ITEM 1. BUSINESS
Overview of Our Business
We are a holding company that only operates through our indirect Chinese subsidiaries Beijing SOD and Chongqing SOD. Through our Chinese subsidiaries, we develop, manufacture and market our SOD products in China. SOD is a naturally occurring enzyme which may act as a potent antioxidant defense in cells that are exposed to oxygen. Certain research has shown that under certain biological conditions, SOD revitalizes cells and reduces the rate of cell destruction. It neutralizes the most common free radical-superoxide radical-by converting it into hydrogen peroxide and water. Because superoxide is harmful to human cells, and certain forms of SOD exist naturally in most humans, many studies show that SOD is valuable in protecting human cells from the harmful effects of superoxide. SOD is thought to be more powerful than antioxidant vitamins as it activates the body's productions of its own antioxidants. As a result, SOD is referred to as the “enzyme of life.” Commercially, SOD has a wide range of applications and is widely applied in foods, drinks, skin care productions, pharmaceuticals, to combat ailments ranging from sunburn to rheumatoid arthritis.
History and Corporate Structure
We are a New York corporation that was incorporated on February 29, 1996, as United Network Technologies, Inc. and we changed our name to Panagra International Corporation on October 2, 1998. From our inception until 2001, we were relatively inactive with limited operations. On August 2, 2001 we changed our name to Minghua Group International Holdings Limited and at that time we also increased the authorized common shares of our common stock from 40,000,000 shares to 200,000,000 shares. On October 16, 2007, we effectuated a 1-for-20 reverse stock split of all our issued and outstanding shares of common stock, or the Reverse Split, and changed our name to China Longyi Group International Holdings Limited.
Reverse Acquisition
In June 2001 we formed Minghua Acquisition Corp., a Delaware corporation, and acquired all the equity interests of Minghua Group International Holding (Hong Kong) Limited, or Minghua Hong Kong, a Hong Kong limited company formed on June 4, 1997, for a purchase price of $1,000,000 in cash and 28,000,000 (pre Reverse Split) shares of our common stock. The shares received by the Minghua Hong Kong shareholders equaled 70% of our issued and outstanding shares of common stock, resulting in a change of control to the Minghua Hong Kong shareholders.
At that time, the sole asset of Minghua Hong Kong was an 85% equity interest in the Shenzhen Minghua Environmental Protection Vehicle Co., Ltd., or Minghua EPV, a PRC corporation. The remaining 15% equity minority interest in China Minghua EPV was owned by a related party, Asia Key Group Limited, through its wholly-owned subsidiary Minghua Real Estate (Shenzhen) Ltd., formerly known as Minghua Investment Co., Ltd., or Minghua Real Estate. On January 29, 2004, the Company acquired this 15% minority interest held by Minghua Real Estate, in a related party transaction by paying $990,638 in cash and issuing 28,210,000 (pre reverse split) shares of our common stock. Through Minghua EPV, our business became the development and commercialization of mass transit, hybrid electric vehicles, primarily buses.
Acquisition of the Bus Installation Company
On March 13, 2003, our indirect subsidiary, Ming Hua Environmental Protection Science and Technology Limited, a Hong Kong limited company, or Minghua Science, acquired an 89.8% equity interest in the Guangzhou City View Bus Installation Company, or the Bus Installation Company, through its acquisition of Good View Bus Manufacturing (Holdings) Company Limited, a Hong Kong limited company and Eagle Bus Development Limited, a Hong Kong limited company, which own 23.8% and 66% of the Bus Installation Company, respectively. The Bus Installation Company manufactured motor coaches for domestic sale in China and for export under the “Eagle” brand name. We sold 6 standard diesel buses in 2005 and 5 standard diesel buses in 2004, however, once we sold off the inventory of diesel buses and parts that we acquired along with our acquisition of the Bus Installation Company, we no longer sold or manufactured diesel buses.
Acquisition of Beijing Cardinal
On June 16, 2004, Minghua Hong Kong formed a wholly owned subsidiary in the PRC, named Beijing China Cardinal Real Estate Consulting Co., Ltd., or Beijing Cardinal. We intended to use Beijing Cardinal as a vehicle to make future real estate investments in the PRC. However, at December 31, 2006, Beijing Cardinal had not begun significant operations.
Sale of Environmental Vehicle Business
Through Minghua Hong Kong, we had been focused on the development and commercialization of mass transit, hybrid electric vehicles, primarily buses. However, although prototype hybrid vehicles and a limited number of other vehicles have been produced, we have not been able to successfully commercialize these vehicles. As a result, on September 28, 2006, we disposed of our entire interests in Minghua Hong Kong and Minghua Science to Messrs. Han Lian Zhong and Niu Rui Cheng for 1 HK$, in exchange for their assumption of Minghua Hong Kong and Minghua Science’s debt. However, we retained our interests in China Cardinal, which were transferred to our subsidiary, Euromax International Investments Limited, or Euromax, and in the Guangzhou City View Bus Installation Company, which was transferred to our subsidiary, Top Team Holdings Limited (BVI), or Top Team.
Qiang Long Investment
On January 29, 2004, we entered into a subscription agreement with Qiang Long Real Estate Development Co., Ltd., or Qiang Long, a PRC company, pursuant to which, as amended and supplemented from time to time, Qiang Long was obligated to purchase 140,000,000 (pre reverse split) shares of our common stock, par value $0.01 at an aggregate purchase price of US$29,400,000, or $0.21 per share. An amount equaling US$653,795 was paid to us as a performance bond and an additional US$632,911 was paid to us in 2006 in exchange for 3,013,862 (pre reverse split) shares. The balance of US$28,113,294 was to be paid in full by June 30, 2007, for the remaining 136,986,138 (pre reverse split) shares. On June 29, 2007, we consummated our obligations under the contract, pursuant to a letter agreement between the Company and Qiang Long. Pursuant to the letter agreement, we acknowledged our receipt of the final payment in cash from Qiang Long as fulfillment of Qiang Long’s investment obligation, and agreed to issue 50,000,000 (pre reverse split) shares to Qiang Long on or before July 23, 2007, and the remaining 86,986,138 (pre reverse split) shares within fifteen (15) business days following the effective date of an amendment to our Certificate of Incorporation to effect a one-for-twenty reverse split of our outstanding common stock, which will be equal to 4,349,307 shares post-reverse split. Accordingly, on August 2, 2007, 50,000,000 shares were issued to Qiang Long.
As a result of the closing of the investment transaction with Qiang Long, our Chairman, Mr. Changde Li, now beneficially owns and controls 155,000,000 (pre reverse split) shares (7,750,000 shares post-reverse split) or 54.0% of the Company’s issued and outstanding common stock, 15,000,000 (pre reverse split) of which he holds indirectly through Qiang Long, 136,986,137 (pre reverse split) of which he holds indirectly through Qiang Long’s affiliate, Jolly Concept Management Limited, a BVI company, and 3,013,863 (pre reverse split) of which he holds through Qiang Long’s affiliate, Chinese Dragon Heritage Investment Management Limited, a PRC company.
Acquisition of Top Time
From the time when we sold the 6 standard diesel buses in the first quarter of 2005 until November 12, 2007 when we completed the acquisition transaction with Daykeen Group Limited, or Daykeen, discussed herein, we had limited operations and did not engage in active business operations other than our search for, and evaluation of, potential business opportunities for acquisition or participation.
On November 12, 2007, we completed an acquisition transaction with Top Time International Limited, a Hong Kong Company, or Top Time, whereby we paid Daykeen, Top Time’s sole shareholder, a total consideration of $54.9 million (RMB 407 million, based on an exchange ratio of $1=RMB 7.414) in exchange for 100% ownership of Top Time, consisting of $30 million in cash and $24.9 million in shares of our common stock issuable within 90 days of the closing. $30 million of cash was paid to Daykeen by three transactions, Beijing Cardinal, De Qiu Hong, and Mr. Chen Zhiping paid $29 million, $0.4 million, and $0.6 million on behalf of the Company, respectively. As a result, the Company offset the same amounts of balance of the three parties’ current accounts. The equity portion of the purchase price amounts to a total of 62,250,000 (post reverse split) shares of our common stock (based upon $0.02/share, the average of the closing price of the Company’s common stock on the OTCBB for the 365 calendar days prior to May 31, 2007, which was adjusted for our stock split which occurred on October 16, 2007 and resulted an effective purchase price of $0.40 per share). Top Time thereby became our wholly owned subsidiary and Daykeen will become our controlling stockholder upon our issuance to Daykeen of the equity portion of the purchase price in accordance with the Share Purchase Agreement.
Top Time was incorporated in Hong Kong in December 2006 and currently has two subsidiaries: Beijing SOD and Chongqing SOD. Beijing SOD was incorporated in China in March 2005 and is 90% owned by Top Time and 10% owned by Ms. Ran Wang.
For accounting purposes, the acquisition of Top Time was treated as a reorganization of entities under common control. When we refer in this report to business and financial information for periods prior to the consummation of the acquisition, we are referring to the business and financial information of Top Time on a consolidated basis unless the context suggests otherwise.
Sale of Top Team Subsidiaries
Through acquisition of Top Time, our business became the development, manufacture and sale of SOD products. As a result, on November 28, 2007, we disposed of five subsidiaries held by Top Team Holdings Limited (BVI): Euromax International Investments Limited, Beijing China Cardinal Real Estate Consulting Co., Ltd, Eagle Bus Development Limited (HK), Good View Bus Manufacturing Company Limited (HK), and Guangzhou City View Bus Installation Company Limited (PRC), to Mr. Zhiping Cheng, for an aggregate sale price of RMB5,000,000 (approximately $715,000).
The following chart reflects our organizational structure as of the date of this report.
Our Industry
The health supplements industry is currently made up of many small- and medium-sized companies that manufacture and distribute products generally intended to, or marketed for the purpose of maintaining, and sometimes improving, the body’s health and general well being. In 2004, sales of health supplements in China reached RMB 34 billion (approximately $4.25 billion) and according to the China Personal Health & Supplemental Industry Survey 2005, the annual growth rate of health supplement consumption in China between 15% and 30%, compared with around 13 % in other developed countries.
According to China Enterprises Association, currently, there are over 3,000 manufacturers of health supplement products in China, with an annual production value of over $6.25 billion. Of these manufacturers, large enterprises with registered capital of over $12.5 million only account for 1.45%; medium-sized enterprises with registered capital under $12.5 million, but over $6.25 million, make up 38%; and workshop-style enterprises with registered capital below $12,500 make up 12.5% of the total number of manufacturers. According to China Personal Health & Supplemental Industry Survey 2005, the sales of health supplement products in China are expected to reach RMB 70 billion (approximately $ 8.75 billion) in 2009, with a compounded annual growth rate of 15.24%.
Ever since American scientists Joe McCord and Irwin Fridovich discovered SOD in cattle erythrocytes in 1969 and hypothesized that it can protect life molecules from oxygenation and retrogradation, experts in the fields of biology and medicine and many entrepreneurs and industrialists have been engaged in research, study, development, application and transformation of SOD into products that we believe will provide human beings with certain health and longevity benefits.
Research into the functions and applications of SOD in China began in the late 1970’s. Since then, various centers of research in China, including universities, the military and private companies, have researched food, medicinal, and cosmetic applications for SOD. In the 1990’s, SOD foods began to be sold in China, including SOD soy milk, SOD dairy milk, and SOD beer. Due to technical problems with these first-generation SOD food products and limited public knowledge of the health benefits of SOD, many were discontinued. Technical difficulties relating to the commercialization of SOD products in China have included: (1) lack of methods for efficient harvesting of SOD from animal and human blood and plants; (2) problems with the maintenance and stabilization of harvested SOD, the longest shelf life so far being only two years in China; and (3) technical problems in the effectiveness of SOD in products, particularly food and other products to be consumed orally. More recently, however, various SOD food products have reappeared in China, including SOD milk, SOD wine, and SOD vegetables and fruits. We believe that these and other types of SOD products will become extremely popular due in part to innovations in the SOD industry; recognition of SOD technologies as proprietary intellectual property; government policies encouraging healthier food; the higher awareness of consumers in China of the health benefits of consuming products containing SOD; and the growth of the spending power of Chinese citizens.
In addition, the China Science and Technology Institute has recognized that SOD product technologies are proprietary intellectual property. SOD companies, including us, have instituted strict measures to protect their SOD product technologies from being misappropriated. As such, the SOD product technologies may be protected by Chinese intellectual property law even if they are not patented. As a result, companies are encouraged to develop and commercialize SOD technologies.
The growing wealth of the Chinese public and its related greater interest in better health and nutrition are also trends in SOD industry’s favor. SOD production and distribution companies have been working hard to develop innovations to best exploit the commercial potential of SOD, including our subsidiary, Chongqing SOD. Since 1993, various types of SOD products have been sold in China, such as Beijing Dabao SOD skin care series, Wuhan Jiutouniao SOD liquid nutrition drink series, Guizhou Laoliafu SOD liquid nutrition drink series, Zhejing SOD beer, SOD toothpaste, SOD soy milk. We believe that the SOD industry in China should expand as Chinese consumers grow more able and willing to purchase SOD products.
Our Products
Currently we are manufacturing one product, which is Jiuzhou SOD plant wine which we market under the name “Jiuzhou Holy Wine.” Our Jiuzhou SOD plant wine is a product developed from the zymolysis of natural wide berries with an alcohol level of 21%. We plan to produce SOD oral liquid and SOD capsules after our Jiuzhou SOD plant wine products enter into the market and generate revenues to us. We also plan to produce and sell SOD medicines and skin care products after we receive manufacturing permits from the State Food and Drug Administration, or SFDA.
Sales & Marketing Strategy
Our sales and marketing department currently consists of 16 employees. We are developing a diversified sales network which allows us to effectively market products and services to our customers. In addition to sales efforts conducted directly by our internal sales team and other employees, we also use sales agents. We have relationships with 15 sales agents to sell our products.
In terms of geographic area, our sales network covers 21 cities in China. Our Jiuzhou SOD wine has been listed on the governmental procurement list of Chongqing City, which will grant us a priority to sell our SOD products to various governmental agencies in Chongqing City. We also expect that our SOD products will be listed on the governmental procurement list of Beijing City within the next 6 months. We plan to expand our sales network to cover more Chinese cities, including Shenzhen, Guangzhou, Nanjing, Shanghai, Shijiazhuang, Lhasa and Nanchang.
