Sino Green Land Corp. 10-K/A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion of the results of our operations and financial condition should be read in conjunction with our financial statements and the related notes, which appear elsewhere in this annual report. The following discussion includes forward-looking statements. Statements in this annual report may be “forward-looking statements.” Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those described above and those risks discussed from time to time in this annual report, including the risks described under “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this annual report. In addition, such statements could be affected by risks and uncertainties related to weather and natural disasters, our ability to conduct business in the PRC, product demand, including the demand for fruit and vegetable products, our ability to develop and maintain good relations with local cooperative suppliers, our ability to raise any financing which we may require for our operations, including financing for our green produce hub, competition, government regulations and requirements, pricing and development difficulties, our ability to make acquisitions and successfully integrate those acquisitions with our business, as well as general industry and market conditions and growth rates, and general economic conditions. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this annual report. 26 Overview We are engaged in the wholesale distribution, marketing and sales of premium fruits in China. Our main products include Fuji apples, emperor bananas and tangerine oranges. We purchase our products directly from farming cooperative groups to whom we provide varying degrees of farming, harvesting and marketing services. Almost all of our products are sold by us at the Guangdong Yun Cheng wholesale market and the Beijing Xin Fadi agricultural products wholesale market, two major markets for the sale of agricultural products in their respective areas, where we lease space to sell our produce. We sell to trading agents who sell our products to customers in and around the provinces in which the produce is grown. We have recently introduced a line of vegetable products, which we process and distribute to end users. However, our revenue from vegetables has been nominal through December 31, 2009. Fruits, such as apples, bananas and oranges, as well as vegetables are considered staples in the Chinese diet, similar to rice and meat, and historically, demand for these products has not fluctuated with the ups and downs of the general economy. As a result, we have not yet seen a significant decline in our business from the recent economic downturn and the global credit crisis. However, if economic conditions further deteriorate, including business layoffs, downsizing, industry slowdowns and other similar factors that affect our distributors, customers, suppliers, farmers and creditors, we could see a reduction in the demand for our products which could have a material adverse effect on our business operations. Since we promote our products as premium foods, in troubled economic times, consumers may purchase cheaper fruits and vegetables rather than our products, which could affect both our revenue and our gross margin. All fruits and vegetables are perishable, and are subject to spoilage if they are not delivered to market in a timely manner. Our ability to both purchase and sell produce is dependent upon a number of factors which are not under our control. Severe weather conditions and natural disasters, such as floods, droughts, frosts, earthquakes or pestilence, may affect our ability both to purchase products and to sell our products at the wholesale markets. Under these conditions, we may incur a higher cost of cold storage with no assurance that, even in the best conditions, spoilage cannot be avoided. Since weather conditions are not uniform throughout China, our competitive position may be impaired if our competitors are able to deliver produce to market at a time when we are not able to make deliveries, either because we are unable to purchase the produce or because we are unable to bring the produce to market. We only have long-term arrangements to purchase produce from five farming cooperatives. If we are not able to purchase our produce from these farmers, whether because of a shortage, because of government regulations or otherwise, we may be unable to purchase produce from other co-ops or farmers, and if we are able to purchase produce, our costs may be greater, which could impair our gross margins. Substantially all of our produce is grown by farming cooperatives on land which we lease pursuant to 25-year lease and development agreements which we entered into since 2005. All of these leases were entered into with the farmers who held the land use rights from the government. The farming cooperatives consist of many farmers who held the land use rights. Pursuant to these agreements, as of December 31, 2009, we had paid a total of $21 million to the holders of the land use rights, who are not affiliated with us, and the farmers agreed to manage the land and plant the crops and we received a priority right to purchase the crops at fair market price. The farming cooperatives do not pay us rent for