ITEM 1. BUSINESS.
Overview
China Changjiang Mining & New Energy Co., Ltd. (the “Company”) is currently in the development stage with the goal of becoming a turnkey developer and Engineering, Procurement and Construction (“EPC”) contractor of photovoltaic (“PV”) solar energy facilities (“SEF”).We intend to design, engineer, construct, market and sell high-quality PV SEFs for commercial and utility applications to local markets.
Before June 1, 2012, we were engaged in exploration for commercially recoverable metal-bearing mineral deposits On June 1, 2012, we entered into an agreement with Xunyang Yongjin Mining Co., Ltd to transfer our mining exploration rights for a cash payment of $2,380,612 (RMB 15,000,000). Further, on December 30, 2013, our subsidiary, Shaanxi Changjiang Mining &New Energy Co., Ltd (“Shaanxi Changjiang”), entered into Equity Transfer Agreements with each of Zhang Hong Jun, a director of the Company and owner of a controlling interest in the Company (holding 54.43% as of December 31, 2013), and Wang Sheng Li, a director and shareholder of the Company (holding 11.52% as of December 31, 2013), to sell Shaanxi Changjiang’s entire 60% interest in Shaanxi East Mining Co., Ltd., (“East Mining” and formerly referred to as “Dongfang Mining”) for a total consideration of $885,696(RMB5,400,000). The consideration payable to the Company was used to offset amounts owed to each of the acquirers. Each of the acquirers obtained a 30% equity in this transaction.
Together with Mr. Zhang Hong Jun, a director of the Company and owner of a controlling interest in the Company (holding 54.43% as of December 31, 2013), the Company established a subsidiary, named Shaanxi Weinan Changjiang Solar Photovoltaic Energy Applied Science and Technology Co., Ltd (“Changjiang PV”), to develop the new solar energy business in April 2012. Our subsidiary holds a 51% interest in Changjiang PV. We and Mr. Zhang Hong Jun have invested new energy industry for several years. With close relations with government departments and extensive personal connections, we devoted our major efforts to the Solar photovoltaic downstream market after signing the mines disposing agreement in June 2012.
Our subsidiary, Changjiang PV, concentrates on the development and operation of EPC projects. Our first EPC project, the Weinan Hechuan 137KWp solar PV building applications has been completed and is expected to begin operating in the near future.
We also hold land use rights in a land parcel and we lease a portion of the land use rights on the 5.7 square kilometer parcel to Shaanxi Huanghe Bay Springs Lake Theme Park Ltd. (“Huanghe”), a company with a common control person. The term of the lease agreement is from January 1, 2011 to December 31, 2029 and the annual rent is approximately $1.2 million (RMB 7,500,000).
Our Corporate History and Background
The Company is the result of a 2008 share exchange transaction among: (i) North American Gaming and Entertainment Corporation, a Delaware corporation (“North American”); (ii) Shaanxi Changjiang Petroleum & Energy Development Stock Co., Ltd. (“CJP”), a limited liability company established and existing under the law of People’s Republic of China; and (iii) the shareholders of CJP, among whom the predominant shareholder, holding 97.2% of CJP’s shares, was a Hong Kong company, Hong Kong Wah Bon Enterprise Limited (“Wah Bon”). After completion of the share exchange transaction, the Company entered into a reverse merger with North American.
At the time of the share exchange transaction, CJP owned 60%, and the Company continues to control, Shaanxi East Mining Co., Ltd., (“East Mining”) which held the Chinese exploration license through which we pursued our exploration activity.
The share exchange was completed on February 4, 2008, resulting in the shareholders of CJP controlling approximately 96% of the equity ownership of North American At the time of the closing of the share exchange, North American was a shell company domiciled in Delaware which filed reports under the Exchange Act and whose shares traded in the U.S. over-the-counter market. Wah Bon caused its subsidiary, CJP, to pay $370,000 in cash, and Wah Bon delivered shares constituting 97.2% of the outstanding equity of CJP, in exchange for 3,800,000 shares of North American common stock and 500,000 shares of Series C Preferred Stock of North American, which originally were entitled to 1,218 votes per share. Two U.S. individuals, through their advisory company, Capital Advisory Services, Inc., were paid in the aggregate 4,500,000 shares of North American. In June 2008, CJP changed its name to “Shaanxi Changjiang Mining &New Energy Co., Ltd (“Shaanxi Changjiang”).”
Following the share exchange transaction, Wah Bon replaced North American’s Board of Directors.
China Changjiang Mining & New Energy Co., Ltd. was incorporated in the state of Nevada on September 19, 2008 for the purposes of re-domesticating the Company from Delaware to Nevada, adopting the Company’s current name, and to serve as the surviving company of a reverse merger with North American.
Pursuant to Articles of Merger filed with the Secretary of the State of the State of Nevada on December 4, 2008 and the Secretary of the State of the State of Delaware on April 2, 2009, North American was merged with and into the Company, with the Company being the surviving entity.
On February 9, 2010, we filed a Certificate of Amendment to our Articles of Incorporation to effect a 1-for-10 reverse stock split of our common stock, subject to FINRA approval. The 1-for-10 reverse split was approved by FINRA on July 30, 2010, effective August 2, 2010.
On September 15, 2010, the Company filed with the Nevada Secretary of State a Certificate of Designation and a Certificate of Conversion and Elimination of the Series C Convertible Preferred Stock, pursuant to which: (i) all shares of our Series C Preferred Stock were converted into shares of common stock at a rate of 1,218 shares of common stock for each outstanding share of Series C Preferred Stock; and (ii) we canceled and eliminated the Series C Preferred Stock. In the aggregate, the outstanding shares of the Company’s Series C Preferred Stock were converted into 609 million shares of common stock.
As a result of these transactions, we currently have 250,000,000 authorized shares of common stock, par value $0.01 per share, of which 64,629,559 shares are issued and outstanding on the date of filing of this Form 10-K, and 10,000,000 authorized shares of preferred stock, of which no shares are presently issued and outstanding. At the time our share exchange transaction was completed, approximately 96% of the outstanding shares of North American were owned by Wah Bon. See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
We established a subsidiary, named Shaanxi Weinan Changjiang Solar Photovoltaic Energy Applied Science and Technology Co., Ltd. (“Changjiang PV”), in April 2012 to develop the new solar energy business. Our subsidiary, Shaanxi Changjiang accounted for 51% shares of Changjiang PV, and Mr. Zhang Hong Jun, the actual controller, accounted for the other 49% shares.
Our organization chart as of December 31, 2013is illustrated as follows.
Industry overview
Solar photovoltaic energy is an emerging, clean energy industry with a growing market share. The global solar PV market has grown from 6.1Gigawatt (“GW”) in 2008 to an estimated 25GW in 2012 but with imbalanced development. Application of solar energy in developed countries such as Germany and Japan, are relatively comprehensive and mature. At the present time, the Chinese PV downstream market is still in the initial stages of development, though most of the PV modules are manufactured in China.
In the past year, China's solar PV module manufacturers were hit by the European Union and the United States anti-dumping sanctions. Businesses and governments are trying to find better alternative applications market to absorb the huge domestic surplus solar PV capacity. The untapped domestic PV downstream market is one of the best ways to absorb the surplus production capacity.
The Chinese government is encouraging the construction of a large PV base and the development of distributed photovoltaic. Currently, we mainly focus on the development of distributed photovoltaic power generation projects.
It has been reported that as of the end of 2011, the installed capacity of photovoltaic power generation was 3.6 GW, thereinto, the installed capacity of distributed photovoltaic power generation only accounted for 0.2GW. According to a recent government planning, by 2015, the Chinese solar photovoltaic power generation capacity will reach 21GW, and distributed photovoltaic more than 10 GW. It was estimated that, by 2020, if the Building Integrated PV (“BIPV”) would be applied for 10% of the roof area and 15% of the facade area in the existing and new buildings, the potential market of BIPV applications would reach 1000GW, equivalent to 45 new installed capacity of the Three Gorges Hydropower Station.
Since the first half of 2012, the supply and demand of silicon in the international market has undergone great changes, resulting in obvious decline in the cost of solar modules. With the declining cost of solar modules from RMB 15 to RMB 6 per watt, the cost of PV power generation was significantly reduced.
We believe the next few years will show protracted continued growth in the PV solar market. Government policies, in the form of both regulation and incentives, have accelerated the adoption of solar technologies by businesses and consumers and have provided opportunities for developers to construct PV systems as an alternative to more traditional forms of power generation.
Our Industry and Principal Market
Sales and Marketing
We have established a sales and marketing department which is focused on identifying and establishing relationships with entities that are likely to have a need for our products and services.
Our products and services are expected to be largely represented through our Company’s sales force located in Xi’an City and Weinan City, Shaanxi Province, China.
Current Business Operations
a) At the present time, we focus on serving the local distributed solar PV market,
According to the national policy and because of the favorable market conditions, Weinan City is to develop photovoltaic power generation demonstration area. Weinan city is a prosperous city, adjacent to the capital of Shaanxi province, Xian city. With rich solar radiation and developed business in the Northwest, Weinan city took advantage to accelerate the development of the distributed solar PV.
We established a subsidiary, named Shaanxi Weinan Changjiang solar photovoltaic energy applied science and technology Co., Ltd. (“Changjiang PV”), in April 2012 to develop the local distributed solar PV business.
The following chart showed our distributed solar PV business model.
Our main EPC projects are as follows.
Huanghe Bay Project
In September 2012, Changjiang PV entered into an agreement with Shaanxi Changling Solar Energy & Electric Co., Ltd (“Changling”) to outsource the construction of a solar energy project located in Huanghe Bay Springs Lake Theme Park. The project, with a total contract amount of $310,548, was completed by the year end of 2012.
A series of licenses or permits must be obtained from the government organizations for power generation and distribution in PRC. Up to present, we have obtained following permits: a) The Heyang County Power Grid Access license; b) Application for the provincial solar photovoltaic building demonstration projects nominated by both the Housing and Urban-Rural Construction Bureau of Weinan City and Weinan Municipal Finance Bureau; and c) Filing in the Weinan City Municipal Development and Reform Commission.
The project was designed to generate electricity preferentially for Huanghe, and sell the surplus power to the grid company. We have received the subsidy funds of $159,096 (RMB 1,000,000) from the local government for the project in December, 2012. In the first quarter of 2014, Huanghe Bay Project is beginning to supply electricity to Huanghe.
Baishui Project
We are applying for the Building-integrated photovoltaic (BIPV) demonstration project of Weinan City for Baishui Project, with an estimated total investment of $1,204,176 (RMB 7,341,740), which is the way to obtain the subsidy funds.
We are responsible to install PV modules for all of the roofs of Weinan Baishui Dukang liquid factory, with a total power capacity of 649.2KW. A PV module is an assembly of PV cells that are electrically interconnected, laminated and framed in a durable and weatherproof package. The DC (direct current) power generated from the PV module is converted into AC (alternating current) power by the inverter to supply the electricity needs inside the building. The surplus electricity is fed to a power grid.
b) Our joint venture, Shaanxi Changjiang electricity & new energy Co., Ltd (“Changjiang Electricity”), is dedicated to the construction and operation of the biomass incineration power. Currently, we account for 20% shares of Changjiang Electricity, Mr. Zhang Hong Jun, our director and controlling shareholder, and Shaanxi Changfa Industrial Co., LTD (“Changfa”) accounts for 52% and 28% respectively.
In order to further develop the clean energy projects, we are entrusted full responsibility by Mr. Zhang Hong Jun and Changfa to manage the following cooperation issues.
In October 2011, we entered into an agreement with Shaanxi Lanniao New Energy Development Co., Ltd (“Shaanxi Lanniao”) to jointly develop Changjiang Electricity. In the near future, according to the agreement, Shaanxi Lanniao will invest around $11,529,000 in projects construction and accounts for 68% shares of the new Changjiang Electricity. We will invest a portion of our land in Huanghe Bay into Changjiang Electricity. As a result, Mr. Zhang Hong Jun, Changfa and we account for 32% shares of the new Changjiang Electricity.
c) We also hold land use rights in a 5.7 square kilometer parcel located in Huanghe Nantan, Heyang County, in the Shaanxi Province of China. We lease a portion of the land use rights on the 5.7 square kilometer parcel to Shaanxi Huanghe Bay Springs Lake Theme Park Ltd. (“Huanghe”) for the development and operation of a theme park. The term of the lease agreement is from January 1, 2011 to December 31, 2029. The annual rent is approximately $1.2 million. For additional information, see “Item 2. Properties”.
Solar PV Industry
General
Though we may be a new participant in solar PV industry, we also realized that the local downstream market of solar PV industry was as new as we are. Experience in some developed countries has shown that there should be a business opportunity in China’s PV downstream market in the near future.
Each of our EPC projects is a strategic long-term investment, with relatively low risk, a stable cash inflow can be generated and little ongoing maintenance costs would be incurred once the project begins operations.
