Item 1A. Risk Factors
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 or
results of operations could suffer. In that case, the trading price of our
common stock could decline, and you may lose all or part of your
investment.
RISKS
RELATED TO OUR BUSINESS
Our
revenue will decrease if the construction and building material industries
experience a downturn, or if the concrete industry in China does not realize an
increase in demand at the pace we expect.
Our
cement and cement products serve as key components in construction and building
projects for a wide range of industries and private and public sector projects.
Therefore, we are subject to the general changes in economic conditions
affecting many segments of the economy. Demand for concrete is typically
affected by a number of economic factors, including, but not limited to,
interest rates, market and government confidence, political
priorities, level of construction of commercial, government and
residential projects, and the level of construction financing available. Also,
our revenue is dependent upon the cost and availability of raw materials, the
cost of labor, increased taxes, and other costs of doing business. If
there is a decline in construction activity in China or a rise in the costs of
doing business in China, demand for our concrete products may decline and our
revenue will decrease.
Competition
in the concrete industry could adversely affect our results of
operations.
We
operate in local and regional markets in China, and many factors affect the
competitive environments we face in any particular market. These factors include
the number of competitors in the market, the pricing policies and financial
strength of those competitors, the total production capacity serving the market,
the barriers to enter the market and the proximity of natural resources, as well
as general economic conditions and demand for construction materials within the
market. Although we believe our products and quality of service are superior,
there is no assurance that existing or new competitors may not receive contracts
for which we compete by reason of events and factors beyond our
control.
23
Our
growth strategy is capital intensive; without additional capital on favorable
terms we may not accomplish our strategic plan.
Our
expansion plans are premised upon our raising sufficient capital to timely build
or acquire two to three new production plants in the next two to three years to
accommodate the increased concrete production needs. Although we
believe that, given our current level of revenue and net income, our management
team, and our track record of performance, we may be able to raise
sufficient capital to carry out our strategic plan, there can be no assurance
that we will do so. Our inability to raise sufficient capital or inability to
raise capital on acceptable terms to fund these new production plants would
negatively impact our projected revenues and our projected growth.
Long-term
collection of accounts receivable and potential bad debts may impose a threat to
our operations and expansion.
Common
among most of the businesses in the concrete industry, we have a large amount of
accounts receivable, which accounts for over 50% of the total assets. A
substantial majority of our outstanding trade receivables are not secured by any
collaterals or credit insurance. While we have procedures to monitor and limit
exposure to credit risk on our trade and non-trade receivables, there is no
assurance that such procedures will effectively limit our risks of bad debts and
avoid losses, which could have a material adverse effect on our financial
condition, operating results and business expansion.
We
depend heavily on key personnel, and turnover of key employees and senior
management could harm our business.
Our
future business and results of operations depend in significant part upon the
continued contributions of our key technical and senior management personnel,
including Rong Yang, our Chairman and Chief Executive Officer. They also
depend in significant part upon our ability to attract and retain additional
qualified management, technical, marketing and sales and support personnel for
our operations. If we lose a key employee, or if we are not able to
attract and retain skilled employees as needed, our business could suffer.
Significant turnover in our senior management could significantly deplete
our institutional knowledge held by our existing senior management team.
We depend on the skills and abilities of these key employees in managing
the manufacturing, technical, marketing and sales aspects of our business, any
part of which could be harmed by turnover in the future.
We
expect approximately 60% of our sales revenues will be derived from our ten
largest customers in 2011 and any reduction in revenues from any of these
customers would reduce our revenues and net income.
In fiscal
year 2010, we derived 72.8% of our revenue from our ten largest
customers. In fiscal year 2009, we derived 48% from our ten largest
customers.
24
Leased
properties and production lines may be terminated due to unexpected
reasons.
We
presently have a ten-year lease, signed in 2006, for our Beijing production base
and have built our offices and manufacturing facilities on this site. We lease
land for our Xi’an production facility. While we believe this lease is secure
for us, under our laws, the lease could be terminated for unexpected reasons.
Our
intellectual property rights in our proprietary admixture products may be hard
to protect, and litigation to protect our intellectual property rights may be
costly.
One of
our strategies focuses on the development, use and sale of specialty admixture
concrete products. We currently use such products in our own
operations. These proprietary admixture products are protected by trade secrets
only, and are not patented. Accordingly, we cannot ensure that a
competitor may not be able to duplicate and commercialize our proprietary
products. Litigation may be necessary to enforce our intellectual property
rights and given the relative unpredictability of China’s legal system and
potential difficulties enforcing a court judgment in China, there is no
guarantee litigation would result in an outcome favorable to us. Further, any
such litigation could be costly and divert management away from our core
business. Our financial results could be negatively affected if we cannot
protect or timely develop our admixture products.
