjustments
|
34,412 | 34,412 | ||||||||||||||||||||||||||||||||||
Net
income
|
12,795,675 | 12,795,675 | ||||||||||||||||||||||||||||||||||
Balance:
December 31, 2009
|
500,000 | $ | 500 | 13,854,281 | $ | 13,854 | 0 | 5,435,232 | 21,379,363 | 2,595,722 | $ | 29,424,671 |
F-6
NOTES
TO FINANCIAL STATEMENTS
1. Nature
of operations
China
For-Gen Corporation (“the Company”) was incorporated in the State of Delaware on
February 26th, 2008. The Company acquired all of the equity interests of
Liaoning Shengsheng Biotechnological Co., Ltd. (“Liaoning Shengsheng”), a
company incorporated in the People’s Republic of China (the “PRC”) on November
24, 2000. Since its inception, Liaoning Shengsheng has been an
agricultural and forestry company engaged in the breeding, cloning and sale of
plant seedlings and specialized transgenic plant seedlings, and the research and
development of seedling breeding technologies.
2. Acquisition
Pursuant
to the Share Transfer Agreement entered into on March 26, 2009 (the “Share
Transfer”) between the shareholders of Liaoning Shengsheng and the Company, we
acquired Liaoning Shengsheng and its wholly-owned subsidiary,
Pusheng. The closing of the Share Transfer (the “Closing”) took place
on May 6, 2009 whereby we acquired all RMB 35,000,000 (approximately $5.15
million as of June 21, 2010) of the registered capital of Liaoning Shengsheng
(the “Shengsheng Shares”) from all of its shareholders in consideration for
$5.12 million. In February, 2010, the Company paid $1.28 million to
the Shengsheng Shareholders, who are included among the selling stockholders
hereunder. As a result of the Closing, Liaoning Shengsheng became a
wholly foreign-owned subsidiary (“WFOE”) of China For-Gen.
As part
of the Share Transfer, on June 8, 2009, certain officers and directors of the
Company (the “Grantees”) entered into a call option agreement (the “Call Option
Agreement”) with Ms. Sherry Li (“Ms. Li”), then the sole shareholder officer,
director and shareholder of China For-Gen, wherein she agreed to transfer a
number of shares of the Company equal to 60% (now approximately 55% since the
additional investment right was exercised by those investors who participated in
the February 2010 private placement) of the issued and outstanding shares of
common stock after an initial public offering. The Call Option
Agreement became effective upon the closing of the Share
Transfer. The option may be exercised by the Grantees for nominal
consideration. The Call Option Agreement provides that Ms. Li may not
dispose of any of the shares owned by Ms. Li in China For-Gen without the
Grantee’s prior written consent.
The
transaction was accounted for as a reverse merger and, accordingly, the Company
is the legal surviving entity and Liaoning Shengsheng is the accounting
acquirer.
3. Summary
of Significant Accounting Policies
Basis of
presentation
On May
11, 2010, the Company effected a 1:1.5 reverse split of the Company’s issued and
outstanding common stock, decreasing the number of outstanding shares from
20,781,421 to 13,854,281 as of December 31, 2009. These statements
have been adjusted to reflect this reverse split on a historical pro-forma
basis.
The
consolidated financial statements include the financial statements of the
Company and its wholly-owned subsidiaries. All significant inter-company
balances and transactions have been eliminated in consolidation.
Use of
estimates
The
preparation of financial statements in conformity with US generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates and such differences could be
material.
Cash and Cash
Equivalents
Cash and
cash equivalents includes cash on hand and demand deposits held by banks.
Deposits held in financial institutions in the PRC are not insured by any
government entity or agency.
F-7
CHINA
FOR-GEN CORPORATION
NOTES
TO FINANCIAL STATEMENTS
3. Summary
of Significant Accounting Policies
Accounts
Receivable
The
Company extends unsecured credit to its customers in the ordinary course of
business. Trade accounts receivable are recognized and carried at original
invoice amount less an allowance for any uncollectible amounts. An allowance for
doubtful accounts is established and determined based on management’s assessment
of known requirements, aging of receivables, payment history, the customer’s
current credit worthiness and the economic environment. There was no allowance
for doubtful accounts as of December 31, 2009 and 2008.
Inventories
Inventories
consist of trees grown from seedlings developed by the Company and trees
purchased and grown for resale. The costs of growing trees are capitalized into
inventory until the time of harvest. Once a tree is harvested and sold, the
related inventoried costs are recognized as a cost of sale to provide an
appropriate matching of expenses with the related revenue earned. The Company
states its inventories at the lower of cost or net realizable
value.
Property, Plant and
Equipment
Property,
plant and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the useful lives of
the assets. Land lease acquisition costs are amortized over the life the lease.
Major renewals are capitalized and depreciated; maintenance and repairs that do
not extend the life of the respective assets are charged to expense as incurred.
Upon disposal of assets, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in
income.
Revenue
Recognition
Our
revenues consist of sales of genetically modified saplings. Sales are
recognized in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104
included in the codification as ASC 605, Revenue Recognition, when the following
four revenue criteria are met: persuasive evidence of an arrangement exists,
delivery has occurred, the selling price is fixed or determinable and
collectability is reasonably assured. No return allowance is made as
products are normally not returnable upon acceptance by the
customers.
The price
at which we sell fast-growing poplar seedlings is based on numerous factors,
including: market price changes of fast-growing poplar seedlings; regional
supply of fast-growing poplar seedlings; seasonal availability of seedlings and
demand for fast-growing poplar seedlings. Generally, it takes 20 days
for a single transaction to be consummated. This time frame includes
negotiation of terms, execution of contract, preparation, delivery,
transportation, planting of products and receipt of payment. For
larger transactions, it can take up to one year for the last payment to be
made.
Because
the Company is categorized as in a farm and forest industry, it is entitled to
participate in a government subsidy program for its sapling business. Under the
program, the Company collects value added tax (VAT) from customers in an amount
equal to 3% of sales during the year ended December 31, 2009 and 6% of sales
during the year ended December 2008. This amount is not required to
be remitted to the government. VAT, which is included in revenue, was $682,735
and $1,251,786 for the years ended December 31, 2009 and 2008
respectively.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to reverse. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in the
statement of operations in the period that includes the enactment
date. A valuation allowance is provided for deferred tax assets if it
is more likely than not that these items will either expire before the Company
is able to realize their benefits, or that future deductibility is
uncertain.
Impairment of Long-Lived
Assets
Long-term
assets of the Company are reviewed annually to assess whether the carrying value
has become impaired according to the guidelines established in Statement of
Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” No impairment of assets was
recorded in the periods reported.
Derivative Financial
Instruments
In
connection with the sale of debt or equity instruments, we may sell options or
warrants to purchase our common stock. In certain circumstances, these options
or warrants may be classified as derivative liabilities, rather than as equity.
Additionally, the debt or equity instruments may contain embedded derivative
instruments, such as embedded derivative features, which in certain
circumstances may be required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument liability.
Derivative financial instruments are recorded as liabilities in the consolidated
balance sheet, measured at fair value. When available, quoted market
prices are used in determining fair value. However, if quoted market
prices are not available, we estimate fair value using either quoted market
prices of financial instruments with similar characteristics or other valuation
techniques. The derivative instrument liabilities are re-valued at the end of
each reporting period, with changes in the fair value of the derivative
liability recorded as charges or credits to income, in the period in which the
changes occur.
F-8
CHINA
FOR-GEN CORPORATION
NOTES
TO FINANCIAL STATEMENTS
3. Summary
of Significant Accounting Policies
Foreign Currency and
Comprehensive Income
The
accompanying financial statements are presented in US dollars. The functional
currency is the Renminbi (“RMB”) of the PRC. The financial statements are
translated into US dollars from RMB at year-end exchange rates for assets and
liabilities, and weighted average exchange rates for revenues and expenses.
Capital accounts are translated at their historical exchange rates when the
capital transactions occurred.
Accumulated
other comprehensive income represents foreign currency translation
adjustments.
Net Income Per
Share
Basic net
income per share is computed on the basis of the weighted average number of
common shares outstanding during the period. Diluted net income per share is
computed on the basis of the weighted average number of common shares and common
share equivalents outstanding. Dilutive securities having an anti-dilutive
effect on diluted net income per share are excluded from the calculation.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the
period.
New accounting
pronouncement
On
September 30, 2009, the Company adopted changes issued by the FASB to the
authoritative hierarchy of generally accepted accounting principles
(“GAAP”). These changes establish the FASB Accounting Standards
Codification TM (“Codification”) as the source of authoritative accounting
principles recognized by the FASB to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
GAAP in the U.S. The Codification was effective for financial statements issued
for interim and annual periods ending after September 15, 2009. The
adoption had no material impact on the Company’s consolidated results of
operations or financial condition.
In
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective for us beginning July 1, 2010, with earlier adoption
permitted. Under the new guidance on arrangements that include software
elements, tangible products that have software components that are essential to
the functionality of the tangible product will no longer be within the scope of
the software revenue recognition guidance, and software-enabled products will
now be subject to other relevant revenue recognition guidance. Additionally, the
FASB issued authoritative guidance on revenue arrangements with multiple
deliverables that are outside the scope of the software revenue recognition
guidance. Under the new guidance, when vendor specific objective evidence or
third party evidence for deliverables in an arrangement cannot be determined, a
best estimate of the selling price is required to separate deliverables and
allocate arrangement consideration using the relative selling price method. The
new guidance includes new disclosure requirements on how the application of the
relative selling price method affects the timing and amount of revenue
recognition. We believe the adoption of this new guidance will
not have a material impact on our financial statements.
4.
Deposits
December
31,
|
December
31,
|
||||||||
2009
|
2008
|
||||||||
Equipment
purchase
|
(a)
|
$
|
7,205,413
|
$
|
-
|
||||
Business
acquisition
|
(b)
|
292,903
|
-
|
||||||
Property
with trees
|
(c)
|
-
|
6,645,012
|
||||||
Supplies
|
83,268
|
58,039
|
|||||||
-
|
-
|
||||||||
7,581,584
|
6,703,051
|
|
a.
|
In April 2009, Liaoning entered
into an agreement to purchase equipment for RMB 61,500,000 (approximately
$9,000,000). This equipment will be used in a factory the
Company intends to build in the city of Karamai to produce wood
panel. Payment made to this supplier under this agreement
totaled RMB 49,200,000 (approximately $7,200,000) as of December 31,
2009. Under this Agreement, the equipment vendor will design,
manufacture, deliver, and set up all equipment required for manufacturing
artificial board, or Medium Density
Fiberboard.
|
|
b.
|
In May 2009, Liaoning entered
into an agreement to acquire 80% of the outstanding shares of Daxinganling
Tuqiangbeiji Wood Co. Ltd. for RMB31,000,000 (approximately $4.56 million
as of June 21, 2010). A deposit of RMB2,000,000 (approximately
$294,221.48 as of June 21, 2010) was paid as of December 31,
2009.
|
F-9
CHINA
FOR-GEN CORPORATION
NOTES
TO FINANCIAL STATEMENTS
|
c.
|
The balance as of December 31,
2008 represents the prepayment to Karamai Pulin Ecology and Technology
Co., Ltd to purchase trees and
timber.
|
5.
|
Property, Plant and
Equipment
|
Property,
Plant and Equipment consists of the following:
December 31,
2009
|
December 31,
2008
|
Estimated Useful
Life
|
|||||||
Land
use rights
|
$ | 61,704 | $ | 132,927 |
Life
of lease
|
||||
Buildings
|
2,932,790 | 2,930,043 |
10-30
years
|
||||||
Machinery
and equipment
|
1,130,164 | 1,129,106 |
3-8
years
|
||||||
Vehicles
|
139,306 | 139,175 |
5-8
years
|
||||||
Computer
and office equipment
|
83,917 | 80,912 |
3-5
years
|
||||||
Office
equipment
|
9,710 | 9,701 |
3-5
years
|
||||||
Total
property, plant and equipment
|
4,357,591 | 4,421,865 | |||||||
Accumulated
depreciation
|
(1,634,390 | ) | (1,444,377 | ) | |||||
2,723,201 | 2,977,488 |
6.
|
Advance from
customer
|
Advance
from customer consists of deposit from a customer. This amount is noninterest
bearing.