Competition
We anticipate that our competitors in the solar PV markets will be local and regional EPC contractors and developers. Other companies in China that engage in solar PV power generation that we consider to be likely competitors, include: Xiaan Huanghe Photovoltaic Technology Co., Ltd, Shaanxi Tuori New Energy Technology Limited, and Shaanxi Changling Electric Co., Ltd etc. These competitors have more experience in the operation of solar PV energy and have superior financial resources than we do.
The entire solar industry also faces competition from other power generation sources, both conventional sources as well as other emerging technologies. Solar power has certain advantages and disadvantages when compared to other power generating technologies. The advantages include the ability to deploy products in many sizes and configurations, provide reliable power for many applications, serve as both a power generator and the skin of a building and eliminate air, water and noise emissions. The disadvantages mainly came from the relatively high cost of power generation.
The cost of electricity generated by PV products currently still exceeds the cost of electricity generated from conventional power such as coal and hydropower in Chinese markets. A significant reduction in the scope or discontinuation of government incentive programs could cause demand for our products and our revenue to decline, and have a material adverse effect on our business, financial condition, results of operations and prospects.
As an emerging industry, the rapid growth of the solar PV could reduce the intensity of competition from alternative products and services.
In the near term, mature government subsidy roadmaps from the government have led developers to be aggressive with their solar installations so that they can enjoy better economic returns. Cost reductions of solar installations have proven to be viable and have also led to aggressive solar installation. In the long run, we believe that solar energy continues to have significant future growth potential and that demand for our products and services will continue to grow significantly for the following reasons:
increasing demand for renewable energies, including solar energy, due to the finiteness of fossil fuels and concerns over nuclear power;
increasing environmental awareness leading to regulations and taxes aimed at limiting emissions from fossil fuels;
continued adoption or maintenance of government incentives for solar energy at all level of Chinese government;
narrowing cost differentials between solar energy and conventional energy sources due to market-wide decreases in the average selling prices for PV products driven by lower raw materials costs and increased production efficiencies; and
continual improvements in the conversion efficiency of PV products leading to lower costs per watt of electricity generated, making solar energy more efficient and cost-effective.
Government Regulation
This section sets forth a summary of the most significant regulations or requirements that affect our business activities in China.
Regulations issued or implemented by the State Council, China’s National Development and Reform Commission (“NDRC”), and other relevant government authorities cover many aspects of new energy industry, including, but not limited to the following principal regulations:
Renewable Energy Law
On December 26, 2009, China revised its Renewable Energy Law, which originally became effective on January 1, 2006. The revised Renewable Energy Law became effective on April 1, 2010 and has laid the legal foundation for developing renewable energy in China.
Renewable Energy Law clearly stipulates the following principles for the development of new energy:
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To encourage and support the use of solar and other renewable energy and the use of on-grid generation.
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To encourage the installation and use of solar energy water-heating systems, solar energy heating and cooling systems, solar PV systems and other solar energy utilization systems.
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To authorize the relevant pricing authorities to set favorable prices for the purchase of electricity generated by solar and other renewable power generation systems.
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To provide financial incentives, such as national funding, preferential loans and tax preferences for the development of renewable energy projects.
Government Directives
In January 2006, the NDRC promulgated two implementation directives of the Renewable Energy Law. These directives set forth specific measures in setting prices for electricity generated by solar and other renewal power generation systems and in sharing additional expenses occurred. The directives further allocate the administrative and supervisory authorities among different government agencies at the national and provincial levels and stipulate responsibilities of electricity grid companies and power generation companies with respect to the implementation of the Renewable Energy Law.
China’s Ministry of Construction issued a directive in June of 2005, which seeks to expand the use of solar energy in residential and commercial buildings and encourages the increased application of solar energy in townships. In addition, China’s State Council promulgated a directive in June of 2005, which sets forth specific measures to conserve energy resources and encourage exploration, development and use of solar energy in China’s western areas, which are not fully connected to electricity transmission grids, and other rural areas.
In July 2007, the PRC State Electricity Regulatory Commission issued the Supervision Regulations on the Purchase of All Renewable Energy by Power Grid Enterprises which became effective on September 1, 2007. To promote the use of renewable energy for power generation, the regulations require that electricity grid enterprises must in a timely manner set up connections between the grids and renewable power generation systems and purchase all the electricity generated by renewable power generation systems. The regulations also provide that power dispatch institutions shall give priority to renewable power generation companies in respect of power dispatch services provision.
On September 4, 2006, China’s Ministry of Finance and Ministry of Construction jointly promulgated the Interim Measures for Administration of Special Funds for Application of Renewable Energy in Building Construction, which provides that the Ministry of Finance will arrange special funds to support the application of renewable energy in building construction in order to enhance building energy efficiency, protect the ecological environment and reduce the consumption of fossil energy. These special funds provide significant support for the application of solar energy in hot water supply, refrigeration and heating, PV technology and lighting integrated into building construction materials.
On October 28, 2007, the Standing Committee of the National People’s Congress adopted amendments to the PRC Energy-saving Law, which sets forth policies to encourage the conservation of energy in manufacturing, civic buildings, transportation, government agents and utilities sectors. The amendments also seek to expand the use of the solar energy in construction areas.
In March 2009, China’s Ministry of Finance promulgated the Interim Measures for Administration of Government Subsidy Funds for Application of Solar Photovoltaic Technology in Building Construction, or the Interim Measures, to support the demonstration and the promotion of solar PV applications in China. Local governments are encouraged to issue and implement supporting policies for the development of solar PV technology. These Interim Measures set forth subsidy funds set at RMB20 per watt for 2009 to cover solar PV systems integrated into building construction that have a minimum capacity of 50 kilowatt peak.
In April 2009, the Ministry of Finance and the Ministry of Housing and Urban-Rural Development jointly issued the “Guidelines for Declaration of Demonstration Project of Solar Photovoltaic Building Applications.” These guidelines created a subsidy of up to RMB20 per watt for building integrated PV or BIPV projects using solar-integrated building materials and components and up to RMB15 per watt for BIPV projects using solar-integrated materials for rooftops or walls.
In July 2010, the Ministry of Housing and Urban-Rural Development issued the “City Illumination Administration Provisions” or the Illumination Provision. The Illumination Provisions encourage the installation and use of renewable energy system such as PV systems in the process of construction and re-construction of city illumination projects.
On March 8, 2011, the Ministry of Finance and the Ministry of Housing and Urban-Rural Development jointly promulgated the Notice on Further Application of Renewable Energy in Building Construction, which aims to raise the percentage of renewable energy used in buildings.
On March 27, 2011, the NDRC promulgated the revised Guideline Catalogue for Industrial Restructuring which categorizes the solar power industry as an encouraged item.
On March 14, 2012, the Ministry of Finance, the NDRC and the National Energy Bureau jointly issued the interim measures for the management of additional subsidies for renewable-energy power prices, according to which relevant renewable-energy power generation enterprises are entitled to apply for subsidies for their renewable power generation projects that satisfy relevant requirements set forth in the measures.
On March 1, 2013, China’s State Council issued the “Twelfth Five Year Plan.” The plan supports the promotion and development of renewable energy, including the solar energy. The plan also encourages the development of solar PV power stations in the areas with abundant solar power resource.
On November 18, 2013, the National Energy Bureau issued “The Interim Measures for the management of distributed photovoltaic power generation projects”. The regulation contributes to promote the application of distributed photovoltaic power and regulate the projects management.
On November 26, 2013, the Ministry of Finance announced that the power generated by its own distributed PV power generation project could be exempted from imposing government fee, such as renewable energy surcharges, fee for major national water conservancy construction, etc.
Restrictions on Foreign Businesses and Investments
The principal regulation governing foreign ownership of photovoltaic businesses in the PRC is the Foreign Investment Industrial Guidance Catalogue, updated and effective as of January 30, 2012. Under this regulation, industrial activity is categorized as “permitted,” “restricted,” or “prohibited.” and the solar photovoltaic business is listed as an industry of “permitted” where foreign investments are encouraged.
Enterprise Income Tax
On March 16, 2007, the National People’s Congress passed the new Enterprise Income Tax Law (“the new EIT Law”), which was effective as of January 1, 2008.
The key changes for the new EIT Law are:
a)
The new EIT Law imposes a single income tax rate of 25% for most domestic enterprises and foreign investment enterprises.
b)
The Companies established before March 16, 2007 continue to enjoy tax holiday treatment approved by local government for a grace period of either for the next 5 years or until the tax holiday term is completed, whichever is sooner.
c)
Entities that qualify as “High and New Technology Enterprises” are entitled to the preferential lower tax rate of 15%.
d)
The new EIT Law grants tax holiday to entities operating in certain beneficial industries, such as environmental protection, energy - saving, etc. Entities in beneficial industries enjoy a three-year tax exempt and a three-year period with 50% reduction in the income tax rates.
The new EIT Law also provides that an enterprise established under the laws of foreign countries or regions but whose “de facto management body” is located in the PRC be treated as a resident enterprise for PRC tax purpose and consequently be subject to the PRC income tax at the rate of 25% for its worldwide income. The Implementing Rules of the new EIT Law merely defines the location of the “de facto management body” as “the place where the exercising, in substance, of the overall management and control of the production and business operation, personnel, accounting, properties, etc., of a non-PRC company is located.” On April 22, 2009, the PRC State Administration of Taxation further issued a notice entitled “Notice regarding Recognizing Offshore-Established Enterprises Controlled by PRC Shareholders as Resident Enterprises Based on Their place of Effective Management.” Under this notice, a foreign company controlled by a PRC company or a group of PRC companies shall be deemed as a PRC resident enterprise, if (ⅰ)the senior management and the core management departments in charge of its daily operations mainly function in the PRC; (ⅱ) its financial decisions and human resource decisions are subject to decisions or approvals of persons or institutions in the PRC; (ⅲ) its major assets, accounting books, company sales, minutes and files of board meetings and shareholders’ meetings are located or kept in the PRC; and (ⅳ) more than half of the directors or senior management personnel with voting rights reside in the PRC. Based on a review of surrounding facts and circumstances, the Company does not believe that it is likely that its operations outside of the PRC should be considered a resident enterprise for PRC tax purposes. However, due to limited guidance and implementation history of the new EIT Law, should the Company be treated as a resident enterprise for PRC tax purposes, the Company will be subject to PRC tax on worldwide income at a uniform tax rate of 25% retroactive to September 19, 2008.
The new EIT Law also imposes a withholding income tax of 10% on dividends distributed by a foreign invested enterprise to its immediate holding company outside of China, if such immediate holding company is considered as a non-resident enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. Such withholding income tax was exempted under the previous income tax regulations. The United States of America, where the Company is incorporated, has such tax treaty with China.
Our Employees
As of December 31, 2013, we had an aggregate of 21 employees, of whom 16 were full-time employees. This includes two people in marketing, one in manufacturing, four in research and development and quality control, two in financial and accounting, and seven in general management.
Available Information
We currently do not maintain a web site; however, our annual, periodic and current reports can be accessed on the web site of the SEC at www.sec.gov and printed free of charge.
ITEM 1A.
ITEM 1A. RISK FACTORS.
An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with all of the other information included in this report, before making an investment decision. If any of the following risks actually occurs, our business, financial condition and results of operations could suffer. In that case, the trading price of our common stock could decline, and you may lose part or all of your investment. You should read the section entitled “Special Notes Regarding Forward-Looking Statements” above for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this report.
RISKS RELATED TO OUR BUSINESS
WE HAVE TRANSITIONED OUR BUSINESS FROM MINING TO NEW CLEAN ENERGY BUSINESS, WHICH INVOLVED SIGNIFICANT TRANSITION AND INTEGRATION RISK
We have disposed our mining business sector in the past year, and currently we are developing our new clean energy solar business. This change involves significant transition and integration risks, both because we are required to end our participation in mining operations and wind down our existing relationships prior to our being able to participate in a new energy business and because we may incur costs and/or a loss of revenue (or a delay in anticipated increased revenue from the new business) in connection with these changes. The significant transition and integration risks include:
an inability to transition our business to clean energy due to a lack of applicable approvals or difficulty in satisfying entrance requirements;
significant revenue dilution as we terminate our participation in mining operations and/or insufficient, or delay in receipt of, revenue from our participation in current operations, including an inability to maintain our key customer and business relationships as we transition to new energy; and
difficulties integrating our technology processes, and
lack of experience in EPC project management.
If any of these risks or costs materializes, they could have a material adverse effect on our business, results of operations and financial condition.
OUR LIMITED OPERATING HISTORY IN CLEAN NEW ENERGY INDUSTRY MAKE IT DIFFICULT TO EVALUATE OUR RESULTS OF OPERATIONS AND PROSPECTS.
We are a company engaged in the business of local clean solar energy development with two EPC projects under construction and several potential projects. We also hold land use rights in a 5.7 square kilometer parcel located in Huanghe Nantan (Huanghe Bay), Heyang County, in the Shaanxi Province of China, which is held for leasing purpose.