Our
continuing rapid expansion could significantly strain our resources, management
and operational infrastructure which could impair our ability to meet increased
demand for our products and hurt our business results.
To
accommodate our anticipated growth and to build additional production plants, we
will need to expend capital resources and dedicate personnel to implement and
upgrade our accounting, operational and internal management systems and enhance
our record keeping and contract tracking system. If we cannot successfully
implement these measures efficiently and cost-effectively, we will be unable to
satisfy the demand for our products, which will impair our revenue growth and
hurt our overall financial performance.
We
may lose business to competitors who underbid us, and we may be otherwise unable
to compete favorably in our highly competitive industry.
Our
competitive position in a given market depends largely on the location and
operating costs of our plants and prevailing prices in that market.
Generally, our products are price-sensitive. Our prices are subject to changes
in response to relatively minor fluctuations in supply and demand, general
economic conditions and market conditions, all of which are beyond our control.
Because of the fixed-cost nature of our business, our overall profitability is
sensitive to minor variations in sales volumes and small shifts in the balance
between supply and demand. Price is the primary competitive factor among
suppliers for small or simple jobs, principally in residential construction.
However, timeliness of delivery and consistency of quality and service, as well
as price, are the principal competitive factors among suppliers for large or
complex jobs. Concrete manufacturers like us generally obtain customer contracts
through local sales and marketing efforts directed at general contractors,
developers and homebuilders. As a result, we depend on local
relationships. We generally do not have any long-term sales contracts with
our customers.
25
Our
competitors range from small, owner-operated private companies to subsidiaries
or operating units of large, vertically integrated manufacturers of cement and
aggregates. Our vertically integrated competitors generally have greater
manufacturing, financial and marketing resources than we have, providing them
with a competitive advantage. Competitors having lower operating costs than we
do or having the financial resources to enable them to accept lower margins than
we do will have a competitive advantage over us for projects that are
particularly price-sensitive. Competitors having greater financial resources or
less financial leverage than us may have a competitive advantage because of
their greater financial flexibility to invest in new mixer trucks, build plants
in new areas or pay for acquisitions.
Our
contracts may require us to perform extra or change order work, which can result
in disputes and adversely affect our working capital, profits and cash
flows.
Our
contracts may require us to perform extra or change order work as directed by
the customer even if the customer has not agreed in advance on the scope or
price of the work to be performed. This process can result in disputes over
whether the work performed is beyond the scope of the work included in the
original project plans and specifications or, if the customer agrees that the
work performed qualifies as extra work, the price the customer is willing to pay
for the extra work. Even when the customer agrees to pay for the extra work, we
may be required to fund the costs of such work for a lengthy period of time
until the change order is approved and funded by the customer.
We
may incur material costs and losses as a result of claims if our products do not
meet regulatory requirements or contractual specifications.
Our
operations involve providing products that must meet building code or other
regulatory requirements and contractual specifications for durability,
stress-level capacity, weight-bearing capacity and other characteristics. If we
fail or are unable to provide products meeting these requirements and
specifications, material claims may arise against us and our reputation could be
damaged. We expect that in the future there may be claims of this kind asserted
against us. If a significant product-related claim or claims are resolved
against us in the future, that resolution may have a material adverse effect on
our financial condition, results of operations and cash flows.
Our
net sales attributable to public infrastructure projects could be negatively
impacted by a decrease or delay in governmental spending.
Our
business depends in part on the level of governmental spending on infrastructure
projects in our markets. Reduced levels of governmental funding for public works
projects or delays in that funding could adversely affect our business,
financial condition, results of operations and cash flows. The timing of bid
activity may be negatively affected by the economy, municipal budgets and
availability of financing.
26
Severe
weather can reduce construction activity and lead to a decrease in demand for
the Company’s products in areas affected by adverse weather
conditions.
The
Company’s operations and the demand for a number of the Company’s products are
affected by weather conditions in the markets where the Company operates.
Sustained adverse weather conditions such as rain, extreme cold or snow could
disrupt or curtail outdoor construction activity which in turn could reduce
demand and the quality of our products and have a material adverse effect on our
operations, financial performance or prospects.