7.
|
Stockholders’
equity
|
In May
2008, the Company amended and restated Certificate of Incorporation to authorize
the issuance of 22,000,000 shares, consisting of 500,000 preferred shares and
21,500,000 are common shares, par value $.001 per share.
In May
2008, the Company sold 500,000 shares of Series A preferred shares (“Preferred
Stock”) and 1,000,000 warrants to purchase 0.66 (1.00 share pre-reverse split)
share of the Company’s common stock for an aggregate consideration of $455,000.
Each share of Preferred Stock is convertible into 0.66 (1.00 share pre-reverse
split) share of common stock. The Company has the right at any time to
repurchase the Series A Stock at a price of $1.71 ($1.14 per share pre-reverse
split) per share. In lieu of exercising such repurchase option, the
Company may make annual distributions to holders of Series A Stock in an amount
equal to two percent (2%) of the net income of the Company, if any.
The
Series A Stock shall be entitled to a dividend in the amount of 11% per annum,
payable monthly. No dividends are permitted to be paid on Company
common stock while the Series A Stock is outstanding. The Company is
further prohibited from redeeming or repurchasing any common stock or any other
class of Company securities which is junior to or on parity with the Series A
Stock while the Series A Stock is outstanding.
The
Series A Stock has no voting rights, however, so long as any Series A Stock is
outstanding, the Company shall not, without the prior approval of the holders of
the Series A Stock then outstanding, (a) alter the powers, preferences or rights
of the Series A Stock, (b) authorize or create any class of securities ranking
senior to the Series A Stock as to dividends or distributions of assets, (c)
amend its certificate of incorporation or other charter documents in breach of
any of the provisions of the certificate of designation, (d) increase the
authorized number of shares of Series A Stock or (e) enter into any agreement
with respect to the foregoing.
The
Company shall not effect any conversion of the Series A Stock if after giving
effect to such conversion, such holder would beneficially own in excess of 4.9%
of the number of shares of our common stock outstanding immediately following
such conversion.
F-10
CHINA
FOR-GEN CORPORATION
NOTES
TO FINANCIAL STATEMENTS
Holders
of Series A Stock may be entitled to an additional number of shares of our
common stock under certain circumstances in the event the Company issues common
stock, warrants, options or convertible debt or equity with an exercise or
conversion price that places a valuation of less than $42,500,000.
8. Earnings
Per Share
The
following table sets forth the computation of basic and diluted earnings per
share of common stock:
Years
Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Basic
net income per share:
|
||||||||
Numerator:
|
||||||||
Net
income used in computing basic net income per share
|
$ | 12,795,675 | $ | 6,688,771 | ||||
Net
income applicable to common shareholders
|
$ | 12,795,675 | $ | 6,688,771 | ||||
Denominator:
|
||||||||
Weighted
average common shares outstanding
|
13,854,281 | 13,854,281 | ||||||
Basic
net income per share
|
$ | 0.92 | $ | 0.48 | ||||
Diluted
net income per share:
|
||||||||
Numerator:
|
||||||||
Net
income used in computing diluted net income per share
|
$ | 12,795,675 | $ | 6,688,771 | ||||
Net
income applicable to common shareholders
|
$ | 12,795,675 | $ | 6,688,771 | ||||
Denominator:
|
||||||||
Weighted
average common shares outstanding
|
13,854,281 | 13,854,281 | ||||||
Weighted
average effect of dilutive securities:
|
||||||||
Shares
used in computing diluted net income per share
|
13,854,281 | 13,854,281 | ||||||
Diluted
net income per share
|
$ | 0.92 | $ | 0.48 |
As of
December 31, 2009, the Company had 500,000 shares of Series A Convertible P
referred S tock outstanding and 1,000,000 warrants (on a pre-reverse split
basis). The Series A Convertible Preferred Stock had a $0.91
conversion price on a pre-reverse split basis), which was the same as the fair
value of the Company’s common stock on December 31, 2009. The
warrants had an exercise price of $1.25 per share (on a pre-reverse split
basis), which is greater than the fair value of the Company’s common stock on
December 31, 2009. The 500,000 shares of Series A Convertible Preferred
Stock and 1,000,000 warrants were excluded from the EPS calculations as they
were anti-dilutive in the year-ended December 31, 2009 and 2008.
9.
|
Warrants
|
The
Warrants are entitled to a price adjustment provision that allows the exercise
price of the Warrants to be reduced in the event the Company issues any
additional shares of common stock at a price per share less than the
then-applicable warrant price. The Company determined that the Warrants meet the
definition of a derivative under ASC Topic 815, Derivatives and Hedging “ASC
Topic 815”. In determining whether the Warrants were eligible for a scope
exception from ASC Topic 815, the Company considered the provisions of ASC Topic
815-40 (Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock). The Company determined that the Warrants do not meet a
scope exception because they are not deemed indexed to the Company’s own stock.
Pursuant to ASC Topic 815, derivatives should be measured at fair value as of
the inception date and re-measured at fair value as of each subsequent balance
sheet date with changes in fair value recorded in earnings at each reporting
period.
Fair
value is generally based on independent sources such as quoted market prices or
dealer price quotations. To the extent certain financial instruments trade
infrequently or are non-marketable securities, they may not have readily
determinable fair values. The Company estimated the fair value of the Warrants
and using historical information that management deems most
relevant.
The
Company used the Black-Scholes option-pricing model with the following
assumptions:
Year
Ended December
31,
|
||||||||
2009
|
2008
|
|||||||
Estimated
dividends
|
11 | % | 11 | % | ||||
Expected
volatility
|
54 | % | 54 | % | ||||
Risk-free
interest rate
|
3 | % | 3 | % | ||||
Expected
term
|
3.3
years
|
4.3
years
|
10.
|
Income
tax
|
The
Company’s subsidiary, Liaoning Shengsheng, is exempted from income tax for its
sapling business effective January 1, 2008. During the years ended December 31,
2008 and 2009, Liaoning Shengsheng paid income tax of approximately RMB
20,000,000 (approximately $2,900,000) which will be refunded in 2011. The
Company recorded this amount as income tax receivable on its balance
sheet.
A
reconciliation of the Company’s effective income tax rate to the U.S. Federal
statutory rate is as follows:
F-11
CHINA
FOR-GEN CORPORATION
NOTES
TO FINANCIAL STATEMENTS
Year Ended December
31,
|
||||||||
2009
|
2008
|
|||||||
Federal
statutory rate
|
35 | % | 35 | % | ||||
Tax
exempt income
|
-36 | % | -37 | % | ||||
Valuation
allowance
|
1 | % | 2 | % | ||||
Effective
tax rate
|
0 | % | 0 | % |
Under the
income tax laws of the PRC, the Company’s subsidiaries operate in a nationally
investment-encouraged industry and are not subject to income tax.
The
Company has a deferred tax asset of approximately $100,000 and $190,000
resulting from net operating loss carryforwards from company’s U.S. operation
for the years ended December 31, 2008 and 2009 in the U.S. for which a 100%
valuation allowance has been provided.
The
Company has available approximately $300,000 and $260,000 of net operating loss
carryforwards in the United States which expire in 2028 and 2029.
11.
|
Concentration of Credit Risks and
Uncertainties
|
Concentration
of credit risk exists when changes in economic, industry or geographic factors
similarly affect groups of counter parties whose aggregate credit exposure is
material in relation to the Company’s total credit exposure. Two customers, each
independent distributors, accounted for more than 10% of accounts receivable at
December 31, 2009 and 2008, totaling 87% and 69%, respectively. Two customers
accounted for 81% and 94% of sales for the year ended December 31, 2009 and
2008.
12.
|
Subsequent
events
|
On
February 12, 2010, the Company received gross proceeds of $2,000,000 from the
sale of five year convertible promissory notes, bearing interest at ten percent
(10%) per annum (the “Notes”) and common stock Purchase Warrants A and B (each,
the “A Warrants” and “B Warrants” and collectively, the “Warrants”) to various
accredited and institutional investors. Following the Reverse Split,
these Notes are convertible into 1,320,133 shares of our common
stock. Additionally, such investors have, as of August 10, 2010,
exercised their right to purchase up to an additional $2,500,000 of Notes on
terms identical to the Notes purchased in February 2010, which such Notes are
convertible into 1,650,165 post-Reverse Split shares of common
stock. Accordingly, such investors have outstanding Notes convertible
into an aggregate of 2,970,298 shares of common stock. The Notes are
convertible at any time at the option of the Note holder.
The
Company determined that the Warrants meet the definition of a derivative under
ASC Topic 815, Derivatives and
Hedging “ASC Topic 815”). In determining whether the Warrants were
eligible for a scope exception from ASC Topic 815, the Company considered the
provisions of ASC Topic 815-40 ( Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock
). The Company determined that the Warrants do not meet a scope
exception because they are not deemed indexed to the Company’s own stock.
Pursuant to ASC Topic 815, derivatives should be measured at fair value at the
date of issuance and recorded as a corresponding liability and re-measured at
fair value with changes in fair value recorded in earnings at each reporting
period. Fair value is generally based on independent sources such as quoted
market prices or dealer price quotations. Due to the fact that the
Company’s securities are non-marketable securities, they do not have
readily determinable fair values. The Company will estimate the fair value of
the Warrants using various pricing models and available information that
management deems most relevant. Among the factors to be considered in
determining the fair value of financial instruments are discounted anticipated
cash flows, the cost, terms and liquidity of the instrument, the financial
condition, operating results and credit ratings of the issuer, the quoted market
price of similar traded securities, and other factors generally pertinent to the
valuation of financial instruments. Upon the earlier of the warrant exercise or
the expiration date, the warrant liability will be reclassified into
shareholders’ equity. Until that time, the warrant liability will be
recorded at fair value based on the methodology described above.
On August
10, 2010, those investors exercised their right and purchased an additional
$2,500,000 face value of convertible notes.
The notes
bears interest at a rate of 10% per annum accrued monthly in kind for the first
12 months and shall be payable in cash by the 10th day of each month, following
the initial 12 months, at the election of the note holder. Total financing
costs directly associated with the issuance of these notes was $292,500 and is
recorded as deferred financing costs in the balance sheet at grant date. The
Company is amortizing these financing costs over the life of the
Notes.
The
conversion feature of the convertible notes provides for a rate of conversion
that is above market value. There is no BCF.
As of
grant date, we recorded carrying value of convertible notes of $2,500,000 on the
balance sheet.
F-12
CHINA
FOR-GEN CORP.
CONSOLIDATED
BALANCE SHEETS
September 30,
2010
|
December 31,
2009
|
|||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 8,689,839 | $ | 843,358 | ||||
Accounts
receivable
|
12,436,371 | 10,895,902 | ||||||
Deposits
|
8,337,703 | 7,581,584 | ||||||
Prepaid
expenses
|
37,808 | - | ||||||
Income
tax receivables
|
1,521,590 | 2,962,539 | ||||||
Inventories
|
3,435,768 | 5,963,585 | ||||||
Other
receivables
|
- | 11,118 | ||||||
Total
current assets
|
34,459,079 | 28,258,086 | ||||||
Property,
plant and equipment
|
$ | 2,728,542 | $ | 2,723,201 | ||||
Long-term
deposit
|
2,687,329 | |||||||
Deferred
financing costs
|
418,517 | - | ||||||
Total
assets
|
$ | 40,293,467 | $ | 30,981,287 | ||||
Liabilities
and stockholders' equity
|
||||||||
Current
liabilities
|
||||||||
Trade
accounts payable
|
$ | 895 | $ | 309 | ||||
Accrued
expenses and other payables
|
312,120 | 409,984 | ||||||
Advance
from customer
|
57,730 | 1,039,398 | ||||||
Due
to shareholder
|
95,067 | |||||||
Total
current liabilities
|
465,812 | 1,449,691 | ||||||
Warrant
liabilities
|
911,209 | 106,925 | ||||||
Convertible
notes, net of debt discount of 1,681,250
|
2,818,750 | - | ||||||
Convertible
notes-accrued interest
|
81,825 | - | ||||||
Total
liabilities
|
4,277,596 | 1,556,616 | ||||||
Stockholders'
equity
|
||||||||
Preferred
stock: par value $0.001; 2,000,000 shares authorized, 500,000 shares
issued and authorized
|
500 | 500 | ||||||
Common
stock: par value $0.001; 50,000,000 shares authorized, 14,270,948 and
13,854,281 shares issued and outstanding at September 30, 2010 and
December 31, 2009, respectively
|
14,271 | 13,854 | ||||||
Additional
paid in capital
|
9,439,394 | 5,435,232 | ||||||
Retained
earnings
|
23,122,008 | 21,379,363 | ||||||
Other
comprehensive income
|
3,439,698 | 2,595,722 | ||||||
Total
stockholders' equity
|
36,015,871 | 29,424,671 | ||||||
Total
liabilities and stockholders' equity
|
$ | 40,293,467 | $ | 30,981,287 |
CHINA
FOR-GEN CORP.