Though we commenced the biomass incineration power business in 2009 by cooperation with our strategic partner, our business change in 2012 was our first time to enter the solar photovoltaic industry and determine the strategy of mainly focusing on PV EPC developing in the future.
We expected to generate revenue from PV business in the first quarter of 2014. However, our limited operating history makes the prediction of future results of operations difficult, and in addition, we cannot assure that the existing management model is suitable for the EPC project development.
We will devote more resources in our marketing promotion, and attempt to adapt our management to a more flexible operation environment as we have to deal with a variety of competitors due to the relatively lower entrance barrier for solar PV downstream industry.
WE DEPEND ON OUR SENIOR MANAGEMENT AND KEY EMPLOYEES, THE LOSS OF WHOM COULD ADVERSELY AFFECT OUR OPERATIONS.
Our success will depend to a large degree upon our ability to identify, hire, and retain personnel, particularly persons familiar with the marketing, manufacturing and administrative processes associated with the solar energy business. We depend on the skills of our management team and current key employees, such as Mr. Chen Wei Dong, our Chairman, President, and Chief Executive Officer. We may be unable to retain our existing key personnel or attract and retain additional key personnel.
The loss of any of our key employees or the failure to attract, and retain experienced or additional key employees could have a material adverse effect on our business and financial condition.
WE ACT AS THE GENERAL CONTRACTOR FOR OUR CUSTOMERS IN CONNECTION WITH THE INSTALLATION OF OUR SOLAR POWER SYSTEMS AND ARE SUBJECT TO RISKS ASSOCIATED WITH CONSTRUCTION, BONDING, COST OVERRUNS, DELAYS AND OTHER CONTINGENCIES, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
We act as the general contractor for our customers in connection with the installation of our solar power systems. All essential costs are estimated at the time of entering into the sales contract for a particular project, and these are reflected in the overall price that we charge our customers for the project. These cost estimates are preliminary and may or may not be covered by contracts between us or the other project developers, subcontractors, suppliers and other parties to the project. In addition, we require qualified, licensed subcontractors to install most of our systems. Shortages of such skilled labor could significantly delay a project or otherwise increase our costs. Should miscalculations in planning a project or defective or late execution occur, we may not achieve our expected margins or cover our costs. Additionally, many systems customers require performance bonds issued by a bonding agency. Due to the general performance risk inherent in construction activities, it is sometimes difficult to secure suitable bonding agencies willing to provide performance bonding. In the event we are unable to obtain bonding, we will be unable to bid on, or enter into sales contracts requiring such bonding.
Delays in solar panel or other supply shipments, other construction delays, unexpected performance problems in electricity generation or other events could cause us to fail to meet these performance criteria, resulting in unanticipated and severe revenue and earnings losses and financial penalties. Construction delays are often caused by inclement weather, failure to timely receive necessary approvals and permits, or delays in obtaining necessary solar panels, inverters or other materials. The occurrence of any of these events could have a material adverse effect on our business and results of operations.
WE ARE A PRIVATE COMPANY MAINLY OPERATING IN CHINA, WHICH MAY RESULT IN A MORE DIFFICULT BUSINESS ENVIRONMENT FOR US, COMPAIRED WITH THE STATE OWNED COMPANY IN PV INDUSTRY
We are a private company operating in China in PV industry, which may incur more cost in obtaining administrative permit, acquiring EPC project, etc, while many competitors are state-owned Companies and operate in a preferable business environment. The PV developer must apply for the PV demonstration project for financial subsidy. Usually the relevant government agencies give priority to the state-owned company under equal conditions.
RISKS RELATED TO OUR PV INDUSTRY
A SIGNIFICANT REDUCTION IN OUR DISCONTINUATION OF GOVERNMENT SUBSIDIES AND ECONOMIC INCENTIVES MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
Demand for our products and services substantially depends on government incentives aimed to promote greater use of solar power. The PV application markets would not be commercially viable without government incentives. This is because the cost of generating electricity from solar power currently exceeds the cost of generating electricity from conventional or non-solar renewable energy sources.
Usually, the local government bears the financial subsidy. If the local finance is too tight to offer the subsidy, the change of incentive policy may be the only choice. Though we don’t think the national incentive policy shall be significant changed in the near future, the local financial subsidy policy adjustment could have a material effect on our business directly.
The scope of the government incentives for solar power depends, to a large extent, on political and policy developments in China related to environmental, economic or other concerns, which could lead to a significant reduction in or a discontinuation of the support for renewable energy sources.
Any new government regulations or utility policies pertaining to our solar power products may result in significant additional expenses to us, our resellers, and our customers and as a result, could cause a significant reduction in demand for our solar power products.
BECAUSE THE MARKETS IN WHICH WE COMPETE ARE HIGHLY COMPETITIVE AND MANY OF OUR COMPETITORS HAVE GREATER RESOURCES THAN US, WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY AND WE MAY LOSE OR BE UNABLE TO GAIN MARKET SHARE.
We mainly focus on the local solar PV downstream market. Our competitors include Xiaan Huanghe Photovoltaic Technology Co., Ltd, Shaanxi Tuori New Energy Technology Limited, and Shaanxi Changling Electric Co., Ltd etc. Most of them have a stronger market position than ours, more sophisticated technologies greater resources and better name recognition than we do.
The barriers to entry are relatively low in the PV consumer market. Financial strength and social relations resource were the key barriers to entry for the EPC project acquisition. Because of the government's continuous efforts to encourage the PV consumer market, more and more companies with strong financial support commenced their solar PV energy business. It is a challenge for us to establish our competitive market position in the industry. In order to acquire more market share, we must respond more quickly to changing customer demands or market conditions or to devote greater resources to the marketing promotion.
New competitors or alliances among existing competitors could emerge and rapidly acquire a significant market share, which would harm our business. If we fail to compete successfully, our business would suffer and we may lose or be unable to gain market share.
RISKS RELATED TO THE REAL ESTATE INDUSTRY
THE CHINESE GOVERNMENT OWNS ALL LAND IN CHINA, AND CHINA ISSUES LAND USE RIGHTS INSTEAD OF LEGAL TITLE TO THE PROPERTIES. THERE IS NO ASSURANCE THAT OUR RIGHTS TO THE PROPERTIES WILL NOT BE SUBJECT TO IMPAIRMENT OR LOSS.
In China, all property is owned by the central government. Unlike deeds or other evidence of a fee simple ownership interest, land use rights are always subject to fixed periods and permitted land use, usually for long periods of time. These periods are frequently 50 years. Disputes over mining claims are common. A loss of our property rights would cause material damage to the Company and the price of its securities and could result in the loss of the entire value of our Company.
RISKS RELATED TO DOING BUSINESS IN THE PEOPLE'S REPUBLIC OF CHINA
WE ARE SUBJECT TO THE POLITICAL AND ECONOMIC POLICIES OF THE PEOPLE’S REPUBLIC OF CHINA, AND GOVERNMENT REGULATION COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR INTENDED BUSINESS.
All of our assets and operations are in the PRC. As a result, our operating results and financial performance as well as the value of our securities could be affected by adverse changes in economic, political and social conditions in China.
The Chinese government adopted a policy to transition from a planned economy to a market driven economy in 1978. Since then, the economy of the PRC has undergone rapid modernization, although the Chinese government still exerts a dominant force in the nation's economy. This continues to include reservation to the state of land use rights, and includes controls on foreign exchange rates and restrictions or prohibitions on foreign ownership in various industries. All lands in China are state owned and only limited “land use rights” are conveyed to business enterprises or individuals.
All of our intended exploration and mining activities require approvals from the local government authorities in China. Obtaining governmental approval is typically a lengthy and difficult process with no guaranty of success. Since the lands where our activities are located were acquired through the grant of a land use right, changes in government policy could adversely affect our business.
The Chinese government operates the economy in many industries through various five-year plans and even annual plans. A large degree of uncertainty is associated with potential changes in these plans. Since China’s economic reforms have no precedent, there can be no assurance that future changes will not create materially adverse conditions for our business.
FLUCTUATION OF THE CHINESE CURRENCY COULD MATERIALLY AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We expect that our future revenue and expenses will be generated in China, but our reporting currency is US dollars and reported results will be affected by exchange rate fluctuations between the RMB and the US dollar. We cannot give any assurance that the value of the RMB will continue to appreciate, or even remain stable against the US dollar or any other foreign currency. Accordingly, we may experience economic losses and negative impacts, as reported in U.S. Dollars, as a result of foreign exchange rate fluctuations.
The RMB is currently not a fully convertible currency. The Chinese government may restrict future access to foreign currencies for current account transactions. This may make it difficult for us to transfer money from China to other countries on an economically advantageous basis or even at all. It may also make it difficult for us to pay cash returns on the investment of foreign capital.
THERE ARE RISKS INHERENT IN DOING BUSINESS IN CHINA OVER WHICH WE HAVE NO CONTROL.
The political and economic systems of the PRC are very different from those of the United States and other western countries. China remains volatile with respect to certain social, economic and political issues which could lead to revocation or adjustment of reforms. There are also issues between China and the United States that could result in disputes or instabilities. The role of China and its government remain in flux both domestically and internationally, and could cause shocks or setbacks that may adversely affect our business.
THE CHINESE LEGAL SYSTEM DIFFERS FROM THAT OF THE UNITED STATES, PROVIDING LESS PROTECTION FOR INVESTORS, AND IT MAY BE DIFFICULT FOR INVESTORS TO SEEK LEGAL REDRESS AGAINST US OR OUR OFFICERS AND DIRECTORS, INCLUDING CLAIMS THAT ARE BASED UPON U.S. SECURITIES LAWS.
All of our current operations are conducted in China. All of our current directors and officers are nationals or residents of China. All of the assets of these persons are located in China. The PRC legal system is a civil law system. Unlike the common law system, the civil law system is based on written statutes in which decided legal cases have little value as precedents. Differences in interpretations and rulings can occur with limited opportunity for redress or appeal.
It may not be possible to effect service of process within the U.S. or elsewhere outside China upon our officers and directors. Even if service of process were successful, considerable uncertainty exists as to whether Chinese courts would recognize and enforce U. S. laws or judgments obtained in the U.S. federal and state securities laws as the U. S. laws confer substantial rights to investors and shareholders that have no equivalent in China. Therefore a claim against us or our officers and/or directors or even a final judgment in the U. S. may not be recognized or enforced by Chinese courts.
In 1979, the PRC began to reform its legal system and has enacted numerous laws regulating economic and business development, including those related to foreign investment. Currently many of the approvals required for our business may be obtained at local or provincial level. We believe that it is relatively easier and faster to obtain provincial approval than central government approval. Changes to existing laws that repeal or alter local regulatory authority and preempt it with national laws could negatively affect our business and the value of our securities.
China's regulations and policies regarding investments, including investment in the PV business, are subject to continued reformation and revisions. They may change in a manner adverse to us and our stockholders.
CHINESE LAWS COULD RESTRICT THE PAYMENT OF DIVIDENDS FROM ANY PROCEEDS OBTAINED FROM LIQUIDATION OF OUR ASSETS.
All of our assets are located in China. Chinese law governs the distributions that can be made in the event of liquidation of assets of foreign invested enterprises. While dividend distribution is allowed, some distributions are subject to the approval from the foreign exchange authority in China. Liquidation proceeds would also be subject to foreign exchange control. We are unable to predict the outcome in the event of liquidation insofar as it affects payment to non-Chinese nationals.
RISKS RELATED TO OUR COMMON STOCK
SUSPENSION OF TRADING
The SEC announced a suspension, pursuant to Section 12(k) of the Exchange Act, of trading in the securities of the Company on April 1, 2011. Questions have arisen regarding the accuracy and completeness of information contained in the Company’s public filings with the SEC and concerning the company’s financial statements. The absence of a trading market adversely affects the value of our securities.
However, as of September 5, 2012, the Securities and Exchange Commission officially notified us of termination of the investigation against us that began in April 2011. We expect that our common stock would resume trading after review of our Form 211 Application by Financial Industry Regulatory Authority (“FINRA”).
THERE IS CURRENTLY A LARGE MARKET OVERHANG IN OUR COMMON STOCK AND FUTURE SALES OF OUR COMMON STOCK COULD DEPRESS THE MARKET PRICE AND DIMINISH THE VALUE OF YOUR INVESTMENT.
On February 9, 2010, we filed a Certificate of Amendment to our Articles of Incorporation to effect a 1-for-10 reverse split of our common stock, after which all shares of our Series C Preferred Stock were converted into an aggregate of 609 million shares of our common stock. This effectively eliminated the ability of our other common stock holders to have a significant role in the election of directors and other corporate changes. Future sales of shares of our common stock or securities that are convertible into our common stock could adversely affect the market price of our common stock. If any of our principal stockholders sells a large number of shares or if we issue a large number of shares, the market price of our common stock could significantly decline. Moreover, the perception in the public market that our principal stockholders might sell shares of common stock could further depress the market for our common stock.
