Item 1. Business.
Forward-Looking Statements
This annual report on Form 10-K contains forward-looking statements. These statements can be identified by the use of forward-looking terminology such as “believes,” “plans,” “will,” “intends,” “seek,” “scheduled,” “future,” “potential,” “continue,” “estimates,” “anticipates,” “hopes,” “goal,” “objective,” “expects,” “may,” “should,” “could” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. We caution you that no statements contained in this annual report should be construed as a guarantee or assurance of future performance or results. You should not place undue reliance upon any forward-looking statements. Forward-looking statements involve risks and uncertainties, including those discussed throughout this annual report and in other reports we file with the Securities and Exchange Commission (the “SEC”). The actual results that we achieve may differ materially from any forward-looking statements due to the effect of such risks and uncertainties. These forward-looking statements are based on current expectations, and, except as required by law, we assume no obligation to update this information whether as a result of new information, future events or otherwise. Readers are urged to carefully review and consider the various disclosures made by us in this annual report and in our other reports filed with the SEC that attempt to advise interested parties of the risks that may affect our business, financial condition and results of operations.
Company History
China Agri-Business, Inc. was incorporated in the State of Maryland on December 7, 2005. On March 24, 2006, China Agri formed Mei Xin Agri Technology (Shaanxi) Co., Ltd. (“Meixin”) in Xi’an city, located in the PRC. Meixin is a wholly owned subsidiary of China Agri and a limited liability company organized under the laws of the PRC. Since 2006, Meixin has acted as a management company for our operating business in the PRC, conducted by Shaanxi Xin Sheng Centennial Agricultural and Technology Co., Ltd. (“Xinsheng”), in accordance with the management entrustment agreement described below. Meixin controls all aspects of Xinsheng’s business and management, and is entitled to all proceeds of Xinsheng’s business and obligated to fund its operations. China Agri-Business, Inc. is a holding company with no operations other than acting as a holding company for Meixin and raising capital for Meixin’s and Xinsheng’s operations. China Agri-Business, Inc. and Meixin do not own any equity rights in Xinsheng.
Xinsheng was founded on April 22, 2002 as a joint stock limited liability company formed under the laws of the PRC. Meixin’s control over Xinsheng was established in the following manner, and in accordance with PRC laws:
•
On April 18, 2006, Meixin entered into a management entrustment agreement (the “Management Agreement”) with Xinsheng. Under the Management Agreement, Xinsheng and its shareholders entrusted to Meixin its management rights, the rights and powers of its shareholders and board of directors, and the right to receive all of Xinsheng’s profits in exchange for Meixin’s assumption of responsibility for any losses resulting from Xinsheng’s operations and the obligation to pay Xinsheng’s debts if Xinsheng is unable to pay those debts as they become due.
•
On April 22, 2006, following a Xinsheng shareholder meeting at which an attorney-in-fact was appointed to represent the Xinsheng shareholders, China Agri entered into a stock purchase agreement with the attorney-in-fact (the “Stock Purchase Agreement”). Pursuant to the Stock Purchase Agreement, China Agri issued an aggregate of 5,389,221 shares (10,950,897 shares after a 2.032-for-1 forward split in October 2006) of common stock to the Xinsheng shareholders in consideration of the execution of the Management Agreement between Xinsheng and Meixin. Pursuant to the Stock Purchase Agreement and a voting trust and escrow agreement (the “Voting Trust and Escrow Agreement”) entered into by the parties in connection with the Stock Purchase Agreement, these shares were issued in the name of the trustees for the Xinsheng shareholders, which trustees also act as the escrow and selling agent for the Xinsheng shareholders for the sale of the shares. The trustees are entitled to exercise all rights and powers to vote the shares on behalf of the Xinsheng shareholders. Each shareholder can request the release of his or her shares from the trust. Alternatively, each shareholder can request that the trustees sell the shares on behalf of such shareholder and remit the proceeds to such shareholder. The entry into the Management Agreement, the Stock Purchase Agreement and the Voting Trust and Escrow Agreement, and the appointment of the attorney-in-fact, were approved by the Xinsheng shareholders at a meeting held on April 10, 2006, in accordance with PRC Law. The issuance of China Agri stock to Xinsheng shareholders was made in reliance on the exemptions from registration under the Securities Act of 1933, as amended, provided by Regulation S and/or Section (4)(2). The Xinsheng shareholders terminated the Voting Trust and Escrow Agreement in 2010.
The following diagram sets forth the current corporate structure of the Company:
At present, neither China Agri-Business nor Meixin have any existing or planned business activities other than acting as a holding company and management company, respectively, for Xinsheng. However, these plans are subject to change in the future.
Overview of Business
Xinsheng began producing agricultural application products in 2004. Our business is concentrated in the growing “Green Food” market in the PRC. Xinsheng manufactures and sells non-toxic fertilizer, bactericide and fungicide products used for farming in the PRC. Crops grown with our products are eligible to qualify for the “AA Green Food” rating administered by the China Green Food Development Center, an agency under the jurisdiction of the Ministry of Agriculture of the PRC (however, our products themselves do not bear the “AA green food” designation). As an effort to expand our business and offset the influence of weather conditions, we launched a “New Agriculture - Generator” initiative in the fourth quarter of 2008, which included a super chain sales partner program and a direct sales stores program. The purpose of this campaign is to establish our own sales network by creating closer relationships with farmers through our super chain and direct sales stores in the rural areas of China in addition to the traditional sales network. The direct sales stores were controlled and managed by the Company until December 2010. To better manage our expansion, in December 2010, the Company outsourced the operations and ownership of the direct sales stores to subcontractors who bear the risk of operations of the stores. The super chain sales stores and outsourced direct sales stores are all under the name of “Xinsheng Shiji”. We refer to these stores as the“Xinsheng Shiji branded stores. As of December 31, 2010, there were approximately 500 Xinsheng Shiji branded stores. The majority of these branded stores are located in Shannxi Province (domestic province), others are located in Hunan and Sichuan provinces.
The executive offices of China Agri-Business in the United States are located at 11 East 86th Street, New York, New York 10028. China Agri’s telephone number in the United States is (212) 348-5600. Xinsheng is located outside of the city of Xi-an in the Shaanxi Province of the PRC. Xinsheng’s address is Building 2, Unit 1, 15th Floor, Ling Xian Xin Cheng, Hi-Tech Industrial Development Zone, Xi-An, China 710065. Xinsheng’s telephone number is 011-86-29-68596556.
Our Organic Biochemical Agricultural Application Products
We manufacture and market the following organic biochemical agricultural application products. Our products are designed to be environmentally friendly, as explained in further detail below. Within the following five product categories, we produce more than 50 different agricultural application products.
Product Brand Name
Description and Functionality
Plant Suitability
Price*
Xinsheng Luyuan
A line of fertilizer product whose primary function is to increase agricultural production.
Wheat, Rice, Maize, Tobacco, Cotton, Melons and various other fruits and vegetables.
$
66.60/Box
Xinsheng Lufeng
A line of organic soil amendment products whose primary function is as a bactericide.
Tomatoes and Apples.
$
78.78/Box
Xinsheng Huang-jin-gai
A line of amino acid fertilizer products designed to help crops absorb calcium and to improve their overall quality.
Tomatoes and Apples.
$
57.57/Box
Xinsheng Jia-tian-xia
A line of humic acid fertilizer products designed to improve the overall quality of crops
Maize, Cotton, Apples, Tomatoes, Watermelon, and various other fruits and melons.
$
48.48/Box
Xinsheng Bai-le
A line of amino acid fertilizer products designed to provide supplementary micro-nutrients to crops and to help crops grow with balanced nutrition.
Maize, Cotton, Apples, Tomatoes, Watermelon, and various other fruits & melons.
$
26.35/Box
* Based on the rounded currency exchange rate in effect as of December 31, 2010 ($1 = approximately RMB 6.60). A standard box contains various bottles and/or bags of the product. The price per box may vary depending on the contents of the box.
Our Xinsheng Luyuan agricultural application products, our major products, are made of a chemical polymer combined with active potassium, organic nitrogen and 20 other ingredients, including chitosan. The key raw material for our products is chitosan, which consists primarily of polysaccharides extracted from the shells of crustaceans, such as crabs and shrimp, and mixed with active calcium. Because each of our products are designed to minimize harm to the environment, use of our products contributes to the production of healthy and environmentally friendly crops.
Studies performed by our research and development personnel indicate that nitrogen, phosphorus, potassium and other potentially environmentally harmful nutrients in traditional chemical fertilizers tend to become soluble in the presence of water, which can lead to potentially harmful runoff when it rains. Our products, which contain chitosan, are designed to release nutrients into the soil at a slower rate, making them less likely to be leached from the soil by rainwater. The retention of these nutrients improves the effects of both naturally-occurring and applied nutrients and fertilizers. Our chitosan based products are also designed to build soil structure, which allows more air to reach plant roots and increases the soil’s ability to retain water, resulting in healthier crops. Our products also use chitosan to provide nutrients used by soil microorganisms, which in turn make mineral nutrients available to plants.
Our agricultural application products are produced and sold in two types of packaging: (i) polyethylene bottles that are 12 centimeters in height and 5.8 centimeters in diameter and have a net weight of 200 grams and (ii) bags that are 11 centimeters in length and 8.4 centimeters in width and have a net weight of 20 grams.
The raw materials used in the production of our products are generally available from local suppliers and, accordingly, we do not have any long term supply contracts. Our principal suppliers are Changsha Haobo, Shangdong Wilidan Fertilizer Inc., Yihua Chemistry Supply Center, Shengfang Chemistry and Zhong E Fertilizer.
The principal advantages of our agricultural application products include their quality and their potential to reduce farmers’ costs. In addition, our proprietary blending methods allow our products to mix readily with water so that they can be sprayed onto crops. This permits our products to be applied consistently over large areas. Higher yields mean that farmers can plant less and therefore decrease their costs. We believe our products can ultimately increase plant growth by up to 20%. These estimates are based on our own testing and on field trial reports issued on our Xinshing Luyuan product by the following three independent land and fertilizer working stations in China, for the years of 2005 and 2004: Shaanxi Chunhua County Land and Fertilizer Working Station, Shaanxi Province Land and Fertilizer Working Station and Shaanxi Province Yangling Zone Land and Fertilizer Working Station.
In addition, we offer agricultural application products that contain, in addition to growth-promoting compounds, both bactericides and pesticides. These products are cost effective because they eliminate the need to purchase separate pesticides and bactericides.
Manufacturing Capacity
As of December 31, 2010, Xinsheng’s manufacturing capacity was approximately 540 tons per year. Xinsheng has the ability to increase its manufacturing capacity to approximately 700 tons per year through the use of the facilities of third party contract manufacturers. Xinsheng’s manufacturing output is primarily order driven. Accordingly, Xinsheng uses the facilities contract manufacturers on an as needed basis, when orders exceed capacity. Xinsheng’s employees are present to oversee the manufacturing process when facilities of contract manufacturers are used.
The PRC’s “Green Food” Industry
By the late 1980s, in an effort to produce more food, the PRC had reached a point where its farmers were relying heavily on the use of fertilizers and pesticides. This reliance on fertilizers and pesticides, including the use of environmentally harmful fertilizers and pesticides, led to the sale of products with dangerous and high concentrations of harmful chemicals. In addition to creating a dangerous situation for domestic consumers, it also created problems for the PRC’s food exporters which, in many cases, were barred from exporting to countries with minimum acceptable standards for pesticide and chemical use.
