As filed with the Securities and
Exchange Commission on
March 3, 2009
Registration No. 333-154222
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
AMENDMENT NO. 3 TO FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CHINA NUTRIFRUIT GROUP LIMITED
(Exact name of registrant as
specified in its charter)
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Nevada
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2033
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87-0395695
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(State or other
jurisdiction of
incorporation or organization)
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(Primary Standard
Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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China Nutrifruit Group Limited
No. 2 Wenhua Street
Dongfeng New Village, Daqing,
Heilongjiang 163311, China
Telephone: (86) 459-4609488
(Address, including zip
code, and telephone number, including area code, of registrants principal
executive offices)
____________________________
Copies to:
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Louis A. Bevilacqua, Esq.
Thomas M. Shoesmith, Esq.
Joseph R. Tiano, Jr., Esq.
Pillsbury Winthrop Shaw
Pittman LLP
2300 N Street, N.W.,
Washington, D.C. 20037
+1 202 663 8000
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(Names, addresses and telephone
numbers of agents for service)
____________________________
Approximate date of
commencement of proposed sale to public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being
registered on this Form are to be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933, check the following box.
Q
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
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Accelerated filer
¨
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Non-accelerated
filer
¨
(Do
not check if smaller reporting company)
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Smaller reporting
company
Q
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CALCULATION OF REGISTRATION FEE
Title of each class of
securities to be registered
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Amount to be registered(1)
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Proposed maximum offering
price per share (2)
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Proposed maximum aggregate
offering price(2)
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Amount of registration fee
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Common stock, $0.001 par value
per share
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5,899,598
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$3.2
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$18,878,713.6
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$737
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Common stock, $0.001 par value
per share (3)
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216,009 (3)
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$3.2
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$691,228.8
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$27
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Total
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6,115,607
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$3.2
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$19,588,502.4
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$764
(4)
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(1)
In accordance with Rule 416(a),
the Registrant is also registering hereunder an indeterminate number of shares
that may be issued and resold resulting from stock splits, stock dividends or
similar transactions.
(2)
Estimated pursuant to Rule 457(c)
of the Securities Act of 1933 solely for the purpose of computing the amount of
the registration fee based on the average of the high and low prices reported on
the OTC Bulletin Board on October 9, 2008.
(3)
Represents shares of common stock
issuable upon exercise of three-year warrants to purchase shares of common stock
held by certain selling stockholders named in this registration statement.
(4) $770 registration
fee was previously paid with the filing of the initial registration statement on
October 14, 2008.
The registrant hereby amends
this registration statement on such date or dates as may be necessary to delay
its effective date until the registrant shall file a further amendment which
specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or until
the registration statement shall become effective on such date as the
Commission, acting pursuant to such Section 8(a), may determine.
The information in this
prospectus is not complete and may be changed. We may not sell these securities
until the registration statement filed with the Securities and Exchange
Commission is effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
PROSPECTUS
Subject to completion, dated
March 3
, 2009
CHINA NUTRIFRUIT GROUP LIMITED
6,115,607 Shares of Common
Stock
This prospectus relates to
6,115,607
shares of common stock of China Nutrifruit Group Limited that
may be sold from time to time by the selling stockholders named in this
prospectus, which includes:
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5,899,598
shares of common
stock; and
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216,009 shares of common stock
issuable upon the exercise of warrants held by some of the selling stockholders.
We will not receive any of the
proceeds from the sale of shares of our common stock by the selling stockholders
but we will receive funds from the exercise of the warrants held by the selling
stockholders if and when those warrants are exercised for cash. We will utilize
any proceeds from the exercise of such warrants for general corporate and
working capital purposes.
Our common stock is quoted on
the OTC Bulletin Board maintained by the Financial Industry Regulatory
Authority, or FINRA, under the symbol "CNGL.OB." The closing bid price for our
common stock on February 27, 2009 was $3.50 per share, as reported on the OTC
Bulletin Board.
Any participating broker-dealers
and any selling stockholders who are affiliates of broker-dealers may be
underwriters within the meaning of the Securities Act of 1933, as amended, or
the Securities Act, and any commissions or discounts given to any such
broker-dealer or affiliate of a broker-dealer may be regarded as underwriting
commissions or discounts under the Securities Act. The selling stockholders
have informed us that they do not have any agreement or understanding, directly
or indirectly, with any person to distribute their common stock.
Investing in our common stock
involves a high degree of risk. See Risk Factors beginning on page 7 to read
about factors you should consider before buying shares of our common stock.
Neither the Securities and
Exchange Commission nor any state securities commission has approved or
disapproved of these securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
The date of this Prospectus is
, 2009.
TABLE OF CONTENTS
PROSPECTUS SUMMARY
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1
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RISK FACTORS
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7
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FORWARD-LOOKING
STATEMENTS
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18
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MARKET DATA AND
FORECASTS
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19
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USE OF PROCEEDS
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19
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MARKET FOR OUR COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
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19
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MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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20
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CORPORATE STRUCTURE AND
HISTORY
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29
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OUR BUSINESS
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31
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MANAGEMENT
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44
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EXECUTIVE COMPENSATION
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45
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SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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46
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TRANSACTIONS WITH
RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS; DIRECTOR
INDEPENDENCE
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46
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CHANGE IN ACCOUNTANTS
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47
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SELLING STOCKHOLDERS
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48
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DESCRIPTION OF CAPITAL
STOCK
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51
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SHARES ELIGIBLE FOR
FUTURE SALE
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52
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PLAN OF DISTRIBUTION
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53
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LEGAL MATTERS
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55
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EXPERTS
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55
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WHERE YOU CAN FIND MORE
INFORMATION
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55
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You
should only rely on the information contained in this prospectus. We have not,
and the selling stockholders have not, authorized any other person to provide
you with different information. This prospectus is not an offer to sell, nor is
it seeking an offer to buy, these securities in any state where the offer or
sale is not permitted. The information in this prospectus is accurate only as
of the date on the front cover, but the information may have changed since that
date.
i
PROSPECTUS SUMMARY
The items in the following
summary are described in more detail later in this prospectus. This summary
provides an overview of selected information and does not contain all of the
information you should consider. Therefore, you should also read the more
detailed information set out in this prospectus, including the financial
statements, the notes thereto and matters set forth under Risk Factors.
Our Business
We are a holding company that
operates through our indirectly owned subsidiary to Daqing Longheda Food
Company Limited, a leading producer of premium specialty fruit based
products in China. We specialize in developing, processing, marketing and
distributing a variety of food products processed primarily from premium
specialty fruits grown in Northeast China, including golden berry, crab
apple, blueberry and raspberry. We have been producing our premium
specialty fruit based products since 2004 and believe that we are the
largest golden berry processor in China.
Our primary product offering
includes fruit concentrate, nectar, glazed fruits, beverages as well as
fresh fruits. Our best selling products are derived from golden berries.
We generated approximately 50% of our revenues from golden berry based
products in fiscal year 2008. While golden berry based products will remain
our main source of revenue, we plan to further diversify our product mix and
increase the processing volume of other fruits types such as crab apple and
blueberry. Our best selling type of product is fruit concentrate. Sales of
fruit concentrate contributed approximately 48% to our total revenue in
fiscal year 2008. We plan to continue to focus on fruit concentrate which
is our fastest growing product line with greatest market demand.
We sell our products through
an extensive nationwide sales and distribution network covering 19 provinces
and 41 cities in China. As of December 31, 2008, this network was comprised
of 68 distributors. Our processed fruit products are mainly sold to food
producers for further processing into fruit juice and other fruit related
foods, and our fresh fruits are mainly sold to fruit supermarkets. Our
customers are based primarily in China and include Beijing Huapeng Food Co.
Ltd., Beijing Taihuaxing Food Co. Ltd., Shanxi Desheng Trading Co. Ltd.,
Haerbin Shengjinlai Economic and Technology Development Co. Ltd. and Tianjin
Aokai Chemical Trading Co. Ltd.
Quality and safety are of
primary importance to us. We have established quality control and food
safety management systems for all stages of our business, including raw
material sourcing, producing, packaging, storage and transportation of our
products. We currently operate from our manufacturing facilities located in
Daqing and Mu Dan Jiang, Heilongjiang province, China where abundant supply
of a variety of premium specialty fruits is available. We have four fruit
processing lines with an aggregate capacity of 15,960 tons and one beverage
production line with a capacity of 10,800 tons. To meet the fast growing
market demand, we plan to add four new fruit processing production lines by
July 2010 which will increase our total installed fruit processing capacity
to 31,560 tons.
Our sales revenue grew by
49.9% in the fiscal year ended March 31, 2008 to $34.5 million, from $23.0
million in the fiscal year ended March 31, 2007. Net income grew by 31.6%
in the fiscal year ended March 31, 2008 to $10.0 million from $7.6 million
in the fiscal year ended March 31, 2007. Our gross margin for the fiscal
year ended March 31, 2008 was 45.1%.
Our Industry
According to a report on Chinas
fruit processing industry issued by Beijing Business & Intelligence
Consulting Co. Ltd., an independent market research firm, or the BBIC
report, Chinas fruit processing industry has grown significantly in the
past several years. The total output of fruit processed products in China
grew from $16.8 billion in 2005 to $27.5 billion in 2007, representing a
compound annual growth rate, or CAGR, of 27.9%. Sales value of fruit
processed products in China grew from $17.0 billion in 2005 to $26.1 billion
in 2007, representing a CAGR of 27.7%. BBIC projected that the total sales
value and net income of fruit processed products in China will reach $37.2
billion and $2.5 billion in 2010, or a CAGR of 42.5% and 66.7%,
respectively, during the four-year period from 2007 to 2010.
With approximately a quarter
of the worlds population, China represents a key growth driver for the
global fruit food market. However, according to Euromonitor, the per capita
fruit juice consumption in China is currently well below that of major
developed countries, indicating that there is a great potential market for
the marketing of fruit based products, like our products, in China. We
believe the growth of Chinas fruit based products has been, and is expected
to continue to be, driven by growing acceptance and increasing affordability
of fruit based products in China, enhanced health consciousness, and growing
global demand. In China, the fast-growing economy, and thus increasing per
capita income, enables more consumers to buy more expensive healthy food and
drinks, as evidenced by high demand for our products. Due to increased
consumer health consciousness, we believe health-oriented foods and drinks
will continue to experience strong growth in China,
especially premium specialty fruit based products. We believe that given the
projected growth opportunities of Chinas fruit processing industry, we are
well-positioned to achieve market leadership in China.
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Our Competitive Strengths
We believe that our success to
date and potential for future growth can be attributed to a combination of
our strengths, including the following:
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High-end niche products.
We process
premium specialty fruits that have high nutrient concentration, potential
health benefits and high value. Our products are positioned in the high-end
market as premium healthy food and are distinguished from the common fruit
based products in the market.
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Leading market position
and rapid growth.
We believe we are the largest
processor of golden berry in China and a leading producer
of premium specialty fruit based products. In the past three fiscal years,
our revenue has grown at a compound annual growth rate of approximately 77%
from $11.0 million in fiscal year 2006 to $34.5 million in fiscal year 2008.
Our net income has grown at a compound annual growth rate of approximately
60% from $3.9 million in fiscal year 2006 to $10.0 million in fiscal year
2008.
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Established raw material
procurement network.
Our
facilities are strategically located in close proximity to major premium
specialty fruit orchards in Northeastern China which allows us to have easy
access to the supply of the source fruits, enjoy sourcing stability and
maintain a competitive cost structure. We have employed different strategies
to secure the supply of source fruits to support our rapid growth. For
example, we have entered into cooperative agreements with local government
where major premium specialty fruit orchards are based to coordinate with
individual farmers to supply us with golden berries. We have also secured
the supply of other source fruits by developing a group of effective and
loyal agents who collect source fruits from individual farmers. We believe
these supply arrangements provide us with an important competitive advantage
in terms of quality, stability and reliability of supply.
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Emphasis on quality
control and food safety.
We
emphasis quality and safety and have quality control and food safety
management systems for all stages of our business, including raw materials
sourcing, production, packaging, storage and transportation of our products.
We apply and adhere to internal quality standards that we believe are
stricter than the PRC national standards. Our processing facility possesses
ISO9001 and HACCP series qualifications.
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Extensive nationwide
sales and distribution network.
Our extensive sales and
distribution network allows us to reach a wide range of customers all over
the nation. As of December 31, 2008, we had 68 regional distributors in 19
provinces and 41 cities. Our distributors sell our products through their
own network in the region to fruit super markets or fruit based food
producers for further processing. We have a stable and effective group of
distributors who helped to bring up our sales at a compound growth rate of
approximately 77% in the past three years.
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Experienced management
team with a strong track record.
Our
management team has extensive operating experience and industry knowledge. Changjun
Yu, our founder and chairman, has over 13 years of experience in the fruit
based product industry. Jinglin Shi, our chief executive officer, has over
ten years of experience in managerial positions. This extensive local
industry experience is combined with international experience. For example,
Colman Cheng, our chief financial officer, has over 14 years of auditing,
accounting and financial management experience in international companies.
We believe that our management teams experience and capabilities have
contributed greatly to our significant growth in the past three years.
Our Growth Strategy
As a leading premium specialty
fruit based product company in China, we believe we are well positioned to
capitalize on future industry growth in China. We are dedicated to providing
healthy and high nutritional premium specialty fruit based products. We will
implement the following strategic plans to take advantage of industry
opportunities and our competitive strengths:
2
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-
Increase production
capacity
.
Our
existing production lines have been running at close to full capacity while
the market demand for our existing products keeps increasing. We also have
abundant supply of source fruits to support the expansion of our business.
In 2007, Heilongjiang
provinces total estimated output of golden berry, crab apple, blueberry and
raspberry was approximately 200,000 tons, 700,000 tons, 200,000 tons and
100,000 tons, respectively. Our current processing capacity only allows us
to process a small percentage of the total output. We plan to add five new
production lines to expand our fruit processing capacity from 9,960 tons to
31,560 tons by July 2010.
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Further strengthen our
raw materials procurement network.
We believe that a secure
supply of principal raw materials is crucial to our future success. Hence,
we intend to further strengthen our existing cooperative relationship with
the two golden berry farm bases that we procure golden berries from and to
develop new relationship with other golden berry farm bases when necessary.
We will keep developing new quality agents in orchards of other fresh fruits
to secure sufficient supply to support our rapid growth.
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Further expand our
distribution network to increase the prevalence of our products nationwide.
Our current
sales depend heavily on our regional distributors and their network. To
support our rapid growth in sales, we plan to further expand our
distribution network by adding five to ten new distributors annually in the
next few years.
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Continue to diversify
our product portfolio to satisfy different customer preferences.
We
currently offer fresh golden berries and four series of products processed
from four types of source fruits. We constantly evaluate our products and
seek to adapt to changing market conditions by updating our products to
reflect new trends in consumer preferences. We have finished research
and
development for our new products glazed blueberry, sea buckthorn concentrate
and blackcurrant concentrate. Currently another new product golden berry
extracts is under development and we expect to finish its development in
fiscal 2010. We will analyze the market trends and customer preference to
decide which products to be launched.
Risk Factors
Our ability to successfully
operate our business and achieve our goals and strategies is subject to
numerous risks as discussed more fully in the section titled Risk Factors,
including for example:
-
Our ability to acquire raw
materials in sufficient quantity and on commercially competitive terms, and
at quality levels meeting our stringent standards;
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Our dependence on consumer
perception of safety and quality of our products as well as similar products
distributed by other companies in our industry;
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Our ability to expand our
operations and production capacities sufficiently to meet our customers
demands;
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Our ability to effectively
manage rapid growth and accurately project market demand for our products;
and
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Unexpected change in Chinas
political or economic situation or legal environment.
Any of the above risks could
materially and adversely affect our business, financial position and results
of operations. An investment in our common stock involves risks. You
should read and consider the information set forth in Risk Factors and all
other information set forth in this prospectus before investing in our
common stock.
Corporate Information
We were originally
incorporated in the state of Utah in 1983, but changed our state of
incorporation to Nevada on April 16, 1999. On August 14, 2008, we acquired
Fezdale Investments Limited, a British Virgin Islands, or BVI, corporation,
in a reverse acquisition transaction. We conduct our operations in China
through our indirect PRC subsidiary Daqing Longheda Food Company Limited.
We amended our Articles of Incorporation to change our name to China
Nutrifruit Group Limited on August 14, 2008 to better reflect our business
after the acquisition. See Corporate Structure and History Our Corporate
History.
The following chart reflects
our organizational structure as of the date of this prospectus.
3
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The address of our principal
executive office in No. 2 Wenhua Street, Dongfeng New Village, Daqing,
Heilongjiang, China 163311, and our telephone number is (86) 459-4609488.
Our subsidiary Longheda maintains a website at
www.longheda.net
.
Information available on our website is not incorporated by reference in
and is not deemed a part of this prospectus.
Use of Terms
Except where the context
otherwise requires and for the purposes of this prospectus only:
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We, us, our company,
our, and China Nutrifruit refer to the combined business of China
Nutrifruit Group Limited and its consolidated subsidiaries, but do not
include the stockholders of China Nutrifruit Group Limited;
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Fezdale refers to Fezdale
Investments Limited, our direct, wholly-owned subsidiary, a BVI corporation;
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Solar Sun refers to Solar
Sun Holding Limited, our indirect, wholly-owned subsidiary, a Hong Kong
corporation;
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Longheda refers to Daqing
Longheda Food Company Limited, our indirect, wholly-owned subsidiary, a
Chinese corporation;
-
China, Chinese and PRC,
refer to the Peoples Republic of China;
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Renminbi and RMB refer to
the legal currency of China; and
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U.S. dollars, dollars and
$ refer to the legal currency of the United States.
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Common stock offered by
selling stockholders
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6,115,607 shares, including
216,009 shares of common stock that are issuable upon the exercise of
warrants held by some of the selling stockholders. This number represents
16.9% of our current outstanding common stock (1)
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Common stock outstanding
before the offering
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36,125,754 shares.
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Common stock outstanding after
the offering
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36,341,763 shares.
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Proceeds to us
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We will not receive proceeds
from the resale of shares by the Selling Stockholders. To the extent that
the selling stockholders exercise, for cash, all of the warrants covering
the 216,009 shares of common stock registered for resale under this
prospectus, we would receive $600,505.02 in aggregate from such exercises.
We intend to use such proceeds for general corporate and working capital
purposes.
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Dividend
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Other than dividends paid by our subsidiary
Longheda to its shareholders before our reverse acquisition of Fezdale,
we have never paid dividends on our common stock.
We currently intend to retain any future earnings to fund the development
and growth of our business, and do not anticipate paying any cash dividends
in the foreseeable future. See Dividend Policy.
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Trading Symbol
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CNGL.OB
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(1) Based on 36,125,754 shares of common stock outstanding as of February 27,
2009.
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5
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Summary Consolidated Financial Information
The following table summarizes
selected historical financial data regarding our business and should be read
in conjunction with our consolidated financial statements and related notes
contained elsewhere in this prospectus and the information under
Managements Discussion and Analysis of Financial Condition and Results of
Operations.
The summary consolidated
statement of income for the years ended March 31, 2008 and 2007 and the
summary balance sheet data as of March 31, 2008 and 2007 are derived from
the audited consolidated financial statements of Longheda included elsewhere
in this prospectus. Longheda conducts all our business operations and became
our wholly-owned subsidiary on August 14, 2008. We derived our summary
consolidated financial data for the nine months ended December 31, 2008 and
2007 from our unaudited consolidated financial statements included elsewhere
in this prospectus, which include all adjustments, consisting of normal
recurring adjustments, that our management considers necessary for a fair
presentation of our financial position and results of operations as of the
dates and for the periods presented. The results of operations for past
accounting periods are not necessarily indicative of the results to be
expected for any future accounting period.
(All amounts, except earnings
per share date, in thousands of U.S. dollars)
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Nine
Months Ended
December 31,
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Fiscal Year Ended
March 31,
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2008
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2007
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2008
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2007
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Summary Consolidated Statement of Operations:
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Net sales
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$36,212
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$ 27,156
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$34,510
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$23,022
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Cost of products sold
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19,021
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14,415
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18,947
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11,610
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Gross profit
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17,191
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12,741
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15,563
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11,412
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Selling, general and administrative expenses
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3,541
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2,376
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3,155
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2,167
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Operating income
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13,650
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10,365
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12,408
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9,245
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Interest expenses
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318
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281
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|
403
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471
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Other income
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26
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17
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|
31
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122
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Income before income taxes
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13,358
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10,101
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12,036
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8,896
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Provision for income taxes
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3,244
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294
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2,035
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1,341
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Earnings before minority interest
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10,114
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1,716
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10,001
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7,555
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Minority interest
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209
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-
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-
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-
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Net income
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9,905
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8,656
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10,001
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7,555
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Summary balance sheet data:
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Cash and cash equivalent
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8,397
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7,104
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4,004
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Working capital
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4,191
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6,986
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(1,173)
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Total assets
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40,415
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21,895
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18,159
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Current liabilities
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19,067
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4,109
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8,445
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Total long-term liabilities
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-
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-
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3,230
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Total liabilities
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19,067
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4,109
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11,675
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Total stockholders equity
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21,348
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17,786
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6,485
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RISK FACTORS
An investment in our common
stock involves a high degree of risk. You should carefully consider the risks
described below, together with all of the other information included in this
prospectus, before making an investment decision. If any of the following risks
actually occurs, our business, financial condition or results of operations
could suffer. In that case, the trading price of our common stock could
decline, and you may lose all or part of your investment. You should read the
section entitled Special Notes Regarding Forward-Looking Statements
immediately following these risk factors for a discussion of what types of
statements are forward-looking statements, as well as the significance of such
statements in the context of this prospectus.
RISKS RELATED TO OUR BUSINESS
Any ill effects, product
liability claims, recalls, adverse publicity or negative public perception
regarding particular fruits we use as raw materials, our products or our
industry in general could harm our sales and cause consumers to avoid our
products.
The food industry is subject to
risks posed by food spoilage and contamination, product tampering, product
recall, and consumer product liability claims. Our operations could be impacted
by both genuine and fictitious claims regarding our and our competitors
products. In the event of product contamination or tampering, we may need to
recall some of our products. A widespread product recall could result in
significant loss due to the cost of conducting a product recall including
destruction of inventory and the loss of sales resulting from the unavailability
of the product for a period of time.
In addition, any adverse publicity
or negative public perception regarding particular fruits we use as raw
materials, our products, our actions relating to our products, or our industry
in general could result in a substantial drop in demand for our products. This
negative public perception may include publicity regarding the safety or quality
of particular fruits we use as raw materials or products in general, of other
companies or of our products specifically. Negative public perception may also
arise from regulatory investigations or product liability claims, regardless of
whether those investigations involve us or whether any product liability claim
is successful against us. We could also suffer losses from a significant product
liability judgment against us. Either a significant product recall or a product
liability judgment, involving either our company or our competitors, could also
result in a loss of consumer confidence in our products or the food category,
and an actual or perceived loss of value of our brands, materially impacting
consumer demand.
Our business and financial
results depend on maintaining a consistent and cost-effective supply of source
fruits. Any interruption in our supply of source fruits could materially and
adversely affect our results of operations, financial condition and business
prospects.
The availability, size, quality
and cost of source fruits for the production of our products are subject to
risks inherent to farming, such as crop size, quality, and yield fluctuation
caused by poor weather and growing conditions, pest and disease problems, and
other factors beyond our control. Because cost for source fruits currently
represents approximately 73% of our total cost of revenue in fiscal year 2008,
we are particularly vulnerable to crop diseases or other events that could cause
significant fluctuations in the availability and cost of the source fruits we
use as raw materials. The prices of our fresh source fruits and other raw
materials are generally determined by the market, and may change at any time.
Increases in prices for any of these raw materials could have a material adverse
impact on our ability to achieve profitability.
Currently, we source our fresh
golden berry primarily from two fruit farm bases pursuant to cooperation
agreements with local governments and other source fruits from agents who
collect fruits from individual farmers. While we believe that we have adequate
sources of raw materials and that we in general maintain good supplier
relationships, if we are unable to continue to find adequate suppliers for our
raw materials on economic terms acceptable to us, it will adversely affect our
results of operations, financial condition and business prospects.
7
Product liability claims
against us could result in adverse publicity and potentially significant
monetary damages.
As with other food producers, we
are also exposed to risks associated with product liability claims if the
consumption of our products results in injury or death. We cannot predict what
impact such product liability claims or resulting negative publicity would have
on our business or on our brand image. The successful assertion of product
liability claims against us could result in potentially significant monetary
damages, diversion of management resources and require us to make significant
payments and incur substantial legal expenses. We do not have product liability
insurance and have not made provisions for potential product liability claims.
Therefore, we may not have adequate resources to satisfy a judgment if a
successful claim is brought against us. Even if a product liability claim is not
successfully pursued to judgment by a claimant, we may still incur substantial
legal expenses defending against such a claim. Finally, serious product quality
concerns could result in governmental action against us, which, among other
things, could result in the suspension of production or distribution of our
products, loss of certain licenses, or other governmental penalties.
We compete in an industry
that is brand-conscious, and unless we are able to establish and maintain brand
name recognition our sales may be negatively impacted.
Our business is substantially
dependent upon awareness and market acceptance of our products and brand by our
targeted consumers. In addition, our business depends on acceptance by our
independent distributors and consumers of our brand. Although we believe that we
have made progress towards establishing market recognition for our brand
农珍之冠
in the Chinese fruit products industry, it is too early in the product life
cycle of the brand to determine whether our products and brand will achieve and
maintain satisfactory levels of acceptance by independent distributors and
retail consumers.
We compete in an industry
characterized by rapid changes in consumer preferences, so our inability to
continue developing new products to satisfy our consumers changing preferences
would have a material adverse effect on our sales volumes.
Our products are processed from
premium specialty fruits and sell at a high price. A decline in the consumption
of our products could occur as a result of a change in consumer preferences,
perceptions and spending habits at any time. Future success will depend partly
on our ability to anticipate or adapt to such changes and to offer, on a timely
basis, new products that meet consumer preferences. Our failure to adapt our
product offering to respond to such changes may result in reduced demand and
lower prices for our products, resulting in a material adverse effect on our
sales volumes, sales and profits.
Our current market distribution
and penetration is limited as compared with the potential market and so our
initial views as to customer acceptance of a particular product can be
erroneous, and there can be no assurance that true market acceptance will
ultimately be achieved. In addition, customer preferences are also affected by
factors other than taste. If we do not adjust to respond to these and other
changes in customer preferences, our sales may be adversely affected.
We rely primarily on
third-party distributors, this could affect our ability to efficiently and
profitably distribute and market our products, maintain our existing markets and
expand our business into other geographic markets.
We do not sell our products
directly to our end customers. Instead, we primarily rely on third-party
distributors for the sale and distribution of our products. We sell our products
through an extensive nationwide sales and distribution network covering 19
provinces and 41 cities in China. As of December 31, 2008, this network
comprised 68 distributors. We typically do not enter into long-term agreements
with distributors and have no control over their everyday business activities.
To the extent that our distributors are distracted from selling our products or
do not expend sufficient efforts in managing and selling our products, our sales
will be adversely affected. Our ability to maintain our distribution network and
attract additional distributors will depend on a number of factors, many of
which are outside our control. Some of these factors include: (i) the level of
demand for our brand and products in a particular distribution area; (ii) our
ability to price our products at levels competitive with those offered by
competing products and (iii) our ability to deliver products in the quantity and
at the time ordered by distributors.
There can be no assurance that we
will be able to meet all or any of these factors in any of our current or
prospective geographic areas of distribution. Furthermore, shortage of adequate
working capital may make it impossible for us to do so. Our inability to achieve
any of these factors in a geographic distribution area will have a material
adverse effect on our relationships with our distributors in that particular
geographic area, thus limiting our ability to maintain and expand our market,
which will likely adversely effect our revenues and financial results.
8
We generally do not have
long-term agreements with our distributors, and we may need to spend significant
time and incur significant expense in attracting and maintaining key
distributors.
Our marketing and sales strategy
presently, and in the future, will rely on the performance of our independent
distributors and our ability to attract additional distributors. We generally
have one-year written agreements with our distributors which are renewable at
the beginning of every year. In addition, despite the terms of the written
agreements with certain of our significant distributors, we have no assurance as
to the level of performance under those agreements, or that those agreements
will not be terminated. There is also no assurance that we will be able to
maintain our current distribution relationships or establish and maintain
successful relationships with distributors in new geographic distribution areas.
Moreover, there is the additional possibility that we will have to incur
significant expenses to attract and maintain key distributors in one or more of
our geographic distribution areas in order to profitably exploit our geographic
markets. We may not have sufficient working capital to allow us to do so.
Failure to execute our
business expansion plan could adversely affect our financial condition and
results of operations.
We plan to add four new fruit
processing lines by 2010 to meet an expected increase in demand for our
products. Our decision to increase our production capacity was based in part on
our projections of increases in our sales volume and growth in the size of the
premium specialty fruit based product market in China. If actual customer demand
does not meet our projections, we will likely suffer overcapacity problems and
may have to leave capacity idle, which may reduce our overall profitability and
adversely affect our financial condition and results of operations. Our future
success depends on our ability to expand our business to address growth in
demand for our current and future products. Our ability to add production
capacity and increase output is subject to significant risks and uncertainties,
including:
-
the unavailability of additional
funding to expand our production capacity, purchase additional fixed assets and
purchase raw materials on favorable terms or at all;
-
delays and cost overruns as a
result of a number of factors, many of which may be beyond our control, such as
problems with equipment vendors and suppliers of raw materials;
-
failure to maintain high quality
control standards;
-
shortage of source fruits;
-
our inability to obtain, or delays
in obtaining, required approvals by relevant government authorities;
-
diversion of significant
management attention and other resources; and
-
failure to execute our expansion
plan effectively.
As our business grows, we will
need to implement a variety of new and upgraded operational and financial
systems, procedures and controls, including improvements to our accounting and
other internal management systems by dedicating additional resources to our
reporting and accounting functions, and improvements to our record keeping and
contract tracking system. We will need to respond to competitive market
conditions and continue to enhance existing products and develop new products,
and retain existing customers and attract new customers. We will also need to
recruit more personnel and train and manage our growing employee base.
Furthermore, we will need to maintain and expand our relationships with our
current and future customers, suppliers, distributors and other third parties,
and there is no guarantee that we will succeed.
9
If we encounter any of the risks
described above, or are otherwise unable to establish or successfully operate
additional production capacity or to increase production output, we may be
unable to grow our business and revenues, reduce our operating costs, maintain
our competitiveness or improve our profitability, and our business, financial
condition, results of operations and prospects may be adversely affected.
Because we experience
seasonal fluctuations in our sales, our quarterly results will fluctuate and our
annual performance will depend largely on results from two quarters.
Our business is highly seasonal,
reflecting the harvest season of our primary source fruits during the months
from mid July to mid November. Typically, a substantial portion of our revenues
are earned during our second and third fiscal quarters. We generally experience
lowest revenues during our first fiscal quarter. Sales in the second and third
fiscal quarters accounted for approximately 69.3% of our revenues for fiscal
year ended March 31, 2008. If sales in these quarters are lower than expected,
our operating results would be adversely affected, and it would have a
disproportionately large impact on our annual operating results.
Due to our rapid growth in
recent years, our past results may not be indicative of our future performance
and evaluating our business and prospects may be difficult.
Our business has grown and evolved
rapidly in recent years as demonstrated by our growth in net sales for the
fiscal year ended March 31, 2008 to $34.5 million, from $23.0 million for the
prior fiscal year. We may not be able to achieve similar growth in future
periods, and our historical operating results may not provide a meaningful basis
for evaluating our business, financial performance and prospects. Moreover, our
ability to achieve satisfactory production results at higher volumes is
unproven. Therefore, you should not rely on our past results or our historical
rate of growth as an indication of our future performance.
We depend heavily on key
personnel, and turnover of key employees and senior management could harm our
business.
Our future business and results of
operations depend in significant part upon the continued contributions of our
key technical and senior management personnel, including Changjun Yu, our
Chairman, Jinglin Shi, our Chief Executive Officer, Colman Cheng, our Chief
Financial Officer, and Manjiang Yu, our Vice President of Sales. None of these
key management members currently owns any shares of common stock or any other
equity interest in the Company. Although they have signed employment agreements
with our subsidiary Fezdale which include a non-competition provision which
prohibits them from engaging in the food processing industry during the term of
the agreement and for two years after the termination of employment, such
employment agreements can be terminated at will. If we lose any of these key
employees and are unable to find a qualified replacement in a timely manner, our
business will be negative impacted. In addition, if a key employee fails to
perform in his or her current position, or if we are not able to attract and
retain skilled employees as needed, our business could suffer. Significant
turnover in our senior management could significantly deplete the institutional
knowledge held by our existing senior management team. We depend on the skills
and abilities of these key employees in managing the reclamation, technical, and
marketing aspects of our business, any part of which could be harmed by turnover
in the future.
The concentration of
ownership of our securities by our controlling stockholder who does not
participate in the management of our business can result in stockholder votes
that are not in our best interests or the best interests of our minority
stockholders.
Mr. Yiu Fai Kung and Mr. Kwan Mo
Ng, collectively own approximately 83.5% of our outstanding voting securities,
giving them controlling interest in the Company. However, neither Mr. Kung nor
Mr. Ng is an executive officer or director of the Company and is not a
participant in any way in the day to day affairs of the Company. Mr. Kung and
Mr. Ng may have little or no knowledge of the details of the Companys
operations and do not participate in the corporate governance of the Company.
In addition, this concentration of ownership may also have the effect of
discouraging, delaying or preventing a future change of control, which could
deprive our stockholders of an opportunity to receive a premium for their shares
as part of a sale of our company and might reduce the price of our shares.
10
We do not have any
independent directors and may be unable to appoint any qualified independent
directors.
We currently do not have any
independent directors. We plan to appoint a number of independent directors
which will constitute a majority of our board of directors before our common
stock is listed on a national securities exchange or NASDAQ, but we may not be
able to identify independent directors qualified to be on our board.
Our inability to protect our
trademarks, patent and trade secrets may prevent us from successfully marketing
our products and competing effectively.
Failure to protect our
intellectual property could harm our brands and our reputation, and adversely
affect our ability to compete effectively. Further, enforcing or defending our
intellectual property rights, including our trademarks, patents, copyrights and
trade secrets, could result in the expenditure of significant financial and
managerial resources. We produce, market and sell our products under
农珍之冠
.
We regard our intellectual property, particularly our trademarks and trade
secrets to be of considerable value and importance to our business and our
success. We rely on a combination of trademark, patent, and trade secrecy laws,
and contractual provisions to protect our intellectual property rights. There
can be no assurance that the steps taken by us to protect these proprietary
rights will be adequate or that third parties will not infringe or
misappropriate our trademarks, trade secrets (including our flavor concentrate
trade secrets) or similar proprietary rights. In addition, there can be no
assurance that other parties will not assert infringement claims against us, and
we may have to pursue litigation against other parties to assert our rights. Any
such claim or litigation could be costly and we may lack the resources required
to defend against such claims. In addition, any event that would jeopardize our
proprietary rights or any claims of infringement by third parties could have a
material adverse affect on our ability to market or sell our brands, and
profitably exploit our products.
We may be exposed to
potential risks relating to our internal controls over financial reporting and
our ability to have those controls attested to by our independent auditors.
As directed by Section 404 of the
Sarbanes-Oxley Act of 2002 or SOX 404, the SEC adopted rules requiring public
companies to include a report of management on the companys internal controls
over financial reporting in their annual reports, including Form 10-K. In
addition, the independent registered public accounting firm auditing a companys
financial statements must also attest to the operating effectiveness of the
companys internal controls. Since we just completed the acquisition of Fezdale
on August 14, 2008, we have not evaluated Fezdale and its consolidated
subsidiary internal control systems in order to allow our management to report
on, and our independent auditors to attest to, our internal controls on a
consolidated basis as required by these requirements of SOX 404. Under current
law, we were subject to these requirements beginning with our annual report for
the fiscal year ending March 31, 2008, although the auditor attestation is not
required until our annual report for the fiscal year ending March 31, 2011
assuming our filing status remains as a smaller reporting company. We can
provide no assurance that we will comply with all of the requirements imposed
thereby. There can be no positive assurance that we will receive a positive
attestation from our independent auditors. In the event we identify significant
deficiencies or material weaknesses in our internal controls that we cannot
remediate in a timely manner or we are unable to receive a positive attestation
from our independent auditors with respect to our internal controls, investors
and others may lose confidence in the reliability of our financial statements.
We have limited insurance
coverage and do not carry any business interruption insurance, third-party
liability insurance for our production facilities or insurance that covers the
risk of loss of our products in shipment.
Operation of our facilities
involves many risks, including equipment failures, natural disasters, industrial
accidents, power outages, labor disturbances and other business interruptions.
Furthermore, if any of our products are faulty, then we may become subject to
product liability claims or we may have to engage in a product recall. We do not
carry any business interruption insurance, product recall or third-party
liability insurance for our production facilities or with respect to our
products to cover claims pertaining to personal injury or property or
environmental damage arising from defects in our products, product recalls,
accidents on our property or damage relating to our operations. Therefore, our
existing insurance coverage may not be sufficient to cover all risks associated
with our business. As a result, we may be required to pay for financial and
other losses, damages and liabilities, including those caused by natural
disasters and other events beyond our control, out of our own funds, which could
have a material adverse effect on our business, financial condition and results
of operations.
11
We may be exposed to
liabilities under the Foreign Corrupt Practices Act, and any determination that
we violated the Foreign Corrupt Practices Act could have a material adverse
effect on our business.
We are subject to the Foreign
Corrupt Practice Act, or the FCPA, and other laws that prohibit improper
payments or offers of payments to foreign governments and their officials and
political parties by U.S. persons and issuers as defined by the statute for the
purpose of obtaining or retaining business. We have operations, agreements with
third parties and make sales in China, which may experience corruption. Our
activities in China create the risk of unauthorized payments or offers of
payments by one of the employees, consultants, sales agents or distributors of
our company, because these parties are not always subject to our control. It is
our policy to implement safeguards to discourage these practices by our
employees. Also, our existing safeguards and any future improvements may prove
to be less than effective, and the employees, consultants, sales agents or
distributors of our Company may engage in conduct for which we might be held
responsible. Violations of the FCPA may result in severe criminal or civil
sanctions, and we may be subject to other liabilities, which could negatively
affect our business, operating results and financial condition. In addition, the
government may seek to hold our Company liable for successor liability FCPA
violations committed by companies in which we invest or that we acquire.
RISKS RELATED TO DOING BUSINESS
IN CHINA
Adverse changes in political
and economic policies of the PRC government could impede the overall economic
growth of China, which could reduce the demand for our products and damage our
business.
We conduct substantially all of
our operations and generate most of our revenue in China. Accordingly, our
business, financial condition, results of operations and prospects are affected
significantly by economic, political and legal developments in China. The PRC
economy differs from the economies of most developed countries in many respects,
including:
-
a higher level of government
involvement;
-
a early stage of development of
the market-oriented sector of the economy;
-
a rapid growth rate;
-
a higher level of control over
foreign exchange; and
-
the allocation of resources.
As the PRC economy has been
transitioning from a planned economy to a more market-oriented economy, the PRC
government has implemented various measures to encourage economic growth and
guide the allocation of resources. While these measures may benefit the overall
PRC economy, they may also have a negative effect on us.
Although the PRC government has in
recent years implemented measures emphasizing the utilization of market forces
for economic reform, the PRC government continues to exercise significant
control over economic growth in China through the allocation of resources,
controlling the payment of foreign currency-denominated obligations, setting
monetary policy and imposing policies that impact particular industries or
companies in different ways.
Any adverse change in economic
conditions or government policies in China could have a material adverse effect
on the overall economic growth in China, which in turn could lead to a reduction
in demand for our services and consequently have a material adverse effect on
our business and prospects.
PRC food hygiene and safety
laws may become more onerous, which may adversely affect our operations and
financial performance and lead to an increase in our costs which we may be
unable to pass on to our customers.
Operators within the PRC fruit
processing industry are subject to compliance with PRC food hygiene and safety
laws and regulations. Such laws and regulations require all enterprises engaged
in the production of fruit based products to obtain a hygiene license. They also
set out hygiene standards with respect to food and food additives, packaging and
containers, labeling on packaging as well as hygiene requirements for food
production and sites, facilities and equipment used for the transportation and
the sale of food. Failure to comply with PRC food hygiene and safety laws may
result in fines, suspension of operations, loss of hygiene license and, in
certain cases, criminal proceedings against an enterprise and its management.
Although we are in compliance with current PRC food hygiene and safety laws and
regulations, in the event that such laws and regulations become more stringent
or widen in scope, we may fail to comply with such laws, or if we comply, our
production and distribution costs may increase, and we may be unable to pass
these additional costs on to our customers.
12
Uncertainties with respect
to the PRC legal system could limit the legal protections available to you and
us.
We conduct substantially all of
our business through our operating subsidiary in the PRC. Our operating
subsidiary is generally subject to laws and regulations applicable to foreign
investments in China and, in particular, laws applicable to foreign-invested
enterprises. The PRC legal system is based on written statutes, and prior court
decisions may be cited for reference but have limited precedential value. Since
1979, a series of new PRC laws and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
since the PRC legal system continues to rapidly evolve, the interpretations of
many laws, regulations and rules are not always uniform and enforcement of these
laws, regulations and rules involve uncertainties, which may limit legal
protections available to you and us. In addition, any litigation in China may be
protracted and result in substantial costs and diversion of resources and
management attention. In addition, all of our executive officers and all of our
directors are residents of China and not of the United States, and substantially
all the assets of these persons are located outside the United States. As a
result, it could be difficult for investors to affect service of process in the
United States or to enforce a judgment obtained in the United States against our
Chinese operations and subsidiary.
If we are found to have
failed to comply with applicable laws, we may incur additional expenditures or
be subject to significant fines and penalties.
Our operations are subject to PRC
laws and regulations applicable to us. However, many PRC laws and regulations
are uncertain in their scope, and the implementation of such laws and
regulations in different localities could have significant differences. In
certain instances, local implementation rules and/or the actual implementation
are not necessarily consistent with the regulations at the national level.
Although we strive to comply with all the applicable PRC laws and regulations,
we cannot assure you that the relevant PRC government authorities will not later
determine that we have not been in compliance with certain laws or regulations.
In addition, our facilities and
products are subject to many laws and regulations administered by the PRC State
Administration for Industry and Commerce, the PRC State Administration of
Taxation, the PRC Ministry of Health and Hygiene Permitting Office, the PRC
General Administration of Quality Supervision, Inspection and Quarantine, and
the PRC State Food and Drug Administration Bureau relating to the processing,
packaging, storage, distribution, advertising, labeling, quality, and safety of
food products. Our failure to comply with these and other applicable laws and
regulations in China could subject us to administrative penalties and injunctive
relief, as well as civil remedies, including fines, injunctions and recalls of
our products. It is possible that changes to such laws or more rigorous
enforcement of such laws or with respect to our current or past practices could
have a material adverse effect on our business, operating results and financial
condition. Further, additional environmental, health or safety issues relating
to matters that are not currently known to management may result in
unanticipated liabilities and expenditures.
The PRC government exerts
substantial influence over the manner in which we must conduct our business
activities.