Certain
of our existing stockholders have substantial influence over our company, and
their interests may not be aligned with the interests of our other
stockholders.
Mr. Rui
Shen is the owner of approximately 45.7% of our common stock. He has given the
voting power of approximately 87.3% of his shares to Mr. Rong Yang, CEO and
Chairman of the Company, and approximately 12.7% to Mr. Xiao, a former
director. As a result, Mr. Yang and Mr. Xiao may have significant influence
over our business, including decisions regarding mergers, consolidations and the
sale of all or substantially all of our assets, election of directors and other
significant corporate actions. This concentration of ownership may also have the
effect of discouraging, delaying or preventing a future change of control, which
could deprive our stockholders of an opportunity to receive a premium for their
shares as part of a sale of our company and might reduce the price of our
shares.
Environmental
claims or failure to comply with any present or future environmental regulations
may require us to spend additional funds and may harm our results of
operations.
Our
business is subject to environmental, health and safety laws and regulations
that affect our operations, facilities and products in each of the jurisdictions
in which we operate. We believe that we are in compliance with all material
environmental, health and safety laws and regulations related to our products,
operations and business activities. Although we have not suffered material
environmental claims in the past, the failure to comply with any present or
future regulations could result in the assessment of damages or imposition of
fines against us, suspension of production, cessation of our operations or even
criminal sanctions. The enacting of new regulations could also require us
to acquire costly equipment or to incur other significant expenses.
We
have limited insurance coverage and do not carry any business interruption
insurance, third-party liability insurance for our manufacturing facilities or
insurance that covers the risk of loss of our products in use.
We
presently only carry insurance for the protection of our workers. We do not
carry business interruption insurance, third-party liability insurance, or
insurance for any other aspect of our business. If we should suffer from natural
or other unexpected disaster, business or government litigation, or any
uncovered risks of operation, our financial condition may be significantly
impaired.
27
We
may be exposed to potential risks relating to our internal controls over
financial reporting and our ability to have those controls attested to by our
independent auditors.
As
directed by Section 404 of the Sarbanes-Oxley Act of 2002 or SOX 404, the SEC
adopted rules requiring public companies to include a report of management on
the company’s internal controls over financial reporting in their annual
reports, including Form 10-K. In addition, the independent registered
public accounting firm auditing a company’s financial statements must also
attest to and report on the operating effectiveness of the company’s internal
controls if the company's public float is over $75 million. These
requirements do not currently apply to us with respect to the filing of an
auditor’s report. We can provide no assurance that we will comply with all of
the requirements imposed thereby. There can be no assurance that we will receive
a positive attestation from our independent auditors, if and when the respective
regulations become applicable to us. In the event we identify significant
deficiencies or material weaknesses in our internal controls that we cannot
remediate in a timely manner or we are unable to receive a positive attestation
from our independent auditors with respect to our internal controls, investors
and others may lose confidence in the reliability of our financial
statements.
Our
holding company structure may limit the payment of dividends.
We have
no direct business operations, other than our ownership of our subsidiaries.
While we have no current intention of paying dividends, should we decide
in the future to do so, as a holding company, our ability to pay dividends and
meet other obligations depends upon the receipt of dividends or other payments
from our operating subsidiaries and other holdings and investments. In
addition, our operating subsidiaries, from time to time, may be subject to
restrictions on their ability to make distributions to us, including as a result
of restrictive covenants in loan agreements, restrictions on the conversion of
local currency into U.S. dollars or other hard currency and other regulatory
restrictions as discussed below. If future dividends are paid in RMB,
fluctuations in the exchange rate for the conversion of RMB into U.S. dollars
may reduce the amount received by U.S. stockholders upon conversion of the
dividend payment into U.S. dollars.
Chinese
regulations currently permit the payment of dividends only out of accumulated
profits as determined in accordance with Chinese accounting standards and
regulations. Our subsidiaries in China are also required to set aside a
portion of their after tax profits according to Chinese accounting standards and
regulations to fund certain reserve funds. Currently, our subsidiaries in
China are the only sources of revenues or investment holdings for the payment of
dividends. If they do not accumulate sufficient profits under Chinese
accounting standards and regulations to first fund certain reserve funds as
required by Chinese accounting standards, we will be unable to pay any
dividends.
28
RISKS
RELATED TO DOING BUSINESS IN CHINA
Risks
Related to Doing Business in the PRC
The Company faces the risk that
changes in the policies of the PRC government could have a significant impact
upon the business that the Company may be able to conduct in the PRC and the
profitability of such business .