BECAUSE OUR OFFICERS AND DIRECTORS CONTROL THE MAJORITY OF THE VOTING POWER OF OUR COMMON STOCK, INVESTORS IN OUR COMMON STOCK WILL NOT BE ABLE TO DETERMINE THE OUTCOME OF STOCKHOLDER VOTES.
Our officers and directors currently control approximately 94% of our common stock. So long as they continue to hold, directly or indirectly, shares of common stock representing more than 50% of the combined voting power of our common stock, they will be able to direct the election of all of the members of our board of directors who will determine our strategic plans and financing decisions and appoint top management. They will also be able to determine the outcome of substantially all matters submitted to a vote of our stockholders, including matters involving mergers, acquisitions and other transactions resulting in a change of control of us, and our pursuit of corporate opportunities. They may seek to cause us to take courses of action that, in their judgment, could enhance their investment in us, but which might involve risks to holders of our common stock or adversely affect us or other investors.
THE MARKET FOR SHARES OF OUR COMMON STOCK HAS BEEN LIMITED AND SPORADIC, AND THERE IS NO GUARANTEE THAT A MARKET WILL BE AVAILABLE FOR YOU TO SELL YOUR SHARES.
Shares of our common stock are not listed on any exchange but have been sporadically traded in over the counter transactions or in inter-dealer quotations. The trading of our stock was suspended by the SEC in April 2011. There is no assurance that any market makers will in the future post bid and ask prices for our shares of common stock. Our stock has been very thinly traded and there were many days or weeks that the shares did not trade at all. There is no assurance that any market will exist at the time that a shareholder wishes to sell his or her shares and there is no assurance that any market will continue.
OUR COMMON STOCK PRICE IS VOLATILE AND MAY NOT APPRECIATE IN VALUE.
The trading of our stock was suspended on April 1, 2011 by the SEC. The market price of shares of our common stock fluctuated and, if trading resumes, is likely to continue to fluctuate significantly. Fluctuations could be rapid and severe and may provide investors little opportunity to react. Factors such as changes in commodity prices, conversion of our preferred shares, results of operations, and a variety of other factors, many of which are beyond the control of the Company, could cause the market price of our common stock to fluctuate substantially. Also, stock markets in penny stock shares tend to have extreme price and volume volatility. The market prices of the securities of many smaller public companies are subject to volatility for reasons that frequently are unrelated to operating performance, earnings or other recognized measurements of value. This volatility may cause declines, including very sudden and sharp declines, in the market price of our common stock. We cannot assure investors that the stock price will appreciate in value, that a market will be available to resell your securities or that the shares will retain any value at all.
WE DO NOT FORESEE PAYING CASH DIVIDENDS IN THE FORESEEABLE FUTURE.
We have not paid cash dividends on our stock and we do not plan to pay cash dividends on our stock in the foreseeable future. We intend to retain any earnings to help fund operations. Therefore an investment in our common stock is not appropriate for investors who require regular and periodic returns on their investments.
OUR STOCK IS A PENNY STOCK. TRADING OF OUR STOCK MAY BE RESTRICTED BY THE SEC’S PENNY STOCK REGULATIONS AND THE FINRA’S SALES PRACTICES, WHICH MAY LIMIT A STOCKHOLDER’S ABILITY TO BUY AND SELL OUR STOCK.
The trading of our stock was suspended on April 1, 2011, by the SEC. If trading resumes, our stock will be a penny stock. The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker- dealers who sell to persons other than established customers and “accredited investors”, as defined. Rule 15g-2 requires a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form required by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market, and cautions investors against making a hurried investment decision. The broker-dealer must also provide the customer with the current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction. The broker-dealer must also send a confirmation of these prices after the trade. After a purchase of penny stock, the broker-dealer must send a monthly account statement that gives an estimate of the value of each penny stock purchased.
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules.
Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in, and limit the marketability of, our common stock.
In addition to the “penny stock” rules promulgated by the SEC, the FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative, low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker- dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable to a smaller reporting company.
ITEM 2.
ITEM 2. PROPERTIES.
Corporate Headquarters
Our corporate headquarters, consisting of 554 square meters, are located at Seventeenth Floor, Xinhui Mansion, Gaoxin Road, Hi-tech Zone, Xi'An, Shaanxi Provence PRC, 710075. Our telephone number is (86)29- 88331685 and our fax number is (86)29-88332335. We have renewed the leasing contract for our headquarters in January, 2013, at a rental rate of $12,301(RMB 75,000) per year.
Land use right leasing Parcel
All land in China is owned by the state. Individuals and companies are permitted to acquire rights to use land, or “land use rights,” for specific purposes. In the case of land used for commercial purposes, the land use rights are granted for a period of 50 years. The original period, and any subsequent periods, may be renewed prior to their expiration. Granted land use rights are transferable and may be used as security for borrowings and other obligations.
We have land use rights (certificate No. (2006) 3240001), in a 5.7 square kilometer parcel in Huanghe Nantan (Huanghe Bay), Heyang County, Shaanxi province. We currently lease a portion of this parcel to Huanghe for the development and operation of a theme park. The lease expires on December 31, 2029. The photograph below shows an overview of our land in Huanghe Bay.
The solar PV parcel
We have invested $280,178 to Huanghe Bay Project for the construction of solar PV system as of December 31, 2013, located in the Huanghe Nantan (Huanghe Bay), Heyang County, Shaanxi province.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
We received a document subpoena dated April 4, 2011, pursuant to which the Enforcement Division of the SEC informed us that it was conducting an investigation of the Company to determine whether the Company has committed a violation of the federal securities laws. The subpoena required us to produce certain documents to the SEC, and we complied and responded on May 2, 2011.
On June 7, 2011, the SEC issued another subpoena in furtherance of its investigation and required the Company to produce additional documents relating to its land use right. We complied with the subpoena and responded on June 24, 2011 to the Los Angeles Regional Office of the SEC.
On September 5, 2012, the Securities and Exchange Commission officially notified us of its termination of the investigation against us that began in April 2011. The SEC also confirmed that it had no intention of recommending any enforcement action by the Commission.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market information
The trading of our stock was suspended on April 1, 2011 by the SEC. Prior to the suspension, the Company's common stock was traded over-the-counter and quoted from time to time in the Over-the-Counter (“OTC”) Bulletin Board under the trading symbol “CHJI.OB”. There is currently no public trading market for the Company's common stock. The following table sets forth the range of high and low bid prices as reported by the OTC Bulletin Board for the periods indicated. Such quotations represent inter-dealer prices without retail markup, markdown, or commission, and may not necessarily represent actual transactions.
Holders
As of December 31, 2013, we had 3,353 record holders of our common stock.
Dividends
To date, we have not declared or paid any dividends on our common stock. We currently do not anticipate paying any cash dividends in the foreseeable future on our common stock. Although we intend to retain our earnings, if any, to finance the exploration and growth of our business, our board of directors reserves the right to declare and pay dividends in the future, to the extent permitted by law.
Stock Option Grants
None.
Unregistered Sales of Equity Securities
On December 25, 2009, the Company issued an aggregate of 4,500,000 shares of common stock to Messrs. Donald R. Monroe and Stanley F. Wilson, the principals of Capital Advisory Services, Inc., in connection with our share exchange transaction. To the best of our knowledge, each of them now holds 2,250,000 shares of common stock the shares were issued without registration in reliance on section 4(2) of the Securities Act. All issued and outstanding shares of series C Preferred Stock have been converted into an aggregate amount of 609 million shares of our common stock which were issued without registration in reliance on SEC Regulation S and section 3(a)(9) of the Securities Act.
Repurchases of Shares by the Company
None.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Not required for a smaller reporting company.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto as filed with the SEC, and other financial information contained elsewhere in this Form 10- K.
Overview
We have transitioned our business from mining to clean new energy , and mainly focus on the solar photovoltaic, or “PV”, downstream market at the present stage. We are currently in the development stage with the goal of becoming a turnkey developer and Engineering, Procurement and Construction contractor of solar PV energy facilities. We intend to design, engineer, construct, market and sell high-quality PV energy facilities for commercial and utility applications to local markets. Though the solar PV business did not generate revenue in 2013, our Huanghe Bay Project was expected to begin the operation in 2014. In the near future, we plan to gradually increase the resources devoted to marketing.
Before June 1, 2012, we were engaged in exploration for commercially recoverable metal-bearing mineral deposits On June 1, 2012, we entered into an agreement with Xunyang Yongjin Mining Co., Ltd to transfer our mining exploration rights for a cash payment of $2,380,612 (RMB 15,000,000). Further, on December 30, 2013, our subsidiary, Shaanxi Changjiang Mining &New Energy Co., Ltd (“Shaanxi Changjiang”), entered into Equity Transfer Agreements with each of Zhang Hong Jun, a director of the Company and owner of a controlling interest in the Company (holding 54.43% as of December 31, 2013), and Wang Sheng Li, a director and shareholder of the Company (holding 11.52% as of December 31, 2013), to sell Shaanxi Changjiang’s entire 60% interest in Shaanxi East Mining Co., Ltd., (“East Mining” and formerly referred to as “Dongfang Mining”) for a total consideration of $885,696(RMB5,400,000). The consideration payable to the Company was used to offset amounts owed to each of the acquirers. Each of the acquirers obtained a 30% equity in this transaction.
We also hold land use rights in a land parcel and we lease a portion of the land use rights on the 5.7 square kilometer parcel to Shaanxi Huanghe Bay Springs Lake Theme Park Ltd. (“Huanghe”), a company with Zhang Hong Jun, a director of the Company and owner of a controlling interest in the Company. The term of the lease agreement is from January 1, 2011 to December 31, 2029. Our land use rights are amortized over their 50 year term. The Land use right was not only our largest asset, but also the stable operating income to support our other business, with an annual rent of approximately $ 1.2 million (RMB7,500,000).
The following is a summary of the book value of our land use rights as of December 31, 2013:
The amortization expense for the year ended December 31, 2013 and December 31, 2012 was $414,416 and $407,262, respectively.
As reflected in the accompanying consolidated financial statements, the Company had an accumulated deficit of $3,325,983 as at December 31, 2013, which includes net income of $2,318,261 for the year ended December 31, 2013. The Company’s operations used cash of $1,207,425 in 2013.
We began to generate revenue for the year ended December 31, 2011, of which the revenue from land use right leasing was expected to provide stable cash flow. In the future, we expect that there will no longer be a need for us to continue to rely on loans from our directors and other related parties. We believe that we have adequate capital to assure that we will be able to meet our obligations or obtain sufficient capital to complete our plan of operations for the next twelve (12) months.
RESULTS OF OPERATIONS
Comparison of the Years Ended December 31, 2013 and December 31, 2012
Sales revenue
We generated total revenue of $1,211,397 from continuing operations for the year ended December 31, 2013, compared with the revenue of $1,188,119 for the year ended December 31, 2012. The fluctuation was due to the appreciation of RMB against USD, as there was no change for the RMB 7,500,000 annual rent for the year ended December 31, 2013 and 2012.
Operating Expenses
Total operating expenses from continuing operations for the year ended December 31, 2013 increased to $772,442 from comparable figure of $619,184 for the year ended December 31, 2012 ($676,094 before stripping subsidiary). The increase was partially due to an increase in the administrative expense, which increased to $320,075 from comparable figure of $185,952, due to more professional fee and entertainment expenses occurred in 2013. The amortization expense for the year ended December 31, 2013 remained stable, as no addition or disposal occurred for Land use rights and the small amount disposed fixed assets had limited effect on the total amortization expense.
Income before taxes and non-controlling interests from continuing operations for the year ended December 31, 2013 was $625,042 as compared to an income of $658,618 for year ended December 31, 2012($601,242 before stripping subsidiary). The slight decrease for our operating results was partial attributable to the increased administrative expense for the year ended December 31, 2013.
Income (loss) on discontinued operations
Income on discontinued operations was $1,693,219 for the year ended December 31, 2013, compared to a loss of $43,111 for the year ended December 31, 2012. The significant change was due to the gain on disposal of mines of $2,294,386 for the year ended December 31, 2013.
East Mining transferred its mines exploration rights to Xunyang County Yongjin Mining Co., Ltd with a consideration of $2,422,794 (RMB 15,000,000). The transaction was completed and the outstanding amount was settled as of December 31, 2013. The gain on disposal of mines consists of the considerations and the total of $128,408 for the related business tax and the surcharges.
The following table showed the detail of Income (loss) on East Mining.
Net Income
We achieved a net income of $2,318,261 for both continuing and discontinued operations for the year ended December 31, 2013, compared to a net income of $615,507 for the year ended December 31, 2012. The significant increase was primarily due to the gain from disposing our mines business in 2013, which was included in the item of income (loss) on discontinued operations.