In 1990, the PRC Ministry of Agriculture began to encourage the production of “Green Food”, which is food that is deemed safe, free from pollutants and harmful chemicals, and of good quality. In 1992, the PRC Ministry of Agriculture established the China Green Food Development Center to oversee food quality and the development and management of Green Food at the national and provincial level in the PRC. In 1993, the Ministry of Agriculture established regulations on the use of Green Food labeling. In 1996, an identifying trademark for Green Food was registered in the PRC and put into use. More information regarding the China Green Food Development Center, including the green food regulatory and authentication process, is available at the Center’s website at http://www.greenfood.org.cn/sites/GREENFOOD/. The contents of this website are not incorporated by reference herein.
According to the China Green Food Development Center website, China’s Green Food industry experienced a rapid growth period from 1997 to 2007. For example, from 2002 to 2007, certified Green Food products and Green Food production enterprises increased at a rate of 21.8% and 30.8% per year, respectively. By the end of October 2010, there were 17,748 Green Food products and 6,391 Green Food production enterprises in China. Approximately 10.1 million hectares of the total farm land in China, is used in the production of Green Food.
Seasonality
Our business is seasonal and order driven. Accordingly, we experience seasonal fluctuations in our revenues and our operating costs.
Generally, our sales peak occurs at the beginning of the planting season, which generally occurs during the period from March though June. Our sales are typically the lowest in the period from December through January and are relatively stable for the rest of the year.
Adverse weather conditions and other natural disasters may affect our customers’ planting activities and therefore reduce demand for our products. For example, our business was negatively impacted during 2008 by the following events: (i) severe winter weather conditions that existed in China during the end of January and early February, (ii) the major earth quake on May 12, 2008 whose epicenter was located in Sichuan province, and (iii) widespread flooding in the central and southern parts of China in May and June 2008 , including the Hunan and Hubei provinces.
Employees
As of December 31, 2010, Xinsheng had approximately 138 employees, including 63 who are engaged in sales and marketing activities. Approximately half of our employees are full-time employees and the remaining half are part-time or seasonal employees.
Sales and Marketing
We have traditionally sold our products through wholesale and retail distributors. In order to market our products, we advertise in newspapers, including national publications. We have also utilized a limited amount of television advertising, and distributed brochures, company profiles and promotional videos to farmers. We also offer free field trials to potential customers for the purpose of comparing plantings that have applied our products to plantings that have not. We believe that potential customers are more inclined to purchase our products after seeing the comparison results. We have a marketing team comprised of approximately 57 people who demonstrate to our dealers and our direct customers the correct methods of using our products, and who help address issues that arise for our dealers and customers in using our products and collect feedback from them.
As of December 31, 2010, we have established relationships with approximately 90 wholesale distributors. Our products are sold in 12 provinces in the PRC.
During 2008 we launched a new sales and marketing initiative “New Agriculture-Generator” designed to expand our distribution network directly in the rural areas of China. The purpose of the campaign is to establish a closer relationship with farmers through agricultural cooperatives located throughout the rural areas of China.
In connection with this initiative, we established “Direct Sales Stores.” The direct sales stores are controlled and managed directly by the Company. In December 2010, the Company outsourced operation and ownership of its direct sales stores to subcontractors who bear the risk of operations of the stores.
The outsourced direct sales stores are called “Xinsheng Shiji”. We refer to these stores as “Xinsheng Shiji branded stores”. We not only provide our products to these branded stores but also provide training and other support service through these branded stores to establish customer loyalty and to attract new farmer customers. As of December 31, 2010, there were approximately 500 branded stores. The majority of branded stores are located in Shannxi Province (local province); others are located in Hunan and Sichuan provinces. For the year ended December 31, 2010, approximately 75% of revenue was generated from our branded stores, and 25% from traditional sales channels.
Despite the growth of these initiatives, there can be no assurance that the “New Agriculture-Generator” campaign, including the branded sales stores program, will be successful.
Government Regulation
Fertilizer Registration Certificates
In the PRC, producers of fertilizer and related products must obtain a government approval known as a fertilizer registration certificate. Accordingly, we have obtained temporary registration certificates from the PRC’s Ministry of Agriculture for each of our primary products. The certificates authorize us to manufacture and distribute our agricultural application products in the PRC. The term of a temporary fertilizer registration certificate is one (1) year, subject to annual renewal. The certificates were renewed in 2010. There is no assurance that the certificates will continue to be renewed in the future.
The Company’s application for a permanent fertilizer registration certificate in 2006 was not accepted because the PRC government had not yet established standards for the Company’s products. The PRC government has since established standards for the following three of the Company’s five products: Xinsheng Huang-jin-gai, a line of amino acid fertilizer products, Xinsheng Bai-le, a line of amino acid fertilizer products, and Xinsheng Jia-tian-xia, a line of humic acid fertilizer. The temporary certificates for these products are eligible for permanent certificates after three years. The Company will seek to obtain permanent certificates for these products as soon as the Company is eligible. Permanent certificates are also required to be renewed annually. This renewal process is only a formality. The Company will be eligible on October 31, 2011 for Xinsheng Huang-jin-gai, October 31, 2011 for Xinsheng Bai-le, and December 31, 2011 for Xinsheng Jia-tian-xia. In the meantime, the Company will continue to apply annually for temporary certificates. Other than the term of the certificate, there is no difference in the restrictions applied to temporary certificate holders and permanent certificate holders.
Registration No.
Trademark/Product Name
Expiration Date
No. (2004) 1485
Xinsheng Luyuan
September 2011
No. (2004) 1542
Xinsheng Lufeng
October 2011
No. (2007) 2968
Xinsheng Huang-jin-gai
December 2010(1)
No. (2007) 2969
Xinsheng Bai-le
December 2010(1)
No. (2007) 2970
Xinsheng Jia-tian-xia
December 2010(1)
(1) Application for renewal pending.
China Green Food Development Center “Green Food” Certification
Although the Company does not produce “Green Food” products, crops grown by farmers with the use of our products may qualify for the “AA green food” designation in the PRC. The green food rating system, which consists of an “A” rating and a more stringent “AA” rating, is overseen by the China Green Food Development Center, an agency under the jurisdiction of the Ministry of Agriculture of the PRC. The “AA” rating indicates that the crops contain minimal chemical residue from fertilizers. While crops grown using our products may qualify for the “AA green food” designation, our products themselves do not bear the “AA green food” designation. We do not incur additional costs in producing products that allow farmers crops to qualify for the “AA green food” designation.
While we believe that we maintain all requisite licenses and permits and are in compliance with all applicable regulations, we may not be able to maintain all requisite licenses and permits and remain in compliance with all applicable regulations. Any failure to satisfy those and other regulatory requirements could have a material adverse effect on our financial condition and results of operations.
Competition
The industry in which we operate is highly competitive. We compete largely on the basis of the quality of our products, which results from our processing and combining raw materials properly. Each of our five product categories has a different blending process and combination of ingredients.
We consider the following companies to be among our primary competitors:
Company Name
Location within PRC
Weifang Xinde Bio-tech Co., Ltd.
Shandong Province
Shaanxi Haide’er Bio-tech Co., Ltd.
Shaanxi Province
Weifang Hengsheng Bio-tech Co., Ltd.
Shandong Province
Zhejiang Lanhai Bio-engineering Co., Ltd.
Zhejiang Province
Aiwo Beijing Agricultural Technology Co., Ltd.
Beijing City
China Green Agriculture, Inc.
Shaanxi Province
Shandong Dongyan Kefeng Bio-tech Co., Ltd.
Shangdong Province
Shandong Tianda Bio-tech Co., Ltd.
Shangdong Province
Guangxi Beihai Guofa Bio-tech Co., Ltd.
Guangxi Province
Intellectual Property
Trademarks
We own the rights to the following registered trademarks in the PRC, which we use in our business and which appear on our product packaging. We do not own the rights to any registered trademarks in the United States.
Trademark
Registration Number
Expiration Date
Xinsheng Shiji
July 2014
Xinsheng Luyuan
September 2015
Xinsheng Lufeng
September 2015
Xinsheng Huang-jin-gai
August 2022
Xinsheng Bai-le
August 2022
Xinsheng Jia-tian-xia
August 2022
New Agriculture - Generator
September 2023
Patents
We own the rights to one patent in the PRC for “Zero-tillage Fertilizing Equipment” (PRC Patent Number: 330398), which is a type of seeding machine, the use of which prevents soil erosion. We do not currently use this patent or the Zero-tillage Fertilizing Equipment in our business. This patent must be renewed every 5 years. We have not yet determined whether and when this patent may be utilized in our business. We do not own the rights to any patents in the United States.
Licensed Rights
We acquired a new product license to produce potassium and magnesium fertilizer on February 14, 2010 at a cost of approximately $117,000. Our license expires in July 2012. We intend to explore other licensing opportunities for existing products in the future.
Research and Development
We have a research and development team consisting of six full time employees and five consultants. This team is responsible for formulating our organic biochemical agricultural application products and developing new products.
We have spent $33,378 and $25,418 on research and development for the years ended December 31, 2010 and 2009, respectively. These expenses relate mostly to the testing of our products.
Reports to Security Holders
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and proxy and information statements and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended. You may read and copy these materials at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding us and other companies that file materials with the SEC electronically.
Item 1A.
Item 1A. Risk Factors.
Not applicable to smaller reporting companies.
Item 1B.
Item 1B. Unresolved Staff Comments.
Not applicable to smaller reporting companies.
Item 2.
Item 2. Properties.
There is no private land ownership in PRC. Land in the PRC is owned by the government and cannot be sold to any individual or entity. Instead, the government grants or allocates landholders a “land use right,” which is sometimes referred to informally as land ownership. Land use rights are granted for specific purposes and for limited periods. Each period may be renewed at the expiration of the initial and any subsequent terms. Granted land use rights are transferable and may be used as security for borrowings and other obligations. Generally speaking, there are four primary ways of obtaining land use rights in the PRC:
·
Grant of the right to use land;
·
Assignment of the right to use land;
·
Lease of the right to use land; and
·
Allocated land use rights.
Xinsheng does not own any land use rights.
As of December 31, 2010, Xinsheng owns its office buildings, valued at cost of RMB 1,665,783 (approximately $252,399), manufacturing facility, valued at cost of RMB 134,400 (approximately $20,364), manufacturing machinery and office equipment, valued at cost of RMB 2,262,319 (approximately $342,787) and vehicles, valued at cost of RMB 1,553,887 (approximately $235,445) based on the exchange rate in effect as of December 31, 2010.
Xinsheng leased its office space (approximately 7,300 square feet) in Building 2, Unit 1, 15th Floor, Ling Xian Xin Cheng, Hi-tech Industrial Development Zone in Xi-an, Shaanxi Province, for an annual rent of RMB 366,390 (approximately $55,515) from Shaanxi Heng Xing Property Management Co., Ltd. The term of the lease was three years and expired on March 31, 2011. The Company terminated this lease on October 1, 2009 after relocating to its new office buildings. On October 1, 2009, the Company signed a new lease with the same landlord for an office space (approximately 344 square feet) at an annual rent of RMB 12,000 (approximately $1,818). This one year lease expired on September 30, 2010. The Company did not renew the lease but reached an oral arrangement with the landlord to continue to use the premises at the same rent.
Xinsheng leases its operating and testing space (approximately 2,600 square feet), located at the Xi’an Vegetable Research Institute, 2 Ouyan Road, Xian, Shaanxi, China, for an annual rent of RMB 38,500 (approximately $5,834). The lease expired on March 31, 2010. The Company did not renew the lease but reached an oral arrangement with the landlord to continue to use the premises at the same rent.