We also plan to employ an online order system, which will cover four major metropolitan areas, such as Beijing, Chengdu, Kuming and Chongqing, within the next 12 months. Through our website http://www.jiuzhoushengjiu.com/index.asp, we will be able to offer a complete line of our products to our customers 24 hours a day, seven days a week. This additional sales channel will enable us to market and sell our products in regions where we do not have retail operations or have limited operations.
Competition
The health supplementary business both within China and globally is highly fragmented and intensely competitive. Many of our competitors, both domestic and international, have significant research and development capabilities and financial, scientific, manufacturing, marketing and sales resources. Although our marketing and sales efforts of SOD products are very limited, we believe that we will compete with our competitors based upon the price and quality of our products, ability to produce a diverse range of products and customer services.
In China, we compete principally with Chengdu New Asia Bioengineering Co., Ltd., Zhuhai Zixing Biological Engineering Co., Ltd. and Liaoyuan Jinchang Bioengineering Co., Ltd.
We believe that our Jiuzhou SOD wine, made from more than 10 kinds of wild plants, is more efficient to remove superoxide free radicals than SOD liquid products made by our competitors. In addition, we believe that our SOD plant compound enzyme can be stored under the normal atmospheric temperature for more than 10 years, much longer than the life span of many other SOD products made from animal blood or a single plant.
Intellectual Property
Although none of our products are currently covered by patents, we already prepared all necessary documents and related materials and will register patent for SOD mother solution application skill. Furthermore, we have registered a trademark for our SOD product which we will sell under the name “Jiuzhou Holy Wine.”
In addition, we protect our know how technologies through confidentiality agreements we entered into with our employees in our production department.
Research and Development
We currently operate our research and development department through Beijing SOD. As of December 31, 2008, we have eight research and development staff (six of whom hold Master/PhD degrees). Our research and development department is responsible for developing advanced technologies, developing new SOD products and training. We also plan to establish a “life technology” research academy for where our staff may research and develop SOD’s application as an antioxidant and energy booster.
Expenditures for research and development for the years ended December 31, 2008 and 2007 were $0 and $211 respectively.
Regulation
Based on different potential uses, SOD products in China are classified into three types under the Chinese law and accordingly are subject to different Chinese laws and regulations.
If the SOD products are sold for manufacturing food, they are considered as food additives. Under the Chinese law, a company may not produce SOD products for food additives use without two licenses, the Food Hygiene License issued by the provincial Administration of Health, or AOH, and the Food Production License issued by the provincial Administration of Quality Supervision, Inspection and Quarantine, or AQSIQ. If the SOD products are sold as raw materials for drugs, the Company should first obtain the Pharmaceutical Producer License from the provincial AOH and the approval from the provincial FDA.
We have already obtained both the Food Hygiene License issued by the Chongqing AOH and the Food Production License issued by the local AQSIQ. Since we also plan to produce and sell SOD medicines and skin care products, we plan to apply for the Pharmaceutical Producer License from the provincial AOH and the approval from the provincial State Food and Drug Administration, or SFDA.
In addition, we are also subject to PRC’s foreign currency regulations. The PRC government has control over RMB reserves through, among other things, direct regulation of the conversion or RMB into other foreign currencies. Although foreign currencies which are required for “current account” transactions can be bought freely at authorized Chinese banks, the proper procedural requirements prescribed by Chinese law must be met. At the same time, Chinese companies are also required to sell their foreign exchange earnings to authorized Chinese banks and the purchase of foreign currencies for capital account transactions still requires prior approval of the Chinese government.
Employees
As of December 31, 2008, we had a total of 72 full-time employees. The following table illustrates the allocation of these employees among the various job functions conducted at our Company.
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.
We believe that we maintain a satisfactory working relationship with our employees and we have not experienced any significant labor disputes or any difficulty in recruiting staff for our operations.
ITEM 1A.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below, which constitute all of the material risks facing us. If any of the following risks actually occur, our business could be harmed. You should also refer to the other information about us contained in this report, including our financial statements and related notes.
RISKS RELATED TO OUR BUSINESS
The recent financial crisis could negatively affect our business, results of operations, and financial condition.
The recent credit crisis and turmoil in the global financial system may have an impact on our business and our financial condition, and we may face challenges if conditions in the financial markets do not improve. Our ability to access the capital markets may be restricted at a time when we would like, or need, to raise capital, which could have an impact on our flexibility to react to changing economic and business conditions. In addition, these economic conditions also impact levels of consumer spending, which have recently deteriorated significantly and may remain depressed for the foreseeable future. Consumer purchases of discretionary items, including our Jiuzhou SOD plant wine, generally decline during recessionary periods and other periods where disposable income is adversely affected. If demand for our products fluctuates as a result of economic conditions or otherwise, our revenue and gross margin could be harmed.
We are an early stage development company and we have a limited operating history of our current business. We have earned only insignificant revenues and it is uncertain whether we will earn any revenues in the future or whether we will ultimately be profitable.
We are in the development stage and our future operations are subject to all of the risks inherent in the establishment of a new business enterprise. The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the development of SOD products, the utilization of unproven technology and the competitive environment in which we operate. There can be no assurance that we will be able to develop, manufacture or market any products in the future, that future revenues will be significant, that any sales will be profitable or that we will have sufficient funds available to complete our marketing and development programs or to market any products which we may develop. In addition, as a result of our limited operating history even though we do currently have a marketable product, we expect to incur substantial operating losses until we can generate sufficient revenues from the sales of our SOD products to cover our operating costs. We currently have limited sources of potential operating revenue and there can be no assurance that we will be able to develop revenue sources or that our operations will ever become profitable.
Our industry is highly fragmented and competitive, and increased competition could reduce our operating income.
The health supplement business both within China and globally is highly fragmented and intensely competitive. We compete with a number of domestic and international manufacturers and distributors that are producing and marketing products in China that are similar to our products. We may not be able to effectively compete against them because our existing or potential competitors may have superior financial, technical, distribution, marketing, sales and other resources, as well as more significant name recognition and established positions in the market we serve. Increased competition could force us to lower our prices or offer services at a higher cost to us, which could reduce our operating income.
Our products could be subject to product liability claims by consumers, which would adversely affect our profit margins, results from operations and stockholder value.
We are exposed to risks inherent in the packaging and distribution of health supplement products, such as with respect to adequacy of warnings, mislabeling and contamination. As a result, there is a risk that someone using our products may experience significant negative side effects which may permanently harm them and we could be subject to claims for damages based on theories of product liability and other legal theories. The costs and resources to defend such claims could be substantial and, if such claims are successful, we could be responsible for paying some or all of the damages. Also, our reputation could be adversely affected, regardless of whether such claims are successful. We currently intend to obtain product liability insurance at the appropriate time; however, there can be no assurance that we will be able to obtain or maintain insurance on acceptable terms for our products or that such insurance would be sufficient to cover any potential product liability claim or recall. Any of these results would adversely affect our profit margins, results from operations and stockholder value.
We may not be able to adequately protect our proprietary intellectual property and technology, which may harm our competitive position and result in increased expenses incurred to enforce our rights.
We rely on a combination of copyright, trademark and trade secret laws, non-disclosure agreements and other confidentiality procedures and contractual provisions to establish, protect and maintain our proprietary intellectual property and technology and other confidential information. Some of these technologies, especially the technology to extract SOD and SOD related enzyme from wild plants, are important to our business and are not protected by patents. Despite our efforts, the steps we have taken to protect our proprietary intellectual property and technology and other confidential information may not be adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights. Protecting against the unauthorized use of our products, trademarks and other proprietary rights is also expensive, difficult and, in some cases, impossible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of management resources, either of which could harm our business, operating results and financial condition.
Compliance with environmental regulations can be expensive, and our failure to comply with these regulations may result in adverse publicity and may have a material adverse effect on our business.
As a manufacturer, we are subject to various Chinese environmental laws and regulations on air emission, waste water discharge, solid wastes and noise. Although we believe that our operations are in substantial compliance with current environmental laws and regulations, we may not be able to comply with these regulations at all times as the Chinese environmental legal regime is evolving and becoming more stringent. Therefore, if the Chinese government imposes more stringent regulations in the future, we will have to incur additional and potentially substantial costs and expenses in order to comply with new regulations, which may negatively affect our results of operations. If we fail to comply with any of the present or future environmental regulations in any material aspects, we may suffer from negative publicity and may be required to pay substantial fines, suspend or even cease operations. Failure to comply with Chinese environmental laws and regulations may materially and adversely affect our business, financial condition and results of operations.
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 Jie Chen, our Chief Executive Officer and Xinmin Pan, our Chief Financial Officer. They also depend in significant part upon our ability to attract and retain additional qualified management, technical, marketing and sales and support personnel for our operations. If we lose a key employee or if 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 our institutional knowledge held by our existing senior management team. We depend on the skills and abilities of these key employees in managing the manufacturing, technical, marketing and sales aspects of our business, any part of which could be harmed by further turnover.
We may be exposed to potential risks relating to our internal controls over financial reporting and our ability to have the operating effectiveness of our internal 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 Company’s internal controls over financial reporting in their annual reports on Form 10-K. We are subject to this requirement commencing with our fiscal year ended December 31, 2008 and a report of our management is included under Item 9A(T) of this Annual Report on Form 10-K. In addition, SOX 404 requires the independent registered public accounting firm auditing a company’s financial statements to also attest to and report on the operating effectiveness of such company’s internal controls. However, this annual report does not include an attestation report because under current law, we will not be subject to these requirements until our annual report for the fiscal year ending December 31, 2009. We can provide no assurance that we will comply with all of the requirements imposed thereby. There can be no assurance that we will receive a positive attestation from our independent registered public accountants. 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 registered public accountants with respect to our internal controls, investors and others may lose confidence in the reliability of our financial statements.
Our holding company structure may limit the payment of dividends to our stockholders.
We have no direct business operations, other than our ownership of our subsidiaries. While we have no current intention of paying dividends, should we decide in the future to do so, as a holding company, our ability to pay dividends and meet other obligations depends upon the receipt of dividends or other payments from our operating subsidiaries and other holdings and investments. In addition, our operating subsidiaries, from time to time, may be subject to restrictions on their ability to make distributions to us, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions as discussed below. If future dividends are paid in RMB, fluctuations in the exchange rate for the conversion of RMB into U.S. dollars may reduce the amount received by U.S. stockholders upon conversion of the dividend payment into U.S. dollars.
Chinese regulations currently permit the payment of dividends only out of accumulated profits as determined in accordance with Chinese accounting standards and regulations. Our subsidiaries in China are also required to set aside a portion of their after tax profits according to Chinese accounting standards and regulations to fund certain reserve funds. Currently, our subsidiaries in China are the only sources of revenues or investment holdings for the payment of dividends. If they do not accumulate sufficient profits under Chinese accounting standards and regulations to first fund certain reserve funds as required by Chinese accounting standards, we will be unable to pay any dividends.
RISKS RELATED TO DOING BUSINESS IN CHINA
Changes in China’s political or economic situation could harm us and our operational results.
Economic reforms adopted by the Chinese government have had a positive effect on the economic development of the country, but the government could change these economic reforms or any of the legal systems at any time. This could either benefit or damage our operations and profitability. Some of the things that could have this effect are:
Level of government involvement in the economy;
Control of foreign exchange;