Comprehensive Income
Our comprehensive income for both continuing and discontinued operations for the year ended December 31, 2013 was $2,755,837 compared with comprehensive income of $646,757 for the year ended December 31, 2012. The comprehensive income (loss) for each period only referred to the foreign currencies translation gain (loss), between the U.S. Dollar and the Chinese Yuan RMB (or Hong Kong Dollar for Wah Bon).
Stockholders’ Equity
Stockholders' equity increased to $13,893,639 as of December 31, 2013, or approximately 9%, from $12,728,536 as of December 31, 2012. The significant increase was primarily due to our net income of $2,318,261 generated for the year ended December 31, 2013.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows From Operating Activities
Net cash used in operating activities of $797,379 for the year ended December 31, 2013 was primarily attributable to its outstanding account receivable from Shaanxi Huanghe Bay Springs Lake Theme Park Ltd of $1,230,133 (RMB 7,500,000) occurred in 2013 The adjustments to reconcile our net income to net cash flow mainly include depreciation and amortization expense of $ 447,372, notes payable written off of $434,137, an increase in operating liability of $138,442, a decrease in other current assets and prepayment of $42,493, the allowance for long term investment of $190,536, and net cash used in discontinued operations of $576,994.
The net cash used in discontinued operations of $576,994 was mainly due to the decrease of $323,039 in advance from customers for the year ended December 31, 2013.
Cash Flows From Investing Activities
Net cash used in investing activities of $1,419,679 for continuing operations for the year ended December 31, 2013 was incurred mainly from the increased borrowing of $1,355,597 to our related parties.
Investing activities for discontinued operations provided net cash of $569,210 in which cash of $2,422,794 was received for disposal of mines and cash of $1,829,036 was borrowed to East Mining’s related parties.
As a result, the Company used total cash of $850,469 by investing activities for the year ended December 31, 2013, compared to total cash of $396,066 provided in investing activities for the year ended December 31, 2012.
Cash Flows From Financing Activities
Net cash of $18,116 used in financing activities for the year ended December 31, 2013, compared to net cash of $532,376 provided for the year ended December 31, 2012. The continuing operations provided cash of $80,543 and the discontinued operations used cash of $98,659 for the year ended December 31, 2013.
General
Collectability of our account receivable for the land use right leasing is important to our continuation of operation. In addition, we have access to short and long term loans of cash from our directors or other related parties.
Our continuing operations and discontinued operations provided loans of $1,355,597 and $1,829,036 respectively to our related parties for the year ended December 31, 2013.
Our continuing operations received cash of $87,558 from our related parties and returned cash of $ 7,015 to our shareholders for the year ended December 31, 2013.
Our current assets decreased by $2,683,168 and total assets decreased by $145,066 respectively, which resulted in our sharply decreased cash on hand for the year ended December 31, 2013.
We have cash of $159,866 and $1,763,381 as of December 31, 2013 and 2012 respectively. The significant decrease of cash balance was due to the following collection in 2013:
The subsidiary of East Mining was disposed at the end of 2013 with an offset to amounts due to the transferees.
We provided cash of $1,295,740(RMB 7,900,000) to our related party, Shaanxi Du Kang Liquor Group Co., Ltd for the year ended December 31, 2013.
We did not receive any cash for our business for the year ended December 31, 2013.
However, we believe that we have sufficient cash to fund operations for the next 12 months.
FINANCING
We anticipated the cash generated from operating activities will be sufficient to sustain our daily operations for the next twelve months.
INFLATION
Our management believes that inflation did not have a material effect on our results of operations in 2013.
OFF-BALANCE SHEET ARRANGEMENTS.
We do not have any off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
None
BASIS OF PRESENTATION
The Company's consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP").
This basis of accounting differs in certain material respects from that used for the preparation of the books of account of the Company, which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises with limited liabilities established in the PRC ("PRC GAAP"), the accounting standards used in the places of their domicile. The accompanying consolidated financial statements reflect necessary adjustments not recorded in the books of account of the Company to present them in conformity with US GAAP.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities to comply with generally accepted accounting principles. We base our estimates on historical experience and on various other assumptions that we believe are 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. Actual results could differ from our estimates, which would affect the related amounts reported in our financial statements.
An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimates are made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that the following critical accounting policies reflect the significant estimates and assumptions which are used in the preparation of the consolidated financial statements and affect our financial condition and results of operations.
The Company recognizes revenue when the earnings process is complete, both significant risks and rewards of ownership are transferred or services have been rendered and accepted, the selling price is fixed or determinable, and collectability is reasonably assured.
We are currently leasing the land use right to Huanghe for the development and operation of a theme park. We generally collect the annual rent every year, and then recognize land use right leasing revenue over the beneficial period described by the agreement, as the revenue is realized or realizable and earned.
Related Party
A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, member of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting party might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
Our related parties are the following individuals and entities: (i) Mr. Wang Sheng Li (a director of the Company), Mr. Chen Weidong (our President, Chief Executive Officer and Chairman of the Board), Ms Li Ping (a director of the Company), and Ms. Chen Min (a director of the Company), all of whom are shareholders of the Company; (ii) Mr. Zhang Hong Jun, who is currently a director and controlling shareholder of the Company; (iii) Ms Li Ping (our Chief Financial Officer and who has the same name with our Director Ms Li Ping); and (iv) the following companies: Du Kang Liquor Development Co., Ltd., Huitong World Property Superintendent Company, Xi Deng Hui Development Stock Co., Ltd. Zhongke Lvxiang Development Stock Co., Ltd., Shaanxi Du Kang Liquor Group Co., Ltd., Shaanxi Bai Shui Du Kang Brand Management Co., Ltd, Shaanxi Changjiang electricity & new energy Co., Ltd, Shaanxi Huanghe Bay Springs Lake Theme Park Ltd, Shaanxi Changfa Industrial Co., LTD, Shaanxi Tangrenjie Advertising Media Co., Ltd and Zhongke Aerospace , Shaanxi East Mining Co., Ltd, & Agriculture Development Stock Co., Ltd.
Cash flows from due from related parties are classified as cash flows from investing activities. Cash flows from due to related parties are classified as cash flows from financing activities.
FINANCIAL INSTRUMENTS
We do not employ derivative financial instruments and have no foreign exchange contracts. Our financial instruments are primarily cash and cash equivalents, but also include receivables, payables, long term debt, and short term notes. We do not try to manage risk of foreign exchange rates or engage in hedging activities.
FOREIGN EXCHANGE RATES
All of our sales are in the Chinese currency, RMB, but our financial reporting is in U. S. dollars. We are therefore subject to fluctuations in foreign exchange rates in our reports. There can be no assurance that changes in foreign exchange rates will not have a material adverse impact on our financial reporting and a negative effect on the prices of our securities.
Foreign currency translation gain or loss is reported as other comprehensive income in the consolidated statements of operations and comprehensive loss and stockholders’ equity. The translation gain recorded for the years ended December 31, 2013 and 2012 were $437,576 and $31,250 respectively. The equity accounts were stated at their historical rate.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required for a smaller reporting company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data filed as part of this report are set forth beginning on page of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
In July 2008, we engaged Brock, Schechter & Polakoff, LLP (“BSP”) as our principal independent accountants to audit our financial statements for the fiscal year ended December 31, 2009 and 2008, to be included on our Form 10-K under Section 13(a) or 15(d) under the Exchange Act of 1934, as amended, and for the fiscal quarterly reports.
Resignation of Brock, Schechter & Polakoff, LLP
On January 5, 2011, Brock, Schechter & Polakoff, LLP (“BSP”) resigned as the principal independent accountant to audit the consolidated financial statements of the Company as of and for the fiscal year ended December 31, 2010. The Company’s Board of Directors accepted BSP’s resignation. During the years ended December 31, 2009 and 2008, and the subsequent interim periods, there was a disagreement between BSP and the Company, arising with regard to the filing by the Company of the September 30, 2010 Quarterly Report on Form 10-Q without prior approval by BSP.
On January 7, 2011, the Company was formally notified by BSP of the following:
(i)
The September 30, 2010 condensed consolidated financial statements and the Form 10-Q for the related quarter should not be relied upon.
(ii)
The September 30, 2010 Quarterly Report on Form 10-Q was filed without prior approval by BSP and failed to address issues identified by the SEC, and for these reasons should be considered deficient and not timely filed.
(iii)
The Company’s December 31, 2009 consolidated financial statements and Form 10-K for the year ended December 31, 2009 include errors identified by the SEC that require correction, and that report, including its financial statements, should not be relied upon.
(iv)
The March 31, 2010 and June 30, 2010 condensed consolidated financial statements and Forms 10-Q include errors identified by the SEC that need to be corrected and those reports should not be relied upon.
Resignation of Parker Randall CF (H.K.) CPA Limited
Effective May 23, 2012, Parker Randall CF (H.K.) CPA Limited (“Parker Randall”) resigned as our independent registered public accounting firm.
The reports of Parker Randall on the our financial statements as of and for the years ended December 31, 2010 and December 31, 2009 contained no adverse opinion or disclaimer of opinion nor were any such reports qualified or modified as to uncertainty, audit scope, or accounting principle.
During the recent fiscal years ending December 31, 2010 and December 31, 2009 and through the date of this Annual Report, there have been no (i) disagreements with Parker Randall on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to Parker Randall’s satisfaction, would have caused Parker Randall to make reference to the subject matter of the disagreement(s) in connection with its reports; or (ii) “reportable events” as defined in Item 304(a)(1)(v) of Regulation S-K.
We have provided Parker Randall with a copy of the above disclosures and requested that Parker Randall furnish us with a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the above statement.
Engagement of New Auditor
On August 20, 2012, we engaged MaloneBailey LLP (“MaloneBailey”), as our new independent registered public accounting firm.
During the recent fiscal years ending December 31, 2011, December 31, 2012 and December 31,2013, and through the date of this Annual Report, we have not consulted MaloneBailey regarding (i) the application of accounting principles to any specified transaction, either completed or proposed, (ii) the type of audit opinion that might be rendered on the Company’s financial statements, or (iii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv)) or a reportable event (as defined in Item 304(a)(1)(v)).
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
In connection with the preparation of this Annual Report on Form10-K, an evaluation was carried out by the Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2012. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2013.
Internal Control over Financial Reporting
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework and Internal Control over Financial Reporting-Guidance for Smaller Public Companies. As a result of this assessment, management identified a material weakness in internal control over financial reporting.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
We note the following deficiencies that management believes to be material weaknesses:
a)
Various members of the Company’s executive management are also members of its board of directors, including the board’s chairman. This situation prevents a truly independent review of the actions of the Company’s management.
b)
The Company does not have an independent audit committee to oversee the external financial reporting process and the internal control over financial reporting as required by the Sarbanes-Oxley Act of 2002. This, in combination with the lack of an independent board of directors, creates a material weakness in the oversight of the Company’s management, its internal control and its financial reporting process.
c)
The Company does not have sufficient knowledge of all the necessary financial statement disclosures that are required to be made in accordance with U.S. generally accepted accounting principles.
Based on the material weakness described above, management has concluded that, as of December 31, 2013, the Company's internal control over financial reporting was not effective based on the criteria in Internal control - Integrated framework issued by the COSO.
The Company intends to take the following steps as soon as practicable to remediate the material weakness we identified as follows:
1.
We intend to recruit independent directors such that at least a majority of our Board is independent.
2.
We intend to constitute audit, nominating and compensation committees comprised entirely of independent directors and to adopt committee charters for those committees, in accordance with the corporate governance standards of the New York Stock Exchange. We intend that at least one member of our Audit Committee will qualify as an “Audit Committee financial expert.”
Changes in Internal Controls over Financial Reporting
There has been no significant change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)- 15(f) of the Exchange Act) that occurred during the year ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors, Executive Officers and Key Employees
The following table sets forth the directors, executive officers and key employees of the Company as of December 31, 2013.
POSITION AND OFFICE
Board of Director Independence
We intend to comply with the rules of the New York Stock Exchange governing director independence, although our stock is not listed on the New York Stock Exchange. As of December 31, 2013 none of our directors qualified as independent director under the rules of the New York Stock Exchange, because each director is involved in an employee or executive management function with the Company. Further, as of December 31, 2013 we did not have a lead independent director.
Biographical Information of Directors, Officers and Key Employees of the Company
Listed below is biographical information for each of the directors and executive officers of the Company, including their principal occupations during the five (5) years ended December 31, 2013, and other affiliations. None of our officers, directors, promoters or control persons has filed or been involve for the past ten years in any of the events listed in item 401(f) of Regulation S-K. No family relationships exist between any of our executive officers and directors.
Chen Wei Dong - President, Chief Executive Officer and Chairman of the Board
Mr. Chen is the President, Chief Executive Officer and Chairman of our board of directors. He has served in these functions since March 2006. From 2001 to January 2006, he served as the General Manager of Du Kang Trading Company, a distributor of alcoholic beverages. Mr. Chen graduated from China’s Northwestern University majoring in Enterprise Management. We believe Mr. Chen’s qualifications to serve on our board of directors include his expertise in business and corporate strategy, and his knowledge regarding our Company and industry.