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Nine months ended
September 30,
|
Three months ended September
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Sales
revenues
|
$ | 16,288,827 | $ | 12,922,412 | $ | 45,552 | $ | 6,094 | ||||||||
Cost
of goods sold
|
3,485,125 | 5,201,809 | 9,957 | 4,483 | ||||||||||||
Gross
profit
|
12,803,702 | 7,720,603 | 35,595 | 1,611 | ||||||||||||
Operating
expenses
|
||||||||||||||||
Selling
expense
|
1,729,768 | 2,562,828 | 7,625 | 628 | ||||||||||||
General
and administrative expenses
|
1,019,482 | 491,064 | 211,762 | 114,349 | ||||||||||||
Total
operating expenses
|
2,749,250 | 3,053,892 | 219,387 | 114,977 | ||||||||||||
Operating
income
|
10,054,452 | 4,666,711 | (183,792 | ) | (113,366 | ) | ||||||||||
Other
income (expense)
|
||||||||||||||||
Interest
income
|
7,703 | 4,180 | 3,613 | 531 | ||||||||||||
Gain
on change of fair value of derivative liabilities
|
149,644 | - | 68,726 | - | ||||||||||||
Interest
expense
|
(376,623 | ) | - | (166,708 | ) | - | ||||||||||
Other
expense
|
(1,514 | ) | (245 | ) | (741 | ) | (476 | ) | ||||||||
Total
other income (expenses)
|
(220,790 | ) | 3,935 | (95,110 | ) | 55 | ||||||||||
Net
income(loss)
|
9,833,662 | 4,670,646 | (278,902 | ) | (113,311 | ) | ||||||||||
Foreign
Currency Translation Adjustment
|
843,976 | (3,026 | ) | 742,056 | 30,396 | |||||||||||
Comprehensive
Income
|
$ | 10,677,638 | $ | 4,667,620 | $ | 463,154 | (82,915 | ) | ||||||||
Net
income for common share
|
||||||||||||||||
Income(loss)
per share-Basic
|
$ | 0.69 | $ | 0.34 | $ | (0.02 | ) | $ | (0.01 | ) | ||||||
Income(loss)
per share-Diluted
|
$ | 0.69 | $ | 0.34 | $ | (0.02 | ) | $ | (0.01 | ) | ||||||
Weighted
average common stock outstanding
|
||||||||||||||||
Basic
|
14,270,948 | 13,854,281 | 14,270,948 | 13,854,281 | ||||||||||||
Diluted
|
14,270,948 | 13,854,281 | 14,270,948 | 13,854,281 |
F-14
CHINA
FOR-GEN CORP.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Nine months ended September
30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 9,833,662 | $ | 4,670,646 | ||||
Adjustments
to reconcile net income to net cash provided by
operations:
|
||||||||
Depreciation
and amortization
|
155,504 | 149,015 | ||||||
Gain
on the change of fair value of derivative liabilities
|
(149,644 | ) | - | |||||
Amortization
of deferred financing costs
|
28,983 | - | ||||||
Amortization
of discount convertible notes
|
242,438 | - | ||||||
Changes
in operating liabilities and assets:
|
||||||||
Trade
accounts receivable
|
(1,305,622 | ) | (4,304,017 | ) | ||||
Advance
to suppliers
|
(12,716 | ) | (2,818,559 | ) | ||||
Inventories
|
2,597,768 | (502,814 | ) | |||||
Prepaid
expense
|
(35,908 | ) | 45,888 | |||||
Other
receivable
|
10,887 | 5,850,365 | ||||||
Income
tax receivable
|
1,472,486 | (2,133,518 | ) | |||||
Deposit
|
(597,184 | ) | (292,290 | ) | ||||
Long-term
deposit
|
(2,640,690 | ) | - | |||||
Trade
accounts payable
|
571 | (1,155,974 | ) | |||||
Advance
from customer
|
(984,470 | ) | 98,895 | |||||
Accrued
expenses and other payables
|
82,491 | 277,569 | ||||||
Accrued
interest expenses-convertible notes
|
81,825 | - | ||||||
Net
cash provided by (used in) operating activities
|
8,780,381 | (114,794 | ) | |||||
Cash
flows from investing activities:
|
||||||||
Purchases
of property, plant and equipment
|
(108,776 | ) | (1,149 | ) | ||||
Net
cash used in investing activities
|
(108,776 | ) | (1,149 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from issuance of convertible notes
|
4,500,000 | - | ||||||
Deferred
financing costs
|
(447,500 | ) | - | |||||
Capital
contribution
|
3,034,819 | |||||||
Dividend
paid
|
(8,091,017 | ) | ||||||
Proceeds
(repayment) to shareholder
|
93,417 | (70,553 | ) | |||||
Net
cash used in financing activities
|
(910,281 | ) | (70,553 | ) | ||||
Effect
of rate changes on cash
|
85,157 | (223 | ) | |||||
Increase
(decrease) in cash and cash equivalents
|
7,846,481 | (186,719 | ) | |||||
Cash
and cash equivalents, beginning of period
|
843,358 | 612,971 | ||||||
Cash
and cash equivalents, end of period
|
$ | 8,689,839 | $ | 426,252 |
F-15
CHINA
FOR-GEN CORP.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Series A Preferred Stock
|
Common Stock
|
Additional
Paid in
|
Retained
|
Comprehensive
|
||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Earnings
|
Income
|
Totals
|
|||||||||||||||||||||||||
Balance:
January 1, 2009
|
500,000 | $ | 500 | 13,854,281 | $ | 13,854 | $ | 5,435,232 | $ | 14,722,854 | $ | 2,561,310 | $ | 22,733,750 | ||||||||||||||||||
Dividend
paid
|
$ | (6,139,166 | ) | $ | (6,139,166.13 | ) | ||||||||||||||||||||||||||
Foreign
currency translation adjustments
|
$ | 34,412 | $ | 34,412 | ||||||||||||||||||||||||||||
Net
income
|
$ | 12,795,675 | $ | 12,795,675 | ||||||||||||||||||||||||||||
Balance:
December 31, 2009
|
500,000 | $ | 500 | 13,854,281 | $ | 13,854 | $ | 5,435,232 | $ | 21,379,363 | $ | 2,595,722 | $ | 29,424,671 | ||||||||||||||||||
Issuance
of shares for cancellation of warrants
|
$ | 416,667 | $ | 417 | $ | 106,508 | $ | 106,925 | ||||||||||||||||||||||||
Beneficial
conversion feature
|
$ | 862,835 | $ | 862,835 | ||||||||||||||||||||||||||||
Capital
contribution
|
$ | 3,034,819 | $ | 3,034,819 | ||||||||||||||||||||||||||||
Dividend
declared or paid
|
$ | (8,091,017 | ) | $ | (8,091,017 | ) | ||||||||||||||||||||||||||
Foreign
currency translation adjustments
|
$ | 843,976 | $ | 843,976 | ||||||||||||||||||||||||||||
Net
income
|
$ | 9,833,662 | $ | 9,833,662 | ||||||||||||||||||||||||||||
Balance:
September 30, 2010
|
500,000 | $ | 500 | 14,270,948 | $ | 14,271 | $ | 9,439,394 | $ | 23,122,008 | $ | 3,439,698 | $ | 36,015,871 |
CHINA
FOR-GEN CORPORATION
NOTES
TO FINANCIAL STATEMENTS
1. Nature of
operations
China
For-Gen Corporation (the “Company”) was incorporated in the State of Delaware on
February 26th, 2008. The Company acquired all of the equity interests of
Liaoning Shengsheng Biotechnological Co., Ltd. (“Liaoning Shengsheng”), a
company incorporated in the People’s Republic of China (the “PRC”) on November
24, 2000. Since its inception, Liaoning Shengsheng has been an
agricultural and forestry company engaged in the breeding, cloning and sale of
plant seedlings and specialized transgenic plant seedlings, and the research and
development of seedling breeding technologies.
The
Company experiences strong seasonality in the sales of popular saplings, its
main product. The majority of sales are executed in April, May,
October and November each year. Accordingly, the Company has extreme seasonal
fluctuations in its revenue, operating income and cash flows. Result of
operation for three and nine months ended September 30, 2010 and 2009 are not
necessarily indicative of the results to be obtained a full year.
2. Acquisition
Pursuant
to the Share Transfer Agreement entered into on March 26, 2009 (the “Share
Transfer”) between the shareholders of Liaoning Shengsheng and the Company, we
acquired Liaoning Shengsheng and its wholly-owned subsidiary,
Pusheng. The closing of the Share Transfer (the “Closing”) took place
on May 6, 2009 whereby we acquired all RMB 35,000,000 of the registered capital
of Liaoning Shengsheng (the “Shengsheng Shares”) from all of its shareholders in
consideration for $5.12 million. In February, 2010, the Company paid
$1.28 million to the Shengsheng Shareholders, who are included among the selling
stockholders hereunder. As a result of the Closing,
Liaoning Shengsheng became a wholly foreign-owned subsidiary (“WFOE”) of China
For-Gen.
As part
of the Share Transfer, on June 8, 2009, the shareholders of Liaoning Shengsheng
(the “Grantees”) entered into a call option agreement (the “Call Option
Agreement”) with Ms. Sherry Li (“Ms. Li”), then the sole shareholder officer,
director and shareholder of China For-Gen, wherein she agreed to transfer a
number of shares of the Company equal to 60% of the issued and outstanding
shares of common stock after an initial public offering. The Call
Option Agreement became effective upon the closing of the Share
Transfer. The call option may be exercised by the Grantees for
nominal consideration, which would give the Grantees indirect ownership of a
significant percentage of our common stock. The Call Option Agreement
provides that Ms. Li may not dispose of any of the shares owned by Ms. Li in
China For-Gen without the Grantee’s prior written consent.
The
transaction was accounted for as a reverse merger and, accordingly, the Company
is the legal surviving entity and Liaoning Shengsheng is the accounting
acquirer.
3. 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.
The
Company's functional currency is the Chinese Renminbi, however the accompanying
consolidated financial statements have been translated and presented in United
States Dollars.
On May
12, 2010, the Company effected a 1:1.5 reverse split of the Company’s issued and
outstanding shares of common stock, decreasing the number of outstanding shares
from 20,781,421 to 13,854,281 as of December 31, 2009 and from 21,406,422 to
14,270,948 as of September 30, 2010. These statements have been
adjusted to reflect this reverse split.
Principles of
consolidation
The
consolidated financial statements include the financial statements of the
Company and its wholly-owned subsidiaries. All significant inter-company
balances and transactions have been eliminated in
consolidation.
F-17
CHINA
FOR-GEN CORPORATION
NOTES
TO FINANCIAL STATEMENTS
3. Summary
of Significant Accounting Policies (continued)
Use of
estimates
The
preparation of financial statements in conformity with US generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates and such differences could be
material.
Cash and Cash
Equivalents
Cash and
cash equivalents includes cash on hand and demand deposits held by banks.
Deposits held in financial institutions in the PRC are not insured by any
government entity or agency.