the land. We amortize our payments over the life of the leases. The amortization of our lease payments is included in cost of goods sold. We are in the process of constructing a new hub for the sale of green foods in the Guangdong wholesale market. We believe that our hub will be the first hub in the PRC to provide wholesale and retail customers with the ability to purchase a wide variety of green foods in one location. We intend to purchase green foods from members of the China Green Food Association, who sell more than 17,000 food items, and sell the foods in our green foods hub. As of December 31, 2009, we had paid approximately $4.6 million in connection with the construction of this hub from cash generated by our operations and from funds which we raised in 2009. We anticipate completing the construction of the hub by the end of 2010 and to begin the operations of our new green foods product line in 2011. We anticipate that the total investment to launch this business will be $18 million, which includes construction costs of approximately $12 million, with approximately $4 million auxiliary facilities, such as refrigerated cold-storage trucking capabilities and air conditioning, and $2 million for initial inventory of new green foods products. On an ongoing basis, we believe that we will need to maintain inventory in the range of $4 million. 27 As part of our green foods distribution hub business, we may market our green foods directly to supermarkets and other retail stores. We anticipate that some of the retail markets will purchase our green food products at our distribution hub while others will require us to deliver the foods to them. In order to develop this business, we will need to expand our marketing effort and establish a delivery system for the retail food. We will require significant additional funding for our green foods distribution hub business. We have no commitments for the funding and our failure to obtain funding will impair our ability to develop this business. If we are not able to operate the green foods hub, we may not be able to recover our costs, in which event we would include a charge equal to the amount of the unrecovered costs. While we currently generate sufficient operating cash flows to support our operations, our capital requirements and the cash flow provided by future operating activities, if any, will vary greatly from quarter to quarter, depending on the volume of business during the period and payment terms with our customers. A significant portion of our revenue growth has resulted from increased land use rights which we lease under long-term leases that require us to pay the rental for the entire lease term at the inception of the lease. During 2009, we expended approximately $3.4 million to purchase additional leases. If we are to expand our business, we will continue to lease additional farm land on which our produce can be grown, which will require significant additional capital. We have commenced construction of our green foods distribution hub in the Guangdong wholesale market at an estimated cost of approximately $18 million, of which we paid approximately $4.6 million as of December 31, 2009 toward the construction of the hub. These funds were generated from our operations and the sale of our equity securities. We have no commitment for the balance of our estimated cost. Our failure to raise the necessary funds for this project could impair our ability to complete the project and we may lose the money we have invested to date. We presently sell our produce in the wholesale markets, where our customers are wholesale distributors. In connection with, and as part of, our green foods distribution hub, we may seek to market to supermarkets and other retail outlets. To the extent that we develop this business, we would incur additional marketing, shipping and other expenses. The current uncertainty arising out of domestic and global economic conditions, including the disruption in credit markets, may affect our ability to obtain either debt or equity financing which we may require in order to expand our business. Although our products are considered staples in Chinese consumers’ daily life, and, historically, demand for such staples has not fluctuated with the ups and downs of the general economy, if the current economic situation continues to deteriorate, we could see a more drastic reduction in the demand for our products. Since we are marketing our products as premium produce, consumers, in a time of economic difficulties, could purchase non-premium produce, which could have a material adverse effect on our business. Seasonality Our fresh fruit business is highly seasonal. Fuji apples are harvested mainly from late August until early November and are sold throughout the year. Tangerine oranges are harvested in late September through late November with the result that we have limited sales of tangerine oranges in the third quarter of the year. Emperor bananas are harvested throughout the year. They grow in an eight-month cycle, and are cultivated and harvested all year long. As harvested fruits cannot be stored at room temperature for a long time, they must be processed for sale as soon as they are harvested or stored at a cold temperature. As a result, the sales volume for our produce occurs during the harvesting season and for the months following the harvesting season. 