On October 21, 2009, Xinsheng received an approval letter from the Bureau of Foreign Trade and Economic Cooperation of Lantian County of Xinsheng’s application to purchase land use rights in Lantian County to establish “Xinsheng Centennial Industrial Zone”. Xinsheng intends to purchase the land use rights for 66 acres for a term of 30 years. The land use rights purchase cost is expected to be approximately $4,243,000 (28,000,000 RMB). In addition, the estimated cost for relocation of local dwellers is expected to be approximately $309,000 (2,040,000 RMB). As of the filing date of this Form 10-K, the transaction has not yet been finalized due to the delay in processing by the local government.
On November 12, 2010, Xinsheng entered into a Land Leasing Contract with Xi’an Shishang Weiyang Investment & Management, Inc. pursuant to which the Company agreed to lease 24 mu of land (one mu is equivalent to approximately 0.165 acres) located in Zhongcha Village, Petrochemical Road, Weiyang District, Xi’an, China. Pursuant to the terms of the lease, the Company has the right to construct warehouses and processing centers on the land. The Company plans to build a warehouse and distribution center for the Company’s and other organic manufacturers’ products. The term of the lease is twenty-one years, from November 12, 2010 through November 12, 2031. The Company is obligated to pay rent of RMB 360,000 ($54,547) per year. Rent for the first ten years totaling RMB 3,600,000 ($545,472) was paid in November 2010 pursuant to the lease, which amount is being expensed as rent expense using the straight line method over the 10 year period of the prepayment. The annual rental will increase by 12% every three years starting on November 12, 2020. Upon the expiration of the lease, the Company has a right of first refusal with regard to contract renewal.
China Agri’s executive offices in the United States are located at 11 East 86th Street, New York, New York 10028. Michael Segal, one of our directors, allows us to use the space rent free.
We believe that our facilities are suitable for our current operations. However, our expansion plans contemplate the need for additional space as we increase production.
Item 3.
Item 3. Legal Proceedings.
We may be subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time. We are not currently a party to any material litigation or other legal proceedings brought against us. We are also not aware of any legal proceeding, investigation or claim, or other legal exposure that has a more than remote possibility of having a material adverse effect on our business, financial condition or results of operations.
None of our directors, officers, affiliates, or holders of more than 5% of our outstanding shares of common stock, or any associate of such person, is a party adverse to us or any pf our subsidiaries or has a material interest adverse to us or any of our subsidiaries.
Item 4.
Item 4. (Removed and Reserved).
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock has been quoted on the OTC Bulletin Board (“OTCBB”) since October 17, 2007 under the symbol CHBU.OB. The price range per share of common stock presented below represents the highest and lowest intra-day prices for the Company’s common stock as quoted on the OTCBB. Such over-the-counter market quotations may reflect inter-dealer prices, without markup, markdown or commissions and may not necessarily represent actual transactions. Our common stock is traded relatively infrequently and accordingly the market for our common stock may not be indicative of a liquid trading market. The closing price of our common stock as quoted on the OTCBB on March 30, 2011 was $1.51.
Number of Shareholders
As of March 30, 2011, there were 13,118,574 shares of our common stock issued and outstanding and 14 holders of record of our common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of security brokers, dealers, and registered clearing agencies.
All of our common shares held by brokerage firms, banks and other financial institutions in the United States and Canada as nominees for beneficial owners are considered to be held of record by Cede & Co. in respect of brokerage firms, banks and other financial institutions in the United States. Cede & Co. is also considered to be one shareholder of record.
The Company’s transfer agent is Securities Transfer Corporation, 2591 Dallas Parkway, Suite 102, Frisco, TX 75034, telephone number: (469) 633-0101.
Dividends
We have not declared or paid any cash dividends on our common stock. We currently intend to retain all earnings, if any, for use in our business operations and we do not anticipate declaring any dividends in the foreseeable future.
The payment of dividends is contingent on the ability of our PRC based operating subsidiary to obtain approval to send monies out of the PRC. The PRC’s national currency, called the Yuan or Renminbi, is not a freely convertible currency. The PRC government imposes controls on the convertibility of renminbi into foreign currencies and, in certain cases, the remittance of currency out of the PRC.
Securities Authorized for Issuance Under Equity Compensation Plans
We do not currently have any stock option, bonus, profit sharing, pension or similar plan.
Recent Sales of Unregistered Securities
We have not sold any unregistered securities during 2010 that were not previously reported on a Quarterly Report on Form 10-Q or Current Report on Form 8-K.
We did not repurchase any securities in the fourth quarter of 2010.
Item 6.
Item 6. Selected Financial Data.
Not applicable to smaller reporting companies.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our financial statements and notes thereto included in this Form 10-K for the year ended December 31, 2010 filed with the SEC.
Results of Operations
Year Ended December 31, 2010 as compared to Year Ended December 31, 2009
Comparison of Sales for the Years Ended December 31, 2010 and 2009
In 2008, the Company launched a new sales and marketing initiative to establish a closer relationship with farmers through agricultural cooperatives located throughout the rural areas of China. One component of this initiative is called the “Super Chain Sales Partner Program”, which involves stores branded under the name of “Xinsheng Shiji” but owned and managed by third parties. The other is called “Direct Sales Stores”. The Direct Sales Stores were controlled and managed by the Company to December 2010. In December 2010, the Company outsourced operation and ownership of the Direct Sales Stores to subcontractors who bear the risk of operations of the stores. As of December 31, 2010, there were approximately 500 branded and outsourced direct sales stores. The majority of branded and outsourced direct sales stores are located in Shannxi Province (local province); others are located in Hunan and Sichuan provinces. For the year ended December 31, 2010, approximately 75% of revenue was generated from our branded and outsourced direct sales stores, and 25% from traditional sales channels.
Sales by Sales Network
The revenue from branded and outsourced direct sales stores was $9,243,632 in 2010, an increase of $8,209,639, or 794%, compared to $1,033,993 in 2009. The revenue from our national sales network was $3,023,072 in 2010, an increase of $1,018,505, or 51%, compared to $2,004,567 in 2009. We believe that the increase in sales was primarily attributable to the successful implementation of our “New Agriculture-Generator” campaign, which was designed to expand our distribution network and to establish a closer relationship with farmers through agricultural cooperatives in the rural areas of China.
Revenue from our manufactured products was $6,360,315 in 2010, an increase of $3,321,755, or 109%, compared to $3,038,560 in 2009. Revenue from sales of products manufactured by third parties was $5,906,389 in 2010.
Comparison of Gross Profit for the Years Ended December 31, 2010 and 2009
Cost of goods sold for the years ended December 31, 2010 was $6,818,881, an increase of $5,753,282, or 540%, compared to $1,065,599 in 2009. Gross profit was 44% for the year ended December 31, 2010, a decrease of 21 percentage points from 65% for the year ended December 31, 2009. The increase in cost of goods sold and decrease in gross profit margin was attributable to our using third party manufacturers to produce some of the products we sold, which resulted in our selling lower margin products. The gross profit margin of our internally made products was 66% and 65% for the years ended December 31, 2010 and 2009, respectively. The gross profit margin for our retail sales of fertilizer products from other manufacturers in our direct sale stores was 21% for the year ended December 31, 2010.
Comparison of Net Income for the Years Ended December 31, 2010 and 2009
Selling and marketing
Selling and marketing expenses were $1,116,270 for the year ended December 31, 2010, an increase of $903,516, or 425%, compared to $212,754 in 2009. The increase in selling and marketing expense was primarily attributable to the expansion of our market initiatives.
Professional fees
Professional fees consist of audit and review fees, legal and attorney fees, director fees and contracted professional service fees. Professional fees were $176,014 and $228,587 in 2010 and 2009, respectively.
Other General and Administrative Expenses
Other general and administrative expenses generally included: wages and related benefits, research and development expenses, rent and utility expenses, office expenses, bad debt expense, travel and miscellaneous expenses. Other general and administrative expenses were $368,675 in 2010, an increase of $148,576, or 68%, compared to $220,099 in 2009. The increase in other general and administrative expenses was also attributable to the increase in expenses in connection with the expansion of our market iniatives.
Interest expense
Interest expense was $163,175 in 2010, which included amortization of deferred financing costs of $72,732, amortization of fair value of warrants of $54,444, amortization of a beneficial conversion feature of $18,055 and loan interest of $17,944. Most of these expenses were related to the convertible notes issued in September 2008. Interest expense in the same period of 2009 was $225,288.
Net income
Our income from operations was $3,717,468 in 2010, an increase of $2,452,549, or 194%, compared to $1,264,919 in 2009. Net income for the year ended December 31, 2010 was $3,580,790, an increase of $2,526,529, or 240%, compared to net income of $1,054,261 in 2009. The increase in net income primarily resulted from the successful implementation of our “New Agriculture-Generator” campaign, which involved expansion of our outsourced direct sales stores network.
Liquidity and Capital Resources
As of December 31, 2010, 85% of the Company’s assets consisted of cash and cash equivalents, compared to 87% as of December 31, 2009. As of December 31, 2010, our cash and cash equivalents amounted to $13,153,741, an increase of $3,528,084 compared to $9,625,657 as of December 31, 2009.
Net cash provided by operating activities was $3,860,981 and $1,296,338 for the years ended December 31, 2010 and 2009, respectively. The increase resulted from the increase in net income in the year ended December 31, 2010.
Net cash used in investing activities was $977,899 in 2010. During 2010, the Company acquired additional product rights for $121,216 (800,000 RMB) and related machinery and equipment from a vendor for $303,040 (2,000,000 RMB). The Company also spent $8,171 on other equipment. In 2010, the Company paid a prepayment of land lease costs totaling $545,472. During the comparative period of 2009, the Company received total proceeds of $131,760 from the disposal of unused equipment and product rights and spent $126,837 on equipment.
Net cash used in financing activities was $235,951. During 2010, the Company received $501,215 from Mr. Liping Deng, executive officer of the Company, and used the proceeds to repay the $500,000 convertible notes. The advance from Mr. Deng is interest free and due on demand. In addition, the Company repaid $5,264 towards the long term loan. On December 17, 2010, the Company received proceeds of $240,000 from the exercise of 160,000 Series C warrants at $1.50 per share. Net cash used in financing activities was $2,803 in 2009.
Foreign currency translation
Xinsheng’s functional currency is the Chinese Yuan, or Renminbi (“RMB”). Our financial position and results of operations (reported in U.S. Dollars) are affected by changes in RMB exchange rates.
Tax-exempt status in the PRC
Xinsheng is subject to a 25% standard enterprise income tax in the PRC. However, due to Xinsheng’s agricultural activities, the National Tax Bureau in Xi’an High-Tech Development Zone has granted Xinsheng annual exemptions from this tax for the year ending December 31, 2010.
For purposes of comparison, had we been subject to the 25% tax, our operating cash flow and net income for the years ended December 31, 2010 and 2009 would each have been reduced by approximately $985,657 and $385,235, respectively.
Private Placement of Convertible Notes and Warrants
On September 29, 2008, the Company completed the sale of 3% unsecured convertible notes in an aggregate principal amount of $500,000, and Series C warrants to purchase 500,000 shares of common stock, to two accredited investors. The Company received net proceeds of $431,500 after the deduction of Placement Agent commissions of $40,000, Placement Agent expense allowance of $25,000, and an escrow agent fee of $3,500.