Accounts
Receivable
The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. Trade accounts receivable are recognized
and carried at original invoice amount less an allowance for any uncollectible
amounts. An allowance for doubtful accounts is established and determined based
on management’s assessment of known requirements, aging of receivables, payment
history, the customer’s current credit worthiness and the economic environment.
As of September 30, 2010 and December 31, 2009, there were no allowances of
doubtful accounts. .
Inventories
Inventories
consist of trees grown from seedlings developed by the Company and trees
purchased and grown for resale. The costs of growing trees are capitalized into
inventory until the time of harvest. Once a tree is harvested and sold, the
related inventoried costs are recognized as a cost of sale to provide an
appropriate matching of expenses with the related revenue earned. The Company
states its inventories at the lower of cost or net realizable
value.
Property, Plant and
Equipment
Property,
plant and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the useful lives of
the assets. Land lease acquisition costs are amortized over the life the lease.
Major renewals are capitalized and depreciated; maintenance and repairs that do
not extend the life of the respective assets are charged to expense as incurred.
Upon disposal of assets, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is included in
income.
Revenue
Recognition
Our
revenues consist of sales of genetically modified saplings. Sales are
recognized in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104
included in the codification as ASC 605, Revenue Recognition, when the following
four revenue criteria are met: persuasive evidence of an arrangement exists,
delivery has occurred, the selling price is fixed or determinable and
collectability is reasonably assured. No return allowance is made as
products are normally not returnable upon acceptance by the
customers.
The price
at which we sell fast-growing poplar seedlings is based on numerous factors,
including: market price changes of fast-growing poplar seedlings; regional
supply of fast-growing poplar seedlings; seasonal availability of seedlings and
demand for fast-growing poplar seedlings. Generally, it takes 20 days
for a single transaction to be consummated. This time frame includes
negotiation of terms, execution of contract, preparation, delivery,
transportation, planting of products and receipt of payment. For
larger transactions, it can take up to one year for the last payment to be
made.
Because
the Company is categorized as in a farm and forest industry, it is entitled to
participate in a government subsidy program for its sapling and farming
business. Under the program, the Company collects value added tax (VAT) from
customers at 3% of sales. This amount is not required to be remitted to the
government. VAT, which is included in revenue, was $474,772 and $727,321 for the
nine months ended September 30, 2010 and 2009 respectively.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to reverse. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in the
statement of operations in the period that includes the enactment
date. A valuation allowance is provided for deferred tax assets if it
is more likely than not that these items will either expire before the Company
is able to realize their benefits, or that future deductibility is
uncertain.
F-18
CHINA
FOR-GEN CORPORATION
NOTES
TO FINANCIAL STATEMENTS
3. Summary
of Significant Accounting Policies (continued)
Impairment of Long-Lived
Assets
Long-term
assets of the Company are reviewed annually to assess whether the carrying value
has become impaired according to the guidelines established in Statement of
Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” No impairment of assets was
recorded in the periods reported.
Foreign Currency and
Comprehensive Income
The
accompanying financial statements are presented in US dollars. The functional
currency is the Renminbi (“RMB”) of the PRC. The financial statements are
translated into US dollars from RMB at year-end exchange rates for assets and
liabilities, and weighted average exchange rates for revenues and expenses.
Capital accounts are translated at their historical exchange rates when the
capital transactions occurred.
Accumulated
other comprehensive income represents foreign currency translation
adjustments.
Earnings Per
Share
Basic net
income per share is computed on the basis of the weighted average number of
common shares outstanding during the period. Diluted net income per share is
computed on the basis of the weighted average number of common shares and common
share equivalents outstanding. Dilutive securities having an anti-dilutive
effect on diluted net income per share are excluded from the calculation.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the
period.
Derivative Financial
Instruments
In
connection with the sale of debt or equity instruments, we may sell options or
warrants to purchase our common stock. In certain circumstances, these options
or warrants may be classified as derivative liabilities, rather than as equity.
Additionally, the debt or equity instruments may contain embedded derivative
instruments, such as embedded derivative features, which in certain
circumstances may be required to be bifurcated from the associated host
instrument and accounted for separately as a derivative instrument liability.
Derivative financial instruments are recorded as liabilities in the consolidated
balance sheet, measured at fair value. When available, quoted market
prices are used in determining fair value. However, if quoted market
prices are not available, we estimate fair value using either quoted market
prices of financial instruments with similar characteristics or other valuation
techniques. The derivative instrument liabilities are re-valued at the end of
each reporting period, with changes in the fair value of the derivative
liability recorded as charges or credits to income, in the period in which the
changes occur.
New accounting
pronouncement
In
January 2010, FASB issued ASU N0. 2010-01, Equity (ASC Topic 505), Accounting
for Distributions to Shareholders with Components of Stock and Cash. The update
clarifies that the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a potential limitation on the total
amount of cash that all shareholders can elect to receive in the aggregate is
considered a share issuance that is reflected prospectively in earnings per
share and is not considered a stock dividend for purposes of ASC Topic 505 and
Topic 260, Earnings Per Share. This standard is effective for interim and annual
periods ending on or after December 15, 2009, and should be applied on a
retrospective basis. This standard is not currently applicable to the
Company.
On
September 30, 2009, the Company adopted changes issued by the FASB to the
authoritative hierarchy of generally accepted accounting principles
(“GAAP”). These changes establish the FASB Accounting Standards
CodificationTM (“Codification”) as the source of authoritative accounting
principles recognized by the FASB to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
GAAP in the U.S. The Codification was effective for financial statements issued
for interim and annual periods ending after September 15, 2009. The
adoption had no material impact on the Company’s consolidated results of
operations or financial condition.
In
October 2009, the FASB issued authoritative guidance on revenue recognition that
will become effective for us beginning July 1, 2010, with earlier adoption
permitted. Under the new guidance on arrangements that include software
elements, tangible products that have software components that are essential to
the functionality of the tangible product will no longer be within the scope of
the software revenue recognition guidance, and software-enabled products will
now be subject to other relevant revenue recognition guidance. Additionally, the
FASB issued authoritative guidance on revenue arrangements with multiple
deliverables that are outside the scope of the software revenue recognition
guidance. Under the new guidance, when vendor specific objective evidence or
third party evidence for deliverables in an arrangement cannot be determined, a
best estimate of the selling price is required to separate deliverables and
allocate arrangement consideration using the relative selling price method. The
new guidance includes new disclosure requirements on how the application of the
relative selling price method affects the timing and amount of revenue
recognition. We believe the adoption of this new guidance will
not have a material impact on our financial statements.
F-19
CHINA
FOR-GEN CORPORATION
NOTES
TO FINANCIAL STATEMENTS
5. Deposits
Deposits
consist of the following:
9/30/2010
|
12/31/2009
|
||||||||
Equipment
purchase
|
(a)
|
$
|
7,345,367
|
$
|
7,205,413
|
||||
Business
acquisition
|
(b)
|
895,776
|
292,903
|
||||||
Supplies
|
96,560
|
83,268
|
|||||||
Total
|
$
|
8,337,703
|
$
|
7,581,584
|
a.
|
In April 2009, Liaoning
Shengsheng entered into an agreement to purchase equipment for
RMB61,500,000 (approximately $9,000,000). This equipment will
be used in a factory the Company intends to build in the city of Karamai
to manufacture artificial board or Medium Density Fiberboard
(“MDF”). Payment made to this supplier under this agreement
totaled RMB 49,200,000 (approximately $7,345,367) as of September 30,
2010. Under the agreement, the equipment vendor will design, manufacture,
deliver and setup all equipment required for manufacturing
MDF.
|
|
|
b.
|
In May 2009, Liaoning Shengsheng
entered into an agreement to acquire 80% of the outstanding shares of
Daxinganling Tuqiangbeijisong Wood Co. Ltd. for $3,084,335. As
of September 30, 2010, the Company paid $895,776 as a deposit for this
acquisition.
|
|
|
6. Property,
Plant and Equipment
Property,
Plant and Equipment consists of the following:
9/30/2010
|
12/31/2009
|
Estimated
Useful Life
|
||||||
Land
use rights
|
$
|
55,172
|
$
|
61,704
|
Life
of lease
|
|||
Buildings
|
2,989,754
|
2,932,790
|
10-30
years
|
|||||
Machinery
and equipment
|
1,158,210
|
1,130,164
|
3-8
years
|
|||||
Vehicles
|
187,063
|
139,306
|
5-8
years
|
|||||
Computer
and office equipment
|
88,366
|
83,917
|
3-5
years
|
|||||
Office
equipment
|
66,632
|
9,710
|
3-5
years
|
|||||
Total
property, plant and equipment
|
4,588,199
|
4,357,591
|
||||||
Accumulated
depreciation
|
(1,816,655
|
)
|
(1,634,390
|
)
|
||||
$
|
2,728,542
|
$
|
2,723,201
|
7.
Long-term deposit
As of September 30, 2010, the Company has a long-term deposit
of $2,687,329 paid to Karamai Gas
Company for large-scale forestation projects (30,000 mu).
8.
Advance from customer
Advances
from customers consists of deposits from one of our customers. This
amount is non-interest bearing.
9. Due
to shareholder
The
Company has a payable due to a shareholder as of September 30, 2010 of
$95,067. Amounts due are payable on demand with no stated
interest.
F-20
CHINA
FOR-GEN CORPORATION
NOTES
TO FINANCIAL STATEMENTS
10. Convertible
Notes
On
February 12, 2010, pursuant to a convertible note purchase agreement, the
Company received gross proceeds of $2,000,000 from the sale of five year
convertible promissory notes, bearing interest at ten percent (10%) per annum
(the “Notes”) and maturing on February 11, 2015 and common stock Purchase
Warrants A and B (each, the “A Warrants” and “B Warrants” and collectively, the
“Warrants”) to various accredited and institutional
investors. Following the Reverse Split (see note 3), the Notes are
convertible into an aggregate of 1,320,133 shares of common
stock. The Notes are convertible at any time at a conversion price of
$1.515 post split ($1.01 per share before split). On August 10, 2010,
the Note investors exercised their additional investment right and purchased an
additional $2,500,000 face value of Notes.
The
convertible note agreement the Company entered into with its investors contain
various covenants that may limit the Company’s discretion in operating its
business. In particular, the Company agrees for two years after the second
payment not to enter into any borrowing of more than three times as much as of
the EBITDA (defined as earnings before interest, tax, depreciation and
amortization) from recurring operations over the past four quarters. The Company
also agrees not to issue any convertible debt for a period of three years from
the closing date.
The notes
bears interest at a rate of 10% per annum accrued monthly in kind for the first
12 months and shall be payable in cash by the 10th day of each month following
the initial 12 months, at the election of the note
holder. Approximately $418,517 of due diligence fees and other costs
directly associated with the issuance of the Notes is recorded as deferred
financing costs in the balance sheet at September 30, 2010. The Company is
amortizing these financing costs over the life of the Notes. The amortization
for the period ended September 30, 2010 was $28,983.
The
conversion feature of the Notes provides for a rate of conversion that is below
market value. This feature is characterized as a beneficial conversion feature
(“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC
Topic 470-20. In this circumstance, the convertible debt has been recorded net
of the discount related to the BCF and the Company will amortize the discount to
interest expense over the life of the notes. The Company recorded a BCF of
$862,835 related to the convertible notes. The effective interest rate paid,
inclusive of the amortization on the discount relating to the warrant liability
and the beneficial conversion feature is 33.5%.
As of
September 30, 2010, convertible notes consisted of the following:
Gross
proceeds
|
Discount Debt
|
BCF
|
September 30, 2010
|
|||||||||||
$
|
2,000,000
|
$
|
927,156
|
$
|
754,094
|
$
|
318,750
|
|||||||
$
|
2,500,000
|
-
|
-
|
$
|
2,500,000
|
|||||||||
$
|
4,500,000
|
$
|
927,156
|
$
|
754,094
|
$
|
2,818,750
|
11. Stockholders’
equity
On January
20, 2010, Liaoning Shengsheng declared a dividend to the original Liaoning
Shengsheng Shareholders in the amount of $8,091,017 (RMB
55,300,000). RMB 34,557,800 ($5,056,198) of such dividend was paid in
May 2010 to the non-management Shengsheng Shareholders. On June 28, 2010, the
remaining Shengsheng Shareholders agreed to waive their right to obtain their
dividends, in a total amount equal to $3,046,471 (RMB 20,742,200), in order to
assist the Company’s future developments.