Methods of allocating resources;
Balance of payments position;
International trade restrictions; and
International conflict.
The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in many ways. As a result of these differences, we may not develop in the same way or at the same rate as might be expected if the Chinese economy were similar to those of the OECD member countries.
Our business is largely subject to the uncertain legal environment in China and your legal protection could be limited.
The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which precedents set in earlier legal cases are not generally used. The overall effect of legislation enacted over the past 20 years has been to enhance the protections afforded to foreign invested enterprises in China. However, these laws, regulations and legal requirements are relatively recent and are evolving rapidly, and their interpretation and enforcement involve uncertainties. These uncertainties could limit the legal protections available to foreign investors, such as the right of foreign invested enterprises to hold licenses and permits such as requisite business licenses. In addition, all of our executive officers are residents of China and not of the U.S., and substantially all the assets of these persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons.
The Chinese government exerts substantial influence over the manner in which we must conduct our business activities.
China only recently has permitted provincial and local economic autonomy and private economic activities. The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, 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 these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.
Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.
Future inflation in China may inhibit our ability to conduct business profitably in China.
In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. During the past ten years, the rate of inflation in China has been as high as 20.7% and as low as -2.2%. These factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.
Any recurrence of severe acute respiratory syndrome, or SARS, or another widespread public health problem, could harm our operations.
A renewed outbreak of SARS or another widespread public health problem in China, where our operations are conducted, could have a negative effect on our operations.
Our operations may be impacted by a number of health-related factors, including the following:
quarantines or closures of some of our offices which would severely disrupt our operations,
the sickness or death of our key officers and employees, and
a general slowdown in the Chinese economy.
Any of the foregoing events or other unforeseen consequences of public health problems could damage our operations.
If consumer spending power in China declines, our ability to market SOD products may weaken.
The success of our SOD products relies in part on the perception of consumers of the relative necessity of SOD, which is largely dependent on Chinese consumers’ financial ability to afford SOD-enriched products. If Chinese consumers’ spending power declines, whether because of the reversal of China’s economic growth or other causes, then our SOD products may become less profitable if companies that use its product to enrich their products stop ordering it.
If health problems relating to SOD products made in China emerge, then SOD sales may fall or be banned entirely.
In light of recent news pieces about the health problems and risks of products made in China, the global market and foreign and Chinese health authorities may be especially sensitive about health problems caused by or relating to SOD products made in China. If health problems relating to SOD products made in China become evident, then the market demand for Chinese SOD producers may be particularly susceptible to a fall. Likewise, such problems become evident, foreign or Chinese health authorities may ban or impose other controls or regulations on such SOD products that could harm or eliminate SOD product sales. As a producer of a SOD product in China, we would be subject to these risks.
Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.
The majority of our revenue will be settled in RMB and U.S. Dollars, and any future restrictions on currency exchanges may limit our ability to use revenue generated in RMB to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents at those banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment and loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB.
We may be unable to complete a business combination transaction efficiently or on favorable terms due to complicated merger and acquisition regulations which became effective on September 8, 2006.
On August 8, 2006, six PRC regulatory agencies, including the CSRC, promulgated the Regulation on Mergers and Acquisitions of Domestic Companies by Foreign Investors, which became effective on September 8, 2006. This new regulation, among other things, governs the approval process by which a PRC company may participate in an acquisition of assets or equity interests. Depending on the structure of the transaction, the new regulation will require the PRC parties to make a series of applications and supplemental applications to the government agencies. In some instances, the application process may require the presentation of economic data concerning a transaction, including appraisals of the target business and evaluations of the acquirer, which are designed to allow the government to assess the transaction. Government approvals will have expiration dates by which a transaction must be completed and reported to the government agencies. Compliance with the new regulations is likely to be more time consuming and expensive than in the past and the government can now exert more control over the combination of two businesses. Accordingly, due to the new regulation, our ability to engage in business combination transactions has become significantly more complicated, time consuming and expensive, and we may not be able to negotiate a transaction that is acceptable to our stockholders or sufficiently protect their interests in a transaction.
The new regulation allows PRC government agencies to assess the economic terms of a business combination transaction. Parties to a business combination transaction may have to submit to the Ministry of Commerce and other relevant government agencies an appraisal report, an evaluation report and the acquisition agreement, all of which form part of the application for approval, depending on the structure of the transaction. The regulations also prohibit a transaction at an acquisition price obviously lower than the appraised value of the PRC business or assets and in certain transaction structures, require that consideration must be paid within defined periods, generally not in excess of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including aspects of the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions relating to the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Therefore, such regulation may impede our ability to negotiate and complete a business combination transaction on financial terms that satisfy our investors and protect our stockholders’ economic interests.
The value of our securities will be affected by the foreign exchange rate between U.S. dollars and RMB.
The value of our common stock will be 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. Currently, RMB is stronger than U.S. Dollars. For example, to the extent that we need to convert U.S. dollars into RMB for our operational needs and should RMB appreciate against the U.S. dollar at that time, our financial position, the business of the Company, and the price of our common stock may be harmed. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of declaring dividends on our common stock or for other business purposes and the U.S. dollar appreciates against RMB, the U.S. dollar equivalent of our earnings from our subsidiaries in China would be reduced.
RISKS RELATED TO THE MARKET FOR OUR STOCK
Our common stock is quoted on the OTC Bulletin Board which may have an unfavorable impact on our stock price and liquidity.
Our common stock is quoted on the 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.
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 purchaser’s 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 a 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.
Our controlling stockholder, Wei Wang, holds a significant percentage of our outstanding voting securities and accordingly may make decisions regarding our daily operations, significant corporate transactions and other matters that other stockholders may believe are not in their best interests.
Ms. Wei Wang, our Director, is the beneficial owner of approximately 80.81% of our outstanding voting securities. As a result, she possesses significant influence over the election of our Board of Directors and significant corporate transactions. Her ownership may also have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discourage a potential acquirer from making a tender offer. Other stockholders may believe that these future decisions made by Ms. Wang are not in their best interests.
The Board of Directors obtained an independent valuation from Asset Appraisal Limited, a Hong Kong-based asset appraisal company regarding the SOD transaction, which evaluated the financial condition and prospects of Top Time and determined that a purchase price of $54.9 million (RMB 407 million, based on an exchange ratio of $1=RMB 7.414) for Top Time was reasonable. However, the Board of Directors has not obtained a fairness opinion with respect to the equity part of the purchase price of $54.9 million, which amounts to a total of 62,250,000 shares of the Company’s common stock. The share number was calculated based upon $0.02/share, the average of the closing price of the Company’s common stock on the OTCBB, for the 365 calendar days prior to May 31, 2007, which was adjusted for our stock split which occurred on October 16, 2007. As a result, the effective purchase price per share was $0.40. Although such price is greater than the then trading price of our common stock, which was $0.145 per share on November 12, 2007, as reported on the OTCBB, the then trading price did not reflect our 1-for-20 reverse split. The price in fact reflects the current trading price, which is $0.51 as of February 13, 2008. In addition, the $0.40 per share purchase price, as well as the current trading price of our stock on the OTCBB, may be significantly lower than the pre-acquisition book value per share of the Company. Finally, the book value of SOD assets being acquired will be significantly less than the acquisition purchase price.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
All land in China is owned by the State or collectives. Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes. In the case of land used for industrial purposes, the land use rights are granted for a period of 50 years. This period may be renewed at the expiration of the initial and any subsequent terms according to the relevant Chinese laws. Granted land use rights are transferable and may be used as security for borrowings and other obligations.
Our executive offices are located at 8/F East Area, Century Golden Resources Business Center, 69 Bangjing Road, Haidian District, Beijing, People’s Republic of China 100089. Our executive offices consist of approximately 130 square meters consisting entirely of administrative office space. This lease expired on December 31, 2005 and we continue to occupy this property on a month-to-month basis.
Our main production facilities are located at Sanjie Village, Shuanfu Town, Jiangjin City, Chongqing. The total site area is approximately 20,000 square meters. We lease this facility under a lease agreement with ShuanFu Town Government. The term of the lease is 20 years. We plan to buy the facility when the lease expires.
We believe that all our properties have been adequately maintained, are generally in good condition, and are suitable and adequate for our business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
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 affect on our business, financial condition or operating results.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth quarter of fiscal year 2008.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is quoted and traded from time to time on the Over-the-Counter Electronic Bulletin Board (OTCBB) under the symbol “CGYG”. The CUSIP number is 16942Q109. The transfer agent of our common stock is Securities Transfer Corporation whose address is at 2591 Dallas Parkway, Suite 102 Frisco, TX 75034, (469) 633-0101.
The following table sets forth, for the periods indicated, the high and low bid prices for the common stock as reported on Yahoo.com. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
(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.
Holders
On April 13, 2009, there were approximately 273 stockholders of record of our common stock.
Dividends
We have not paid any cash dividends with respect to our common stock in the last two fiscal years. We presently intend to retain future earnings to finance our development and expansion and therefore do not anticipate the payment of any cash dividends in the foreseeable future. Payment of future dividends, if any, will depend upon our future earnings and capital requirements and other factors that our board of directors considers appropriate.
Securities Authorized for Issuance under Equity Compensation Plans
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not Applicable.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
This subsection of MD&A is an overview of the important factors that management focuses on in evaluating our businesses, financial condition and operating performance, our overall business strategy and our earnings for the periods covered.
General
We are a holding company that only operates through our indirect Chinese subsidiaries. Through our Chinese subsidiaries, we develop and manufacture SOD in China, with a wide range of applications, especially in foods, medicines and cosmetic products. We plan to market, sell and service our products nationally through a combination of company-owned offices and independent sales agents. Currently we have two sales offices, one located in Chengdu, and the other located in Chongqing, and we plan to establish agents in additional offices across China. We have targeted our approach to meet local market conditions which we believe provides the best possible products for our customers throughout China. In recent years, more and more people are choosing to eat or drink healthier foods and beverages. During fiscal year 2009, we plan to not only produce and sell our SOD wine and beverage products, but we plan to negotiate with local food manufacturing companies to become a supplier of SOD for use as a food additive.
Industry Wide Factors that are Relevant to Our Business
We expect several key demographic, healthcare, and lifestyle trends to drive the growth of our business in the coming future:
Increased Focus on Healthy Living: Our management believes that as China becomes more affluent, its citizens are becoming more health conscious. They are leading more active lifestyles and becoming increasingly focused on healthy living, nutrition, and supplementation. According to the Nutrition Business Journal, a higher percentage of today’s global population is involved to some degree in health and wellness than a few years ago. We believe that growth in the health supplements industry will continue to be driven by consumers who increasingly embrace health and wellness as a critical part of their lifestyles.
Aging Population: The average age of the Chinese population is increasing. According to World Population Prospects: The 2004 Revision (2005), the percentage of elderly persons in China is projected to triple between 2006 and 2050, from 8 percent to 24 percent, a total of 322 million people. We believe that these consumers are significantly more likely to use health supplements than younger persons and have higher levels of disposable income to pursue healthy lifestyles.
Rising Healthcare Costs and Use of Preventive Measures: Healthcare related costs have increased substantially in China. A survey released by China’s Ministry of Health found that the percentage of out-of-pocket health expenditures in China has increased from 35.7% in 1990 to 55.5% in 2003. To reduce medical costs and avoid the complexities of dealing with the healthcare system, and given increasing incidence of medical problems and concern over the use and effects of prescription drugs, many consumers take preventive measures, including alternative medicines and nutritional supplements.