28 We generally experience higher sales in the second half of the year. Sales in second half of 2009 accounted for approximately 63% of our revenue for 2009, and sales in the second half of 2008 accounted for approximately 59% of our revenue for 2008. If sales in the second half of the year are lower than expected, our operating results would be adversely affected, and it would have a disproportionately large impact on our annual operating results. Sales of tangerine oranges were nominal during the third quarter of 2009. Because of the large number of green foods products which we plan to distribute through at our green foods distribution hub, there will be many different seasons for the different products we operate. We cannot predict at this time how the seasonality of the various products we propose to sell will affect our overall profitability. Taxation The PRC Enterprise Income Tax Law and Implementing Rules impose a unified EIT rate of 25.0% on all domestic-invested enterprises and foreign-invested enterprises, or FIEs, unless they qualify under certain limited exceptions. The law gives the FIEs established before March 16, 2007, such as our subsidiaries Zhuhai Organic and Guangzhou Organic, a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatment. During this five-year grandfather period, the old FIEs which enjoyed tax rates lower than 25% under the original EIT law shall gradually increase their EIT rate by 2% per year until the tax rate reaches 25%. In addition, the FIEs that are eligible for a full exemption and 50% reduction under the original law are allowed to retain their preferential treatment until these holidays expire. Under the current income tax laws and the related implementing rules, FIEs engaging in agriculture businesses, such as Guangzhou Organic, are entitled to a two-year tax exemption from PRC enterprise income tax, subject to approval from local taxation authorities. Guangzhou Organic is tax exempt for 2008 to 2009 and is entitled to a 50% tax reduction for the three years thereafter. Due to the absence of significant business in 2008, Zhuhai Organic was entitled to tax exemption in 2007, and will be entitled to a one-year tax exemption after the business resumes. However, Zhuhai Organic did not constitute a significant source of revenue or income in 2009 or 2008. Currently, pursuant to income tax law, the income tax rate for foreign-capitalized enterprises is 25% and the value-added tax rate is 13%. Accounting Treatment of Financing Instruments In April 2008, Organic Region, which was then a privately-owned company, issued, for $500,000, its one-year 18% convertible notes in the principal amount of $500,000 and warrants to purchase common stock after Organic Region effects a going public transaction, which includes a reverse acquisition with a publicly traded shell corporation. Due to variability in the terms of the warrants’ exercise price for which accounting rules preclude them from being considered as indexed to our common stock, the warrants are recorded at fair value, with changes in value reported in the income statement each period. Although the debt was paid off in 2009, the warrants remain outstanding. The series A preferred stock issued in 2009 were issued with warrants and/or a conversion feature that require the proceeds received on the transaction to be allocated to each applicable component. Any resulting warrant liabilities are recorded at fair value, with changes in value recorded in the income statement each period. Any proceeds allocated to beneficial conversion features on the preferred shares are recorded as a discount on such shares, with a credit to additional paid-in capital. The discounts are then charged immediately to retained earnings as deemed preferred stock dividends pursuant to the terms of the agreement which provide immediate conversion rights. Restatement of Financial Statements On August 23, 2010, we concluded, after a review of the pertinent facts, that the previously issued financial statements contained in our annual report on Form 10-K for the year ended December 31, 2009 and our quarterly reports on Form 10-Q for the quarters ended March 31, 2010, September 30, 2009, June 30, 2009 and March 31, 2009, respectively, should not be relied upon for reasons set forth in Note 14 of Notes to Consolidated Financial Statements. This annual report reflects restated financial statements for the years ended December 31, 2009 and 2008 because of our failure to account properly for the treatment of securities issued in financings during 2009 and 2008. As a result, our net income, as originally reported, was overstated by approximately $3.5 million for 2009 and understated by $113,000 for 2008. As described in Note 14 of Notes to Consolidated Financial Statements, our balance sheet at December 31, 2009 and 2008 and our statements of income and comprehensive income for the years then ended have been restated to reflect the derivative liability and the effect of changes in derivative liability. 