The
Company is not required to pay US taxes for this dividend since the Company paid
the first purchase payment to Liaoning Shengsheng in February
2010. Liaoning Shengsheng became a wholly foreign-owned subsidiary
(“WFOE”) of China For-Gen as a result of the closing.
12. Warrants
In
connection with the convertible note purchase agreement, the Company issued the
A warrants and B warrants to purchase shares of the Company’s common
stock.
The A
Warrants were initially exercisable for five years at an exercise price of $1.35
per share, for up to an aggregate of 1,662,500 shares of our common
stock. The B Warrants were initially exercisable for five years at an
exercise price of $1.70 per share, for up to an aggregate of an additional
1,662,500 shares of our common stock. Following the Reverse Split,
the A Warrants are exercisable for 1,108,334 shares of common stock at an
exercise price of $2.03 per share and the B Warrants are exercisable for
1,108,333 shares of common stock at an exercise price of $2.55 per
share.
F-21
CHINA
FOR-GEN CORPORATION
NOTES
TO FINANCIAL STATEMENTS
12. Warrants
(continued)
In the
event the Company’s net income for the year ended December 31, 2010 is less than
$.6163 per share on a fully-diluted basis, then the B Warrant exercise price
shall be reduced by the percentage shortfall as reported for the fiscal year
ended December 31, 2010. The warrant exercise price shall be reduced
proportionately by 0% if the earnings are $.6163 per share and by 75% if the
earnings are $.1541 per share.
The
Warrants are entitled to a price adjustment provision that allows the price of
the Warrants to be reduced in the event the Company issues any additional shares
of common stock at a price per share less than the then-applicable warrant
price. The Company determined that the Warrants meet the definition of a
derivative under ASC Topic 815, Derivatives and Hedging “ASC Topic 815”. In
determining whether the Warrants were eligible for a scope exception from ASC
Topic 815, the Company considered the provisions of ASC Topic 815-40
(Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity’s Own Stock). The Company determined that the Warrants do not meet a
scope exception because they are not deemed indexed to the Company’s own stock.
Pursuant to ASC Topic 815, derivatives should be measured at fair value as of
the inception date and re-measured at fair value as of each subsequent balance
sheet date with changes in fair value recorded in earnings at each reporting
period. These warrants were measured at fair value of $1,060,853 on
the grant date. The Company recorded a gain on change in fair value of warrants
liability of $149,644 and $68,726 for the six and three months ended September
30, 2010, respectively.
Fair
value is generally based on independent sources such as quoted market prices or
dealer price quotations. To the extent certain financial instruments trade
infrequently or are non-marketable securities, they may not have readily
determinable fair values. The Company estimated the fair value of the Warrants
and using historical information that management deems most
relevant.
As of
September 30, 2010, the Company used the Black-Scholes option-pricing model with
the following assumptions:
Expected
Term (Years)
|
4.37
|
|||
Dividend
Rate (%)
|
0
|
|||
Volatility
(%)
|
53.9
|
|||
Risk
Free Rate (%)
|
1.27
|
On
January 1, 2010, the Company entered into an agreement to cancel 1,000,000
outstanding warrants which were issued during the year ended December 31, 2008
in exchange for 416,667 shares of common stock.
13.
Earnings per share
The
following table sets forth the computation of basic and diluted earnings per
share of common stock:
For the nine months ended
September 30,
|
||||||||
2010
|
2009
|
|||||||
Basic
net income per share:
|
||||||||
Numerator:
|
||||||||
Net
income used in computing basic net income per share
|
$
|
9,833,662
|
$
|
4,670,646
|
||||
Net
income applicable to common shareholders
|
$
|
9,833,662
|
$
|
4,670,646
|
||||
Denominator:
|
||||||||
Weighted
average common shares outstanding
|
14,270,948
|
13,854,281
|
||||||
Basic
income per share
|
$
|
0.69
|
$
|
0.34
|
||||
Diluted
net loss per share:
|
||||||||
Numerator:
|
||||||||
Net
income used in computing diluted net income per share
|
$
|
9,833,662
|
$
|
4,670,646
|
||||
Net
income applicable to common shareholders
|
$
|
9,833,662
|
$
|
4,670,646
|
||||
Denominator:
|
||||||||
Weighted
average common shares outstanding
|
14,270,948
|
13,854,281
|
||||||
Weighted
average effect of dilutive securities:
|
-
|
-
|
||||||
Shares
used in computing diluted net income per share
|
14,270,948
|
13,854,281
|
||||||
Diluted
net income per share
|
$
|
0.69
|
$
|
0.34
|
As of
September 30, 2010, the Company had 500,000 shares of Series A Convertible
Preferred Stock outstanding and convertible promissory notes outstanding which
are convertible into 2,970,298 shares of Company common stock and 2,216,667
common stock purchase warrants. The Series A convertible preferred
stock has a $1.37 convertible price, the same as the fair value of the Company’s
common stock valued on September 30, 2010. The promissory notes are
convertible into Company common stock at a price of $1.52 per share, which is
greater than the fair value of common stock valued on September 30,
2010. The 2,216,667 warrants include 1,108,334 Series A warrants and
1,108,333 Series B warrants. The A Warrants have an exercise price of $2.03 and
the B Warrants have an exercise price of $2.55.
The
500,000 shares of Series A Convertible preferred stock, promissory notes of the
Company convertible into 2,970,298 shares of Company stock and 2,216,667
warrants issued by the Company were excluded from the EPS calculations as they
were anti-dilutive in the nine and three month periods ended September 30, 2010
and 2009.
F-22
CHINA
FOR-GEN CORPORATION
NOTES
TO FINANCIAL STATEMENTS
14. Income
Tax
A
reconciliation of the Company’s effective income tax rate to the U.S. Federal
statutory rate is as follows:
For the period ended September
30
|
||||||||
2010
|
2009
|
|||||||
Federal
statutory rate
|
35
|
%
|
35
|
%
|
||||
Tax
exempt income
|
-36
|
%
|
-37
|
%
|
||||
Valuation
allowance
|
1
|
%
|
2
|
%
|
||||
Effective
tax rate
|
0
|
%
|
0
|
%
|
Under the
income tax laws of the PRC, the Company’s subsidiaries operate in a nationally
investment- encouraged industry and are not subject to income tax.
The
Company has deferred tax assets of approximately $267,350 and $48,687 from net
operating loss in the U.S. for the nine months ended September 30, 2010 and 2009
for which a 100% valuation allowance has been provided.
15. Concentration
of Credit Risks and Uncertainties
Two
customers accounted for more than 10% of accounts receivable at September 30,
2010, totaling 89%. Two customers accounted for more than 10% of
accounts receivable at September 30, 2009, totaling 95%. Two
customers represented 92% of total sales for the nine months ended September 30,
2010 and two vendors accounted for 91% of total purchases during the nine months
ended September 30, 2010.
16. Subsequent
events
The
Company has evaluated subsequent events through November 15, 2010, the date
these financial statements were issued, and no such subsequent events requiring
disclosure have occurred.
F-23
4,000,000
Shares
China
For-Gen Corp.
COMMON
STOCK
Until
, 2011 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.
PROSPECTUS
Maxim
Group LLC
,
2011
[Alternate
Page for Selling Securityholder Prospectus]
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and is not soliciting an offer to buy these securities in
any state or other jurisdiction where the offer or sale is not
permitted.
Preliminary
Prospectus
Subject
to Completion, Dated
[ ],
2011
CHINA
FOR-GEN CORP.
8,068,698
shares of common stock
This
prospectus relates to the resale of up to 8,068,698 shares (the “Shares”) of
common stock, par value $.001 per share of China For-Gen Corp., a Delaware
corporation, that may be sold from time to time by the selling stockholders
named in this prospectus on page SS-2 (“Selling Stockholders”). The shares
of common stock offered under this prospectus includes (i) 5,697,751 shares
of common stock issuable upon exercise of preferred stock, promissory notes and
warrants and (ii) 2,370,947 shares of common stock currently issued and
outstanding.
The
Shares were issued to the Selling Stockholders in private placement transactions
which were exempt from the registration and prospectus delivery requirements of
the Securities Act of 1933, as amended.
The
distribution of securities offered hereby may be effected in one or more
transactions that may take place on the NYSE AMEX Stock Exchange, including
ordinary brokers’ transactions, privately negotiated transactions or through
sales to one or more dealers for resale of such securities as principals, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the selling
securityholders. No sales of the shares covered by this prospectus shall occur
until the shares of common stock sold in our initial public offering begin
trading on the NYSE Amex Stock Exchange.
We will
not receive any proceeds from the sale of the Shares by the Selling
Stockholders. To the extent the Warrants are exercised for cash, if at all, we
will receive the exercise price for those Warrants.
Our
common stock is not currently quoted or traded on any public market. We
intend to apply to have our shares listed on the NYSE AMEX Stock Exchange under
the symbol CFG.
On
[ ], 2011, a
registration statement under the Securities Act with respect to our initial
public offering underwritten by Maxim Group LLC, as the representative of the
underwriters, of 4,000,000 shares of Common Stock assuming a $5.00 per share
initial public offering price (the midpoint of the offering range) was declared
effective by the Securities and Exchange Commission. We received approximately
$[ ] in net proceeds from the offering (assuming no exercise of the
underwriters’ over-allotment option) after payment of underwriting discounts and
commissions and estimated expenses of the offering.
THIS
INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY IF
YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE “RISK FACTORS” BEGINNING
ON PAGE 8 FOR A DISCUSSION OF RISKS APPLICABLE TO US AND AN INVESTMENT IN
OUR COMMON STOCK.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS
APPROVED OR DISAPPROVED 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
[Alternate
Page for Selling Securityholder Prospectus]
TABLE OF
CONTENTS
Prospectus
Summary
|
6
|
The
Offering
|
9
|
Risk
Factors
|
12
|
Cautionary
Note Regarding Forward-Looking Statements and Other Information
Contained in this Prospectus
|
27
|
Use
of Proceeds
|
27
|
Selling
Stockholders
|
S-2
|
Dividend
Policy
|
28
|
Capitalization
|
29
|
Market
Price of and Dividends of Common Equity and Related Stockholder
Matters
|
30
|
Determination
of Offering Price
|
30
|
Dilution
|
31
|
Exchange
Rate Information
|
32
|
Selected
Consolidated Financial and Operating Data
|
33
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
34
|
Industry
Overview
|
43
|
Business
|
49
|
Facilities
|
51
|
Legal
Proceedings
|
56
|
Our
History and Corporate Structure
|
58
|
Directors
and Executive Officers
|
61
|
Executive
Compensation
|
64
|
Security
Ownership of Certain Beneficial Owners and Management
|
65
|
Certain
Relationships and Related Transactions
|
66
|
Description
of Our Securities
|
67
|
Shares
Eligible for Future Sale
|
69
|
Material
PRC Income Tax Considerations
|
70
|
Transfer
Agent and Registrar
|
72
|
Legal
Matters
|
76
|
Experts
|
76
|
Interests
of Named Experts and Counsel
|
76
|
Service
of Process and Enforcement of Judgments
|
76
|
Where
You Can Find More Information
|
77
|
Disclosure
of Commission Position on Indemnification for Securities Act
Liabilities
|
78
|
Index
to Financial Statements
|
F-1
|
81
[Alternate
Page for Selling Securityholder Prospectus]
THE
OFFERING
This
prospectus relates to the sale by the Selling Stockholders of up to 8,068,698
shares of our Common Stock, which includes (i) 2,370,947 currently outstanding
shares of Common Stock; and (ii) 2,970,298 shares of Common Stock issuable
upon conversion of 2010 PIPE Convertible Notes; (iii) 2,283,334 shares of
Common Stock issuable upon exercise of currently outstanding Warrants; and (iii)
444,119 shares issuable upon conversion of 2008 Series A Preferred
Stock.