Food and Beverage Security: Since 2007, food and beverage security has become more important to PRC regulators. The PRC government regulates and enforces strict food and beverage testing procedures and we are required to obtain licenses for the sale of any new food and beverage products from the relevant authorities. We currently sell SOD products (SOD WINE ) for manufacturing food, and we have already obtained both the Food Hygiene License issued by the Chongqing AOH and the Food Production License issued by the local AQSIQ. We also plan to produce and sell SOD medicines and skin care products, and we have applied for the Pharmaceutical Producer License from the provincial AOH and the approval from the provincial State Food and Drug Administration, or SFDA. It will take more than half year to get the license from AOH and the approval from SFDA for us to sell SOD medicines and skin care products.
Weaknesses and Uncertainties that Affect our Financial Condition
We face certain challenges and risks that may affect our financial condition. In recent years, low quality products and false advertisements have given the Chinese cosmetic and health products market a bad reputation. Consumers are often suspicious of the effects of cosmetics and health products. Some consumers think that these products cannot induce substantial beautification or health improvements, while others think these products may actually be harmful. In a market where efficient and inefficient markets are mixed up, and consumers have a distrust of the market, we will keep up our research and development of products, while strengthening our quality control at the same time. Based on our past high quality control, we believe that the reputation of our products will be strong.
For accounting purposes, the acquisition of Top Time was treated as a reorganization of entities under common control. When we refer in this report to business and financial information for periods prior to the consummation of the acquisition, we are referring to the business and financial information of China Longyi on a consolidated basis unless the context suggests otherwise.
Results of Operations
We are a development stage company. We have only generated limited revenues from our operations since our inception. Before November 12, 2007, we had limited operations and our purpose was to acquire an operating business or the valuable assets of an unidentified company. As a result of the acquisition of Top Time, we changed our business to the development, manufacture and sale of SOD products.
Fiscal Year Ended December 31, 2008 Compared to December 31,
The following table summarizes the results of our operations during the fiscal years ended December 31, 2008 and 2007 and provides information regarding the dollar and percentage increase or (decrease) from the 2007 fiscal year to the 2008 fiscal year.
Revenue
Our revenues in fiscal year 2008 amounted to $144,402, which is $96,948 or approximately 204% more than that of fiscal year 2007, when we had revenues of $47,454. The increase in revenues was attributable to the increase of our sales of SOD products during the fiscal year 2008.
Cost of Sales
Our cost of sales in fiscal years 2008 and 2007 was $97,849 and $33,811, respectively, which accounts for approximately 68% and 71%, respectively, as a percentage of total revenues. The dollar amount of the cost of sales increased with the growth of annual sales. Cost of sales as a percentage of annual revenues decreased by about 3% in 2008 as compared with 2007, which is mainly attributable to the result of economies of scale due to the substantial increase of sales of our SOD products in 2008.
Operating Expenses
Our operating expenses for the fiscal year ended December 31, 2008 were $2,486,510, as compared to $1,314,806 for 2007. This increase of $1,171,704 or 89% is primarily the result of acquisition of Top Time in the end of the fiscal year 2007, and we had to increase the General and Administration expenses in order that Beijing and Chongqing subsidiaries were carrying on their business during the fiscal year 2008. Furthermore, we decided to write off the total amount of $1,777,125 from other receivable account at December 28, 2008 due to the fact that this amount of money could not be collected from debt holders.
Income taxes
We are currently subject to income taxes according to applicable tax laws in the PRC. The tax rates are 25% for both Beijing SOD and Chongqing SOD.
On March 16, 2007, the National People’s Congress of China passed the new Enterprise Income Tax Law, or EIT Law, and on November 28, 2007, the State Council of China passed the Implementing Rules for the EIT Law, or Implementing Rules, which took effect on January 1, 2008. The EIT Law and Implementing Rules impose a unified EIT of 25.0% on all domestic-invested enterprises and foreign invested entities, or FIEs, unless they qualify under certain limited exceptions.
Therefore, nearly all FIEs are subject to the new tax rate alongside other domestic businesses rather than benefiting from the FEIT, and its associated preferential tax treatments, beginning January 1, 2008.
Despite these changes, the EIT Law gives the FIEs established before March 16, 2007, or Old FIEs, a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatments. During this five-year grandfather period, the Old FIEs which enjoyed tax rates lower than 25% under the original EIT Law shall gradually increase their EIT rate within 5 years until the tax rate reaches 25%. In addition, the Old FIEs that are eligible for the “two-year exemption and three-year half reduction” or “five-year exemption and five-year half-reduction” under the original EIT Law, are allowed to remain to enjoy their preference until these holidays expire. The discontinuation of any such special or preferential tax treatment or other incentives would have an adverse effect on the Company’s business, fiscal condition and current operations in China.
In addition to the changes to the current tax structure, under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a resident enterprise and will normally be subject to an EIT of 25.0% on its global income. The Implementing Rules define the term “de facto management bodies” as “an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise”. If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then the organization’s global income will be subject to PRC income tax of 25.0%.
We incurred no income taxes in either 2008 or 2007.
Net Income.
Net income decreased $5,283,244, or 171%, to $(2,188,359) for the year ended December 31, 2008, from $3,094,885 for 2007. This decrease in net income was primarily due to the following factors:
Due to a wide exchange rate range between RMB and US$ in 2008, our transaction exchange gain decreased from $881,643 in the fiscal year 2007 to $137,774 in the fiscal year 2008.
During the fiscal year 2007, the company disposed several subsidiaries and recognized a gain of $3,385,630, while in 2008 the company did not dispose any subsidiaries.
After a risk assessment, we determined that a total $1,777,125 other receivable could not be collected from our debtors. Therefore, we wrote off this amount of money from other receivable account on December 28, 2008. $1,634,715 of this was from Guangzhou City View.
Liquidity and Capital Resources
General
As of December 31, 2008, we had cash and cash equivalents of approximately $51,307. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report.
Cash Flow
Operating Activities
Net cash used in operating activities was $704,158 for the fiscal year ended December 31, 2008, which is a decrease of $896,112 from $191,954 net cash provided by operating activities for 2007. The decrease of the cash provided by operating activities was mainly attributable to the fact that we disposed several subsidiaries and recognized a gain of $3,385,630 in the fiscal year 2007. We did not dispose any subsidiaries during the fiscal year 2008.
Investing Activities
Our primary uses of cash for investing activities are payments for the acquisition of property, plant and equipment.
Net cash provided by investing activities for the fiscal year ended December 31, 2008 was $462,566, which is an increase of $73,381 from net cash provided by investing activities of $389,185 for 2007. The increase of the cash provided by investing activities was mainly due to the decrease of payments to acquire equipment in fiscal year 2008 .
Financing Activities
Net cash provided by financing activities for the fiscal year ended December 31, 2008 was $377,494, while in 2007 we had $892,459 net cash used in financing activities. Such change was attributable to the fact that the cash used in payments to stockholders payable was $903,769 in the fiscal year 2007 compared with none in the fiscal year 2008.
On January 29, 2004, we entered into a subscription agreement with Qiang Long Real Estate Development Co., Ltd., or Qiang Long, a PRC company, pursuant to which, as amended and supplemented from time to time, Qiang Long was obligated to purchase 140,000,000 shares of our common stock, par value $0.01 at an aggregate purchase price of US$29,400,000, or $0.21 per share. An amount equaling US$653,795 was paid to us as a performance bond and an additional US$632,911 was paid to us in 2006 in exchange for 3,013,862 shares. The balance of US$28,113,294 was to be paid in full by June 30, 2007, for the remaining 136,986,138 shares. On June 29, 2007, we consummated our obligations under the contract, pursuant to a letter agreement between the Company and Qiang Long. Pursuant to the letter agreement, we acknowledged our receipt of the final payment in cash from Qiang Long as fulfillment of Qiang Long’s investment obligation, and agreed to issue 50,000,000 shares to Qiang Long on or before July 23, 2007, and the remaining 86,986,138 shares within fifteen (15) business days following the effective date of an amendment to our Certificate of Incorporation to effect a one-for-twenty reverse split of our outstanding common stock, which will be equal to 4,349,307 shares post-reverse split.
The consummation of the Qiang Long investment obligation resulted in net cash inflows of approximately $28.1 million, which is an increase of approximately 853% over net cash inflows during the same period in 2006. As a result of the Qiang Long funding, we believe that we will have enough capital to sustain our operations at our current levels through at least the next twelve months. However, depending on our future needs and changes and trends in the capital markets affecting our shares and the Company, we may determine to seek additional equity or debt financing in the private or public markets.
Critical Accounting Policies
Economic and Political Risks
The Company faces a number of risks and challenges as a result of having primary operations and marketing in the PRC. Changing political climates in the PRC could have a significant effect on the Company’s business.
Foreign Currencies
The company has determined that RMB to be its functional currency. The accompanying consolidated financial statements are presented in U.S. dollars. The consolidation financial statements are translated into US dollars from RMB at year-end exchange rates for assets and liabilities, and weighted average exchange rates for revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
Use of 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 and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Restrictions on Transfer of Assets Out of the PRC
Dividend payments by Beijing SOD are limited by certain statutory regulations in the PRC. No dividends may be paid by Beijing SOD without first receiving prior approval from the Foreign Currency Exchange Management Bureau. Dividend payments are restricted to 85% of profits, after tax.
Significant Estimates
Several areas require significant management estimates relating to uncertainties for which it is reasonably possible that there will be a material change in the near term. The more significant areas requiring the use of management estimates related to property and equipment, accrued liabilities and, the useful lives for depreciation.
Revenue Recognition
Revenues are recognized as earned when the following four criteria are met: (1) a customer issues purchase orders or otherwise agrees to purchase products; (2) products are delivered to the customer; (3) pricing is fixed or determined in accordance with the purchase order or agreement; and (4) collectability is reasonably assured.
Inflation
Inflation does not materially affect our business or the results of our operations.
Seasonality
We may experience seasonal variations in our future revenues and our operating costs, however, we do not believe that these variations will be material.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The full text of our audited consolidated financial statements as of December 31, 2008 and 2007 begins on page of this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On December 21, 2007, Child, Van Wagoner & Bradshaw, PLLC, or Van Wagoner, resigned as our independent registered public accounting firm. On the same date, we engaged Bernstein & Pinchuk LLP (“Bernstein”) as our independent registered public accounting firm for the fiscal year ending December 31, 2007. The decision to change our independent auditor was approved by our Board of Directors.
Van Wagoner audited our financial statements for the fiscal years ended December 31, 2005 and 2006 and Van Wagoner’s reports are included in our annual reports on Form 10-KSBs for such periods. Van Wagoner’s reports on the Company’s financial statements for the fiscal years ended December 31, 2005 and 2006 or for any subsequent interim period did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.
During its tenure as our auditor for the fiscal years ended December 31, 2005 and 2006 and for the subsequent interim period through to the date of its resignation, (1) there were no disagreements between us and Van Wagoner on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Van Wagoner’s satisfaction, would have caused Van Wagoner to make reference to the subject matter of the disagreement in connection with its report; and (2) Van Wagoner did not advise us of any reportable events of the type described in Item 304(a)(1)(iv)(B) of Regulation S-B.
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, Ms. Jie Chen and Mr. Xinmin Pan, respectively, evaluated the effectiveness of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, Ms. Chen and Mr. Pan concluded that as of December 31, 2008, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were effective to satisfy the objectives for which they are intended.
(b) Management’s annual report on internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting refers to the process designed by, or under the supervision of, our chief executive officer and chief financial officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, and includes those policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; 	
(2) 	
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and
(3) 	
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, management used the framework set forth in the report entitled Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting is effective, as of December 31, 2008.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this annual report.
(c) Changes in internal control over financial reporting
There were no changes in our internal controls over financial reporting during the fourth quarter of our fiscal year ended December 31, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
The following sets forth the name and position of each of our current executive officers and directors:
Changde Li was appointed Chairman of the Board of Directors on May 10, 2004. Mr. Li has also served as the President of our subsidiary, Beijing SOD, since November 8, 2007,and has acted as the chairman of the Board of Directors of our controlling stockholder, Qiang Long, since 1993. During his tenure as chairman, he has led the Company to develop many holiday villages, hotels and business centers throughout China.