The PRC 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, import and export tariffs, environmental regulations, land
use rights, property and other matters. We believe that our operations in China
are in material compliance with all applicable legal and regulatory
requirements. However, the central or local governments of the jurisdictions in
which we operate 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.
13
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 or joint ventures.
Restrictions on currency
exchange may limit our ability to receive and use our sales revenue effectively.
All our sales revenue and expenses
are denominated in RMB. Under PRC law, the RMB is currently convertible under
the current account, which includes dividends and trade and service-related
foreign exchange transactions, but not under the capital account, which
includes foreign direct investment and loans. Currently, our PRC operating
subsidiary may purchase foreign currencies for settlement of current account
transactions, including payments of dividends to us, without the approval of the
State Administration of Foreign Exchange, or 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 RMB, any
existing and future restrictions on currency exchange may limit our ability to
utilize revenue generated in RMB to fund our business activities outside China
that are denominated in foreign currencies.
Foreign exchange transactions by
our PRC operating subsidiary 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. In particular, if our
PRC operating subsidiary borrows foreign currency through loans from us or other
foreign lenders, these loans must be registered with SAFE, and if we finance the
subsidiary by means of additional capital contributions, these capital
contributions must be approved by certain government authorities, including the
Ministry of Commerce, or MOFCOM, or their respective local counterparts. These
limitations could affect their ability to obtain foreign exchange through debt
or equity financing.
Fluctuations in exchange
rates could adversely affect our business and the value of our securities.
The value of our common stock will
be indirectly affected by the foreign exchange rate between U.S. dollars and RMB
and between those currencies and other currencies in which our sales may be
denominated. Because substantially all of our earnings and cash assets are
denominated in RMB and the net proceeds from the PIPE transaction will be
denominated in U.S. dollars, fluctuations in the exchange rate between the U.S.
dollar and the RMB will affect the relative purchasing power of these proceeds,
our balance sheet and our earnings per share in U.S. dollars following the PIPE
transaction. In addition, appreciation or depreciation in the value of the RMB
relative to the U.S. dollar would affect our financial results reported in U.S.
dollar terms without giving effect to any underlying change in our business or
results of operations. Fluctuations in the exchange rate will also affect the
relative value of any dividend we issue after the PIPE transaction that will be
exchanged into U.S. dollars as well as earnings from, and the value of, any U.S.
dollar-denominated investments we make in the future.
Since July 2005, the RMB has no
longer been pegged to the U.S. dollar. Although the Peoples Bank of China
regularly intervenes in the foreign exchange market to prevent significant
short-term fluctuations in the exchange rate, the RMB may appreciate or
depreciate significantly in value against the U.S. dollar in the medium to long
term. Moreover, it is possible that in the future PRC authorities may lift
restrictions on fluctuations in the RMB exchange rate and lessen intervention in
the foreign exchange market.
Very limited hedging transactions
are available in China to reduce our exposure to exchange rate fluctuations. To
date, we have not entered into any hedging transactions. While we may enter into
hedging transactions in the future, the availability and effectiveness of these
transactions may be limited, and we may not be able to successfully hedge our
exposure at all. In addition, our foreign currency exchange losses may be
magnified by PRC exchange control regulations that restrict our ability to
convert RMB into foreign currencies.
Currently, some of our raw
materials and major equipment are imported. In the event that the U.S. dollars
appreciate against RMB, our costs will increase. If we cannot pass the
resulting cost increases on to our customers, our profitability and operating
results will suffer. In addition, if our sales to international customers grow,
we will be increasingly subject to the risk of foreign currency depreciation.
14
Restrictions under PRC law
on our PRC subsidiarys ability to make dividends and other distributions could
materially and adversely affect our ability to grow, make investments or
acquisitions that could benefit our business, pay dividends to you, and
otherwise fund and conduct our businesses.
Substantially all of our revenues
are earned by our PRC subsidiary. However, PRC regulations restrict the ability
of our PRC subsidiary to make dividends and other payments to its offshore
parent company. PRC legal restrictions permit payments of dividend by our PRC
subsidiary only out of its accumulated after-tax profits, if any, determined in
accordance with PRC accounting standards and regulations. Our PRC subsidiary is
also required under PRC laws and regulations to allocate at least 10% of our
annual after-tax profits determined in accordance with PRC GAAP to a statutory
general reserve fund until the amounts in said fund reaches 50% of our
registered capital. Allocations to these statutory reserve funds can only be
used for specific purposes and are not transferable to us in the form of loans,
advances or cash dividends. Any limitations on the ability of our PRC subsidiary
to transfer funds to us could materially and adversely limit our ability to
grow, make investments or acquisitions that could be beneficial to our business,
pay dividends and otherwise fund and conduct our business.
Under the New EIT Law, we
may be classified as a resident enterprise of China. Such classification will
likely result in unfavorable tax consequences to us and our non-PRC
stockholders.
China passed a new Enterprise
Income Tax Law, or the New EIT Law, and its implementing rules, both of which
became effective on January 1, 2008. Under the New EIT Law, an enterprise
established outside of China with de facto management bodies within China is
considered a resident enterprise, meaning that it can be treated in a manner
similar to a Chinese enterprise for enterprise income tax purposes. The
implementing rules of the New EIT Law define de facto management as substantial
and overall management and control over the production and operations,
personnel, accounting, and properties of the enterprise. Because the New EIT
Law and its implementing rules are new, no official interpretation or
application of this new resident enterprise classification is available.
Therefore, it is unclear how tax authorities will determine tax residency based
on the facts of each case.
If the PRC tax authorities
determine that China Nutrifruit is a resident enterprise for PRC enterprise
income tax purposes, a number of unfavorable PRC tax consequences could follow.
First, we may be subject to the enterprise income tax at a rate of 25% on our
worldwide taxable income as well as PRC enterprise income tax reporting
obligations. In our case, this would mean that income such as interest on
proceeds from the PIPE transaction and non-China source income would be subject
to PRC enterprise income tax at a rate of 25%. Second, although under the New
EIT Law and its implementing rules dividends paid to us from our PRC subsidiary
would qualify as tax-exempt income, we cannot guarantee that such dividends
will not be subject to a 10% withholding tax, as the PRC foreign exchange
control authorities, which enforce the withholding tax, have not yet issued
guidance with respect to the processing of outbound remittances to entities that
are treated as resident enterprises for PRC enterprise income tax purposes.
Finally, it is possible that future guidance issued with respect to the new
resident enterprise classification could result in a situation in which a 10%
withholding tax is imposed on dividends we pay to our non-PRC stockholders and
with respect to gains derived by our non-PRC stockholders from transferring our
shares. We are actively monitoring the possibility of resident enterprise
treatment for the 2008 tax year and are evaluating appropriate organizational
changes to avoid this treatment, to the extent possible.
If we were treated as a resident
enterprise by PRC tax authorities, we would be subject to taxation in both the
U.S. and China, and our PRC tax may not be creditable against our U.S. tax.
If the China Securities
Regulatory Commission, or CSRC, or another PRC regulatory agency determines that
CSRC approval is required in connection with the reverse acquisition of Fezdale
or challenges the delayed payment of acquisition consideration by Solar Sun, the
reverse acquisition may be unwound, or we may become subject to penalties.
On August 8, 2006, six PRC
regulatory agencies, including the CSRC, promulgated the Provisions Regarding
Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the
M&A Rule, which became effective on September 8, 2006. The M&A Rule, among
other things, requires that an offshore company controlled by PRC companies or
individuals that have acquired a PRC domestic company for the purpose of listing
the PRC domestic companys equity interest on an overseas stock exchange must
obtain the approval of the CSRC prior to the listing and trading of such
offshore companys securities on an overseas stock exchange. In addition, when
an offshore company acquires a PRC domestic company, the offshore company is
generally required to pay the acquisition consideration within three months
after the issuance of the foreign-invested company license unless certain
ratification from the relevant PRC regulatory agency is obtained. On September
21, 2006, the CSRC, pursuant to the M&A Rule, published on its official web site
procedures specifying documents and materials required to be submitted to it by
offshore companies seeking CSRC approval of their overseas listings.
15
In the opinion of our PRC counsel,
Grandall Legal Group, the M&A Rule concerning the CSRC approval for acquisition
of a PRC domestic company by an offshore company controlled by PRC companies or
individuals does not apply to our reverse acquisition of Fezdale because none of
China Nutrifruit, Fezdale and Solar Sun is a Special Purpose Vehicle or an
offshore company controlled by PRC companies or individuals as defined in the
M&A Rule. Our PRC counsel, Grandall Legal Group, is also in the opinion that,
even though Solar Sun did not pay the consideration for acquiring 75% interest
in Longheda within three months after the issuance of the foreign-invested
company license, since the relevant provincial agency has issued document
indicating the authoritys awareness of such delayed payment and Solar Sun has
obtained the approval from local foreign exchange administrative department for
the remittance of such payment into the PRC and made such payment, based on its
experience, in practice, the chance that such delayed payment being challenged
by PRC regulatory agencies is minimal. If the CSRC or another PRC governmental
agency subsequently determines that we must obtain CSRC approval prior to the
completion of the reverse acquisition or challenges the delayed payment by Solar
Sun, the reverse acquisition may be unwound and 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 China
and limit our operating privileges in China, 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
shares.
The M&A Rule establishes
more complex procedures for some acquisitions of Chinese companies by foreign
investors, which could make it more difficult for us to pursue growth through
acquisitions in China.
The M&A Rule establishes
additional procedures and requirements that could make some acquisitions of
Chinese companies by foreign investors more time-consuming and complex,
including requirements in some instances that the PRC Ministry of Commerce be
notified in advance of any change-of-control transaction and in some situations,
require approval of the PRC Ministry of Commerce when a foreign investor takes
control of a Chinese domestic enterprise. In the future, we may grow our
business in part by acquiring complementary businesses, although we do not have
any plans to do so at this time. The M&A Rule also requires PRC Ministry of
Commerce anti-trust review of any change-of-control transactions involving
certain types of foreign acquirers. Complying with the requirements of the M&A
Rule to complete such transactions could be time-consuming, and any required
approval processes, including obtaining approval from the PRC Ministry of
Commerce, may delay or inhibit our ability to complete such transactions, which
could affect our ability to expand our business or maintain our market share.
You may have difficulty
enforcing judgments against us.
We are a Nevada holding company
and most of our assets are located outside of the United States. All of our
current operations are conducted in the PRC. In addition, all of our directors
and officers are nationals and residents of countries other than the United
States. A substantial portion of the assets of these persons is located outside
the United States. As a result, it may be difficult for you to effect service of
process within the United States upon these persons. It may also be difficult
for you to enforce in U.S. courts judgments on the civil liability provisions of
the U.S. federal securities laws against us and our officers and directors, most
of whom are not residents in the United States and the substantial majority of
whose assets are located outside of the United States. In addition, there is
uncertainty as to whether the courts of the PRC would recognize or enforce
judgments of U.S. courts. Grandall Legal Group, our counsel as to PRC law, has
advised us that the recognition and enforcement of foreign judgments are
provided for under the PRC Civil Procedures Law. Courts in China may recognize
and enforce foreign judgments in accordance with the requirements of the PRC
Civil Procedures Law based on treaties between China and the country where the
judgment is made or on reciprocity between jurisdictions. China does not have
any treaties or other arrangements that provide for the reciprocal recognition
and enforcement of foreign judgments with the United States. In addition,
according to the PRC Civil Procedures Law, courts in the PRC will not enforce a
foreign judgment against us or our directors and officers if they decide that
the judgment violates basic principles of PRC law or national sovereignty,
security or the public interest. So it is uncertain whether a PRC court would
enforce a judgment rendered by a court in the United States.
16
RISKS RELATED TO THE MARKET FOR
OUR STOCK GENERALLY
The market price of our
common stock is volatile, leading to the possibility of its value being
depressed at a time when you may want to sell your holdings.
The market price of our common
stock is volatile, and this volatility may continue. Numerous factors, many of
which are beyond our control, may cause the market price of our common stock to
fluctuate significantly. In addition to market and industry factors, the price
and trading volume for our common stock may be highly volatile for specific
business reasons. Factors such as variations in our revenues, earnings and cash
flow, announcements of new investments, cooperation arrangements or
acquisitions, and fluctuations in market prices for our products could cause the
market price for our shares to change substantially.
Securities class action litigation
is often instituted against companies following periods of volatility in their
stock price. This type of litigation could result in substantial costs to us and
divert our managements attention and resources.
Moreover, the trading market for
our common stock will be influenced by research or reports that industry or
securities analysts publish about us or our business. If one or more analysts
who cover us downgrade our common stock, the market price for our common stock
would likely decline. If one or more of these analysts cease coverage of us or
fail to regularly publish reports on us, we could lose visibility in the
financial markets, which, in turn, could cause the market price for our common
stock or trading volume to decline.
Furthermore, securities markets
may from time to time experience significant price and volume fluctuations for
reasons unrelated to operating performance of particular companies. These market
fluctuations may adversely affect the price of our common stock and other
interests in our company at a time when you want to sell your interest in us.
We may be subject to penny
stock regulations and restrictions and you may have difficulty selling shares of
our common stock.
The SEC has adopted regulations
which generally define so-called penny stocks to be an equity security that
has a market price less than $5.00 per share or an exercise price of less than
$5.00 per share, subject to certain exemptions. If our common stock becomes a
penny stock, we may become subject to Rule 15g-9 under the Exchange Act, or
the Penny Stock Rule. This rule imposes additional sales practice
requirements on broker-dealers that sell such securities to persons other than
established customers and accredited investors (generally, individuals with a
net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or
$300,000 together with their spouses). For transactions covered by Rule 15g-9,
a broker-dealer must make a special suitability determination for the purchaser
and have received the purchasers written consent to the transaction prior to
sale. As a result, this rule may affect the ability of broker-dealers to sell
our securities and may affect the ability of purchasers to sell any of our
securities in the secondary market.
For any transaction involving a
penny stock, unless exempt, the rules require delivery, prior to any transaction
in penny stock, of a disclosure schedule prepared by the SEC relating to the
penny stock market. Disclosure is also required to be made about sales
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock held
in the account and information on the limited market in penny stock.
There can be no assurance that our
common stock will qualify for exemption from the Penny Stock Rule. In any
event, even if our common stock were exempt from the Penny Stock Rule, we would
remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the
authority to restrict any person from participating in a distribution of penny
stock, if the SEC finds that such a restriction would be in the public interest.
17
Our common stock is quoted
on the OTC Bulletin Board which may have an unfavorable impact on our stock
price and liquidity.
Our common stock is quoted on the
OTC Bulletin Board. The OTC Bulletin Board is a significantly more limited
market than the New York Stock Exchange or Nasdaq system. The quotation of our
shares on the OTC Bulletin Board may result in a less liquid market available
for existing and potential stockholders to trade shares of our common stock,
could depress the trading price of our common stock and could have a long-term
adverse impact on our ability to raise capital in the future.
The number of shares being registered for sale
is significant in relation to our trading volume.
All of the shares registered for sale on behalf
of the selling stockholders are restricted securities as that term is defined
in Rule 144 under the Securities Act. We have filed this registration statement
to register these restricted shares for sale into the public market by the
selling stockholders. These restricted securities, if sold in the market all at
once or at about the same time, could depress the market price during the period
the registration statement remains effective and also could affect our ability
to raise equity capital. Any outstanding shares not sold by the selling
stockholders pursuant to this prospectus will remain as restricted shares in
the hands of the holders, except for those held by non-affiliates for a period
of six months, calculated pursuant to Rule 144.
Certain provisions of our Articles
of Incorporation may make it more difficult for a third party to effect a
change-of-control.
Our Articles of Incorporation
authorizes the board of directors to issue up to 5,000,000 shares of preferred
stock. The preferred stock may be issued in one or more series, the terms of
which may be determined at the time of issuance by the board of directors
without further action by the stockholders. These terms may include preferences
as to dividends and liquidation, conversion rights, redemption rights and
sinking fund provisions. The issuance of any preferred stock could diminish the
rights of holders of our common stock, and therefore could reduce the value of
such common stock. In addition, specific rights granted to future holders of
preferred stock could be used to restrict our ability to merge with, or sell
assets to, a third party. The ability of the board of directors to issue
preferred stock could make it more difficult, delay, discourage, prevent or make
it more costly to acquire or effect a change-in-control, which in turn could
prevent our stockholders from recognizing a gain in the event that a favorable
offer is extended and could materially and negatively affect the market price of
our common stock.
FORWARD-LOOKING STATEMENTS
This prospectus contains
forward-looking statements that are based on our current expectations,
assumptions, estimates and projections about ourselves and our industry. All
statements other than statements of historical fact in this prospectus are
forward-looking statements. In some cases, these forward-looking statements can
be identified by words or phrases such as anticipate, believe, continue,
estimate, expect, intend, is/are likely to may, plan, should,
will, aim, potential, continue, or other similar expressions. The
forward-looking statements included in this prospectus relate to, among others:
-
our goals and strategies;
-
our future business development,
financial condition and results of operations;
-
the expected growth of the premium
specialty fruit based products and fruit processing industries in China;
-
market acceptance of our products;
-
our expectations regarding demand
for our products;
-
our ability to stay abreast of
market trends and technological advances;
-
competition in the fruit
processing industry in China;
-
PRC governmental policies and
regulations relating to the fruit based products and fruit processing
industries; and
-
general economic and business
conditions in China.
These forward-looking statements
involve various risks and uncertainties. Although we believe that our
expectations expressed in these forward-looking statements are reasonable, our
expectations may turn out to be incorrect. Our actual results could be
materially different from our expectations. Important risks and factors that
could cause our actual results to be materially different from our expectations
are generally set forth in the Prospectus Summary, Risk Factors,
Managements Discussion and Analysis of Financial Condition and Results of
Operations, Business and other sections in this prospectus.
18
The forward-looking statements are
made as of the date of this prospectus. We undertake no obligation to update any
forward-looking statements to reflect events or circumstances after the date on
which the statements are made or to reflect the occurrence of unanticipated
events.
MARKET DATA AND FORECASTS
Unless otherwise indicated,
information in this prospectus concerning economic conditions and our industry
is based on information from independent industry analysts and publications, as
well as our estimates. Except where otherwise noted, our estimates are derived
from publicly available information released by third-party sources, as well as
data from our internal research, and are based on such data and knowledge of our
industry, which we believe to be reasonable. None of the independent industry
publications used in this prospectus was prepared on our or our affiliates
behalf.
This prospectus also contains data
related to the fruit processing industry in China. These market data include
estimates and projections that are based on a number of assumptions. If any one
or more of the assumptions underlying the market data turn out to be incorrect,
actual results may differ significantly from the projections. For example, the
fruit processing market may not grow at the rate projected by market data, or at
all. In addition, the rapidly changing nature of the fruit processing industry
subjects any projections or estimates relating to the growth prospects or future
condition of our market to significant uncertainties.
USE OF PROCEEDS
We will not receive any of the
proceeds from the sale of shares of our common stock by the selling stockholders
but we will receive funds from the exercise of the warrants held by the selling
stockholders if and when those warrants are exercised for cash. We will utilize
any proceeds from the exercise of such warrants for general corporate and
working capital purposes. We will have complete discretion over how we may use
the proceeds, if any, from any exercise of the warrants.
MARKET FOR OUR COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the
OTC Bulletin Board trades under the symbol CNGL.OB. The following table sets
forth, for the periods indicated, the high and low bid prices of our common
stock. These prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions. The high and
low quotations for the first quarter of fiscal year 2009 have been adjusted for
the 10-for-1 reverse stock split that became effective on June 19, 2008.
|
|
|
|
|
Year Ended March 31,
2009
|
|
|
First Quarter
|
$3.00
|
$0.50
|
Second Quarter
|
$3.00
|
$3.00
|
Third Quarter
|
$5.00
|
$1.00
|
|
|
|
Year Ended March 31,
2008
|
|
|
First Quarter
|
N/A
|
N/A
|
Second Quarter
|
$0.65
|
$0.65
|
Third Quarter
|
$0.70
|
$0.30
|
Fourth Quarter
|
$0.30
|
$0.20
|
|
|
|
Year Ended March 31,
2007
|
|
|
First Quarter
|
$1.50
|
$0.65
|
Second Quarter
|
$2.75
|
$0.35
|
Third Quarter
|
$1.50
|
$0.35
|
Fourth Quarter
|
$1.50
|
$0.65
|
__________________
(1) The above tables set forth the range of high and low closing bid prices per
share of our common stock as reported by
www.quotemedia.com
for the periods indicated.
19
Holders
As of February 27, 2009, there were
approximately 515 stockholders of record of our common stock. The number of
record holders does not include persons who held our common stock in nominee or
"street name" accounts through brokers. The last reported sale price of our common stock on
February 27, 2009
was $3.50 per share.
Dividend Policy
Other than dividends paid by our subsidiary
Longheda to its shareholders before our reverse acquisition of Fezdale,
we have never declared dividends
or paid cash dividends. Our board of directors will make any future decisions
regarding dividends. We currently intend to retain and use any future earnings
for the development and expansion of our business and do not anticipate paying
any cash dividends in the foreseeable future.
Our board of directors has
complete discretion on whether to pay dividends, subject to the approval of our
shareholders. Even if our board of directors decides to pay dividends, the
form, frequency and amount will depend upon our future operations and earnings,
capital requirements and surplus, general financial condition, contractual
restrictions and other factors that the board of directors may deem relevant.
Securities Authorized for Issuance Under Equity
Compensation Plans
We presently do not have any equity based or
other long-term incentive programs. In the future, we may adopt and establish an
equity-based or other long-term incentive plan if it is in the best interest of
the Company and our stockholders to do so.
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We are a holding company and
conduct all our operations through our indirect, wholly owned subsidiary
Longheda, a leading producer of premium specialty fruit based products in China,
specializing in developing, processing, marketing and distributing a variety of
food products processed primarily from premium specialty fruits grown in
Northeast China, including golden berry, crab apple, blueberry and raspberry.
Our primary product offering includes fruit concentrate, nectar, glazed fruits,
beverage as well as fresh fruits. We sell our products through an extensive
nationwide sales and distribution network covering 19 provinces and 41 cities in
China. As of December 31, 2008, this network was comprised of 68 distributors.
Our processed fruit products are mainly sold to food producers for further
processing into fruit juice and other fruit related foods, and our fresh fruits
are mainly sold to fruit supermarkets. We currently operate from our
manufacturing facility located in Daqing and Mu Dan Jiang, Heilongjiang
province, China where abundant supply of a variety of premium specialty fruits
is available. We have four fruit processing lines with an aggregate capacity of
15,960 tons and one beverage production lines with a capacity of 10,800 tons.
Our sales revenue grew by 49.9% in
the fiscal year ended March 31, 2008 to $34.5 million, from $23.0 million in the
fiscal year ended March 31, 2007. Net income grew by 31.6% in the fiscal year
ended March 31, 2008 to $10.0 million from $7.6 million in the fiscal year ended
March 31, 2007. Our gross margin for the fiscal year ended March 31, 2008 was
45.1%.
Because our recent operations have
been limited to the operations of Longheda which we acquired on August 14, 2008,
the discussion below of our performance is based upon the audited financial
statements of Longheda for the fiscal years ended March 31, 2008 and 2007, the
unaudited consolidated financial statements of China Nutrifruit for the nine
months ended December 31, 2008 and the unaudited pro forma
consolidated financial statements of China Nutrifruit for the nine months ended
December 31, 2007 included
elsewhere in this prospectus.
We have also filed the
consolidated financial statements of Fezdale for the fiscal years ended March
31, 2008 and 2007 in this prospectus. Since Fezdale and Solar Sun do not have
any assets except their ownership of Longheda and such financial statements only
reflects the consolidated financial results of Fezdale and its subsidiaries
since Fezdales incorporation on August 22, 2007, we believe a discussion of
Fezdales consolidated financial statements does not provide a meaningful
guidance of our financial results.
20
Principal Factors Affecting Our
Financial Performance
Our operating results are
primarily affected by the following factors:
-
Growth of china's fruit
processing industry.
BBIC projects that the total sales value and net income of fruit processed
products in China will reach $37.2 billion and $2.5 billion in 2010, or a growth
of 42.52% and 66.67%, respectively, since 2007. We believe that the recent
growth in fruit processed product consumption in China is largely attributable
the increased affordability of fruit processed products in China due to Chinas
economic growth and increased health and wellness consciousness. We expect these
factors to continue to drive industry growth, especially in our primary markets
premium specialty fruit processed products. Such growth will not only increase
the overall market size for fruit processed products, but will also benefit
companies that are well positioned to sell in these markets.
-
Product offering and
pricing.
Fruit
processed products has been, and is expected to remain, our primary product. Our
fruit processing products contributed approximately 75.5% and 74.0% of our total
net sales for years ended March 31, 2008 and 2007, respectively. The gross
margin for our fruit processed products was approximately 48.6% for the fiscal
year ended March 31, 2008 as compared to 34.3% for our beverage and other
products. We plan to continue to focus on our higher margin fruit processed
products in the future. Because we have a strong bargaining power on golden
berry based products, we generally price our gold berry based products based on
the raw material prices to ensure stable profit margin. We price our other
products with reference to the prevailing market price.
-
Fluctuations in Raw Material
Supply and Prices.
The per unit costs of producing our products are subject to the supply and price
volatility of raw materials, especially fresh fruits which are affected by
factors such as weather, growing condition and pest that are beyond our control.
Fresh fruits accounted for approximately 73% of our total cost of sales in
fiscal year 2008. Historically, we have been able to meet our fresh fruit supply
needs by building our processing facilities in close proximity to orchards and
by collaborating with local government and establishing an effective group of
agents. Increases in the price of fresh fruits would negatively impact our gross
margins if we are not able to offset such price increases through increases in
our selling price or change in product mix.
-
PRC
government policy promoting the development of the fruit processing
industry.
In the PRC central governments eleventh five-year guideline,
the central government emphasized its determination to solve the problems of
farmers, boost modern agriculture and increase rural affluence. The PRC Ministry
of Agriculture, or MOA, also stated its objective to improve the fruit
processing ratio and fruit commercialization ratio. We believe that our business
model is structured within the framework of these MOA initiatives and that
government policies will continue to have a positive impact on the sale of our
products.
-
Expansion of our production
capacity.
Expansion
of our capacity is needed to satisfy increased demand for our products. The
average utilization rate for our three fruit processing production lines was
approximately 96.7% in fiscal year 2008. In order to increase our production
capacity, we must make capital investment to build additional production lines
to satisfy the projected demand of our products.
21
Results of Operations
Nine
Months Ended December 31, 2008 Compared to Nine Months Ended December 31, 2007
We have consolidated 75% of the results of
Longheda into our condensed consolidated financial statements from April 1, 2008
to May 21, 2008 and 100% of the results Longheda into our condensed consolidated
financial statements from May 21, 2008 to December 31, 2008. For comparison
purposes, we have provided our results of operations in actual reported amounts
for the nine months ended December 31, 2008 and on a pro forma basis for the
nine
months ended December 31, 2007 to provide comparable presentation to our
reported results during such periods. We believe that providing this
financial information as if we had consolidated Longheda may assist investors in
assessing historical performance between periods.
The following table sets forth key
components of our results of operations for the periods indicated, both in
dollars and as a percentage of our net sales.
(All amounts, other than
percentage, in thousands of US dollars)
|
For the nine
months
|
For the nine
months ended
|
|
ended
|
|
(Unaudited)
|
December 31,
2008
|
December 31,
2007
|
|
(As reported)
|
(Pro forma)
|
|
|
In
|
As a
|
|
|
In
|
As a
|
|
|
|
Thousands
|
Percentage
|
|
|
Thousands
|
Percentage
|
|
|
|
|
of
|
|
|
|
of
|
|
|
|
|
Net Sales
|
|
|
|
Net Sales
|
|
Net Sales
|
$
|
36,212
|
100.0
|
%
|
$
|
27,156
|
100.0
|
%
|
Costs of Sales
|
|
19,021
|
52.5
|
%
|
|
14,415
|
53.1
|
%
|
Gross profit
|
|
17,191
|
47.5
|
%
|
|
12,741
|
46.9
|
%
|
Selling, general and administrative expenses
|
|
3,541
|
9.8
|
%
|
|
2,376
|
8.7
|
%
|
Operating income
|
|
13,650
|
37.7
|
%
|
|
10,365
|
38.2
|
%
|
Other income
|
|
26
|
0.1
|
%
|
|
17
|
0.1
|
%
|
Interest expenses
|
|
318
|
0.9
|
%
|
|
281
|
1.0
|
%
|
Income before minority interests and income
taxes
|
|
13,358
|
36.9
|
%
|
|
10,101
|
37.2
|
%
|
Income taxes
|
|
3,244
|
9.0
|
%
|
|
1,445
|
5.3
|
%
|
Minority interest
|
|
209
|
0.6
|
%
|
|
-
|
-
|
|
Net income
|
|
9,905
|
27.3
|
%
|
|
8.656
|
31.9
|
%
|
Earnings per share (basic and diluted)
|
|
0.51
|
|
|
|
0.28
|
|
|
The functional currency of the Company is RMB, however, our
financial information is expressed in USD. The results of operations reported in
the table above is based on the exchange rate of RMB7.57 to $1 for the nine
months ended December 31, 2007 and the rate of RMB6.89 to $1 for the nine
months ended December 31, 2008.
Net Sales.
Our net sales
consist of revenue derived from the sale of our fruit and fruit based products.
Our net sales increased $9.0 million, or
33.3% to $36.2 million for the nine months ended December 31, 2008 from $27.2
million for the nine months ended December 31, 2007. The increase was primarily
due to the increase of sales of our fruit processed products and expansion of
our customer base in the first six months of fiscal 2009 and our increased brand
recognition. We were able to satisfy the growth in demand by commencing
operation of our Mu Dan Jiang factory production line and realized an increase
in revenue from net sales due partly to that expansion of production capacity.
Cost of Sales.
Our cost of sales is primarily
comprised of the costs of our raw materials, labor, overhead and sales tax. Our
cost of sales increased $4.6 million, or 32.0%, to $19.0 million for the nine
months ended December 31, 2008 from $14.4 million for the nine months ended
December 31, 2007. This increase was primarily due to the increase of sales
volume. As a percentage of net sales, the cost of sales decreased to 52.5% for
the nine months ended December 31, 2008 from 53.1% for the nine months ended
December 31, 2007.
Gross Profit and Gross Margin.
Our gross profit is equal to our net revenues less
our cost of sales.
Our gross profit
increased $4.5 million to $17.2 million for the nine months ended December 31,
2008 from $12.7 million for the nine months ended December 31, 2007. Gross
profit as a percentage of net sales was 47.5% and 46.9% for the nine months
ended December 31, 2008 and 2007, respectively. The increase in the gross margin
was primarily driven by the increased sales of higher margin nectar, glazed
fruits and fruit concentrate products for the nine months ended December 31,
2008 as compare to the sales for the nine months ended December 31, 2007.
Selling and General and Administrative Expenses.
Our
selling and general and administrative expenses increased $1.2 million, or
49.0%, to $3.5 million for the nine months ended December 31, 2008 from $2.4
million for the nine months ended December 31, 2007.
Our selling expenses include sales commissions, the cost of advertising and
promotional materials, salaries and fringe benefits of sales personnel and other
sales related costs.
Our selling expenses increased $0.5 million or 33.7%, to $2.0
million for the nine months ended December 31, 2008 from $1.5 million for the
nine months ended December 31, 2007. We believe the increase of our selling
expenses is generally in line with the increase of our net sales.
Our general and administrative expenses include the costs associated with
staff and support personnel who manage our business activities and professional
fees paid to third parties.
Our general and administrative expenses increased $652,363,
or 76.4%, to $1.5 million for the nine months ended December 31, 2008 from
$853,440 for the nine months ended December 31, 2007. As a percentage of net
sales, general and administrative expenses for the nine months ended December
31, 2008 increased by 1.1% to 4.2%, as compared to 3.1% for the nine months
ended December 31, 2007. This percentage increase was primarily attributable to
the increased cost of insurance benefits for certain of our employees as
mandated by the PRC government in 2008 and the additional professional and staff
costs incurred after the reverse acquisition transaction on August 14, 2008.
22
Interest Expenses.
Our interest expenses increased
$36,953 to $318,050 for the nine months ended December 31, 2008 from $281,097
for the nine months ended December 31, 2007. The increase in interest expenses
was primarily attributable to the increase in the outstanding balances of our
bank loans.
Income before Minority Interest and Income Taxes.
Income before minority interests and income taxes increased $3.3 million, or
32.2%, to $13.4 million for the nine months ended December 31, 2008 from $10.1
million for the nine months ended December 31, 2007. Income before minority
interests and income taxes as a percentage of net sales decreased slightly from
37.2% for the nine months ended December 31, 2007 to 36.9% for the nine months
ended December 31, 2008. Such percentage decrease was primarily due to the
increase in additional professional and staff costs incurred after the reverse
acquisition transaction on August 14, 2008.
Minority Interests
.
Our financial statements reflect
an adjustment to our consolidated group net income equal to $209,308 for the
nine months ended December 31, 2008, reflecting the fact that we had only 75%
ownership in Longheda from April 1, 2008 to May 20, 2008.
Provision for Income Taxes
.
We file separate tax returns in the United States and China. Income taxes of
our PRC subsidiary are calculated in accordance with taxation principles
currently effective in the PRC. For China Nutrifruit Group Limited, applicable
U.S. tax laws are followed. We
expect that the tax rate of 25% currently applicable to Longheda will remain
unchange in 2009.
A company registered in China is
subject to national and local income taxes within China at the applicable tax
rate on the taxable income as reported in its PRC statutory financial statements
in accordance with relevant income tax laws. Under the Provisional Taxation
Regulation of the Peoples Republic of China effective before January 1, 2008,
income tax was generally payable by enterprises at a rate of 33% of their
taxable income. Newly established high-technology enterprises, such as our
subsidiary Longheda, is entitled to a two-year 50% tax reduction. The tax
holiday of Longheda commenced in 2006 and expired in 2007. Longheda was subject
to a tax rate of 15% in 2007 and is subject to a tax rate of 25% in 2008.
In 2007, China passed the New EIT
Law and its implementing rules, both of which became effective on January 1,
2008. The New EIT Law significantly curtails tax incentives granted to
foreign-invested enterprises under the previous law. The New EIT Law, however, (i)
reduces the statutory rate of enterprise income tax from 33% to 25%, (ii)
permits companies to continue to enjoy their existing tax incentives, adjusted
by certain transitional phase-out rules, and (iii) introduces new tax
incentives, subject to various qualification criteria.
Substantially all of our income
may be derived from dividends we receive from our PRC operating subsidiaries
described above. The New EIT Law and its implementing rules generally provide
that a 10% withholding tax applies to China-sourced income derived by
non-resident enterprises for PRC enterprise income tax purposes. We expect that
such 10% withholding tax will apply to dividends paid to us by our PRC
subsidiaries but this treatment will depend on our status as a non-resident
enterprise. For detailed discussion of PRC tax issues related to resident
enterprise status, see Risk Factors Risks Associated with Doing Business in
China Under the New EIT Law, we may be classified as a resident enterprise
of China. Such classification will likely result in unfavorable tax consequences
to us and our non-PRC stockholders.
We incurred income tax
expenses of $3.2 million for the nine
months ended December 31, 2008, an increase of 124.5% against $1.4 million for
the nine months ended December 31, 2007. The increase was primarily attributable
to the increase of net sales and profits and the increased tax rate as a result
of the implementation of the New EIT Law as discussed above.
Net Income.
Although we incurred a minority interest
of $209,308 before the acquisition of the remain 25% ownership in Longheda on
May 21, 2008, our net income increased $1.2 million or 14.4%, to $9.9 million
for the nine months ended December 31, 2008 from $8.7 million for the nine
months ended December 31, 2007. The main reasons for the growth of our net
income were due to increased market demand for our products and expansion of our
customer base in the first six months of fiscal year 2009, and increased brand
recognition.
23
Fiscal Year Ended March 31,
2008 Compared to Fiscal Year Ended March 31, 2007
The discussion below of our
performance in fiscal years ended March 31, 2008 and 2007 is based on the
audited financial statements of our subsidiary Longheda. As discussed above, our recent
business operations have been limited to the operations of Longheda. Since
Fezdale does not have any assets except its ownership of Longheda and the
consolidated financial statements of Fezdale only reflects the consolidated
financial results of Fezdale and its subsidiaries since its inception on August
22, 2007, we believe a discussion of Longhedas consolidated financial
statements provide a meaningful guidance of our financial results for the fiscal
years ended March 31, 2008 and 2007.
The following table sets forth key components of our results of operations for
the periods indicated, both in dollars and as a percentage of our sales.
(All amounts, other than
percentage, in thousands of US dollars)
|
Year Ended
|
Year Ended
|
Item
|
March 31, 2008
|
March 31, 2007
|
|
|
As a
|
|
As a
|
(Audited)
|
|
percentage of
|
|
percentage of
|
|
In Thousands
|
net sales
|
In Thousands
|
net sales
|
|
|
|
|
|
Net sales
|
$34,510
|
100.0%
|
$23,022
|
100.0%
|
|
|
|
|
|
Cost of sales
|
18,947
|
54.9%
|
11,610
|
50.4%
|
|
|
|
|
|
Gross profit
|
15,563
|
45.1%
|
11,412
|
49.6%
|
|
|
|
|
|
Selling, general and
administrative
|
|
|
|
|
expenses
|
3,155
|
9.1%
|
2,167
|
9.4%
|
|
|
|
|
|
Operating income
|
12,408
|
36.0%
|
9,245
|
40.2%
|
|
|
|
|
|
Interest expenses
|
403
|
1.2%
|
471
|
2.0%
|
Other income
|
31
|
0.1%
|
122
|
0.5%
|
|
|
|
|
|
Income before income taxes
|
12,036
|
34.9%
|
8,896
|
38.6%
|
|
|
|
|
|
Provision of income taxes
|
2,035
|
5.9%
|
1,341
|
5.8%
|
|
|
|
|
|
Net income
|
10,001
|
29.0%
|
7,555
|
32.8%
|
Net Sales
.
Net sales increased $11.5 million, or 49.9% to $34.5 million in fiscal year 2008
from $23.0 million in fiscal year 2007. This increase was mainly due to the
significant increase of sales of our fruit concentrate products. Our sales of
fruit concentrate products reached approximately $16.6 million in fiscal year
2008, a $9.7 million, or 140.6% increase from $6.9 million in fiscal year 2007.
The fruit concentrate production line was put into production in 2007. The
utilization rate of such production line was 77.1% in fiscal year 2007 and
increase to 98.3% in fiscal year 2008. Our high quality fruit concentrate
products processed from premium specialty fruits were well accepted by our
customers in the fiscal year 2008. We also benefited from growth in the fruit
processing product market in China, the increased market demand for our products
and our increased brand recognition and customer base. The number of our
distributors increased from 57 in fiscal year 2007 to 68 as of March 31,
2008. The fruit processing products market in China, especially the market for
premium specialty fruit products, continued to expand in fiscal year 2008 due,
in part, to increased health awareness in the general population and increased
per capita disposable income in China.
Cost of Sales
.
Our cost of sales increased $7.3 million, or 63.2%, to $18.9 million in fiscal
year 2008 from $11.6 million in fiscal year 2007. This increase was mainly due
to the increase of our sales revenue. As a percentage of net sales, the cost of
sales increased to 54.9% in fiscal year 2008 from 50.4% in fiscal year 2007. The
percentage increase was mainly due to the increased sales of our fruit
concentrate products as discussed in more details below.
Gross Profit and Gross
Margin
. Our gross
profit increased $4.2 million to $15.6 million in fiscal year 2008 from $11.4
million in fiscal year 2007. Gross profit as a percentage of net revenues was
45.1% and 49.6% for fiscal years 2008 and 2007, respectively. The decrease in
the gross margin was primarily driven by the increased sales of fruit
concentrate products in fiscal year 2008. Our fruit concentrate products
generally have a relatively lower margin than other fruits processed products.
In fiscal year 2008, the average gross margin for our fruit concentrate products
was approximately 38.0% and the average gross margin of our nectar and glazed
fruits products were approximately 68.5% and 62.9%, respectively. Although the
fruit concentrate products has a lower gross profit margin in comparison with
other products, the demand for fruit concentrate grew significantly from fiscal
year 2007. In order to meet the increasing demand of fruit concentrate products,
we will increase our production capacity by putting a new fruit concentrate
production line in fiscal year 2009. The new production line is located in our
new factory at Mu Dan River. We also experienced strong demand for our glazed
fruits products in fiscal year 2007 and 2008. We plan to put a new glazed fruits
production line in our existing factory in Daqing in 2009.
Selling and General and
Administrative Expenses
.
Our selling and general and administrative expenses increased $987,621, or
45.6%, to $3.2 million in fiscal year 2008 from $2.2 million in fiscal year
2007. Our selling expenses increased $530,717, or 34.3%, to $2.1 million in
fiscal year 2008 from $1.5 million in fiscal year 2007. We believe the increase
of our selling expenses is generally in line with the increase of our net sales.
As a percentage of net sales, our selling expenses slightly decreased to 6.0% in
fiscal year 2008 from 6.7% in fiscal year 2007. This percentage decrease was
primarily a result of more efficient control of our transportation cost.
24
Our general and administrative
expenses increased $456,903, or 73.6%, to $1.1 million in fiscal year 2008 from
$621,028 in fiscal year 2007. As a percentage of net sales, general and
administrative expenses increased to 3.1% in fiscal year 2008, as compared to
2.7% in fiscal year 2007. This percentage increase was primarily attributable to
the increase of depreciation expenses. Our fruit concentrate production line
commenced production in July 2007, as a result, we only recorded depreciation
expenses for idle capacity for 4 months in fiscal year 2007, but recorded a
depreciate expense for idle capacity for 7 months in fiscal year 2008.
Other Income
.
Other income primarily consists of bank interest income and sundry income. Other
income decreased $91,363 to $30,509 in fiscal year 2008 from $121,872 in fiscal
year 2007. The decrease was primarily attributable to the decrease in sundry
income.
Interest Expenses
.
Our interest expenses decreased $68,240 to $402,677 in fiscal year 2008 from
$470,917 in fiscal year 2007. As a percentage of net sales, our interest
expenses and other financial costs decreased to 1.2% in fiscal year 2008 from
2.0% in fiscal year 2007. This percentage decrease was primarily attributable to
the decrease of an outstanding bank loan.
Income Before Income Taxes
.
Income before income taxes increased $3.1 million, or 35.3%, to $12.0 million in
fiscal year 2008 from $8.9 million in fiscal year 2007. Income before income
taxes as a percentage of net sales decreased to 34.9% in fiscal year 2008 from
38.6% in fiscal year 2007. The main reason for such a percentage decrease was
mainly due to the significant increase in sales of our fruit concentrate
products as discussed above.
Provision for Income Taxes
.
We incurred income tax expenses of $2.0 million in fiscal year 2008, an
increase of 53.8% against $1.3 million in fiscal year 2007. The increase was
primarily attributable to the increase of sales revenue and profits.
Net Income
.
Our net income increased $2.4 million, or 31.6%, to $10 million in fiscal year
2008 from $7.6 million in fiscal year 2007, mainly as a result of increased
market demand for our products and our increased brand recognition and customer
base as discussed above.
Liquidity and Capital Resources
As of March 31, 2008 and December
31, 2008, we had cash and cash equivalents of approximately $7.1 million and
$8.4 million, respectively. The following table provides detailed information
about our net cash flow for all financial statements periods presented in this
prospectus.