Common
stock outstanding prior to the offering
|
14,270,948
shares
|
|
Common
stock offered by Selling Stockholders
|
8,068,698
shares
|
|
Common
stock outstanding after the offering on a fully diluted basis, including
shares offered (assuming conversion of all outstanding
convertible promissory notes, convertible preferred stock and warrants and
exercise of the underwriter’s over-allotment option)
|
24,568,699
shares
|
|
Risk
Factors
|
See
“Risk Factors” beginning on page 6 and other information included in this
prospectus for a discussion of factors you should consider before deciding
to invest in shares of our common
stock.
|
USE
OF PROCEEDS
We will
not receive any of the proceeds from the sale of the shares of Common Stock by
the Selling Stockholders. However, to the extent that the warrants are exercised
for cash, we will receive proceeds from the exercise of such warrants. We intend
to use any proceeds received from the exercise of the warrants for working
capital and other general corporate purposes.
SS-1
[Alternate
Page for Selling Securityholder Prospectus]
SELLING
STOCKHOLDERS
We are
registering for resale an aggregate of 8,068,698 shares of our common stock, of
which 2,370,947 are currently issued and outstanding and 5,697,751 are issuable
upon (i) conversion of outstanding notes and preferred stock and (ii) exercise
of outstanding warrants. We are registering the shares to permit the Selling
Stockholders and their pledgees, donees, transferees and other
successors-in-interest that receive their shares from a Selling Stockholder as a
gift, partnership distribution or other non-sale related transfer after the date
of this prospectus to resell the shares when and as they deem appropriate in the
manner described in the “Plan of Distribution”. None of the selling shareholders
are broker-dealers or affiliates of broker-dealers.
The
following table sets forth:
|
·
|
the name of the Selling
Stockholders,
|
|
·
|
the number of shares of our
common stock that the Selling Stockholders beneficially owned prior to the
offering for resale of the shares under this
prospectus,
|
|
·
|
the maximum number of shares of
our common stock that may be offered for resale for the account of the
Selling Stockholders under this prospectus,
and
|
|
·
|
the number and percentage of
shares of our common stock to be beneficially owned by the Selling
Stockholders after the offering of the shares (assuming all of the offered
shares are sold by the Selling
Stockholders).
|
Name of Selling Stockholder
|
Shares of
Common Stock
Beneficially
Owned Prior
to Offering(1)
|
Percentage of
Shares Before
Offering(1)
|
Maximum
Number of
Shares to
be Sold
|
Shares of
Common Stock
Beneficially
Owned After
Offering(2)
|
Percentage
Ownership
After
Offering
|
|||||||||||||||
T
Squared Investments LLC
|
2,645,099
|
(3)
|
15.90
|
2,645,099
|
0
|
0
|
||||||||||||||
T
Squared China Fund LLC
|
259,348
|
(4)
|
1.78
|
259,348
|
0
|
0
|
||||||||||||||
Silver
Rock II, Ltd.
|
1,296,741
|
(5)
|
8.3
|
1,296,741
|
0
|
0
|
||||||||||||||
Ross
Pirasteh
|
129,674
|
(6)
|
*
|
129,674
|
0
|
0
|
||||||||||||||
Special
Situations Private Equity Fund, L.P.
|
583,534
|
(7)
|
3.93
|
583,534
|
0
|
0
|
||||||||||||||
G.
Tyler Runnels and Jasmine N. Runnels TTEES
|
393,726
|
(8)
|
2.76
|
393,726
|
0
|
0
|
||||||||||||||
Steven
B. Dunn
|
393,726
|
(8)
|
2.76
|
393,726
|
0
|
0
|
||||||||||||||
Swing
Rock Trading, LLC
|
860,786
|
(9)
|
5.69
|
860,786
|
0
|
0
|
||||||||||||||
Jin
Haifu, Inc.
|
483,040
|
(10)
|
3.38
|
483,040
|
0
|
0
|
||||||||||||||
Wan
Xuesheng, Inc.
|
483,040
|
(11)
|
3.38
|
483,040
|
0
|
0
|
||||||||||||||
Maxsun
Investments
|
25,000
|
(12)
|
*
|
25,000
|
0
|
0
|
||||||||||||||
Steven
Fox
|
80,000
|
*
|
80,000
|
0
|
0
|
|||||||||||||||
China
Financial Services
|
334,984
|
(13)
|
2.35
|
334,984
|
0
|
0
|
||||||||||||||
Minmin
Zhang
|
100,000
|
*
|
100,000
|
0
|
0
|
*
Represents less than 1% of total outstanding common stock.
(1) Beneficial
ownership is determined in accordance with Rule 13d-3 of the Exchange Act. In
computing the number of shares beneficially owned by a person and the percentage
ownership of that person, securities that are currently convertible or
exercisable into shares of our common stock, or convertible or exercisable into
shares of our common stock within 60 days of the date hereof are deemed
outstanding. Such shares, however, are not deemed outstanding for the purpose of
computing the percentage ownership of any other person. Except as indicated in
the footnotes to the following table, each stockholder named in the table has
sole voting and investment power with respect to the shares set forth opposite
such stockholder’s name. The percentage of beneficial ownership is based on
14,270,948 shares of common stock outstanding as of January 24, 2011
.
(2) Assumes
that all securities registered will be sold.
SS-2
(3) The
2,645,099 shares of common stock include: (i) 283,200 shares of common stock
issued and outstanding as of the date hereof; (ii) 1,314,357 shares of common
stock issuable upon conversion of such holder’s 2010 Notes; (iii) 980,875 shares
of common stock issuable upon conversion of such holder’s 2010 Warrants; and
(iv) 66,667 shares of common stock issuable upon conversion of the common
stock purchase warrant held by such holder. Mark Jensen and Thomas
Suave have voting and investment control over such securities.
(4) The
259,348 shares of common stock include: (i) 148,515 shares of common stock
issuable upon conversion of the 2010 Notes; and (ii) 110,833 shares of common
stock issuable upon conversion of the 2010 Warrants. Mark Jensen and
Thomas Suave have voting and investment control over such
securities.
(5) The
1,296,741 shares of common stock include: (i) 742,574 shares of common stock
issuable upon conversion of the 2010 Notes; and (ii) 554,167 shares of common
stock issuable upon conversion of the 2010 Warrants. Ezzat Jallad has
voting and investment control over such securities.
(6) The
129,674 shares of common stock include: (i) 74,257 shares of common stock
issuable upon conversion of the 2010 Notes; and (ii) 55,417 shares of common
stock issuable upon conversion of the 2010 Warrants.
(7) The
583,534 shares of common stock include: (i) 334,159 shares of common stock
issuable upon conversion of the 2010 Notes; and (ii) 249,375 shares of common
stock issuable upon conversion of the 2010 Warrants. Benjamin Burditt has
voting and investment control over such securities.
(8) The
393,726 shares of common stock include: (i) 82,508 shares of common stock issued
and outstanding as of the date hereof; (ii) 178,218 shares of common stock
issuable upon conversion of such holder’s 2010 Notes; and (iii) 133,000 shares
of common stock issuable upon conversion of the 2010 Warrants.
(9) The
860,786 shares of common stock include: (i) 444,119 shares issuable upon
conversion of Series A Preferred Stock; and (ii) 416,667 shares of common stock
issued upon cashless exercise by the selling stockholder of its common stock
purchase warrants. Greg Goldberg has voting and investment control over
such securities.
(10) Huafu
Wang has voting and investment control over such securities.
(11) Li
Liao has voting and investment control over such securities.
(12) Johnny
Song Lin has voting and investment control over such securities.
(13) Sherry
Li has voting and investment control over such securities.
May
2008 Private Placement
On May
30, 2008, the Company conducted a private placement of 500,000 shares of its
newly created Series A Convertible Preferred Stock convertible into 333,333
shares of our common stock and a five-year common stock purchase warrant to
purchase up to 666,667 post-reverse split shares of common stock at an
exercise price of $1.88 post-reverse split per warrant (equivalent to $1.25
pre-reverse split per warrant) or 416,667 post-reverse split shares of
common stock upon cashless exercise of such warrants (in either event equivalent
to 1,000,000 pre-reverse split shares) (the “2008 Warrant”). The
Company received gross proceeds of $455,000 from the private
placement. The 2008 Warrant was exercised in January, 2010 on a
cashless basis for 416,667 shares of our common stock. Following the
Reverse Split and the February 2010 private placement, the Series A Convertible
Preferred Stock is convertible into 444,119 shares of common stock at a
conversion price of $0.91 per share. The securities were offered
pursuant to exemptions from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, Regulation D and Rule 506.
In
connection with the May 2008 private placement, we entered into a registration
rights agreement to have the shares of common stock underlying the preferred
stock and 2008 Warrants registered for public resale. The filing of the
registration statement of which this prospectus is a part is intended to satisfy
certain of our obligations under that registration rights
agreement.
February
2010 Private Placement
On
February 12, 2010, the Company received gross proceeds of $2,000,000 from the
sale of five year convertible promissory notes, bearing interest at ten percent
(10%) per annum (the “Notes”) and common stock Purchase Warrants A and B (each,
the “A Warrants” and “B Warrants” and collectively, the “Warrants”) to various
accredited and institutional investors. Following the Reverse Split, these
Notes are convertible into 1,320,133 shares of our common stock.
Additionally, such investors have, as of August 10, 2010, exercised their right
to purchase up to an additional $2,500,000 of Notes on terms identical to the
Notes purchased in February 2010, which such Notes are convertible into
1,650,165 post-Reverse Split shares of common stock. Accordingly, such
investors have outstanding Notes convertible into an aggregate of 2,970,298
shares of common stock. The Notes are convertible at any time at the
option of the Note holder.
SS-3
Holders
of the Notes and Warrants shall not be entitled to convert their Notes or any
Warrants into such number of shares of our common stock which, when added to the
number of shares of common stock beneficially owned by such holder and its
affiliates immediately prior to conversion of such Note or Warrant, would result
in beneficial ownership by such holder and its affiliates of more than 4.99% of
the outstanding shares of our common stock. For purposes of the
immediately preceding sentence, “beneficial ownership” is determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Rule 13d-3 thereunder. This restriction may be waived or
amended only with the consent of the applicable Note holder and the consent of
holders of a majority of the shares of our outstanding common stock who are not
affiliates of the Company.
The A
Warrants are currently exercisable for five years at an exercise price of $2.03
per share, for up to an aggregate of 1,108,334 shares of our common stock.
The B Warrants are currently exercisable for five years at an exercise price of
$2.55 per share, for up to an aggregate of an additional 1,108,333 shares of our
common stock. There were no adjustments to the exercise price as a result
of the Company’s financial position as of December 31, 2009.
The
exercise price of the A Warrants is subject to adjustment in the event the
Company fails to meet certain earnings per share projections. In the event
the Company’s net income for the year ended December 31, 2010 is less than
$.6163 per share on a fully-diluted basis, then the exercise price shall be
reduced by the percentage shortfall (where net income on a fully diluted basis
shall always be defined as earnings from continuing operations before any
non-cash items on a pre-taxed fully diluted basis (including dilution from any
options, warrants and convertible securities) as reported for the fiscal year
ended December 31, 2010). The A Warrant exercise price shall be reduced
proportionately by 0% if the earnings are $.6163 per share and by 75% if the
earnings are $.1541 per share. For example, if the Company earns $.4930
per share, or 20% below $.6163 per share, then the A Warrant exercise price
shall be reduced by 20%. Such reduction shall automatically be in effect
at the time the December 31, 2010 financial results are reported or at any other
time that the initial investor in the Note and the Company have a written and
executed agreement stating otherwise, and shall be made from the starting
exercise price of the warrants being the exercise price of the warrants at that
time, and shall be cumulative upon any other changes to the exercise price of
the warrant that may already have been made.