The Notes matured two years from the date of issuance and bore interest at the rate of 3% per annum, which was payable annually in cash or in shares of common stock, subject to approval of the holder. Overdue interest was to bear interest at the rate of 15% per annum. Overdue principal was to bear interest at the rate of 8% per annum. The Notes were convertible at the option of the holder into the common stock of the Company at an initial conversion price of $0.50 per share. The conversion price was subject to adjustment upon the occurrence of stock splits, combinations, dividends and subsequent offerings.
The Series C warrants have a term of three years and are exercisable into shares of common stock at an exercise price of $1.50 per share. Upon exercise of a Series C warrant, in addition to receiving shares of common stock, each Series C warrant holder shall be issued a Series D warrant to purchase additional shares of common stock in an amount equal to the number of Series C warrants exercised. The Series D warrants, if issued, shall have a term of three years and an exercise price of $2.00 per share. The exercise price of the warrants is subject to adjustment upon the occurrence of stock splits, combinations, dividends and subsequent offerings, as set forth in the warrants.
The Company may call for the termination of any unexercised portion of the Series C warrants upon consummation of a subsequent offering by the Company of not less than $7,500,000 in gross proceeds and upon 30 days written notice to the holders. Upon termination of any unexercised Series C warrants, the warrant holders will not receive any Series D warrants, any shares underlying the Series C or Series D warrants, or any other securities.
In connection with the transaction, the Company agreed to prepare and file a registration statement with the Securities and Exchange Commission (the “SEC”) within 60 days following the final closing date. In addition, if the registration statement was not declared effective within 120 days from the filing date, the Company was subject to monthly cash liquidated damages payments equal to 2% of the purchase price paid by each investor, subject to a maximum of 24%. On February 13, 2009, the Company filed a registration statement on Form S-1 to register the shares underlying the convertible notes and warrants. In response to SEC comment letters, the Company filed amendments to the registration statement on Form S-1. The Company and the investors entered into agreements extending the date that the Form S-1 was required to become effective to October 30, 2009. The registration statement on Form S-1 was declared effective on November 16, 2009. The Company accrued $734 liquidated damages under the registration rights agreement payable to the investors as of November 16, 2009.
The Company recorded the $149,615 relative fair value of the warrants ($78,136 for the Series C warrants; $71,479 for the Series D warrants) and the $49,615 intrinsic value of the beneficial conversion feature as additional paid in capital.
The $149,615 fair value of the Series C and Series D warrants was calculated using a Black-Scholes option pricing model and the following assumptions: risk-free interest rate of 2.26%; expected stock price volatility of 130.69%; stock price of $0.40 per share; exercise price of $1.50 per share for the Series C warrants and $2.00 per share for the Series D warrants; and term of 3 years.
In connection with the private placement, the placement agent received warrants to purchase 80,000 shares of the Company’s common stock at an exercise price of $1.00 per share for a term of three years. The $19,920 fair value of these warrants (calculated using the same assumptions described above except for the exercise price) was charged to deferred financing costs and added to additional paid in capital. On October 9, 2009, the Company issued warrants to purchase 1,000 shares of the Company’s common stock at an exercise price of $1.00 per share for a term of three years for services rendered and waiving registration rights. The $426 fair value of these warrants (calculated using the same assumptions described above except for the exercise price) was charged to current financing cost and added to additional paid in capital.
On September 29, 2010, the maturity date of the Convertible Notes, the Company repaid the Notes principal of $500,000 together with the interest accrued on the Notes in the amount of $15,000.
On December 17, 2010, the investors exercised 160,000 Series C Warrants at a price of $1.50 per share. The Company received $240,000 in cash and issued 160,000 shares of common stock to the investors.
Long-term Debt
Long-term debt represents mortgages payable to Xian Commerce Bank in connection with Xinsheng’s acquisition of two units in a building in August 2009 (see Note 4). The mortgages, which had a total initial balance of $121,216 (800,000 RMB), are secured by the units, bear interest at an annual rate of 6.53% and are due in monthly installments of interest and principal of approximately $1,378 (9,097 RMB) to August 6, 2019.
Expansion plan
On October 21, 2009, Xinsheng received an approval letter from the Bureau of Foreign Trade and Economic Cooperation of Lantian County of Xinsheng’s application to purchase land use rights in Lantian County to establish “Xinsheng Centennial Industrial Zone”. Xinsheng intends to purchase the land use rights for 66 acres for a term of 30 years. The land use rights purchase cost is expected to be approximately $4,243,000 (28,000,000 RMB). In addition, the estimated cost for relocation of local dwellers is expected to be approximately $309,000 (2,040,000 RMB). We intend to pay such amounts through cash generated from operations. As of the filing date of this Form 10-K, the transaction has not yet been finalized due to the delay in processing by the local government.
On November 12, 2010, Xinsheng entered into a Land Leasing Contract with Xi’an Shishang Weiyang Investment & Management, Inc. pursuant to which the Company agreed to lease 24 mu of land (one mu is equivalent to approximately 0.165 acres) located in Zhongcha Village, Petrochemical Road, Weiyang District, Xi’an, China. Pursuant to the terms of the lease, the Company has the right to construct warehouses and processing centers on the land. The Company plans to build a warehouse and distribution center for the Company’s and other organic manufacturers’ products. The term of the lease is twenty-one years, from November 12, 2010 through November 12, 2031. The Company is obligated to pay rent of RMB 360,000 ($54,547) per year. Rent for the first ten years totaling RMB 3,600,000 ($545,472) was paid in November 2010 pursuant to the lease, which amount is being expensed as rent expense using the straight line method over the 10 year period of the prepayment. The annual rental will increase by 12% every three years starting on November 12, 2020. Upon the expiration of the lease, the Company has a right of first refusal with regard to contract renewal.
Sources of Liquidity
We presently do not have any available credit, bank financing or other external sources of liquidity. We believe that our existing cash resources will be sufficient to meet our existing operating requirements for the foreseeable future. However, we are seeking opportunities to expand our manufacturing and distribution capabilities in the PRC that may require an investment beyond our existing cash resources. Accordingly, we expect that we will require additional funding through additional equity and/or debt financings. However, there can be no assurance that any additional financing will become available to us, and if available, on terms acceptable to us.
The exercise of our outstanding warrants into shares of common stock would have a dilutive effect on our common stock, which could in turn reduce our ability to raise additional funds on favorable terms. In addition, the subsequent sale on the open market of any shares of common stock issued upon exercise of our outstanding warrants could impact our stock price which could in turn reduce our ability to raise additional funds on favorable terms.
Any financing, if available, may involve restrictive covenants that may impact our ability to conduct our business or raise additional funds on acceptable terms. If we are unable to raise additional capital when required or on acceptable terms, we may have to delay, scale back or discontinue our expansion plans and our business may be adversely affected.
Critical Accounting Policies and Estimates
Financial Reporting Release No. 60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, published by the SEC, recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements. Policies determined to be critical are those policies that have the most significant impact on our consolidated financial statements and require management to use a relatively greater degree of judgment and estimates. Actual results may differ from those estimates.
General
The Company’s Consolidated Financial Statements are prepared in accordance with U.S. Generally Accepted Accounting Principles, which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
For revenue from product sales, the Company recognizes revenue when: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgment regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.
Allowance for Doubtful Accounts
The Company’s receivables primarily consist of accounts receivable from its customers. Accounts receivable are recorded at invoiced amounts and generally do not bear interest. The Company performs ongoing credit evaluations of its customers’ financial condition, but generally does not require collateral to support customer receivables. The credit risk is controlled through credit approvals, limits and monitoring procedures. The Company establishes an allowance for doubtful accounts based upon historical experience, management’s evaluation of the outstanding accounts, age of receivables and other factors. As of December 31, 2010, the allowance for doubtful accounts totaled $8,248. It is equivalent to 8% of the balance of accounts receivable.
Long-Lived Assets
The Company has adopted Financial Accounting Standards Board (“FASB) Accounting Standards Codification (“ASC”) 350. ASC 350 requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted discounted cash flows. Should impairment in value be indicated, the carrying value of long-lived assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 350 also requires assets to be disposed of to be reported at the lower of the carrying amount or the fair value less costs to sell.
Recently Adopted Accounting Standards
In February 2010, the Company adopted an amendment to previously adopted accounting guidance on subsequent event disclosure, which established standards of accounting for and disclosure of events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued. Under the amended guidance, the Company is no longer required to disclose the date through which subsequent events have been evaluated. The adoption of this requirement did not have a material impact on the Company’s financial condition or results of operations.
We adopted the accounting principles established by ASU 2009-17, Consolidations: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, effective January 1, 2010. This ASU requires an ongoing reassessment and replaces the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity (“VIE”) with a primarily qualitative analysis. The qualitative analysis is based on identifying the party that has both the power to direct the activities that most significantly impact the VIE’s economic performance (the “power criterion”) and the obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE (the “losses/benefit criterion”). The party that meets both these criteria is deemed to have a controlling financial interest. The party with the controlling financial interest is considered to be the primary beneficiary and as a result is required to consolidate the VIE. The adoption of this new guidance did not have a material effect on our financial statements.
Recently Issued Accounting Standards
In January 2010, the Financial Accounting Standards Board issued guidance which expands the required disclosures about fair value measurements. This guidance requires disclosures about transfers of investments between levels in the fair value hierarchy and disclosures relating to the reconciliation of fair value measurements using significant unobservable inputs (level 3 investments). This guidance is effective for the Company as of January 1, 2011. The adoption of this guidance will not have a material impact on its financial condition or results of operations.
In April 2010, the FASB issued ASU 2010-13, “Compensation-Stock Compensation (Topic 718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force,” or ASU 2010-13. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update do not expand the recurring disclosures required by Topic 718. Disclosures currently required under Topic 718 are applicable to a share-based payment award, including the nature and the term of share-based payment arrangements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The adoption of this guidance will not have a material impact on its financial condition or results of operations.
Certain other accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective and have not yet been adopted by the Company. The impact on the Company’s financial position and results of operations from adoption of these standards is not expected to be material.
Inflation
There has been no material impact of inflation on our continuing operations for the past two years.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable to smaller reporting companies.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Our audited consolidated financial statements at and for the fiscal years ended December 31, 2009 and 2010, together with the related notes thereto, have been included in this annual report beginning on page. By this reference, we have incorporated by reference these financial statements into this annual report in response to this Item 8. As a smaller reporting company, we have omitted supplementary data from our consolidated financial statements.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of the Company's management, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) were effective as of December 31, 2010.
Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Company’s management, including the Company’s principal executive officer and principal financial officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment, management believes that, as of December 31, 2010, the Company’s internal control over financial reporting was effective.
Management’s report is not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report.
Changes in Internal Controls over Financial Reporting
There were no changes in the Company’s internal controls over financial reporting during the quarter ended December 31, 2010 that have materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.
Item 9B.
Item 9B. Other Information.
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance.
The following are the officers and directors of China Agri, Meixin, and Xinsheng.