The PRC
economy is in a transition from a planned economy to a market oriented economy
subject to five-year and annual plans adopted by the government that set
national economic development goals. Policies of the PRC government can have
significant effects on the economic conditions of the PRC. The PRC government
has confirmed that economic development will follow the model of a market
economy. Under this direction, the Company believes that the PRC will continue
to strengthen its economic and trading relationships with foreign countries and
business development in the PRC will follow market forces. While the Company
believes that this trend will continue, there can be no assurance that this will
be the case. A change in policies by the PRC government could adversely
affect the Company’s interests by, among other factors: changes in laws,
regulations or the interpretation thereof, confiscatory taxation, restrictions
on currency conversion, imports or sources of supplies, or the expropriation or
nationalization of private enterprises. Although the PRC government has been
pursuing economic reform policies for more than two decades, there is no
assurance that the government will continue to pursue such policies or that such
policies may not be significantly altered, especially in the event of a change
in leadership, social or political disruption, or other circumstances affecting
the PRC political, economic and social life.
The
PRC laws and regulations governing the Company’s current business operations are
sometimes vague and uncertain. Any changes in such PRC laws and regulations may
have a material and adverse effect on the Company’s business.
There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including but not limited to the laws and regulations
governing the Company’s business, or the enforcement and performance of the
Company’s arrangements with customers in the event of the imposition of
statutory liens, death, bankruptcy and criminal proceedings. The Company and any
future subsidiaries are considered foreign persons or foreign funded enterprises
under PRC laws, and as a result, the Company is required to comply with PRC laws
and regulations. These laws and regulations are sometimes vague and may be
subject to future changes, and their official interpretation and enforcement may
involve substantial uncertainty.
The
effectiveness of newly enacted laws, regulations or amendments may be delayed,
resulting in detrimental reliance by foreign investors. New laws and regulations
that affect existing and proposed future businesses may also be applied
retroactively. The Company cannot predict what effect the interpretation of
existing or new PRC laws or regulations may have on the Company’s
businesses.
A
slowdown or other adverse developments in the PRC economy may materially and
adversely affect the Company’s customers, demand for the Company’s products and
the Company’s business.
All of
the Company’s operations are conducted in the PRC and all of its revenue is
generated from sales in the PRC. Although the PRC economy has grown
significantly in recent years, the Company cannot assure investors that such
growth will continue. A slowdown in overall economic growth, an economic
downturn or recession or other adverse economic developments in the PRC could
materially reduce the demand for our products and materially and adversely
affect the Company’s business.
29
Inflation
in the PRC could negatively affect our profitability and growth.
In recent
years, the Chinese economy has experienced periods of rapid expansion and highly
fluctuating rates of inflation. During the past ten years, the rate of
inflation in China has been as high as 20.7% and as low as -2.2%. These
factors have led to the adoption by the Chinese government, from time to time,
of various corrective measures designed to restrict the availability of credit
or regulate growth and contain inflation. High inflation may in the future
cause the Chinese government to impose controls on credit and/or prices, or to
take other action, which could inhibit economic activity in China, reduce
demand, materially increase our costs, and thereby harm the market for our
products and our Company.
Governmental
control of currency conversion may affect the value of an investment in the
Company and may limit our ability to receive and use our revenues
effectively.
The
Company receives all of its revenues in Renminbi, which is currently not a
freely convertible currency. The PRC government imposes controls on the
convertibility of Renminbi into foreign currencies and, in certain cases, the
remittance of currency out of the PRC. Any future restrictions on currency
exchanges may limit our ability to use revenue generated in Renminbi to fund any
future business activities outside China or to make dividend or other payments
in U.S. dollars. Although the Chinese government introduced regulations in
1996 to allow greater convertibility of the Renminbi for current account
transactions, significant restrictions still remain, including primarily the
restriction that foreign-invested enterprises may only buy, sell or remit
foreign currencies after providing valid commercial documents, at those banks in
China authorized to conduct foreign exchange business. In addition, conversion
of Renminbi for capital account items, including direct investment and loans, is
subject to governmental approval in China, and companies are required to open
and maintain separate foreign exchange accounts for capital account items. We
cannot be certain that the Chinese regulatory authorities will not impose more
stringent restrictions on the convertibility of the Renminbi.
The
fluctuation of the Renminbi may materially and adversely affect investments in
the Company and the value of our securities.