The
exercise price of the B Warrants is also subject to adjustment in the event the
Company fails to meet certain earnings per share projections. In the event
the Company’s net income for the year ended December 31, 2010 is less than
$.6163 per share on a fully-diluted basis, then the B Warrant exercise price
shall be reduced by the percentage shortfall (where net income on a fully
diluted basis shall always be defined as earnings from continuing operations
before any non-cash items on a pre-taxed fully diluted basis (including dilution
from any options, warrants and convertible securities) as reported for the
fiscal year ended December 31, 2010). The warrant exercise price shall be
reduced proportionately by 0% if the earnings are $.6163 per share and by 75% if
the earnings are $.1541 per share. For example, if the Company earns $0.4930 per
share, or 20% below $.6163 per share, then the B Warrant exercise price would be
reduced by 20%. Such reduction shall automatically be in effect at the
time the December 31, 2010 financial results are reported or at any other time
that the initial investor in the Note and the Company have a written and
executed agreement stating otherwise, and shall be made from the starting
exercise price of the warrants being the exercise price of the warrants at that
time, and shall be cumulative upon any other changes to the exercise price of
the warrant that may already have been made.
Each
Selling Stockholder may offer for sale all or part of the shares from time to
time. The selling stockholder table assumes the Selling Stockholders will sell
all of the shares offered for sale. A Selling Stockholder is under no
obligation, however, to sell any shares pursuant to this
prospectus.
SS-4
[Alternate
Page for Selling Securityholder Prospectus]
PLAN
OF DISTRIBUTION
The
selling securityholders, which as used herein includes donees, pledgees,
transferees or other successors-in-interest selling shares of common stock or
interests in shares of common stock received after the date of this prospectus
from a selling securityholder as a gift, pledge, partnership distribution or
other transfer, may, from time to time, sell, transfer or otherwise dispose of
any or all of their shares of common stock or interests in shares of common
stock on any stock exchange, market or trading facility on which the shares are
traded or in private transactions. These dispositions may be at fixed prices, at
prevailing market prices at the time of sale, at prices related to the
prevailing market price, at varying prices determined at the time of sale, or at
negotiated prices.
The
selling securityholders may use any one or more of the following methods when
disposing of shares or interests therein:
|
•
|
ordinary brokerage transactions
and transactions in which the broker-dealer solicits
purchasers;
|
|
•
|
block trades in which the
broker-dealer will attempt to sell the shares as agent, but may position
and resell a portion of the block as principal to facilitate the
transaction;
|
|
•
|
purchases by a broker-dealer as
principal and resale by the broker-dealer for its
account;
|
|
•
|
an exchange distribution in
accordance with the rules of the applicable
exchange;
|
|
•
|
privately negotiated
transactions;
|
|
•
|
short
sales;
|
|
•
|
through the writing or settlement
of options or other hedging transactions, whether through an options
exchange or otherwise;
|
|
•
|
broker-dealers may agree with the
selling securityholders to sell a specified number of such shares at a
stipulated price per share;
|
|
•
|
a combination of any such methods
of sale; and
|
|
•
|
any other method permitted
pursuant to applicable law.
|
The
selling securityholders may, from time to time, pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock, from time to time, under
this prospectus, or under an amendment to this prospectus under Rule 424(b)(3)
or other applicable provision of the Securities Act amending the list of selling
securityholders to include the pledgee, transferee or other successors in
interest as selling securityholders under this prospectus. The selling
securityholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus;
provided ,
however , that
prior to any such transfer the following information (or such other information
as may be required by the federal securities laws from time to time) with
respect to each such selling beneficial owner must be added to the prospectus by
way of a prospectus supplement or post-effective amendment, as appropriate:
(1) the name of the selling beneficial owner; (2) any material
relationship the selling beneficial owner has had within the past three years
with us or any of our predecessors or affiliates; (3) the amount of
securities of the class owned by such security beneficial owner before the
offering; (4) the amount to be offered for the security beneficial owner’s
account; and (5) the amount and (if one percent or more) the percentage of
the class to be owned by such security beneficial owner after the offering is
complete.
In
connection with the sale of our common stock or interests therein, the selling
securityholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
securityholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The
selling securityholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
aggregate proceeds to the selling securityholders from the sale of the common
stock offered by them will be the purchase price of the common stock less
discounts or commissions, if any. Each of the selling securityholders reserves
the right to accept and, together with their agents from time to time, to
reject, in whole or in part, any proposed purchase of common stock to be made
directly or through agents. We will not receive any of the proceeds from this
offering. Upon any exercise of the warrants by payment of cash, however, we will
receive the exercise price of the warrants.
SS-5
The
selling securityholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act of 1933,
as amended, provided that they meet the criteria and conform to the requirements
of that rule.
The
selling securityholders and any underwriters, broker-dealers or agents that
participate in the sale of the common stock or interests therein may be
“underwriters” within the meaning of Section 2(11) of the Securities Act.
Any discounts, commissions, concessions or profit they earn on any resale of the
shares may be underwriting discounts and commissions under the Securities Act.
Selling securityholders who are “underwriters” within the meaning of
Section 2(11) of the Securities Act will be subject to the prospectus
delivery requirements of the Securities Act.
To the
extent required, the shares of our common stock to be sold, the names of the
selling securityholders, the respective purchase prices and public offering
prices, the names of any agents, dealer or underwriter, any applicable
commissions or discounts with respect to a particular offer will be set forth in
an accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this
prospectus.
The
maximum amount of compensation to be received by any FINRA member or independent
broker-dealer for the sale of any securities registered under this prospectus
will not be greater than 8.0% of the gross proceeds from the sale of such
securities.
In order
to comply with the securities laws of some states, if applicable, the common
stock may be sold in these jurisdictions only through registered or licensed
brokers or dealers. In addition, in some states the common stock may not be sold
unless it has been registered or qualified for sale or an exemption from
registration or qualification requirements is available and is complied
with.
We have
advised the selling securityholders that the anti-manipulation rules of
Regulation M under the Exchange Act may apply to sales of shares in the market
and to the activities of the selling securityholders and their affiliates. In
addition, we will make copies of this prospectus (as it may be supplemented or
amended from time to time) available to the selling securityholders for the
purpose of satisfying the prospectus delivery requirements of the Securities
Act. The selling securityholders may indemnify any broker-dealer that
participates in transactions involving the sale of the shares against certain
liabilities, including liabilities arising under the Securities
Act.
We have
agreed to indemnify the selling securityholders against liabilities, including
liabilities under the Securities Act and state securities laws, relating to the
registration of the shares offered by this prospectus.
We have
agreed with the selling securityholders to keep the registration statement of
which this prospectus constitutes a part effective until the earlier of
(1) such time as all of the shares covered by this prospectus have been
disposed of pursuant to and in accordance with the registration statement or
(2) the date on which the shares may be sold pursuant to Rule 144 of the
Securities Act.
To our
knowledge, no selling securityholder is a broker-dealer or an affiliate of a
broker-dealer.
Lock-Up Agreement
All
Selling Stockholders have agreed not to sell or otherwise dispose of their
shares of Common Stock until the three month anniversary of the effectiveness of
this Registration Statement.
LEGAL
MATTERS
The
validity of the securities offered hereby has been passed upon for us by
Ellenoff Grossman & Schole LLP, New York, New York.
SS-6
[Alternate
Page for Selling Securityholder Prospectus]
Until
, 2011 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.
8,068,698
Shares
of
Common
Stock
CHINA
FOR-GEN CORP.
▪
PROSPECTUS
▪
,
2011
SS-7
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution.
Expenses
payable by us in connection with this offering are as follows:
SEC
Registration Fee
|
$ | 9,075.80 | ||
AMEX
Filing Fees
|
$ | 60,000 | ||
Professional
Fees and Expenses
|
$ | 300,000 | ||
Printing
and Engraving Expenses (1)
|
$ | 40,000 | ||
Miscellaneous
Expenses(1)
|
$ | 5,355.20 | ||
Total
(1)
|
$ | 414,431 |
(1)
Estimates
Item
14. Indemnification of Directors and Officers.
We are a
Delaware corporation, and accordingly, we are subject to the corporate laws
under the Delaware General Corporation Law. Article Sixth of our second
amended and restated certificate of incorporation contains the following
indemnification provision for our directors and officers:
“The
Corporation shall have the power to indemnify any director, officer, employee or
agent of the Corporation or any other person who is serving at the request of
the Corporation in any such capacity with another corporation, partnership,
joint venture, trust or other enterprise (including, without limitation, any
employee benefit plan) to the fullest extent permitted by the General
Corporation Law of the State of Delaware as it exists on the date hereof or as
it may hereafter be amended, and any such indemnification may continue as to any
person who has ceased to be director, officer, employee or agent and may inure
to the benefit of the heirs, executors and administrators of such a
person.”
None of
our directors will be personally liable to us or our stockholders for monetary
damages resulting from a breach of fiduciary duty as a director, except
liability for the following:
|
•
|
Any breach of their duty of
loyalty to us or our
stockholders;
|
|
•
|
Acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of
law;
|
|
•
|
Unlawful payments of dividends or
unlawful stock repurchases or redemptions as provided in Section 174
of the Delaware General Corporation Law;
and
|
|
•
|
Any transaction from which the
director derived an improper personal
benefit.
|
Our
amended and restated certificate of incorporation also provides discretionary
indemnification for the benefit of our directors, officers, and employees, to
the fullest extent permitted by Delaware law, as it may be amended from time to
time. Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, or the Securities Act, may be permitted to our
directors or officers, or persons controlling us, pursuant to the foregoing
provisions, we have been informed that in the opinion of the SEC, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
Pursuant
to our amended and restated bylaws, we are required to indemnify our directors,
officers, employees and agents, and we have the discretion to advance his or her
related expenses, to the fullest extent permitted by law.
The
limitation of liability and indemnification provisions in our amended and
restated certificate of incorporation and bylaws may discourage stockholders
from bringing a lawsuit against our directors for breach of their fiduciary
duty. They may also reduce the likelihood of derivative litigation against
our directors and officers, even though an action, if successful, might benefit
us and our stockholders. Furthermore, a stockholder’s investment may be
adversely affected to the extent we pay the costs of settlement and damage
awards against directors and officers as required by these indemnification
provisions. At present, there is no pending litigation or proceeding involving
any of our directors, officers or employees regarding which indemnification is
sought, and we are not aware of any threatened litigation that may result in
claims for indemnification.
II-1
Item
15. Recent Sales of Unregistered Securities
The
following are all issuances of securities by the registrant during the past
three years which were not registered under the Securities Act of 1933, as
amended. In each of these issuances the recipient represented that he or
it was acquiring the shares for investment purposes only, and not with a view
towards distribution or resale except in compliance with applicable securities
laws. No general solicitation or advertising was used in connection with
any transaction, and the certificate evidencing the securities that were issued
contained a legend restricting their transferability absent registration under
the Securities Act or the availability of an applicable exemption therefrom.
Unless specifically set forth below, no underwriter participated in the
transaction and no commissions were paid in connection with the
transactions.
May
2008 Private Placement
On May
30, 2008, the Company conducted a private placement of 500,000 shares of its
newly created Series A Convertible Preferred Stock convertible into 500,000
shares of our common stock and the 2008 Warrant. The Company received
gross proceeds of $455,000 from the private placement. The 2008 Warrant is
exercisable through May 20, 2013 at an exercise price of $1.25 per share.
The securities were offered pursuant to exemptions from registration
provided by Section 4(2) of the Securities Act of 1933, as amended,
Regulation D and Rule 506. The 2008 Warrant was exercised in January, 2010
on a cashless basis for 416,667 shares of our common stock.
In
connection with the May 2008 private placement, we entered into a registration
rights agreement to have the shares of common stock underlying the preferred
stock and 2008 Warrants registered for public resale. The filing of the
registration statement of which this prospectus is a part is intended to satisfy
certain of our obligations under that registration rights
agreement.
February
2009 Private Placement
On
February 12, 2010, the Company received gross proceeds of $2,000,000 from the
sale of five year convertible promissory notes, bearing interest at ten percent
(10%) per annum (the “Notes”) and Common Stock Purchase Warrants A and B (each,
the “A Warrants” and “B Warrants” and collectively, the “Warrants”) to various
accredited and institutional investors. The securities were offered
pursuant to exemptions from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, Regulation D and Rule 506.