Zhang Hong Jun - Director
Mr. Zhang has been a director of our Company since August 2006. In 2000, he was named to serve as the Executive Commissioner of the Shaanxi Federation of Industry & Commerce, an academician of the China Academy of Management of Science, the Shaanxi Deputy of the National People’s Congress, a member of the Shaanxi Executive Commission of the Political Consultation Committee, and the Vice Chairman of the Beijing Federation of Shaanxi Commerce. From February 2002 to May 2006, Mr. Zhang served as Chairman and CEO of Shaanxi Bai shui Du Kang Liquor Co., where his responsibilities included raising capital, as well as corporate culture and brand construction. Mr. Zhang received his MBA Certificate from the China Academy of Management of Science. He joined our board in August 2006. Our board believes that his entrepreneurial qualities, his governmental, political and association experience, and his business acumen offer a valuable perspective to our Company.
Wang Sheng Li - Director
Mr. Wang has been a director of our Company since March 2006. From 1998 to March 2006, he served as the general manager of Xi Deng Hui Alcohol Co. Ltd. Mr. Wang is in charge of the development and maintenance of our public relations, as well as the leasing of our real estate. Mr. Wang studied in Xi’an Petroleum University Electron Construction School, where he majored in computers. We believe that Mr. Wang’s qualifications to serve on our board of directors include his significant local community network as well as his knowledge regarding our Company and our industry.
Li Ping - Chief Financial Officer
Ms. Li has been our Chief Financial Officer since March 2008. From 2000 to 2005, she worked as CFO of China Life Insurance Company, Weinan branch. From September 2005 to January 2008, Ms. Li was a professor at China’s Northwest Business College. Ms. Li has substantial experience in financial management and in the regulations, tax system and banking business of China. Ms. Li studied in the Shaanxi Finance and Economics College from 1985 to 1991, where she majored in Finance and Economics Management. Our board of directors believes that Ms. Li’s judgment, decision making, and experience in the financial and accounting industry, provide a valuable perspective to our Company.
Tian Hai Long - Director
Mr. Tian has been a director of the Company since March 2006. From May 1998 to December 2006, he served as the marketing director in Shaan Xi Hong Yuan E-commerce Limited Co., and as marketing general manager for Shaan Xi Bai Shui Trade Limited Co. Mr. Tian participates in formulating the Company’s mineral resources market research work and establishing our network database for minerals logistics. He studied in Xi’an Technological University Electronic Information School, where he majored in e-commerce and marketing management. We believe Mr. Tian’s qualifications to serve on our board of Directors include his extensive experience in marketing as well as his knowledge of our Company and industry.
Chen Min - Director
Ms Chen was appointed as a director of the Company in September 2006. She was in charge of item funds management and budget in a bridge design Company from March 2000 to September 2006. She worked in a national machinery manufacturing enterprise from 1997 to 2000. She obtained a bachelor degree from the Northern West University in Financial and foreign exchange management in 1996.
Li Ping - Director
Ms. Li has been a director of the Company since September 2006. From 2002 to 2006, she was a teacher in Shaanxi Northwest Metallurgy College. She graduated from Shaanxi Metallurgy College in 1992 and majored in Metallurgy.
Audit Committee
We did not have an audit committee at December 31, 2013, and we are in the process of developing one.
Code of Ethics
We have adopted a code of ethics (the "Code of Ethics") that applies to our principal chief executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Code of Ethics is being designed with the intent to deter wrongdoing, and to promote the following:
•
Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships
•
Full, fair, accurate, timely and understandable disclosure in reports and documents that registrant files with, or submits to, the Commission and in other public communications made by the registrant
•
Compliance with applicable governmental laws, rules and regulations The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code
•
Accountability for adherence to the code.
Stockholders may request a copy of the Code of Ethics, which will be provided without charge, by writing to: China Changjiang Mining & New Energy Co.., Ltd., 17th Floor, Xinhui Mansion, Gaoxin Road, Hi-Tech Zone, Xi’An, P.R. China, 710075.
We are in the process of reviewing and updating our Code of Ethics.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires each director, officer and individual beneficially owning more than 10% of a registered security of the Company, to file with the SEC, within specified time frames, initial statements of beneficial ownership (Form 3) and statements of changes in beneficial ownership (Forms 4 and 5) of common stock of the Company. To the best of our knowledge, no reports required to be filed by Section 16(a) of the Exchange Act were untimely during fiscal 2013.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table and the accompanying notes provide detailed information for each of the last two fiscal years ended 2013 and 2012 concerning cash and non-cash compensation paid or accrued to our named executive officers.
Summary Compensation Table - Fiscal Years Ended December 31, 2013 and 2012
____________
(1)
Compensation paid in RMB has been converted at the rate of $1USD = 6.1912RMB.
Director Compensation
In 2013, all directors were company employees and received no compensation for service as directors. We reimbursed the directors for any expenses incurred in connection with their duties as directors.
Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 2013, none of our executive officers served as a member of a compensation committee (or other committee of the board of directors performing equivalent functions or, in the absence of any such committee, the entire board of directors) of any entity that has one or more executive officers serving as a member of our board of directors.
Stock Option Plan
We have not implemented a stock option plan at this time and have issued no stock options, SARs or other equity compensation. We may decide, at a later date, and reserve the right to, initiate such a plan as deemed necessary by the Board.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information with respect to the beneficial ownership of our common stock as of December 31, 2013 for:
Each stockholder, or group of affiliated stockholders, who we know beneficially to own more than 5% of the outstanding shares of our common stock;
Each of our current directors;
Each of our executive officers; and Each of our current directors and current executive officers as a group.
Beneficial ownership is determined in accordance with rules of the SEC and generally includes any shares over which a person exercises sole or shared voting and/or investment power. We believe the beneficial owners of the common stock listed below, based on information furnished by them, have sole voting and investment power with respect to the number of shares listed opposite their names.
The number of shares and percentages of beneficial ownership set forth below are based on 64,629,559 shares of common stock outstanding as of December 31, 2013, which gives effect to our 1-for-10 reverse split of our common stock and the conversion of all outstanding shares of Series C Preferred Stock into 609 million shares of common stock.
______________
(1)
The address for each beneficial owner is Seventeenth Floor, Xinhui Mansion, Gaoxin Road Hi-Tech Zone, Xi’An P.R. China 71005.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTIES TRANSACTIONS.
Loans from/to Related Parties
Our related parties are the following individuals and entities: (i) Mr. Wang Sheng Li (a director of the Company), Mr. Chen Weidong (our President, Chief Executive Officer and Chairman of the Board), Ms Li Ping (a director of the Company), and Ms. Chen Min (a director of the Company), all of whom are shareholders of the Company; (ii) Mr. Zhang Hong Jun, who is currently a director of the Company; (iii) Ms Li Ping (our Chief Financial Officer and who has the same name with our Director Ms Li Ping); and (iv) the following companies: Du Kang Liquor Development Co., Ltd., Huiton World Property Superintendent Company, Xi Deng Hui Development Stock Co., Ltd. Zhongke Lvxiang Development Stock Co., Ltd., Shaanxi Du Kang Liquor Group Co., Ltd., Shaanxi Bai Shui Du Kang Brand Management Co., Ltd, Shaanxi Changjiang electricity & new energy Co., Ltd, Shaanxi Huanghe Bay Springs Lake Theme Park Ltd, Shaanxi Changfa Industrial Co., LTD, Shaanxi Tangrenjie Advertising Media Co., Ltd and Zhongke Aerospace, Shaanxi East Mining Co., Ltd & Agriculture Development Stock Co., Ltd.
§ As of December 31, 2013, the related parties owed the Company $5,486,628, for advances made on an unsecured basis, repayable on demand, as follows:
The balance of $1,337,388 represents the loan to the related parties Du Kang Liquor Development Co., Ltd, which are unsecured, repayable on demand. These loans bear interest in the benchmark lending rate over the same period.
The balance of $2,460,267 from Shaanxi Huanghe Bay Springs Lake Theme Park Ltd was the receivable of rent for land use right as of December 31, 2013.
The remaining balances of $1,688,973 are the loans to the related parties, which are interest free, unsecured and repayable on demand..
As of December 31, 2013, the Company owed an aggregate of $3,418,321 to three stockholders, for a loan made on an unsecured basis, repayable on demand and interest free, as follows.
We transferred 30% equity of East Mining to Mr. Zhang Hong Jun, with a consideration of $442,848 (RMB 2,700,000), on December 25, 2013. The balance of $995,096 as of December 31, 2013 was the result after offsetting the due from amount of $442,848.
We transferred 30% equity of East Mining to Mr. Wang Sheng Li, with a consideration of $442,848 (RMB 2,700,000), on December 25, 2013. The balance of $1,809,755 as of December 31, 2013 was the result after offsetting the due from amount of $442,848.
The Company owed the following companies an aggregate of $3,473,437, as of December 31, 2013, which is interest free, unsecured and repayable on demand.
Consulting Fees
E.H. Hawes, II served as the chairman of the board, President and Chief Executive Officer of North American until February 2008. Mr. Hawes has provided certain consulting services to the Company and was paid $0 in consulting fees during 2008 and 2007. He did not receive a salary from the Company and, the sum of $170,000 was paid to him in settlement of all claims and obligations.
At the completion of the reverse merger transaction between North American and the Company in February 2008, we paid Capital Advisory Services, Inc. $370,000 and issued 3,700 shares of Series C Preferred Stock in satisfaction of our obligation for the legal and consulting fees incurred in connection with the reverse merger transaction. Stanley F. Wilson was the CEO of Capital Advisory Services. From 2006 until completion of the reverse merger transaction, Capital Advisory Services provided consultation to the Company in connection with its business plan, evaluation of companies for potential mergers, and assistance to management in completing required tasks necessary for securities law compliance. On January 10 and January 21, 2010, we issued 4,500,000 shares of common stock in exchange for 3,700 Series C Preferred shares, according to the exchange agreement. All such shares were restricted securities and could not be resold without registration or an exemption from registration under the Securities Act.
Review, Approval or Ratification of Transactions with Related Persons
The Company’s policy with regard to any transactions between the Company and a related person is that such transactions must be on terms at least as favorable to the Company as arms’-length transactions of similar types with unaffiliated third parties. Additionally, all related party transactions must be disclosed to, and considered and approved by, our board of directors prior to entering into any such transaction.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Independent Auditors’ Fees
Fees Billed for Audit and Non-Audit Services
On March 18, 2011, we engaged Parker Randall CF (H.K.) CPA Limited (“Parker Randall”) as our independent accounting firm for purposing of performing another audit of our financial statements for the years ended December 31, 2007, 2008, 2009 and 2010. The following table represents the aggregate fees billed for professional audit services rendered to Parker Randall for the audit of our financial statements for the years ended December 31, 2010 and 2009.
On August 20, 2012, we engaged MaloneBailey LLP (“MaloneBailey”), as the Company’s new independent registered public accounting firm.
The following table represents the aggregate fees billed for professional audit services rendered to MaloneBailey for the audit of our financial statements for the year ended December 31, 2013 and 2012.
______________
(1)
Audit Fees. These are fees for professional services for the audit of our annual financial statements, and for services that are normally provided in connection with statutory and regulatory filings or engagements.
(2)
The amounts shown in 2010 and 2009 relate to (i) the audit of our annual financial statements for the fiscal years ended December 31, 2010 and 2009.
(3)
Audit-Related Fees. These are fees for the assurance and related services reasonably related to the performance of the audit or the review of our financial statements.
(4)
Tax Fees. These are fees for professional services with respect to tax compliance, tax advice, and tax planning.
(5)
All Other Fees. These are fees for permissible work that does not fall within any of the other fee categories, i.e., Audit Fees, Audit-Related Fees, or Tax Fees.
Pre-Approval Policy for Audit and Non-Audit Services
We do not have a standing audit committee, and the full Board performs all functions of an audit committee, including the pre-approval of all audit and non-audit services before we engage an accountant. All of the services rendered to us by MaloneBailey have been pre-approved by our Board of Directors.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as part of or incorporated by reference into this 10K:
(a)(1)
Consolidated Financial Statements: The index of the consolidated financial statements contained herein is set forth on page hereof.
(a)(2)
Financial Statement Schedule: All schedules have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
(b)
Exhibits Required by Item 601 of Regulation S-K:
______________
*
Filed herewith.
(1)
Incorporated by reference from the Information Statement on Form 8-K of North American Gaming and Entertainment Company filed with the Securities and Exchange Commission on February 6, 2008.
(2)
Incorporated by reference from the Annual Report on Form 10-K for the year ended December 31, 2011 of the Company filed with the Securities and Exchange Commission on February 26, 2013.