Directors and Executive Officers of China Agri:
NAME
POSITION
AGE
Liping Deng
Director, Chief Executive Officer and President
Limin Deng
Chairman of Board of Directors
Xiaolong Zhou
Chief Financial Officer
Michael Segal
Director
Directors and Executive Officers of Meixin:
NAME
POSITION
AGE
Liping Deng
Chairman of Board of Directors
Limin Deng
Vice-Chairman of Board of Directors
Zhengfeng Guo
Director
Directors and Executive Officers of Xinsheng:
NAME
POSITION
AGE
Liping Deng
Director and President
Limin Deng
Chairman of Board of Directors
Hong Cai
Director and Finance Manager
Yi Fu
Director and Vice President
Mengzhou Li
Director
Mr. Liping Deng was appointed as our Director, President and Chief Executive Officer on June 26, 2006. He has been a Director and President of Xinsheng since 2002 and Chairman of Board of Directors of Meixin since March 2006. Prior to joining us, Mr. Deng served as a senior manager at Xianyang Tong Lida Electronic Communication Co., Ltd. from 1996 to 1998. Prior to that, Mr. Deng served as President of the Worker's Union in Xianyang Pottery Factory from 1991 to 1995. Mr. Deng obtained a technical secondary school degree from Xi'an Construction Company Pottery Technology School. Mr. Liping Deng is the brother of Mr. Limin Deng. Mr. Deng’s day to day leadership as our President and Chief Executive Officer brings to our Board of Directors an intimate knowledge of our operations. Mr. Deng also offers extensive business experience in the PRC, excellent business negotiation skills and extensive professional investment experience.
Mr. Limin Deng was appointed as our Director on June 26, 2006. He founded Xinsheng in 2002 and served as Chairman of Xinsheng since that time. Mr. Deng is the Vice Chairman of the Board of Directors of Meixin. Prior to joining us, he served as a security manager in the Xi'An Electronic Technology University for six years. He founded Shaanxi Xinsheng Weiye Technology Development Co., Ltd. in 2001, which has been liquidated. He obtained a junior college degree in Economic Management from the Continuous Education College of Xi'an Electronic Technology University. Mr. Limin Deng is the brother of Mr. Liping Deng. Mr. Deng brings to our Board of Directors an extensive understanding of the business and operations of Xinsheng, our operating company in the PRC. Mr. Deng offers excellent business negotiation skills, extensive professional management experience, and also brings extensive knowledge of the legal and regulatory regimes in the PRC.
Mr. Xiaolong Zhou was appointed as our Chief Financial Officer in April 1, 2007. Prior to his appointment, he had been a senior accountant in Liss Okou Goldstein Okun and Tancer CPA'S P.C. in Great Neck, New York for the prior nine years. He is a certified public accountant, registered in the state of New York, a member of American Institute of Certified Public Accountants, and a member of New York State Society of Certified Public Accountants. Mr. Zhou obtained an M.B.A. in accountancy degree from Baruch College of CUNY and an M.A. in economics degree from City College of CUNY. He obtained a B.A. in economics degree from Fudan University, Shanghai, China.
Mr. Michael Segal was appointed as our Director on June 8, 2006. He is President, General Securities Principal, an Options Compliance Principal and an Investment Banking Representative of Halcyon Cabot Partners LTD., a member of the Financial Industry Regulatory Authority (FINRA) since January 2010. From 2006 to 2009 and 2003 to 2005 Mr. Segal was a Principal, Option Compliance Principal and Branch Manager of Whitaker Securities LLC. Mr. Segal is also individually registered as a Commodity Trading Advisor with the Commodity Futures Trading Commission and is a founding member of the Managed Funds Association. Mr. Segal received a B.B.A. in marketing and economics from the University of Miami in Florida. Mr. Segal sits on the board of directors of the following privately held companies: China Chanfang Pharmaceuticals Inc.; International American Capital Inc. and Segal Cirone Services Inc. Mr. Segal also sits on the board of directors of the following publicly held company: Asia Carbon Industries Inc. (ACRB.BB); China Printing & Packaging Inc.(CHPI.BB); China Pharmaceuticals Inc.(CFMI.BB); China Power Equipment Company Inc.(CPQQ.BB); and DK Sinopharma Inc.(DKSP.BB). From March 2007 until December 2009, Mr. Segal was a member of the board of directors of Biostar Pharmaceuticals Inc.(BSPM) Mr. Segal brings to our Board of Directors his expertise in the financial and equity markets and his years of experience providing strategic and financial advisory services to complex international organizations. Mr. Segal also provides unique perspective as our only U.S. director.
Ms. Hong Cai was appointed as a director of Xinsheng in 2008. Ms. Cai has served as finance manager for Xinsheng since 2005. Previously, Ms. Cai acted as finance manager for Xi’an Labor Insurance Company.
Mr. Zhengfeng Guo was appointed as a director of Meixin in November 2007. Prior to that, he was industry supervisor of Shaanxi Xinsheng Centennial Agriculture & Technology Co., Ltd. in the PRC from 2001 to 2007. He obtained his bachelor degree in marketing management from Shaanxi Finance & Economics college in the PRC.
Mr. Yi Fu was appointed as a Director and Vice President of Xinsheng in 2008. Prior that, he served as sales manager of Xinsheng. Mr. Fu graduated from Shaanxi Mechanical and Electrical Industry College in 1995.
Mr. Mengzhou Li was appointed as a Director of Xinsheng in 2009. Prior that, he was a Vice-Manager of Jiahui Group. He obtained his dealer certificate of Shanghai Stock Exchanges in 2001.
According to our By-laws, the term of our directors is from the date of their appointment or election until the next annual meeting of shareholders or until his or her successor shall have been elected and qualified. The terms for our principal executive officers are one year, and they serve at the discretion of our board of directors.
Family Relationships
Mr. Limin Deng and Mr. Liping Deng are brothers. There are no other family relationships between any director or executive officer.
Involvement in Certain Legal Proceedings.
None of the Company’s directors or executive officers have been involved in any proceeding described in Item 401(f) of Regulation S-K during the last 10 years.
Director Independence
Michael Segal is an independent director as that term is defined in the Nasdaq Stock Market, Inc. Marketplace Rules.
Our Board of Directors does not presently have a majority of independent directors. In the absence of a majority of independent directors, our executive officer, who is also a principal stockholder and director, could establish policies and enter into transactions without independent review and approval thereof. This could present the potential for a conflict of interest between the Company and its stockholders generally and the controlling officers, stockholders or directors.
Committees of the Board of Directors
We do not currently have separately designated audit, nominating or compensation committees, or committees performing similar functions. Shares of our common stock are not listed on any national securities exchange, and thus we are not subject to the SEC’s or any exchange’s rules requiring standing committees or independent directors. Since October 17, 2007, our common stock has been quoted on the OTCBB, which does not currently have requirements as to the maintenance of standing committees or the independence of our board members. We are not, and in the past have not been, subject to any specific corporate governance guidelines or rules imposing requirements on the independence of our directors or committee members. Given the fact that our board of directors currently consists of three members, our board of directors determined that it was not appropriate to designate separate committees of the board of directors. The board of directors as a whole is responsible for fulfilling the duties which would otherwise be delegated to such committees.
At some future time, we may seek to have our common stock or other securities quoted on a tier of a national securities exchange. In so doing, we will reevaluate the need to have independent directors on our board and on standing committees, in light of applicable corporate governance rules and corporate best practices. At the present time, our board of directors is collectively responsible for analyzing and evaluating our financial statements and our internal controls and procedures for financial reporting, and for acting as our compensation and nominating committee.
Code of Ethics
We intend to adopt a Code of Business Conduct and Ethics in the near future that applies to our principal executive officer, principal financial officer and principal accounting officer.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, requires our executive officers, directors and persons who beneficially own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. These executive officers, directors, and greater than 10% beneficial owners are required by SEC regulation to furnish us with copies of all Section 16(a) forms filed by such reporting persons.
Based solely on our review of such forms furnished to us and written representations from certain reporting persons, we believe that all filing requirements applicable to our executive officers, directors, and greater than 10% beneficial owners were complied with for the year ended December 31, 2010.
Item 11.
Item 11. Executive Compensation.
Summary Compensation Table
The following table sets forth all compensation awarded to, or earned by, our principal executive officer. None of our executive officers were paid compensation in excess of $100,000 during 2010 or 2009.
(1) Based on the rounded currency exchange rate in effect as of December 31, 2010 ($1 = approximately RMB 6.60).
We do not have written employment agreements with our executive officers. Under PRC employment laws, if an employer and employee do not enter into a written employment agreement within one year, they are deemed to have entered into a de facto employment contract with an open (indefinite) term. In the absence of an employment contract, an employer remains obligated to participate in the PRC’s social insurance programs on behalf of the employee, including pension, medical, unemployment, occupational accident/disability, and maternity insurance. We can terminate the de facto employment contract by informing an executive officer of termination at least one month prior to the termination date or terminate an executive officer effective immediately and agree to pay one month’s salary. Mr. Liping Deng, our executive officer other than Mr. Zhou, is considered to have a de facto employment contract under PRC law.
Outstanding Equity Awards at Fiscal Year End
We do not currently have a pension plan, stock option plan, non-equity incentive plan or deferred compensation arrangement. We may implement a more comprehensive compensation program in the future, which will incorporate elements of compensation including, but will not be not limited to, non-cash and other equity-based compensation such as stock options.
Director Compensation
The compensation of our directors is determined on a case by case basis. The factors considered by the Company for the purpose of determining director compensation include, but are not limited to: the director’s relevant work experience; the number of years the director has served as a director of the Company, and; the director’s overall contributions to the Company, including the amount of time devoted to the Company by the director. The Company has not established a maximum fee for its directors.
Effective January 1, 2008, Michael Segal is paid cash compensation at the rate of $1,500 per month, or $18,000 annually, for his services as director.
Mr. Limin Deng receives no compensation for his services as a director.
Our Chief Executive Officer, Liping Deng, does not receive any additional compensation for his services as director above and beyond his salary as an officer.
The following table sets forth compensation paid to each named director during the year ended December 31, 2010.
(1) Based on the rounded currency exchange rate in effect as of December 31, 2010 ($1 = approximately RMB 6.60).
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth information regarding the beneficial ownership of our common stock as of March 30, 2011 by:
·
each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock;
·
each of our officers and directors; and
·
all our officers and directors as a group.
Based on information available to us, all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them, unless otherwise indicated. Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended. In computing the number of shares beneficially owned by a person or a group and the percentage ownership of that person or group, shares of our common stock subject to options or warrants currently exercisable or exercisable within 60 days after the date of this Annual Report are deemed outstanding, but are not deemed outstanding for the purpose of computing the percentage of ownership of any other person. Applicable percentage ownership is based upon 13,118,574 shares of common stock outstanding as of March 30, 2011.
Unless otherwise indicated, the address of each individual named below is c/o China Agri-Business, Inc. Building 2, Unit 1, 15th Floor, Ling Xian Xin Cheng, 86 Gaoxin Road, Hi-Tech Industrial Development Zone, Xian, Shannxi, China 710065.
* Less than 1%
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Director Independence
Michael Segal is an independent director as that term is defined in the Nasdaq Stock Market, Inc. Marketplace Rules.
Our Board of Directors does not presently have a majority of independent directors. In the absence of a majority of independent directors, our executive officer, who is also a principal stockholder and director, could establish policies and enter into transactions without independent review and approval thereof. This could present the potential for a conflict of interest between the Company and its stockholders generally and the controlling officers, stockholders or directors.
During 2010, the Company received $501,215 from Mr. Liping Deng, chief executive officer of the Company, and used the loan to repay $500,000 in convertible notes. The advance from Mr. Deng is interest-free and due on demand.
Item 14.
Item 14. Principal Accounting Fees and Services.
The following table sets forth the fees accrued or paid to the Company's independent registered public accounting firm during fiscal years 2010 and 2009. The Company’s financial statements for those years were audited by Michael T. Studer, CPA, P.C.
(1) Audit fees are fees for services provided in connection with the audits of the Company's annual financial statements and quarterly reviews of interim quarterly financial statements, as well as audit provided in connection with other statutory and regulatory filings.