Jie Chen was appointed Chief Executive Officer of the Company on September 22, 2006. Prior to her appointment, Ms. Chen served as Vice President of Public Relations and has been a member of the Board of Directors of the Company since February 2004. Upon being appointed as Chief Executive Officer of the Company, Ms. Chen resigned from the office of Vice President of Public Relations. Ms. Chen is the Vice Secretary of the Zhang Xue-Liang Fund Association and has held such position and other positions with such Association over the past five years. The Zhang Xue-Liang Fund Association is in the business of arranging meetings, conferences and exhibitions. It also provides public relations and investor relations support to its clients. Prior to joining the Zhang Xue-Liang Fund Association, Ms. Chen held various key positions with television stations and public relations companies in China. Ms. Chen holds a Master’s degree in International Finance from Beijing University.
Xinmin Pan became the Company’s Chief Financial Officer on December 4, 2006. Prior to his appointment, Mr. Pan has worked as an accountant with the Company since October 2006. Before joining the Company Mr. Pan served as the General Accountant for ZhongFang Investment Holding Ltd. from March 2006 to October 2006, as the Chief Financial Officer of the Beijing JinLang Hotel from January 2002 to March 2006, as the Chief Financial Officer of the Beijing Happy Holiday Hotel from January 2001 to January 2002, and as Chief Accountant and Chair of the Financing Department of North China Jinghai Industry Corporation, from November 1990 to January 2001.
Hui Chen was appointed to the Board of Directors on and effective December 2, 2005. Since 1999, Mr. Chen has also served as the Assistant General Manager of our controlling stockholder, Qiang Long, a real estate development and investment company. Mr. Chen graduated from Xi’an University of Architecture and Technology in 1991.
Honliang Li became our director on May 10, 2004. Prior to joining us, Mr. Li acted as vice general manager of Beijing JiuFa Industry Ltd., a company engaged in commerce and trade, from 1994 to 2003 and served as Assistant General Manager of one of our stockholders, China Cardinal Limited, from 2003 to 2004. China Cardinal Limited is engaged in the business of acting as an investment company.
Wei Wang became a director on November 12, 2007. Ms. Wang has also served since 2005, as the Chairperson of China Cardinal Limited, since January 2007. In addition, Ms. Wang has served as the Chairperson of Daykeen and Top Time since 2006 and as the President and Chairperson of Beijing SOD from January 2007 until November 8, 2007. Prior to joining our Company, Ms. Wang served as a director of Manchuria Tianrui Investment Co., Ltd from 1999 to 2005. Ms. Wang graduated from Saint Petersburg National Technology University of Russia in 1998.
There are no agreements or understandings for any of our executive officers or directors to resign at the request of another person and no officer or director is acting on behalf of nor will any of them act at the direction of any other person. Our current director holds no directorships in any other reporting companies.
Board Composition and Committees
The board of directors is currently composed of five members, Mr. Changde Li, Ms. Jie Chen, Mr. Hui Chen, Mr. Hongliang Li and Ms. Wei Wang. All board action requires the approval of a majority of the directors in attendance at a meeting at which a quorum is present.
We currently do not have standing audit, nominating or compensation committees. Our entire board of directors handles the functions that would otherwise be handled by each of the committees. We intend, however, to establish an audit committee, a nominating committee and a compensation committee of the board of directors as soon as practicable. We envision that the audit committee will be primarily responsible for reviewing the services performed by our independent auditors, evaluating our accounting policies and our system of internal controls. The nominating committee would be primarily responsible for nominating directors and setting policies and procedures for the nomination of directors. The nominating committee would also be responsible for overseeing the creation and implementation of our corporate governance policies and procedures. The compensation committee will be primarily responsible for reviewing and approving our salary and benefit policies (including stock options), including compensation of executive officers.
None of our directors is an audit committee financial expert. Upon the establishment of an audit committee, the board will determine whether any of the directors qualify as an audit committee financial expert.
Family Relationships
There are no family relationships among our directors or officers.
Section 16(A) Beneficial Ownership Reporting Compliance
Under U.S. securities laws, directors, certain executive officers and persons holding more than 10% of our common stock must report their initial ownership of the common stock, and any changes in that ownership, to the SEC. The SEC has designated specific due dates for these reports. Based solely on our review of copies of such reports filed with the SEC by and written representations of our directors and executive offers, we believe that our directors and executive offers filed the required reports on time in 2008 fiscal year.
Involvement in Certain Legal Proceedings
To the best of our knowledge, except as set forth in our discussion below in “Certain Relationships and Related Transactions”, 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. None of the directors, director designees or executive officers to our knowledge 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
Code of Ethics
On March 8, 2004, our board of directors adopted a code of ethics that our principal financial officer, principal accounting officer or controller and any person who may perform similar functions is subject to. A copy of the code of ethics has been filed as Exhibit 14 to our Annual Report on Form 10-KSB for the fiscal year ending December 31, 2003 filed on April 15, 2004.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table - 2007 and 2008
The following table sets forth information concerning all compensation awarded to, earned by or paid to Our Chief Executive Officer for services rendered in all capacities during 2007 and 2008. No other executive officers received total annual salary and bonus compensation in excess of $100,000 in either fiscal year.
Narrative to Summary Compensation Table
(1) Ms. Chen was appointed as our Chief Executive Officer in September 2006. She received total compensation for her compensation as our Chief Executive Officer amounting to RMB 36,000 or US$5,181 in 2008.
Outstanding Equity Awards at Fiscal Year End
There was no unexercised option, stock that has not vested or equity incentive plan award for any named executive officer as of December 31, 2008.
Additional Narrative Disclosure
We have an employment agreement with Mr. Xinmin Pan who became our Chief Financial Officer in December 2006 after serving as our accountant from October 2006 to December 2006. We are obligated to pay him an annual salary of RMB 72,000, or $13,500. However, in 2007, we changed the employment agreement with Mr. Pan to pay him an annual salary of RMB 36,000 or $4,732 due to company’s limited revenue in the fiscal year 2007. We paid to Mr. Pan RMB 36,000 or $5,181 as his annual salary of the fiscal year 2008.
We have a verbal understanding with our Chief Executive Officer and Director, Jie Chen, regarding her annual salary of $5,181 for year 2008.
Although we have a verbal understanding with our Chairman, Chang-de Li regarding the payment to him of an annual salary in amount of $107,692, based on a verbal agreement between Mr. Li and the Company, Mr. Li did not receive any compensation in 2007. Furthermore, On November 8, 2007, Mr. Li became our subsidiary Beijing SOD’s President, and he did not receive any compensation from Beijing SOD in 2007 and 2008.
Compensation of Directors
There have been no fees earned or paid in cash for services to our directors. No stock or stock options or other equity incentives were awarded to our directors for their services as directors during the fiscal year ended December 31, 2008. In the future, we may adopt a policy of paying independent directors a fee for their attendance at board and committee meetings. However, we do reimburse each director for reasonable travel expenses related to such director's attendance at board of directors and committee meetings.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
Security Ownership of Certain Beneficial Owners
The following table sets forth information regarding beneficial ownership of our common stock as of April 13, 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 China Longyi Group International Holdings Limited, 8B 8/F East Area, Century Golden Resources Business Center, 69 Banjing Road, Haidian District, Beijing, and People’s Republic of China 100097.
Changes in Control
There are no arrangements known to us, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in control of the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain Relationships and Related Transactions
The following includes a summary of transactions since the beginning of the last fiscal year, or any currently proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds $120,000, 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 arm’s-length transactions.
Our Chairman Chang-de Li is affiliated with Qiang Long. We entered into a contract, dated January 29, 2004, with Qiang Long, or the Qiang Long Contract, under which, as amended and supplemented from time to time, Qiang Long is obligated to purchase 7,000,000 shares of our common stock at an aggregate purchase price of US$29,400,000, or $4.20 per Share, US$653,795 of which was paid to us as a performance bond at the signing of the Qiang Long Contract, another US$632,911 of which was paid to us in 2006 in exchange for 150,693 Shares, and the balance of US$28,113,294 of which was to be paid in full by June 30, 2007, for the remaining 6,849,307 Shares. On June 29, 2007, we entered into a letter agreement, or the Letter Agreement, with Qiang Long, pursuant to which we acknowledged receipt of the balance of US$28,113,294 from Qiang Long as fulfillment of Qiang Long’s investment obligation, and agreed to issue the remaining shares to Qiang Long within 15 business days after the completion of our 1-for-20 reverse split, which took place on October 16, 2007.
Prior to December 2006, Qianglong Real Estate Co., Ltd., or Qianglong, an entity controlled by our chairman and controlling shareholder, Changde Li was a 51% stockholder of Beijing SOD, Top Time’s majority-owned subsidiary. On December 22, 2006, Top Time completed an equity transfer agreement with the then stockholders of Beijing SOD, including Qianglong, pursuant to which, Qianglong transferred its 51% equity interest in Beijing SOD to Top Time for a purchase price of $30,960,000. The purchase price was payable in three installments, due within 3 months, 6 months and 1 year of the amendment to Beijing SOD’s license, respectively. An English translation of the equity transfer agreement is filed herewith as Exhibit 10.6.
Pursuant to certain agreements, dated December 22, 2006 and December 27, 2006, Daykeen assumed Top Time’s obligation to pay Qianglong for the acquisition of Beijing SOD under the December 22, 2006 agreement in exchange for 5,482 shares of Top Time. An English translation of each of these agreements is filed herewith as Exhibits 10.7 and 10.8, herewith.
During the six months ended June 30, 2007, Top Time loaned money to its shareholder, Guo Qing Tan. The loan bears no interest and does not have fixed repayment terms. As of December 31, 2008, the balance of the loan was $75,441.
On November 12, 2007, we completed an acquisition transaction with Top Time whereby we paid Daykeen, Top Time’s sole shareholder, a total consideration of $54.9 million (RMB 407 million, based on an exchange ratio of $1=RMB 7.414), in exchange for 100% ownership of Top Time, consisting of $30 million in cash and $24.9 million in shares of our common stock issuable within 90 days of the closing. The equity portion of the purchase price amounts to a total of 62,250,000 shares of our common stock (based upon $0.02/share, the average of the closing price of the Company’s common stock on the OTCBB for the 365 calendar days prior to May 31, 2007, which was adjusted for our stock split which occurred on October 16, 2007 and resulted an effective purchase price of $0.40 per share). Beijing SOD thereby became our 90% indirectly owned subsidiary and Daykeen will become our controlling stockholder upon our issuance to Daykeen of the equity portion of the purchase price in accordance with the Stock Purchase Agreement. Daykeen is owned and controlled by Wei Wang, our director and 80% shareholder. Wei Wang has controlling interests and exercises voting and investment power over shares of our common stock owned by China Cardinal and Daykeen Investment Limited. In addition, Chang-de Li, our Chairman, was the controlling shareholder of Top Time until December, 2006 when he transferred his ownership interest in Top Time to Daykeen. In light of Mr. Li’s prior involvement with Top Time and Mr. Wang’s current ownership of Daykeen, our board of directors determined that it was in the best interest of the shareholders to obtain an independent valuation of Top Time. We obtained an independent valuation from Asset Appraisal Limited, a Hong Kong-based asset appraisal company, that evaluated the financial condition and prospects of Top Time and determined that a purchase price of $54.9 million for Top Time was reasonable. The valuation report is attached as Exhibit 99 to the Current Report on Form 8-K of the Company filed on November 12, 2007. The board determined that it would be in the Company’s best interests to pay the purchase price in a combination of cash and stock.
Promoters and Certain Persons
We did not have any promoters at any time during the past five years.
Director Independence
Our Board is currently composed of five members, none of whom are “independent” directors, as that term is defined under the NASDAQ listing standards. All actions of the board of directors require the approval of a majority of the directors in attendance at a meeting at which a quorum is present. Our directors have a duty of to act in good faith with a view to our interests. In fulfilling their duty of care to us, our directors must ensure compliance with our Certificate of Incorporation, as amended and our Bylaws. Board action requires the approval of a majority of the directors in attendance at a meeting at which a quorum is present.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed for each of the fiscal years ended December 31, 2008 and 2007 for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included in our Form 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were $60,000 and $60,000, respectively.
Accounting Fees
The aggregate fees billed in each of the fiscal years ended December 31, 2008 and 2007 for assurance and related services by the principal accountant that are reasonably related to the performance of audit or review of our financial statements and are not reported under the paragraph captioned “Audit Fees” above are $38,585 and $38,585, respectively.
Tax Fees
The aggregate fees billed in each of the fiscal years ended December 31, 2008 and 2007 for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning were $0 and $0, respectively.
All Other Fees
The aggregate fees billed in each of the fiscal years ended December 31, 2008 and 2007 for products and services provided by the principal accountant, other than the services reported above under other captions of this Item 14 are $0 and $0, respectively.
Pre-Approval Policies and Procedures
Under the Sarbanes-Oxley Act of 2002, all audit and non-audit services performed by our auditors must be approved in advance by our Board to assure that such services do not impair the auditors’ independence from us. In accordance with its policies and procedures, our Board pre-approved the audit service performed by Bernstein & Pinchuk LLP for our consolidated financial statements as of and for the year ended December 31, 2008.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
(2)
Financial Statement Schedules: All Schedules are omitted because the information called for is not applicable, is not required, or because the financial information is set forth in the financial statements or notes thereto.
(3)
Exhibits
Exhibits (including those incorporated by reference).
The following exhibits are filed as part of this report or incorporated by reference:
* Incorporated by reference as indicated.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
By: /s/ Jie Chen 	
Jie Chen 	
Chief Executive Officer 	
	