29 Results of Operations The following table sets forth information relating to our products for the years ended December 31, 2009 and 2008 (dollars in thousands): Period Product Sales Percentage Cost of Sales Gross Profit Year Ended December 31, 2009 Fuji Apples $ 92,027 85.2 % $ 82,258 $ 9,769 Emperor Bananas 9,872 9.1 % 8,618 1,255 Tangerine Oranges 5,575 5.2 % 4,937 638 Vegetables 572 0.5 % 496 76 Total $ 108,045 $ 96,308 $ 11,737 Year Ended December 31, 2008 Fuji Apples $ 63,682 86.6 % $ 57,130 6,552 Emperor Bananas 5,199 7.1 % 4,533 666 Tangerine Oranges 4,289 5.8 % 3,767 522 Vegetables 392 0.5 % 395 (3 Total $ 73,563 $ 65,825 $ 7,737 Years ended December 31, 2008 and 2009 The following table sets forth the key components of our results of operations for the years ended December 31, 2008 and 2009, in dollars and as a percentage of sales and the changes in these components from 2008 to 2009 in dollars and as a percentage (dollars in thousands): 30 Change from Year Ended Year Ended December 31, December 31, 2008 2009 (Restated) 2008 (Restated) To December 31, 2009 Amount Percent Amount Percent Amount Percent Sales $ 108,045 100.0 % $ 73,563 100.0 % $ 34,482 46.9 % Cost of sales 96,308 89.1 % 65,825 89.5 % 30,483 46.3 % Gross profit 11,737 10.9 % 7,737 10.5 % 4,000 51.7 % Operating expenses: Selling expenses 2,581 2.4 % 1,631 2.2 % 950 58.2 % General and administrative expenses 2,249 2.1 % 1,073 1.5 % 1,143 106.5 % Total operating expenses 4,831 4.4 % 2,704 3.7 % 2,094 77.4 % Income from operations 6,906 6.4 % 5,033 6.8 % 1,906 37.9 % Other income (expenses) Interest expense, net (64 ) (0.1 %) (134 ) (0.2 %) 70 (52.2 %) Loss on debt extinguishment (139 ) (0.1 %) -- -- (139 ) 2 Change in derivative liability (3,866 ) (3.6 %) (201 ) (0.3 %) (3,665 ) 1,823.8 % Other, net 154 0.1 % 15 0.0 % 139 926.7 % Total other income (expense) (3,915 ) (3.6 %) (319 ) (0.4 %) (3,596 ) 1,126.4 % Net income 1 3,024 2.8 % 4,714 6.4 % (1,690 ) (35.8 %) Deemed preferred stock dividend 650 0.6 % -- -- 650 2 Net income allocable to common stockholders 2,374 2.2 % 4,714 6.4 % (2,340 ) (49.6 %) Foreign currency translation gain (loss) (313 ) (0.3 %) 778 1.1 % (1,091 ) (140.2 %) Comprehensive income 2,711 2.5 % 5,492 7.5 % (2,781 ) (50.6 %) 1 Pursuant to the tax laws of the PRC, no income tax was due with respect to 2009 or 2008. If income tax were payable at the statutory rate, the net income available to common stockholders would have been $1,385,874 for 2009 and $3,563,650 for 2008. 2 The percentages were not included since they do not provide meaningful information. Sales . Sales increased $34.4 million, or 46.9%, to $108.0 million in 2009 from $73.6 million in 2008. This increase was mainly due to our expanded plantation bases and supply sources during 2009 period, as we increased the land which we leased by approximately 8,700 acres during 2009, of which 4,000 acres generated produce during the second half of 2009. Sales of our Fuji apples increased by 43.7% in 2009 as compared to 2008, with 97% of this increase being attributable to increased sales volume and 3% to increases in the average sales price. Sales of our emperor bananas increased by 88.9% in 2009 as compared to 2008, with 94% of this increase being attributable to increased sales volume and 6% attributable to increases in the average sales price of these products. Sales of our tangerine oranges increased by 29.3% in 2009 as compared to 2008, with 81.6% of this increase is attributable to increased sales volume and 18.4% is attributable to increases in the average sales price of these products. Our sales volume was significantly lower than usual during the first quarter of 2008 as a result of low supplies of Fuji apples due to heavy snow in the regions in which our Fuji apples are grown. During the first quarter of 2009, more favorable weather conditions resulted in increased supplies and increased sales. In addition, our sales volume increased by an aggregate of 38,500 tons in 2009 because we leased an additional 3,220 acres of land from the farming cooperative that supplies us with Fuji apples, and 833 acres of land from the farming cooperative that supplies us with emperor bananas. We began generating revenues from sales of products harvested on these newly leased lands in the third quarter of 2009. 31 Cost of Sales . Our cost of sales is primarily comprised of the costs of our produce from our farming cooperatives and, to a significantly lesser extent, the amortization of our long-term lease prepayments relating to the land used by the farming cooperatives. Our cost of sales increased $30.4 million, or 46.3%, to $96.3 million in 2009 from $65.8 million in 2008. This increase was mainly due to an increase of sales during 2009 and is proportionate to the increase in sales, and also reflects the additional amortization of our long-term leases resulting from the additional land under lease. Our amortization of our long-term lease prepayments was $0.6 million in 2009 and $0.5 million in 2008. Gross Profit and Gross Margin . Our gross profit increased $4.0 million to $11.7 million in 2009 from $7.7 million in 2008. Our gross margin was 10.9% in 2009 and 10.5% in 2008, reflecting a modest increase resulting from our ability to effect price increases in 2009. Although our sales prices and costs remained relatively stable between 2008 and 2009, we cannot predict whether this will continue. The relationship between our sales prices and costs can be affected by a number of factors, including