(2) Audit-related fees are aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the financial statements and are not otherwise reported as Audit fees.
(3) Tax fees are aggregate fees billed for professional services rendered for tax compliance, tax advice, and tax planning.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules.
1. List of Consolidated Financial Statements. The consolidated financial statements and the accompanying notes of China Agri-Business, Inc., have been included in this Report on Form 10-K beginning on page:
2. All financial statement schedules are omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the respective financial statements or notes thereto contained herein.
3. List of Exhibits filed in accordance with Item 601 of Regulation S-K. The warranties, representations and covenants contained in the agreements, documents and other instruments included or incorporated by reference herein or which appear as exhibits hereto should not be relied upon by buyers, sellers or holders of the company’s securities and are not intended as warranties, representations or covenants to any individual or entity except as specifically set forth in such agreements, documents and other instruments. The following exhibits are incorporated by reference in, or filed with, this Report on Form 10-K:
Exhibit
No.
Description
3.1
Articles of Incorporation (1)
3.2
Bylaws (1)
3.3
Articles of Incorporation, as amended (1)
4.1
Form of 3% Convertible Note (2)
4.2
Form of Series C Warrant (2)
4.3
Form of Series D Warrant (2)
4.4
Form of 2007 Underwriter Warrant (3)
4.5
Form of 2009 Placement Agent Warrant (3)
4.6
Form of Warrant issued to Legend Merchant Group dated October 9, 2009. (7)
9.1
Voting Trust and Escrow Agreement with Xinsheng Shareholders and their trustee dated April 22, 2006. (1)
10.1
Stock Purchase Agreement between China Agri-Business, Inc. and Xinsheng Shareholders dated April 22, 2006. (1)
10.2
Management Agreement between Xinsheng and Meixin dated April 18, 2006. (1)
10.3
Form of Subscription Agreement. (2)
10.4
Form of Registration Rights Agreement. (2)
10.5
Placement Agent Agreement. (4)
10.6
Business Advisory Agreement. (6)
10.7
Letter agreement dated as of August 12, 2009 among China Agri-Business, JAG Multi-Investment, LLC and Keith Guenther. (5)
10.8
Letter agreement dated as of June 12, 2009 among China Agri-Business, JAG Multi-Investment, LLC and Keith Guenther. (7)
10.9
Letter agreement dated as of October 12, 2009 among China Agri-Business, JAG Multi-Investment, LLC and Keith Guenther. (7)
10.10
Investor and Media Relations Service Agreement, dated as of March 31, 2010, between China Agri-Business, Inc. and Christensen International Limited. (8)
21.1
Subsidiaries (1)
31.1
Certification by Chief Executive Officer pursuant to Sarbanes Oxley Section 302.*
31.2
Certification by Chief Financial Officer pursuant to Sarbanes Oxley Section 302.*
32.1
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350.*
32.2
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350.*
(1) Incorporated by reference to the Form SB-2 (File No. 333-140118) filed on January 19, 2007.
(2) Incorporated by reference to the Form 8-K filed on October 3, 2008.
(3) Incorporated by reference to the Form S-1 (File No. 333-157346) filed on February 13, 2009.
(4) Incorporated by reference to the Form S-1/A (File No. 333-157346) filed on June 16, 2009.
(5) Incorporated by reference to the Form 10-Q filed on August 14, 2009.
(6) Incorporated by reference to the Form S-1/A (File No. 333-157346) filed on August 28, 2009.
(7) Incorporated by reference to the Form S-1/A (File No. 333-157346) filed on November 12, 2009.
(8) Incorporated by reference to the Form 8-K filed on April 8, 2010.
* Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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 registrant and in the capacities and on the dates indicated.
Name and Signature
Capacity
Date
/s/ Liping Deng
President, Chief Executive Officer and Director
March 31, 2011
Liping Deng
(Principal Executive Officer)
/s/ Xiaolong Zhou
Chief Financial Officer (Principal Financial Officer
March 31, 2011
Xiaolong Zhou
and Principal Accounting Officer)
/s/ Limin Deng
Director
March 31, 2011
Limin Deng
/s/ Michael Segal
Director
March 31, 2011
Michael Segal
EXHIBIT INDEX
Exhibit
No.
Description
3.1
Articles of Incorporation (1)
3.2
Bylaws (1)
3.3
Articles of Incorporation, as amended (1)
4.1
Form of 3% Convertible Note (2)
4.2
Form of Series C Warrant (2)
4.3
Form of Series D Warrant (2)
4.4
Form of 2007 Underwriter Warrant (3)
4.5
Form of 2009 Placement Agent Warrant (3)
4.6
Form of Warrant issued to Legend Merchant Group dated October 9, 2009. (7)
9.1
Voting Trust and Escrow Agreement with Xinsheng Shareholders and their trustee dated April 22, 2006. (1)
10.1
Stock Purchase Agreement between China Agri-Business, Inc. and Xinsheng Shareholders dated April 22, 2006. (1)
10.2
Management Agreement between Xinsheng and Meixin dated April 18, 2006. (1)
10.3
Form of Subscription Agreement. (2)
10.4
Form of Registration Rights Agreement. (2)
10.5
Placement Agent Agreement. (4)
10.6
Business Advisory Agreement. (6)
10.7
Letter agreement dated as of August 12, 2009 among China Agri-Business, JAG Multi-Investment, LLC and Keith Guenther. (5)
10.8
Letter agreement dated as of June 12, 2009 among China Agri-Business, JAG Multi-Investment, LLC and Keith Guenther. (7)
10.9
Letter agreement dated as of October 12, 2009 among China Agri-Business, JAG Multi-Investment, LLC and Keith Guenther. (7)
10.10
Investor and Media Relations Service Agreement, dated as of March 31, 2010, between China Agri-Business, Inc. and Christensen International Limited. (8)
21.1
Subsidiaries (1)
31.1
Certification by Chief Executive Officer pursuant to Sarbanes Oxley Section 302.*
31.2
Certification by Chief Financial Officer pursuant to Sarbanes Oxley Section 302.*
32.1
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350.*
32.2
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350.*
(1) Incorporated by reference to the Form SB-2 (File No. 333-140118) filed on January 19, 2007.
(2) Incorporated by reference to the Form 8-K filed on October 3, 2008.
(3) Incorporated by reference to the Form S-1 (File No. 333-157346) filed on February 13, 2009.
(4) Incorporated by reference to the Form S-1/A (File No. 333-157346) filed on June 16, 2009.
(5) Incorporated by reference to the Form 10-Q filed on August 14, 2009.
(6) Incorporated by reference to the Form S-1/A (File No. 333-157346) filed on August 28, 2009.
(7) Incorporated by reference to the Form S-1/A (File No. 333-157346) filed on November 12, 2009.
(8) Incorporated by reference to the Form 8-K filed on April 8, 2010.
* Filed herewith.
CHINA AGRI-BUSINESS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of China Agri-Business, Inc.
I have audited the accompanying consolidated balance sheets of China Agri-Business, Inc. and subsidiaries (the “Company”) as of December 31, 2010 and 2009 and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. My responsibility is to express an opinion on these financial statements based on my audits.
I conducted my audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Agri-Business, Inc. and subsidiaries as of December 31, 2010 and 2009 and the results of their operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.
/s/Michael T. Studer CPA P.C.
Michael T. Studer CPA P.C.
Freeport, New York
March 31, 2011
China Agri-Business, Inc.
Consolidated Balance Sheets December 31, 2010 and 2009
The accompanying notes are an integral part of these financial statements.
China Agri -Business, Inc.
Consolidated Statements of Income and Comprehensive Income
For the Years Ended December 31, 2010 and 2009
The accompanying notes are an integral part of these financial statements.
China Agri -Business, Inc.
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 2010 and 2009
The accompanying notes are an integral part of these financial statements.
China Agri -Business, Inc.
Consolidated Statements of Cash Flows
For the Years December 31, 2010 and 2009
The accompanying notes are an integral part of these financial statements.
CHINA AGRI-BUSINESS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
China Agri-Business, Inc. (“China Agri” or the “Company”) was incorporated in the State of Maryland on December 7, 2005. On October 31, 2006, China Agri effectuated a 2.032 to 1 forward stock split. All share and per share amounts have been retroactively adjusted to reflect the stock split.
China Agri is a holding company with no operations other than acting as a holding company for its wholly owned subsidiary, Mei Xin Agri Technology (Shaanxi) Co., Ltd. (“Meixin”), a limited liability company and a wholly-owned foreign enterprise (“WOFE”) organized under the laws of the People’s Republic of China (the “PRC”) on March 24, 2006. Meixin acts as a management company for our operating business in the PRC, Shaanxi Xin Sheng Centennial Agricultural and Technology Co., Ltd. (“Xinsheng”), a corporation formed under the laws of the PRC on April 22, 2002, in accordance with the terms of a management entrustment agreement between Meixin and Xinsheng. Meixin controls Xinsheng's business and management, and is entitled to the proceeds of Xinsheng's business and is obligated to fund Xinsheng’s operations, including any losses. China Agri and Meixin do not own any equity rights in Xinsheng.
Pursuant to a Management Entrustment Agreement dated April 18, 2006 between Meixin and Xinsheng, and a Stock Purchase Agreement dated April 22, 2006 between China Agri and Xinsheng (collectively, the “Transaction”), China Agri issued 10,950,897 shares of China Agri common stock, representing approximately 89% of the 12,278,774 shares of China Agri common stock outstanding immediately after the Transaction, to a trustee of a trust for the benefit of the Xinsheng stockholders. The Transaction was accounted for as a “reverse merger”, since the stockholders of Xinsheng owned a majority of China Agri’s common stock immediately following the Transaction. Xinsheng was deemed to be the acquirer in the reverse merger. Consequently, the assets and liabilities and the historical operations that are reflected in the financial statements prior to the Transaction are those of Xinsheng and are recorded at the historical cost basis of Xinsheng, and the consolidated financial statements after completion of the Transaction include the assets and liabilities of China Agri, Meixin, and Xinsheng (collectively, the “Company”), historical operations of Xinsheng, and operations of China Agri and Meixin from the date of the Transaction.
China Agri-Business, Inc., through its operating company in China, manufactures and sells non-toxic fertilizer, bactericide and fungicide products used for farming in the People’s Republic of China (the “PRC”). Crops grown with our products are eligible to qualify for the “AA Green Food” rating administered by the China Green Food Development Center, an agency under the jurisdiction of the Ministry of Agriculture of the PRC. Also, Xinsheng sells third party products through its direct sales stores (see Note 14).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of China Agri, Meixin and Xinsheng. All significant intercompany accounts and transactions have been eliminated in consolidation.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, net, other receivables, accounts payable and accrued liabilities, long-term debt, and convertible notes, net. The fair value of these financial instruments approximate their carrying amounts reported in the consolidated balance sheets due to the short term maturity of these instruments or by comparison to other instruments with similar terms.
Foreign Currency Transactions and Comprehensive Income
The functional currency of China Agri is the United States dollar. The functional currency of Xinsheng and Meixin is the RMB. The reporting currency of the Company is the United States dollar.
The assets and liabilities of Xinsheng and Meixin are translated into United States dollars at period-end exchange rates ($0.15152 and $0.1465 at December 31, 2010 and 2009, respectively). The revenues and expenses are translated into United States dollars at average exchange rates for the periods ($0.14774 and $0.14474 for the years ended December 31, 2010 and 2009, respectively). Resulting translation adjustments are recorded as a component of accumulated other comprehensive income within stockholders’ equity.