Date: April 14, 2009 	
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company in the capacities and on the dates indicated.
Each person whose signature appears below hereby authorizes Jie Chen and Xinmin Pan, or any of them, as attorneys-in-fact to sign on his behalf, individually, and in each capacity stated below, and to file all amendments and/or supplements to this annual report on Form 10-K.
SIGNATURE
CAPACITY
DATE
	
	
	
	
	
	
/s/Chang-de Li 	
Chairman 	
	
	
	
April 14, 2009 	
Chang-de Li 	
	
	
	
	
	
	
	
	
/s/Jie Chen 	
Chief Executive Officer and Director 	
	
	
	
April 14, 2009 	
Jie Chen 	
	
	
	
	
	
	
	
	
/s/Xinmin Pan 	
Chief Financial Officer 	
	
	
	
April 14, 2009 	
Xinmin Pan 	
	
	
	
	
	
	
	
	
/s/Hui Chen 	
Director 	
	
	
	
April 14, 2009 	
Hui Chen 	
	
	
	
	
	
	
	
	
/s/Hongliang Li
Director 	
	
	
	
April 14, 2009 	
Hongliang Li 	
	
	
	
	
	
	
	
	
/s/Wei Wang 	
Director 	
	
	
	
April 14, 2009 	
Wei Wang 	
	
	
EXHIBITS
* Incorporated by reference as indicated.
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008 and 2007
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
China Longyi Group International Holdings Limited
We have audited the accompanying consolidated balance sheets of China Longyi Group International Holdings Limited, a development stage company ("the Company") as of December 31, 2008 and 2007, and the related statements of operations and comprehensive income, stockholders' equity, and cash flows for the years then ended. The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on these 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that 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 the Company as of December 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/Bernstein & Pinchuk LLP
New York, NY
March 15, 2009
See notes to consolidated financial statements
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
See notes to consolidated financial statements
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
See notes to consolidated financial statements
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements
(Audited)
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of American (“US GAAP”) for financial information and with the instructions to Form 10-K and Item 310 of Regulation S-B. According, they do not include all of the information and footnotes required by US GAAP for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The accounts of China LongYi Group International Holdings Limited and all of its subsidiaries are included in the consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated operating results for the twelve months ended December 31, 2008.
1.
BUSINESS DESCRIPTION AND ORGANIZATION
NAME CHANGE AND REORGANIZATION
The consolidated financial statement of China LongYi Group International Holdings Limited (“the Company”), include the accounts of the parent company and its wholly-owned and majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. We amended our certificate of incorporation on October 16, 2007 and changed our name from Minghua Group International Holdings Limited (“Minghua USA”) to China LongYi Group International Holdings Limited. At the same time, we implemented a 1 for 20 reverse stock split of issued and outstanding shares of our common stock which reduced the number of our issued and our outstanding shares from 198,509,866 to 9,925,493.
Minghua USA, formerly Panagra International Corporation (“Panagra”), was incorporated under the laws of the State of New York on February 29, 1996 under the name, United Network Technologies, Inc. On August 2, 2001, an amendment to the certificate of incorporation was made changing the name from Panagra to Minghua USA. This amendment also increased the authorized common shares of Minghua USA from 40,000,000 shares to 200,000,000 shares.
In June 2001, Panagra and its subsidiary, Minghua Acquisition Corp. acquired all the outstanding shares of Minghua Group International Holding (Hong Kong) Limited (“Minghua Hong Kong”). The acquisition was effected by paying to the shareholders of Minghua Hong Kong $1,000,000 and issuing 28,000,000 additional Minghua USA common shares that resulted in the Minghua Hong Kong shareholders owning approximately 70% of the outstanding shares of Minghua USA and having control of Minghua USA after this transaction. For financial reporting purposes, this transaction was recorded as a recapitalization of Minghua Hong Kong. Minghua Hong Kong was deemed to be the continuing, surviving entity for accounting purposes, but through reorganizations, was deemed to have adopted the capital structure of Minghua USA.
At that time, the sole asset of Minghua Hong Kong was an 85% equity interest in the Shenzhen Minghua Environmental Protection Vehicle Co., Ltd. (“Minghua China”), a Peoples Republic of China (PRC) corporation. The remaining 15% equity minority interest in Minghua China was owned by a related party, Asia Key Group Limited, through its wholly-owned subsidiary Minghua Real Estate (Shenzhen) Ltd, formerly known as Minghua Investment Co., Ltd. (“Minghua Real Estate”). On January 29, 2004, Minghua USA acquired this 15% minority interest held by Minghua Real Estate, in a related party transaction by paying $990,638 in cash and issuing 28,210,000 common shares of Minghua USA. In September 2006, Minghua USA disposed of its entire interests in Minghua Hong Kong and Minghua China.
On November 12, 2007, we entered into a share purchase agreement, or the Share Purchase Agreement, with Daykeen Group Limited (“Daykeen”), a BVI company, or Daykeen, pursuant to which we acquired 100% ownership of Top Time International Limited (“Top Time”), a Hong Kong company. Daykeen is the sole shareholder of Top Time. Top Time owns 90% equity interest of Beijing Longyi Biology Technology Co. Ltd (“Beijing SOD”), which is a holding company that owns 90.05% equity interest of Chongqing JiuZhou Dismutase Biology Technology Co. Ltd (“Chongqing SOD”), a corporation incorporated in China. Chongqing SOD is a manufacturer of superoxide dismutase, or SOD products. As a result of this acquisition transaction, Top Time became our wholly owned subsidiary and Daykeen became our controlling stockholder upon our issuance to Daykeen of the equity portion of the purchase price in accordance with the Share Purchase Agreement. Top Time was incorporated in Hong Kong in December 2006 and currently has two subsidiaries: Beijing SOD and Chongqing SOD. Beijing SOD is 90% owned by Top Time and was incorporated in China in March 2005. Chongqing SOD was incorporated in China in March 2007 and is 90.05% owned by Beijing SOD.
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements
(Audited)
1.
BUSINESS DESCRIPTION AND ORGANIZATION
NAME CHANGE AND REORGANIZATION - Continued
Through acquisition of Top Time, we changed our business to develop, manufacture and sell SOD products. As a result, on November 28, 2007, one of our subsidiaries, Top Team Holdings Limited (BVI), disposed five subsidiaries including Euromax International Investments Limited, Beijing China Cardinal Real Estate Consulting Co., Ltd, Eagle Bus Development Limited (HK), Good View Bus Manufacturing Company Limited (HK), and Guangzhou City View Bus Installation Company Limited (PRC) to Mr. Chen, Zhiping for RMB5, 000,000.
In aggregate, in 2007 the company recognized gain of $3,385,630 on the sale of the subsidiaries.
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements
(Audited)
1.
BUSINESS DESCRIPTION AND ORGANIZATION - Continued
CAPITAL RESOURCES AND BUSINESS RISKS
The Company remains in the development stage and all future business operations are subject to all of the risks inherent in the establishment of a new business enterprise. The Company has no proven revenue stream from the sales of its products. Additional capital resources through current and future offerings of securities will be needed in order to accomplish the Company's present marketing, development and manufacturing plans. The manufacturing facility and other operations in China, as well as the business financial conditions and results of operations are, to a significant degree, subject to economic, political and social events in China.
The Company had incurred losses since inception and had little working capital until June 29, 2007. However, the substantial doubt about its ability to continue as a going concern, which contemplated the realization of assets and the payment of liabilities in the ordinary course of business, was alleviated on June 29, 2007, when management obtained $28,113,294 in funding through the issuance of additional stock to one of the Company’s shareholders. On November 12, 2007, we completed an acquisition transaction with Top Time whereby we paid Daykeen, Top Time’s sole shareholder, a total consideration of $54.9 million, in exchange for 100% ownership of Top Time, consisting of $30 million in cash and $24.9 million in shares of our common stock issuable within 90 days of the closing. The equity portion of the purchase price amounts to a total of 62,250,000 shares of our common stock.
On July 27, 2007, Company instructed prior Transfer Agent to issue the 50,000,000 shares of common stock to Jolly Concept Management Limited, in accordance with Qiang Long’s instructions. On December 14, 2007, Company instructed present Transfer Agent to issue the replacement certificate showing the new name of the company and the correct number of shares, post reverse-split, and the remaining 4,349,307 shares of common stock issuable to Qiang Long, to Jolly Concept Management Limited and to Zhang, Lifang. The company also agreed to issue 1,131,026 shares of common stock post-reverse-split to Luck Pond Enterprises Limited or its designee, for its services as finder in connection with the Qiang Long investment. On December 14, 2007, company instructed present Transfer Agent to issue the total amount of 62,250,000 shares of the Company’s common stock, post-reverse-split, issuable to Daykeen, to Daykeen Investment Limited.
RESTRICTIONS ON TRANSFER OF ASSET OUT OF CHINA
Dividend payments by the Company’s operating subsidiaries are limited by certain statutory regulations in China. No dividends may be paid by these subsidiaries without first receiving prior approval from the Foreign Currency Exchange Management Bureau. Dividend payments are restricted to 85% of profits, after tax. Repayments of loans or advances from subsidiaries to China Longyi, unless certain conditions are met, will be restricted by the Chinese government.
CONTROL BY PRINCIPAL STOCKHOLDERS
The directors, executive officers, affiliates and related parties own, beneficially and in the aggregate, the majority of the voting power of the outstanding shares of the common stock of the Company. Accordingly, if they voted their shares uniformly, directors, executive officers and affiliates would have the ability to control the approval of most corporate actions, including increasing the authorized capital stock of China Longyi and the dissolution, merger or sale of the Company's assets.
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements
(Audited)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements for all periods presented include the financial statements of China Longyi Group International Holding Limited, Top Team Holdings Limited, Full Ample Group Limited (Daykeen Group, BVI), Top Time International Limited (HK), Beijing Longyi Biology Technology Co. Ltd, and Chongqing JiuZhou Dismutase Biology Technology Co. Ltd. The consolidated statements have been prepared in accordance with US GAAP. All significant intercompany transactions have been eliminated.
The Company has determined the People’s Republic of China Chinese Yuan Renminbi (“RMB”) to be its functional currency. The accompanying consolidated financial statements are presented in United States (US) dollars. The consolidated financial statements are translated into US dollars from RMB at year-end exchange rates for assets and liabilities, and weighted average exchange rates for revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
RMB is not freely convertible into the currency of other nations. All such exchange transactions must take place through authorized institutions. There is no guarantee the RMB amounts could have been, or could be, converted into US dollars at rates used in translation.
MINORITY INTEREST IN SUBSIDIARIES
The Company owns 90% of the equity interests in the Beijing LongYi Biology Technology Co. Ltd, and the remaining 10% is owned by Miss Ran Wang. Therefore, the Company records minority interest expense to allocate 10% of the earnings or loss of the Beijing Longyi Biology Technology limited to Miss Ran Wang, its minority shareholder.
The company owns 81% of the equity interests in the Chongqing JiuZhou Dismutase Biology Technology Co. Ltd, and remaining 9% is owned by Miss Ran Wang, and another 10% is owned by Mr. Guoqing Tan. Therefore, the company records minority interest expense to allocate 19% of the earnings of the Chongqing JiuZhou Dismutase Biology Technology Co. Ltd to Miss Ran Wang and Mr. Guoqing Tan, its minority shareholder.
USE OF ESTIMATES
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
SIGNIFICANT ESTIMATES
Several areas require significant management estimates relating to uncertainties for which it is reasonably possible that there will be a material change in the near term. The more significant areas requiring the use of management estimates related to the valuation of acquired companies, equipment, patent rights, accrued liabilities and stock options, and the useful lives for amortization and depreciation.
REVENUE RECOGNITION
Revenues are recognized as earned when the following four criteria are met: (1) a customer issues a purchase order or otherwise agrees to purchase products; (2) products are delivered to the customer; (3) pricing is fixed or determined in accordance with the purchase order or agreement; and (4) collectability is reasonably assured.