government regulations, climate and weather conditions, and changes in consumer preferences. Selling Expenses . Our selling expenses are comprised of marketing expense, the salaries of our marketing staff, bonus, rent and other selling expense. Our selling expenses increased $1.0 million, or 58.2%, to $2.6 million in 2009 from $1.6 million in 2008. As a percentage of sales, our selling expenses increased to 2.4% in 2009 from 2.2% in 2008. General and Administrative Expenses . Our general and administrative expenses are comprised of salary of executives, travel expense, office expense, product development, market research, exhibition, audit expense, advisory expense. Our administrative expenses increased $1.2 million, or 116.3%, to $2.2 million in 2009 from $1.0 million in 2008. As a percentage of sales, administrative expenses increased to 2.1% in 2009, as compared with 1.4% in 2008. The increase in general and administrative expenses also reflects $0.5 million in expenses relating to the reverse acquisition, $0.2 million in increased compensation and $0.4 million of legal, consulting and other expenses resulting from our status as a public company. Interest Expense . In April 2008, we issued, for $500,000, our 18% convertible notes in the principal amount of $500,000 and warrants to purchase a number of shares to be determined based on future financings. The interest for the 2009 period reflects interest on the outstanding notes. Loss on debt extinguishment . In April 2008, Organic Region issued, for $500,000, its 18% convertible debentures in the principal amount of $500,000 and warrants to purchase shares of common stock, with the exercise price and the number of shares to be determined after the completion of a reverse acquisition transaction and the completion of one or more financings generating proceeds of $3 million. In January 2009, as part of the reverse acquisition, we assumed the convertible debt along with the obligation to issue the warrants. In December 2009, we completed raising $3 million in financing and the terms of the warrants were then determined. The $500,000 proceeds were allocated between the convertible notes ($361,000) and the warrants ($139,000). The convertible notes were paid in August 2009, and the $139,000 difference between the $500,000 payment and the $361,000 carrying value of the notes was treated as a loss on debt extinguishment. See Note 7 of Notes to Consolidated Financial Statements. Change in derivative liability . The $3.9 million change of derivative liability compared for 2009, as compared with to $0.2 million for 2008, representing the change in fair value of warrants outstanding. The change in fair value, as computed using the Black-Scholes option pricing model, primarily reflected the increase in our stock price, which was $0.25 at December 31, 2009 and $0.09 at December 31, 2008. Tax. Since our operating subsidiaries benefited from a tax exemption for agriculture products for 2008 and 2009, we did not incur any income tax liability in 2008 or 2009. Net Income . As a result of the factors described above, our net income was $3.0 million for 2009, as compared with $4.7 million for 2008. Deemed Preferred Stock Dividend . In August 2009, we issued for $1,000,000 (i) 1,000,000 shares of series A preferred stock, (ii) an option to purchase an additional 1,000,000 shares of series A preferred stock and (iii) warrants to purchase a total of 20,000,000 shares of common stock. We incurred deemed preferred stock dividend of $650,000 in December 2009 in connection with the exercise of an option to purchase 650,000 shares of series A preferred stock, representing the difference between the market price of the common stock on the date of exercise and the purchase price of the common stock issuable upon conversion of the series A preferred stock on an “as if converted” basis. With respect to the issuance of the series A preferred stock in August 2009, since all of the consideration received was allocated to the option to purchase preferred stock and the warrants, there was no consideration allocated to the series A preferred stock with the effect that (i) there is no deemed preferred stock dividend with respect to that issuance and (ii) no part of the consideration received is shown as preferred stock on the statement of stockholders’ equity. 32 Net Income Applicable to Common Stockholders . As a result of deemed preferred stock dividend, our net income per share of common stock for 2009 was $2.7 million, or $0.03 per share (basic) and $0.02 per share (diluted), as compared with $4.7 million, or $0.06 per share (basic and diluted) for 2008. Liquidity and Capital Resources At December 31, 2009, we had a working capital deficiency of approximately $3.7 million, as compared with a working capital deficiency of approximately $1.2 million at December 31, 2008. The increase in working capital reflects the $4.9 million increase in the derivative liability, which reflects the increase in the value of the derivatives resulting from the increase in our stock price. Our working capital also reflects our investment in long-term lease prepayments of $3.3 million, advances relating to construction of our green foods hub of $4.6 million and equity financings which generated $2.7 million and cash flow used in operations