Cash Flow
(All amounts in thousands of U.S.
dollars)
|
N
ine Months Ended
December 31,
(Unaudited)
|
|
Year Ended
March 31
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
(As reported)
|
|
(Pro forma)
|
|
|
|
|
Net cash provided by/(used in) operating
activities
|
$
|
4,912
|
$
|
1,552
|
$
|
10,562
|
$
|
7,173
|
Net cash (used in)/provided by investing activities
|
|
(14,550)
|
|
1
|
|
-
|
|
(4,461)
|
Net cash provided by/financing activities
|
|
11,190
|
|
2,659
|
|
(8,033)
|
|
(2,528)
|
Effect of exchange rate on cash and cash
equivalents
|
|
(260)
|
|
379
|
|
571
|
|
144
|
Cash and cash equivalents at beginning of
the period
|
|
7,105
|
|
4,004
|
|
4,004
|
|
3,676
|
Cash and cash equivalents at end of period
|
|
8,397
|
|
8,595
|
|
7,104
|
|
4,004
|
25
Cash Flows from Operating
Activities
.
Net cash provided by operating activities was $4.6 million
for nine months ended December 31, 2008, an increase of $3.3 million from $1.6
million net cash used in operating activities for nine months ended December 31,
2007. The increase of net cash provided by operating activities was primarily
attributable to a $9.9 million increase in net income and a $7.4 million advance
from our major shareholder Yiu Fai Kung made for the purpose of acquiring
Longheda. Our inventory for finished products increased $10.5 million in the
first nine months of fiscal year 2009 because our new fruit concentrate
production line with a processing capacity of 6,000 tons became operational in
August 2008 and we stocked up more finished products for sale for the coming
months until the next harvest season.
Net cash provided by operating
activities was $10.6 million in fiscal year 2008, an increase of $3.4 million,
or 47.2% from $7.2 million net cash provided by operating activities in fiscal
year 2007. Such increase of net cash provided by operating activities was
primarily attributable to an approximately $2.4 million increase in net income.
Cash Flows from Investing
Activities
.
Our cash used in investing activities for nine
months ended December 31, 2008 primarily related to our acquisition of the 25%
of minority interest in Longheda for $1.5 million and the purchase of property,
plant and equipment for the new concentrated fruit juice production line in Mu
Dan Jiang for $13 million. We had no investing activities for the nine months
ended December 31, 2007.
Net cash used in investing
activities in fiscal year 2007 was $4.5 million, as compared to $0 in fiscal
year 2008. We purchased a concentrate juice production line in fiscal year 2007.
Cash Flows from Financing
Activities
.
Net cash provided by financing activities was $11.2 million
in the nine months ended December 31, 2008. The net cash provided by financing
activities for the nine months ended December 31, 2008 was mainly attributable
to proceeds from bank loans of $4.4 million and $6.8 million from the private
placement of our common stock completed on October 10, 2008.
Net cash used in financing
activities totaled $8.0 million in fiscal year 2008, an increase of $5.5
million, or 220% from $2.5 million in fiscal year 2007. The increase of net cash
used in financing activities was primarily due to a bank loan repayment of $6.0
million and the payment of dividends of $7.4 million in fiscal year 2008 which
more than offset the bank loan drawdown of $5.4 million. We declared dividends
in the fiscal year 2007 and the dividend was paid in fiscal year 2008.
As of December 31, 2008, the amount, maturity
date and term of each of our bank loans are as follows:
(All amounts, other than percentages, in
millions of U.S. dollars)
Banks
|
Amounts
|
Maturity Date
|
Duration
|
Daqing City Commercial Bank
|
$2.9
|
February 10, 2009
|
6 months
|
Daqing City Commercial Bank
|
4.4
|
August 14, 2009
|
1 year
|
Total
|
$7.3
|
|
|
At December 31, 2008, certain of our plant and
machinery with an aggregate net book value of approximately $5,817,601 was
pledged to secure the bank loans.
On October 10, 2008, we completed a private
placement of our common shares to certain investors for approximately $8.58
million in gross proceeds, resulting in approximately $6.84 million in net
proceeds after payment of approximately $1.74 million in offering expenses.
We did not repay any bank loan in the three months ended
December 31, 2008. Subsequently, we repaid the $2.9 million loan due on February
10, 2009 and have approximately $4.4 million in outstanding bank loans that will
mature in the next 12 months.
Capital Expenditures
Our capital expenditures were $4.5
million and $0 for the fiscal years ended March 31, 2007 and 2008, respectively.
Our capital expenditures were mainly used to expand our production capacity. Our
material capital expenditure requirement for fiscal year 2009 is expected to be
approximately $18.6 million, which will be used for constructing a concentrate
fruit juice and a glazed fruits production line.
We believe that our cash on hand, cash flow from
operations, together with the net proceeds from the private offering referenced
above and anticipated additional cash resources will meet our expected capital
expenditure and working capital for the next 12 months. In addition, we may, in
the future, require additional cash resources due to changed business
conditions, implementation of our strategy to expand our production capacity or
other investments or acquisitions we may decide to pursue. If our own financial
resources are insufficient to satisfy our capital requirements, we may seek to
sell additional equity or debt securities or obtain additional credit
facilities. The sale of additional equity securities could result in dilution to
our stockholders. The incurrence of indebtedness would result in increased debt
service obligations and could require us to agree to operating and financial
covenants that would restrict our operations. Financing may not be available in
amounts or on terms acceptable to us, if at all. Any failure by us to raise
additional funds on terms favorable to us, or at all, could limit our ability to
expand our business operations and could harm our overall business prospects.
26
Critical Accounting Policies
The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires our management to make assumptions, estimates and
judgments that affect the amounts reported, including the notes thereto, and
related disclosures of commitments and contingencies, if any. We have identified
certain accounting policies that are significant to the preparation of our
financial statements. These accounting policies are important for an
understanding of our financial condition and results of operation. Critical
accounting policies are those that are most important to the portrayal of our
financial conditions and results of operations and require management's
difficult, subjective, or complex judgment, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. Certain accounting estimates are particularly
sensitive because of their significance to financial statements and because of
the possibility that future events affecting the estimate may differ
significantly from management's current judgments. We believe the following
critical accounting policies involve the most significant estimates and
judgments used in the preparation of our financial statements:
Use of estimates.
The preparation of the financial statements requires our management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from these estimates.
Trade accounts receivables.
In the normal course of business, we extend credit to customers. Trade accounts
receivable, less allowance for doubtful accounts, reflect the net realizable
value of receivables, and approximate fair value. On a regular basis, we
evaluate our trade accounts receivable and establish an allowance for doubtful
accounts based on a combination of specific customer circumstances, credit
conditions, and payment history. A receivable is considered past due if payments
have not been received within the agreed upon invoice terms. Trade accounts
receivable is charged off against the allowance after management determines the
potential for recovery is remote.
Inventories.
The cost of finished products inventories includes raw materials, director labor
and indirect production costs. Inventories are stated at the lower of cost or
market value. We use first-in, first-out methods to value our inventories.
During the idle production period, overhead costs, including depreciation, are
treated as current-period charges, which are charged directly as the general and
administrative expense instead of costs of inventories.
Impairment of long-lived
assets.
Long-lived
assets, except goodwill and indefinite-lived intangible assets, are reviewed for
impairment when circumstances indicate the carrying value of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to future net cash flows
estimated by our management to be generated by such assets. If such assets are
considered to be impaired, the impairment to be recognized is the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
Assets to be disposed of by sale are recorded as held for sale at the lower of
carrying value or estimated net realizable value.
All lands in the PRC are owned by
the PRC government. The government in the PRC, according to the relevant PRC
law, may sell the right to use the land for a specific period of time. Thus, all
of our land purchases in the PRC are considered to be leasehold land and are
stated at cost less accumulated amortization and any recognized impairment loss.
Amortization is provided over the term of the land use right agreements on a
straight-line basis, which is 50 years and they will expire in 2055.
Property, plant and equipment,
net.
Property, plant
and equipment are recorded at cost and are depreciated on a straight-line basis
over the estimated useful lives of the assets. Maintenance and repairs are
expensed as incurred. The principal estimated useful lives generally are:
buildings and leasehold improvements 20 years; machinery and equipment - 10
years. During the idle production period,
overhead costs, including depreciation, are treated as current-period charges,
which are charged directly as the general and administrative expense instead of
costs of inventories.
27
Revenue recognition.
We recognize revenue from sales of products, where persuasive evidence of an
arrangement exists, delivery has occurred, the seller's price is fixed or
determinable and collectibility is reasonably assured. This generally occurs
when the customer receives the product or at the time title passes to the
customer. Customers generally do not have the right to return products unless
damaged or defective. Net sales are comprised of gross sales reduced by customer
returns, trade promotions, performance allowances and discounts.
Effects of Inflation
Inflation and changing prices have
not had a material effect on our business and we do not expect that inflation or
changing prices will materially affect our business in the foreseeable future.
However, our management will closely monitor the price change in fruit products
and continually maintain effective cost control in operations.
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 or capital expenditures
or capital resources that is material to an investor in our securities.
Seasonality
The harvest season for our source
fruits are generally from mid July to mid November every year. As fruits
collected cannot be stored at room temperature for a long time, they must be
processed as soon as they are harvested. Our fruit processing production is
generally from mid July to mid November every year. Our fruit beverage
production lasts throughout the year since the raw materials we use are not
subject to seasonal effect.
Due to the nature of our business,
we will generally experience higher sales in the second and third fiscal quarter
mainly due to distributors (i) efforts to obtain adequate supply of our fruit
processing products before the supply diminishes after production ceases in
November; and (ii) anticipation of higher demand for fruit processed products as
a result of festive seasons at the end of the year and beginning of the
following year such as Christmas and the Chinese spring festival.
Recent Accounting
Pronouncements
In September 2006, the Financial Accounting Standards Board
("FASB") issued SFAS 157,
Fair
Value Measurements
("SFAS 157"), which provides guidance about how to
measure assets and liabilities that use fair value. SFAS 157 apply whenever
another US GAAP standard requires (or permits) assets or liabilities to be
measured at fair value but does not expand the use of fair value to any new
circumstances. This standard also requires additional disclosures in both annual
and quarterly reports. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. In February 2008, the FASB
issued FASB Staff Position ("FSP") 157-1,
Application of FASB Statement No. 157
to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13
("FSP 157-1"), which states that SFAS 157 does not address fair
value measurements for purposes of lease classification or measurement. In
February 2008, the FASB issued FSP 157-2,
Effective Date of FASB Statement No.
157
("FSP 157-2"), which delays the effective date for non-financial assets
and non-financial liabilities to fiscal years beginning after November 15, 2008,
except for items that are measured at fair value in the financial statements on
a recurring basis (at least annually). The Company adopted the provisions of
SFAS 157 for its financial assets and liabilities and those items for which it
has measured on a recurring basis effective January 1, 2008, and the adoption
did not have a material impact on its financial position and results of
operations. As provided by FSP 157-2, the Company has elected to defer the
adoption of SFAS 157 for certain of its non-financial assets and liabilities and
is currently evaluating the impact of adopting SFAS 157 on its non-financial
assets and liabilities.
In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities - Including an amendment of FASB Statement No.
115 (SFAS 159), which is effective for fiscal years that begin after November
15, 2007. This standard permits entities to choose to measure many financial
instruments and certain other items at fair value and consequently report
unrealized gains and losses on such items in earnings. The Group has elected not
to adopt the fair value provisions of SFAS159, which does not have a significant
impact of its financial position, cash flows and results of operations.
28
In December 2007, the FASB issued SFAS 141 (revised 2007),
Business Combinations
("SFAS
141(R)"). SFAS 141(R) establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in the
acquiree and the goodwill acquired. SFAS 141(R) also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the
business combination. SFAS 141(R) will be effective for financial statements
issued for fiscal years beginning after December 15, 2008, and will be adopted
by the Company beginning in the first quarter of 2009. The Company does not
expect there to be any significant impact of adopting SFAS 141(R) on its
financial position, cash flows and results of operations.
In December 2007, the FASB issued SFAS 160,
Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No.51
("SFAS 160"). SFAS 160 establishes accounting and reporting standards
for ownership interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parents ownership interest, and the
valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. SFAS 160 also establishes disclosure requirements that clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. SFAS 160 will be effective for financial
statements issued for fiscal years beginning after December 15, 2008, and will
be adopted by the Company beginning in the first quarter of 2009. The Company
does not expect there to be any significant impact of adopting SFAS 160 on its
financial position, cash flows and results of operations.
In March 2008, the FASB issued
SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities ("SFAS
161"). SFAS 161 is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity's financial position,
financial performance, and cash flows. SFAS 161 achieves these improvements by
requiring disclosure of the fair values of derivative instruments and their
gains and losses in a tabular format. It also provides more information about an
entity's liquidity by requiring disclosure of derivative features that are
credit risk-related. Finally, it requires cross-referencing within footnotes to
enable financial statement users to locate important information about
derivative instruments. SFAS 161 will be effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008
and will be adopted by the Group beginning in the first quarter of 2009. The
Group is currently evaluating the impact of adopting SFAS 161.
In May 2008, the FASB issued SFAS
No. 162, The Hierarchy of Generally Accepted Accounting Principles ("SFAS 162").
SFAS 162 identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with accounting
principles generally accepted in the United States of America. The Group is
currently evaluating the impact of adopting SFAS 162.
In May 2008, FASB issued Financial
Accounting Standards No. 163, Accounting for Financial Guarantee Insurance
Contracts - an interpretation of FASB Statement No. 60. Diversity exists in
practice in accounting for financial guarantee insurance contracts by insurance
enterprises under FASB Statement No. 60, Accounting and Reporting by Insurance
Enterprises. That diversity results in inconsistencies in the recognition and
measurement of claim liabilities because of differing views about when a loss
has been incurred under FASB Statement No. 5, Accounting for Contingencies. This
Statement requires that an insurance enterprise recognize a claim liability
prior to an event of default (insured event) when there is evidence that credit
deterioration has occurred in an insured financial obligation. This Statement
also clarifies how Statement 60 applies to financial guarantee insurance
contracts, including the recognition and measurement to be used to account for
premium revenue and claim liabilities. Those clarifications will increase
comparability in financial reporting of financial guarantee insurance contracts
by insurance enterprises. This Statement requires expanded disclosures about
financial guarantee insurance contracts. The accounting and disclosure
requirements of the Statement will improve the quality of information provided
to users of financial statements. This Statement is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and all
interim periods within those fiscal years.
The Company does not expect there to be any
significant impact of adopting SFAS 163 on its financial position, cash flows
and results of operations.
Other recent accounting
pronouncements issued by the FASB (including its Emerging Issues Task Force (EITF),
the American Institute of Certified Public Accountants (AICPA), and the SEC
did not or are not believed by management to have a material impact on our
present or future financial statements.
CORPORATE STRUCTURE AND HISTORY
We are a Nevada holding company
and conduct substantially all of our business through our operating subsidiary
Longheda in China. We own all of the equity in Longheda through Fezdale and
Fezdales wholly owned subsidiary Solar Sun. Both Fezdale and Solar Sun are
intermediate holding companies and have no other significant assets and
operations of its own. Longheda is incorporated in China in 2004. Subsequently,
in a series of transactions between 2007 and 2008, Solar Sun acquired 100%
ownership of Longheda in May 2008.
The following chart reflects our
organizational structure as of the date of this prospectus.
29
Our Corporate History
We were originally incorporated in
the State of Utah on April 22, 1983 under the name Portofino Investment, Inc.
In January 1984, we changed our name to Fashion Tech International, Inc. In
April 1999, our stockholders approved a merger with Fashion Tech International,
Inc., a Nevada corporation to change the domicile of the Company from Utah to
Nevada. We were a developmental-stage company from inception to January 1,
1984, when we became the holding company of certain operating or
development-stage subsidiaries. From April 1, 1985 to August 14, 2008, we
re-entered development-stage status. We had been a shell corporation since at
least 1989.
On August 14, 2008, we acquired
Fezdale in a reverse acquisition transaction, which involved a financing
transaction and a related share exchange transaction whereby all of our current
business operations were acquired by Fezdale. In the share exchange transaction,
100% of the issued and outstanding shares of Fezdale were exchanged for
30,166,878 shares of our common stock, thereby making the existing stockholders
of Fezdale owners of 83.5% of our stock and also making Fezdale our wholly owned
subsidiary. In a related financing transaction, we completed a private placement
in which we sold 3,085,840 newly issued shares of our common stock for $8.58
million.
In connection with these
transactions, Fezdales major stockholder Yiu Fai Kung entered into an escrow
agreement in which he agreed to a make good obligation with the investors in
the aforementioned private placement financing transaction. Under the make
good obligation, Yiu Fai Kung agreed to place into escrow the number of shares
of our common stock equal to the newly issued shares to the private placement
investors. The escrowed shares were beneficially owned by Yiu Fai Kung at the
time they were placed in escrow. The escrowed shares will become subject to
disbursement to Yiu Fai Kung or to the private placement investors based upon
our financial performance in the fiscal years ended 2009 and 2010.
Under the make good arrangement,
minimum net income thresholds of $13,919,707 and $18,495,315 were established
for the 2009 and 2010 fiscal years, respectively. If, in a given fiscal year,
the applicable minimum net income threshold is exceeded, 50% of the escrow
shares is required to be disbursed to Yiu Fai Kung. If, in a given fiscal year,
the applicable minimum net income threshold is not met, 50% escrowed shares is
required to be disbursed to the private placement investors.
In addition, in connection with
these transactions, Fezdales major stockholder Yiu Fai Kung entered into
another escrow agreement in which he agreed to a make good obligation with HFG
International, Limited, or HFG. Under the make good obligation, Yiu Fai Kung
agreed to place into escrow 2,513,758 shares of our common stock. The escrowed
shares were beneficially owned by Yiu Fai Kung at the time they were placed in
escrow. The escrowed shares will become subject to disbursement to Yiu Fai Kung
or to HFG based upon our financial performance in the fiscal years ended 2009
and 2010.
Under the make good arrangement,
minimum net income thresholds of $13,919,707 and $18,495,315 were established
for the 2009 and 2010 fiscal years, respectively. If, in a given fiscal year,
the applicable minimum net income threshold is exceeded, 50% of the escrow
shares is required to be disbursed to Yiu Fai Kung. If, in a given fiscal year,
the applicable minimum net income threshold is not met, 50% escrowed shares is
required to be disbursed to HFG.
30
OUR BUSINESS
Overview
We are a holding company that
operates through our indirectly owned subsidiary Longheda, a leading producer of
premium specialty fruit based products in China. We specialize in developing,
processing, marketing and distributing a variety of food products processed
primarily from premium specialty fruits grown in Northeast China, including
golden berry, crab apple, blueberry and raspberry. We have been producing our
premium specialty fruit based products since 2004 and believe that we are the
largest golden berry processor in China.
Our primary product offering
includes fruit concentrate, nectar, glazed fruits, beverages as well as fresh
fruits. Our best selling products are derived from golden berries. We
generated approximately 50% of our revenues from golden berry based products in
fiscal year 2008. While golden berry based products will remain our main source
of revenue, we plan to further diversify our product mix and increase the
processing volume of other fruits types such as crab apple and blueberry. Our
best selling type of product is fruit concentrate. Sales of fruit concentrate
contributed approximately 48% to our total revenue in fiscal year 2008. We plan
to continue to focus on fruit concentrate which is our fastest growing product
line with greatest market demand.
We sell our products through an
extensive nationwide sales and distribution network covering 19 provinces and 41
cities in China. As of December 31, 2008, this network was comprised of 68
distributors. Our processed fruit products are mainly sold to food producers for
further processing into fruit juice and other fruit related foods, and our fresh
fruits are mainly sold to fruit supermarkets. Our customers are based primarily
in China and include Beijing Huapeng Food Co. Ltd., Beijing Taihuaxing Food Co.
Ltd., Shanxi Desheng Trading Co. Ltd., Haerbin Shengjinlai Economic and
Technology Development Co. Ltd. and Tianjin Aokai Chemical Trading Co. Ltd.
Quality and safety are of primary
importance to us. We have established quality control and food safety
management systems for all stages of our business, including raw material
sourcing, producing, packaging, storage and transportation of our products. We
currently operate from our manufacturing facilities located in Daqing and Mu Dan
Jiang, Heilongjiang province, China where abundant supply of a variety of
premium specialty fruits is available. We have four fruit processing lines with
an aggregate capacity of 15,960 tons and one beverage production line with a
capacity of 10,800 tons. To meet the fast growing market demand, we built a new
facility in Mu Dan Jiang, Heilongjiang province in August, 2008 and plan to add
four new fruit processing production lines by July 2010 which will increase our
total installed fruit processing capacity to 31,560 tons.
Our sales revenue grew by 49.9% in
the fiscal year ended March 31, 2008 to $34.5 million, from $23.0 million in the
fiscal year ended March 31, 2007. Net income grew by 31.6% in the fiscal year
ended March 31, 2008 to $10.0 million from $7.6 million in the fiscal year ended
March 31, 2007. Our gross margin for the fiscal year ended March 31, 2008 was
45.1%.
Our Industry
According to a report on Chinas
fruit processing industry issued by Beijing Business & Intelligence Consulting
Co. Ltd. (BBIC, and such report is hereinafter referred to as the BBIC
Report), an independent market research firm, Chinas fruit processing industry
has grown significantly in the past several years. The total output of fruit
processed products in China grew from $16.8 billion in 2005 to $27.5 billion in
2007, representing a compound annual growth rate (CAGR) of 27.94%. The sales
value of fruit processed products in China grew from $17.0 billion in 2005 to
$26.1 billion in 2007, representing a CAGR of 27.72%. Among the fruit processed
products, glazed fruits and fruit juice and beverage experienced the highest
growth rate since 2005. The following table sets forth the output and CAGR of
four categories of fruit processed products.
31
|
Output Value Breakdown of
Fruit Processing Industry in China
(in Billions of U.S.$, except
for CAGR data)
|
|
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
CAGR
|
Canned Fruit
|
3.0
|
|
3.7
|
|
4.3
|
|
19.72%
|
Deep Processed Fruit*
|
9.7
|
|
13.1
|
|
16.1
|
|
28.83%
|
Fruit Juice and Beverage
|
3.3
|
|
4.4
|
|
5.7
|
|
31.43%
|
Glazed Fruits
|
0.7
|
|
1.0
|
|
1.4
|
|
41.42%
|
* Deep processed fruits
includes nectar, dried fruit and fruit wine, etc.
|
|
|
Source: 2006-2008 Fruit processing
industry research report, Beijing Business & Intelligence Consulting Co. Ltd.
BBIC projected that the total
sales value and net income of fruit processed products in China will reach $37.2
billion and $2.5 billion in 2010, or a growth of 42.52% and 66.67%,
respectively, during the four-year period from 2007 to 2010. The table below
sets forth the sales and net income of fruit processing industry in China from
2005 to 2010 and projected sales and net income of fruit processing industry in
China from 2008 to 2010.
Sales and Projected Sales and
Net Income of Fruit Processing Industry in China, 2005-2010
(in Billions of U.S. $)
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
Sales
|
16.0
|
|
21.0
|
|
26.1
|
|
28.5
|
|
32.9
|
|
37.2
|
Net Income
|
0.9
|
|
1.2
|
|
1.5
|
|
1.8
|
|
2.2
|
|
2.5
|
Source: 2006-2008 Fruit processing
industry research report, Beijing Business & Intelligence Consulting Co. Ltd.
We anticipate that growth in
Chinas fruit processing industry, especially, the premium specialty fruit based
products, will mainly be driven by the following factors:
The low per capita rate of
fruit consumption in China is poised for growth
.
With approximately a quarter of the worlds population, China represents a key
growth driver for the global fruit food market. According to Euromonitor, an
independent research firm, although China is the largest producer of apples,
third largest producer of oranges, and one of the top producers of pears and
peaches in the world, per capita fruit juice consumption in China is currently
well below that of major developed countries.
Growing affluence fosters
increased consummation of fruit processed products
.
Chinas economy has
grown significantly in recent years. According to the National Bureau of
Statistics of China (the NBS), Chinas gross domestic product (the GDP) has
increased from RMB12.0 trillion ($1.6 trillion) in 2002 to RMB25.0 trillion
($3.4 trillion) in 2007. The International Monetary Fund also estimated that
Chinas real GDP should grow at an annual growth rate of 10.0% in 2008. Chinas
economic growth has resulted in a significant increase in household disposable
income in China. According to the NBS, between 2002 and 2007, urban household
disposable income per capita increased from RMB7,703 ($1,055) to RMB13,786
($1,887), or a CAGR of 17.4%, and rural household disposable income per capita
increased from RMB2,476 ($339) to RMB4,140 ($557), or a CAGR of 12.1%. We
believe that as GDP and disposable income increase, fruit processed products
will become more affordable and consumers will generally spend an increasing
portion of their disposable income on healthy nutritional products, such as our
premium specialty fruit based products.
Greater health awareness
will stimulate consumption of fruit and fruit processed products
.
We believe that
improved living standards and growing household disposable income have led to
greater health awareness among the population. As people become more affluent,
we believe that their spending on quality healthy and nutritional products, like
our products, will increase. For example, according to the BBIC Report,
non-carbonated beverages are gradually taking more market shares from carbonated
beverages. The market share of carbonated beverages has decreased from 34% of
the total beverage market in 2003 to 26% in 2007, and fruit juice and purified
water are the main contributors for the market share increase of non-carbonated
beverages.
32
Growing overseas demand for
Chinas fruit products.
The
export of fruit products is also a growing aspect of the fruit processing
industry in China. With improvements in the quality and quantity of the
production, marketing, and transportation technologies, China has strengthened
its position in the world market. According to the BBIC Report, processed fruit
export sales are expected to reach $10.9 billion in 2010, representing a 42.72%
growth over that in 2007.
Government aims to promote
the growth of Chinas fruit process industry.
According
to the BBIC Report, the harvest loss of fruits in China is estimated at
approximately 20%-30%, less than 50% of the total harvested fruit can be
commercialized, and less than 10% of the total commercialized fruit is
processed. We believe that the Chinese government will promote the development
of the fruit and fruit processing industry, as evidenced by the Development
Program of Food Processing Industry 2006-2010 report issued by the MOA. The
MOA aims to increase the fruit processing ratio to 10%-15% and the fruit
commercialization ratio to above 60%, and to reduce the fruit harvest loss ratio
to 10%-15% by 2010. We believe the governments five year plan will further
facilitate the growth of the fruit processing industry in China.
Our Competitive Strengths
We believe that our success to
date and potential for future growth can be attributed to a combination of our
strengths, including the following:
-
High-end niche products.
We process premium
specialty fruits that have high nutrient concentration, potential health
benefits and high value. Our products are positioned in the high-end market as
premium healthy food and are distinguished from the common fruit based products
in the market.
-
Leading market position and
rapid growth.
We
believe we are the largest processor of golden berry in China and a leading
producer of premium specialty fruit based products. In the past three fiscal
years, our revenue has grown at a compound annual growth rate of approximately
77% from $11.0 million in fiscal year 2006 to $34.5 million in fiscal year 2008.
Our net income has grown at a compound annual growth rate of approximately 60%
from $3.9 million in fiscal year 2006 to $10.0 million in fiscal year 2008.
-
Established raw material
procurement network.
Our
facilities are strategically located in close proximity to major premium
specialty fruit orchards in Northeastern China which allows us to have easy
access to the supply of the source fruits, enjoy sourcing stability and maintain
a competitive cost structure. We have employed different strategies to secure
the supply of source fruits to support our rapid growth. For example, we have
entered into cooperative agreements with local government where major premium
specialty fruit orchards are based to coordinate with individual farmers to
supply us with golden berries. We have also secured the supply of other source
fruits by developing a group of effective and loyal agents who collect source
fruits from individual farmers. We believe these supply arrangements provide us
with an important competitive advantage in terms of quality, stability and
reliability of supply.
-
Emphasis on quality control
and food safety.
We
emphasis quality and safety and have quality control and food safety management
systems for all stages of our business, including raw materials sourcing,
production, packaging, storage and transportation of our products. We apply and
adhere to internal quality standards that we believe are stricter than the PRC
national standards. Our processing facility possesses ISO9001 and HACCP series
qualifications.
-
Extensive nationwide sales
and distribution network.
Our extensive sales and
distribution network allows us to reach a wide range of customers all over the
nation. As of December 31, 2008, we had 68 regional distributors in 19
provinces and 41 cities. Our distributors sell our products through their own
network in the region to fruit super markets or fruit based food producers for
further processing. We have a stable and effective group of distributors who
helped to bring up our sales at a compound growth rate of approximately 77% in
the past three years.
-
Experienced management team
with a strong track record.
Our
management team has extensive operating experience and industry knowledge. Changjun
Yu, our founder and chairman, has over 13 years of experience in the fruit based
product industry. Jinglin Shi, our chief executive officer, has over ten years
of experience in managerial positions. This extensive local industry experience
is combined with international experience. For example, Colman Cheng, our chief
financial officer, has over 14 years of auditing, accounting and financial
management experience in international companies. We believe that our management
teams experience and capabilities have contributed greatly to our significant
growth in the past three years.
33
Our Growth Strategy
As a leading premium specialty
fruit based product company in China, we believe we are well positioned to
capitalize on future industry growth in China. We are dedicated to providing
healthy and high nutritional premium specialty fruit based products. We will
implement the following strategic plans to take advantage of industry
opportunities and our competitive strengths:
-
Increase production capacity
.
Our existing
production lines have been running at close to full capacity while the market
demand for our existing products keeps increasing. We also have abundant supply
of source fruits to support the expansion of our business. In 2007, Heilongjiang
provinces total estimated output of golden berry, crab apple, blueberry and
raspberry was approximately 200,000 tons, 700,000 tons, 200,000 tons and 100,000
tons, respectively. Our current processing capacity only allows us to process a
small percentage of the total output. We plan to add four new production lines
to expand our fruit processing capacity from 15,960 tons to 31,560 tons by July
2010.
-
Further strengthen our raw
materials procurement network.
We believe that a secure supply
of principal raw materials is crucial to our future success. Hence, we intend to
further strengthen our existing cooperative relationship with the two golden
berry farm bases that we procure golden berries from and to develop new
relationship with other golden berry farm bases when necessary. We will keep
developing new quality agents in orchards of other fresh fruits to secure
sufficient supply to support our rapid growth.
-
Further expand our
distribution network to increase the prevalence of our products nationwide.
Our
current sales depend heavily on our regional distributors and their network. To
support our rapid growth in sales, we plan to further expand our distribution
network by adding five to ten new distributors annually in the next few years.
-
Continue to diversify
our product portfolio to satisfy different customer preferences.
We
currently offer fresh golden berries and four series of products processed
from four types of source fruits. We constantly evaluate our products and
seek to adapt to changing market conditions by updating our products to
reflect new trends in consumer preferences. We have finished research
and
development for our new products glazed blueberry, sea buckthorn concentrate
and blackcurrant concentrate. Currently another new product golden berry
extracts is under development and we expect to finish its development in fiscal
2010. We will analyze the market trends and customer preference to decide which
products to be launched.
Our Products
Our primary product offering
includes fruit concentrate, nectar, glazed fruits, beverages as well as fresh
fruits. We are also in the process of developing several new products.
The following table sets forth our
products categorized by both source fruits and product type in terms of revenue
for the fiscal years 2008 and 2007:
34
Fruit concentrate is our primary
product line, accounting for approximately 48% of our total revenue in fiscal
year 2008. We currently produce four types of fruit concentrate: golden berry,
crab apple, blueberry and raspberry. We currently have two concentrate
production lines which are allocated for the production of all of four types of
concentrates. We plan to continue to focus on fruit concentrate which is our
fastest growing product line with greatest market demand. To achieve this end,
we plan to add one more concentrate production line with an installed capacity
of 6,000 tons. The new production line is expected to become operational by
July 2010.
Among the four types of
concentrate, golden berry concentration enjoys the highest gross margin and crab
apple concentrate has a relatively lower gross margin, but occupies most of our
production capacity. We produce more crab apple concentrate despite its
relatively lower gross margin mainly because of the high demand for such
products and abundant supply of fresh crab apples which has the largest supply
in Northeast China as compared to the other three source fruits.
35
Crab apple is a special species of
apple which has much higher acidity than normal species of apple. The apple
concentrate produced in China commonly has an acidity of 1.2 to 1.8 while crab
apple concentrate typically has acidity over 3.2. The only way to raise the
acidity of apple concentrate is to mix it with another apple concentrate with
higher acidity. Since the apple concentrates that are exported from China to
overseas market are usually required to have an acidity of no less 2.0, the
local producers of apple concentrate need large quantity of high acidity apple
concentrate to add to its low acidity apple concentrate. Therefore, crab apple
concentrate is in high demand in the market.
Nectar
Our nectar product line
contributed approximately 15% of our total revenue in fiscal year 2008. Nectar
is an unfermented and unconcentrated pulp product. To produce nectar, fresh
fruits are crushed and then instantaneously sterilized under high temperature
without adding any additives other than citric acid. It preserves the nutrition
and flavor of the fresh fruit to the greatest extent and has a long shelf life.
Nectar is easy to store and transport, and thus providing the producers of fresh
fruit based products a much better alternative material than fresh fruit.
We currently produce and sell
nectar from golden berry only. Our nectar products are commonly used for
further processing into a wide variety of products, including fruit concentrate,
fruit ice cream, nectar beverage, biscuits, fruit jam and fruit yogurt. Our
nectar products have been certified as green food by China Green Food
Development Center in May 2006.
Glazed Fruits
Our glazed fruits product line
contributed approximately 13% of our total revenue in fiscal year 2008. Glazed
fruit is preserved fruit with high sugar content, a traditional Chinese food
that enjoys great popularity in China. Glazed fruits have a long shelf life and
are commonly consumed as snacks.
We currently produce and sell
glazed fruits from golden berry only. Glazed golden berry is mainly sold as a
high-end snack. Due to the special taste of golden berry, our products are also
commonly used in a wide variety of foods such as baked foods. Our glazed fruits
products have been certified as green food by China Green Food Development
Center in May 2006.
Fresh Fruit
Sales from fresh golden berries
contributed approximately 6% of our total revenue in fiscal year 2008. We sell
fresh golden berries to our distributors during the picking season which is
typically mid July to mid November every year. We purchase fresh golden berries
from local farmers in Heilongjiang province and sort them into different grades.
Only the top-grade golden berries that are freshest and carry the best color,
shape and aroma are sold as fresh fruit. The rest of the fresh golden berries
are further processed into glazed fruits, nectar or concentrate.
Golden berries are especially
difficult to preserve in the hot season after they are picked and usually perish
within one week after harvest. To achieve longer shelf life, we keep the fresh
fruit in ice houses before we pack them with preservative packing. With these
measures, our products can generally remain fresh after long distance
transportation and have at least one week longer of shelf life than other
similar products in the market.
Beverage and others
Beverage
Beverages are not our principal
products and accounted for approximately 12% of our total revenue in fiscal year
2008 which is expected to drop to approximately 6% in fiscal year 2010.
Beverage products usually require large capital for advertising and other sales
and marketing efforts. We believe we can generate more profits by focusing on
our primary high-end premium products.
We have a beverage production line
with a capacity of 10,800 tons and produce two brands of beverage.
36
-
Beverage The World of Legend:
Beverage The World of Legend is a fruit juice beverage produced from apple
juice that we purchase from third party vendors. Beverage The World of Legend
is mainly sold in internet bars. The World of Legend is the brand name of a
popular online game in China. We have a three-year license agreement with
Shanghai Shanda Xin Hua Interactive Entertainment Co., Ltd., or Shanda, the
developer of the game, to use The World of Legend as the brand of our
beverage. Pursuant to the agreement, we pay Shanda an annual base royalty
ranging from approximately $0.14 million (RMB 1 million) in 2006 to
approximately $0.21 million (RMB 1.44 million) in 2008. In addition, if our
sales volume exceeds certain amount, we pay an additional royalty equal to 3% of
revenue generated from such extra sales. The term of the license agreement
expired on December 14, 2008. We have been phasing out the use of The World of
Legend and launched our own brand The Legend of Network since May 2008.
Others
Since fiscal year 2008, due to
demand from our distributors, we started to distribute apple concentrate
products and pear concentrate products. These concentrate products are processed
by third party vendors according to our technical requirements and standards.
New products under
development
We plan to further diversify our
product mix to cater to different customer tastes and preferences. Currently
golden berry extracts is under development and we expect to finish its
development in fiscal 2010.
Production
Production Facility
Our primary production facility is
located in Daqing, Heilongjiang province, which started production in 2004. The
facility is located on a 24,127-square-meter tract where we have land use rights
until May 2055 and encompasses approximately 5,998 square meters of plant and
warehouse space. We also have leased office space in Beijing covering
approximately 193 square meters. We built another processing facility in Mu Dan
Jiang, Helongjiang province in August 2008.
We currently own and operate four
fruit processing lines with an aggregate processing capacity of 15,960 tons (one
production line with an installed capacity of 6,000 tons became operational in
August 2008) and one beverage production line with a processing capacity of
10,800 tons. The average utilization rate of our fruit processing lines was
approximately 96.7% in fiscal year 2008. Since fresh fruits are difficult to
preserve in the hot season, we generally keep zero stock of fresh fruits during
our production. We believe the current utilization rate of the fruit processing
lines is the highest rate we can achieve given the zero stock. The utilization
rate of our beverage production line was approximately 69.4% in fiscal year 2008
and still has surplus capacity for future growth.
Other than our beverage production
line, our production is mainly conducted from mid July to mid November each year
because our primary source fruits are typically harvested during that time and
must be processed right away. Our beverage production line runs the entire year
since the raw material of beverages are mainly fruit juices that are available
all seasons.
37
To meet the expected growth of our
business and to broaden our product portfolio, we plan to add one fruit
processing line in our Daqing facility and three more fruit processing lines in
Mu Dan Jiang facility. The following table sets forth the new production lines
expected production commencement date, location, the capacity of each new
production line, and the aggregate capacity of each of our main product lines
after such expansion.
New Production Lines
|
Location
|
Expected Production
Commencement Date
|
Processing
Capacity (tons)
|
Aggregate Processing
Capacity after
Expansion (tons)
|
Glazed fruits
|
Daqing
|
July 2009
|
1,200
|
2,400
|
Nectar
|
Mu Dan Jiang
|
July 2009
|
4,800
|
9,600
|
Concentrate
|
Mu Dan Jiang
|
July 2010
|
6,000
|
15,960
|
Glazed fruits
|
Mu Dan Jiang
|
July 2010
|
1,200
|
3,600
|
Total
|
|
|
13,200
|
31,560
|
Production Process
The processing of our fruit
concentrate, nectar and glazed fruits begins with the collection of fresh fruits
from fruit farmers. Fresh fruits are first sorted and washed after arriving in
our facility. Clean fresh fruits then go through the following processes to be
made into different products.
-
Nectar: crush fresh fruits into
tiny granules beat crushed fruits into raw nectar homogenize raw nectar in a
blending tank pasteurise and sterilize the raw nectar fill aseptic bags with
sterilized nectar.
-
Fruit concentrate: crush and beat
fresh fruits into mashes press fruit mashes until fruit juice comes out mix
raw fruit juice with proper amount of compound enzyme to remove pectin and
starch filter concentrate fruit juice in three-way concentrators to achieve
the target content of soluble solids, acidity and other quality standards fill
the aseptic bags with concentrates.
-
Glazed fruits: separate fresh
fruits into different grades go through needling machine to get the fruits
needled at the surface blanch needled fruits in a blanching boiler evacuate
the air from fruits soak evacuated fruits in sugar solution in a sugaring tank
bake sugared fruits in a group of tunnel dryers.
Quality Control
We place primary importance on
quality. Our production facility has ISO 9001 and HACCP series qualifications.
We have established quality control and food safety management system for the
purchase of raw materials, fruit processing, packaging, storage and
distribution. We have also adopted internal quality standards that we believe
are stricter than the standards mandated by the PRC government. We have a
17-person quality control team to closely monitor and test the quality of our
products to ensure compliance with these standards.
High quality raw materials are
crucial to the production of quality fruit products. Therefore, we rigorously
examine and test fresh fruits arriving at our plant. Any fruits that fail to
meet our quality standard will be rejected. We perform routine product
inspection and sample testing at our production facility and adhere to strict
hygiene standards. For example, every employee involved in production is
required to change into specially made clothes, wear working caps and shoes. No
one is allowed to enter our production room unless he or she is directly
involved in the production process.
All of our products undergo
inspection at each stage of the production process, as well as post production
inspection and final checking before distribution for sales. Products in storage
or in the course of distribution are also subject to regular quality testing.
38
Raw Materials and Suppliers
Raw Materials
Our business depends on
maintaining a regular and adequate supply of high-quality raw material. The
principal raw materials for our production are fresh fruits, which accounted for
approximately 73% of our total costs of sales in fiscal year 2008. Our facility
is strategically located in Heilongjiang province, where abundant supply of
source fruits is available. In 2007, the total estimated output of golden
berry, crab apple, blueberry and raspberry in Heilongjiang province was
approximately 200,000 tons, 700,000 tons, 200,000 tons and 100,000 tons,
respectively, representing approximately 98%, 61%, 90% and 70% of its respective
total output in China. The close proximity of our facility to the orchards
enables us to acquire sufficient fresh fruits with lower logistics costs. Our
other raw materials mainly include packing materials (e.g. aseptic bags) and
auxiliary materials (e.g. sugar and additives) that are widely available on the
market.
Suppliers and Supply
Arrangements
We employ different procurement
strategies to support our rapid growth based on the source fruit type. We
coordinate primarily with the local government for the supply of golden berries
and rely on a large group of agents for the supply of other source fruits.
Golden berries in Heilongjiang are
mainly grown in four fruit farm bases where a large amount of individual farmers
plant golden berries in their own lands. Our estimated annual output of golden
berries at these four fruit farm bases is approximately 100,000 tons, accounting
for approximately 50% of the total output of golden berries in Heilongjiang
province. Our processing volume of golden berry (including those sold as fresh
fruits) in fiscal year 2008 was approximately 25,000 tons. We currently purchase
a majority of our golden berry from two of these fruit farm bases, namely Hailun
Base and Nehe Base. Since it is too costly to purchase fresh fruits from each
individual farmer, we coordinate with the local governments who play a critical
role in planning and coordinating the overall fruit planting activities of
individual farmers in the bases.
We normally sign written
cooperative agreements with the local governments of Hailun Base and Nehe Base
at the beginning of each year, which generally has a one-year term. The
agreement typically sets forth the total quantity of golden berry to be
purchased by us and a predetermined minimum price. The local governments,
through their offices located in every village of the farm bases, deliver the
demand information to individual farmers and coordinates corresponding planting
activities. In the picking season, we submit our daily request of golden berries
to the local governments, who then instruct the farmers to deliver fresh fruits
to our plant on a timely basis. The final purchase price is based on the
prevailing market price, but no lower than the predetermined minimum price. This
arrangement cuts down our procurement costs significantly and allows the local
governments to protect and maximize individual farmers interest. After years
of cooperation with the local governments of these two farm bases, we believe we
have a solid and exclusive relationship with them which allows us to have a
stable supply of golden berries on commercially reasonable terms.