The value
of the Renminbi against the U.S. dollar and other currencies may fluctuate and
is affected by, among other things, changes in the PRC’s political and economic
conditions. As the Company relies principally on revenues earned in the PRC, any
significant revaluation of the Renminbi may materially and adversely affect the
Company’s cash flows, revenues and financial condition, and the price of our
common stock may be harmed. For example, to the extent that the Company needs to
convert U.S. dollars it receives from an offering of its securities into
Renminbi for the Company’s operations, appreciation of the Renminbi against the
U.S. dollar could have a material adverse effect on the Company’s business,
financial condition and results of operations. Conversely, if the Company
decides to convert its Renminbi into U.S. dollars for the purpose of making
payments for dividends on its common stock or for other business purposes and
the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of
the Renminbi that the Company converts would be reduced. In addition, the
depreciation of significant U.S. dollar denominated assets could result in a
charge to the Company’s income statement and a reduction in the value of these
assets.
30
Recent PRC State Administration of
Foreign Exchange (“SAFE”) Regulations regarding offshore financing activities by
PRC residents have undergone a number of changes that may increase the
administrative burden the Company faces. The failure by the Company’s
stockholders who are PRC residents to make any required applications and filings
pursuant to such regulations may prevent the Company from being able to
distribute profits and could expose the Company and its PRC resident
stockholders to liability under PRC law.
In the
event that the proper procedures are not followed under the SAFE Circular 75,
the Company could lose the ability to remit monies outside of the PRC and would
therefore be unable to pay dividends or make other distributions. The Company’s
overseas and cross border investment activities could be restricted, and its
ownership structure affected. The Company’s PRC resident stockholders could be
subject to fines, other sanctions and even criminal liabilities under the PRC
Foreign Exchange Administrative Regulations promulgated January 29, 1996, as
amended. All of this could adversely affect our business and our
prospects.
We
may be exposed to liabilities under the Foreign Corrupt Practices Act, and any
determination that we violated the Foreign Corrupt Practices Act could hurt our
business.
Although
we are currently not subject to these regulations, we anticipate to become
subject to the Foreign Corrupt Practices Act, or FCPA, and other laws that
prohibit improper payments or offers of payments to foreign governments and
their officials and political parties by U.S. persons and issuers as defined by
the statute for the purpose of obtaining or retaining business. Our activities
in China create the risk of unauthorized payments or offers of payments by one
of the employees, consultants, sales agents or distributors of our Company, even
though these parties are not always subject to our control. It is our policy to
implement safeguards to discourage these practices by our employees. However,
our existing safeguards and any future improvements may prove to be less than
effective, and the employees, consultants, sales agents or distributors of our
Company may engage in conduct for which we might be held responsible. Violations
of the FCPA may result in severe criminal or civil sanctions, and we may be
subject to other liabilities, which could negatively affect our business,
operating results and financial condition.
Because
the Company’s principal assets are located outside of the United States and the
Company’s officers and some of the directors reside outside of the United
States, it may be difficult for investors to enforce their rights in the U.S.
based on U.S. federal securities laws against the Company and the Company’s
officers and directors or to enforce U.S. court judgments against the Company or
them in the PRC.
Beijng
Concrete is located in the PRC and substantially all of its assets are located
outside of the United States; it may therefore be difficult or impossible for
investors in the United States to enforce their legal rights based on the civil
liability provisions of the U.S. federal securities laws against the Company in
the courts of either the U.S. or the PRC and, even if civil judgments are
obtained in U.S. courts, to enforce such judgments in PRC courts. Further, it is
unclear if extradition treaties now in effect between the United States and the
PRC would permit effective enforcement against the Company or its officers and
directors of criminal penalties, under the U.S. federal securities laws or
otherwise.
31
The
Company may have difficulty establishing adequate management, legal and
financial controls in the PRC.
The PRC
historically has not adopted a western style of management and financial
reporting concepts and practices, as well as in modern banking, computer and
other control systems. The Company may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC. As a result of
these factors, the Company may experience difficulty in establishing management,
legal and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet western standards.
PRC
regulations also involve complex procedures for acquisitions conducted by
foreign investors that could make it more difficult for us to grow through
acquisitions.