In
connection with the February 2009 private placement, we entered into a
registration rights agreement to have the shares of Common Stock underlying the
Notes and Warrants registered for public resale. The filing of the
registration statement of which this prospectus is a part is intended to satisfy
certain of our obligations under that registration rights
agreement.
II-2
Exhibit
Number
|
|
Document
|
1.1
|
|
Form
of Underwriting Agreement (2)
|
2.1
|
Share
Transfer Agreement, dated March 26, 2009, by and among the Company,
Liaoning Shengsheng and the shareholders of Liaoning Shengsheng
(1)
|
|
3.1
|
Certificate of
Incorporation of the Company (1)
|
|
3.2
|
|
Amended
and Restated Certificate of Incorporation of the Company
(1)
|
3.3
|
|
Second
Amended and Restated Certificate of Incorporation of the Company
(1)
|
3.4
|
|
By-Laws
of the Registrant (1)
|
4.1
|
Specimen
Share Certificate (3)
|
|
4.2
|
Form
of Certificate of Series A Convertible Preferred Stock issued to
investors, dated May 30, 2008 (1)
|
|
4.3
|
Form
of Convertible Warrant issued to investors, dated May 30, 2008
(1)
|
|
4.4
|
|
Form
of Convertible Warrant A issued to investors, dated February 12, 2010, as
amended (1)
|
4.5
|
Form
of Convertible Warrant B issued to investors, dated February 12, 2010, as
amended (1)
|
|
4.6
|
Form
of Convertible Note issued to investors, dated February 12, 2010
(1)
|
|
5.1
|
|
Opinion
of Ellenoff Grossman & Schole LLP (1)
|
10.1
|
Securities
Purchase Agreement, dated May 30, 2008, between the Company and
Professional Offshore Opportunity Fund, Ltd. (1)
|
|
10.2
|
Registration
Rights Agreement, dated May 30, 2008, between the Company and Professional
Offshore Opportunity Fund, Ltd. (1)
|
|
10.3
|
Note
Purchase Agreement, dated February 12, 2010, between the Company
and private placement investors (1)
|
|
10.4
|
Registration
Rights Agreement, dated February 12, 2010, between the Company and private
placement investors (1)
|
|
10.5
|
|
Form
of Lock-up Agreement (1)
|
10.6
|
Form
of Make Good Escrow Agreement (3)
|
|
10.7
|
Amended
and Restated Call Option Agreement, dated May 12, 2010
(1)
|
|
10.8
|
Certification
of Use of Proceeds Executed by Liaoning Shengsheng Biotechnology Co.,
Ltd., dated February 12, 2010 (1)
|
|
10.9
|
Unofficial
English translation of Employment Agreement between Liaoning Shengsheng
and Mr. Baoquan Wang (4)
|
|
10.10
|
Unofficial
English translation of Employment Agreement between Liaoning Sheng sheng
and Mr. Jun Fang (5)
|
|
10.11
|
Unofficial
English translation of Employment Agreement between Liaoning Shengsheng
and Mr. Gang Xu (6)
|
|
10.12
|
Unofficial
English translation of Employment Agreement between Liaoning Shengsheng
and Ms. Lanfang Wu (7)
|
|
10.13
|
Unofficial
English translation of Confirmation Letter issued by Shenyang
Agriculture University date d March 31, 2010 (8)
|
|
10.14
|
Unofficial
English translation of Confirmation Letter issued by Dalian Technology
University dated May 28, 2010 (9)
|
|
10.15
|
Unofficial
English translation of Beijisong Share Transfer Agreement dated May 10,
2009 and its Amendment dated May 13, 2009 (10)
|
|
21.1
|
|
Subsidiaries
of the Company (1)
|
23.1
|
|
Consent
of Paritz & Company (2)
|
23.2
|
|
Consent
of Ellenoff Grossman & Schole LLP (included in Exhibit 5.1)
(1)
|
(1)
|
Previously
filed
|
(2)
|
Filed
herewith
|
(3)
|
Tobe
filed by amendment
|
(4)
|
Previously
filed as exhibit 99.1 to Amendment No. 1 to the Registration Statement on
Form S-1 filed with the SEC on July 15,
2010
|
(5)
|
Previously
filed as exhibit 99.2 to Amendment No. 1 to the Registration Statement on
Form S-1 filed with the SEC on July 15,
2010
|
(6)
|
Previously
filed as exhibit 99.3 to Amendment No. 1 to the Registration Statement on
Form S-1 filed with the SEC on July 15,
2010
|
(7)
|
Previously
filed as exhibit 99.4 to Amendment No. 1 to the Registration Statement on
Form S-1 filed with the SEC on July 15,
2010
|
(8)
|
Previously
filed as exhibit 99.5 to Amendment No. 1 to the Registration Statement on
Form S-1 filed with the SEC on July 15,
2010
|
(9)
|
Previously
filed as exhibit 99.6 to Amendment No. 1 to the Registration Statement on
Form S-1 filed with the SEC on July 15,
2010
|
(10)
|
Previously
filed as exhibit 99.7 to Amendment No. 1 to the Registration Statement on
Form S-1 filed with the SEC on July 15,
2010
|
(b)
Financial Statement Schedules. None
II-3
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;
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 SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price set
forth in the “Calculation of Registration Fee” table in the effective
Registration Statement;
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, 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)
That, 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.
(4)
For the purpose of determining any liability under the Securities Act of 1933,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(5) File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
(6
That, for the purpose of determining liability under the Securities Act of 1933
to any purchaser:
Each
prospectus filed by the Registrant pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to
such date of first use.
Insofar
as indemnification for liabilities arising under the Act may be permitted to
directors, officers and controlling persons of the small business issuer
pursuant to the foregoing provisions, or otherwise, the small business issuer
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 small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer 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 small business issuer 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.
II-4
(6) That,
for the purpose of determining liability of the registrant under the Securities
Act of 1933 to any purchaser in the initial distribution of the
securities:
The
undersigned registrant undertakes that in a primary offering of securities of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(i) Any
preliminary prospectus or prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424 (§230.424 of this
chapter).
II-5
SIGNATURES
In
accordance with 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 Haicheng City, Liaoning Province,
People’s Republic of China, on January 24, 2011.
CHINA
FOR-GEN CORP.
|
|
/s/
Baoquan Wang
|
|
By:
Baoquan Wang
|
|
President
and Chairman of the Board of Directors
|
|
(principal
executive officer)
|
Pursuant
to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on
the dates indicated.
Name and Title
|
|
Date
|
/s/
Baoquan Wang
|
January
24, 2011
|
|
Baoquan
Wang
|
||
President
and Chairman of the Board of Directors
|
||
(principal
executive and accounting officer)
|
||
*
|
January
24, 2011
|
|
Lanfeng
Wu
|
||
Treasurer
and Secretary (principal financial officer)
|
||
*
|
January
24, 2011
|
|
Jia
Yu
|
||
Director
|
||
*
|
January
24, 2011
|
|
Zhang
Daoxu
|
||
Director
|
||
*
|
January
24, 2011
|
|
Gang
Xu
|
||
Director
|
||
*
|
January
24, 2011
|
|
Scott
Ogilvie
|
||
Director
|
||
*
|
January
24, 2011
|
|
Kevin
Randolph
|
||
Director
|
||
*
|
January
24, 2011
|
|
Marc
Klee
|
||
Director
|
||
*/s/
Baoquan Wang
|
||
Baoquan
Wang
|
||
Attorney-in-Fact
|
S-1
EXHIBIT
INDEX
Exhibit
Number
|
|
Document
|
1.1
|
|
Form
of Underwriting Agreement (2)
|
2.1
|
Share
Transfer Agreement, dated March 26, 2009, by and among the Company,
Liaoning Shengsheng and the shareholders of Liaoning Shengsheng
(1)
|
|
3.1
|
Certificate of
Incorporation of the Company (1)
|
|
3.2
|
|
Amended
and Restated Certificate of Incorporation of the Company
(1)
|
3.3
|
|
Second
Amended and Restated Certificate of Incorporation of the Company
(1)
|
3.4
|
|
By-Laws
of the Registrant (1)
|
4.1
|
Specimen
Share Certificate (3)
|
|
4.2
|
Form
of Certificate of Series A Convertible Preferred Stock issued to
investors, dated May 30, 2008 (1)
|
|
4.3
|
Form
of Convertible Warrant issued to investors, dated May 30, 2008
(1)
|
|
4.4
|
|
Form
of Convertible Warrant A issued to investors, dated February 12, 2010, as
amended (1)
|
4.5
|
Form
of Convertible Warrant B issued to investors, dated February 12, 2010, as
amended (1)
|
|
4.6
|
Form
of Convertible Note issued to investors, dated February 12, 2010
(1)
|
|
5.1
|
|
Opinion
of Ellenoff Grossman & Schole LLP (1)
|
10.1
|
Securities
Purchase Agreement, dated May 30, 2008, between the Company and
Professional Offshore Opportunity Fund, Ltd. (1)
|
|
10.2
|
Registration
Rights Agreement, dated May 30, 2008, between the Company and Professional
Offshore Opportunity Fund, Ltd. (1)
|
|
10.3
|
Note
Purchase Agreement, dated February 12, 2010, between the Company
and private placement investors (1)
|
|
10.4
|
Registration
Rights Agreement, dated February 12, 2010, between the Company and private
placement investors (1)
|
|
10.5
|
|
Form
of Lock-up Agreement (1)
|
10.6
|
Form
of Make Good Escrow Agreement (3)
|
|
10.7
|
Amended
and Restated Call Option Agreement, dated May 12, 2010
(1)
|
|
10.8
|
Certification
of Use of Proceeds Executed by Liaoning Shengsheng Biotechnology Co.,
Ltd., dated February 12, 2010 (1)
|
|
10.9
|
Unofficial
English translation of Employment Agreement between Liaoning Shengsheng
and Mr. Baoquan Wang (4)
|
|
10.10
|
Unofficial
English translation of Employment Agreement between Liaoning Sheng sheng
and Mr. Jun Fang (5)
|
|
10.11
|
Unofficial
English translation of Employment Agreement between Liaoning Shengsheng
and Mr. Gang Xu (6)
|
|
10.12
|
Unofficial
English translation of Employment Agreement between Liaoning Shengsheng
and Ms. Lanfang Wu
(7)
|
10.13
|
Unofficial
English translation of Confirmation Letter issued by Shenyang
Agriculture University date d March 31, 2010 (8)
|
|
10.14
|
Unofficial
English translation of Confirmation Letter issued by Dalian Technology
University dated May 28, 2010 (9)
|
|
10.15
|
Unofficial
English translation of Beijisong Share Transfer Agreement dated May 10,
2009 and its Amendment dated May 13, 2009 (10)
|
|
21.1
|
|
Subsidiaries
of the Company (1)
|
23.1
|
|
Consent
of Paritz & Company (2)
|
23.2
|
|
Consent
of Ellenoff Grossman & Schole LLP (included in Exhibit 5.1)
(1)
|
(1)
|
Previously
filed
|
(2)
|
Filed
herewith
|
(3)
|
To
be filed by amendment
|
(4)
|
Previously
filed as exhibit 99.1 to Amendment No. 1 to the Registration Statement on
Form S-1 filed with the SEC on July 15,
2010
|
(5)
|
Previously
filed as exhibit 99.2 to Amendment No. 1 to the Registration Statement on
Form S-1 filed with the SEC on July 15,
2010
|
(6)
|
Previously
filed as exhibit 99.3 to Amendment No. 1 to the Registration Statement on
Form S-1 filed with the SEC on July 15,
2010
|
(7)
|
Previously
filed as exhibit 99.4 to Amendment No. 1 to the Registration Statement on
Form S-1 filed with the SEC on July 15,
2010
|
(8)
|
Previously
filed as exhibit 99.5 to Amendment No. 1 to the Registration Statement on
Form S-1 filed with the SEC on July 15,
2010
|
(9)
|
Previously
filed as exhibit 99.6 to Amendment No. 1 to the Registration Statement on
Form S-1 filed with the SEC on July 15,
2010
|
(10)
|
Previously
filed as exhibit 99.7 to Amendment No. 1 to the Registration Statement on
Form S-1 filed with the SEC on July 15,
2010
|
95