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements
(Audited)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
CASH AND CASH EQUIVALENTS
The Company invests idle cash primarily in money market accounts, certificates of deposits and short-term commercial paper. Money market funds and all highly liquid debt instruments with an original maturity of three months or less are considered cash equivalents.
PROPERTY AND EQUIPMENT
Impairment of long-lived assets is recognized when events or changes in circumstances indicate that the carrying amount of the asset, or related groups of assets, may not be recoverable. Under the provisions of SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, the Company recognizes an “impairment charge” when the expected net undiscounted future cash flows from an asset's use and eventual disposition are less than the asset's carrying value and the asset's carrying value exceeds its fair value. Measurement of fair value for an asset or group of assets may be based on appraisal, market values of similar assets or estimated discounted future cash flows resulting from the use and ultimate disposition of the asset or assets.
Expenditures for maintenance, repairs and betterments, which do not materially extend the normal useful life of an asset, are charged to operations as incurred. Upon sale or other disposition of assets, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or income (loss) is reflected in income.
Depreciation and amortization are provided for financial reporting purposes primarily on the straight-line method over the estimated useful lives of the respective assets as follows:
INTANGIBLE ASSETS
The Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), effective January 1, 2002. Under SFAS 142, goodwill and indefinite lived intangible assets are not amortized, but are reviewed annually for impairment, or more frequently, if indications of possible impairment exist. The Company has performed the requisite annual transitional impairment tests on intangible assets and made the impairment adjustments as necessary.
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements
(Audited)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
INCOME TAXES
Income tax expense is based on reported income before income taxes. Deferred income taxes reflect the effect of temporary differences between assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 109, “Accounting for Income Taxes,” these deferred taxes are measured by applying currently enacted tax laws.
The Company did not provide any current or deferred income tax provision or benefit for any period presented to date because it has experienced operating incomes (losses) since inception. The benefit of any tax income (loss) carry forwards is fully offset by a valuation allowance, as there is a more than fifty percent chance that the Company will not realize those benefits.
There are net operating loss carry forwards allowed under the Hong Kong and China Governments’ tax system.
RESEARCH AND DEVELOPMENT COSTS
Company sponsored research and development costs, related to both present and future products, are charged to operations when incurred and are included in operating expenses. Expenditures for research and development for the years ended December 31, 2008 and 2007 were $0 and $211 respectively and a cumulative amount of $8,850,928 for the period from June 4, 1997 (inception) to December 31, 2008.
RELATED PARTY TRANSACTIONS AND STOCKHOLDER’S LOAN
The caption “Due to Related Party” are loans that are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand. The Company rents office space from the related company on a month to month basis. Rent expense under this arrangement was $31,376 in 2008 $28,655 in 2007.
INCOME (LOSS) PER SHARE
Basic income (loss) per common share ("LPS") is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the year. Diluted earnings per common share are calculated by adjusting the weighted average outstanding shares, assuming conversion of all potentially dilutive stock options. There were no stock options outstanding at December 31, 2008.
The numerator and denominator used in the basic and diluted LPS of common stock computations are presented in the following table:
There were no potentially dilutive securities outstanding at December 31, 2008 or 2007.
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements
(Audited)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
EQUITY BASED COMPENSATION
The Company accounts for employee stock options in accordance with SFAS 123(R), “Share-Based Payment.” Under SFAS 123(R) the Company is required to recognize share-based compensation expense at fair valued. “The Company had no such compensation expense for the years ended December 31, 2008 and 2007.
COMPREHENSIVE INCOME (LOSS)
The accompanying financial statements are presented in United States (US) dollars. The functional currency is the Renminbi (RMB). The financial statements are translated into US dollars from RMB at year-end exchange rates for assets and liabilities, and weighted average exchange rates for revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred. Currency translation adjustments are presented as other comprehensive income.
RMB is not freely convertible into the currency of other nations. All such exchange transactions must take place through authorized institutions. There is no guarantee the RMB amounts could have been, or could be, converted into US dollars at rates used in translation.
3.
BUSINESS ACQUISITIONS
On March 13, 2003, Minghua USA’s indirect subsidiary, Minghua Environmental Protection Science and Technology Limited, a Hong Kong limited company (“Minghua Science”), entered into the Acquisition Agreement with Good View Bus Manufacturing (Holdings) Company Limited, a Hong Kong limited company (Good View), Eagle Bus Development Limited, a Hong Kong limited company (Eagle), and Mr. Sin Keung Kok (Mr. Kok), relating to the acquisition of an 89.8% equity interest in the Guangzhou City View Bus Installation Company, a People’s Republic of China limited company (the Guangzhou Bus Installation Company). The Guangzhou Bus Installation Company manufactured motor coaches for domestic sale in China and for export under the “Eagle” brand name.
The acquisition of the equity interest was effective on January 2004 after obtaining certain governmental approvals. The parties to the Acquisition Agreement entered into, and simultaneously consummated the transactions contemplated by, a supplemental agreement (the Supplemental Agreement), which replaced the original Acquisition Agreement. Pursuant to the Supplemental Agreement, instead of acquiring the Guangzhou Bus Installation Company directly, Minghua Science acquired a controlling interest in the entities that control the Guangzhou Bus Installation Company. More specifically, Minghua Science acquired Good View (which owned 23.8% of the Guangzhou Bus Installation Company) and Eagle (which owned 66% of the Guangzhou Bus Installation Company), respectively. Therefore, Minghua USA became the indirect owner of an 89.8% equity interest in the Guangzhou Bus Installation Company. The remaining 10.2% was held by Guangzhou Public Automobile No. 2 Company.
The purchase price of RMB14, 000,000 (US$1,690,474) was determined by the parties based upon the market value of the assets and business potential of Guangzhou Bus Installation Company.
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements
(Audited)
3.
BUSINESS ACQUISITIONS - Continued
The purchase price was allocated to assets and liabilities as follows on the designated effective date on January 1, 2004:
Goodwill in the amount of $468,546 was written to zero at 2004 and was reported as goodwill impairment loss.
In January 2004, Minghua Hong Kong entered into a stock purchase agreement with Jinmou Li, the son of Minghua USA’s former Chairman, to acquire 100% of the equity in Asia Key Group Limited (“Asia Key”) a Hong Kong corporation, in which Jinmou Li was the sole shareholder. Asia Key’s only asset at the time was a 15% equity interest in Shenzhen Minghua Environmental Protection Vehicle Co., Ltd. (“Minghua China”). Upon the consummation of this acquisition, Minghua China become a 100% wholly-owned subsidiary of Minghua USA. The acquisition required $990,638 in cash and issuance of 28,210,000 shares of common stock at US$0.14 per share of Minghua USA for an aggregate price of $3,949,400. The book value of the net assets transferred at the time of acquisition had a negative balance. In this regard, the purchase of the 15% minority interest was recorded to goodwill. Minghua USA subsequently recorded the entire amount as impairment loss. In September 2006, Minghua USA disposed of its entire interests in Minghua Hong Kong and Minghua China.
On June 16, 2004, Minghua Hong Kong formed a wholly-owned subsidiary in the PRC, name Beijing China Cardinal Real Estate Consulting Co., Ltd. (“Beijing Cardinal Real Estate”). Minghua USA intends to use Beijing Cardinal Real Estate as a vehicle to make future real estate investments in the PRC. At December 31, 2006, Beijing Cardinal Real Estate had not begun significant operations.
During August 2006, Minghua USA restructured ownership of certain assets between its indirectly owned subsidiaries in preparation for the disposition of Minghua Science along with its wholly-owned subsidiary, Minghua China and Minghua Hong Kong. The transfers of ownership within Minghua USA’s subsidiaries are listed as follows:
(a) Minghua USA transferred Beijing Cardinal Real Estate from Minghua Hong Kong to Euromax International Investments Limited; and
(b) Minghua USA transferred Good View and Eagle from Minghua Science to Top Team Holdings Limited (BVI).
During September 2006, Minghua disposed of its entire interests in Minghua Hong Kong, Minghua Science to Messrs. Han Lian Zhong and Niu Rui Cheng in exchange for their assumption of Minghua Hong Kong and Minghua Science’s debt.
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements
(Audited)
3.
BUSINESS ACQUISITIONS - Continued
In aggregate, Minghua USA recognized gains of $707,825 on the sale of the subsidiaries.
On October 16, 2007, Minghua USA changed its name to China LongYi Group International Holdings Limited. At the same time, the Company implemented a 1 for 20 reverse stock split of issued and outstanding shares of our common stock which reduced the number of our issued and our outstanding shares form 198,509,866 to 9,925,493.
On November 12, 2007, the Company entered into a share purchase agreement, with Daykeen Group Limited, a BVI company, pursuant to which company acquired 100% ownership of Top Time International Limited, a Hong Kong company. Daykeen is the sole shareholder of Top Time. Top Time owns 90% equity interest of Beijing SOD, which is a holding company that owns 90% equity of Chongqing SOD, a corporation incorporated in China. Chongqing SOD is a manufacturer of superoxide dismutase, or SOD products.
The Company completed an acquisition transaction with Top Time whereby we paid Daykeen, Top Time’s sole shareholder, a total consideration of $54.9 million (RMB 407 million, based on an exchange ratio of $1=RMB 7.414) in exchange for 100% ownership of Top Time, consisting of $30 million in cash and $24.9 million in shares of our common stock issuable within 90 days of the closing. The equity portion of the purchase price amounts to a total of 62,250,000 shares of our common stock (based upon $0.02/share, the average of the closing price of the Company’s common stock on the OTCBB for the 365 calendar days prior to May 31, 2007, which was adjusted for our stock split which occurred on October 16, 2007 and resulted an effective purchase price of $0.40 per share). Top Time thereby became our wholly owned subsidiary and Daykeen became our controlling stockholder upon our issuance to Daykeen of the equity portion of the purchase price in accordance with the Share Purchase Agreement.
Top Time was incorporated in Hong Kong in December 2006 and currently has two subsidiaries: Beijing SOD and Chongqing SOD. Beijing SOD is 90% owned by Top Time and was incorporated in China in March 2005. Chongqing SOD was incorporated in China in March 2007. Chongqing SOD is 90% owned by Beijing SOD. For accounting purposes, the acquisition of Top Time was treated as a reorganization of entities under common control.
4.
STOCKHOLDERS' EQUITY
ISSUANCE OF COMMON STOCK
In February 2002, the Company issued 372,807 shares of the Company's common stock at $.20 per share in a private placement. The total amount due of $74,561 was determined to be uncollectible during 2004 and was charged to additional paid in capital.
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements
(Audited)
4.
STOCKHOLDERS' EQUITY
ISSUANCE OF COMMON STOCK - Continued
In April 2002, 540,260 options were exercised by a former director at a cashless exercise amount of $416,000. The balance of the 2,000,000 options granted to this former director was forfeited in 2002.
In November 2002, 1,100,000 shares were issued to the Board of Directors at $.13 per share, for a total consideration of $143,000, for services provided to the Company in 2002.
In March 2003, the Company issued 1,513,969 shares of common stock for $.12 per share, for a total consideration of $181,676 to settle various debts with third party vendors and a loan payable to a former Director of the Company.