of $0.8 million. The following table sets forth information as to the principal changes in the components of our working capital (dollars in thousands). Category December 31, 2008 to March 31, 2009 December 31, 2009 December 31, 2008 Change Percent Change Current Assets: Cash and cash equivalents $ 1,987 $ 545 1,442 264.6 % Accounts receivable, net 171 201 (30 ) (14.9 )% Due from related parties 1 353 (352 ) (99.7 )% Inventories 10 17 (7 ) (41.2 )% Advances – current portion 256 -- 256 NA Other current assets 343 58 285 491.4 % Total current assets 2,769 1,173 1,596 136.1 % Current Liabilities: Accounts payable and accrued expenses 1,186 1,530 (344 ) (22.4 )% Advances from customers 49 56 (7 ) (12.5 )% Due to related parties 3 129 (126 ) (97.7 )% Convertible debenture -- 361 (361 ) (100.0 )% Derivative liability 5,207 340 4,867 1431.5 % Total current liabilities 6,446 2,417 4,029 166.7 % Net working capital deficiency (3,677 ) (1,244 ) (2,433 ) (195.6 )% In 2009, we used $0.8 million in our operations, as compared with cash flow from operations of $0.1 million in 2008. Our cash flow from operations for both 2009 and 2008 reflected significant cash expenditures for long-term lease obligations which are payable at the commencement of the lease. For 2009, cash used in operations included approximately $4.1 million in advances and $3.4 million in long-term prepaid lease obligations and reflected the $3.9 million change in derivative liability. The principal item in the advances is the payment of approximately $4 million, which represented a payment toward the construction of the distribution hub, which we will be leasing from a non-affiliated party. The $3.4 million in long-term lease obligations represents the lease payments for the 25-year leases for the land on which our farming cooperatives grow our produce. Under the terms of the leases, the rent for the full 25 years is payable at the beginning of the lease. For 2008, the long-term lease obligation payments were $7.2 million. Since these payments are reflected in our cash flow from operations for 2009 and 2008, our operations used $0.8 million in 2009 and generated $0.1 million in 2008. 33 Cash flow used in investing activities was approximately $0.5 million in 2009, as compared with cash flow used in operations for 2008 of $0.1 million. The principal investing activity in 2009 was additional property, plant and equipment. Cash funds used in investing activities was immaterial for 2008. For 2009, our cash flow from financing activities was $2.9 million, compared with cash used in financing activities of $0.1 million in 2008, reflecting $0.5 million from the sale of convertible notes and payments of $0.6 million of payments to related parties. Our primary source of funds, other than operations, was the sale of our equity securities, from which we received $3.4 million in 2009. In June and July 2009, we borrowed $1.43 million from a group of investors. Effective August 3, 2009, we entered into two agreements with the noteholders and with another investor who invested $200,000. Pursuant to these agreements, the notes were cancelled and we issued common stock and warrants as follows: Pursuant to one agreement, we issued 13,129,410 shares of common stock at a purchase price of $0.085 per share and two-year warrants to purchase 10,145,454 shares of common stock at an exercise price of $0.11 per share. Pursuant to the second agreement, we issued 4,333,334 shares of common stock at a purchase price of $0.12 per share, granted the investors an option to purchase acquire up to 6,500,000 shares of common stock at a purchase price of $0.12 per share and issued two-year warrants to purchase 3,466,666 shares of common stock at an exercise price of $0.15 per share. In the event that such investors exercise the option to purchase shares of common stock, we will issue two-year warrants to purchase up to 5,200,000 shares of common stock at an exercise price of $0.15 per share. In January 2010, in connection with the exercise of an option to purchase 2,333,333 shares, we issued the exercising party a warrant to purchase 1,866,667 shares of common stock at $0.15 per share. In July 2010, the remaining options were exercised, and we issued the exercising party warrants to purchase 3,333,333 shares of common stock. On August 7, 2009, we entered into a series A convertible preferred stock and warrant purchase agreement with three accredited investors, who are the selling stockholders, to whom we sold, for $1,000,000, an aggregate of 1,000,000 shares of the series A convertible preferred stock and five-year warrants to purchase 10,000,000 shares of common stock at $0.14 per share and 10,000,000 shares of common stock at $0.25 per share. The investors had the option to acquire an additional 1,000,000 shares of preferred stock at $1.00 per share, and, in December 2009 and January 2010, they exercised this option and we issued 1,000,000 shares of series A preferred stock for $1,000,000. We paid an aggregate of $50,000 of broker fees in connection with this transaction and an additional $50,000 upon the exercise of the option. We also reimbursed the investors for $45,000 of due diligence expenses. In February 2010, we sold to two of the investors in the August 7, 2009 financing and their affiliates, 4,167,000 