We purchase other source fruits,
including blueberry, crab apple and raspberry, primarily from agents. Since
there is no centralized farm base for these fruits, their supply is scattered
which makes it costly and infeasible to source them directly from individual
farmers. As an alternative, we have developed a large group of agents who
purchase fruits from the local farmers, then sell them to us. Our sourcing
staffs maintain close communication with our agents to ensure their efficiency
and loyalty. Our sourcing staff also spends a lot of time to keep developing new
agents in the planting area of these fruits. We believe we have established an
effective and loyal group of agents who are able to provide us with sufficient
fresh fruits to support our rapid annual growth.
Marketing, Sales and
Distribution
Sales and Distribution
We currently sell all our products
directly to 68 regional distributors across 19 provinces and 41 cities in China
who then sell the products to various customers, including food processors,
supermarkets and wholesale stores. As of March 31, 2008, our sales team
consisted of 17 experienced employees. We divide the national market into six
regions and assign each region a sales team. Northern China is currently our
biggest market, accounting for approximately 49% of our total revenue in fiscal
year 2008.
39
We generally require our
distributors to pay the full purchase price in cash before we deliver the
products. We also offer credit for our products to selected existing
distributors with long-term business relationships and excellent credit records.
The credit term is generally one month. We utilize different pricing policies
based on the type of source fruit. For golden berry based products, we price
our products based on raw material costs to ensure stable profit margin. We
believe that we are the largest golden berry processor in China and the only
processor in Northeast China which allows us to have strong pricing power. For
products based on other source fruits, we price our products with reference to
the prevailing market price.
Distributors normally have
distribution rights to sell our products within a defined territory. We
typically enter into a one-year contract with each of our distributors at the
beginning of the year. The contract generally requires a 15-day notice of the
purchase amount prior to the required delivery date. We have the right to
supervise and monitor distributors sale of our products. We generally have a no
return policy. According to our standard distribution agreement, we are liable
for any loss resulted from a quality problem only if the distributor provides
certification from relevant authorities. However, distributors will bear any
losses caused by their negligence in the storage of the products. We offer no
sales rebates or rewards to our distributors.
We believe we maintain stable
relationships with our distributors, and many of them have been our distributors
for more than three years. Our top ten distributors accounted for approximately
63.8% and 64.1% of our total revenue in fiscal years 2008 and 2007,
respectively. Our biggest distributor Beijing Huapeng Food Co., Ltd. accounted
for approximately 13.8% and 14.5% of total revenue in fiscal years 2008 and
2007, respectively. No other distributors accounted for more than 10% of our
total revenue in fiscal year 2008.
Marketing
As of March 31, 2008, we have five
experienced marketing personnel who are responsible for market research,
promotion and advertisement. We strengthen our market presence through various
types of market campaigns. We participate in several domestic and international
trade fairs, such as China National Sugar and Alcoholic Commodities Fair and
International China Harbin Fair for Trade and Economic Cooperation. These trade
fairs help to promote our reputation and name recognition in the industry.
Our Competition
Since we process premium specialty
fruits grown in Northeast China, we face little direct competition from the
processors of common fruits or broad-based food processors. Our main competitors
are local fruit processors that offer products similar to ours. Most of our
competitors are small-sized local processors and generally processes of only one
or two types of premium specialty fruits. Compared to these competitors, we
believe we have more diversified products, higher production capacity and
greater resources. Our major competitors in China include Dalian Xinlian Food
Company, Shandong Longkou Fudi Food Co. Ltd., Zhalantun Changzheng Beverage
Factory and Muxing Quick Frozen Food Factory.
Research and Development
Our research and development
activities focus on new product development for new premium specialty fruits and
quality improvement. We currently have five employees dedicated to research and
development. We also cooperate with Heilongjiang Ba Yi Land Reclamation
University (HLAU), one of the earliest agriculture universities in China.
Since 2004, our company and HLAU have cooperatively completed the development
of six new products, four of which are now our principal products. On March 7,
2008, we entered into a technology cooperation agreement with HLAU to develop
several new products, including glazed blueberry, blackcurrant concentrate,
seabuckthorn concentrate and golden berry extracts. Under the agreement, we
will provide a total amount of approximately $25,670 (RMB 180,000) to HLAU for
the development of the new products and all intellectual property rights of the
new products belong to our company.
40
Intellectual Property
All of our product formulations
are proprietary. We have not registered or applied for protections in China for
most of our intellectual property or proprietary technologies relating to the
formulations of our products. See Risk factorsRisks Related to Our Business
Our inability to protect our trademarks, patent and trade secrets may prevent us
from successfully marketing our products and competing effectively. Although we
believe that, as of today, patents and copyrights have not been essential to
maintaining our competitive market position, we intend to assess appropriate
occasions in the future for seeking patent and copyright protections for those
aspects of our business that provide significant competitive advantages.
We sell our fruit concentrate,
glazed fruit and nectar products under the brand of
农珍之冠
.
Our chairman Changjun Yu has registered the trademark for
农珍之冠
in class 32 with the Trademark Office of the State Administration for Industry
and Commerce of China, or the Trademark Office. He has applied the trademark
for
农珍之冠
in class 29 which application has been accepted by the Trademark Office. In May
2008, Mr. Yu agreed to transfer the trademarks for
农珍之冠
in both class 29 and class 32 to our company for a consideration of RMB 1 for
each trademark and granted us the exclusive right to use such trademarks before
the transfer was approved by the Trademark Office. We have filed the application
for such transfer with the Trademark Office. If the approval is granted, we
will have all the legal rights for such trademark, the term of which expires in
2018.
We also filed an application for
the trademark The Legend of Network with the Trademark Office in May 2008. The
application has been accepted by the Trademark Office.
We rely on trade secret protection
and confidentiality agreements to protect our proprietary information and
know-how. Our management and each of our research and development personnel have
entered into a standard annual employment contract, which includes a
confidentiality clause and a clause acknowledging that all inventions, designs,
trade secrets, works of authorship, developments and other processes generated
by them on our behalf are our property, and assigning to us any ownership rights
that they may claim in those works. Despite our precautions, it may be possible
for third parties to obtain and use, without our consent, intellectual property
that we own or are licensed to use. Unauthorized use of our intellectual
property by third parties, and the expenses incurred in protecting our
intellectual property rights, may adversely affect our business. See Risk
factorsRisks Related to Our BusinessFailure to adequately protect our
intellectual property rights may undermine our competitive position, and
litigation to protect our intellectual property rights may be costly.
Regulation
The food industry, of which fruit
based products form a part, is subject to extensive regulation in China. This
following summarizes the most significant PRC regulations governing our business
in China.
Food Hygiene and Safety Laws
and Regulations
As a producer of food products in
China, we are subject to a number of PRC laws and regulations governing food
safety and hygiene, including:
-
the PRC Product Quality Law;
-
the PRC Food Hygiene Law;
-
the Implementation Rules on the
Administration and Supervision of Quality and Safety in Food Producing and
Processing Enterprises (trail implementation);
-
the Regulation on the
Administration of Production Licenses for Industrial Products;
-
the General Measure on Food
Quality Safety Market Access Examination;
-
the General Standards for the
Labeling of Prepackaged Foods;
41
These laws and regulations set out
safety and hygiene standards and requirements for various aspects of food
production, such as the use of additives, production, packaging, handling,
labeling and storage, as well as facilities and equipment. Failure to comply
with these laws and regulations may result in confiscation of our products and
proceeds from the sales of non-compliant products, destruction of our products
and inventory, fines, suspension of production and operation, product recalls,
revocation of licenses, and, in extreme cases, criminal liability.
Environmental Regulations
We are subject to various
governmental regulations related to environmental protection. The major
environmental regulations applicable to us include:
-
the Environmental Protection Law
of the PRC;
-
the Law of PRC on the Prevention
and Control of Water Pollution;
-
Implementation Rules of the Law of
PRC on the Prevention and Control of Water Pollution;
-
the Law of PRC on the Prevention
and Control of Air Pollution;
-
Implementation Rules of the Law of
PRC on the Prevention and Control of Air Pollution;
-
the Law of PRC on the Prevention
and Control of Solid Waste Pollution; and
-
the Law of PRC on the Prevention
and Control of Noise Pollution.
We have obtained all permits and
licenses required for production of our products and believe we are in material
compliance with all applicable laws and regulations.
Environmental Matters
Our manufacturing facilities are
subject to various pollution control regulations with respect to noise, water
and air pollution and the disposal of waste and hazardous materials. We are also
subject to periodic inspections by local environmental protection authorities.
Our operating subsidiary has received certifications from the relevant PRC
government agencies in charge of environmental protection indicating that their
business operations are in material compliance with the relevant PRC
environmental laws and regulations. We are not currently subject to any pending
actions alleging any violations of applicable PRC environmental laws.
Our Employees
As of December 31, 2008, we employed
a total of 570 full-time employees. The following table sets forth the number of
our employees by function as of September 30, 2008.
42
Department
|
Number of Employees
|
Senior Management
|
8
|
Human resource &
Administration.
|
57
|
Production
|
404
|
Procurement
|
4
|
Marketing
|
4
|
Sales
|
17
|
Logistic
|
39
|
Research & Development
|
5
|
Quality Control
|
21
|
Accounting
|
11
|
TOTAL
|
570
|
Our employees are not represented
by a labor organization or covered by a collective bargaining agreement. We
have not experienced any work stoppages.
We are required under PRC law to
make contributions to the employee benefit plans at specified percentages of the
after-tax profit. In addition, we are required by the PRC law to cover employees
in China with various types of social insurance. We believe that we are in
material compliance with the relevant PRC laws.
Seasonality
As is typical in the fruit
processing industry, we experience seasonality in our business. Except for the
beverage production line which runs for the full year, our fruit processing
lines are mainly carried out from mid July to mid November each year because our
primary source fruits are typically harvested during that period and must be
processed right away. In fiscal year 2008, sales during the second and third
fiscal quarters accounted for approximately 69.3% of our total sales revenue.
As a result of seasonality, our personnel, working capital requirements, cash
flow and inventories vary substantially throughout the year.
Insurance
We have property insurance for our
facility located in Daqing. We believe our insurance coverage is customary and
standard for companies of comparable size in comparable industries in China.
We do not have any business
liability, interruption or litigation insurance coverage for our operations in
China. Insurance companies in China offer limited business insurance products.
While business interruption insurance is available to a limited extent in China,
we have determined that the risks of interruption, cost of such insurance and
the difficulties associated with acquiring such insurance on commercially
reasonable terms make it impractical for us to have such insurance. Therefore,
we are subject to business and product liability exposure. See Risk Factors
We have limited insurance coverage and do not carry any business interruption
insurance, third-party liability insurance for our production facilities or
insurance that covers the risk of loss of our products in shipment.
Litigation
From time to time, we may become
involved in various lawsuits and legal proceedings, which arise, in the ordinary
course of business. However, litigation is subject to inherent uncertainties,
and an adverse result in these or other matters may arise from time to time that
may harm our business. We are currently not aware of any such legal proceedings
or claims that we believe will have a material adverse effect on our business,
financial condition or operating results.
43
MANAGEMENT
Directors and Executive
Officers
The following sets forth
information about our directors and executive officers as of the date of this
prospectus:
Name
|
Age
|
Position
|
Changjun Yu
|
35
|
Chairman
|
Jinglin Shi
|
34
|
Chief Executive Officer,
President and director
|
Colman Cheng
|
40
|
Chief Financial Officer,
Treasurer and Secretary
|
Manjiang Yu
|
36
|
Vice President of Sales
|
Changjun Yu
.
Mr. Yu is the leading founder of our company and has served as the chairman of
our board of directors since the completion of the reverse acquisition of
Fezdale on August 14, 2008. Mr. Yu has been the chairman of our subsidiary
Longheda since its formation in 2004. From 2001 to 2003, Mr. Yu was the vice
president of sales of Haerbin Shengjinlai Economic and Technology Development
Co. Ltd. From 1997 to 2000, He served as the vice president of production and
then vice president of sales of Shandong Qingzhou Dajinxing Aviation Beverage
Co. Ltd. Mr. Yu has over 13 years of experience in the food industry.
Jinglin Shi.
Mr.
Shi is one of our founders. He has been our Chief Executive Officer, President
and director since the completion of the reverse acquisition of Fezdale on
August 14, 2008. Mr. Shi has served as the Chief Executive Officer of our
subsidiary Longheda since its formation in 2004. From 2001 to 2003, Mr. Shi
worked as the sales manager and then the vice president of sales of Daqing
Yuehaitian Economic and Trade Co. Ltd.
Sing Kau (Colman) Cheng.
Mr.
Cheng has been our Chief Financial Officer, Treasurer and Secretary since the
completion of the reverse acquisition of Fezdale on August 14, 2008 and the
Chief Financial Officer of our subsidiary Longheda since August 2007. Mr. Cheng
has over 14 years of auditing, accounting and financial management experience in
big four accounting firms and other sizable corporations. From August 2006 to
June 2007, he served as an investment manager of KAB Asia Limited. From October
2004 to August 2006, he was a financial controller and company secretary of A&K
Education Software Holdings Limited, a GEM listed company in Hong Kong. From
February 2003 to October 2004, he was a senior auditor of CCIF CPA Limited. Mr.
Cheng received a bachelors degree in Accounting from Edith Cowan University in
Australia and is an associate member of both the Hong Kong Institute of
Certified Public Accountants and CPA Australia.
Manjiang Yu.
Mr.
Yu has been our Vice President of Sales since the completion of the reverse
acquisition of Fezdale on August 14, 2008. Mr. Yu worked as the assistant to
the Chief Executive Officer, then the Chief Market Officer of our subsidiary
Longheda since its formation in 2004. Before joining Longheda, he served as the
president of Daqing High-tech Zone Ruinuo Economic & Trade Co. Ltd. from 2002 to
2004.
Family Relationships
There is no family relationship
among any of our officers or directors.
Involvement in Certain Legal
Proceedings
To the best of our knowledge, none
of our directors or executive officers has been convicted in a criminal
proceeding, excluding traffic violations or similar misdemeanors, or has been a
party to any judicial or administrative proceeding during the past five years
that resulted in a judgment, decree or final order enjoining the person from
future violations of, or prohibiting activities subject to, federal or state
securities laws, or a finding of any violation of federal or state securities
laws, except for matters that were dismissed without sanction or settlement.
Except as set forth in our discussion below in Transactions with Related
Persons; Promoters and Certain Control Persons; Director Independence, none of
our directors, director nominees or executive officers has been involved in any
transactions with us or any of our directors, executive officers, affiliates or
associates which are required to be disclosed pursuant to the rules and
regulations of the SEC.
44
EXECUTIVE COMPENSATION
Summary Compensation Table
Fiscal Years Ended March 31, 2008 and 2007
The following table sets forth
information concerning all cash and non-cash compensation awarded to, earned by
or paid to the named persons for services rendered in all capacities during the
noted periods. No other executive officers received total annual compensation
in excess of $100,000.
Name and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock Awards
($)
|
Option Awards
($)
|
Non-Equity
Incentive Plan
Compensation
Earnings
($)
|
Non-
Qualified Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
Jinglin Shi, CEO and President
(1)
|
2008
|
$4,040
|
-
|
-
|
-
|
-
|
-
|
-
|
$4,040
|
2007
|
$3,848
|
-
|
-
|
-
|
-
|
-
|
-
|
$3,848
|
Richard Crimmins, former
President, Treasurer and Secretary
(2)
|
2008
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2007
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1) On August 14, 2008, we
acquired Fezdale in a reverse acquisition transaction that was structured as a
share exchange and in connection with that transaction, Mr. Shi became our Chief
Executive Officer, President and director. Prior to the effective date of the
reverse acquisition, Mr. Shi served at Fezdales wholly owned subsidiary
Longheda as its chief executive officer. The annual, long term and other
compensation shown in this table include the amount Mr. Shi received from
Longheda prior to the consummation of the reverse acquisition.
(2) Richard Crimmins resigned from
all offices he held with us and his position as our director upon the closing of
the reverse acquisition of Fezdale on August 14, 2008.
Employment Agreements
On July 30, 2008, our subsidiary
Fezdale entered into an employment agreement with Jinglin Shi, our Chief
Executive Officer and President. Under the employment agreements, Mr. Shi will
receive an annual salary of RMB 600,000 (approximately $87,464). Mr. Shi is
subject to customary confidentiality and non-competition covenants as provided
in the employment agreement.
We have not provided retirement
benefits (other than a state pension scheme in which all of our employees in
China participate) or severance or change of control benefits to our named
executive officer.
Outstanding Equity Awards at
Fiscal Year End
None of our executive officers
received any equity awards, including, options, restricted stock or other equity
incentives during the fiscal year ended March 31, 2008.
OUTSTANDING EQUITY AWARDS AT
FISCAL YEAR-END
|
OPTION AWARDS
|
STOCK AWARDS
|
Name
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number
of
Shares
or Shares
of
Stock That
Have
Not
Vested
(#)
|
Market
Value
of
Shares
or
Shares
of
Stock
That
Have
Not
Vested
($)
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Shares or
Other
Rights
That Have
Not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Shares or
Other
Rights
That
Have Not
Vested
(#)
|
Jinglin
Shi
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
Richard
Crimmins
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
Compensation of Directors
During the 2007 and 2008 fiscal
years, no member of our board of directors received any compensation for his
services as a director.
45
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth
information regarding beneficial ownership of our common stock as of March 2,
2009 (i) by each person who is known by us to beneficially own more than 5%
of our common stock; (ii) by each of our officers and directors; and (iii) by
all of our officers and directors as a group. Unless otherwise specified, the
address of each of the persons set forth below is in care of Daqing Longheda
Food Company Limited, No. 2 Wenhua Street, Dongfeng New Village, Daqing,
Heilongjiang 163311, China.
Name & Address of
Beneficial Owner
|
Office, If Any
|
Title of Class
|
Amount and Nature of
Beneficial Ownership
(1)
|
Percent of Class
(2)
|
Officers and Directors
|
Changjun Yu
|
Chairman
|
Common stock $0.001 par value
|
0
|
*
|
Jinglin Shi
|
President and CEO
|
Common stock $0.001 par value
|
0
|
*
|
Colman Cheng
|
CFO and Secretary
|
Common stock $0.001 par value
|
0
|
*
|
Manjiang Yu
|
Vice President of Sales
|
Common stock $0.001 par value
|
0
|
*
|
All officers and directors as
a group (4 persons named above)
|
|
Common stock $0.001 par value
|
0
|
*
|
5% Securities Holders
|
Halter Financial Investments,
L.P.
12890 Hilltop Road
Argyle, TX 76226
|
|
Common stock $0.001 par value
|
2,513,758
|
6.96%
|
Yiu Fai Kung
(3)
|
|
Common stock $0.001 par value
|
21,116,815
(3)
|
58.45%
|
Kwan Mo Ng
|
|
Common stock $0.001 par value
|
9,050,063
|
25.05%
|
* Less than 1%
1
Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities.
2
A total of 36,125,754 shares of our common stock are considered to be
outstanding pursuant to SEC Rule 13d-3(d)(1) as of February 27, 2009. For each
beneficial owner above, any options exercisable within 60 days have been
included in the denominator.
3
Pursuant to the make good escrow agreements with
HFG and the private placement investors described elsewhere in this prospectus
,
Mr. Kung pledged
2,513,758 and 3,085,840
shares of our common stock owned by him along with blank stock powers, to be
held in escrow for the benefit of HFG and investors, respectively. Those
escrowed shares will be subject to disbursement to Mr. Kung or to the investors/HFG
based on the Companys financial performance in fiscal years 2009 and 2010.
TRANSACTIONS WITH RELATED
PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS; DIRECTOR INDEPENDENCE
Transactions With Related
Persons
The following includes a summary
of transactions since the beginning of the 2008 fiscal year, or any currently
proposed transaction, in which we were or are to be a participant and the amount
involved exceeded or exceeds the lesser of $120,000 or one percent of the
average of our total assets at year-end for the last three completed fiscal
years, and in which any related person had or will have a direct or indirect
material interest (other than compensation described under Executive
Compensation). We believe the terms obtained or consideration that we paid or
received, as applicable, in connection with the transactions described below
were comparable to terms available or the amounts that would be paid or
received, as applicable, in arms-length transactions.
46
-
On May 16, 2008, our Chairman
Changjun Yu entered into a Trademark Transfer Agreement with our company
pursuant to which Mr. Yu transferred his rights to the trademark
农珍之冠
to our company for a nominal consideration of RMB 1. In connection with the
trademark transfer, Mr. Yu also entered into a Trademark License Agreement with
our company pursuant to which Mr. Yu granted us the exclusive rights to use such
trademark before the Trademark Office approves the transfer of such trademark.
See Our Business Intellectual Property.
-
On April 28, 2008, our subsidiary
Longheda entered into a financial advisory agreement (the Financial Advisory
Agreement) with HFG International, Limited. The Financial Advisory Agreement
was amended on August 12, 2008. Under the Financial Advisory Agreement, as
amended, HFG International, Limited agreed to provide Longheda with financial
advisory and consulting services in facilitating Longhedas going public
transaction. In consideration for these services, HFG International, Limited is
entitled to $450,000 which will be paid within 45 days after the closing of the
going public transaction. HFG International, Limited is an affiliate of Halter
Financial Investments, L.P., which was an 87.5% shareholder of our company
before the closing of the reverse acquisition of Fezdale and a 6.96% shareholder
as of the date of this prospectus. A copy of the Financial Advisory Agreement is
filed as Exhibit 10.22 to this Amendment.
-
On August 14, 2008, Mr. Kung, the
former shareholder of Fezdale, entered into a make good escrow agreement with
HFG International, Limited. Pursuant to the agreement, Mr. Kung established an
escrow account and delivered to the escrow agent certificates evidencing
2,513,758 shares of our common stock beneficially owned by him along with blank
stock powers, to be held for the benefit of HFG International, Limited. Mr. Kung
agreed that if the after tax net income (after the exclusion of certain items
from the calculation), or ATNI, for the Companys 2009 fiscal year is less than
$13,919,707 or the ATNI for the Companys 2010 fiscal year is less than
$18,495,315, then, in each case, Mr. Kung will transfer to HFG International,
Limited 1,256,879 shares. If the ATNI for the Companys 2009 fiscal year is no
less than $13,919,707 or the ATNI for the Companys 2010 fiscal year is no less
than $18,495,315, then, in each case, 1,256,879 shares will be returned to Mr.
Kung.
Promoters and Certain Control
Persons
We did not have any promoters at
any time during the past five fiscal years.
Director Independence
We currently do not have any
independent directors, as the term independent is defined by the rules of the
Nasdaq Stock Market.
CHANGE IN ACCOUNTANTS
Prior to our reverse acquisition
transaction with Fezdale, our independent registered public accounting firm was
Pritchett, Siler & Hardy, P.C., while Fezdales independent registered public
accounting firm was HLB Hodgson Impey Cheng. On August 14, 2008, concurrent with
the change in control transaction discussed above, our board of directors
approved the dismissal of Pritchett, Siler & Hardy, P.C., as our independent
auditor, effective immediately. Concurrent with the decision to dismiss
Pritchett, Siler & Hardy, P.C. as our independent auditor, our board of
directors elected to continue the existing relationship of Fezdale with HLB
Hodgson Impey Cheng and appointed HLB Hodgson Impey Cheng as our independent
auditor.
Pritchett, Siler & Hardy, P.C.s
reports on Fashion Tech International, Inc.s financial statements as of and for
the fiscal years ended March 31, 2008 and 2007, did not contain an adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope, or accounting principles, except that its report for
the fiscal year ended March 31, 2008 contained a going concern qualification as
to Fashion Tech Technology, Inc.s ability to continue.
In connection with the audits of
the fiscal years ended March 31, 2008 and 2007, there were (1) no disagreements
with Pritchett, Siler & Hardy, P.C. on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to the satisfaction of Pritchett, Siler &
Hardy, P.C., would have caused Pritchett, Siler & Hardy, P.C. to make reference
to the subject matter of the disagreements in connection with its reports, and
(2) no events of the type listed in paragraphs (A) through (D) of Item
304(a)(1)(v) of Regulation S-K.
During the fiscal years ended
March 31, 2008 and 2007 and through the date hereof, neither us nor anyone
acting on our behalf consulted HLB Hodgson Impey Cheng with respect to (i) the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
our financial statements, and neither a written report was provided to us or
oral advice was provided that HLB Hodgson Impey Cheng concluded was an important
factor considered by us in reaching a decision as to the accounting, auditing or
financial reporting issue; or (ii) any matter that was the subject of a
disagreement or reportable events set forth in Item 304(a)(1)(iv) and (v),
respectively, of Regulation S-K.
47
We provided Pritchett, Siler &
Hardy, P.C. with a copy of this disclosure on August 14, 2008, providing
Pritchett, Siler & Hardy, P.C. with the opportunity to furnish us with a letter
addressed to the SEC stating whether it agrees with the statement made by us
herein in response to Item 304(a) of Regulation S-K and, if not, stating the
respect in which it does not agree. A letter from Pritchett, Siler & Hardy, P.C.
dated August 14, 2008 was filed by us as Exhibit 16.1 to our current report on
Form 8-K on August 14, 2008.
SELLING STOCKHOLDERS
This prospectus relates to the
resale by the selling stockholders named below from time to time of up to a
total of 6,115,607 shares of our common stock that were issued to the selling
stockholders pursuant to transactions exempt from registration under the
Securities Act. All of the common stock offered by this prospectus is being
offered by the selling stockholders for their own accounts. The selling
stockholders are divided into three categories: (i) investors from the private
placement transaction; (ii) certain shareholders who received warrants in
connection with their placement agent services, and (iii) certain shareholders
who received shares of our common stock before the reverse acquisition of
Fezdale.
Private Placement Transaction
On October 10, 2008, we completed
a private placement transaction and sold 3,085,840 shares of our common stock to
certain investors at $2.78 per share for a total of $8.58 million pursuant to a
securities purchase agreement dated August 14, 2008, as amended on September 25,
2008. The issuance of our shares to these investors was made in reliance on the
exemption provided by Section 4(2) of the Securities Act for the offer and sale
of securities not involving a public offering and Regulation D promulgated
thereunder. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate the investment, and who represented
to us that the shares were being acquired for investment.
Warrants Issued to Placement
Agents
On October 10, 2008, as part of
the compensation for WLT Brothers Capital, Inc., Wentworth Securities, Inc. and
Euro Pacific Capital, Inc.s services as our placement agents for the private
placement transaction described above, we issued to the placement agents
warrants to purchase an aggregate of 216,009 shares of our common stock. The
warrants have an exercise price of $2.78 and have a term of 3 years. The
warrants were issued in reliance on the Section 4(2) of the Securities Act and
Regulation D promulgated thereunder.
Existing Shareholders before
the reverse acquisition of Fezdale
We are registering 2,813,758
shares of our common stock owned by 4 shareholders who received our shares
before our reverse acquisition of Fezdale, including 2,513,758 shares of our
common stock HFI purchased in reliance on the Section 4(2) private placement
exemption.
Selling Stockholders
The following table sets forth certain information regarding the selling
stockholders and the shares offered by them in this prospectus. Beneficial
ownership is determined in accordance with the rules of the SEC. In computing
the number of shares beneficially owned by a selling stockholder and the
percentage of ownership of that selling stockholder, shares of common stock
underlying shares of convertible preferred stock, options or warrants held by
that selling stockholder that are convertible or exercisable, as the case may
be, within 60 days of March 2, 2009 are included. Those shares, however, are
not deemed outstanding for the purpose of computing the percentage ownership of
any other selling stockholder. Each selling stockholders percentage of
ownership in the following table is based upon 36,125,754 shares of common stock
outstanding as of February 27, 2009.
48
Except as specifically set forth
in the footnotes to the table, none of the selling stockholders has held a
position as an officer or director of the Company, nor has any selling
stockholder had any material relationship of any kind with us or any of our
affiliates. All information with respect to share ownership has been furnished
by the selling stockholders. The shares being offered are being registered to
permit public secondary trading of the shares and each selling stockholder may
offer all or part of the shares owned for resale from time to time. In
addition, none of the selling stockholders has any family relationships with our
officers, directors or controlling stockholders. Furthermore, except as
specifically set forth in the footnote to the table below, no selling
stockholder is a registered broker-dealer or an affiliate of a registered
broker-dealer. The selling stockholders who are also broker dealers are
underwriters with respect to the shares that they are offering for resale.
The
investors in the private placement transaction have represented to the Company that they purchased their shares in the ordinary course of
business, and at the time of the purchase of the shares, they had
no agreements or understandings, directly or indirectly, with any person to
distribute such shares.
For additional information, refer
to Security Ownership of Certain Beneficial Owners and Management above.
The term selling stockholders
also includes any transferees, pledges, donees, or other successors in interest
to the selling stockholders named in the table below. To our knowledge, subject
to applicable community property laws, each person named in the table has sole
voting and investment power with respect to the shares of common stock set forth
opposite such persons name. We will file a supplement to this prospectus to
name successors to any named selling stockholders who are able to use this
prospectus to resell the securities registered hereby.
Name
|
Beneficial Before
the Offering
|
Shares of Common Stock
Included in Prospectus
|
Beneficial Ownership
After the Offering
(1)
|
Percentage of Common Stock
Owned After Offering
(2)
|
Halter Financial Investments,
L.P.
(3)
|
2,513,758
|
2,513,758
|
0
|
*
|
Real Path, Inc.
(4)
|
104,787
|
104,787
|
0
|
*
|
Devonshire Partners, LLC
(5)
|
94,987
|
94,987
|
0
|
*
|
Lynn Dixon
|
100,226
|
100,226
|
0
|
*
|
Ladislav Bobi
|
215,827
|
215,827
|
0
|
*
|
Gerald W. Bolfing
|
35,971
|
35,971
|
0
|
*
|
FALLKLANDY s.j.
(6)
|
53,956
|
53,956
|
0
|
*
|
FILUMA Spol S.R.O.
(7)
|
89,928
|
89,928
|
0
|
*
|
Wojciech Gasiorek
|
29,167
|
29,167
|
0
|
*
|
Harold E. Gear
|
26,978
|
26,978
|
0
|
*
|
Grzegorz Grabowski
|
53,956
|
53,956
|
0
|
*
|
Grandmark Limited Partnership
(8)
|
8,992
|
8,992
|
0
|
*
|
Halter Global Opportunity Fund
(9)
|
116,906
|
116,906
|
0
|
*
|
Kevin Jr. Halter
|
35,971
|
35,971
|
0
|
*
|
James B. Lisle and W. Pauline
Lisle
|
5,395
|
5,395
|
0
|
*
|
Piotr Januszko
|
35,962
|
35,962
|
0
|
*
|
Leszek Kornaszewski
|
48,714
|
48,714
|
0
|
*
|
Janusz Krzesinski
|
71,942
|
71,942
|
0
|
*
|
Eva Boenna Lada
|
53,956
|
53,956
|
0
|
*
|
Robert O. McDonald
|
8,992
|
8,992
|
0
|
*
|
Marek Missala
|
53,947
|
53,947
|
0
|
*
|
Zdeněk Morávek
|
107,902
|
107,902
|
0
|
*
|
Jaroslaw Popkowski
|
53,956
|
53,956
|
0
|
*
|
RESBEX Sp. z.o.o.
(10)
|
53,956
|
53,956
|
0
|
*
|
Support2trading LTD.
(11)
|
44,964
|
44,964
|
0
|
*
|
Leszek Szot
|
53,947
|
53,947
|
0
|
*
|
The USX China Fund
(12)
|
90,000
|
90,000
|
0
|
*
|
T. Williams LLC
(13)
|
7,194
|
7,194
|
0
|
*
|
49
Marek Wachelka
|
71,942
|
71,942
|
0
|
*
|
Sebastian Wagner
|
17,985
|
17,985
|
0
|
*
|
Marian Wiciejewski
|
71,942
|
71,942
|
0
|
*
|
Artur Wisniewski
|
46,762
|
46,762
|
0
|
*
|
Rafal Wisniewski
|
35,971
|
35,971
|
0
|
*
|
Maciej Zawada
|
35,971
|
35,971
|
0
|
*
|
Piotr Zwolski
|
53,908
|
53,908
|
0
|
*
|
Bernard L. Warner Trust U/A/D
03/28/94
|
35,971
|
35,971
|
0
|
*
|
Mark Andrew Charlebois
|
17,985
|
17,985
|
0
|
*
|
Rudolf III Eckert
|
35,971
|
35,971
|
0
|
*
|
Frederick Laun & Lisa Laun
JTWROS
|
35,971
|
35,971
|
0
|
*
|
Halter Global Opportunity Fund
(9)
|
71,942
|
71,942
|
0
|
*
|
Heidi & Kevin Kiene JTWROS
|
35,971
|
35,971
|
0
|
*
|
James W. and R. Darlene
Bridges JTWROS
|
71,942
|
71,942
|
0
|
*
|
Joseph A. & Parnela M. Panella
Living Trust UA 5/11/04
|
28,776
|
28,776
|
0
|
*
|
Hemant Kathuria
|
7,194
|
7,194
|
0
|
*
|
Kent G. Schmidt & Kevin G.
Schmidt Jt. Ten.
|
35,971
|
35,971
|
0
|
*
|
Barbara S. Meister
|
35,971
|
35,971
|
0
|
*
|
James B. Moore
|
20,000
|
20,000
|
0
|
*
|
Quincy Murphy
|
35,971
|
35,971
|
0
|
*
|
Patrick Kirk & Gloria Kirk
JTWROS
|
17,985
|
17,985
|
0
|
*
|
Paul D. Ehrman & Michelle
Ehrman JTWROS
|
35,971
|
35,971
|
0
|
*
|
Paul F. Oreffice Trust UAD
9/15/95
|
17,985
|
17,985
|
0
|
*
|
Richard Potapchuk
|
107,913
|
107,913
|
0
|
*
|
Steve Smith
|
35,971
|
35,971
|
0
|
*
|
Mehran Muhammad Taslimi
|
71,942
|
71,942
|
0
|
*
|
The Suter Family Trust UAD
4/12/2002
|
179,856
|
179,856
|
0
|
*
|
Wylie Family Trust UAD
07/01/01
|
17,985
|
17,985
|
0
|
*
|
Greystone Financial Services
Inc. Profit Sharing Plan
(14)
|
35,971
|
35,971
|
0
|
*
|
Tomas Hudec
|
43,763
|
43,763
|
0
|
*
|
Piotr Januszko
|
34,163
|
34,163
|
0
|
*
|
Jerome M. and Leah Y.
Fullinwider
|
71,942
|
71,942
|
0
|
*
|
Russel Parker
|
53,956
|
53,956
|
0
|
*
|
Małgorzata Płusa
|
61,151
|
61,151
|
0
|
*
|
Krzysztof Pudlowski
|
89,928
|
89,928
|
0
|
*
|
Donald E. Schmidt
|
35,971
|
35,971
|
0
|
*
|
Artur Wisniewski
|
10,791
|
10,791
|
0
|
*
|
WLT Brothers Capital, Inc.
(15)
|
66,171
|
66,171
|
0
|
*
|
Wentworth Securities, Inc.
(16)
|
95,781
|
95,781
|
0
|
*
|
Euro Pacific Capital, Inc.
(17)
|
54,057
|
54,057
|
0
|
*
|
Totals:
|
6,115,607
|
6,115,607
|
0
|
*
|
* Less than 1%
(1) Assumes that all securities
offered are sold.
50
(2) As of
February 27, 2009, a total
of 36,125,754 shares of our common stock are considered to be outstanding
pursuant to SEC Rule 13d-3(d)(1). For each beneficial owner above, any options
exercisable within 60 days have been included in the denominator.
(3) Halter Financial Investments, L.P.
is a Texas limited partnership in which Timothy P. Halter, David Brigante, Marat
Rosenberg and George Diamond (or their affiliated entities) are limited
partners. All of them have voting power and investment power over the
securities owned by Halter Financial Investments, L.P.
(4) Suzanne Rupert is the sole
shareholder, officer and director of Real Path, Inc. and has voting power and
investment power over the securities owned by Real Path, Inc.
(5) Thomas G. Kimble is the sole owner
and manager of Devonshire Partners, LLC and has voting power and investment
power over the securities owned by Devonshire Partners, LLC.
(6)
Stanislaw Fal
is the manager of Fallklandy s.j. and has voting power and investment power over
the securities owned by Fallklandy s.j.
(7)
J. Peterka
is the
managing partner of Filuma Spol S.R.O. and has voting power and investment power
over the securities owned by Filuma Spol S.R.O.
(8)
Paul E. Plowman
is the president of Grandmark Limited Partnership and has voting power and
investment power over the securities owned by Grandmark Limited Partnership.
(9) Mark Hood is the president of
Halter Global Opportunity Fund and has voting power and investment power over
the securities owned by Halter Global Opportunity Fund.
(10) Z. Serwanski is the director
of Resbex Sp. z.o.o. and has voting power and investment power over the
securities owned by Resbex Sp. z.o.o.
(11) J. Vratny is the managing
partner of Support2trading LTD. and has voting power and investment power over
the securities owned by Support2trading LTD.
(12) Stephan C. Pan is the
portfolio manager of The USX China Fund and has voting power and investment
power over the securities owned by The USX China Fund.
(13)
Eugene Thomas Williams
is the general partner of T. Williams LLC and has voting power and investment
power over the securities owned by T. Williams LLC.
(14) David J. Klose is the
president of Greystone Financial Services Inc. and has voting power and
investment power over the securities owned by Greystone Financial Services Inc.
(15) Includes 66,171 shares underlying
the warrant to purchase shares of our common stock. James Groh is the president
and chief executive officer of WLT Brothers Capital, Inc. and has voting and
investment control over securities held by the company. WLT Brothers Capital,
Inc. is a broker-dealer and certified that it purchased the shares covered by
this prospectus in the ordinary course of business and at the time of the
purchase of the shares, it had no agreements or understandings, directly or
indirectly, with any person to distribute such shares
(16) Includes 95,781 shares underlying
the warrant to purchase shares of our common stock.
Mitchell Posner
is the president of Wentworth Securities, Inc. and has voting and investment
power over the securities owned by Wentworth Securities, Inc.
(17) Includes 54,057 shares underlying
the warrant to purchase shares of our common stock.
Peter D. Schiff
is the president of Euro Pacific Capital, Inc. and has voting and investment
power over the securities owned by Euro Pacific Capital, Inc.
We will not receive any of the
proceeds from the sale of any shares by the selling stockholders but we will
receive funds from the exercise of the warrants held by the selling stockholders
if and when those warrants are exercised for cash. We have agreed to bear
expenses incurred by the selling stockholders that relate to the registration of
the shares being offered and sold by the selling stockholders, including the SEC
registration fee and legal, accounting, printing and other expenses of this
offering.
DESCRIPTION OF CAPITAL STOCK
Common Stock
We are authorized to issue up to
120,000,000 shares of common stock, par value $0.001 per share. Each outstanding
share of common stock entitles the holder thereof to one vote per share on all
matters. Our bylaws provide that any vacancy occurring in the board of
directors may be filled by the affirmative vote of a majority of the remaining
directors though less than a quorum of the board of directors. Stockholders do
not have preemptive rights to purchase shares in any future issuance of our
common stock.
The holders of shares of our
common stock are entitled to dividends out of funds legally available when and
as declared by our board of directors. Our board of directors has never
declared a dividend and does not anticipate declaring a dividend in the
foreseeable future. Should we decide in the future to pay dividends, as a
holding company, our ability to do so and meet other obligations depends upon
the receipt of dividends or other payments from our operating subsidiaries and
other holdings and investments. In addition, our operating subsidiaries, from
time to time, may be subject to restrictions on their ability to make
distributions to us, including as a result of restrictive covenants in loan
agreements, restrictions on the conversion of local currency into U.S. dollars
or other hard currency and other regulatory restrictions. In the event of our
liquidation, dissolution or winding up, holders of our common stock are entitled
to receive, ratably, the net assets available to stockholders after payment of
all creditors.
All of the issued and outstanding
shares of our common stock are duly authorized, validly issued, fully paid and
non-assessable. To the extent that additional shares of our common stock are
issued, the relative interests of existing stockholders will be diluted.
51
Preferred Stock
We may issue up to 5,000,000
shares of preferred stock in one or more classes or series within a class as may
be determined by our board of directors, who may establish, from time to time,
the number of shares to be included in each class or series, may fix the
designation, powers, preferences and rights of the shares of each such class or
series and any qualifications, limitations or restrictions thereof. Any
preferred stock so issued by the board of directors may rank senior to the
common stock with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding up of us, or both. Moreover, under certain
circumstances, the issuance of preferred stock or the existence of the un-issued
preferred stock might tend to discourage or render more difficult a merger or
other change in control.
No shares of preferred stock are
currently outstanding. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
majority of our outstanding voting stock.
Warrants
In connection with our private
placement which closed on October 10, 2008, WLT Brothers Capital, Inc.,
Wentworth Securities, Inc. and Euro Pacific Capital, Inc., our placement agents,
received, as partial compensation, warrants to purchase 66,171, 95,781 and
54,057 shares of our common stock, respectively. The warrants have a term of 3
years and are immediately exercisable at $2.78 per share, subject to the usual
adjustments for certain corporate events. The shares underlying the warrants
are being included in this registration statement, but none of the warrants have
been exercised.
Transfer Agent and Registrar
Our independent stock transfer
agent is Interwest Transfer Corporation, located in Salt Lake City, Utah. Their
mailing address is 1981 East Murray Holladay Road, Suite 100, Salt Lake City,
Utah 84117. Their phone number is (801) 272-9294.
SHARES ELIGIBLE FOR FUTURE SALE
As of February 27, 2009, there
were approximately 36,125,754
shares of our common stock outstanding.
Shares Covered by this
Prospectus
All of the 6,115,607 shares being
registered in this offering may be sold without restriction under the Securities
Act of 1933.
Rule 144
The SEC has recently adopted
amendments to Rule 144 which became effective on February 15, 2008 and applies to securities acquired both before and after that date. Under these
amendments, a person who has beneficially owned restricted shares of our common
stock or warrants for at least six months would be entitled to sell their
securities provided that (1) such person is not deemed to have been one of our
affiliates at the time of, or at any time during the three months preceding, a
sale, (2) we are subject to the Exchange Act reporting requirements for at least
90 days before the sale and (3) if the sale occurs prior to satisfaction of a
one-year holding period, we provide current information at the time of sale.
Persons who have beneficially
owned restricted shares of our common stock or warrants for at least six months
but who are our affiliates at the time of, or at any time during the three
months preceding, a sale, would be subject to additional restrictions, by which
such person would be entitled to sell within any three-month period only a
number of securities that does not exceed the greater of:
52
Provided,
in each case, that we are subject
to the Exchange Act periodic reporting requirements for at least three months
before the sale.
However, since we anticipate that
our shares will be quoted on the OTC Bulletin Board, which is not an automated
quotation system, our stockholders will not be able to rely on the market-based
volume limitation described in the second bullet above. If, in the future, our
securities are listed on an exchange or quoted on NASDAQ, then our stockholders
would be able to rely on the market-based volume limitation. Unless and until
our stock is so listed or quoted, our stockholders can only rely on the
percentage based volume limitation described in the first bullet above.
Such sales by affiliates must also
comply with the manner of sale, current public information and notice provisions
of Rule 144. The selling stockholders will not be governed by the foregoing
restrictions when selling their shares pursuant to this prospectus.