On September 29, 2003, the Company entered into its first stock subscription agreement with the Beijing Qiang Long Real Estate Development Co., Ltd. (“Qiang Long”), relating to the purchase of 15,000,000 shares of the Company's common stock at a purchase price of $.40 per share, for an aggregate consideration amount of $6,000,000. In October 2003, 1,511,488 shares of stock were purchased according to the subscription agreement for $604,595. In addition to $604,595, $604,887 was received in advance for the stocks issued in January 2004. Total amount received was $1,209,482 during October 2003. In January 2004, 3,023,998 shares of stock were purchased under the same agreement for a price of $1,209,599. Amount received was $604,712 which was $1,209,482 less $604,887. In 2004, 10,464,514 shares of stock were purchased under the subscription agreement for an aggregate consideration of $ 4,185,806. Accordingly, the Company has received all the payments from the first stock subscription receivable.
On January 29, 2004 a second stock subscription agreement was entered into with Qiang Long. The second agreement calls for the purchase of 140,000,000 shares of the Company's common stock at a purchase price of $.21 per share, for an aggregate consideration of $29,400,000. Qiang Long will become the controlling stockholder of the Company as a result of this second agreement. During 2004 the Company collected $653,795 as a partial payment toward the stock subscription receivable, however, no stocks were issued. In December 2006, pursuant to this agreement, Qiang Long Real Estate Development Co. Ltd., paid $632,911 in partial fulfillment of the agreement. Company issued 3,013,862 shares of common stock to Qiang Long.
Prior to the issuance of the shares, the Company is required to hold a stockholders meeting to increase the number of common shares authorized, in order to have enough common shares to satisfy its stock obligations to Qiang Long. Qiang Long does not have the right to cancel its subscription and the consideration is not refundable.
In January 2004 the Company issued 24,036,269 shares of its common stock to Kingsrich Development Limited in satisfaction of debt in accordance with a prior agreement.
On January 29, 2004 the Company issued 28,210,000 shares of its common stock in the acquisition of the 15% minority interest in Minghua China. The shares were valued at $.14 per share. The transaction is further discussed in Note 1.
In February 2004, the Company issued 4,000,000 shares of its common stock in exercise of stock options. The exercise price was paid in services to the Company. Compensation expense of $480,000 was charged to current expense as a result of the transaction.
During May of 2004 the Company issued 16,483,514 shares of its common stock to China Cardinal Limited, of Hong Kong, in satisfaction of a subscription agreement. The stock was sold at a price of $.14 per share, for an aggregate amount of $2,307,692.
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements
(Audited)
4.
STOCKHOLDERS' EQUITY
ISSUANCE OF COMMON STOCK - Continued
Luck Pond Enterprises Limited by Hong Kong (“Luck Pond”) had provided consulting services and acted as a finder in connection with the above-mentioned two subscription agreements with Qiang Long and an investment that was made in January 2004 by China Cardinal Limited of Hong Kong. In consideration of those services, Luck Pond will receive a ten percent commission on the total investment proceeds from both investors, payable in common stock of the Company and was determined by management to be equivalent to 28,390,531 common shares. This commission is contingent upon final funding of 100% of all the three above-mentioned subscription agreements. During 2004, at the completion of two of the agreements, the Company charged $830,100 to expense. The amount was included in accrued liabilities at December 31, 2004, and in January 2005, the Company issued 5,770,000 shares of its common stock in payment of the liability.
On June 29, 2007, the Board of Directors of Company unanimously approved, subject to the Majority Shareholders approval, the 1-for-20 Reverse Split of company’s issued and outstanding Common Stock, which will be effectuated in conjunction with the adoption of the Certificate of Amendment. The Majority Shareholders also approved this action in the Written Consent.
The Reverse Split reduce the number of issued and outstanding shares of Company’s Common Stock and effectively increase the number of authorized and unissued shares of our Common Stock available for future issuance. The Reverse Split will become effective on the Effective Date, which occurs when the Certificate of Amendment is filed with the Secretary of Sate for the State of New York following the expiration of the 20-day period mandated by Rule 14c of the Exchange Act.
Effect of Reverse Split on Common Stock
The table below sets forth, as of the Record Date and as of the Effective Date the following information both before and after the proposed Reverse Split (subject to slight adjustments resulting rounding of fractional shares):
The number of issued and outstanding shares of Common Stock
The number of authorized and reserved shares of Common Stock;
The number of authorized but unissued and unreserved shares of Common Stock.
CAPITALIZATION STRUCTURE OF THE COMPANY AT VARIOUS TIMES
As shown in the table above, the Reverse Split of the outstanding shares of our Common Stock will reduce the number of issued and outstanding shares of our Common Stock and effectively increase the number of authorized and unissued shares of our Common Stock available for future issuance.
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements
(Audited)
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements
(Audited)
4.
STOCKHOLDERS' EQUITY - Continued
STOCK OPTION PLAN
On April 5, 2001, the Company's 2001 Stock Option Plan (the “2001 Plan”) was adopted by the board of directors and was approved by the Company's shareholders at the stockholders' annual meeting on August 2, 2001. Pursuant to the 2001 Plan, the Company may grant incentive and non-statutory (nonqualified) stock options to key employees and directors of the Company. A total of 20,000,000 shares of common stock have been reserved for issuance under the 2001 Plan. No employee may be granted options for more than 2,000,000 restricted shares under the 2001 Plan in any one fiscal year.
The maximum term of options granted under the 2001 Plan is ten years. Options granted are nontransferable and generally expire within three months after the termination of the grantee's services.
The exercise price of incentive stock options must not be less than the fair value of the common stock on the date of the grant. The authority to grant new options under the 2001 Plan will terminate on April 5, 2011, unless the 2001 Plan is terminated prior to that time by the board of directors.
In 2001, the Company granted 2,000,000 nonqualified stock options under the 2001 Plan to the Chairman with a 5-year expiration date, and an exercise price of $1.75 per share. However, all 2,000,000 options were forfeited on May 10, 2004 when the chairman resigned.
5.
INVESTMENT
The Company has a one year deposit certificate with an investment company in the PRC. The certificate earns interest at 5.5% to 8% per annum. The principal amount for the years ended December 31, 2008 and 2007 was $1,035,686 and $1,489,472, and was recorded on the balance sheet as a short term investment.
6.
INVENTORIES
Inventories at December 31, 2008 and 2007 consisted of:
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements
(Audited)
7.
PROPERTY AND EQUIPMENT
Property and equipment at cost consisted of:
Depreciation expense for the years ended December 31, 2008 and 2007 was $42,386 and $53,472, respectively.
8.
DUE TO DIRECTORS
Amount due to directors consisted of:
9.
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, “Accounting for Income Taxes.
Income tax expense is based on reported income before income taxes. Deferred income taxes reflect the effect of temporary differences between assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. In accordance with SFAS No. 109, “Accounting for Income Taxes”, these deferred income taxes are measured by applying currently enacted tax laws.
The Company has a United States federal net operating income (loss) carryforward of approximately $(5.24) million expiring in the years 2021 - 2025. The tax benefit of this net operating income (loss) has been offset by a full valuation allowance. The net operating loss carryforward will be subject to a limitation due to the “Change of ownership provisions” under Section 382 of the Internal Revenue Code and similar state provisions.
Net operating loss carry forwards are allowed under the Hong Kong and Chinese governments’ tax systems. In China, the previous five years’ net operating losses are allowed to be carried forward to offset future taxable income. In Hong Kong, net operating losses can be carried forward indefinitely to offset future taxable income.
10.
COMMITMENTS AND CONTINGENCIES
From time to time, the Company has disputes that arise in the ordinary course of its business. Currently, according to management, there are no material legal proceedings to which the Company is a party to or to which any of their property is subject that will have a material adverse effect on the Company’s financial condition.
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements
(Audited)
11.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, “Disclosures about Fair Value of Financial Instruments” (“SFAS 107”) requires entities to disclose the fair values of financial instruments except when it is not practicable to do so. Under SFAS No. 107, it is not practicable to make this disclosure when the costs of formulating the estimated values exceed the benefit when considering how meaningful the information would be to financial statement users.
As a result of the difficulties presented in the valuation of the loans payable to related entities/parties because of their related party nature, estimating the fair value of these financial instruments is not considered practical. The fair values of all other assets and liabilities do not differ materially from their carrying amounts. None of the financial instruments held are derivative financial instruments and none were acquired or held for trading purposes in 2007 and 2008.
12.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115. This Statement provides all entities with an option to report selected financial assets and liabilities at fair value. The Statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007, with early adoption available in certain circumstances.
SFAS No. 141 (Revised), Business Combinations. SFAS No. 141R broadens the guidance of SFAS No. 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. It broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations. SFAS No. 141R expands on required disclosures to improve the statement users’ abilities to evaluate the nature and financial effects of business combinations.
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51. SFAS No. 160 requires that ownership interests in subsidiaries held by parties other than the parent are to be included in the equity section of the balance sheet, but apart from the parent's equity. All changes in the parent's ownership interest in a subsidiary are to be accounted for as equity transactions. Any retained noncontrolling equity interest in a deconsolidated subsidiary is to be initially measured at fair value, with any gain or loss on consolidation measured using this fair value.
SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures for all derivative instruments and hedging activities covered by SFAS No. 133.
SFAS NoSOP No. 07-01, Clarification of the Scope of the Audit and Accounting Guide “Investment Companies” and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies. SOP 07-01 provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide Investment Companies. The provisions of the SOP are effective for fiscal years beginning on or after December 15, 2007, with earlier application encouraged. As of December 1, 2007 the FASB has proposed an indefinite deferral of this SOP.
EITF Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards. In this Issue, a consensus was reached that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity-classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in capital. This Issue should be applied prospectively to the income tax benefits that result from dividends on equity-classified employee share-based payment awards that are declared in fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Early application is permitted.
CHINA LONGYI GROUP INTERNATIONAL HOLDINGS LIMITED
(A DEVELOPMENT STAGE COMPANY)
Notes to consolidated financial statements
(Audited)
12.
NEW ACCOUNTING PRONOUNCEMENTS - Continued
FSP No. FAS 158-1, Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No. 106 and to the Related Staff Implementation Guides. This FSP provides conforming amendments to the illustrations in FASB Statements No. 87, 88, and 106 and to related staff implementation guides as a result of the issuance of FASB Statement No. 158. The conforming amendments made by this FSP are effective as of the effective dates of Statement No. 158. The unaffected guidance that this FSP codifies into Statements No. 87, 88, and 106 does not contain new requirements and therefore does not require a separate effective date or transition method.
FSP No. FIN 46(R)-7, Application of FASB Interpretation No. 46(R) to Investment Companies. This FSP addresses the application of FASB Interpretation (FIN) No. 46 (revised December 2003), Consolidation of Variable Interest Entities, by an entity that accounts for its investments in accordance with the specialized accounting guidance in the AICPA Audit and Accounting Guide, Investment Companies. The provisions of the FSP are effective when the entity adopts SOP 07-01.
SEC Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings. SAB 109 expresses the current view of the staff that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SEC registrants are expected to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007.