shares of common stock for $0.12 per share, for a total of $500,000. In May 2010, we raised $3.4 million from the sale of 17,000,000 shares of common stock at $0.20 per share pursuant to agreements with two sets of investors. One group of investors purchased a total of 3,375,000 shares for $675,000 (the “group A investors”) and the other group purchased 13, 625,000 shares of common stock for $2,725,000 (the “group B investors”). In connection with the May 2010 financing, we agreed with the investors that: · If, as any time as long as any of the group A investors holds any of the shares of common stock purchased in the financing, we sell shares of common stock or issue convertible notes or preferred stock with a conversion price which is less than the $0.20 per share price paid in the financing, we are to issue additional shares to the investors so that the effective price per share is equal to such lower price. The group B investors have no comparable provision. · We would hire a finance manager or chief financial officer with United States public company experience, within 45 days after the closing. If we fail to meet this covenant, we must pay the group A investors liquidated damages of 1% per month in cash or stock (based on the closing price of the transaction) to the investors until the position is filled. We satisfied this covenant. 34 · Within 45 of closing, we shall have a majority of independent directors of which two are to be English-speaking and have prior experience with United States public companies. If we fail to meet this covenant, we must pay the group A investors liquidated damages of 1% per month in cash or stock (based on the closing price of the transaction) to the investors until the covenant is met. We have satisfied this requirement. · Within 120 days of closing with respect to the group A investors and 180 days with respect to the group B investors, we must have sent in the necessary paperwork to apply for a listing on the American Stock Exchange. If we fail to meet this covenant, we must pay the investors liquidated damages of 1% per month in cash or stock (based on the closing price of the transaction) to the investors until the covenant is met. · Within 90 days of closing, we agreed with the group A investors to “conduct a minimum of an eight (8) for one (1) and maximum of ten (10) for one (1) reverse stock split” and we agreed with the group B investors to “conduct a minimum of a six (6) for one (1) and maximum of eight (8) for one (1) reverse stock split.” If we fail to meet this covenant, we must pay the group A investors liquidated damages of 1% per month in cash or stock (based on the closing price of the transaction) to the investors until the covenant is met. On October 4, 2010, we sold 5,000,000 shares of common stock to two investors at $0.20 per share to two investors, for total gross proceeds of $1,000,000. In connection with the financing, we agreed with the investors that: · If, as any time as long as any investor holds any of the shares of common stock purchased in the financing, we sell shares of common stock or issue convertible notes or preferred stock at a price or with a conversion price which is less than the $0.20 per share price paid in the financing, we are to issue additional shares to the investors so that the effective price per share is equal to such lower price. · Within 120 days of closing, we must have sent in the necessary paperwork to apply for a listing on the American Stock Exchange. If we fail to meet this covenant, we must pay the investors liquidated damages of 1% per month in cash or stock (based on the closing price of the transaction) to the investors until the covenant is met. · Within 90 days of closing, we agreed with to “conduct a minimum of an eight (8) for one (1) and maximum of ten (10) for one (1) reverse stock split.” If we fail to meet this covenant, we must pay the group A investors liquidated damages of 1% per month in cash or stock (based on the closing price of the transaction) until the covenant is met. We believe that our cash flow from operations will provide us with sufficient funds to enable us to continue our basic operations, including the purchase of additional land use rights for growing our produce. In the past, we have leased farmland for periods of 25 years on terms which required us to make all of the lease payments at the inception of the lease, which has required us to make significant cash outlays in the past. These payments were approximately $3.4 million in the 2009 and $7.2 million for 2008 and the funding for these leases was generated from our operations. As of December 31, 2009, we had advanced approximately $4.6 million in the construction of our green foods distribution hub. Upon completion of the construction, the construction cost advances will be reflected as leasehold improvements and amortized over the 18 year term of the lease. We estimate our total initial costs of this operation to be approximately $18 million, which includes construction costs of approximately $12 million, with approximately $4 million for auxiliary facilities, such as a cold storage facility as part of the distribution hub and refrigerated trucking capabilities, and $2 million for initial inventory of new green foods products. On an ongoing basis, we believe that we will need to maintain inventory in the range of $4 million. We will need to raise a substantial amount of capital from equity or debt markets, or to borrow funds from local banks, in order to complete the construction of our hub, launch and operate our new green foods business and maintain inventory. However, there is no assurance that, if required, we will be able to raise additional capital or reduce discretionary spending to provide the required capital. Currently, the capital markets for small capitalization companies are difficult and banking institutions have become stringent in their lending requirements. 