Restrictions on the Use of Rule
144 by Shell Companies or Former Shell Companies
Historically, the SEC staff has
taken the position that Rule 144 is not available for the resale of securities
initially issued by companies that are, or previously were, blank check
companies, like us. The SEC has codified and expanded this position in the
amendments discussed above by prohibiting the use of Rule 144 for resale of
securities issued by any shell companies (other than business combination
related shell companies) or any issuer that has been at any time previously a
shell company. The SEC has provided an important exception to this prohibition,
however, if the following conditions are met:
-
the issuer of the securities that
was formerly a shell company has ceased to be a shell company;
-
the issuer of the securities is
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act;
-
the issuer of the securities has
filed all Exchange Act reports and material required to be filed, as applicable,
during the preceding 12 months (or such shorter period that the issuer was
required to file such reports and materials), other than Current Reports on Form
8-K; and
-
at least one year has elapsed from
the time that the issuer filed current comprehensive disclosure with the SEC
reflecting its status as an entity that is not a shell company.
As a result, it is likely that
pursuant to Rule 144 our stockholders, who were stockholders of ours prior to
the reverse acquisition of Fezdale, will be able to sell the their shares of our
common stock from and after August 14, 2009 (the one year anniversary of our
reverse acquisition of Fezdale) without registration.
PLAN OF DISTRIBUTION
The selling stockholders 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 stockholders 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;
53
-
purchases by a broker-dealer as
principal and resale by the broker-dealer for its account;
-
an exchange distribution in
accordance with the rules of the applicable exchange;
-
privately negotiated transactions;
-
short sales effected after the
date the registration statement of which this Prospectus is a part is declared
effective by the SEC;
-
through the writing or settlement
of options or other hedging transactions, whether through an options exchange or
otherwise;
-
broker-dealers may agree with the
selling stockholders to sell a specified number of such shares at a stipulated
price per share; and
-
a combination of any such methods
of sale.
The selling stockholders 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 stockholders to include the
pledgee, transferee or other successors in interest as selling stockholders
under this prospectus. The selling stockholders 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.
In connection with the sale of our
common stock or interests therein, the selling stockholders 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 stockholders 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 stockholders 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 stockholders 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 stockholders 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.
Broker-dealers engaged by the
selling stockholders may arrange for other broker-dealers to participate in
sales. Broker-dealers may receive commissions or discounts from the selling
stockholders (or, if any broker-dealer acts as agent for the purchase of shares,
from the purchaser) in amounts to be negotiated. The selling stockholders do
not expect these commissions and discounts to exceed what is customary in the
types of transactions involved.
The selling stockholders also may
resell all or a portion of the shares in open market transactions in reliance
upon Rule 144 under the Securities Act, provided that they meet the criteria and
conform to the requirements of that rule.
Any underwriters, agents, or
broker-dealers, and any selling stockholders who are affiliates of
broker-dealers, 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 stockholders who are underwriters within the meaning
of Section 2(11) of the Securities Act will be subject to the prospectus
delivery requirements of the Securities Act. We know of no existing
arrangements between any of the selling stockholders and any other stockholder,
broker, dealer, underwriter, or agent relating to the sale or distribution of
the shares, nor can we presently estimate the amount, if any, of such
compensation. See Selling Stockholders for description of any material
relationship that a stockholder has with us and the description of such
relationship.
54
To the extent required, the shares
of our common stock to be sold, the names of the selling stockholders, the
respective purchase prices and public offering prices, the names of any agents,
dealer or underwriter, any applicable commissions or discounts with respect to a
particular offer will be set forth in an accompanying prospectus supplement or,
if appropriate, a post-effective amendment to the registration statement that
includes this prospectus.
In order to comply with the
securities laws of some states, if applicable, the 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
stockholders 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 stockholders 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 stockholders for the purpose of satisfying the
prospectus delivery requirements of the Securities Act. The selling
stockholders may indemnify any broker-dealer that participates in transactions
involving the sale of the shares against certain liabilities, including
liabilities arising under the Securities Act.
We have agreed to pay certain fees
and expenses incurred by us incident to the registration of the shares. We have
agreed to indemnify the selling stockholders 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
stockholders to keep the registration statement of which this prospectus
constitutes a part effective until the earlier of (1) such time as all of the
shares covered by this prospectus have been disposed of pursuant to and in
accordance with the registration statement or (2) the date on which the shares
may be sold pursuant to Rule 144(k) of the Securities Act.
LEGAL MATTERS
The validity of the common stock
offered by this prospectus will be passed upon for us by Holland & Hart LLP,
Reno, Nevada.
EXPERTS
The consolidated financial
statements of Fezdale Investments Limited and financial statements of Longheda
included in this prospectus and in the registration statement have been audited
by HLB Hodgson Impey Cheng, independent registered public accounting firm, to
the extent and for the periods set forth in their report appearing elsewhere
herein and in the registration statement, and are included in reliance on such
report, given the authority of said firm as an expert in auditing and
accounting.
The audited financial statements for Fashion Tech
International, Inc. included in this prospectus and in the registration
statement has been audited by Pritchett Siler & Hardy PC, Ltd., an independent
registered public accounting firm, to the extent and for the periods set forth
in their report appearing elsewhere herein and in the registration statement,
and are included in reliance on such report, given on the authority of said firm
as experts in auditing and accounting.
No expert or counsel named in this prospectus as having
prepared or certified any part of this prospectus or having given an opinion
upon the validity of the securities being registered or upon other legal matters
in connection with the registration or offering of the common stock was employed
on a contingency basis, or had, or is to receive, in connection with the
offering, a substantial interest, direct or indirect, in the Registrant or any
of its parents or subsidiaries. Nor was any such person connected with the
Registrant or any of its parents or subsidiaries as a promoter, managing or
principal underwriter, voting trustee, director, officer or employee.
WHERE YOU CAN FIND MORE
INFORMATION
We have filed with the SEC a
registration statement on Form S-1 under the Securities Act with respect to the
common stock offered in this offering. This prospectus does not contain all of
the information set forth in the registration statement. For further
information with respect to us and the common stock offered in this offering, we
refer you to the registration statement and to the attached exhibits. With
respect to each such document filed as an exhibit to the registration statement,
we refer you to the exhibit for a more complete description of the matters
involved.
You may inspect our registration
statement and the attached exhibits and schedules without charge at the public
reference facilities maintained by the SEC at 100 F Street, N.E., Washington,
D.C. 20549. You may obtain copies of all or any part of our registration
statement from the SEC upon payment of prescribed fees. You may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330.
Our SEC filings, including the
registration statement and the exhibits filed with the registration statement,
are also available from the SECs website at www.sec.gov, which contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC.
55
INDEX TO FINANCIAL STATEMENTS
China Nutrifruit
Group Limited Consolidated Financial Statements
|
Page
|
|
|
Unaudited condensed
consolidated financial statements for the nine months ended December 31,
2008:
|
|
Balance Sheet
|
F-1
|
Statements of Income
|
F-2
|
Statements of Cash
Flows
|
F-3
|
Statements of Changes
in Owners Equity
|
F-4
|
Notes to Financial
Statements
|
F-5
|
|
|
Unaudited pro forma
condensed consolidated statements of income for the year ended March 31,
2008 and the nine months ended December 31, 2008
|
F-23
|
|
|
Daqing Longheda Food Company Limited Financial Statements
|
|
|
|
Audited financial
statements for the years ended March 31, 2008 and
2007:
|
|
Report of Independent
Registered Public Accounting Firm
|
F-27
|
Balance Sheet
|
F-28
|
Statements of Income
|
F-29
|
Statements of Changes
in Owners Equity
|
F-30
|
Statements of Cash
Flows
|
F-31
|
Notes to Financial
Statements
|
F-32
|
|
|
Fezdale Investments
Limited Consolidated Financial Statements
|
|
|
|
Audited condensed
consolidated financial statements for the Period from August 22, 2007
(Inception) to March 31, 2008 :
|
Report of Independent
Registered Public Accounting Firm
|
F-45
|
Consolidated Balance
Sheet
|
F-46
|
Consolidated Statements
of Income
|
F-47
|
Consolidated Statements
of Changes in Owners Equity
|
F-48
|
Consolidated Statements
of Cash Flows
|
F-49
|
Notes to Consolidated
Financial Statements
|
F-50
|
|
|
Fashion Tech International, Inc. Financial Statements
|
|
|
|
Audited financial Statements for the Period Ended March
31, 2008
|
F-68
|
Report of Independent Registered
Public Accounting Firm
|
F-69
|
Balance Sheets, March 31, 2008 and
March 31, 2007
|
F-70
|
Statements of
Operations, for the years ended March 31, 2008 and 2007 and from the
re-entering of development stage on April 1, 1985 through March 31, 2008
|
F-71
|
Statement of
Stockholders' Equity (Deficit), from the re-entering of development
stage on April 1, 1985 through March 31, 2008
|
F-72
|
Statements of Cash
Flows, for the years ended March 31, 2008 and 2007 and from the
re-entering of development stage on April 1, 1985 through March 31, 2008
|
F-74
|
Notes to Financial Statements
|
F-75
|
|
|
CHINA NUTRIFRUIT GROUP LIMITED AND
SUBSIDIARIES
(FORMERLY KNOWN AS FASHION TECH
INTERNATIONAL, INC.)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Stated in US Dollars)
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
8,396,925
|
|
$
|
7,104,849
|
|
Trade receivables, net
|
|
1,794,802
|
|
|
1,921,457
|
|
Inventory, net
|
|
12,562,421
|
|
|
1,955,725
|
|
Prepayments
|
|
499,546
|
|
|
-
|
|
Other current assets
|
|
4,376
|
|
|
114,865
|
|
Total current assets
|
|
23,258,070
|
|
|
11,096,896
|
|
Property, plant and equipment, net
|
|
16,966,697
|
|
|
7,173,523
|
|
Land use rights, net
|
|
190,095
|
|
|
318,120
|
|
TOTAL ASSETS
|
$
|
40,414,862
|
|
$
|
18,588,539
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Short-term borrowings
|
$
|
7,294,797
|
|
$
|
2,848,110
|
|
Other payables and accrued
expense
|
|
389,178
|
|
|
494,278
|
|
Consideration payable
|
|
-
|
|
|
5,353,755
|
|
Trade payables
|
|
1,220,239
|
|
|
161,136
|
|
Income taxes payable
|
|
1,050,475
|
|
|
607,680
|
|
Advances from customers
|
|
1,737,133
|
|
|
-
|
|
Amount due to a director
|
|
516
|
|
|
-
|
|
Amount due to a shareholder
|
|
7,374,420
|
|
|
-
|
|
Amount due to an affiliate
|
|
-
|
|
|
58,253
|
|
TOTAL LIABILITIES
|
|
19,066,758
|
|
|
9,523,212
|
|
|
|
|
|
|
|
|
Minority interests
|
|
-
|
|
|
4,039,286
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
Authorized: 5,000,000 shares, par value $0.001
|
|
|
|
|
|
|
None issued and outstanding
|
|
-
|
|
|
-
|
|
Common stock
|
|
|
|
|
|
|
Authorized: 120,000,000 shares, par value $0.001
|
|
|
|
|
|
|
Issued and outstanding: 36,125,754 shares as at December
31, 2008;
|
|
|
|
|
|
|
(2,873,036 shares as at March 31, 2008)
|
|
36,126
|
|
|
2,873
|
|
Additional paid-in-capital
|
|
6,781,315
|
|
|
(4,965
|
)
|
Statutory reserves - restricted
|
|
2,872,011
|
|
|
1,713,065
|
|
Accumulated other comprehensive income
|
|
410,125
|
|
|
812,312
|
|
Retained earnings
|
|
11,248,527
|
|
|
2,502,756
|
|
TOTAL STOCKHOLDERS EQUITY
|
|
21,348,104
|
|
|
5,026,041
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
$
|
40,414,862
|
|
$
|
18,588,539
|
|
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-1
CHINA NUTRIFRUIT GROUP LIMITED AND
SUBSIDIARIES
(FORMERLY KNOWN AS FASHION TECH
INTERNATIONAL, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Stated in US Dollars)
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net sales
|
$
|
13,873,857
|
|
$
|
6,210,070
|
|
$
|
36,212,228
|
|
$
|
6,210,070
|
|
Cost of sales
|
|
(7,836,719
|
)
|
|
(3,536,169
|
)
|
|
(19,020,828
|
)
|
|
(3,536,169
|
)
|
Gross profit
|
|
6,037,138
|
|
|
2,673,901
|
|
|
17,191,400
|
|
|
2,673,901
|
|
Selling, general and administrative expenses
|
|
(1,610,004
|
)
|
|
(550,299
|
)
|
|
(3,541,459
|
)
|
|
(550,299
|
)
|
Operating earnings
|
|
4,427,134
|
|
|
2,123,602
|
|
|
13,649,941
|
|
|
2,123,602
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses
|
|
(128,455
|
)
|
|
(114,103
|
)
|
|
(318,050
|
)
|
|
(114,103
|
)
|
Other income
|
|
6,555
|
|
|
60
|
|
|
26,092
|
|
|
60
|
|
Total other income (expenses)
|
|
(121,900
|
)
|
|
(114,043
|
)
|
|
(291,958
|
)
|
|
(114,043
|
)
|
Earnings before minority interests and income
taxes
|
|
4,305,234
|
|
|
2,009,559
|
|
|
13,357,983
|
|
|
2,009,559
|
|
Provision for income taxes
|
|
(1,050,626
|
)
|
|
(293,824
|
)
|
|
(3,243,958
|
)
|
|
(293,824
|
)
|
Earnings before minority interests
|
|
3,254,608
|
|
|
1,715,735
|
|
|
10,114,025
|
|
|
1,715,735
|
|
Minority interests
|
|
-
|
|
|
(416,254
|
)
|
|
(209,308
|
)
|
|
(416,254
|
)
|
Net earnings
|
$
|
3,254,608
|
|
$
|
1,299,481
|
|
$
|
9,904,717
|
|
$
|
1,299,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.0903
|
|
$
|
0.0633
|
|
$
|
0.5089
|
|
$
|
0.1404
|
|
Diluted
|
$
|
0.0902
|
|
$
|
0.0633
|
|
$
|
0.5088
|
|
$
|
0.1404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
36,061,476
|
|
|
20,531,621
|
|
|
19,463,339
|
|
|
9,258,462
|
|
Diluted
|
|
36,091,262
|
|
|
20,531,621
|
|
|
19,465,518
|
|
|
9,258,462
|
|
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-2
CHINA NUTRIFRUIT GROUP LIMITED AND
SUBSIDIARIES
(FORMERLY KNOWN AS FASHION TECH
INTERNATIONAL, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Stated in US Dollars)
|
|
Nine months ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Operating activities:
|
|
|
|
|
|
|
Net earnings
|
$
|
9,904,717
|
|
$
|
1,299,481
|
|
Adjustments to reconcile net loss to net
cash provided by operating activities
|
|
|
|
|
|
|
Minority interests
|
|
209,308
|
|
|
416,254
|
|
Depreciation and amortization
|
|
654,849
|
|
|
62,837
|
|
Loss on disposal of
property, plant and equipment
|
|
289
|
|
|
-
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
Trade receivables, net
|
|
172,808
|
|
|
3,383,301
|
|
Inventory
|
|
(10,501,428
|
)
|
|
1,589,015
|
|
Prepayments
|
|
(499,412
|
)
|
|
(197,472
|
)
|
Other
current assets
|
|
(64,981
|
)
|
|
725,737
|
|
Trade payables
|
|
1,049,463
|
|
|
(574,506
|
)
|
Income
taxes payable
|
|
425,577
|
|
|
476,152
|
|
Advances from customers
|
|
1,727,701
|
|
|
-
|
|
Consideration payables
|
|
(5,352,352
|
)
|
|
-
|
|
Amount due to a
shareholder
|
|
7,360,552
|
|
|
-
|
|
Amount
due to a director
|
|
(59,076
|
)
|
|
34,053
|
|
Other payables and
accrued expenses
|
|
(116,020
|
)
|
|
454,033
|
|
Net cash provided by operating activities
|
|
4,911,995
|
|
|
7,668,885
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
Cash (outflow)/inflow from acquisition of subsidiaries
|
|
(1,451,038
|
)
|
|
829,765
|
|
Purchases of property and equipment
|
|
(13,102,841
|
)
|
|
-
|
|
Proceeds from disposal of property and equipment
|
|
3,918
|
|
|
-
|
|
Net cash (used in)/provided by investing
activities
|
|
(14,549,961
|
)
|
|
829,765
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
Proceeds from borrowings
|
|
4,353,113
|
|
|
-
|
|
Proceeds from issue of common stock
|
|
8,578,706
|
|
|
1,010
|
|
Costs related to issuance of common stock
|
|
(1,741,421
|
)
|
|
-
|
|
Net cash (used in)/provided by financing
activities
|
|
11,190,398
|
|
|
1,010
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
1,552,432
|
|
|
8,499,660
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash and cash
equivalents
|
|
(260,356
|
)
|
|
95,204
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of
the period
|
|
7,104,849
|
|
|
-
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the
period
|
$
|
8,396,925
|
|
$
|
8,594,864
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flows
information:
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
Interest
|
$
|
318,050
|
|
$
|
114,103
|
|
Income tax
|
$
|
2,818,381
|
|
$
|
214,314
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-3
CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES
(FORMERLY KNOWN AS FASHION TECH INTERNATIONAL,
INC.)
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (UNAUDITED)
(Stated in US Dollars)
|
|
Common stock Shares
|
|
|
Amount
|
|
|
Preferred stock Shares
|
|
|
Amount
|
|
|
Additional paid-in capital
|
|
|
Statutory reserves restricted
|
|
|
Retained earnings
|
|
|
Accumulated other comprehensive income
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2008
|
|
2,873,036
|
|
$
|
2,873
|
|
|
-
|
|
$
|
-
|
|
$
|
(4,965
|
)
|
$
|
1,713,065
|
|
$
|
2,502,756
|
|
$
|
812,312
|
|
$
|
5,026,041
|
|
Effect of reverse acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
|
|
30,166,878
|
|
|
30,167
|
|
|
-
|
|
|
-
|
|
|
(47,919
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(17,752
|
)
|
Share issued in private placement at $2.78 per share
|
|
3,085,840
|
|
|
3,086
|
|
|
-
|
|
|
-
|
|
|
8,575,620
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8,578,706
|
|
Cost of raising capital
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,741,421
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,741,421
|
)
|
Transfer to reserve
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,158,946
|
|
|
(1,158,946
|
)
|
|
-
|
|
|
-
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,904,717
|
|
|
-
|
|
|
9,904,717
|
|
Translation
adjustments
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(402,187
|
)
|
|
(402,187
|
)
|
Balance at December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
36,125,754
|
|
|
36,126
|
|
|
-
|
|
|
-
|
|
|
6,781,315
|
|
|
2,872,011
|
|
|
11,248,527
|
|
|
410,125
|
|
|
21,348,104
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-4
China Nutrifruit Group Limited and Subsidiaries (Formerly
Known as Fashion Tech International, Inc.)
Notes to Condensed Consolidated
Financial Statements
For the three and nine months ended December 31, 2008
and 2007
(Unaudited)
(Stated in U.S. Dollars)
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF PRINCIPAL
ACCOUNTING POLICIES
Nature of Business
China Nutrifruit Group Limited, formerly known as Fashion Tech
International, Inc., (the Company) was originally incorporated in the state of
Utah on April 22, 1983 and changed its domicile from Utah to Nevada in April
1999. The Company was not engaged in any business activities and had no
meaningful operations, income producing assets or significant operating capital
since at least 1989 until it acquired Fezdale Investments Limited (Fezdale) on
August 14, 2008.
On August 14, 2008, the Company acquired all of the equity
interests of Fezdale, a British Virgin Islands corporation, through a share
exchange transaction (the Share Exchange Transaction), with the result that
the stockholders of Fezdale became the beneficial owners of approximately 86.59%
of the Companys common stock. As a result of such Share Exchange Transaction,
Fezdale became a wholly-owned subsidiary of the Company and the former
shareholders of Fezdale became the Companys controlling shareholders.
Accordingly, all references to shares of Fezdales ordinary shares have been
restated to reflect the equivalent numbers of the common stock of China
Nutrifruit Group Limited.
The share exchange resulted in Fezdales former shareholder
obtaining a majority voting interest in the Company. Accounting principles
generally accepted in the United States of America (US GAAP) require that a
company whose shareholders retain the majority interest in a combined business
be treated as the acquirer for accounting purposes. As a result, in the Share
Exchange Transaction, Fezdale is treated as the accounting acquirer and China
Nutrifruit Group Limited is treated as the acquired party for accounting
purpose. Accordingly, the Share Exchange Transaction has been accounted for a
recapitalization of the Company. The equity section of the accompanying
financial statements have been restated to reflect the recapitalization of the
Company due to the Share Exchange Transaction as of the first day of the first
period presented. The assets and liabilities acquired that, for accounting
purposes, were deemed to have been acquired by Fezdale were not significant.
Also, on August 14, 2008, our majority shareholder, Yiu Fai
Kung (Mr. Kung), entered into escrow agreements with the private placement
investors and HFG International, Limited (HFG). Mr. Kung will deliver a
certain number of shares of our common stock owned by him to the investors and
HFG pro-rata in accordance with their respective investment amount for no
additional consideration if:
(i)
Our after tax net income for our fiscal
year ending on March 31, 2009 is less than $13,919,707 and fiscal year ending on
March 31, 2010 is less than $18,495,315; and
After the Share Exchange Transaction and the Financing, the
total common stock issued and outstanding of the Company is 36,125,754.
The Company amended its articles of incorporation on August 14,
2008 and changed its name into China Nutrifruit Group Limited.
On October 10, 2008, the Company completed a private placement
financing with certain investors (the Financing). Pursuant to the terms of the
securities purchase agreement, the Company sold 3,085,840 shares of the
Companys common stock at the price of $2.78 per share and received a gross
proceed of $8,578,705.73.
F-5
China Nutrifruit Group Limited and Subsidiaries (Formerly
Known as Fashion Tech International, Inc.)
Notes to Condensed Consolidated
Financial Statements
For the three and nine months ended December 31, 2008
and 2007
(Unaudited)
(Stated in U.S. Dollars)
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF PRINCIPAL
ACCOUNTING POLICIES (CONTD)
Fezdale Investments Limited
Fezdale is a private limited liability company incorporated in
British Virgin Island on August 22, 2007.
In November 2007, Solar Sun Holdings Limited (Solar Sun), a
subsidiary of Fezdale, entered in a share purchase agreement with six owners of
Daqing Longheda Food Company Limited (Longheda) under which the six owners of
Longheda agreed to transfer an aggregate of 75% equity interests in Longheda to
Solar Sun for a total consideration of RMB40,000,000. In May 2008, the six
founders of Longheda transferred the remaining 25% equity interests in Longheda
to Solar Sun. After the transfer, Longheda became the wholly owned subsidiary of
Solar Sun (note 3).
Solar Sun Holdings Limited
Solar Sun is a private limited liability company incorporated
in Hong Kong on September 12, 2007. Solar Sun is a holding company and has no
assets or operations other than its ownership of Longheda.
Daqing Longheda Food Company Limited
Longheda was incorporated in Heilongjiang province of Peoples
Republic of China in June 2004. Longheda manufactures and sells a variety of
food products processed from specialty premium fruits that grow in Northeast
China. Currently, Longheda processes 4 types of premium specialty fruits,
including golden berry, crab apple, blueberry and raspberry, and sells fresh
fruits. Longheda currently has four types of fruit based products, including
fruit concentrate, nectar, glazed fruits and fruit beverage. Longheda sells its
products through an extensive sales and distribution network covering 19
provinces and 41 cities. The fresh fruits are mainly sold to fruit supermarkets
and stores while the processed fruit products are mainly sold to manufacturers
for further processing into fruit juice and other fruit related products.
Basis of presentation
The interim condensed consolidated financial statements include
the accounts of China Nutrifruit Group Limited and its subsidiaries (the
Group). The interim condensed consolidated financial statements have been
prepared in accordance with the US GAAP. The interim condensed consolidated
financial statements of the Group include the accounts of China Nutrifruit Group
Limited, Fezdale Investments Limited, Solar Sun Holdings Limited and Daqing
Longheda Food Company Limited after the date of acquisition. All significant
intercompany transactions and balances have been eliminated.
The interim condensed consolidated financial statements are
unaudited and, in our opinion, include all adjustments, consisting of normal
recurring adjustments and accruals necessary for a fair representation of our
condensed consolidated balance sheets, operating results, and cash flows for the
periods presented. Operating results for the periods presented are not
necessarily indicatives of the annual results for the year ending March 31,
2009. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with the US GAAP have been condensed
or omitted in accordance with the rules and regulations of the Securities and
Exchange Commission (the SEC). The interim condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and accompany notes included in the Companys registration statement
on Form S-1 filed on October 14, 2008. The Company follows the same accounting
policies in the preparation of interim reports.
F-6
China Nutrifruit Group Limited and Subsidiaries (Formerly
Known as Fashion Tech International, Inc.)
Notes to Condensed Consolidated
Financial Statements
For the three and nine months ended December 31, 2008
and 2007
(Unaudited)
(Stated in U.S. Dollars)
Use of estimates
The preparation of the interim condensed consolidated financial
statements in conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent liabilities at the date of the financial statements,
and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from these estimates.
Segment information
The Group identifies and classifies its operating segment based
on the nature of the products with similar economic characteristics. No segment
information is provided as the Group only has one business and geographical
segment. The Groups reportable segment is the manufacture and sell of food
products, which the operations are located in PRC and sales were predominately
made to customers located in the PRC.
Economic and political risks
The Groups operations are conducted in the PRC. According the
Groups business, financial position maybe influenced by the political, economic
and legal environment in the PRC, and by the general state of the PRC economy.
The Groups operations in the PRC are subject to special
considerations and significant risk not typically associated with companies in
North America. These include risks associated with, among others, the political,
economic and legal environmental and foreign currency exchange. The Groups
results may be adversely affected by changes in the political and social
conditions in the PRC, and by changes in governmental policies with respect to
laws and regulations, anti-inflationary measures, currency conversion,
remittances abroad, and rates and methods of taxation, among other things.
Earnings per share
Basic earnings per share is computed by dividing net operating
results for the reporting period attributable to common stockholders by the
weighted average number of common stocks outstanding during the period. Diluted
earnings per share is calculated by dividing net operating results for the
reporting period attributable to common stockholders by the weighted average
number of common stocks outstanding and the dilutive effect of common stock
equivalents.
Trade accounts receivable
In the normal course of business, the Group extends credit to
customers. Trade accounts receivable, less allowance for doubtful accounts,
reflect the net realizable value of receivables, and approximate fair value. On
a regular basis, the Group evaluates its trade accounts receivable and
establishes an allowance for doubtful accounts based on a combination of
specific customer circumstances, credit conditions, and payment history. A
receivable is considered past due if payments have not been received within the
agreed upon invoice terms. No allowance for doubtful accounts at December 31,
2008 was recorded. Trade accounts receivable is charged off against the
allowance after management determines the potential for recovery is remote.
F-7
China Nutrifruit Group Limited and Subsidiaries (Formerly
Known as Fashion Tech International, Inc.)
Notes to Condensed Consolidated
Financial Statements
For the three and nine months ended December 31, 2008
and 2007
(Unaudited)
(Stated in U.S. Dollars)
Cash and cash equivalents
The Group considers all highly liquid investments with an
original maturity date of three months or less to be cash equivalents.
Inventories
The cost of finished products inventories includes raw
materials, direct labor and indirect production costs. Inventories are stated at
the lower of cost or market. The Group uses first-in, first-out methods to value
its inventories. During the idle production period, overhead costs include
depreciation are treated as current-period charges, which charge directly to
general and administrative expense instead of costs of inventories.
Fair value of financial instruments
The carrying amount of certain of the Groups financial
instruments, including cash and cash equivalents, trade accounts receivable,
accounts payable, other current assets, other payables and accrued expenses,
approximates fair value due to the relatively short maturity.
Property, plant and equipment, net
Property, plant and equipment are recorded at cost and are
depreciated on a straight-line basis over the estimated useful lives of the
assets. Maintenance and repairs are expensed as incurred. The principal
estimated useful lives generally are: buildings and leasehold improvements 20
years; machinery and equipment - 10 years. Depreciation of property, plant and
equipment was $660,769 for the nine months period ended December 31, 2008.
During the idle period of the plant, depreciation is treated as current-period
charges, which charge directly to general and administrative expense.
Goodwill
Goodwill represents the excess of the purchase price over the
fair value of the net tangible and identifiable intangible assets acquired in a
business combination. Goodwill is tested at least annually for impairment using
a two-step process. The first step is to identify a potential impairment, and
the second step measures the amount of the impairment loss, if any. Impairment
exists if the carrying amount of a reporting units goodwill exceeds its
estimated fair value.
Negative goodwill represents the excess fair value of the net
tangible and identifiable intangible assets acquired in a business combination
over the purchase price. The negative goodwill is allocated as a pro rata
reduction of the amounts assigned to the assets acquired excluding financial
assets, deferred taxes and other current assets. If negative goodwill exceeds
the amount of those assets, the remaining excess shall be recognized as an
extraordinary gain in the period which the business combination is completed.
(note 3)
Revenue recognition
The Group recognizes revenue from sales of products, where
persuasive evidence of an arrangement exists, delivery has occurred, the
sellers price is fixed or determinable and collectibility is reasonably
assured. This generally occurs when the customer receives the product or at the
time title passes to the customer. Customers generally do not have the right to
return product unless damaged or defective. Net sales are comprised of gross
sales reduced by customer returns, trade promotions and discounts.
F-8
China Nutrifruit Group Limited and Subsidiaries (Formerly
Known as Fashion Tech International, Inc.)
Notes to Condensed Consolidated
Financial Statements
For the three and nine months ended December 31, 2008
and 2007
(Unaudited)
(Stated in U.S. Dollars)
Comprehensive income
Comprehensive income is comprised of net income and other
comprehensive income.
Shipping and handling costs
Shipping and handling costs are included in selling expenses.
The shipping and handling costs for the nine months ended December 31, 2008 was
$1,464,741.
Impairment of long-lived assets
Long-lived assets, except goodwill and indefinite-lived
intangible assets, are reviewed for impairment when circumstances indicate the
carrying value of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of the
assets to future net cash flows estimated by the Group to be generated by such
assets. If such assets are considered to be impaired, the impairment to be
recognized is the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of by sale are recorded as held
for sale at the lower of carrying value or estimated net realizable value.
During the period, no impairment on long-lived assets was recorded by the
Group.
All lands in the PRC are owned by the PRC government. The
government in the PRC, according to the relevant PRC law, may sell the right to
use the land for a specific period of time. Thus, all of the Groups land
located in the PRC is considered to be leasehold land and is stated at cost less
accumulated amortization and any recognized impairment loss. Amortization is
provided over the term of the land use right agreements on a straight-line
basis, which is 50 years and they will expire in 2055.
Advertising costs
Advertising costs are expensed as incurred. The total
advertising costs were $9,359 for the nine months ended December 31, 2008.
Other income recognition
Other income comprised of interest income and others.
Interest income is accrued on a time basis, by reference to the
principal outstanding and at the effective interest rate applicable, which is
the rate that exactly discounts the estimated future cash receipts through the
expected life of the loan to the loans net carrying amount.
Foreign currency translation
The accompanying financial statements are presented in United
States dollars. The functional currency of the Group is Renminbi, RMB. The
financial statements are translated into United States dollars from RMB at
year-end exchange rates as to assets and liabilities and average exchange rates
as to revenues and expenses. Capital accounts are translated at their historical
exchange rates when the capital transactions occurred.
F-9
China Nutrifruit Group Limited and Subsidiaries (Formerly
Known as Fashion Tech International, Inc.)
Notes to Condensed Consolidated
Financial Statements
For the three and nine months ended December 31, 2008
and 2007
(Unaudited)
(Stated in U.S. Dollars)
Foreign currency translation (Continued)
December 31, 2008
|
|
Balance sheet
|
RMB6.8542 to US$1.00
|
Statement of income and comprehensive income
|
RMB6.8916 to US$1.00
|
March 31, 2008
|
|
Balance sheet
|
RMB7.0222 to US$1.00
|
Statement of income and comprehensive income
|
RMB7.4695 to US$1.00
|
The RMB is not freely convertible into foreign currency and all
foreign exchange transactions must take place through authorized institutions.
No representation is made that the RMB amounts could have been, or could be,
converted into US$ at the rates used in translation.
We have restricted cash, amounting to US$8,376,234 and
US$7,103,562 as of December 31, 2008 and March 31, 2008 respectively.
Statutory reserves
The laws and regulations of the PRC require that before an
enterprise distributes profits to its owners, it must first satisfy all tax
liabilities, provide for losses in previous years, and make allocations. The
statutory reserves include a surplus reserve fund and a common welfare fund.
These statutory reserves represent restricted retained earnings. The details of
surplus reserve fund and common welfare fund are as follows:
Surplus reserve fund
The Companys subsidiary in PRC is
required, as necessary, to transfer 10 percent of its net income, as determined
in accordance with the PRC accounting rules and regulations, to a statutory
surplus reserve fund until such reserve balance reaches 50 percent of that
subsidiarys paid-in capital.
The transfer to this reserve must be
made before distribution of any dividends to owners. The surplus reserve fund is
non-distributable other than during liquidation and can be used to fund previous
years' losses, if any, and may be utilized for business expansion or converted
into equity by raising equity from existing owners in proportion to their equity
holdings.
Common welfare fund
The Companys subsidiary in PRC is
required, as necessary, to transfer 5 percent to 10 percent of its net income,
as determined in accordance with the PRC accounting rules and regulations, to
the statutory common welfare fund. This fund can only be utilized on capital
items for the collective benefit of that subsidiarys employees, such as
construction of dormitories, cafeteria facilities, and other staff welfare
facilities. This fund is non-distributable other than upon liquidation. The
transfer to this fund must be made before distribution of any dividends to
owners.
F-10
China Nutrifruit Group Limited and Subsidiaries (Formerly
Known as Fashion Tech International, Inc.)
Notes to Condensed Consolidated
Financial Statements
For the three and nine months ended December 31, 2008
and 2007
(Unaudited)
(Stated in U.S. Dollars)
Related party transactions
A related party is generally defined as (i) any person that
holds 10% or more of the Groups securities and their immediate families, (ii)
the Groups management, (iii) someone that directly or indirectly controls, is
controlled by or is under common control with the Group, or (iv) anyone who can
significantly influence the management or operating decisions of the Group. A
transaction is considered to be a related party transaction when there is a
transfer of resources or obligations between related parties.
Income taxes
The Group accounts for income taxes under the provision of
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes (SFAS 109) and related interpretations and guidance including FIN
48, Accounting for Uncertainty in Income Taxes an interpretation of FASB
Statement No. 109 (Fin 48), resulting in two components of income tax expense:
current and deferred. Current income tax expense approximates taxes to be paid
or refunded for the relevant periods. Deferred income tax expense results from
changes in deferred tax assets and liabilities between periods. Deferred income
tax assets and liabilities are computed for differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities
that will result in taxable or deductible amounts in the future, as well as from
net operating loss and tax credit carryforwards, and are measured at the enacted
tax laws and rates applicable in the years which the differences are expected to
be recovered or settled. A deferred tax asset is recognized if it is more likely
than not that a benefit will be realized. The Groups operations are primarily
located in PRC and subject to PRC profits tax.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board
(FASB) issued SFAS 157, Fair Value Measurements (SFAS 157), which provides
guidance about how to measure assets and liabilities that use fair value. SFAS
157 apply whenever another US GAAP standard requires (or permits) assets or
liabilities to be measured at fair value but does not expand the use of fair
value to any new circumstances. This standard also requires additional
disclosures in both annual and quarterly reports. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007.
In February 2008, the FASB issued FASB Staff Position (FSP) 157-1, Application
of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13 (FSP 157-1), which states
that SFAS 157 does not address fair value measurements for purposes of lease
classification or measurement. In February 2008, the FASB issued FSP 157-2,
Effective Date of FASB Statement No. 157 (FSP 157-2), which delays the
effective date for non-financial assets and non-financial liabilities to fiscal
years beginning after November 15, 2008, except for items that are measured at
fair value in the financial statements on a recurring basis (at least annually).
The Company adopted the provisions of SFAS 157 for its financial assets and
liabilities and those items for which it has measured on a recurring basis
effective January 1, 2008, and the adoption did not have a material impact on
its financial position and results of operations. As provided by FSP 157-2, the
Company has elected to defer the adoption of SFAS 157 for certain of its
non-financial assets and liabilities and is currently evaluating the impact of
adopting SFAS 157 on its non-financial assets and liabilities.
F-11
China Nutrifruit Group Limited and Subsidiaries (Formerly
Known as Fashion Tech International, Inc.)
Notes to Condensed Consolidated
Financial Statements
For the three and nine months ended December 31, 2008
and 2007
(Unaudited)
(Stated in U.S. Dollars)
In February 2007, the FASB issued SFAS 159, The Fair Value
Option for Financial Assets and Financial Liabilities - Including an amendment
of FASB Statement No. 115 (SFAS 159), which is effective for the Company
beginning January 1, 2008. This standard permits entities to choose to measure
many financial instruments and certain other items at fair value and
consequently report unrealized gains and losses on such items in earnings. The
Company has elected not to adopt the fair value provisions of SFAS 159 and the
adoption of SFAS 159 did not have a significant impact of its financial
position, cash flows and results of operations.
In December 2007, the FASB issued SFAS 141 (revised 2007),
Business Combinations (SFAS 141(R)). SFAS 141(R) establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141(R)
also establishes disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. SFAS 141(R) will be effective
for financial statements issued for fiscal years beginning after December 15,
2008, and will be adopted by the Company beginning in the first quarter of 2009.
The Company does not expect there to be any significant impact of adopting SFAS
141(R) on its financial position, cash flows and results of operations.
In December 2007, the FASB issued SFAS 160, Noncontrolling
Interests in Consolidated Financial Statements - an amendment of Accounting
Research Bulletin No.51 (SFAS 160). SFAS 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parents ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements
that clearly identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. SFAS 160 will be effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and will be adopted by the Company beginning in the first quarter of 2009. The
Company does not expect there to be any significant impact of adopting SFAS 160
on its financial position, cash flows and results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 is intended
to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entitys financial position, financial
performance, and cash flows. SFAS 161 achieves these improvements by requiring
disclosure of the fair values of derivative instruments and their gains and
losses in a tabular format. It also provides more information about an entitys
liquidity by requiring disclosure of derivative features that are credit
risk-related. Finally, it requires cross-referencing within footnotes to enable
financial statement users to locate important information about derivative
instruments. SFAS 161 will be effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, will be
adopted by the Company beginning in the first quarter of 2009. The Company does
not expect there to be any significant impact of adopting SFAS 161 on its
financial position, cash flows and results of operations.
F-12
China Nutrifruit Group Limited and Subsidiaries (Formerly
Known as Fashion Tech International, Inc.)
Notes to Condensed Consolidated
Financial Statements
For the three and nine months ended December 31, 2008
and 2007
(Unaudited)
(Stated in U.S. Dollars)
In May 2008, FASB issued Financial Accounting Standards No.
162, The Hierarchy of Generally Accepted Accounting Principles. This Statement
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).
This Statement is effective 60 days following the SEC's approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles. The
Company does not expect there to be any significant impact of adopting SFAS 162
on its financial position, cash flows and results of operations.
In May 2008, FASB issued Financial Accounting Standards No.
163, Accounting for Financial Guarantee Insurance Contracts - an interpretation
of FASB Statement No. 60. Diversity exists in practice in accounting for
financial guarantee insurance contracts by insurance enterprises under FASB
Statement No. 60, Accounting and Reporting by Insurance Enterprises. That
diversity results in inconsistencies in the recognition and measurement of claim
liabilities because of differing views about when a loss has been incurred under
FASB Statement No. 5, Accounting for Contingencies. This Statement requires that
an insurance enterprise recognize a claim liability prior to an event of default
(insured event) when there is evidence that credit deterioration has occurred in
an insured financial obligation. This Statement also clarifies how Statement 60
applies to financial guarantee insurance contracts, including the recognition
and measurement to be used to account for premium revenue and claim liabilities.
Those clarifications will increase comparability in financial reporting of
financial guarantee insurance contracts by insurance enterprises. This Statement
requires expanded disclosures about financial guarantee insurance contracts. The
accounting and disclosure requirements of the Statement will improve the quality
of information provided to users of financial statements. This Statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and all interim periods within those fiscal years. The
Company does not expect there to be any significant impact of adopting SFAS 163
on its financial position, cash flows and results of operations.
Other recent accounting pronouncements issued by the FASB
(including its Emerging Issues Task Force (EITF)), the American Institute of
Certified Public Accountants (AICPA), and the SEC did not or are not believed
by management to have a material impact on the Company's present or future
financial statements.
F-13
China Nutrifruit Group Limited and Subsidiaries (Formerly
Known as Fashion Tech International, Inc.)
Notes to Condensed Consolidated
Financial Statements
For the three and nine months ended December 31, 2008
and 2007
(Unaudited)
(Stated in U.S. Dollars)
NOTE 3 ACQUISITION OF A SUBSIDIARY
In November 2007, Solar Sun entered into a share purchase
agreement with six owners of Longheda to acquire the 75% interest in Longheda
with a total consideration of RMB40,000,000.
In May 2008, Solar Sun entered into another share purchase
agreement with six owners of Longheda to acquire the remaining 25% interests in
Longheda with a total consideration of RMB10,000,000. Since the beneficial
owners of the Company were third parties independent of Longheda and the Group
has obtained the controlling interests in Longheda, the acquisition was
accounted for using the purchase method of accounting. As of the acquisition
date, the Group recorded the fair values of Longheda assets acquired and
liabilities assumed. The allocation of the purchase price to assets acquired and
liabilities assumed as at the date of acquisition is as follows:
|
|
$
|
|
|
|
|
|
Cash and cash equivalents
|
|
5,666,951
|
|
Trade accounts receivable
|
|
2,389,049
|
|
Inventories
|
|
1,126,973
|
|
Other current assets
|
|
2,477,178
|
|
Property, plant and equipment, net
|
|
11,107,547
|
|
Land use right, net
|
|
502,735
|
|
Borrowings
|
|
(2,863,365
|
)
|
Accounts payable
|
|
(111,771
|
)
|
Other payables and accrued expenses
|
|
(478,984
|
)
|
Tax payable
|
|
(166,764
|
)
|
|
|
|
|
Net assets acquired
|
|
19,649,549
|
|
Minority interests
|
|
(13,452,363
|
)
|
Statutory reserves
|
|
(1,713,065
|
)
|
Negative goodwill
|
|
(3,052,439
|
)
|
|
|
|
|
Total purchase price
|
|
1,431,682
|
|
The allocation of the purchase price to assets acquired and
liabilities assumed as at the date of acquisition resulted in negative goodwill
of $3,052,439. In accordance with SFAS No. 141, Business Combinations, the
negative goodwill was allocated as a pro rata reduction of the amounts assigned
to the assets acquired excluding financial assets, deferred taxes and other
current assets. This resulted in the following allocation of negative goodwill:
|
|
$
|
|
Property, plant and equipment, net
|
|
2,920,266
|
|
Land use right, net
|
|
132,173
|
|
Negative goodwill
|
|
3,052,439
|
|
F-14
China Nutrifruit Group Limited and Subsidiaries (Formerly
Known as Fashion Tech International, Inc.)