Transaction gains or losses arising from exchange rate fluctuation on transactions denominated in a currency other than the functional currency are included in the consolidated results of operations. There are no material foreign currency transaction gains or losses for the years ended December 31, 2010 and 2009.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and such differences may be material to the financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, cash on deposit with banks, and highly liquid debt investments with a maturity of three months or less when purchased.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or market.
Property, Plant and Equipment, Net
Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the respective assets.
Intangible and Other Long-Lived Assets, Net
Intangible and other long-lived assets are stated at cost, less accumulated amortization and impairments. The intangible assets are being amortized over their expected useful economic lives ranging from 5 to 10 years.
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, the Company measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, the Company would recognize an impairment loss based on the fair value of the assets.
Revenue Recognition
Sales of products are recorded when title passes to the customer, which is generally at time of shipment. The Company performs ongoing credit evaluations of its customers’ financial condition, but generally does not require collateral to support customer receivables. The credit risk is controlled through credit approvals, limits and monitoring procedures. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other factors. Accounts receivable are charged against the allowance for doubtful accounts once all collection efforts have been exhausted. The Company does not routinely permit customers to return product.
Delivery and other transportation costs are included in selling, general and administrative expenses.
Stock-Based Compensation
Stock-based compensation is accounted for at fair value in accordance with FASB Accounting Standards Codification (“ASC”) topic 718-10, Stock Compensation. In addition to requiring supplemental disclosures, FASB ASC 718 addresses the accounting for share-based payment transactions in which a company receives goods or services in exchange for (a) equity instruments of the company or (b) liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. FASB ASC 718 focuses primarily on accounting for transactions in which a company obtains employee services in share-based payment transactions.
References to the issuances of restricted stock refer to stock of a public company issued in private placement transactions to individuals who are eligible to sell all or some of their shares of restricted Common Stock pursuant to Rule 144, promulgated under the Securities Act of 1933 (“Rule 144”), subject to certain limitations. In general, pursuant to Rule 144, a stockholder who is not an affiliate and has satisfied a six-month holding period may sell all of his restricted stock without restriction, provided that the Company has current information publicly available. Rule 144 also permits, under certain circumstances, the sale of restricted stock, without any limitations, by a non-affiliate of the Company that has satisfied a one-year holding period.
Advertising
Advertising costs include advance payments to our Super Chain Sales Partner stores (to be used for signage and store display). The Company expenses advertising costs as incurred in accordance with ASC 720-35, “Advertising Costs.” Advertising expenses were $146,262 and $113,044 for the years ended December 31, 2010 and 2009, respectively.
Research and Development
In accordance with Accounting Standards Codification subtopic 730-10, Research and Development, the Company expenses all research and development costs as incurred. Research and development expenses for years ended December 31, 2010 and 2009 were $33,378 and $25,418, respectively.
Segment Information
ASC 280-10 requires entity-wide disclosures about the products and services an entity provides, the countries in which it holds assets and reports revenues, and its major customers. The Company operates as a single segment currently and will evaluate additional segment disclosure requirements as it expands its operations.
Income Taxes
The Company accounts for income taxes using the asset and liability method described in ASC 740-10, the objective of which is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting and the tax bases of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. A valuation allowance related to deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Xinsheng is governed by the Income Tax Laws of the PRC. Pursuant to the PRC relevant laws and regulations and tax law, Xinsheng is exempt from income tax.
Earnings (Loss) Per Common Share
The Company has adopted ASC 260-10 which requires presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation.
Basic earnings (loss) per common share are computed on the basis of the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per common share are computed similarly to basic earnings per common share except that it includes the dilutive securities (convertible notes and warrants) outstanding and potential dilution that could occur if dilutive securities were converted. Dilutive securities having an anti-dilutive effect on diluted earnings (loss) per common share are excluded from the calculation.
A reconciliation of net income (the numerator) used to compute basic and diluted earnings per common share for the years ended December 31, 2010 and 2009 follows:
A reconciliation of the weighted average number of common shares (the denominator) used to compute basic and diluted earnings per common share for the years ended December 31, 2010 and 2009 follows:
The Company uses the treasury stock method to account for the dilutive effect of unexercised warrants on diluted earnings per common share. Antidilutive common shares related to warrants excluded from the computation of diluted earnings per common share were 618,980 and 1,378,580 for the years ended December 31, 2010 and 2009, respectively.
Recently Adopted Accounting Standards
In February 2010, the Company adopted an amendment to previously adopted accounting guidance on subsequent event disclosure, which established standards of accounting for and disclosure of events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued. Under the amended guidance, the Company is no longer required to disclose the date through which subsequent events have been evaluated. The adoption of this requirement did not have a material impact on the Company’s financial condition or results of operations.
We adopted the accounting principles established by ASU 2009-17, Consolidations: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, effective January 1, 2010. This ASU requires an ongoing reassessment and replaces the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity (“VIE”) with a primarily qualitative analysis. The qualitative analysis is based on identifying the party that has both the power to direct the activities that most significantly impact the VIE’s economic performance (the “power criterion”) and the obligation to absorb losses from or the right to receive benefits of the VIE that could potentially be significant to the VIE (the “losses/benefit criterion”). The party that meets both these criteria is deemed to have a controlling financial interest. The party with the controlling financial interest is considered to be the primary beneficiary and as a result is required to consolidate the VIE. The adoption of this new guidance did not have a material effect on our financial statements.
Recently Issued Accounting Standards
In January 2010, the Financial Accounting Standards Board issued guidance which expands the required disclosures about fair value measurements. This guidance requires disclosures about transfers of investments between levels in the fair value hierarchy and disclosures relating to the reconciliation of fair value measurements using significant unobservable inputs (level 3 investments). This guidance is effective for the Company as of January 1, 2011. The adoption of this guidance will not have a material impact on its financial condition or results of operations.
In April 2010, the FASB issued ASU 2010-13, “Compensation-Stock Compensation (Topic 718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force,” or ASU 2010-13. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update do not expand the recurring disclosures required by Topic 718. Disclosures currently required under Topic 718 are applicable to a share-based payment award, including the nature and the term of share-based payment arrangements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The adoption of this guidance will not have a material impact on its financial condition or results of operations.
Certain other accounting pronouncements have been issued by the FASB and other standard setting organizations which are not yet effective and have not yet been adopted by the Company. The impact on the Company’s financial position and results of operations from adoption of these standards is not expected to be material.
NOTE 3 - INVENTORY
Inventory consists of:
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consist of:
In August 2009, Xinsheng acquired two units in a building in Shannxi, China containing approximately 3,800 square feet of space for $252,399 (1,665,783 RMB). $131,183 (865,783 RMB) of the purchase price was paid in cash and the remaining $121,216 (800,000 RMB) was financed through two 10 year mortgages (see Note 9). For legal expediency reasons, the property and mortgages were acquired in the name of the Company’s Chairman of the Board of Directors.
In the first quarter of 2010, the Company acquired additional machinery and equipment from a vendor for $303,040 (2,000,000 RMB).
Depreciation expense was $68,080 and $42,673 for the years ended December 31, 2010 and 2009, respectively. In the first quarter of 2009, the Company returned certain unused manufacturing equipment to the original vendor for $94,428, an amount equal to the net book value of the equipment.
NOTE 5 - INVESTMENT IN TIENWE TECHNOLOGY INC
On July 29, 2005, Xinsheng acquired a 13.95% equity interest in Tienwe Technology Inc. (“Tienwe”), a PRC company, for $909,120 (6,000,000 RMB). The investment is carried at cost. Tienwe shares are not quoted or traded on any securities exchange or in any recognized over-the-counter market; accordingly, it is not practicable to estimate the fair value of the investment. Tienwe sells aerospace products to military industry customers. The Company has recently commenced negotiations with Tienwe regarding Xinsheng’s potential sale of this investment.
NOTE 6 - DEFERRED FINANCING COSTS
Deferred financing costs, which were amortized as interest expense over the two year term of the convertible notes payable due September 29, 2010, consist of:
NOTE 7 - INTANGIBLE ASSETS, NET
Intangible assets, net, consist of:
The product rights which were acquired by Xinsheng in December 2006 from an unrelated third party for approximately $90,000 related to nine registered fertilizer products. In the first quarter of 2009, the Company returned three of these products rights to the original vendor for $37,332, an amount equal to the net book value of the respective assets. During the fourth quarter of 2009, the Company determined that the remaining six products rights were worthless. Accordingly, the Company wrote off products rights of $52,740 and related accumulated amortization of $43,950 and recognized a loss on impairment of product rights of $8,685 and a foreign exchange translation adjustment charge of $105.
In the first quarter of 2010, the Company acquired the Jiamei license, permits and product rights for $121,216 (800,000 RMB). These rights are amortized over their expected useful economic lives of 10 years.
The patent was acquired by Xinsheng in 2002 from three related parties (one of the parties was an officer, director and significant stockholder of the Company at the time of the exchange) in exchange for a total of 16.67% of the issued and outstanding shares of Xinsheng common stock. The patent (and contributed capital) at the date of the exchange on April 22, 2002 has been reflected at the transferors’ cost. The patent is for Zero-tillage Fertilizing Equipment (PRC Patent Number 330398), which is a type of seeding machine, the use of which reduces soil erosion.
At December 31, 2010, estimated amortization for the next five years and thereafter are as follows:
NOTE 8 - CONVERTIBLE NOTES PAYABLE, NET
Convertible notes payable, net, consist of:
On September 29, 2008, the Company completed the sale of 3% unsecured convertible notes in an aggregate principal amount of $500,000, and Series C warrants to purchase 500,000 shares of common stock, to two accredited investors. The Company received net proceeds of $431,500 after the deduction of Placement Agent commissions of $40,000, Placement Agent expense allowance of $25,000, and an escrow agent fee of $3,500.
The Notes matured two years from the date of issuance and bore interest at the rate of 3% per annum, which was payable annually in cash or in shares of common stock, subject to approval of the holder. Overdue interest was to bear interest at the rate of 15% per annum. Overdue principal was to bear interest at the rate of 8% per annum. The Notes were convertible at the option of the holder into the common stock of the Company at an initial conversion price of $0.50 per share. The conversion price was subject to adjustment upon the occurrence of stock splits, combinations, dividends and subsequent offerings.
The Series C warrants have a term of three years and are exercisable into shares of common stock at an exercise price of $1.50 per share. Upon exercise of a Series C warrant, in addition to receiving shares of common stock, each Series C warrant holder shall be issued a Series D warrant to purchase additional shares of common stock in an amount equal to the number of Series C warrants exercised. The Series D warrants, if issued, shall have a term of three years and an exercise price of $2.00 per share. The exercise price of the warrants is subject to adjustment upon the occurrence of stock splits, combinations, dividends and subsequent offerings, as set forth in the warrants.
The Company had the right to prepay the Notes at 110% of the outstanding principal amount any time prior to the maturity date and upon 30 days prior written notice to the holders. The Company may call for the termination of any unexercised portion of the Series C warrants upon consummation of a subsequent offering by the Company of not less than $7,500,000 in gross proceeds and upon 30 days written notice to the holders. Upon termination of any unexercised Series C warrants, the warrant holders will not receive any Series D warrants, any shares underlying the Series C or Series D warrants, or any other securities.