Pursuant
to the Regulations on Mergers and Acquisitions of Domestic Enterprises by
Foreign Investors, effective as of September 8, 2006 and revised as of June 22,
2009, additional procedures and requirements were established that are expected
to make merger and acquisition activities in China by foreign investors more
time-consuming and complex, including requirements in some instances that the
Ministry of Commerce of the PRC (“MOFCOM”) be notified in advance of any
change-of-control transaction in which a foreign investor takes control of a PRC
domestic enterprise, or that the approval from MOFCOM be obtained in
circumstances where overseas companies established or controlled by PRC
enterprises or residents acquire affiliated domestic companies and special
anti-monopoly submissions for parties meeting certain reporting thresholds. We
may grow our business in part by acquiring other companies engaged in the
production of ready-mixed concrete for developers and the construction industry
in the PRC. Complying with the requirements of the new regulations to complete
such transactions could be time-consuming, and any required approval processes,
including approval from MOFCOM, may delay or inhibit our ability to complete
such transactions, which could affect our ability to expand our business or
maintain our market share.
In
addition, our Chief Executive Officer, President and Chairman Mr. Yang, under
certain call option agreements between Mr. Yang and Mr. Shen, has an option to
purchase 5,113,384 shares of common stock held by Mr. Shen over the course of
approximately two years in installments upon achievement of certain performance
milestones by the Company. While it is the case that our PRC counsel believes
that this arrangement is lawful under PRC laws and regulations, there are,
however, substantial uncertainties regarding the interpretation and application
of the current or future PRC laws and regulations, including regulations
governing the validity and legality of such call options. Accordingly, we cannot
assure you that PRC government authorities will not ultimately take a view
contrary to the opinion of our PRC legal counsel.
32
Our
PRC stockholders are required to register with SAFE; their failure to do so
could cause us to lose our ability to remit profits out of the PRC as
dividends.
SAFE has
promulgated several regulations, including Circular No. 75 (“Circular 75”),
which became effective in November 2005, requiring PRC residents, including both
PRC legal person residents and PRC natural person residents, to register with
the competent local SAFE branch before establishing or controlling any company
outside of the PRC for the purpose of equity financing with assets or equities
of PRC companies, referred to in the Circular 75 as an “offshore special purpose
company.” PRC residents that have established or controlled an offshore special
purpose company, which has finished a round-trip investment before the
implementation of Circular 75, are required to register their ownership
interests or control in such “special purpose vehicles” with the local offices
of SAFE. Under Circular 75, the term “PRC legal person residents” as used in
Circular 75 refers to those entities with legal person status or other economic
organizations established within the territory of the PRC. The term “PRC natural
person residents” as used in Circular 75 includes all PRC citizens and all other
natural persons, including foreigners, who habitually reside in the PRC for
economic benefit. The term “special purpose vehicle” refers to an offshore
entity established or controlled, directly or indirectly, by PRC residents or
PRC entities for the purpose of seeking offshore equity financing using assets
or interests owned by such PRC residents or PRC entities in onshore companies,
and the term “round-trip investment” refers to the direct investment in PRC by
PRC residents through “special purpose vehicles,” including without limitation,
establishing foreign invested enterprises and using such foreign invested
enterprises to purchase or control (by way of contractual arrangements) onshore
assets. The term “control” includes the possession of the operating rights and
decision making rights in the “special purpose vehicles” through trust, voting
trust, holding shares on behalf of others, or other methods.
In
addition, any PRC resident that is the shareholder of an offshore special
purpose company is required to amend his/her/its SAFE registration with the
local SAFE branch upon (i) injection of equity interests or assets of an onshore
enterprise to the offshore entity, or (ii) subsequent overseas equity financing
by such offshore entity. PRC residents are also required to complete amended
registrations or filing with the local SAFE branch within 30 days of any
material change in the shareholding or capital of the offshore entity not
involving a round-trip investment, such as changes in share capital, share
transfers and long-term equity or debt investments or, already organized or
gained control of offshore entities that have made onshore investments in the
PRC before Circular 75 was promulgated must register with their shareholdings in
the offshore entities with the local SAFE branch on or before March 31,
2006.
Under
Circular 75, PRC residents are further required to repatriate into the PRC all
of their dividends, profits or capital gains obtained from their shareholdings
in the offshore entity within 180 days of their receipt of such dividends,
profits or capital gains. The registration and filing procedures under the
Circular 75 are prerequisites for other approval and registration procedures
necessary for capital inflow from the offshore entity, such as inbound
investments or shareholders loans, or capital outflow to the offshore entity,
such as the payment of profits or dividends, liquidating distributions, equity
sale proceeds, or the return of funds upon a capital reduction.