Notes to Condensed Consolidated
Financial Statements
For the three and nine months ended December 31, 2008
and 2007
(Unaudited)
(Stated in U.S. Dollars)
The following table represents the unaudited results of
operations of the Company as if the acquisition of Longheda had been consummated
as of April 1, 2008 and 2007 and the results are shown for the nine months ended
December 31, 2008 and 2007 includes certain pro forma adjustments, including
depreciation and amortization on the assets acquired, and other adjustments.
|
|
For the nine months ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Pro forma Information:
|
|
|
|
|
|
|
Revenues
|
$
|
36,212,228
|
|
$
|
27,155,984
|
|
Net profit
|
|
10,114,025
|
|
|
8,156,440
|
|
Net profit per share basic
|
$
|
0.5197
|
|
$
|
0.8810
|
|
Net profit per share diluted
|
$
|
0.5196
|
|
$
|
0.8810
|
|
Shares used for computing basic earnings per share
|
|
19,463,339
|
|
|
9,258,462
|
|
Shares used for computing diluted earnings
per share
|
|
19,465,603
|
|
|
9,258,462
|
|
NOTE 4. EARNINGS PER SHARE
The computations of basic and diluted earnings per share for
the three months and nine months ended December 31 are as follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings available to common shareholders
|
$
|
3,254,608
|
|
$
|
1,299,481
|
|
$
|
9,904,717
|
|
$
|
1,299,481
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock
|
|
36,061,476
|
|
|
20,531,621
|
|
|
19,463,339
|
|
|
9,258,462
|
|
Dilutive potential common
stock
|
|
36,091,262
|
|
|
20,531,621
|
|
|
19,465,518
|
|
|
9,258,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings per share
|
$
|
0.0903
|
|
$
|
0.0633
|
|
$
|
0.5089
|
|
$
|
0.1404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings per share
|
$
|
0.0902
|
|
$
|
0.0633
|
|
$
|
0.5088
|
|
$
|
0.1404
|
|
F-15
China Nutrifruit Group Limited and Subsidiaries (Formerly
Known as Fashion Tech International, Inc.)
Notes to Condensed Consolidated
Financial Statements
For the three and nine months ended December 31, 2008
and 2007
(Unaudited)
(Stated in U.S. Dollars)
On June 19, 2008, the Company effected a reverse stock split
pursuant to which each ten outstanding shares of common stock, par value $0.001,
were automatically converted into one share of common stock, par value $0.001
(the Reverse Stock Split). All of the share number, share prices and per-share
amounts have been adjusted, on a retroactive basis, to reflect the effect of the
Reverse Stock Split.
NOTE 5. INVENTORY, NET
At December 31, 2008 and March 31, 2008 inventory is comprised
of the following:
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
Finished goods
|
$
|
12,392,223
|
|
$
|
1,888,650
|
|
Raw material
|
|
170,198
|
|
|
67,075
|
|
|
$
|
12,562,421
|
|
$
|
1,955,725
|
|
NOTE 6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, at December 31, 2008 and
March 31, 2008 are summarized as follows:
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
Buildings
|
$
|
3,486,972
|
|
$
|
1,846,936
|
|
Machinery
|
|
15,216,545
|
|
|
7,254,044
|
|
Furniture, fixtures and office equipment
|
|
13,643
|
|
|
28,016
|
|
Motor vehicles
|
|
6,099
|
|
|
22,304
|
|
|
|
|
|
|
|
|
Total
|
$
|
18,723,259
|
|
$
|
9,151,300
|
|
Less: accumulated depreciation
|
|
(1,756,562
|
)
|
|
(1,977,777
|
)
|
|
$
|
16,966,697
|
|
$
|
7,173,523
|
|
At December 31, 2008 and March 31, 2008, certain of the Groups
plant and machinery with an aggregate net book value of approximately $5,817,601
and $2,559,000, respectively, were pledged to secure the bank borrowings.
F-16
China Nutrifruit Group Limited and Subsidiaries (Formerly
Known as Fashion Tech International, Inc.)
Notes to Condensed Consolidated
Financial Statements
For the three and nine months ended December 31, 2008
and 2007
(Unaudited)
(Stated in U.S. Dollars)
NOTE 7. BORROWINGS
The Group's borrowings are summarized as follows:
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
Bank borrowings
|
$
|
7,294,797
|
|
$
|
2,848,110
|
|
The interest rates are based on the banks best lending rate
plus a certain percentage and the credit lines are normally subject to periodic
review. The range of effective interest rates (which are also equal to
contracted interest rates) on the Groups borrowings for the nine months ended
December 31, 2008 was 8.53% per annum. Plant and machinery with an aggregate net
book value of approximately $5,817,601 as of December 31, 2008 were pledged to
secure such bank borrowings. The maturity dates of the outstanding bank
borrowings as of December 31, 2008 are February 10, 2009 and August 14, 2009.
NOTE 8. AMOUNT DUE TO AN AFFILIATE/ A DIRECTOR/ A
SHAREHOLDER
The amount due to an affiliate/a director/ a shareholder is
unsecured, interest free and has no fixed terms of repayment.
NOTE 9. OTHER PAYABLES AND ACCRUED EXPENSES
Other payables and accrued expenses by major categories are
summarized as follows:
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruals
|
$
|
246,374
|
|
$
|
206,910
|
|
VAT payables
|
|
104,765
|
|
|
229,838
|
|
Other payables
|
|
38,039
|
|
|
57,530
|
|
|
$
|
389,178
|
|
$
|
494,278
|
|
F-17
China Nutrifruit Group Limited and Subsidiaries (Formerly
Known as Fashion Tech International, Inc.)
Notes to Condensed Consolidated
Financial Statements
For the three and nine months ended December 31, 2008
and 2007
(Unaudited)
(Stated in U.S. Dollars)
NOTE 10, PROVISION FOR INCOME TAXES
The provision for income tax is as follows:
|
|
For the nine months period
ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
PRC
|
$
|
3,248,958
|
|
$
|
293,824
|
|
Other jurisdictions
|
|
-
|
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
PRC
|
|
-
|
|
|
-
|
|
Other jurisdictions
|
|
-
|
|
|
-
|
|
|
|
3,248,958
|
|
|
293,824
|
|
At December 31, 2008, the Group did not have material valuation
allowance that would result into any deferred tax assets.
The Groups operations are conducted in the PRC and are subject
to PRCs enterprise income tax. Pursuant to the PRC Income Tax Law prior to
January 1, 2008, enterprise income taxes were generally imposed at a statutory
rate of 33%, which comprised 30% national income tax and 3% local income tax.
However, the Group has been granted a preferential tax treatment by the State
Tax Bureau of the PRC as the Group was considered as a hi-tech enterprise in the
Heilongjiang province. According to the PRC Income Tax Law and various approval
documents issued by the Tax Bureau, the Groups profits for the period prior to
2008 were taxed at a rate of 15%.
On March 16, 2007, the Fifth Plenary Session of the Tenth
National Peoples Congress passed the Corporate Income Tax Law of the PRC which
will take effect on January 1, 2008. According to the new tax law, the
applicable corporate income tax rate for domestically-owned enterprises and
foreign-invested enterprises are subject to a uniform tax rate of 25%. While the
new tax law equalizes the tax rates for domestically-owned and foreign-invested
companies, preferential tax treatment would continue to be given to companies in
certain encouraged sectors and to enterprises classified as high and new
technology companies, whether domestically-owned or foreign-invested
enterprises. The new tax law also provides a five-year transition period
starting from its effective date for those enterprises which were established
before the promulgation date of the new tax law and which were entitled to a
preferential tax treatment. The tax rate of such enterprises will transition to
the uniform tax of 25% within a five-year transition period.
F-18
China Nutrifruit Group Limited and Subsidiaries (Formerly
Known as Fashion Tech International, Inc.)
Notes to Condensed Consolidated
Financial Statements
For the three and nine months ended December 31, 2008
and 2007
(Unaudited)
(Stated in U.S. Dollars)
In July 2006, the FASB issued FIN 48, which clarifies the
accounting and disclosure for uncertainty in tax positions, as defined in SFAS
No. 109. FIN 48 prescribes a more-likely-than-not threshold for financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. This interpretation also provides guidance on
de-recognition of income tax assets and liabilities, classification of current
and deferred income tax assets and liabilities, accounting for interest and
penalties associated with tax positions, accounting for income taxes in interim
periods and income tax disclosures.
The Group adopted the provisions of FIN 48 effective August 22,
2007. Based on its FIN 48 analysis, the Group concluded that the adoption of FIN
48 did not have any impact on the Groups total liabilities or owners equity.
The Groups classifies interests and/or penalties related to income tax matters
in income tax expenses. As of March 31, 2008, the Group did not have interests
and penalties related to uncertain tax positions. The Group does not anticipate
any significant increases or decrease to its liabilities for unrecognized tax
benefits within the next twelve months.
The provision for income taxes appearing in the consolidated
statement of income represents the current tax expenses. A reconciliation
between the provision for income taxes computed by PRC enterprise income tax
rate to income before income taxes is as follows:
|
For the nine months period
ended December 31,
|
|
2008
|
2007
|
|
%
|
%
|
Statutory rate
|
25
|
33
|
Tax effect of preferential tax treatment granted by the
State Tax Bureau of the PRC
|
-
|
(18)
|
|
25
|
15
|
NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the amount at which
the instrument could be exchanged in a current transaction between willing
parties. The carrying amounts of financial assets and liabilities, such as cash
and cash equivalents, trade receivables, trade payables, other payables and
accrued expenses, approximate their fair values because of the short maturity of
these instruments and market rates of interest.
NOTE 12. STOCKHOLDERS EQUITY
General
The Companys total authorized capital at December 31, 2008, is
125,000,000 shares of which 120,000,000 shares are common stock of par value
$0.001 and 5,000,000 shares are preferred stock of par value $0.001. At December
31, 2008, 36,125,754 shares of common stock and none of the shares of preferred
stock, respectively, were issued and outstanding.
F-19
China Nutrifruit Group Limited and Subsidiaries (Formerly
Known as Fashion Tech International, Inc.)
Notes to Condensed Consolidated
Financial Statements
For the three and nine months ended December 31, 2008
and 2007
(Unaudited)
(Stated in U.S. Dollars)
NOTE 12. STOCKHOLDERS EQUITY
Common stock
On August 14, 2008, the Company effected an initial closing of
a private placement transaction and issued 1,692,960 shares of the Companys
common stock to certain investors at a price of $2.78 per share for aggregate
proceeds of $4,706,467.
On October 3, 2008, the Company effected a second closing of a
private placement transaction and issued 955,244 shares of the Companys common
stock to 21 investors at a price of $2.78 per share for aggregate proceeds of
$2,655,600.
On October 10, 2008, the Company effected a third and final
closing of a private placement transaction and issued 437,636 shares of the
Companys common stock to 9 investors at a price of $2.78 per share for
aggregate proceeds of $1,216,637.
Warrants
In connection with the private placement which closed on
October 10, 2008, WLT Brothers Capital, Inc., Wentworth Securities, Inc. and
Euro Pacific Capital, Inc., the Companys placement agents, received, as partial
compensation, warrants to purchase 66,171, 95,781 and 54,057 shares of the
Companys common stock, respectively. The warrants have a term of 3 years and
are immediately exercisable at $2.78 per share, subject to the usual adjustments
for certain corporate events.
NOTE 13. PRC CONTRIBUTION PLAN
Employees of the Group are entitled to retirement benefits
calculated with reference to their salaries basis upon retirement and their
length of service in accordance with a PRC government-managed retirement plan.
The PRC government is directly responsible for the payments of the benefits to
these retired employees. The Group is required to make contributions to the
government-managed retirement plan based on certain percentages of the
employees monthly salaries. The amounts contributed by the Group were
approximately $209,591 for the nine months period ended December 31, 2008.
NOTE 14. SIGNIFICANT CONCENTRATIONS AND RISK
(a) Credit Risk
Financial instruments that potentially subject the Group to
significant concentration of credit risk consist primarily of cash and cash
equivalents. As of December 31, 2008, substantially all of the Groups cash and
cash equivalents were held by major financial institutions located in the PRC,
which management believes are of high credit quality.
(b) Groups operations are in China
All of the Groups products are produced in China. The Groups
operations are subject to various political, economic, and other risks and
uncertainties inherent in China. Among other risks, the Groups operations are
subject to the risks of transfer of funds; domestic and international customs
and tariffs; changing taxation policies; foreign exchange restrictions; and
political conditions and governmental regulations.
F-20
China Nutrifruit Group Limited and Subsidiaries (Formerly
Known as Fashion Tech International, Inc.)
Notes to Condensed Consolidated
Financial Statements
For the three and nine months ended December 31, 2008
and 2007
(Unaudited)
(Stated in U.S. Dollars)
NOTE 15. COMMITMENTS AND CONTINGENT LIABILITIES
Operating Lease Commitments
The Group leases certain office premises and buildings under
non-cancelable leases. Minimum future rental payments required under
non-cancellable operating leases in effect as of December 31, 2008 are as
follows:
Not later than 1 year
|
$
|
8,889
|
|
Later than 1 year and not later than 5 years
|
|
-
|
|
|
$
|
8,889
|
|
Rent expenses for the three months and nine months ended
December 31, 2008 were $8,890 and $25,877, respectively.
NOTE 16. COMPREHENSIVE INCOME
The Companys comprehensive income is comprised of net
operating results and translation adjustments. Comprehensive income for the
three months and nine months ended December 31 are as follows:
|
|
Three months ended
December 31,
|
|
|
Nine months ended
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income :
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
$
|
3,254,608
|
|
$
|
1,299,481
|
|
$
|
9,904,717
|
|
$
|
1,299,481
|
|
Translation adjustments
|
|
(34,698
|
)
|
|
234,471
|
|
|
(402,187
|
)
|
|
234,471
|
|
Total comprehensive loss, net of taxes
|
$
|
3,219,910
|
|
$
|
1,533,952
|
|
$
|
9,502,530
|
|
$
|
1,533,952
|
|
F-21
China Nutrifruit Group Limited and Subsidiaries (Formerly
Known as Fashion Tech International, Inc.)
Notes to Condensed Consolidated
Financial Statements
For the three and nine months ended December 31, 2008
and 2007
(Unaudited)
(Stated in U.S. Dollars)
NOTE 17. RELATED PARTY TRANSACTION
On May 16, 2008, our Chairman Changjun Yu (Mr. Yu) entered
into a Trademark Transfer Agreement with the Company pursuant to which Mr. Yu
transferred his rights to the trademark 农珍之冠 to the Company for a nominal
consideration of RMB 1. In connection with the trademark transfer, Mr. Yu also
entered into a Trademark License Agreement with the Company pursuant to which
Mr. Yu granted the Company the exclusive rights to use such trademark before the
Trademark Office approves the transfer of such trademark.
On April 28, 2008, Longheda entered into a financial advisory
agreement (the Financial Advisory Agreement) with HFG International, Limited.
The Financial Advisory Agreement was amended on August 12, 2008. Under the
Financial Advisory Agreement, as amended, HFG International, Limited agreed to
provide Longheda with financial advisory and consulting services in facilitating
Longhedas going public transaction. In consideration for these services, HFG
International, Limited is entitled to $450,000 which will be paid within 45 days
after the closing of the going public transaction. HFG International, Limited is
an affiliate of Halter Financial Investments, L.P., which was an 87.5%
shareholder of the Company before the closing of the reverse acquisition of
Fezdale.
[End of condensed consolidated financial statements.]
F-22
CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES
(FORMERLY KNOWN AS FASHION TECH INTERNATIONAL, INC.)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The unaudited pro forma condensed consolidated statements of
operations for the three months and nine months ended December 31, 2007 reflects
the results of operations of the Company as if had the merger and the
acquisition of 100% equity interest of Longheda had occurred on April 1, 2007.
The pro forma condensed consolidated statements of operations were prepared as
if the transactions were consummated on April 1, 2007. These pro forma condensed
consolidated statements of operations should be read in conjunction with the
separate financial statements and related notes thereto of China Nutrifruit
Group Limited and have been prepared for comparative purposes only and do not
purport to be indicative of the results of operations which actually would have
resulted had the transaction occurred on the date indicated and are not
necessarily indicative of the results that may be expected in the future.
A pro forma balance sheet has not been provided since the
historical unaudited condensed consolidated balance sheet of China Nutrifruit
Group Limited and its subsidiaries as of December 31, 2008 provided in this
financial statement includes the effects of the recapitalization.
F-23
CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES
(FORMERLY KNOWN AS FASHION TECH INTERNATIONAL, INC.)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Stated in US Dollars)
FOR THE THREE-MONTH PERIOD ENDED
DECEMBER 31, 2007
|
|
China
Nutrifruit
Three-
month
ended
|
|
|
Fezdale
Three-
month
ended
|
|
|
Solar Sun
|
|
Longheda
|
|
|
Pro Forma
Adjustments
|
|
|
Pro Forma
Combined
|
|
Three-
month
ended
|
|
|
Three-
month
ended
|
December
|
|
|
December
|
|
|
December
|
|
|
December
|
31, 2007
|
|
|
31, 2007
|
|
|
31, 2007
|
|
|
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
13,384,677
|
|
|
|
|
$
|
13,384,677
|
|
Cost of sales
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,473,282
|
)
|
|
(C) 174,238
|
|
|
(7,299,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,911,395
|
|
|
|
|
|
6,085,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
(8,035
|
)
|
|
(36,479
|
)
|
|
(74
|
)
|
|
(1,110,312
|
)
|
|
|
|
|
(1,154,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
(8,035
|
)
|
|
(36,479
|
)
|
|
(74
|
)
|
|
4,801,083
|
|
|
|
|
|
4,930,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses
|
|
(23
|
)
|
|
-
|
|
|
-
|
|
|
(107,143
|
)
|
|
|
|
|
(107,166
|
)
|
Other income
|
|
-
|
|
|
-
|
|
|
60
|
|
|
5,454
|
|
|
|
|
|
5,514
|
|
Total other income (expenses)
|
|
(23
|
)
|
|
-
|
|
|
60
|
|
|
(101,689
|
)
|
|
|
|
|
(101,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
(8,058
|
)
|
|
(36,479
|
)
|
|
(14
|
)
|
|
4,699,394
|
|
|
|
|
|
4,829,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(691,052
|
)
|
|
|
|
|
(691,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
$
|
(8,058
|
)
|
$
|
(36,479
|
)
|
$
|
(14
|
)
|
$
|
4,008,342
|
|
|
|
|
$
|
4,138,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
$
|
(0.0004
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.1284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
20,531,621
|
|
|
|
|
|
|
|
|
|
|
|
(A)(18,478,458
|
)
|
|
32,220,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(B) 30,166,878
|
|
|
|
|
F-24
CHINA NUTRIFRUIT GROUP LIMITED AND SUBSIDIARIES
(FORMERLY KNOWN AS FASHION TECH
INTERNATIONAL, INC.)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Stated in US Dollars)
FOR THE NINE-MONTH PERIOD ENDED
DECEMBER 31, 2007
|
|
China
Nutrifruit
|
|
|
Fezdale
|
|
|
Solar Sun
|
|
Longheda
|
|
|
Pro
Forma
Adjustments
|
|
|
Pro
Forma
Combined
|
|
Nine-
month
ended
|
|
|
Nine-month
ended
|
Nine-month
|
|
|
Nine-month
|
ended
|
|
|
ended
|
December
|
|
|
December
|
|
|
December
|
|
|
December
|
31, 2007
|
|
|
31, 2007
|
|
|
31, 2007
|
|
|
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
27,155,984
|
|
|
|
|
$
|
27,155,984
|
|
Cost of sales
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(14,929,237
|
)
|
|
(C) 514,198
|
|
|
(14,415,039)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
-
|
|
|
-
|
|
|
-
|
|
|
12,226,747
|
|
|
|
|
|
12,740,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
(14,580
|
)
|
|
(33,039
|
)
|
|
(74
|
)
|
|
(2,328,032
|
)
|
|
|
|
|
(2,375,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings
|
|
(14,580
|
)
|
|
(33,039
|
)
|
|
(74
|
)
|
|
9,898,715
|
|
|
|
|
|
10,365,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expenses
|
|
(132
|
)
|
|
-
|
|
|
-
|
|
|
(280,965
|
)
|
|
|
|
|
(281,097
|
)
|
Other income
|
|
-
|
|
|
-
|
|
|
60
|
|
|
16,947
|
|
|
|
|
|
17,007
|
|
Total other income (expenses)
|
|
(132
|
)
|
|
-
|
|
|
60
|
|
|
(264,018
|
)
|
|
|
|
|
(264,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income
taxes
|
|
(14,712
|
)
|
|
(33,039
|
)
|
|
(14
|
)
|
|
9,634,697
|
|
|
|
|
|
10,101,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,445,204
|
)
|
|
|
|
|
(1,445,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
$
|
(14,712
|
)
|
$
|
(33,039
|
)
|
$
|
(14
|
)
|
|
8,189,493
|
|
|
|
|
$
|
8,655,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
$
|
(0.0016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.2784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
9,258,462
|
|
|
|
|
|
|
|
|
|
|
|
(A) (8,332,615
|
)
|
|
31,092,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(B) 30,166,878
|
|
|
|
|
F-25
NOTES TO UNAUDITED PROFORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 PRO FORMA ADJUSTMENTS
On August 14, 2008, China Nutrifruit Group Limited acquired
all of the equity interests of Fezdale Investments Limited ("Fezdale"), a
British Virgin Islands corporation, through a share exchange transaction (the
"Share Exchange Transaction"), with the result that the stockholders of Fezdale
became the beneficial owners of approximately 83.5% of the Companys common
stock. As a result of such Share Exchange Transaction, Fezdale became a
wholly-owned subsidiary of the Company and the former shareholders of Fezdale
became the Companys controlling shareholders. Accordingly, all references to
shares of Fezdales ordinary shares have been restated to reflect the equivalent
numbers of the common stock of China Nutrifruit Group Limited.
China Nutrifruit Group Limited completed the acquisition of
Fezdale, pursuant to the share exchange agreement, in August 2008. The
acquisition would be accounted for as a recapitalization effected by a share
exchange, wherein Fedzale is considered as the acquirer for accounting and
financial reporting purposes.
Pro forma adjustments on the attached financial statements include the
following:
(A) To record the 1 for 10 reverse stock split of China Nutrifruit Group
Limiteds common stock.
(B) To record the issuance of 30,166,878 shares of China Nutrifruit Group
Limiteds common stock in connection with the recapitalization.
(C) To record the adjustment of depreciation of property, plant and equipment
and amortization of land use rights due to the effect of negative goodwill
arising from the acquisition of Longheda.
F-26
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Board of Directors and Owners
Daqing Longheda Food Company Limited
We have audited the accompanying balance
sheets of Daqing Longheda Food Company Limited (the "Company") as of March 31,
2008 and 2007, and the related statements of income, changes in owners' 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 financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide reasonable basis for our opinion.
In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial
position of Company as of March 31, 2008 and 2007, 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/ HLB Hodgson Impey Cheng
Chartered Accountants
Certified Public Accountants
Hong Kong, August 11, 2008
..................................................
F-27
DAQING LONGHEDA FOOD COMPANY LIMITED
BALANCE SHEETS
|
March 31
|
|
2008
|
|
2007
|
|
$
|
|
$
|
ASSETS
|
|
|
|
Current Assets
|
|
|
|
Cash and cash
equivalents
|
7,103,562
|
|
4,003,715
|
Trade
accounts receivable
|
1,921,457
|
|
1,943,237
|
Inventories
|
1,955,725
|
|
1,312,668
|
Other current
assets
|
114,865
|
|
12,275
|
|
|
|
|
Total Current Assets
|
11,095,609
|
|
7,271,895
|
Property, plant and
equipment, net
|
10,675,742
|
|
10,772,820
|
Land use rights, net
|
123,768
|
|
114,648
|
|
|
|
|
TOTAL ASSETS
|
21,895,119
|
|
18,159,363
|
|
|
|
|
LIABILITIES AND
OWNERS' EQUITY
|
|
|
|
Current Liabilities
|
|
|
|
Short term
borrowings
|
2,848,110
|
|
-
|
Accounts
payable
|
159,078
|
|
130,167
|
Other
payables and accrued expenses
|
494,278
|
|
930,030
|
Tax payable
|
607,680
|
|
279,886
|
Dividend
payable
|
-
|
|
7,105,071
|
|
|
|
|
Total Current
Liabilities
|
4,109,146
|
|
8,445,154
|
Long-term borrowings
|
-
|
|
3,229,578
|
|
|
|
|
Total Liabilities
|
4,109,146
|
|
11,674,732
|
Owners' Equity
|
|
|
|
Paid-in-capital
|
1,206,738
|
|
1,206,738
|
Statutory
reserves
|
1,713,065
|
|
1,213,035
|
Exchange
reserve
|
1,788,387
|
|
487,614
|
Retained
earnings
|
13,077,783
|
|
3,577,244
|
|
|
|
|
Total Owners' Equity
|
17,785,973
|
|
6,484,631
|
|
|
|
|
TOTAL LIABILITIES
AND OWNERS' EQUITY
|
21,895,119
|
|
18,159,363
|
See
accompanying notes to financial statements
F-28
DAQING LONGHEDA FOOD COMPANY LIMITED
STATEMENTS OF INCOME
|
For the Years Ended March 31,
|
|
2008
|
|
2007
|
|
$
|
|
$
|
|
|
|
|
Net sales
|
34,510,140
|
|
23,022,480
|
|
|
|
|
Cost of products
sold
|
(18,947,091)
|
|
(11,609,731)
|
|
|
|
|
Gross Profit
|
15,563,049
|
|
11,412,749
|
|
|
|
|
Selling, general and
administrative expenses
|
(3,155,007)
|
|
(2,167,386)
|
|
|
|
|
Operating income
|
12,408,042
|
|
9,245,363
|
Interest expense
|
(402,677)
|
|
(470,917)
|
Other income
|
30,509
|
|
121,872
|
|
|
|
|
Income before income
taxes
|
12,035,874
|
|
8,896,318
|
Provision for income
taxes
|
(2,035,305)
|
|
(1,341,195)
|
|
|
|
|
Net income
|
10,000,569
|
|
7,555,123
|
See
accompanying notes to financial statements
F-29
DAQING LONGHEDA FOOD COMPANY LIMITED
STATEMENTS OF CHANGES IN OWNERS' EQUITY
|
|
|
|
Accumulated
|
|
|
|
|
|
Other
|
Total
|
|
Paid-in
|
Statutory
|
Retained
|
Comprehensive
|
Owners
|
|
Capital
|
Reserves
|
Earnings
|
Income
|
Equity
|
|
$
|
$
|
$
|
$
|
$
|
|
|
|
|
|
|
Balance, April 1, 2006
|
1,206,738
|
651,033
|
3,689,194
|
105,998
|
5,652,963
|
Net income
|
-
|
-
|
7,555,123
|
-
|
7,555,123
|
Other comprehensive income:
|
|
|
|
|
|
Currency translation adjustment
|
-
|
-
|
-
|
381,616
|
381,616
|
Comprehensive income
|
|
|
|
|
7,936,739
|
Transfer to statutory reserves
|
-
|
562,002
|
(562,002)
|
-
|
-
|
Dividend declared
|
-
|
-
|
(7,105,071)
|
-
|
(7,105,071)
|
|
|
|
|
|
|
Balance, April 1, 2007
|
1,206,738
|
1,213,035
|
3,577,244
|
487,614
|
6,484,631
|
Net income
|
-
|
-
|
10,000,569
|
-
|
10,000,569
|
Other comprehensive income:
|
|
|
|
|
|
Currency translation adjustment
|
-
|
-
|
-
|
1,300,773
|
1,300,773
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
11,301,342
|
Transfer to statutory reserves
|
-
|
500,030
|
(500,030)
|
-
|
-
|
|
|
|
|
|
|
Balance, March 31, 2008
|
1,206,738
|
1,713,065
|
13,077,783
|
1,788,387
|
17,785,973
|
See
accompanying notes to financial statements
F-30
DAQING LONGHEDA FOOD COMPANY LIMITED
STATEMENTS OF CASH FLOWS
|
For the Years Ended March 31,
|
|
2008
|
|
2007
|
|
$
|
|
$
|
|
|
|
|
Operating Activities:
|
|
|
|
Net income
|
10,000,569
|
|
7,555,123
|
Adjustment to reconcile net income to net
cash provided by operating activities
|
|
|
|
Depreciation and amortization
|
1,130,331
|
|
964,704
|
Changes in operating assets and liabilities:
|
|
|
|
Trade accounts receivable, net
|
207,462
|
|
(1,530,710)
|
Inventories
|
(478,237)
|
|
(164,459)
|
Other current assets
|
(95,264)
|
|
36,387
|
Accounts payable
|
14,654
|
|
46,281
|
Other payables and accrued expenses
|
(499,147)
|
|
157,365
|
Tax payable
|
281,232
|
|
108,001
|
|
|
|
|
Net Cash Provided by Operating Activities
|
10,561,600
|
|
7,172,692
|
|
|
|
|
Investing Activities:
|
|
|
|
Purchases of property, plant and equipment
|
-
|
|
(4,461,320)
|
|
|
|
|
Net Cash Used in Investing Activities
|
-
|
|
(4,461,320)
|
|
|
|
|
Financing Activities:
|
|
|
|
Payment on borrowings
|
(6,024,484)
|
|
(4,802,983)
|
Proceeds from borrowings
|
5,355,096
|
|
2,275,097
|
Dividends paid
|
(7,363,258)
|
|
-
|
|
|
|
|
Net Cash Used in Financing Activities
|
(8,032,646)
|
|
(2,527,886)
|
|
|
|
|
Effect of exchange rate on cash and cash
equivalents
|
570,893
|
|
143,821
|
|
|
|
|
Net increase in cash and cash equivalents
|
2,528,954
|
|
183,486
|
|
|
|
|
Cash and cash equivalents at beginning of
period
|
4,003,715
|
|
3,676,408
|
|
|
|
|
Cash and cash equivalents at end of period
|
7,103,562
|
|
4,003,715
|
|
|
|
|
Supplemental disclosures of cash flows
information:
|
|
|
|
Cash paid during the period for interest
|
402,677
|
|
470,917
|
Cash paid during the period for income taxes
|
1,754,073
|
|
1,233,194
|
See
accompanying notes to financial statements
F-31
DAQING LONGHEDA FOOD COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND OPERATIONS
Organization
Daqing Longheda Food Company Limited (the
"Company") commenced in June 2004, when the Company, a domestic-funded
enterprises established in Heilongjiang province of Peoples' Republic of China
by Yu Changjun, Shi Jinglin, Lu Dongdong, Han Jiqiu, Wei Fenghong and Lu
Yingdong, commenced the production and sales of golden berry nectar. The
paid-in-capital of the Company upon incorporation was $1,206,738 (equivalent to
RMB10,000,000), of which Yu Changjun held 60%, Shi Jinlin held 16% and each of
the other 4 owners held 6%.
In November 2007, the six owners of the
Company transferred an aggregate of 75% of their interests in the Company to
Solar Sun Holdings Limited (the "Solar Sun"), a Hong Kong incorporated company.
After the transfer, Solar Sun held 75% of the paid-in-capital, Yu Changjun held
15%, Shi Jinlin held 4% and each of the other 4 owners held 1.5%.
In November 2007, the Company was granted a
new business license and became a sino-foreign equity enterprise.
In April 2008, the six founders of the
Company transferred all of their interests in the Company, an aggregate of 25%,
to Solar Sun. After the transfer, the Company is wholly owned by Solar Sun.
Nature of Operations
The Company manufactures and sells a variety
of food products processed from rare superfruits that grow in Northeast China.
Currently, the Company processes 4 types of rare superfruits including golden
berry, crab apple, blueberry and raspberry, and sell fresh fruits and 4 types of
fruit based products including fruit concentrate, nectar, glazed fruits and
fruit beverage. The Company sells all of its products through 68 domestic
distributors located in 19 provinces and 39 cities. The fresh fruits are mainly
sold to fruit supermarkets while the processed fruit products are mainly sold to
manufacturers for further processing into fruit juice and other fruit related
foods.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The financial statements represent the
accounts of the Company. The financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America.
Use of estimates
The preparation of the financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent liabilities at
the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
F-32
DAQING LONGHEDA FOOD COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Segment information
The Company identifies and classifies its
operating segment based on the nature of the products with similar economic
characteristics. No segment information is provided as the Company only has one
business and geographical segment. The Company's reportable segment is the
manufacture and sell of foods products, which the operations are located in PRC
and the sales were predominately made to customers located in the PRC.
Customer and supplier concentration
Trade accounts receivable - 2 and 3 customers
each accounted for more than 10% of the Company's trade accounts receivable as
of March 31, 2008 and 2007, respectively. The trade accounts receivable from
those customers represents approximately 33% and 43% of trade accounts
receivable as of March 31, 2008 and 2007.
Net sales 1 customer accounted for more
than 10% of the Company's net sales incurred during the years ended March 31,
2008 and 2007. The net sales from such customer represent approximately 13.8%
and 14.5% of the net sales incurred during the years ended March 31, 2008 and
2007.
The Company closely monitors the credit risk
associated with its customers.
Accounts payable 4 suppliers each accounted
for more than 10% of the Company's accounts payable as of March 31, 2008 and
2007, respectively. The accounts payable to those suppliers represents
approximately 91% and 93% of accounts payable as of March 31, 2008 and 2007.
Purchases No supplier accounted for more
than 10% of the Company's purchases made during the period for the years ended
March 31, 2008 and 2007.
Cash equivalents
The Company considers all highly liquid
investments with an original maturity date of three months or less to be cash
equivalents.
Trade accounts receivable
In the normal course of business, the Company
extends credit to customers. Trade accounts receivable, less allowance for
doubtful accounts, reflect the net realizable value of receivables, and
approximate fair value. On a regular basis, the Company evaluates its trade
accounts receivable and establishes an allowance for doubtful accounts based on
a combination of specific customer circumstances, credit conditions, and payment
history. A receivable is considered past due if payments have not been received
within the agreed upon invoice terms. No allowance for doubtful accounts at
March 31, 2008 and 2007 were recorded. Trade accounts receivable is charged off
against the allowance after management determines the potential for recovery is
remote.
F-33
DAQING LONGHEDA FOOD COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Inventories
The cost of finished products inventories
includes raw materials, director labor and indirect production costs.
Inventories are states at the lower of cost or market. The Group uses first-in,
first-out methods to value its inventories.
During
the idle production period, overhead costs, including depreciation, are treated
as current-period charges, which are charged directly as the general and
administrative expense instead of costs of inventories.
Fair value of financial instruments
The carrying amount of certain the Company's
financial instruments, including cash and cash equivalents, trade accounts
receivables, accounts payables, other current assets, other current liabilities
and accrued expenses, approximates fair value due to the relatively short
maturity.
Property, plant and equipment, net
Property, plant and equipment are recorded at
cost and are depreciated on a straight-line basis over the estimated useful
lives of the assets. Maintenance and repairs are expensed as incurred. The
principal estimated useful lives generally are: buildings and leasehold
improvements 20 years; machinery and equipment - 10 years. Depreciation of
property, plant and equipment was $1,128,000 and $962,000 for the years ended
March 31, 2008 and 2007, respectively.
During the
idle period of the plant, depreciation is treated as current-period charges,
which charge directly to general and administrative expense.
Revenue recognition
The Company recognizes revenue from sales of
products, where persuasive evidence of an arrangement exists, delivery has
occurred, the seller's price is fixed or determinable and collectibility is
reasonably assured. This generally occurs when the customer receives the product
or at the time title passes to the customer. Customers generally do not have the
right to return product unless damaged or defective. Net sales are comprised of
gross sales reduced by customer returns, trade promotions and discounts.
Shipping and handling costs
Shipping and handling costs are included in
selling expenses. The shipping and handling costs for the years ended March 31,
2008 and 2007 was $1,276,000 and $1,053,000, respectively.
Impairment of long-lived assets
Long-lived assets, except goodwill and
indefinite-lived intangible assets, are reviewed for impairment when
circumstances indicate the carrying value of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the assets to future net cash flows estimated by the Company
to be generated by such assets. If such assets are considered to be impaired,
the impairment to be recognized is the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be disposed of by
sale are recorded as held for sale at the lower of carrying value or estimated
net realizable value. During the fiscal year 2008 and 2007, no impairment on
long-lived assets was recorded by the Company.
F-34
DAQING LONGHEDA FOOD COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Impairment of long-lived assets
(continued)
All lands in the PRC are owned by the PRC
government. The government in the PRC, according to the relevant PRC law, may
sell the right to use the land for a specific period of time. Thus, all of the
Company's land purchases in the PRC are considered to be leasehold land and are
stated at costless accumulated amortization and any recognized impairment loss.
Amortization is provided over the term of the land use right agreements on a
straight-line basis, which is 50 years and they will expire in 2055.
Advertising costs
Advertising costs are expensed as incurred.
The total advertising costs were $106,000 and $25,000 for the years ended March
31, 2008 and 2007, respectively.
Other income recognition
Other income comprised of interest income and
others.
Interest income is accrued on a time basis,
by reference to the principal outstanding and at the effective interest rate
applicable, which is the rate that exactly discounts the estimated future cash
receipts through the expected life of the loan to the loan's net carrying
amount.
Statutory reserves
The laws and regulations of the PRC require
that before an enterprise distributes profits to its owners, it must first
satisfy all tax liabilities, provide for losses in previous years, and make
allocations. The statutory reserves include a surplus reserve fund and a common
welfare fund. These statutory reserves represent restricted retained earnings.
Surplus
reserve fund
The Company is
required, as necessary, to transfer 10 percent of its net income, as determined
in accordance with the PRC accounting rules and regulations, to a statutory
surplus reserve fund until such reserve balance reaches 50 percent of the
Company's paid-in capital.
The transfer to
this reserve must be made before distribution of any dividends to owners. The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years' losses, if any, and may be utilized for business
expansion or converted into equity by raising equity from existing owners in
proportion to their equity holdings.
F-35
DAQING LONGHEDA FOOD COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Common welfare
fund
The Company is
required, as necessary, to transfer 5 percent to 10 percent of its net income,
as determined in accordance with the PRC accounting rules and regulations, to
the statutory common welfare fund. This fund can only be utilized on capital
items for the collective benefit of the Company's employees, such as
construction of dormitories, cafeteria facilities, and other staff welfare
facilities. This fund is non-distributable other than upon liquidation. The
transfer to this fund must be made before distribution of any dividends to
owners.
Income taxes
The Company accounts for income taxes under
the provision of Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes
("SFAS 109") and related interpretations and
guidance including FIN 58,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
("Fin 48")
,
resulting in two
components of income tax expense: current and deferred. Current income tax
expense approximates taxes to be paid or refunded for the relevant periods.
Deferred income tax expense results from changes in deferred tax assets and
liabilities between periods. Deferred income tax assets and liabilities are
computed for differences between the financial statements carrying amounts and
the tax bases of existing assets and liabilities that will result in taxable or
deductible amounts in the future, as well as from net operating loss and tax
credit carryforwards, and are measured at the enacted tax laws and rates
applicable in the years which the differences are expected to be recovered or
settled. A deferred tax asset is recognized if it is more likely than not that a
benefit will be realized. The Company's operations are primarily located in PRC
and subject to PRC profits tax.
Related party transactions
A related party is generally defined as (i)
any person that holds 10% or more of the Company's securities and their
immediate families, (ii) the Company's management, (iii) someone that directly
or indirectly controls, is controlled by or is under common control with the
Company, or (iv) anyone who can significantly influence the management or
operating decisions of the Company. A transaction is considered to be a related
party transaction when there is a transfer of resources or obligations between
related parties.
F-36
DAQING LONGHEDA FOOD COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS 157,
Fair Value Measurements ("SFAS 157"), which provides guidance about how to
measure assets and liabilities that use fair value. SFAS 157 applies whenever
another US GAAP standard requires (or permits) assets or liabilities to be
measured at fair value but does not expand the use of fair value to any new
circumstances. This standard also requires additional disclosures in both annual
and quarterly reports. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. In February 2008, the FASB
issued FASB Staff Position ("FSP") 157-1, Application of FASB Statement No. 157
to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13 ("FSP 157-1"), which states that SFAS 157 does not address fair
value measurements for purposes of lease classification or measurement. In
February 2008, the FASB issued FSP 157-2, Effective Date of FASB Statement No.
157 ("FSP 157-2"), which delays the effective date for non-financial assets and
non-financial liabilities to fiscal years beginning after November 15, 2008,
except for items that are measured at fair value in the financial statements on
a recurring basis (at least annually). The Company is currently evaluating the
impact of adopting SFAS 157.
In February 2007, the FASB issued SFAS 159,
The Fair Value Option for Financial Assets and Financial Liabilities - Including
an amendment of FASB Statement No. 115 ("SFAS 159"), which is effective for
fiscal years that begin after November 15, 2007. This standard permits entities
to choose to measure many financial instruments and certain other items at fair
value and consequently report unrealized gains and losses on such items in
earnings. The Company has elected not to adopt the fair value provisions of SFAS
159, which does not have a
significant impact of its financial position,
cash flows and results of operations.
In December 2007, the FASB issued SFAS 141
(revised 2007), Business Combinations ("SFAS 141(R)"). SFAS 141(R) establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any noncontrolling interest in the acquiree and the goodwill acquired. SFAS
141(R) also establishes disclosure requirements to enable the evaluation of the
nature and financial effects of the business combination. SFAS 141(R) will be
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and will be adopted by the Company beginning in the first
quarter of 2009. The Company is currently evaluating the impact of adopting SFAS
141(R).
In December 2007, the FASB issued SFAS 160,
Noncontrolling Interests in Consolidated Financial Statements - an amendment of
Accounting Research Bulletin No.51 ("SFAS 160"). SFAS 160 establishes accounting
and reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent's ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements
that clearly identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. SFAS 160 will be effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and will be adopted by the Company beginning in the first quarter of 2009. The
Company is evaluating the impact of adopting SFAS 160.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities ("SFAS 161").
SFAS 161 is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity's financial position, financial
performance, and cash flows. SFAS 161 achieves these improvements by requiring
disclosure of the fair values of derivative instruments and their gains and
losses in a tabular format. It also provides more information about an entity's
liquidity by requiring disclosure of derivative features that are credit
risk-related. Finally, it requires cross-referencing within footnotes to enable
financial statement users to locate important information about derivative
instruments. SFAS 161 will be effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008 and will be
adopted by the Company beginning in the first quarter of 2009. The Company is
currently evaluating the impact of adopting SFAS 161.
F-37
DAQING LONGHEDA FOOD COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
(CONTINUED)
In May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting Principles ("SFAS 162"). SFAS 162
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with accounting
principles generally accepted in the United States of America. The Company is
currently evaluating the impact of adopting SFAS 162.
Other recent accounting pronouncements issued
by the FASB (including its Emerging Issues Task Force ("EITF")), the American
Institute of Certified Public Accountants ("AICPA"), and the SEC did not or are
not believed by management to have a material impact on the Company's present or
future financial statements.