In connection with the transaction, the Company agreed to prepare and file a registration statement with the Securities and Exchange Commission (the “SEC”) within 60 days following the final closing date. In addition, if the registration statement was not declared effective within 120 days from the filing date, the Company was subject to monthly cash liquidated damages payments equal to 2% of the purchase price paid by each investor, subject to a maximum of 24%. On February 13, 2009, the Company filed a registration statement on Form S-1 to register the shares underlying the convertible notes and warrants. In response to SEC comment letters, the Company filed amendments to the registration statement on Form S-1. The Company and the investors entered into agreements extending the date that the Form S-1 was required to become effective to October 30, 2009. The registration statement on Form S-1 was declared effective on November 16, 2009. The Company accrued $734 liquidated damages under the registration rights agreement payable to the investors as of November 16, 2009.
The Company recorded the $149,615 relative fair value of the warrants ($78,136 for the Series C warrants; $71,479 for the Series D warrants) and the $49,615 intrinsic value of the beneficial conversion feature as additional paid in capital.
The $149,615 fair value of the Series C and Series D warrants was calculated using a Black-Scholes option pricing model and the following assumptions: risk-free interest rate of 2.26%; expected stock price volatility of 130.69%; stock price of $0.40 per share; exercise price of $1.50 per share for the Series C warrants and $2.00 per share for the Series D warrants; and term of 3 years.
In connection with the private placement, the placement agent received warrants to purchase 80,000 shares of the Company’s common stock at an exercise price of $1.00 per share for a term of three years. The $19,920 fair value of these warrants (calculated using the same assumptions described above except for the exercise price) was charged to deferred financing costs and added to additional paid in capital. On October 9, 2009, the Company issued warrants to purchase 1,000 shares of the Company’s common stock at an exercise price of $1.00 per share for a term of three years for services rendered and waiving registration rights. The $426 fair value of these warrants (calculated using the same assumptions described above except for the exercise price) was charged to current financing cost and added to additional paid in capital.
On September 29, 2010, the maturity date of the Convertible Notes, the Company repaid the Notes principal of $500,000 together with the interest accrued on the Notes in the amount of $15,000.
On December 17, 2010, the investors exercised 160,000 Series C Warrants at a price of $1.50 per share. The Company received $240,000 in cash and issued 160,000 shares of common stock and 160,000 Series D Warrants to the investors.
NOTE 9 - LONG-TERM DEBT
Long-term debt represents mortgages payable to Xian Commerce Bank in connection with Xinsheng’s acquisition of two units in a building in August 2009 (see Note 4). The mortgages, which had a total initial balance of $121,216 (800,000 RMB), are secured by the units, bear interest at an annual rate of 6.53% and are due in monthly installments of interest and principal of approximately $1,378 (9,097 RMB) to August 6, 2019.
At December 31, 2010, maturities of the Long-term Debt for the next five years and in total are as follows:
Interest expense incurred on the Long-term Debt during the years ended December 31, 2010 and 2009 was $6,692 and $2,500, respectively.
NOTE 10 - COMMON STOCK
On October 11, 2007, upon the completion of the public offering, China Agri sold 379,800 units at a price of $1.00 per unit to the public investors. Each Unit consisted of one share of Common Stock, one warrant to purchase one share of Common Stock at $1.50 per share exercisable for three years from the date of issuance, and one warrant to purchase one share of Common Stock at $2.00 per share exercisable for three years from the date of issuance only if the $1.50 Unit Warrant was exercised.
On December 17, 2010, the Company issued 160,000 shares of its common stock to the two investors involved in our September 29, 2008 sale of $500,000 convertible notes payable ( see Note 8) as a result of the investors’ exercise of 160,000 Series C warrants at $1.50 per share.
NOTE 11 - WARRANTS
The Company has issued warrants (exercisable into shares of common stock) to investors, the Underwriter, and the Placement Agent as part of its sale of Series A preferred stock, its public offering, and its private placement of convertible notes. Changes in the warrants outstanding are as follows:
Warrants outstanding at December 31, 2010 consist of:
(1) Represents Series C warrants.
(2) Represents Series D warrants.
NOTE 12 - RESTRICTED NET ASSETS
Relevant PRC statutory laws and regulations permit payments of dividends by Meixin and Xinsheng only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. In addition, PRC laws and regulations require that annual appropriations of 10% of after-tax income should be set aside prior to payments of dividends as a reserve fund. As a result of these PRC laws and regulations, the Company is restricted in its ability to transfer a portion of its net assets in the form of dividends, loans or advances. The restricted portion amounted to approximately $5,485,448 and $5,127,000 at December 31, 2010 and 2009, respectively.
NOTE 13 - INCOME TAXES
Xinsheng is subject to a PRC 25% standard enterprise income tax. However, due to its agricultural industry status, the National Tax Bureau in Xi’an High-Tech Development Zone has granted Xinsheng exemptions from this tax since 2006. The Company has to apply for exemption status on an annual basis.
At December 31, 2010 and 2009, the Company had an unrecognized deferred United States income tax liability relating to undistributed earnings of Xinsheng. These earnings are considered to be permanently invested in operations outside the United States. Generally, such earnings become subject to United States income tax upon the remittance of dividends and under certain other circumstances. Determination of the amount of the unrecognized deferred United States income tax liability with respect to such earnings is not practicable.
Based on management’s present assessment, the Company has not yet determined it to be more likely than not that a deferred tax asset of approximately $327,000 ($245,000 at December 31, 2009) attributable to the future utilization of the approximately $935,000 net operating loss carry-forward of China Agri as of December 31, 2010 will be realized. Accordingly, the Company has maintained a 100% allowance against the deferred tax asset in the financial statements at December 31, 2010. The Company will continue to review this valuation allowance and make adjustments as appropriate. The net operating loss carry-forward expires in varying amounts from year 2025 to year 2030.
Current United States income tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available to offset future taxable income may be limited.
The provisions for income taxes differ from the amounts computed by applying the statutory United States federal income tax rate to income (loss) before income taxes. Reconciliations follow:
NOTE 14 - SEGMENT INFORMATION
The Company operates in one industry segment - the manufacturing and sale of agricultural enhancement products. Substantially all of the Company’s identifiable assets at December 31, 2010 and 2009 were located in the PRC. Net sales for the periods presented were all derived from PRC customers.
In 2008, the Company launched a new sales and marketing initiative to establish a closer relationship with farmers through agricultural cooperatives located throughout the rural areas of China. One component of this initiative is called the “Super Chain Sales Partner Program”, which involves stores branded under the name of “Xinsheng Shiji” but owned and managed by third parties. The other is called “Direct Sales Stores”. The Direct Sales Stores were controlled and managed by the Company to December 2010. In December 2010, the Company outsourced operation and ownership of the Direct Sales Stores to subcontractors who bear the risk of operations of the stores. As of December 31, 2010, there were approximately 500 branded and outsourced direct sales stores. The majority of branded and outsourced direct sales stores are located in Shannxi Province (local province); others are located in Hunan and Sichuan provinces. For the year ended December 31, 2010, approximately 75% of revenue was generated from our branded and outsourced direct sales stores, and 25% from traditional sales channels.
In addition to products manufactured by the Company, the Company also sells certain products manufactured by third parties in the outsourced direct sales stores. For the year ended December 31, 2010, total sales of third party products was $5,906,389, or approximately 48% of total sales.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Lease Agreements
Xinsheng leased its office space (approximately 7300 square feet) at an annual rent of 366,390 RMB ($55,515) under a lease with a three year term expiring March 31, 2011. The Company terminated this lease on October 1, 2009 after relocating to its new purchased two units in a building (see Note 4). On October 1, 2009, the Company signed a new lease with the same landlord for office space of 344 square feet at an annual rent of 12,000 RMB ($1,818). This one year lease expired on September 30, 2010. The Company did not renew the lease but reached consent with the landlord to use prior leased premises continually by paying the same rent.
Xinsheng leases its operating and testing space (approximately 2600 square feet) at an annual rent of 38,500 RMB ($5,834) under a lease which expired March 31, 2010. The Company did not renew the lease but reached consent with the landlord to use prior leased premises continually by paying the same rent.
On November 12, 2010, Xinsheng entered into a Land Leasing Contract (the “Agreement”) with Xi’an Shishang Weiyang Investment & Management, Inc. (the “Lessor”) pursuant to which the Company agreed to lease 24 mu of land (one mu is equivalent to approximately 0.165 acres) located in Zhongcha Village, Petrochemical Road, Weiyang District, Xi’an, China. Pursuant to the terms of the Agreement, the Company has the right to construct warehouses and processing centers on the Land. The Company plans to build a warehouse and distribution center for the Company’s and other organic manufacturers’ products.
The term of the lease is twenty-one years, from November 12, 2010 through November 12, 2031. The Company is obligated to pay rent of RMB 360,000 ($54,547) per year. Rent for the first ten years totaling RMB 3,600,000 ($545,472) was paid in November 2010 pursuant to the Agreement, which amount is being expensed as rent expense using the straight line method over the 10 year period of the prepayment. The annual rental will increase by 12% every three years starting on November 12, 2020.
Upon the expiration of the Agreement, the Company has a right of first refusal with regard to contract renewal.
China Agri utilizes office space provided by one of its directors at no cost.
For the years ended December 31, 2010 and 2009, rental and related expenses for all operating leases amounted to $15,653 and $69,757, respectively.
The Company leased store space for direct sales stores from various individuals for terms of six months or one year. Each lease provided for rent payments ranging from $30 to $45 per month. For the year ended December 31, 2010, such rent expense totaled $138,527.
At December 31, 2010, future minimum rental commitments (excluding the $545,472 rent prepaid for the first 10 years of the land lease described above) under all non-cancellable operating leases were:
Consulting Agreement
On March 31, 2010, the Company entered into an Investor and Media Relations Service Agreement (the “Agreement”) with Christensen International Limited (“Christensen”). Pursuant to the Agreement, Christensen was to provide investor relations services to the Company for a term of one year and the Company was to pay Christensen a total of $100,000 in fees, payable quarterly at the beginning of each quarter. The Company paid $25,000 in the second quarter of 2010 and then decided to terminate the service contract with Christensen.
Potential Acquisition of Land Use Rights
On October 21, 2009, Xinsheng received an approval letter from the Bureau of Foreign Trade and Economic Cooperation of Lantian County of Xinsheng’s application to purchase land use rights in Lantian County to establish “Xinsheng Centennial Industrial Zone”. Xinsheng intends to purchase the land use rights for 66 acres for a term of 30 years. The land use rights purchase cost is expected to be approximately $4,243,000 (28,000,000 RMB). In addition, the estimated cost for relocation of local dwellers is expected to be approximately $309,000 (2,040,000 RMB). As of the filing date of this Form 10-K, the transaction has not yet been finalized due to the delay in processing by the local government.
PRC Risks
Substantially all of the Company’s business operations are conducted in the PRC and governed by PRC laws and regulations. Meixin and Xinsheng are generally subject to laws and regulations applicable to foreign investments and foreign-owned enterprises. Because these laws and regulations are relatively new, the interpretation and enforcement of these laws and regulations involve uncertainties.
The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of the PRC. The Company receives substantially all of its revenues in RMB, which is currently not a freely convertible currency. Under existing PRC foreign exchange regulations, payment of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where RMB is to be converted into foreign currency and remitted out of the PRC to pay capital expenses, such as the repayment of bank loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions.
NOTE 16 - CONCENTRATION OF CREDIT RISK
The Company maintains cash balances that are held in five banks in China. Currently, no deposit insurance system has been set up in China. Therefore, the Company will bear a risk if any of these banks become insolvent. As of December 31, 2010 and 2009, the Company’s uninsured cash balances were approximately $13,008,000 and $9,597,000, respectively.