33
To
further clarify the implementation of Circular 75, SAFE issued Circular No. 106
(“Circular 106”) on May 9, 2007, which is guidance that SAFE issued to its local
branches with respect to the operational process for SAFE registration that
standardized more specific and stringent supervision on the registration
relating to the Circular 75. Under Circular 106, PRC subsidiaries of an offshore
special purpose company are required to coordinate and supervise the filing of
SAFE registrations by the offshore holding company’s shareholders who are PRC
residents in a timely manner. If these shareholders and/or beneficial owners
fail to comply, the PRC subsidiaries are required to report such failure to the
local SAFE authorities and, if the PRC subsidiaries do report the failure, the
PRC subsidiaries may be exempted from any potential liability to them related to
the stockholders’ failure to comply. The failure of these shareholders and/or
beneficial owners to timely amend their SAFE registrations pursuant to the
Circular 75 and Circular 106 or the failure of future shareholders and/or
beneficial owners of our company who are PRC residents to comply with the
registration procedures set forth in the Circular 75 and Circular 106 may
subject such shareholders, beneficial owners and/or our PRC subsidiaries to
fines and legal sanctions and may also limit our ability to contribute
additional capital into our PRC subsidiaries, limit our PRC subsidiaries ability
to distribute dividends to our company or otherwise adversely affect our
business.
These
regulations apply to our stockholders who are PRC residents. In the event that
our PRC-resident stockholders do not follow the procedures required by SAFE, we
could (i) be exposed to fines and legal sanctions, (ii) lose the ability to
contribute additional capital into our PRC subsidiaries or distribute dividends
to our company, (iii) face liability for evasion of foreign-exchange
regulations, and/or (iv) lose the ability to consolidate the financial
statements of our PRC subsidiaries under applicable accounting
principals.
Mr. Yang,
our Chief Executive Officer, President and Chairman, may be required
to register with the competent SAFE branch prior to exercise of his call option.
However, it is not clear whether Mr. Yang’s call option will be deemed as a way
of control of the Company. There are substantial uncertainties regarding the
interpretation and application of the Circular 75 on the call
option.
RISKS
RELATED TO THE MARKET FOR OUR STOCK
Our
common stock is quoted on the OTC Bulletin Board which may have an unfavorable
impact on our stock price and liquidity.
Our
common stock is quoted on the Over-the-Counter Bulletin Board (the “OTCBB”).
The OTCBB is a significantly more limited market than the New York Stock
Exchange or NASDAQ. The quotation of our shares on the OTCBB may result in
a less liquid market available for existing and potential stockholders to trade
shares of our common stock, could depress the trading price of our common stock,
could cause high volatility and price fluctuations, and could have a long-term
adverse impact on our ability to raise capital in the future.
There is currently limited trading
market for our common stock and we cannot ensure that one will ever develop or
be sustained .
There is
currently limited trading market on the OTCBB for our common stock, and there is
no assurance that one will develop or be sustained. We have applied to
have our common stock listed on the NASDAQ Global Market, but we cannot ensure
that our common stock will be accepted for listing on such
exchange.
34
The
elimination of monetary liability against the Company’s directors, officers and
employees under the Colorado law and the Company’s By-Laws, and the
existence of indemnification rights to the Company’s directors, officers and
employees may result in substantial expenditures by the Company and may
discourage lawsuits against the Company’s directors, officers and
employees.
Under
Colorado law, a corporation may indemnify its directors, officers, employees and
agents under certain circumstances, including indemnification of such persons
against liability under the Securities Act of 1933, as amended. In addition, a
corporation may purchase or maintain insurance on behalf of its directors,
officers, employees or agents for any liability incurred by him in such
capacity, whether or not the corporation has the authority to indemnify such
person.
The
effect of these provisions may be to eliminate the rights of the Company
and its stockholders (through stockholder’s derivative suits on behalf
of the Company) to recover monetary damages against a director, officer,
employee or agent for breach of fiduciary duty. Insofar as indemnification for
liabilities arising under the Securities Act of 1933, as amended, may be
provided for directors, officers, employees, agents or persons controlling an
issuer pursuant to the foregoing provisions, the opinion of the SEC is that such
indemnification is against public policy as expressed in the Securities Act of
1933, as amended, and is therefore unenforceable.
If we do
not meet the performance targets specified in our financing documents, we could
be required to issue shares of common stock to certain of our investors, which
would result in dilution to your ownership interest in the Company.