NOTE 4 - INVENTORIES
Inventories by major categories at March 31
are as follows:
|
March 31
|
|
2008
|
|
2007
|
|
$
|
|
$
|
|
|
|
|
Finished products
|
1,888,650
|
|
1,203,118
|
Raw materials
|
67,075
|
|
109,550
|
|
|
|
|
Total inventories
|
1,955,725
|
|
1,312,668
|
|
|
|
|
F-38
DAQING LONGHEDA FOOD COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - OTHER CURRENT ASSETS
Other current assets by major categories at
March 31 are as follows:
|
March 31
|
|
2008
|
|
2007
|
|
$
|
|
$
|
|
|
|
|
Prepayments
|
4,987
|
|
4,524
|
Other receivables
|
109,878
|
|
7,751
|
|
|
|
|
|
114,865
|
|
12,275
|
NOTE 6 PROPERTY, PLANT AND EQUIPMENT,
NET
Property, plant and equipment, net, at March
31 are summarized as follows:
|
March 31
|
|
2008
|
|
2007
|
|
$
|
|
$
|
|
|
|
|
Buildings
|
2,582,958
|
|
2,343,119
|
Machinery
|
11,175,444
|
|
10,137,757
|
Furniture, fixtures and
office equipment
|
35,886
|
|
32,554
|
Motor vehicles
|
45,000
|
|
40,822
|
|
|
|
|
Total
|
13,839,288
|
|
12,554,252
|
Less: accumulated
depreciation
|
(3,163,546)
|
|
(1,781,432)
|
|
|
|
|
|
10,675,742
|
|
10,772,820
|
At March 31, 2008 and 2007, certain of the
Company's plant and machinery with an aggregate net book value of approximately
$3,809,000 and $1,752,000 as of March 31, 2008 and 2007, respectively, were
pledged to secure the bank borrowings.
F-39
DAQING LONGHEDA FOOD COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - BORROWINGS
The Company's borrowings at March 31 consist
of the following:
|
March 31
|
|
2008
|
|
2007
|
|
$
|
|
$
|
|
|
|
|
Bank borrowings
|
2,848,110
|
|
3,229,578
|
Less: bank borrowings
due after one year
|
-
|
|
(3,229,578)
|
|
|
|
|
Short-term borrowings
|
2,848,110
|
|
-
|
The interest rates are based on bank's best
lending rate plus a certain percentage and the credit lines are normally subject
to periodic review. The range of effective interest rates (which are also equal
to contracted interest rates) on the Company's borrowings for the year ended
March 31, 2008 was 8.42% per annum (2007: 7.25% per annum). Plant and machinery
with an aggregate net book value of approximately $3,809,000 and $1,752,000 as
of March 31, 2008 and 2007, respectively, were pledged to secure such bank
borrowings. The maturity date of the outstanding bank borrowing as of March 31,
2008 is August 23, 2008.
NOTE 8 - OTHER PAYABLES AND ACCRUED
EXPENSES
Other payables and accrued expenses by major
categories at March 31 are summarized as follows:
|
March 31
|
|
2008
|
|
2007
|
|
$
|
|
$
|
|
|
|
|
Other payables
|
57,530
|
|
485,878
|
VAT payables
|
229,838
|
|
271,426
|
Accruals
|
206,910
|
|
172,726
|
|
|
|
|
|
494,278
|
|
930,030
|
F-40
DAQING LONGHEDA FOOD COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - OWNERS' EQUITY
Paid in capital
The paid in capital of the Company is
$1,206,738. As of March 31, 2008 and 2007, the paid in capital has been
contributed by the owners in full.
Dividend declared
On March 31, 2007, the board of directors
declared a dividend of $7,105,071 to owners of record as of March 31, 2007. The
dividend declared on March 31, 2007 was paid during the year ended March 31,
2008.
NOTE 10 - PRC CONTRIBUTION PLAN
Employees of the Company are entitled to
retirement benefits calculated with reference to their salaries basis upon
retirement and their length of service in accordance with a PRC
government-managed retirement plan. The PRC government is directly responsible
for the payments of the benefits to these retired employees. The Company is
required to make contributions to the government-managed retirement plan based
on certain percentages of the employees' monthly salaries. The amounts
contributed by the Company were approximately $90,000 and $62,000 for the years
ended March 31, 2008 and 2007, respectively.
NOTE 11 - PROVISIONS FOR INCOME TAXES
The Company was established in the PRC in
April 2004 as a PRC domestic enterprise and was subject to PRC's enterprise
income tax. Pursuant to the PRC Income Tax Law as at that moment, enterprise
income taxes were generally imposed at a statutory rate of 33%, which comprised
30% national income tax and 3% local income tax. However, the Company, being a
hi-tech enterprise in the Heilongjiang province, has been granted a preferential
tax treatment by the State Tax Bureau of the PRC. According to the PRC Income
Tax Law and various approval documents issued by the Tax Bureau, the Company was
exempt from enterprise income taxes for two years from the year which the
Company began incurring net profit. Accordingly, the Company was not subject to
enterprise income taxes for the year 2004 and 2005. The Company's profits for
the period subsequent to 2005 were taxed at a rate of 15%.
F-41
DAQING LONGHEDA FOOD COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - PROVISIONS FOR INCOME TAXES
(CONTINUED)
On March 16, 2007, the Fifth Plenary Session
of the Tenth National People's Congress passed the Corporate Income Tax Law of
the PRC which will take effect on January 1, 2008. According to the new tax law,
the applicable corporate income tax rate for domestically-owned enterprises and
foreign-invested enterprises are subject to a uniform tax rate of 25%. While the
new tax law equalizes the tax rates for domestically-owned and foreign-invested
companies, preferential tax treatment would continue to be given to companies in
certain encouraged sectors and to enterprises classified as high and new
technology companies, whether domestically-owned or foreign-invested
enterprises. The new tax law also provides a five-year transition period
starting from its effective date for those enterprises which were established
before the promulgation date of the new tax law and which were entitled to a
preferential tax treatment. The tax rate of such enterprises will transition to
the uniform tax of 25% within a five-year transition period.
In July 2006, the FASB issued FIN 48, which
clarifies the accounting and disclosure for uncertainty in tax positions, as
defined in SFAS No. 109. FIN 48 prescribes a more-likely-than-not threshold for
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This interpretation also provides guidance
on de-recognition of income tax assets and liabilities, classification of
current and deferred income tax assets and liabilities, accounting for interest
and penalties associated with tax positions, accounting for income taxes in
interim periods and income tax disclosures.
The Company adopted the provisions of FIN 48
effective April 1, 2007. Based on its FIN 48 analysis, the Company concluded
that the adoption of FIN 48 did not have any impact on the Company's total
liabilities or owners' equity. The Company classified interests and/or penalties
related to income tax matters in income tax expenses. As of March 31, 2008, the
Company did not have interests and penalties related to uncertain tax positions.
The Company does not anticipate any significant increases or decrease to its
liabilities for unrecognized tax benefits within the next twelve months.
The provision for income taxes appearing in
the statement of income represents the current tax expenses. A reconciliation
between the provisions for income taxes computed by PRC enterprise income tax
rate to income before income before income taxes is as follows:
|
March 31
|
|
2008
|
|
2007
|
|
%
|
|
%
|
|
|
|
|
Statutory rate
|
25
|
|
33
|
Tax effect of
preferential tax treatment granted by the State Tax Bureau of the PRC
|
(14)
|
|
(18)
|
Tax effect of change in
enterprise tax rate*
|
6
|
|
-
|
|
|
|
|
|
17
|
|
15
|
F-42
DAQING LONGHEDA FOOD COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - PROVISIONS FOR INCOME TAXES
(CONTINUED)
*
The tax effect of change in enterprise tax rate
represents the change of enterprise income taxes rate to 25% effective January
1, 2008 from a preferential tax rate of 15% up to December 31, 2007.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Leases commitments
The Company leases certain office premises
and buildings under non-cancelable leases. Rental expenses under operating
leases for the years ended March 31, 2008 and 2007 were approximately $30,000
and $21,000, respectively.
As of March 31, 2008, future minimum lease
payments under non-cancelable operating leases agreements through June 29, 2008
were as follows:
Economic environment
Since the Company's operations are conducted
in the PRC, the Company is subject to special considerations and significant
risks. These risks include, among others, the political, economic and legal
environments. The Company's result from operations may, among other things, be
adversely affected by changes in the political and social conditions in the PRC,
and by changes in governmental policies with respect to: laws and regulations,
anti-inflationary measures and rates and methods of taxation.
Foreign currency remittance
The Company's revenue is earned in the PRC in
the PRC's currency of Renminbi. The transfer of Renminbi outside the PRC
requires approval of the PRC government.
F-43
DAQING LONGHEDA FOOD COMPANY LIMITED
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - PRC PROFIT APPROPRIATION AND
RESTRICTION ON CAPITAL REPARTRIATION
Pursuant to the laws applicable to the
Company, the Company must make appropriations from after-tax profit to
non-distributable reserve funds. These reserves included a (1) general reserve,
(2) enterprise expansion fund and (3) staff bonus and welfare fund. Subject to
certain cumulative limits, the general reserve fund requires annual
appropriations of not less then 10% of after-tax profit (as determined under
accounting principles and financial regulations applicable to PRC enterprises at
each year-end); the other fund appropriations are at the Company's discretion.
These reserve funds can only be used for specific purposes and are not
distributable as cash dividends. As of March 31, 2008 and 2007, the balance of
these reserve funds amounted to approximately $1,713,000 and $1,213,000,
respectively.
In addition to these reserves, the paid in
capital of the Company are also restricted.
[End of financial statements.]
F-44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Fezdale Investments Limited
We have audited the accompanying consolidated
balance sheet of Fezdale Investments Limited and its subsidiaries as of March
31, 2008, and the related consolidated statement of income, changes in
shareholders' equity and cash flows for the period from August 22, 2007 (date of
inception) to March 31, 2008 then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of Fezdale Investments Limited and its
subsidiaries as of March 31, 2008, and the consolidated results of their
operations and their cash flows for the period from August 22, 2007 (date of
inception) to March 31, 2008 then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ HLB Hodgson Impey Cheng
Chartered Accountants
Certified Public Accountants
Hong Kong, August 11, 2008
.............................................................
F-45
FEZDALE INVESTMENTS LIMITED ANT ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2008
|
$
|
ASSETS
|
|
Current
Assets
|
|
Cash and cash
equivalents
|
7,104,849
|
Trade accounts
receivable
|
1,921,457
|
Inventories
|
1,955,725
|
Other current
assets
|
114,865
|
Total
Current Assets
|
11,096,896
|
Property,
plant and equipment, net
|
7,173,523
|
Land use
rights, net
|
318,120
|
TOTAL
ASSETS
|
18,588,539
|
|
|
LIABILITIES
AND SHAREHOLDERS EQUITY
|
|
Current
Liabilities
|
|
Short term
borrowings
|
2,848,110
|
Accounts
payable
|
159,078
|
Consideration
payable
|
5,353,755
|
Other payables
and accrued expenses
|
494,278
|
Income taxes
payable
|
607,680
|
Amount due to
an affiliate
|
57,219
|
Total
Current Liabilities
|
9,520,120
|
|
|
Minority
interests
|
4,039,286
|
|
|
Commitments
and contingencies
|
|
|
|
Shareholders' Equity
|
|
Share capital
|
1,000
|
Statutory
reserves - restricted
|
1,713,065
|
Other
comprehensive income
|
812,312
|
Retained
earnings
|
2,502,756
|
Total
Shareholders' Equity
|
5,029,133
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
18,588,539
|
See
accompanying notes to consolidated financial statements
F-46
FEZDALE INVESTMENTS LIMITED ANT ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD FROM AUGUST 22, 2007 (INCEPTION) TO MARCH 31, 2008
|
|
$
|
|
|
|
Net sales
|
|
13,527,015
|
|
|
|
Cost of
products sold
|
|
(7,499,879)
|
|
|
|
Gross
Profit
|
|
6,027,136
|
|
|
|
Selling,
general and administrative expenses
|
|
(1,395,100)
|
|
|
|
Operating
income
|
|
4,632,036
|
Interest
expense
|
|
(250,985)
|
Other income
|
|
30,569
|
|
|
|
Income
before income taxes and minority interests
|
|
4,411,620
|
Provision for
income taxes
|
|
(882,939)
|
|
|
|
Income
before minority interests
|
|
3,528,681
|
|
|
|
Minority
interests
|
|
(895,780)
|
|
|
|
Net income
|
|
2,632,901
|
|
|
|
Earnings
per share
|
|
|
Basic and
diluted
|
|
2,633
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
Basic and
diluted
|
|
1,000
|
See
accompanying notes to consolidated financial statements
F-47
FEZDALE INVESTMENTS LIMITED ANT ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
|
|
|
|
Accumulated
|
|
|
|
|
|
Other
|
Total
|
|
Share
|
Statutory
|
Retained
|
Comprehensive
|
Shareholders
|
|
Capital
|
Reserves
|
Earnings
|
Income
|
Equity
|
|
$
|
$
|
$
|
$
|
$
|
|
|
|
|
|
|
Subscribers' shares issued upon
incorporation
|
1,000
|
-
|
-
|
-
|
1,000
|
Acquisition of subsidiaries
|
-
|
1,539,538
|
-
|
114,600
|
1,654,138
|
Net income
|
-
|
-
|
2,632,901
|
-
|
2,632,901
|
Other comprehensive income:
|
|
|
|
|
|
Currency translation adjustment
|
-
|
-
|
-
|
697,712
|
697,712
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
3,330,613
|
Minority interests' share of statutory
reserves
|
-
|
43,382
|
-
|
-
|
43,382
|
Transfer to statutory reserves
|
-
|
130,145
|
(130,145)
|
-
|
-
|
|
|
|
|
|
|
Balance, March 31, 2008
|
1,000
|
1,713,065
|
2,502,756
|
812,312
|
5,029,133
|
See
accompanying notes to consolidated financial statements
F-48
FEZDALE INVESTMENTS LIMITED ANT ITS SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM AUGUST 22, 2007 (INCEPTION) TO MARCH 31, 2008
|
$
|
|
|
Operating Activities:
|
|
Net income
|
2,632,901
|
Adjustment to reconcile net income to net
cash provided by operating activities
|
|
Depreciation and amortization
|
207,836
|
Minority interests
|
927,493
|
Changes in operating assets and liabilities:
|
|
Trade accounts receivable, net
|
5,271,640
|
Inventories
|
4,088,234
|
Other current assets
|
624,997
|
Accounts payable
|
(603,475)
|
Other payables and accrued expenses
|
(4,437,157)
|
Tax payable
|
388,569
|
|
|
Net Cash Provided by Operating Activities
|
9,101,038
|
|
|
Investing Activities:
|
|
Cash inflow from acquisition of subsidiaries
|
423,566
|
|
|
Net Cash Used in Investing Activities
|
423,566
|
|
|
Financing Activities:
|
|
Proceeds from borrowings
|
(3,232,067)
|
|
|
Net Cash Used in Financing Activities
|
(3,232,067)
|
|
|
Effect of exchange rate on cash and cash
equivalents
|
812,312
|
|
|
Net increase in cash and cash equivalents
|
7,104,849
|
|
|
Cash and cash equivalents at end of period
|
7,104,849
|
|
|
Supplemental disclosures of cash flows
information:
|
|
Cash paid during the period for interest
|
250,985
|
Cash paid during the period for income taxes
|
275,259
|
See
accompanying notes to consolidated financial statements
F-49
FEZDALE INVESTMENTS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND OPERATIONS
Organization
Fezdale Investments Limited (the "Company")
is a private limited liability company incorporated in British Virgin Island on
August 22, 2007.
In November 2007, Solor Sun Holdings Limited
("Solor Sun"), a subsidiary of the Company, entered in a share purchase
agreement with six owners of Daqing Longheda Food Company Limited ("Longheda")
that the six owners of Longheda agreed to transfer an aggregate of 75% interests
in Longheda to Solar Sun for consideration in aggregate of RMB40,000,000. Since
the beneficial owners of the Group (as defined below) were third parties
independent of Longheda and the Group had obtained the controlling interests in
Longheda subsequent to the acquisition, the acquisition was accounted for using
purchase method of accounting, which the results of operations of Longheda are
included in the consolidated income statement effective from the completion date
of the acquisition.
Nature of Operations
The Company and its subsidiaries (the
"Group") manufacture and sell a variety of food products processed from rare
superfruits that grow in Northeast China. Currently, the Group processes 4 types
of rare superfruits including golden berry, crab apple, blueberry and raspberry,
and sell fresh fruits and 4 types of fruit based products including fruit
concentrate, nectar, glazed fruits and fruit beverage. The Group sells all of
its products through 68 domestic distributors located in 19 provinces and 39
cities. The fresh fruits are mainly sold to fruit supermarkets while the
processed fruit products are mainly sold to manufacturers for further processing
into fruit juice and other fruit related foods.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include
the accounts for the Company and all of its wholly-owned subsidiaries after
elimination of intercompany transactions and balances.
Basis of presentation
The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America.
F-50
FEZDALE INVESTMENTS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Foreign currency translation
Assets and liabilities of the Company's
foreign subsidiaries are translated using the exchange rates in effect at the
balance sheet date, while income and expenses are translated using average rate.
Translation adjustments are reported as a component of shareholders' equity in
accumulated other comprehensive income.
Use of estimates
The preparation of the financial statements
in conformity with accounting principles generally accepted in United States of
America ("US GAAP") requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from these estimates.
Segment information
The Group identifies and classifies its
operating segment based on the nature of the products with similar economic
characteristics. No segment information is provided as the Group only has one
business and geographical segment. The Group's reportable segment is the
manufacture and sell of food products, which operations are located in PRC and
sales were predominately made to customers located in the PRC.
Customer and supplier concentration
Trade accounts receivable - 2 customers each
accounted for more than 10% of the Group's trade accounts receivable as of March
31, 2008. The trade accounts receivable from those customers represents
approximately 33% of trade accounts receivable as of March 31, 2008.
Net sales 2 customers each accounted for
more than 10% of the Group's net sales incurred during the period ended March
31, 2008. The net sales from those customers represent approximately 25% of the
net sales incurred during the period from inception to March 31, 2008.
The Group closely monitors the credit risk
associated with its customers.
Accounts payable 4 suppliers each accounted
for more than 10% of the Group's accounts payable as of March 31, 2008. The
accounts payable to those suppliers represents approximately 91% of accounts
payable as of March 31, 2008.
F-51
FEZDALE INVESTMENTS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Purchases No supplier accounted for more
than 10% of the Group's purchases made during the period ended from inception to
March 31, 2008.
Cash equivalents
The Group considers all highly liquid
investments with an original maturity date of three months or less to be cash
equivalents.
Trade accounts receivable
In the normal course of business, the Group
extends credit to customers. Trade accounts receivable, less allowance for
doubtful accounts, reflect the net realizable value of receivables, and
approximate fair value. On a regular basis, the Group evaluates its trade
accounts receivable and establishes an allowance for doubtful accounts based on
a combination of specific customer circumstances, credit conditions, and payment
history. A receivable is considered past due if payments have not been received
within the agreed upon invoice terms. No allowance for doubtful accounts at
March 31, 2008 was recorded. Trade accounts receivable is charged off against
the allowance after management determines the potential for recovery is remote.
Inventories
The cost of finished products inventories
includes raw materials, direct labor and indirect production costs. Inventories
are stated at the lower of cost or market. The Group uses first-in, first-out
methods to value its inventories.
Fair value of financial instruments
The carrying amount of certain of the Group's
financial instruments, including cash and cash equivalents, trade accounts
receivable, accounts payable, other current assets, other payables and accrued
expenses, approximates fair value due to the relatively short maturity.
Property, plant and equipment, net
Property, plant and equipment are recorded at
cost and are depreciated on a straight-line basis over the estimated useful
lives of the assets. Maintenance and repairs are expensed as incurred. The
principal estimated useful lives generally are: buildings and leasehold
improvements 20 years; machinery and equipment - 10 years. Depreciation of
property, plant and equipment was $207,836 for the period from inception to
March 31, 2008.
F-52
FEZDALE INVESTMENTS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Goodwill
Goodwill represents the excess of the
purchase price over the fair value of the net tangible and identifiable
intangible assets acquired in a business combination. Goodwill is tested at
least annually for impairment using a two-step process. The first step is to
identify a potential impairment, and the second step measures the amount of the
impairment loss, if any. Impairment exists if the carrying amount of a reporting
unit's goodwill exceeds its estimated fair value.
Negative goodwill represents the excess fair
value of the net tangible and identifiable intangible assets acquired in a
business combination over the purchase price. The negative goodwill is allocated
as a pro rate reduction of the amounts assigned to the assets acquired excluding
financial assets, deferred taxes and other current assets. If negative goodwill
exceeds the amount of those assets, the remaining excess shall be recognized as
an extraordinary gain in the period which the business combination is completed.
(See Note 4)
Comprehensive income
Comprehensive income is comprised of net
income and other comprehensive income.
Revenue recognition
The Group recognizes revenue from sales of
products, where persuasive evidence of an arrangement exists, delivery has
occurred, the seller's price is fixed or determinable and collectibility is
reasonably assured. This generally occurs when the customer receives the product
or at the time title passes to the customer. Customers generally do not have the
right to return product unless damaged or defective. Net sales are comprised of
gross sales reduced by customer returns, trade promotions and discounts.
Shipping and handling costs
Shipping and handling costs are included in
selling expenses. The shipping and handling costs for the period from inception
to March 31, 2008 was $438,831.
F-53
FEZDALE INVESTMENTS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Impairment of long-lived assets
Long-lived assets, except goodwill and
indefinite-lived intangible assets, are reviewed for impairment when
circumstances indicate the carrying value of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of the assets to future net cash flows estimated by the Group to
be generated by such assets. If such assets are considered to be impaired, the
impairment to be recognized is the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of by sale
are recorded as held for sale at the lower of carrying value or estimated net
realizable value. During the period, no impairment on long-lived assets was
recorded by the Group.
All lands in the PRC are owned by the PRC
government. The government in the PRC, according to the relevant PRC law, may
sell the right to use the land for a specific period of time. Thus, all of the
Group's land located in the PRC is considered to be leasehold land and is stated
at costless accumulated amortization and any recognized impairment loss.
Amortization is provided over the term of the land use right agreements on a
straight-line basis, which is 50 years and they will expire in 2055.
Amortization was $3,975 for the period from inception to March 31, 2008.
Advertising costs
Advertising costs are expensed as incurred.
The total advertising costs were $86,008 for the period from inception to March
31, 2008.
Other income recognition
Other income comprised of interest income and
others.
Interest income is accrued on a time basis,
by reference to the principal outstanding and at the effective interest rate
applicable, which is the rate that exactly discounts the estimated future cash
receipts through the expected life of the loan to the loan's net carrying
amount.
Statutory reserves
The laws and regulations of the PRC require
that before an enterprise distributes profits to its owners, it must first
satisfy all tax liabilities, provide for losses in previous years, and make
allocations. The statutory reserves include a surplus reserve fund and a common
welfare fund. These statutory reserves represent restricted retained earnings.
The details of surplus reserve fund and common welfare fund are as follows:
F-54
FEZDALE INVESTMENTS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Surplus
reserve fund
The Company's
subsidiary in PRC is required, as necessary, to transfer 10 percent of its net
income, as determined in accordance with the PRC accounting rules and
regulations, to a statutory surplus reserve fund until such reserve balance
reaches 50 percent of that subsidiary's paid-in capital.
The transfer to
this reserve must be made before distribution of any dividends to owners. The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years' losses, if any, and may be utilized for business
expansion or converted into equity by raising equity from existing owners in
proportion to their equity holdings.
Common welfare
fund
The Company's
subsidiary in PRC is required, as necessary, to transfer 5 percent to 10 percent
of its net income, as determined in accordance with the PRC accounting rules and
regulations, to the statutory common welfare fund. This fund can only be
utilized on capital items for the collective benefit of that subsidiary's
employees, such as construction of dormitories, cafeteria facilities, and other
staff welfare facilities. This fund is non-distributable other than upon
liquidation. The transfer to this fund must be made before distribution of any
dividends to owners.
Income taxes
The Group accounts for income taxes under the
provision of Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes ("SFAS 109") and related interpretations and
guidance including FIN 58, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109 ("Fin 48"), resulting in two components
of income tax expense: current and deferred. Current income tax expense
approximates taxes to be paid or refunded for the relevant periods. Deferred
income tax expense results from changes in deferred tax assets and liabilities
between periods. Deferred income tax assets and liabilities are computed for
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities that will result in taxable or deductible
amounts in the future, as well as from net operating loss and tax credit
carryforwards, and are measured at the enacted tax laws and rates applicable in
the years which the differences are expected to be recovered or settled. A
deferred tax asset is recognized if it is more likely than not that a benefit
will be realized. The Group's operations are primarily located in PRC and
subject to PRC profits tax.
F-55
FEZDALE INVESTMENTS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Earnings per share
Basic earnings per is calculated by dividing
net income by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is calculated by dividing net income by
the weighted average number of common shares and potential common shares
outstanding during the period.
Related party transactions
A related party is generally defined as (i)
any person that holds 10% or more of the Group's securities and their immediate
families, (ii) the Group's management, (iii) someone that directly or indirectly
controls, is controlled by or is under common control with the Group, or (iv)
anyone who can significantly influence the management or operating decisions of
the Group. A transaction is considered to be a related party transaction when
there is a transfer of resources or obligations between related parties.
F-56
FEZDALE INVESTMENTS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS 157,
Fair Value Measurements ("SFAS 157"), which provides guidance about how to
measure assets and liabilities that use fair value. SFAS 157 applies whenever
another US GAAP standard requires (or permits) assets or liabilities to be
measured at fair value but does not expand the use of fair value to any new
circumstances. This standard also requires additional disclosures in both annual
and quarterly reports. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. In February 2008, the FASB
issued FASB Staff Position ("FSP") 157-1, Application of FASB Statement No. 157
to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13 ("FSP 157-1"), which states that SFAS 157 does not address fair
value measurements for purposes of lease classification or measurement. In
February 2008, the FASB issued FSP 157-2, Effective Date of FASB Statement No.
157 ("FSP 157-2"), which delays the effective date for non-financial assets and
non-financial liabilities to fiscal years beginning after November 15, 2008,
except for items that are measured at fair value in the financial statements on
a recurring basis (at least annually). The Group is currently evaluating the
impact of adopting SFAS 157.
In February 2007, the FASB issued SFAS 159,
The Fair Value Option for Financial Assets and Financial Liabilities - Including
an amendment of FASB Statement No. 115 ("SFAS 159"), which is effective for
fiscal years that begin after November 15, 2007. This standard permits entities
to choose to measure many financial instruments and certain other items at fair
value and consequently report unrealized gains and losses on such items in
earnings. The Group has elected not to adopt the fair value provisions of SFAS
159, which does not have a significant impact of its financial position, cash
flows and results of operations.
F-57
FEZDALE INVESTMENTS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
(CONTINUED)
In December 2007, the FASB issued SFAS 141
(revised 2007), Business Combinations ("SFAS 141(R)"). SFAS 141(R) establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any noncontrolling interest in the acquiree and the goodwill acquired. SFAS
141(R) also establishes disclosure requirements to enable the evaluation of the
nature and financial effects of the business combination. SFAS 141(R) will be
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and will be adopted by the Group beginning in the first
quarter of 2009. The Group is currently evaluating the impact of adopting SFAS
141(R).
In December 2007, the FASB issued SFAS 160,
Noncontrolling Interests in Consolidated Financial Statements - an amendment of
Accounting Research Bulletin No.51 ("SFAS 160"). SFAS 160 establishes accounting
and reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent's ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements
that clearly identify and distinguish between the interests of the parent and
the interests of the noncontrolling owners. SFAS 160 will be effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and will be adopted by the Group beginning in the first quarter of 2009. The
Group is evaluating the impact of adopting SFAS 160.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities ("SFAS 161").
SFAS 161 is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity's financial position, financial
performance, and cash flows. SFAS 161 achieves these improvements by requiring
disclosure of the fair values of derivative instruments and their gains and
losses in a tabular format. It also provides more information about an entity's
liquidity by requiring disclosure of derivative features that are credit
risk-related. Finally, it requires cross-referencing within footnotes to enable
financial statement users to locate important information about derivative
instruments. SFAS 161 will be effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008 and will be
adopted by the Group beginning in the first quarter of 2009. The Group is
currently evaluating the impact of adopting SFAS 161.
F-58
FEZDALE INVESTMENTS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
(CONTINUED)
In May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting Principles ("SFAS 162"). SFAS 162
identifies the sources of accounting principles and the framework for selecting
the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with accounting
principles generally accepted in the United States of America. The Group is
currently evaluating the impact of adopting SFAS 162.
Other recent accounting pronouncements issued
by the FASB (including its Emerging Issues Task Force ("EITF")), the American
Institute of Certified Public Accountants ("AICPA"), and the SEC did not or are
not believed by management to have a material impact on the Group's present or
future financial statements.
NOTE 4 ACQUISITION OF LONGHEDA
In November 2007, Solor Sun Holdings entered
in a share purchase agreement with six owners of Longheda to acquire 75%
interests in Longheda with consideration in aggregate of RMB40,000,000. This
acquisition was accounted for using the purchase method of accounting. Since the
beneficial owners of the Company were third parties independent of Longheda, the
acquisition was accounted for using the purchase method of accounting. As of the
acquisition date, the Group recorded the fair values of Longheda assets acquired
and liabilities assumed. The allocation of the purchase price to assets acquired
and liabilities assumed as at the date of acquisition is as follows:
|
$
|
|
|
Cash and cash
equivalents
|
829,317
|
Trade accounts
receivable
|
7,193,097
|
Inventories
|
6,043,959
|
Other current
assets
|
738,862
|
Property,
plant and equipment, net
|
11,115,278
|
Land use
right, net
|
474,453
|
Borrowings
|
(6,080,177)
|
Accounts
payable
|
(762,553)
|
Other payables
and accrued expenses
|
(4,931,435)
|
Tax payable
|
(219,111)
|
Net assets
acquired
|
14,401,690
|
Minority
interests
|
(3,186,888)
|
Statutory
reserves
|
(1,539,538)
|
Translation
adjustment
|
(114,600)
|
Negative
goodwill
|
(4,156,062)
|
|
|
Total purchase
price
|
(5,404,602)
|
|
|
F-59
FEZDALE INVESTMENTS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 ACQUISITION OF LONGHEDA
(CONTINUED)
The allocation of the purchase price to
assets acquired and liabilities assumed as at the date of acquisition resulted
in negative goodwill of $4,156,062. In accordance with SFAS No. 141, Business
Combinations, the negative goodwill was allocated as a pro rata reduction of the
amounts assigned to the assets acquired excluding financial assets, deferred
taxes and other current assets. This resulted in the following allocation of
negative goodwill:
|
$
|
|
|
Property,
plant and equipment, net
|
3,985,924
|
Land use
right, net
|
170,138
|
|
|
Negative
goodwill
|
4,156,062
|
Subsequent to the completion date of the
acquisition on November 12, 2007, the results of operations of Longheda have
been included in the consolidated income statement of the Group.
The following is the pro forma results of
operations of the Group for the years ended March 31, 2008 and 2007 as if the
acquisition of 75% interest in Longheda completed on April 1, 2007 and Fezdale
was existed at April 1, 2007:
|
|
2008
|
|
2007
|
|
|
|
|
|
Net sales
|
$
|
34,510,140
|
$
|
23,022,480
|
|
|
|
|
|
Cost of
products sold
|
|
(18,947,091)
|
|
(11,609,731)
|
|
|
|
|
|
Gross Profit
|
|
15,563,049
|
|
11,412,749
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
(4,008,817)
|
|
(2,966,741)
|
|
|
|
|
|
F-60
FEZDALE INVESTMENTS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 ACQUISITION OF LONGHEDA
(CONTINUED)
|
|
|
|
|
Other
expenses, net
|
|
(372,151)
|
|
(349,045)
|
|
|
|
|
|
Income before
income taxes and minority interests
|
|
11,182,081
|
|
8,096,963
|
Provision for
income taxes
|
|
(2,035,305)
|
|
(1,341,195)
|
|
|
|
|
|
Income before
minority interests
|
|
9,146,776
|
|
6,755,768
|
|
|
|
|
|
Minority
interests
|
|
(2,286,694)
|
|
(1,688,942)
|
|
|
|
|
|
Net income
|
$
|
6,860,082
|
$
|
5,066,826
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
Basic and
diluted
|
$
|
6,860
|
$
|
5,067
|
NOTE 5 - INVENTORIES
Inventories by major categories at March 31,
2008 are as follows:
|
$
|
|
|
Finished
products
|
1,888,650
|
Raw materials
|
67,075
|
|
|
Total
inventories
|
1,955,725
|
NOTE 6 - OTHER CURRENT ASSETS
Other current assets by major categories at
March 31, 2008 are as follows:
|
$
|
|
|
Prepayments
|
4,987
|
Other
receivables
|
109,878
|
|
|
|
114,865
|
|
|
F-61
FEZDALE INVESTMENTS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 PROPERTY, PLANT AND EQUIPMENT,
NET
Property, plant and equipment, net, at March
31, 2008 are summarized as follows:
|
$
|
|
|
Buildings
|
1,846,936
|
Machinery
|
7,254,044
|
Furniture,
fixtures and office equipment
|
28,016
|
Motor vehicles
|
22,304
|
|
|
Total
|
9,151,301
|
Less:
accumulated depreciation
|
(1,977,778)
|
|
|
|
7,173,523
|
At March 31, 2008, certain of the Group's
plant and machinery with an aggregate net book value of approximately $2,559,000
were pledged to secure the bank borrowings.
NOTE 8 - BORROWINGS
The Group's borrowings at March 31, 2008
consist of the following:
|
$
|
|
|
Bank
borrowings
|
2,848,110
|
The interest rates are based on the bank's
best lending rate plus a certain percentage and the credit lines are normally
subject to periodic review. The range of effective interest rates (which are
also equal to contracted interest rates) on the Group's borrowings for the
period ended March 31, 2008 was 8.42% per annum. Plant and machinery with an
aggregate net book value of approximately $2,559,000 as of March 31, 2008 were
pledged to secure such bank borrowings. The maturity date of the outstanding
bank borrowing as of March 31, 2008 is August 23, 2008.
F-62
FEZDALE INVESTMENTS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - OTHER PAYABLES AND ACCRUED
EXPENSES
Other payables and accrued expenses by major
categories at March 31, 2008 are summarized as follows:
|
$
|
|
|
Other payables
|
57,530
|
VAT payables
|
229,838
|
Accruals
|
206,910
|
|
|
|
494,278
|
NOTE 10 - SHAREHOLDERS' EQUITY
The authorized share capital of the Company
is $50,000 divided into 50,000 ordinary shares of $1 each. Upon incorporation,
two shareholders subscribed for a total of 1,000 ordinary shares of $1 each at
par.
NOTE 11 - PRC CONTRIBUTION PLAN
Employees of the Group are entitled to
retirement benefits calculated with reference to their salaries basis upon
retirement and their length of service in accordance with a PRC
government-managed retirement plan. The PRC government is directly responsible
for the payments of the benefits to these retired employees. The Group is
required to make contributions to the government-managed retirement plan based
on certain percentages of the employees' monthly salaries. The amounts
contributed by the Group were approximately $16,836 for the period from
inception to March 31, 2008.
NOTE 12 - PROVISION FOR INCOME TAXES
The provision for income tax is as follows:
|
|
2008
|
Current:
|
|
$
|
PRC
|
|
927,493
|
Others
jurisdictions
|
|
-
|
|
|
|
|
|
927,493
|
|
|
|
Deferred:
|
|
|
PRC
|
|
-
|
Others
jurisdictions
|
|
-
|
|
|
|
|
|
-
|
|
|
|
Total income tax
|
|
927,493
|
|
|
|
F-63
FEZDALE INVESTMENTS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - PROVISION FOR INCOME TAXES
(CONTINUED)
At March 31, 2008, the Group did not have
material valuation allowance that would result into any deferred tax assets.
The Group's operations are conducted in the
PRC and are subject to PRC's enterprise income tax. Pursuant to the PRC Income
Tax Law prior to January 1, 2008, enterprise income taxes were generally imposed
at a statutory rate of 33%, which comprised 30% national income tax and 3% local
income tax. However, the Group has been granted a preferential tax treatment by
the State Tax Bureau of the PRC as the Group was considered as a hi-tech
enterprise in the Heilongjiang province. According to the PRC Income Tax Law and
various approval documents issued by the Tax Bureau, the Group's profits for the
period prior to 2008 were taxed at a rate of 15%.
On March 16, 2007, the Fifth Plenary Session
of the Tenth National People's Congress passed the Corporate Income Tax Law of
the PRC which will take effect on January 1, 2008. According to the new tax law,
the applicable corporate income tax rate for domestically-owned enterprises and
foreign-invested enterprises are subject to a uniform tax rate of 25%. While the
new tax law equalizes the tax rates for domestically-owned and foreign-invested
companies, preferential tax treatment would continue to be given to companies in
certain encouraged sectors and to enterprises classified as high and new
technology companies, whether domestically-owned or foreign-invested
enterprises. The new tax law also provides a five-year transition period
starting from its effective date for those enterprises which were established
before the promulgation date of the new tax law and which were entitled to a
preferential tax treatment. The tax rate of such enterprises will transition to
the uniform tax of 25% within a five-year transition period.
In July 2006, the FASB issued FIN 48, which
clarifies the accounting and disclosure for uncertainty in tax positions, as
defined in SFAS No. 109. FIN 48 prescribes a more-likely-than-not threshold for
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. This interpretation also provides guidance
on de-recognition of income tax assets and liabilities, classification of
current and deferred income tax assets and liabilities, accounting for interest
and penalties associated with tax positions, accounting for income taxes in
interim periods and income tax disclosures.
F-64
FEZDALE INVESTMENTS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - PROVISION FOR INCOME TAXES
(CONTINUED)
The Group adopted the provisions of FIN 48
effective August 22, 2007. Based on its FIN 48 analysis, the Group concluded
that the adoption of FIN 48 did not have any impact on the Group's total
liabilities or owners' equity. The Group's classifies interests and/or penalties
related to income tax matters in income tax expenses. As of March 31, 2008, the
Group did not have interests and penalties related to uncertain tax positions.
The Group does not anticipate any significant increases or decrease to its
liabilities for unrecognized tax benefits within the next twelve months.
The provision for income taxes appearing in
the consolidated statement of income represents the current tax expenses. A
reconciliation between the provision for income taxes computed by PRC enterprise
income tax rate to income before income taxes is as follows:
|
2008
|
|
%
|
|
|
Statutory rate
|
25
|
Tax effect of
preferential tax treatment granted by the State Tax Bureau of the PRC
|
(6)
|
Tax effect of
change in enterprise tax rate*
|
-
|
|
|
|
19
|
*
The tax effect of change in enterprise tax rate
represents the change of enterprise income taxes rate to 25% effective January
1, 2008 from a preferential tax rate of 15% up to December 31, 2007.
NOTE 13 EARNINGS PER SHARE
The following table sets forth the
computation of basic and diluted earnings per share.
F-65
FEZDALE INVESTMENTS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 EARNINGS PER SHARE (CONTINUED)
|
|
2008
|
|
|
$
|
Numerator:
|
|
|
Net income
|
|
2,632,910
|
|
|
|
Denominator:
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
1,000
|
|
|
|
Basis earnings
per share
|
|
2,633
|
As of March 31, 2008, the Company did not
have dilutive securities or instruments.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Leases commitments
The Group leases certain office premises and
buildings under non-cancelable leases through June 29, 2008. Rental expenses
under operating leases for the period from inception to March 31, 2008 were
approximately $12,515.
As of March 31, 2008, future minimum lease
payments under non-cancelable operating leases agreements were as follows:
Economic environment
Since the Group's operations are conducted in
the PRC, the Group is subject to special considerations and significant risks.
These risks include, among others, the political, economic and legal
environments. The Group's result from operations may, among other things, be
adversely affected by changes in the political and social conditions in the PRC,
and by changes in governmental policies with respect to: laws and regulations,
anti-inflationary measures and rates and methods of taxation.
Foreign currency remittance
The Group's revenue is earned in the PRC in
the PRC's currency of Renminbi. The transfer of Renminbi outside the PRC
requires approval of the PRC government.
F-66
FEZDALE INVESTMENTS LIMITED AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - PRC PROFIT APPROPRIATION AND
RESTRICTION ON CAPITAL REPARTRIATION
Pursuant to the laws applicable to the Group,
the Group must make appropriations from after-tax profit to non-distributable
reserve funds. These reserves include a (1) general reserve, (2) enterprise
expansion fund and (3) staff bonus and welfare fund. Subject to certain
cumulative limits, the general reserve fund requires annual appropriations of
not less then 10% of after-tax profit (as determined under accounting principles
and financial regulations applicable to PRC enterprises at each year-end); the
other fund appropriations are at the Group's discretion. These reserve funds can
only be used for specific purposes and are not distributable as cash dividends.
As of March 31, 2008, the balance of these reserve funds amounted to
approximately $1,713,000.
NOTE 16 AMOUNT DUE TO AN AFFILIATE
The amount due to an affiliate is unsecured,
interest free and have no fixed terms of repayment.
NOTE 17 SUBSEQUENT EVENTS
In May 2008, Solor Sun Holdings entered in
another share purchase agreement with six owners of Longheda to acquire the
remaining 25% interests in Longheda with considerations in aggregate of
RMB10,000,000. Subsequent to the acquisition of 25% interest in Longheda, the
Company has 100% indirectly interest in Longheda.
[End of financial statements.]
F-67
FASHION TECH INTERNATIONAL, INC.
[A Development Stage Company]
FINANCIAL STATEMENTS
MARCH 31, 2008
F-68
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Fashion Tech International, Inc.
Argyle, Texas
We have audited the accompanying balance sheets of Fashion
Tech International, Inc. [a development stage company] as of March 31, 2008 and
2007, and the related statements of operations, stockholders' equity (deficit)
and cash flows for the years ended March 31, 2008 and 2007 and for the period
from re-entering of development stage on April 1, 1985 through March 31, 2008.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Fashion Tech
International, Inc. as of March 31, 2008 and 2007, and the
results of its operations and its cash flows for the years ended March 31, 2008
and 2007 and for the period from re-entering of development stage on April 1,
1985 through March 31, 2008, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared
assuming that Fashion Tech International, Inc. will continue as a going concern.
As discussed in Note 5 to the financial statements, Fashion Tech International,
Inc. has incurred losses since its inception and has not yet established
profitable operations. These factors raise substantial doubt about the ability
of the Company to continue as a going concern. Management's plans in regards to
these matters are also described in Note 5. The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
PRITCHETT, SILER & HARDY, P.C.
June 16, 2008
Salt Lake City, Utah
F-69
FASHION TECH INTERNATIONAL, INC.