CHINA CHANGJIANG MINING & NEW ENERGY CO., LTD.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
China Changjiang Mining &New Energy Co., Ltd.
We have audited the accompanying consolidated balance sheets of China Changjiang Mining & New Energy Co., Ltd. and its subsidiaries (collectively, the "Company") as of December 31, 2013 and 2012, and the consolidated statements of income and comprehensive income, shareholders' equity and cash flows for the years then ended. The consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of China Changjiang Mining & New Energy Co., Ltd. and its subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ MaloneBailey, LLP
www.malonebailey.com
Houston, Texas
March 28, 2014
CHINA CHANGJIANG MINING & NEW ENERGY CO., LTD.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2013 AND 2012
(Stated in US Dollars)
See accompanying notes to the consolidated financial statements
CHINA CHANGJIANG MINING & NEW ENERGY CO., LTD
CONSOLIDATED BALANCE SHEETS (continued)
AS OF DECEMBER 31, 2013 AND 2012
(Stated in US Dollars)
See accompanying notes to the consolidated financial statements
CHINA CHANGJIANG MINING & NEW ENERGY CO., LTD.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(Stated in US Dollars)
See accompanying notes to the consolidated financial statements
CHINA CHANGJIANG MINING & NEW ENERGY CO., LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(Stated in US Dollars)
See accompanying notes to the consolidated financial statements
CHINA CHANGJIANG MINING & NEW ENERGY CO., LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(Stated in US Dollars)
See accompanying notes to the consolidated financial statements
1.
ORGANIZATION AND PRINCIPAL ACTIVITIES
The Company was incorporated under the laws of the State of Delaware in 1969.
Hong Kong Wah Bon Enterprise Limited ("Wah Bon") was incorporated in Hong Kong on July 7, 2006 as an investment holding company.
Shaanxi Pacific New Energy Development Company Limited ("Shaanxi Pacific") was incorporated as a limited liability company in the People's Republic of China ("PRC") on July 20, 2007 as an investment holding company.
Shaanxi Changjiang Mining & New Energy Co., Ltd (“Shaanxi Changjiang”) (formerly Weinan Industrial and Commercial Company Limited) was incorporated as a limited liability company in the PRC on March 19, 1999. The Company became a joint stock company in January 2006 with its business activities in investment holding and the development of a theme park in Xi’An, PRC.
In August 2005, Shaanxi Changjiang contributed land use rights valued at $7,928,532 in lieu of cash to the registered capital of Huanghe representing 92.93% of the equity of Huanghe. Huanghe was incorporated as a limited liability company in the PRC on August 9, 2005 as Shaanxi Changjiang Petroleum and Energy Development Co., Limited and is engaged in the development of a theme park in Huanghe Bay (Huanghe Nantan), Heyang County, Shaanxi Province, PRC.
On February 5, 2007, Shaanxi Changjiang entered into an agreement with a third party to acquire 40% of the equity interest in East Mining Company Limited ("East Mining") for $3,117,267 in cash. East Mining is engaged in exploration for lead, zinc and gold for mining in Xunyan County, Shaanxi Province, PRC.
On March 22, 2007, Shaanxi Changjiang entered into an agreement with the majority shareholder of Shaanxi Changjiang to exchange its 92.93% interest in Huanghe for a 20% equity interest in East Mining owned by this related party.
On August 15, 2007, 97.2% of the shareholders of Shaanxi Changjiang entered into a definitive agreement with Shaanxi Pacific and the stockholders of Shaanxi Pacific in which they disposed their ownership in Shaanxi Changjiang to Shaanxi Pacific for 98% of ownership in Shaanxi Pacific and cash of $1,328,940 payable on or before December 31, 2007.
On September 2, 2007, Wah Bon acquired 100% ownership of Shaanxi Pacific for a cash consideration of $128,205.
On May 30, 2007, amended to July 5, 2007, North American Gaming and Entertainment Corporation (“North American”) entered into a Material Definitive Agreement, pursuant to which the shareholders of Shaanxi Changjiang exchanged all their shares in Shaanxi Changjiang for 500,000 shares of series C convertible preferred stock ("series C shares") in North American which carried the right of 1,218 votes per share and was convertible to 609,000,000 common shares. In connection with the exchange, Shaanxi Changjiang also delivered $370,000 to North American and certain non-affiliates of North American will transfer to North American or its designee a total of 3,800,000 shares of common stock, par value of $0.01 per share, of North American which had been held for longer than 2 years by such non-affiliates, in exchange for the issuance by North American to each of such non-affiliates of 2,250,000 shares of common stock of North American. Issued and outstanding share of series C preferred stock were automatically converted into that number of fully paid and non-assessable shares of common stock based upon the conversion rate upon the filing by the Company of an amendment to its Certificate of Incorporation, increasing the number of authorized shares of common stock to 800,000,000 shares, changing the Company's name to China Changjiang Mining & New Energy Co. Limited and implementing a one for ten reverse stock split. The transaction was closed on February 4, 2008 and Wah Bon became a wholly owned subsidiary of North American.
There was a 10 to 1 reverse stock split for the Company’s common stock during December 2009 and all the shares information are retroactively restated to reflect the reverse stock split. The Company will affect the reverse stock splits upon obtaining regulatory approval. The preferred stock holders will not convert their C convertible preferred stock until after the completion of the reverse stock split.
On February 9, 2010, we filed a Certificate of Amendment to our Articles of Incorporation to effect a 1-for-10 reverse stock split of our common stock, subject to FINRA approval. The 1-for-10 reverse split was approved by FINRA on July 30, 2010, effective August 2, 2010.
The Company was reincorporated from the state of Delaware to the state of Nevada with the intent to effect a statutory merger of the Delaware corporation "North American Gaming and Entertainment Corporation", into China Changjiang and to swap all issued and outstanding shares in the Delaware corporation for comparable shares in China Changjiang and dissolve the Delaware corporation.
The members have limited liability for the obligations or debts of the entity.
The merger of North American and Wah Bon was treated for accounting purposes as a capital transaction and recapitalization by Wah Bon ("the accounting acquirer") and re-organization by North American ("the accounting acquiree"). The consolidated financial statements have been prepared as if the reorganization had occurred retroactively.
ORGANIZATION AND PRINCIPAL ACTIVITIES (Continued)
On February 4, 2008, (the "Closing Date") we acquired Wah Bon and its three subsidiaries: Shaanxi Pacific; Shaanxi Changjiang and East Mining. Wah Bon owns 100% of Shaanxi Pacific. Shaanxi Pacific owns 97.2% of Shaanxi Changjiang; and Shaanxi Changjiang owns 60% of East Mining. The minority interests represent the minority shareholders' 2.8% and 40% share of the results of Shaanxi Changjiang and East Mining respectively.
On December 30, 2013, the Company transferred all of the 60% equity of East Mining to its common control person, Mr. Zhang Hong Jun and one of the shareholders, Mr. Wang Sheng Li with a consideration of $885,696 (RMB 5,400,000). Each of the acquirers obtained 30% equity of East Mining in this transaction.
Accordingly, the consolidated financial statements include the following:
(1)
The consolidated balance sheet consisting of the net assets of the acquirer at historical cost and the net assets of the acquiree at historical cost.
(2)
The statement of operations including the operations of the acquirer for the periods presented and the operations of the acquiree from the date of the merger or the period presented.
China Changjiang, Wah Bon, Shaanxi Pacific and Shaanxi Changjiang are hereafter referred to collectively as "the Company".
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a)
Method of Accounting
The Company maintains its accounts and prepares its financial statements using the accrual method accounting .The consolidated financial statements and notes are representations of management. Accounting policies adopted by the Company conform to generally accepted accounting principles in the United States of America and have been consistently applied.
(b)
Principles of consolidation
The accompanying consolidated financial statements as of December 31, 2013 and 2012 consolidate the financial statements of China Changjiang and its 100% owned subsidiary Wah Bon, 100% owned subsidiary Shaanxi Pacific, 97.2% owned subsidiary Shaanxi Changjiang. The minority interests represent the minority shareholders' 2.8% shares of the results of Shaanxi Changjiang.
(c)
Business combinations and consolidated financial statements
The acquisition on March 22, 2007, which Shaanxi Changjiang entered into an agreement with the majority stockholder of Shaanxi Changjiang to exchange its 92.93% interest in Huanghe for 20% equity interest in East Mining owned by this related party; the acquisition on August 15, 2007, which 97.2% of the stockholders of Shaanxi Changjiang entered into a definitive agreement with Shaanxi Pacific and the stockholders of Shaanxi Pacific pursuant to which they disposed their ownership in Shaanxi Changjiang to Shaanxi Pacific for 98% of ownership in Shaanxi Pacific; The acquisition on September 2, 2007, in which Wah Bon acquired 100% ownership of Shaanxi Pacific at a consideration of $128,205 in cash; and the stripping off of East Mining on December 25, 2013 were all accounted for as a reorganization of entities under common control.
(d)
Basis of Presentation
The Company's consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP").
This basis of accounting differs in certain material respects from that used for the preparation of the books of account of the Company, which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises with limited liabilities established in the PRC ("PRC GAAP"), the accounting standards used in the places of their domicile. The accompanying consolidated financial statements reflect necessary adjustments not recorded in the books of account of the Company to present them in conformity with US GAAP.
(e)
Economic and Political Risks
The Company's operations are conducted in the PRC and involve risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Company's results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion, remittances abroad, and rates and methods of taxation, among other things.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f)
Use of Estimates
In preparing of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of accounts receivable, inventories, deferred income taxes and the estimation on useful lives of plant and machinery. Actual results could differ from those estimates.
(g)
Concentrations of Credit Risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, notes receivable and amounts due from a related party. The Company places its cash with financial institutions with high-credit ratings and quality. In addition, the Company conducts periodic reviews of the related party financial conditions and payment practices.
(h)
Cash and Cash Equivalents
The Company considers all highly liquid investments with initial maturities of three months or less to be cash equivalents.
(i)
Property, plant and equipment
Property, plant and equipment, are stated at cost less depreciation and amortization and accumulated impairment loss. Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are capitalized.
Depreciation of property, plant and equipment is calculated based on cost, less their estimated residual value, if any, using the straight-line method over their estimated useful lives. Estimated useful lives are as follows:
(j)
Intangible assets
All land belongs to the State in PRC. Enterprises and individuals can pay the State a fee to obtain a right to use a piece of land for commercial purpose or residential purpose for an initial period of 50 years or 70 years, respectively. The land use right can be sold, purchased, and exchanged in the market. The successor owner of the land use right will reduce the amount of time which has been consumed by the predecessor owner.
We acquired the 5.71 sq.km land use right parcel, located in Heyang Country, Shaanxi Province in 2005. Our land use rights are amortized over their fifty year term from October 2001 to October 2051. We have leased our land use right to Huanghe, and began to generate the rent revenue for the year ended December 31, 2011.
(k)
Impairment of long-lived assets
The Company accounts for impairment of property and equipment and amortizable intangible assets in accordance with ASC 360, “Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires the Company to evaluate a long-lived asset for recoverability when there is event or circumstance that indicate the carrying value of the asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset or asset group is not recoverable (when carrying amount exceeds the gross, undiscounted cash flows from use and disposition) and is measured as the excess of the carrying amount over the asset’s (or asset group’s) fair value. There was no impairment of long-lived assets for the years ended December 31, 2013 and 2012.
(l)
Equity-method investment
An affiliated company over which the Company has the ability to exercise significant influence, but does not have a controlling interest is accounted for using the equity method. Significant influence is generally considered to exist when the Company has an ownership interest in the voting stock of the investee of between 20% and 50%, and other factors, such as representation on the investee’s Board of Directors, voting rights and the impact of commercial arrangements, are considered in determining whether the equity method of accounting is appropriate. The Company’s share of earnings of equity affiliate is included in the accompanying consolidated statements of operations below provision for income taxes.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(m)
Fair value of financial instruments
The Company adopted ASC Topic 820 “Fair Value Measurements and Disclosures” (“ASC 820”) (formerly SFAS No. 157, “Fair Value Measurements”), ASC 820 use of financial instruments Intangible Assets" and "Accounting for Impairment or Disposal of Long-Lived Assets" ("SFAS No. 142 and 144"). ASC Topic 820 defines fair value, establishes a three level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The carrying amounts reported in the balance sheets for current receivables and payables qualify as financial instruments. Management concluded the carrying values are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and if applicable, their stated interest rate approximates current rates available. The three levels are defined as follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value.
It is management’s opinion that as of December 31, 2013, the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheet. This is attributed to the short maturities of the instruments and that interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective balance sheet dates.
(n)
Foreign Currency Translation
The Group maintains its consolidated financial statements in the functional currency. The functional currency of the Company is US dollar (“USD”), the functional currency of "Wah Bon" is Hong Kong dollar (“HKD”), and the functional currency of "Shaanxi Pacific", "Shaanxi Changjiang" and "East Mining" are the Renminbi (“RMB”). Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchanges rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.