On
October 16, 2009, we consummated a private placement of a total of approximately
2,564,108 shares of our common stock (“2009 Private Placement”) to a number of
investors (“2009 Investors”) pursuant to a subscription agreement dated October
16, 2009, which was amended on March 5, 2010. Under the subscription agreement,
as amended (“2009 Subscription Agreement”), we will be required to issue shares
of common stock to the 2009 Investors if certain performance thresholds are not
met. If our after tax net income (“Targeted Net Income”) for the
fiscal year ended May 31, 2011 is less than $18,000,000 (which shall be
increased to $19,800,000 in the event that we do not consummate a public
offering on or before the date on which we file our annual report on Form 10-K
for the fiscal year ended May 31, 2011), we will be required to issue to the
2009 Investors additional shares of common stock representing a fraction of
shares issued in the 2009 Private Placement calculated using the percentage of
variation of our actual after tax net income to the Targeted Net Income for such
period (the “Adjustment Percentage”) (for example, if our after tax net income
for fiscal 2011 were $16,200,000, which is a variation of 10% of the respective
Targeted Net Income, we would be required to issue an aggregate of 256,410
shares of common stock to the 2009 Investors). On March 11, 2010, we consummated
a private placement of a total of approximately 1,282,091 shares of our common
stock (“2010 Private Placement”) to a number of investors. Under the 2009
Subscription Agreement, we will be required to issue additional shares of common
stock to the 2009 Investors who invested in the 2010 Private Placement, if the
Targeted Net Income thresholds are not met. The number of such
additional shares shall equal the Adjustment Percentage times the number of
shares of Common Stock acquired by the 2009 Investor in the 2010 Private
Placement, minus the Adjustment Percentage times the number of shares acquired
by such investor in the 2009 Private Placement that have been sold by such
investor as of the date on which the Company releases its respective net income
data in a Form 10-K filed with the SEC. Any issuance of equity securities to
satisfy our obligations pursuant to the 2009 Subscription Agreement as described
above will result in dilution to our existing shareholders and could adversely
affect the market price of our common stock.
35
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of outstanding stock in the
public marketplace could reduce the price of our common stock.
As of
August 27, 2010, there were issued and outstanding (i) 12,930,620 shares of our
common stock, (ii) warrants to purchase 1,504,160 shares of our common stock,
(iii) options to purchase 740,000 shares of our common stock of which options to
purchase 300,000 shares will become exercisable in December 2010 and the balance
will become exercisable in February and March 2011. 4,141,449 shares of our
common stock are currently eligible for resale under Rule 144. In addition to
these shares, we currently have obligation to register 1,282,091 shares of our
common stock. Future sales of substantial amounts of our common stock in the
trading market could adversely affect market price of our common
stock.
ITEM 2. DESCRIPTION OF
PROPERTY
Currently,
we do not own any land, as the PRC does not permit private land ownership. The
Company is leasing land for its Beijing Yizhuang factory from Beijing Guang Da
Yuan Logistic Company. In our Beijing stationary factory, we
currently lease two parcels of land for this factory. One lot is approximately
22,538 square meters. The term of the lease is 10 years and will expire in 2018.
The rent is approximately $49,000 per annum. We also built on site our own
buildings and offices of approximately 600 square meters. The other lot is
approximately 14,673 square meters. The term of the lease is 1 year and can be
renewed. The rent is $32,353 per annum. We use this lot to store our raw
materials. These two lots are located next to each other.
At our
Beijing Shidu station, we are using approximately 5,000 square meters of land
provided by our customer, Jiangxi Jinggang Roads & Bridges (Group) Co.,
Ltd., which is constructing Zhangzhou Highway. We are in the process of setting
up the batching plants on such land to supply the concrete mix to the highway
construction projects, and do not pay rent for such land. We
anticipate operating at this site for two more years.
In our
recently combined Tangshan Caofeidian mobile station, we are using approximately
8,000 square meters of land provided by our customer, China Construction Second
Engineering Bureau, Ltd., which is constructing a highway in the Tangshan area.
Because we set up the batching plants on such land to supply the concrete mix to
the on-going projects, we do not pay rent for such land. We
anticipate operating at this site for one more
year.
36
For the
Xi’an factory, we leased the land lot of 106,667 square meters from the local
government for a term of 15 years. The lease will expire in 2024. The annual
rent for the land lot is RMB 441,741 (or approximately US$65,000).
We
believe that all our properties have been adequately maintained, are generally
in good condition and are suitable and adequate for our
business
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.