[A Development Stage Company]
BALANCE SHEETS
|
|
|
March 31
|
|
March 31
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
--
|
$
|
--
|
|
|
|
|
|
|
Total Current Assets
|
|
|
--
|
|
--
|
|
|
|
|
|
|
Total Assets
|
|
$
|
--
|
$
|
--
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
|
Current Liabilities
|
|
|
|
|
|
Accounts Payable
|
|
$
|
2,058
|
$
|
1,625
|
Advances - related party
|
|
|
1,034
|
|
25,350
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
3,092
|
|
26,975
|
|
|
|
|
|
|
Total Liabilities
|
|
|
3,092
|
|
26,975
|
|
|
|
|
|
|
Stockholder's Deficit
|
|
|
|
|
|
Preferred stock, $.001 par value,
5,000,000 shares
|
|
|
|
|
authorized, no
shares issued and outstanding
|
|
--
|
|
--
|
Common stock,
$.001 par value, 120,000,000 shares
|
|
|
|
|
authorized, 28,728,656 shares issued and outstanding
|
|
28,729
|
|
3,591
|
Capital in excess of par value
|
|
|
591,392
|
|
574,843
|
Retained deficit
|
|
|
(413,549)
|
|
(413,549)
|
Deficit accumulated during the
development stage
|
|
(209,664)
|
|
(191,860)
|
|
|
|
|
|
|
Total Stockholder's Deficit
|
|
|
(3,092)
|
|
(26,975)
|
|
|
|
|
|
|
Total Liabilities and
Stockholder's Deficit
|
$
|
--
|
$
|
--
|
The accompanying notes are an integral part of these financial
statements.
F-70
FASHION TECH INTERNATIONAL, INC.
[A Development Stage Company]
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
From the
|
|
|
|
|
|
Re-entering of
|
|
|
For the
|
Development
|
|
|
Year Ended
|
Stage on April 1,
|
|
|
March 31,
|
1985 Through
|
|
|
|
|
|
March 31,
|
|
|
2008
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE
|
$
|
--
|
$
|
--
|
$
|
--
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
General
and administrative
|
|
17,672
|
|
9,380
|
|
209,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS BEFORE
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
(17,672)
|
|
(9,380)
|
|
(209,240)
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
Interest expense
|
|
(132)
|
|
(524)
|
|
(2,368)
|
Gain on
disposal of assets
|
|
--
|
|
--
|
|
1,944
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
(132)
|
|
(524)
|
|
(424)
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES
|
|
(17,804)
|
|
(9,904)
|
|
(209,664)
|
|
|
|
|
|
|
|
CURRENT TAX EXPENSE
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
DEFERRED TAX EXPENSE
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
NET LOSS
|
$
|
(17,804)
|
$
|
(9,904)
|
$
|
(209,664)
|
|
|
|
|
|
|
|
LOSS PER COMMON SHARE
|
$
|
(.00)
|
$
|
(.00)
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-71
FASHION TECH INTERNATIONAL, INC.
[A Development Stage Company]
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FROM THE RE-ENTERING OF DEVELOPMENT STAGE ON
APRIL 1, 1985 THROUGH MARCH 31, 2008
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
Common Stock
|
|
Capital in
|
|
|
|
During the
|
|
|
|
|
|
Excess of
|
|
Retained
|
|
Development
|
|
Shares
|
|
Amount
|
|
Par Value
|
|
Deficit
|
|
Stage
|
|
|
|
|
|
|
|
|
|
|
BALANCE, April
1, 1985
|
183,063
|
$
|
183
|
$
|
327,382
|
$
|
(413,549)
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
Issuance of 108,000 shares of
common stock for
|
|
|
|
|
|
|
|
|
|
cash at $.50
per share, November 1985
|
108,000
|
|
108
|
|
53,892
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Return and
cancellation of 20,000 shares of
|
|
|
|
|
|
|
|
|
|
common stock, November 1985
|
(20,000)
|
|
(20)
|
|
(9,998)
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Issuance of 80 shares of common
stock for cash
|
|
|
|
|
|
|
|
|
|
at $.50 per
share, November 1985
|
80
|
|
--
|
|
40
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Issuance of
80,000 shares of common stock for
|
|
|
|
|
|
|
|
|
|
assets at $.50 per share, March 1986
|
80,000
|
|
80
|
|
39,920
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Issuance of 20,000 shares of
common stock for
|
|
|
|
|
|
|
|
|
|
services at
$.50 per share, June 1986
|
20,000
|
|
20
|
|
9,998
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Issuance of
220,000 shares of common stock for
|
|
|
|
|
|
|
|
|
|
cash at $.50 per share, October 1986
|
220,000
|
|
220
|
|
109,780
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Net loss from the re-entering of
development stage
|
|
|
|
|
|
|
|
|
|
on April 1,
1985 through March 31, 1998
|
--
|
|
--
|
|
--
|
|
--
|
|
(118,056)
|
|
|
|
|
|
|
|
|
|
|
BALANCE, March
31, 1998
|
591,143
|
|
591
|
|
531,014
|
|
(413,549)
|
|
(118,056)
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended March
31, 1999
|
--
|
|
--
|
|
--
|
|
--
|
|
(8,666)
|
|
|
|
|
|
|
|
|
|
|
BALANCE, March
31, 1999
|
591,143
|
|
591
|
|
531,014
|
|
(413,549)
|
|
(126,722)
|
|
|
|
|
|
|
|
|
|
|
Fractional share adjustment
|
(61)
|
|
--
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Issuance of
3,000,000 shares of common stock to
|
|
|
|
|
|
|
|
|
|
retire note payable and accrued interest at $.001
|
|
|
|
|
|
|
|
|
|
per share, June 1999
|
3,000,000
|
|
3,000
|
|
19,434
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended March
31, 2000
|
--
|
|
--
|
|
--
|
|
--
|
|
(9,713)
|
|
|
|
|
|
|
|
|
|
|
BALANCE, March
31, 2000
|
3,591,082
|
|
3,591
|
|
550,448
|
|
(413,549)
|
|
(136,435)
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended March
31, 2001
|
--
|
|
--
|
|
--
|
|
--
|
|
(11,003)
|
|
|
|
|
|
|
|
|
|
|
BALANCE, March
31, 2001
|
3,591,082
|
|
3,591
|
|
550,448
|
|
(413,549)
|
|
(147,438)
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended March
31, 2002
|
--
|
|
--
|
|
--
|
|
--
|
|
(6,159)
|
|
|
|
|
|
|
|
|
|
|
BALANCE, March
31, 2002
|
3,591,082
|
|
3,591
|
|
550,448
|
|
(413,549)
|
|
(153,597)
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended March
31, 2003
|
--
|
|
--
|
|
--
|
|
--
|
|
(5,554)
|
[Continued]
F-72
FASHION TECH INTERNATIONAL, INC.
[A Development Stage Company]
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FROM THE RE-ENTERING OF DEVELOPMENT STAGE ON
APRIL 1, 1985 THROUGH MARCH 31, 2008
[Continued]
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
Common Stock
|
Capital in
|
|
|
|
During the
|
|
|
|
|
Excess of
|
|
Retained
|
|
Development
|
|
Shares
|
|
Amount
|
|
Par Value
|
|
Deficit
|
|
Stage
|
|
|
|
|
|
|
|
|
|
|
BALANCE, March 31, 2003
|
3,591,082
|
|
3,591
|
|
550,448
|
|
(413,549)
|
|
(159,151)
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended March 31, 2004
|
--
|
|
--
|
|
--
|
|
--
|
|
(6,638)
|
|
|
|
|
|
|
|
|
|
|
BALANCE, March 31, 2004
|
3,591,082
|
|
3,591
|
|
550,448
|
|
(413,549)
|
|
(165,789)
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended March 31, 2005
|
--
|
|
--
|
|
--
|
|
--
|
|
(6,284)
|
|
|
|
|
|
|
|
|
|
|
BALANCE, March 31, 2005
|
3,591,082
|
|
3,591
|
|
550,448
|
|
(413,549)
|
|
(172,073)
|
|
|
|
|
|
|
|
|
|
|
Forgiveness of debt by
|
|
|
|
|
|
|
|
|
|
related party, March 2006
|
--
|
|
--
|
|
14,306
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended
March 31, 2006
|
--
|
|
--
|
|
--
|
|
--
|
|
(9,883)
|
|
|
|
|
|
|
|
|
|
|
|
3,591,082
|
|
3,591
|
|
564,754
|
|
(413,549)
|
|
(181,956)
|
Forgiveness of debt by
|
|
|
|
|
|
|
|
|
|
related
party, March 2007
|
--
|
|
--
|
|
10,089
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended March 31, 2007
|
--
|
|
--
|
|
--
|
|
--
|
|
(9,904)
|
|
|
|
|
|
|
|
|
|
|
|
3,591,082
|
|
3,591
|
|
574,843
|
|
(413,549)
|
|
(191,860)
|
Forgiveness of debt by shareholder
|
|
|
|
|
|
|
|
|
|
as a contribution to
capital
|
--
|
|
--
|
|
36,707
|
|
--
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Issuance of 25,137,574
shares of common stock to
|
|
|
|
|
|
|
|
|
|
Halter
Financial Investments at $.016
|
|
|
|
|
|
|
|
|
|
per share, November 2007
|
25,137,574
|
|
25,138
|
|
374,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid at $.11 per share
|
|
|
|
|
|
|
|
|
|
on October 29, 2007
|
--
|
|
--
|
|
(395,020)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year ended
March 31, 2008
|
--
|
|
--
|
|
--
|
|
--
|
|
(17,804)
|
|
|
|
|
|
|
|
|
|
|
BALANCE, March 31, 2008
|
28,728,656
|
$
|
28,729
|
$
|
591,392
|
$
|
(413,549)
|
$
|
(209,664)
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
F-73
FASHION TECH INTERNATIONAL, INC.
[A Development Stage Company]
STATEMENTS OF CASH
FLOWS
|
|
|
|
|
From the
|
|
|
|
|
|
Re-entering of
|
|
|
For the
|
Development
|
|
|
Year Ended
|
Stage on April 1,
|
|
|
March 31,
|
1985 Through
|
|
|
|
|
|
March 31,
|
|
|
2008
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
Cash Flows from Operating
Activities:
|
|
|
|
|
|
|
Net loss
|
$
|
(17,804)
|
$
|
(9,904)
|
$
|
(209,664)
|
Adjustments to reconcile net loss to net cash used by
|
|
|
|
|
|
|
operating activities:
|
|
|
|
|
|
|
Non-cash expenses
|
|
132
|
|
524
|
|
51,669
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
(Increase) decrease in prepaid expense
|
|
--
|
|
--
|
|
--
|
Increase (decrease) in accounts payable
|
|
433
|
|
(185)
|
|
114
|
Increase (decrease) in accrued interest
|
|
--
|
|
--
|
|
699
|
|
|
|
|
|
|
|
Net Cash (Used) by Operating Activities
|
|
(17,239)
|
|
(9,565)
|
|
(157,182)
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
Net Cash Provided by Investing Activities
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
Advances
from related party
|
|
12,259
|
|
9,565
|
|
60,202
|
Payment of dividend
|
|
(395,020)
|
|
|
|
(395,020)
|
Proceeds
from notes payable
|
|
--
|
|
--
|
|
22,000
|
Proceeds from common stock
issuance
|
|
400,000
|
|
--
|
|
470,000
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
17,239
|
|
9,565
|
|
157,182
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
Cash at Beginning of Period
|
|
--
|
|
--
|
|
--
|
|
|
|
|
|
|
|
Cash at End of Period
|
$
|
--
|
$
|
--
|
$
|
--
|
|
|
|
|
|
|
|
Supplemental Disclosures of
Cash Flow Information:
|
|
|
|
|
|
|
Cash paid during the
period for:
|
|
|
|
|
|
|
Interest
|
$
|
--
|
$
|
--
|
$
|
--
|
Income taxes
|
$
|
--
|
$
|
--
|
$
|
--
|
Supplemental Schedule of Non-cash Investing and Financing Activities:
For the year ended March 31, 2008:
During the year ended March 31,
2008 a shareholder of the Company forgave advances totaling $36,575 and accrued
interest of $132. Due to the related party nature of the debt, the forgiveness
has been accounted for as a capital contribution
For the year ended March 31, 2007:
During the year ended March 31,
2007 a shareholder of the Company forgave advances and accrued interest totaling
$10,089. Due to the related party nature of the debt, the forgiveness has been
accounted for as a capital contribution. The accompanying notes are an integral
part of these financial statements.
F-74
FASHION TECH INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Fashion Tech International, Inc. ("the
Company") was organized under the laws of the State of Utah on April 22, 1983
under the name Portofino Investment, Inc. The name of the Company was changed to
Fashion Tech International, Inc in January 1984. In 1999, the Company changed
its domicile to the State of Nevada. The Company currently has no on-going
operations and is considered to have re-entered the development stage as defined
in Statement of Financial Accounting Standards No. 7 on April 1, 1985. The
Company is currently seeking business opportunities or potential business
acquisitions.
Cash and Cash Equivalents - The Company considers all highly
liquid debt investments purchased with a maturity of three months or less to be
cash equivalents.
Loss Per Share - The computation of loss per share is based
on the weighted average number of shares outstanding during the period
presented, in accordance with Statement of Financial Accounting Standards No.
128, "Earnings Per Share" [See Note 6].
Accounting Estimates - The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reported period. Actual
results could differ from those estimated.
Recently Enacted Accounting Standards - Statement of
Financial Accounting Standards ("SFAS") No. 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140", SFAS
No. 156, "Accounting for the Servicing of Financial Assets", SFAS No. 157, "Fair
Value Measurements", SFAS No. 158, "Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87,
88, 106, and 132(R)", SFAS No. 159, "The Fair Value Option for Financial Assets
and Financial Liabilities - Including an amendment of FASB Statement No. 115",
and SFAS No. 160, "Noncontrolling Interest in Consolidated Financial Statements"
(as amended), were recently issued. SFAS No. 155, 156, 157, 158, 159 and 160
have no current applicability to the Company or their effect on the financial
statements would not have been significant.
Income Taxes - The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." This statement requires an asset and liability approach for
accounting for income taxes [See Note 3].
Restatement - The financial statements for all periods have
been restated to reflect a 100-for-1 reverse stock split which was effected in
April 1999.
Reclassification - The financial statements for periods prior
to March 31, 2008 have been reclassified to conform to the headings and
classifications used in the March 31, 2008 financial statements.
F-75
FASHION TECH INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 2 - CAPITAL STOCK
In April 1999, the Company amended its Articles of
Incorporation to change the common stock par value from $.005 to $.001 and to
authorize 5,000,000 shares of preferred stock with a par value of $.001.
In April 1999, the Company authorized a 100-for-1 reverse
stock split. The financial statements for all periods have been restated to
reflect the stock split.
In June 1999, the Company issued 3,000,000 shares of common
stock for the conversion of a $22,000 note payable and $434 of accrued interest.
In October, 2007, the Company entered into a Stock Purchase
Agreement with Halter Financial Investments, L.P., a Texas limited partnership
("Purchaser"), dated as of October 18, 2007 (the "Stock Purchase Agreement"),
pursuant to which the Company agreed to sell to Purchaser 25,137,574
unregistered shares of the Company's common stock for $400,000. The transactions
under the Agreement closed on October 30, 2007, and all matters described
therein were consummated.
The purchaser holds 25,137,574 shares or 87.5% of the
28,728,656 shares of the Company's common stock presently outstanding following
the completion of all matters referred to above. As such, the Stock Purchase
Agreement resulted in a change of control of the Company.
Richard Crimmins, as a designee of Purchaser, was elected as
the sole director and as the President, CEO, CFO, COO and the
Secretary-Treasurer of the Company replacing Pam Jowett effective October 30,
2007.
The Stock Purchase Agreement also required the Company's
Board of Directors to declare and pay a special cash dividend of $0.11 per share
to the shareholders of the Company on October 29, 2007. The Purchaser did not
participate in such dividend. The dividend was payable to shareholders of record
on October 29, 2007, which is prior to the date the shares were issued to
Purchaser under the Stock Purchase Agreement with a payment date of October 31,
2007. The dividend was payable to the Company's shareholders of record at
October 29, 2007, holding 3,591,082 shares of its common stock which resulted in
a total dividend distribution of $395,020. The funds for the dividend came from
the $400,000 proceeds received from the sale of common stock described herein.
Capital Contribution - During the years ended March 31, 2008
and 2007, respectively a shareholder of the Company forgave advances payable and
accrued interest in the amounts totaling $36,707 and $10,089. In accordance with
AICPA Technical Practice Aids, Practice Alert 00-1, the forgiveness has been
charged to Capital in excess of par value.
NOTE 3 - INCOME TAXES
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". SFAS No. 109 requires the Company to provide a net deferred tax
asset/liability equal to the expected future
F-76
FASHION TECH INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - INCOME TAXES - CONTINUED
tax benefit/expense of temporary reporting differences
between book and tax accounting methods and any available operating loss or tax
credit carryforwards. At March 31, 2008, the Company has available unused
operating loss carryforwards of approximately $80,602, which may be applied
against future taxable income and which expires in various years through 2028.
The amount of and ultimate realization of the benefits from
the operating loss carryforwards for income tax purposes is dependent, in part,
upon the tax laws in effect, the future earnings of the Company, and other
future events, the effects of which cannot be determined. Because of the
uncertainty surrounding the realization of the loss carryforwards, the Company
has established a valuation allowance equal to the tax effect of the loss
carryforwards and, therefore, no deferred tax asset has been recognized for the
loss carryforwards. The net deferred tax assets are approximately $12,090 and
$9,420 as of March 31, 2008 and 2007, respectively, with an offsetting valuation
allowance of the same amount, resulting in a change in the valuation allowance
of approximately $2,670 during the year ended March 31, 2008.
NOTE 4 - RELATED PARTY TRANSACTIONS
Management Compensation - During the years ended March 31,
2008 and 2007, the Company did not pay any compensation to any officer or
director of the Company.
Office Space - The Company has not had a need to rent office
space. A shareholder of the Company is allowing the Company to use his office as
a mailing address, as needed, at no expense to the Company.
Advances from Related Party - During the years ended March
31, 2008 and 2007, respectively, a shareholder of the Company had no additional
advances. During the year ended March 31, 2008, the shareholder forgave advances
of $25,350. Due to the related party nature of the debt the Company recorded the
forgiveness as a contribution to capital.
During the years ended March 31, 2008 and 2007, a shareholder
of the Company had loaned a total of $12,259 and $9,565, respectively, to the
Company. The advances were due on demand and bear interest at 10% per annum.
Interest expense for the years ended March 31, 2008 and 2007 amounted to $132
and $524, respectively. During the years ended March 2008 and 2007 the
Shareholder forgave the advances and accrued interest totaling $12,391 and
$10,089, respectively. The forgiveness of debt was accounted for as a capital
contribution.
NOTE 5 - GOING CONCERN
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
However, the Company, has incurred losses since its inception and has no
on-going operations. Further, the Company has current liabilities in excess of
current assets. These factors raise substantial doubt about the ability of the
Company to continue as a going concern.
F-77
FASHION TECH INTERNATIONAL, INC.
[A Development Stage Company]
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - GOING CONCERN- CONTINUED
In this regard, management is seeking potential business
opportunities and is proposing to raise any necessary additional funds not
provided by operations through loans and/or through additional sales of its
common stock. There is no assurance that the Company will be successful in
raising additional capital or in achieving profitable operations. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
NOTE 6 - LOSS PER SHARE
The following data show the amounts used in computing loss
per share:
|
|
For the
|
|
|
Year Ended
|
|
|
March 31,
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
available to common
stockholders
|
|
|
|
|
(numerator)
|
$
|
(17,804)
|
$
|
(9,904)
|
|
|
|
|
|
Weighted average number of
|
|
|
|
|
common shares outstanding
|
|
|
|
|
used in loss per share during
the
|
|
|
|
|
period (denominator)
|
|
14,030,730
|
|
3,591,082
|
Dilutive loss per share was not presented, as the Company had
no common equivalent shares for all periods presented that would effect the
computation of diluted loss per share.
F-78
6,115,607 Shares
CHINA NUTRIFRUIT GROUP LIMITED
Common Stock
PROSPECTUS
, 2009
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of
Issuance and Distribution
The following table sets forth the
costs and expenses, other than underwriting discounts and commissions, payable
by us in connection with the sale of common stock being registered. All
amounts, other than the SEC registration fee, are estimates. We will pay all
these expenses.
|
|
Amount to be
Paid
|
SEC Registration Fee
|
$
|
770
|
Printing Fees and Expenses
|
|
2,000
|
Legal Fees and Expenses
|
|
70,000
|
Accounting Fees and Expenses
|
|
50,000
|
Blue Sky Fees and Expenses
|
|
0
|
Transfer Agent and Registrar
Fees
|
|
1,000
|
Miscellaneous
|
|
5,000
|
Total
|
$
|
128,770
|
Item 14. Indemnification of
Directors and Officers
Our articles of incorporation
provide for the indemnification of our present and prior directors and officers
or any person who may have served at our request as a director or officer of
another corporation in which we own shares of capital stock or of which we are a
creditor, against expenses actually and necessarily incurred by them in
connection with the defense of any actions, suits or proceedings in which they,
or any of them, are made parties, or a party, by reason of being or having been
director(s) or officer(s) of us or of such other corporation, in the absence of
negligence or misconduct in the performance of their duties. This
indemnification policy could result in substantial expenditure by us, which we
may be unable to recoup.
Insofar as indemnification by us
for liabilities arising under the Securities Exchange Act of 1934 may be
permitted to our directors, officers and controlling persons pursuant to
provisions of the Articles of Incorporation and Bylaws, or otherwise, we have
been advised that in the opinion of the SEC, such indemnification is against
public policy and is, therefore, unenforceable. In the event that a claim for
indemnification by such director, officer or controlling person of us 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
offered, 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 Act and will be governed by the final adjudication of such
issue.
At the present time, there is no
pending litigation or proceeding involving a director, officer, employee or
other agent of ours in which indemnification would be required or permitted. We
are not aware of any threatened litigation or proceeding which may result in a
claim for such indemnification.
Item 15. Recent Sales of
Unregistered Securities
On October 10, 2008, we completed
a private placement transaction under which we sold 3,085,840 shares of our
common stock to certain Investors at $2.78 per share for a total of $8.58
million pursuant to the Securities Purchase Agreement. The issuance of our
shares to the Investors was made in reliance on the exemption provided by
Section 4(2) of the Securities Act for the offer and sale of securities not
involving a public offering, Regulation D and Regulation S promulgated
thereunder. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate the investment, and who represented
to us that the shares were being acquired for investment.
On October 10, 2008, as part of
the compensation for WLT Brothers Capital, Inc., Wentworth Securities, Inc. and
Euro Pacific Capital, Inc.s services as our placement agents for the private
placement transaction described above, we issued to the placement agents
warrants to purchase an aggregate of 216,009 shares of our common stock. The
warrants have an exercise price of $2.78 and have a term of 3 years. The
warrants were issued in reliance on the Section 4(2) of the Securities Act and
Regulation D promulgated thereunder.
II-1
On August 14, 2008 we issued
30,166,878 shares of our common stock to the shareholders of Fezdale. The total
consideration for the 30,166,878 shares of our common stock is 1,000 shares of
Fezdale, which is all the issued and outstanding capital stock of Fezdale. We
did not receive any cash consideration in connection with the share exchange.
The number of our shares issued to the shareholders of Fezdale was determined
based on an arms-length negotiation. The issuance of our shares to these
individuals was made in reliance on the exemption provided by Section 4(2) of
the Securities Act for the offer and sale of securities not involving a public
offering and Regulation S promulgated thereunder.
Pursuant to the stock purchase
agreement, dated November 3, 2006, HFI purchased 2,513,758 shares of our common
stock for $400,000. The purchase above was made in reliance on the Section 4(2)
private placement exemption. We are registering such shares owned by HFI and
its transferees.
In instances described above where
we issued securities in reliance upon Regulation D, we relied upon Rule 506 of
Regulation D of the Securities Act. These stockholders who received the
securities in such instances made representations that (a) the stockholder is
acquiring the securities for his, her or its own account for investment and not
for the account of any other person and not with a view to or for distribution,
assignment or resale in connection with any distribution within the meaning of
the Securities Act, (b) the stockholder agrees not to sell or otherwise transfer
the purchased shares unless they are registered under the Securities Act and any
applicable state securities laws, or an exemption or exemptions from such
registration are available, (c) the stockholder has knowledge and experience in
financial and business matters such that he, she or it is capable of evaluating
the merits and risks of an investment in us, (d) the stockholder had access to
all of our documents, records, and books pertaining to the investment and was
provided the opportunity ask questions and receive answers regarding the terms
and conditions of the offering and to obtain any additional information which we
possessed or were able to acquire without unreasonable effort and expense, and
(e) the stockholder has no need for the liquidity in its investment in us and
could afford the complete loss of such investment. Management made the
determination that the investors in instances where we relied on Regulation D
are accredited investors (as defined in Regulation D) based upon managements
inquiry into their sophistication and net worth. In addition, there was no
general solicitation or advertising for securities issued in reliance upon
Regulation D.
In instances described above where
we indicate that we relied upon Section 4(2) of the Securities Act in issuing
securities, our reliance was based upon the following factors: (a) the issuance
of the securities was an isolated private transaction by us which did not
involve a public offering; (b) there were only a limited number of offerees; (c)
there were no subsequent or contemporaneous public offerings of the securities
by us; (d) the securities were not broken down into smaller denominations; and
(e) the negotiations for the sale of the stock took place directly between the
offeree and us.
In instances described above where
we indicate that we relied upon Regulation S promulgated under the Securities
Act in issuing securities, our reliance was based upon the following factors (a)
each subscriber was neither a U.S. person nor acquiring the shares for the
account or benefit of any U.S. person, (b) each subscriber agreed not to offer
or sell the shares (including any pre-arrangement for a purchase by a U.S.
person or other person in the United States) directly or indirectly, in the
United States or to any natural person who is a resident of the United States or
to any other U.S. person as defined in Regulation S unless registered under the
Securities Act and all applicable state laws or an exemption from the
registration requirements of the Securities Act and similar state laws is
available, (c) each subscriber made his, her or its subscription from the
subscribers residence or offices at an address outside of the United States and
(d) each subscriber or the subscribers advisor has such knowledge and
experience in financial and business matters that the subscriber is capable of
evaluating the merits and risks of, and protecting his interests in connection
with an investment in us.
II-2
Item 16. Exhibits.
The following exhibits are
included as part of this Form S-1.
Exhibit No.
|
|
Description
|
|
|
|
2.1
|
|
Share Exchange Agreement,
dated August 14, 2008, among the registrant, Fezdale and its stockholders
(herein incorporated by reference to Exhibit 2.1 to the Companys current
report on Form 8-K filed on August 14, 2008).
|
3.1
|
|
Amended and Restated Articles
of Incorporation of the registrant as filed with the Secretary of State of
Nevada on August 14, 2008 (herein incorporated by reference to Exhibit 3.1
to the Companys current report on Form 8-K filed on August 20, 2008).
|
3.2
|
|
Amended and Restated Bylaws of
the registrant adopted on June 19, 2008 (herein incorporated by reference to
Exhibit 3.2 to the Companys current report on Form 8-K filed on June 20,
2008).
|
4.1*
*
|
|
Form of Placement Agent Warrants
|
5*
|
|
Opinion of Holland & Hart LLP as to the
legality of the shares.
|
10.1
|
|
Securities Purchase Agreement,
dated August 14, 2008, by and among the registrant, Fezdale, Daqing Longheda
and the investors listed therein (herein incorporated by reference to
Exhibit 10.1 to the Companys current report on Form 8-K filed on August 14,
2008).
|
10.2
|
|
Make Good Escrow Agreement,
dated August 14, 2008, by and among the registrant, WLT Brothers Capital,
Inc., Mr. Yiu Fai Kung and Securities Transfer Corporation (herein
incorporated by reference to Exhibit 10.2 to the Companys current report on
Form 8-K filed on August 14, 2008).
|
10.3
|
|
Make Good Escrow Agreement,
dated August 14, 2008, by and among the registrant, HFG International,
Limited, Mr. Yiu Fai Kung and Securities Transfer Corporation (herein
incorporated by reference to Exhibit 10.3 to the Companys current report on
Form 8-K filed on August 14, 2008).
|
10.4
|
|
Holdback Escrow Agreement,
dated August 14, 2008, by and among the registrant, WLT Brothers Capital,
Inc. and Securities Transfer Corporation (herein incorporated by reference
to Exhibit 4.1 to the Companys current report on Form 8-K filed on August
14, 2008).
|
10.5
|
|
Form of Lock-up Agreement,
dated August 14, 2008 (herein incorporated by reference to Exhibit 10.4 to
the Companys current report on Form 8-K filed on August 14, 2008).
|
10.6
|
|
Form of Escrow Agreement,
dated August 14, 2008. (herein incorporated by reference to Exhibit 10.5 to
the Companys current report on Form 8-K filed on August 14, 2008).
|
10.7
|
|
English Summary of Form of
Memorandum of Understanding by and between the registrant and the local
governments (herein incorporated by reference to Exhibit 10.6 to the
Companys current report on Form 8-K filed on August 14, 2008).
|
10.8
|
|
English Summary of Form of
Distribution Contract (herein incorporated by reference to Exhibit 10.7 to
the Companys current report on Form 8-K filed on August 14, 2008).
|
10.9
|
|
English Summary of Trademark
License Agreement, by and between Daqing Longheda Food Company Limited and
Changjun Yu, dated May 16, 2008 (herein incorporated by reference as Exhibit
10.8 to the Companys report on Form 8-K filed on August 14, 2008).
|
10.10
|
|
English Summary of Trademark
License Agreement, by and between Daqing Longheda Food Company Limited and
Changjun Yu, dated May 16, 2008 (herein incorporated by reference to Exhibit
10.9 to the Companys current report on Form 8-K filed on August 14, 2008).
|
10.11
|
|
English Summary of Technology
Cooperation Agreement, by and between Daqing Longheda Food Company Limited
and College of Food of Heilongjiang Bai Yi Land Reclamation University,
dated March 7, 2008 (herein incorporated by reference to Exhibit 10.10 to
the Companys current report on Form 8-K filed on August 14, 2008).
|
10.12
|
|
English Summary of
Counter-Guarantee Agreement, by and between Daqing Longheda Food Company
Limited and Daqing Industrial and Commercial Guarantee Co., Ltd., dated
August 27, 2007 (herein incorporated by reference to Exhibit 10.11 to the
Companys current report on Form 8-K filed on August 14, 2008).
|
10.13
|
|
English Summary of Renminbi
Loan Agreement, by and between Daqing Longheda Food Company Limited and
Daqing Industrial and Commercial Bank, dated August 24, 2007 (herein
incorporated by reference to Exhibit 10.12 to the Companys current report
on Form 8-K filed on August 14, 2008).
|
10.14
|
|
English Summary of Guarantee
Agreement, by and between Daqing Industrial and Commercial Guarantee Co.,
Ltd. and Daqing Industrial and Commercial Bank, dated August 24, 2007
(herein incorporated by reference to Exhibit 10.13 to the Companys current
report on Form 8-K filed on August 14, 2008).
|
II-3
Exhibit No.
|
|
Description
|
|
|
|
10.15
|
|
English Summary of License
Agreement, by and between Daqing Longheda Food Company Limited and Shanda
Xin Hua Interactive Entertainment Co., Ltd., dated September 15, 2005
(herein incorporated by reference to Exhibit 10.14 to the Companys current
report on Form 8-K filed on August 14, 2008).
|
10.16
|
|
Employment Agreement, by and
between the registrant and Colman Cheng, dated August 14, 2008 (herein
incorporated by reference to Exhibit 10.15 to the Companys current report
on Form 8-K filed on August 14, 2008).
|
10.17
|
|
Employment Agreement, by and
between the registrant and Jinglin Shi, dated August 14, 2008 (herein
incorporated by reference to Exhibit 10.16 to the Companys current report
on Form 8-K filed on August 14, 2008).
|
10.18
|
|
Employment Agreement, by and
between the registrant and Manjiang Yu, dated August 14, 2008 (herein
incorporated by reference to Exhibit 10.17 to the Companys current report
on Form 8-K filed on August 14, 2008).
|
10.19
|
|
Employment Agreement, by and
between the registrant and Changjun Yu, dated August 14, 2008 (herein
incorporated by reference to Exhibit 10.18 to the Companys current report
on Form 8-K filed on August 14, 2008).
|
10.20
|
|
Amendment to the Securities
Purchase Agreement, by and among the Company and the Purchasers identified
therein (herein incorporated by reference to Exhibit 10.1 to the Companys
current report on Form 8-K filed on September 30, 2008).
|
10.21
|
|
Amendment to the Make Good Escrow
Agreement, by and among the Company, KUNG Yiu Fai, WLT Brothers Capital,
Inc. and Securities Transfer Corporation
(herein incorporated by
reference to Exhibit 10.1 to the Companys current report on Form 8-K filed
on September 30, 2008).
|
10.22 **
|
|
Financial Advisory Agreement,
by and between the Company and HFG International, Limited, dated April 28,
2008.
|
21
|
|
List of Subsidiary (herein
incorporated by reference to Exhibit 21 to the Companys current report on
Form 8-K filed on August 14, 2008).
|
23.1*
|
|
Consent of HLB Hodgson Impey Cheng
|
23.2
|
|
Consent of Holland & Hart, LLP
(included in Exhibit 5)
|
23.3*
|
|
Consent of Pritchett Siler &
Hardy PC, Ltd.
|
24**
|
|
Power of Attorney (included on
the signature page to the Registration Statement on Form S-1 filed on
October 14, 2008).
|
* Filed herewith.
** Previously filed.
Item 17. Undertakings
(A) The undersigned Registrant
hereby undertakes:
(1)
To file, during any period in
which offers or sales are being made, a post-effective amendment to this
Registration Statement:
(a)
To include any prospectus required
by Section 10(a) (3) of the Securities Act;
(b)
To reflect in the prospectus any
facts or events arising after the effective date of this Registration Statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
this Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high and of the estimated maximum offering range may be
reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in the
Calculation of Registration Fee table in the effective Registration Statement;
and
(c)
To include any material
information with respect to the plan of distribution not previously disclosed in
the registration statement or any material change to such information in the
registration statement;
II-4
(2)
That, for the purpose of
determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial
bona fide
offering thereof.
(3)
To remove from registration by
means of a post-effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
(4)
That, for the purpose of
determining liability under the Securities Act of 1933 to any purchaser:
(a)
Each prospectus filed by the
registrant pursuant to 424(b)(3) shall be deemed to be part of the registration
statement as of the date the filed prospectus was deemed part of and included in
the registration statement; and
(b)
Each prospectus required to be
filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration
statement in reliance on Rule 430B relating to an offering made pursuant to Rule
415(a)(1)(i), (vii), or (x) for the purpose of providing the information
required by section 10(a) of the Securities Act of 1933 shall be deemed to be
part of and included in the registration statement as of the earlier of the date
such form of prospectus is first used after effectiveness or the date of the
first contract of sale of securities in the offering described in the
prospectus. As provided in Rule 430B, for liability purposes of the issuer and
any person that is at that date an underwriter, such date shall be deemed to be
a new effective date of the registration statement relating to the securities in
the registration statement to which that prospectus relates, and the offering of
such securities at that time shall be deemed to be the initial
bona fide
offering thereof.
Provided
,
however
, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such effective
date, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such effective date.
(5)
That, for the purpose of
determining liability of the registrant under the Securities Act of 1933 to any
purchaser in the initial distribution of the securities:
The undersigned registrant
undertakes that in a primary offering of securities of the undersigned
registrant pursuant to this registration statement, regardless of the
underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(a)
Any preliminary prospectus or
prospectus of the undersigned registrant relating to the offering required to be
filed pursuant to Rule 424;
(b)
Any free writing prospectus
relating to the offering prepared by or on behalf of the undersigned registrant
or used or referred to by the undersigned registrant;
(c)
The portion of any other free
writing prospectus relating to the offering containing material information
about the undersigned registrant or its securities provided by or on behalf of
the undersigned registrant; and
(d)
Any other communication that is an
offer in the offering made by the undersigned registrant to the purchaser.
(B) The undersigned Registrant
hereby undertakes that, for purposes of determining any liability under the
Securities Act, each filing of the Registrants annual report pursuant to
Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each filing
of an employee benefit plans annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in this Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial
bona fide
offering thereof.
(C) Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-5
SIGNATURES
Pursuant to the requirements of
the Securities Act of 1933, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Daqing, China, on the 3rd day of March, 2009.
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CHINA NUTRIFRUIT
GROUP LIMITED
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By:
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/s/ Jinglin Shi
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Jinglin Shi
Chief Executive Officer
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Pursuant to the requirements of
the Securities Act of 1933, as amended, this Amendment No. 3 to Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
Signature
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Title
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/s/ Jinglin Shi
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Chief Executive Officer,
Director and
President (Principal Executive Officer)
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Jinglin Shi
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/s/ Colman Cheng
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Chief Financial Officer
(Principal Financial and Accounting Officer)
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Colman Cheung
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/s/ Changjun Yu
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Chairman of the board
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Changjun Yu
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Date: March 3, 2009
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Exhibit No.
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Description
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2.1
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Share Exchange Agreement,
dated August 14, 2008, among the registrant, Fezdale and its stockholders
(herein incorporated by reference to Exhibit 2.1 to the Companys current
report on Form 8-K filed on August 14, 2008).
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3.1
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Amended and Restated Articles
of Incorporation of the registrant as filed with the Secretary of State of
Nevada on August 14, 2008 (herein incorporated by reference to Exhibit 3.1
to the Companys current report on Form 8-K filed on August 20, 2008).
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3.2
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Amended and Restated Bylaws of
the registrant adopted on June 19, 2008 (herein incorporated by reference to
Exhibit 3.2 to the Companys current report on Form 8-K filed on June 20,
2008).
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4.1*
*
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Form of Placement Agent Warrants
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5*
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Opinion of Holland & Hart LLP as to the
legality of the shares.
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10.1
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Securities Purchase Agreement,
dated August 14, 2008, by and among the registrant, Fezdale, Daqing Longheda
and the investors listed therein (herein incorporated by reference to
Exhibit 10.1 to the Companys current report on Form 8-K filed on August 14,
2008).
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10.2
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Make Good Escrow Agreement,
dated August 14, 2008, by and among the registrant, WLT Brothers Capital,
Inc., Mr. Yiu Fai Kung and Securities Transfer Corporation (herein
incorporated by reference to Exhibit 10.2 to the Companys current report on
Form 8-K filed on August 14, 2008).
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10.3
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Make Good Escrow Agreement,
dated August 14, 2008, by and among the registrant, HFG International,
Limited, Mr. Yiu Fai Kung and Securities Transfer Corporation (herein
incorporated by reference to Exhibit 10.3 to the Companys current report on
Form 8-K filed on August 14, 2008).
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10.4
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Holdback Escrow Agreement,
dated August 14, 2008, by and among the registrant, WLT Brothers Capital,
Inc. and Securities Transfer Corporation (herein incorporated by reference
to Exhibit 4.1 to the Companys current report on Form 8-K filed on August
14, 2008).
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10.5
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Form of Lock-up Agreement,
dated August 14, 2008 (herein incorporated by reference to Exhibit 10.4 to
the Companys current report on Form 8-K filed on August 14, 2008).
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10.6
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Form of Escrow Agreement,
dated August 14, 2008. (herein incorporated by reference to Exhibit 10.5 to
the Companys current report on Form 8-K filed on August 14, 2008).
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10.7
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English Summary of Form of
Memorandum of Understanding by and between the registrant and the local
governments (herein incorporated by reference to Exhibit 10.6 to the
Companys current report on Form 8-K filed on August 14, 2008).
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10.8
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English Summary of Form of
Distribution Contract (herein incorporated by reference to Exhibit 10.7 to
the Companys current report on Form 8-K filed on August 14, 2008).
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10.9
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English Summary of Trademark
License Agreement, by and between Daqing Longheda Food Company Limited and
Changjun Yu, dated May 16, 2008 (herein incorporated by reference as Exhibit
10.8 to the Companys report on Form 8-K filed on August 14, 2008).
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10.10
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English Summary of Trademark
License Agreement, by and between Daqing Longheda Food Company Limited and
Changjun Yu, dated May 16, 2008 (herein incorporated by reference to Exhibit
10.9 to the Companys current report on Form 8-K filed on August 14, 2008).
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10.11
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English Summary of Technology
Cooperation Agreement, by and between Daqing Longheda Food Company Limited
and College of Food of Heilongjiang Bai Yi Land Reclamation University,
dated March 7, 2008 (herein incorporated by reference to Exhibit 10.10 to
the Companys current report on Form 8-K filed on August 14, 2008).
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10.12
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English Summary of
Counter-Guarantee Agreement, by and between Daqing Longheda Food Company
Limited and Daqing Industrial and Commercial Guarantee Co., Ltd., dated
August 27, 2007 (herein incorporated by reference to Exhibit 10.11 to the
Companys current report on Form 8-K filed on August 14, 2008).
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10.13
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English Summary of Renminbi
Loan Agreement, by and between Daqing Longheda Food Company Limited and
Daqing Industrial and Commercial Bank, dated August 24, 2007 (herein
incorporated by reference to Exhibit 10.12 to the Companys current report
on Form 8-K filed on August 14, 2008).
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10.14
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English Summary of Guarantee
Agreement, by and between Daqing Industrial and Commercial Guarantee Co.,
Ltd. and Daqing Industrial and Commercial Bank, dated August 24, 2007
(herein incorporated by reference to Exhibit 10.13 to the Companys current
report on Form 8-K filed on August 14, 2008).
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Exhibit No.
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Description
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10.15
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English Summary of License
Agreement, by and between Daqing Longheda Food Company Limited and Shanda
Xin Hua Interactive Entertainment Co., Ltd., dated September 15, 2005
(herein incorporated by reference to Exhibit 10.14 to the Companys current
report on Form 8-K filed on August 14, 2008).
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10.16
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Employment Agreement, by and
between the registrant and Colman Cheng, dated August 14, 2008 (herein
incorporated by reference to Exhibit 10.15 to the Companys current report
on Form 8-K filed on August 14, 2008).
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10.17
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Employment Agreement, by and
between the registrant and Jinglin Shi, dated August 14, 2008 (herein
incorporated by reference to Exhibit 10.16 to the Companys current report
on Form 8-K filed on August 14, 2008).
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10.18
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Employment Agreement, by and
between the registrant and Manjiang Yu, dated August 14, 2008 (herein
incorporated by reference to Exhibit 10.17 to the Companys current report
on Form 8-K filed on August 14, 2008).
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10.19
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Employment Agreement, by and
between the registrant and Changjun Yu, dated August 14, 2008 (herein
incorporated by reference to Exhibit 10.18 to the Companys current report
on Form 8-K filed on August 14, 2008).
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10.20
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Amendment to the Securities
Purchase Agreement, by and among the Company and the Purchasers identified
therein (herein incorporated by reference to Exhibit 10.1 to the Companys
current report on Form 8-K filed on September 30, 2008).
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10.21**
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Amendment to the Make Good Escrow
Agreement, by and among the Company, KUNG Yiu Fai, WLT Brothers Capital,
Inc. and Securities Transfer Corporation
(herein incorporated by
reference to Exhibit 10.1 to the Companys current report on Form 8-K filed
on September 30, 2008).
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10.22**
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Financial Advisory Agreement,
by and between the Company and HFG International, Limited, dated April 28,
2008.
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21
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List of Subsidiary (herein
incorporated by reference to Exhibit 21 to the Companys current report on
Form 8-K filed on August 14, 2008).
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23.1*
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Consent of HLB Hodgson Impey Cheng
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23.2
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Consent of Holland & Hart, LLP
(included in Exhibit 5)
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23.3*
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Consent of Pritchett Siler &
Hardy PC, Ltd.
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24**
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Power of Attorney (included on
the signature page to the Registration Statement on Form S-1 filed on
October 14, 2008).
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*Filed herewith
** Previously filed.
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