For financial reporting purposes, the consolidated financial statements of the Company, "Wah Bon", "Shaanxi Pacific", "Shaanxi Changjiang" and "East Mining" which are prepared using the functional currency have been translated into United States dollars (“USD”). Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and stockholders’ equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign exchange adjustment to other comprehensive income, a component of stockholders’ equity.
Exchange rates applied for the foreign currency translation during the period are as follows:
USD to RMB
USD to HKD
HK$ is pegged to US$ and hence there is no significant translation adjustment impact on these consolidated financial statements.
RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(o)
Related Party
A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, member of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting party might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.
Cash flows from due from related parties are classified as cash flows from investing activities. Cash flows from due to related parties are classified as cash flows from financing activities.
(p)
Revenue Recognition
The Company recognizes revenue when the earnings process is complete, both significant risks and rewards of ownership are transferred or services have been rendered and accepted, the selling price is fixed or determinable, and collectability is reasonably assured.
The Company currently leased the land use right to Huanghe for the development and operation of a theme park. The Company generally collects the annual rent every year, and then recognizes land use right leasing revenue over the beneficial period described by the agreement, as the revenue is realized or realizable and earned.
(q)
Income Taxes
The Company utilizes SFAS No. 109, “Accounting for Income Taxes,” codified in FASB ASC Topic 740, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
ASC 740-10-25 clarifies the accounting for uncertain tax positions and requires that an entity recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as a component of income tax expense in the consolidated statements of income.
(r)
Comprehensive Income/Loss
Comprehensive income/loss is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a consolidated financial statement that is presented with the same prominence as other financial statements. At present, the only component of other comprehensive income is the company’s foreign currency translation adjustment.
(s)
Earning/Loss per share
Basic earning/loss per share is computed by dividing earning/loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earning/loss per share is computed in a manner similar to basic earning/loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
(t)
Recent Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income” (“ASU 2013-02”).Under ASU 2013-02, an entity is required to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2013-02 is not expected to have a material impact on the Company’s consolidated financial statements.
In October 2012, the FASB issued ASU 2012-04, “Technical Corrections and Improvements” in Accounting Standards Update No. 2012-04 ("ASU 2012-04"). The amendments in this update cover a wide range of topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In August 2012, the FASB issued Accounting Standards Update (“ASU”) 2012-03, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update)” in Accounting Standards Update No. 2012-03. This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
3.
OTHER CURRENT ASSETS AND PREPAYMENTS
Other current assets and prepayments of $155,564 mainly represent the small amount advances to the employees.
4.
PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant and equipment:
Depreciation expenses for the years ended December 31, 2013 and 2012 were $37,951 and $25,970 respectively.
5.
INTANGIBLE ASSET
The following is a summary of intangible asset:
The difference for the balance of cost was mainly due to the fluctuation of exchange rate of USD to RMB.
Amortization expenses were approximately $414,416 and $407,262 for the years ended December 31, 2013, and 2012, respectively.
6.
LONG TERM INVESTMENT
The balance of $132,229 represents the net value of long term investment to Shaanxi Changjiang electricity & new energy Co., Ltd. The Company is holding 20% equity of this associated company from 2008, with an investment cost of $315,658(RMB2,000,000). Impairment of $183,429 was provided for the year ended December 31,2013.
7.
DUE FROM RELATED PARTIES - NON CURRENT
The balance of $5,486,628 due from related parties represents the loan owned from related parties, which are unsecured and repayable on demand.
Due from related parties consists of the following.
The balance of $45,876 as of December 31, 2012 was the advance to our CEO for the Company's business.
8.
OTHER PAYABLES AND ACCRUED EXPENSES
The following is a summary of other payables and accrued liabilities:
9.
NOTES PAYABLE
In May 2004 and subsequently renewed in June 2007, the Company entered into a promissory note with a related party due December 31, 2007. As of December 31, 2007, the note payable is in default on the repayment schedule. Pursuant to the term of note, the lender's sole remedy shall be to foreclose the collateral and seek recovery from the Company's note receivable and the related party shall have no claim against the Company for any deficiency in collection of the collateralized note receivable from a third party.
As the holder of notes was compensated from the proceeds of notes receivable in 2009. The notes payable of $434,137 was written off for the year ended December 31,2013.
10.
DUE TO RELATED PARTIES
The balance of $3,473,437 due to related parties represents the loan owed to related parties, which are interest free, unsecured and repayable on demand twelve months after December 31, 2013.
Due to related parties consists of the following.
11.
DUE TO SHAREHOLDERS
The balance of $3,418,321 due to shareholders represents the loan owed to the shareholders, which are interest free, unsecured and repayable on demand twelve months after December 31, 2013.
Due to shareholders consists of the following.
The Company transferred 30% equity of East Mining to Mr. Zhang Hong Jun, with a consideration of $442,848 (RMB2,700,000),on December 30,2013. The balance of $995,096 as of December 31, 2013 represents the result after offsetting the due from amount of $442,848.
The Company transferred 30% equity of East Mining to Mr. Wang Sheng Li, with a consideration of $442,848 (RMB2,700,000),on December 30,2013. The balance of $1,809,755 as of December 31, 2013 represents the result after offsetting the due from amount of $442,848.
The transfer of East Mining is a transaction between entities under common control. No gain or loss is recognized for the transaction.
12.
SALES REVENUE
The Company entered into a lease and complementary agreements with the related company Huanghe dated July 26, 2010. According to the agreements, a piece of land with the area of 5,706,666.67 square meters was leased to Huanghe for traveling and amusement from January 1, 2011 to December 31, 2029. The annual rent in US dollars is approximately $1,211,397 (equivalent to RMB 7,500,000).
13.
INCOME TAX
China Changjiang is incorporated in the United States and has not incurred net operating income as for income tax purposes for the years ended December 31, 2013 and 2012. The Company’s other subsidiaries and discontinued operations are subject to income tax described below.
Hong Kong
Wah Bon is incorporated in Hong Kong and subject to Hong Kong profits tax. Wah Bon has no operating profit or tax liabilities during the period presented.
PRC
On March 16, 2007, the National People’s Congress passed the new Enterprise Income Tax Law (“the new EIT Law”), which was effective as of January 1, 2008.
The key changes for the new EIT Law are:
a)
The new EIT Law imposes a single income tax rate of 25% for most domestic enterprises and foreign investment enterprises.
b)
The Companies established before March 16, 2007 continue to enjoy tax holiday treatment approved by local government for a grace period of either for the next 5 years or until the tax holiday term is completed, whichever is sooner.
c)
Entities that qualify as “High and New Technology Enterprises” are entitled to the preferential lower tax rate of 15%.
d)
The new EIT Law grants tax holiday to entities operating in certain beneficial industries, such as environmental protection, energy - saving, etc. Entities in beneficial industries enjoy a three-year tax exempt and a three-year period with 50% reduction in the income tax rates.
Shaanxi Pacific, Shaanxi Changjiang and East Mining (discontinued operations) are incorporated in the PRC and subject to the above new EIT. Both Shaanxi Pacific and Shaanxi Changjiang are subject to effective income tax rate of 0% for the year ended December 31, 2013 and 2012. Shaanxi Pacific did not incur any operating income for the years ended December 31, 2013 and 2012. Shaanxi Changjiang had net taxable operating losses of approximately $22,640,132 carried forward for 2013. The discontinued operation is subject to effective income tax rate of 25% for the year ended December 2013 and 2012.
The new EIT Law also provides that an enterprise established under the laws of foreign countries or regions but whose “de facto management body” is located in the PRC be treated as a resident enterprise for PRC tax purpose and consequently be subject to the PRC income tax at the rate of 25% for its worldwide income. The Implementing Rules of the new EIT Law merely defines the location of the “de facto management body” as “the place where the exercising, in substance, of the overall management and control of the production and business operation, personnel, accounting, properties, etc., of a non-PRC company is located.” On April 22, 2009, the PRC State Administration of Taxation further issued a notice entitled “Notice regarding Recognizing Offshore-Established Enterprises Controlled by PRC Shareholders as Resident Enterprises Based on Their place of Effective Management.” Under this notice, a foreign company controlled by a PRC company or a group of PRC companies shall be deemed as a PRC resident enterprise, if (ⅰ)the senior management and the core management departments in charge of its daily operations mainly function in the PRC; (ⅱ) its financial decisions and human resource decisions are subject to decisions or approvals of persons or institutions in the PRC; (ⅲ) its major assets, accounting books, company sales, minutes and files of board meetings and shareholders’ meetings are located or kept in the PRC; and (ⅳ) more than half of the directors or senior management personnel with voting rights reside in the PRC. Based on a review of surrounding facts and circumstances, the Company does not believe that it is likely that its operations outside of the PRC should be considered a resident enterprise for PRC tax purposes. However, due to limited guidance and implementation history of the new EIT Law, should the Company be treated as a resident enterprise for PRC tax purposes, the Company will be subject to PRC tax on worldwide income at a uniform tax rate of 25% retroactive to September 19, 2008.
The new EIT Law also imposes a withholding income tax of 10% on dividends distributed by a foreign invested enterprise to its immediate holding company outside of China, if such immediate holding company is considered as a non-resident enterprise without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. Such withholding income tax was exempted under the previous income tax regulations. The United States of America, where the Company is incorporated, has such tax treaty with China.
The provision for taxes on earnings consisted of:
The income taxes expense (benefit), which is all incurred in PRC, consists of the following:
The following table reconciles the statutory U.S. federal income tax rate to the Company’s effective income tax rate for continuing operations:
The following table reconciles the statutory U.S. federal income tax rate to the Company’s effective income tax rate for discontinued operations.
As of December 31, 2013, the Company had net taxable operating losses of approximately $22,418,146 carried forward for the future years. The PRC Income Tax allows the enterprises to offset their future taxable income with taxable operating losses carried forward in a 5-year period. Although the Company turned loss into profits for the year ended December 31, 2011, 2012 and 2013, the Management believes that the Company’s cumulative losses arising from recurring business in recent years constituted significant negative evidence that most of the deferred tax assets would not be realizable and this evidence outweighed the expectations that the Company would generate future taxable income. The valuation allowance of $5,604,537 was recorded.
Components of the Company’s net deferred tax assets for continuing operations are set forth below:
Accounting for Uncertainty in Income Taxes
The Company adopted the provisions of Accounting for Uncertainty in Income Taxes. The provisions clarify the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with the standard “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The provisions of Accounting for Uncertainty in Income Taxes also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Based on the Company’s evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements.
The Company may from time to time be assessed interest or penalties by major tax jurisdictions. In the event it receives an assessment for interest and/or penalties, it will be classified in the financial statements as tax expense.
14.
DISCONTINUED OPERATIONS
On December 30 2013, the Company transferred all of the 60% equity of East Mining to its control person, Mr. Zhang Hong Jun and one of the other company shareholders, Mr. Wang Sheng Li, with a consideration of $885,696(RMB5,400,000). Each of the acquirers obtained 30% equity in this transaction. The transfer of East Mining is a transaction between entities under common control. No gain or loss is recognized for the transaction
The following table summarized the financial position of East Mining as of the date of sale.
East Mining consummated the sale of its mines exploration rights to Xunyang County Yongjin Mining Co., Ltd for business purpose with a consideration of $2,422,794 (RMB 15,000,000). The transaction was completed and the outstanding amount was settled as of December 31, 2013. The gain of $2,294,386 on disposal of mines consists of the considerations and the total of $128,408 for the related business tax and the surcharges.
Discontinued operations for the years ended December 31, 2013 and 2012 are summarized as follows.
15.
RELATED PARTY TRANSACTIONS
In addition to the other transactions and balances disclosed elsewhere in the financial statements, the Company leased the land use right to Shaanxi Huanghe Bay Springs Lake Theme Park Ltd, a company with the same controlling person as the Company, and generated rent revenue of $1,211,397 for the year ended December 31, 2013.
16.
SEGMENT INFORMATION
The Company originally operated in two reportable segments, Land use right leasing, and solar PV energy. The solar PV energy business did not generated revenue for the year ended December 31, 2013 and 2012. Summarized information by business segment for the year ended December 31, 2013 and 2012 is as follows.
The Company evaluates segment performance based on income from operations. As a result, the components of operating income for one segment may not be comparable to another segment.
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
Capacity
Date
/s/ Chen Wei Dong
Chief Executive Officer President and Chairman
March 28, 2014
of Board of Directors (Principal Executive Officer)
/s/ Li Ping
Chief Financial Officer (Principal Financial Officer)
March 28, 2014
/s/ Zhang Hong Jun
Director
March 28, 2014
/s/ Wang Sheng Li
Director
March 28, 2014
/s/ Tian Hai Long
Director
March 28, 2014
/s/ Chen Min
Director
March 28, 2014
/s/ Li Ping
Director
March 28, 2014