35 Accordingly, we cannot be sure of the availability or terms of any third party financing, and any financing that may be available may be on terms which are not favorable to us and our stockholders and may result in significant dilution to our stockholders. In addition, if our outstanding warrants are not exercised, the presence of such a large number of warrants combined with the lack of an active trading market in our stock and our need to restate our financial statements and our filing of a Form 8-K stating that you cannot rely on our previously issued financial statements may impair both our ability to raise capital in the equity markets and the terms on which any funds could be made available to us. Although we are seeking equity and debt financings to provide us with the funds we require to construct and operate our green foods distribution hub, as of the date of this annual report, we do not have any formal or informal agreement or understanding with respect to any transaction which would provide us with the necessary cash. The failure to obtain funding when required could significantly impair our ability to develop this business. To the extent that we are able to generate funds from the sale of our equity and debt securities, our first priority is the completion and operation of the green foods distribution hubs. To the extent that we develop operations directed to sales to retail operations, these operations will be included as a phase of the green foods distribution hub. We do not currently plan to develop independent operations directed to the retail market. To the extent that we are not able to generate funds from the sale of debt or equity securities, we will limit the expansion of our fruit business to land which we can purchase from our cash flow from operations. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements. Accounts Receivable – Our policy is to maintain reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Inventories – Inventories are valued at the lower of cost (determined on a weighted average basis) or market value. Management compares the cost of inventories with market value and an allowance is provided to reduce the value of inventories to their net market value. Impairment – We apply the provisions of ASC 360-10 (Originally issued as FAS No. 144). ASC 360-10 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. We test long-lived assets, including property, plant and equipment and intangible assets subject to periodic amortization, for recoverability at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the net carrying amount is greater than its fair value. Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. We consider historical performance and future estimated results in our evaluation of potential impairment, and then we compare the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, we measure the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows as the rate we utilize to evaluate potential investments. We estimate fair value based on the information available in making whatever estimates, judgments and projections are considered necessary. 36 Revenue Recognition – Our revenue recognition policies are in compliance with ASC 605 (originally issued as Staff Accounting Bulletin (SAB) 104). Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. Revenues from the sale of products are recognized at the point of sale of our products. Discounts provided to customers by us at the time of sale are recognized as a reduction in sales as the products are sold. Discounts provided by vendors are not recognized as a reduction in sales provided the coupons are redeemable at any retailer that accepts coupons. Sales taxes are not recorded as a component of sales. The “Cost of Good Sold” line item of the Consolidated Statements of Income includes product costs, net of discounts and allowances. Discounts provided to us by vendors at the time of purchase are recognized as a reduction in inventory cost as the products are delivered. All other costs, including warehousing costs, transportation costs; salaries, rent expense and depreciation expense, are shown separately in selling expenses or general and administrative expense in our consolidated statements of income. Foreign Currency Translation – We use United States dollars for financial reporting purposes. Our subsidiaries maintain their books and records in their functional currency - RMB, which is currency of China, where all of our operations are conducted. Such financial statements were translated into United States dollars in accordance with ASC 830 (originally issued as Statement of Financial Accounts Standards (“SFAS”) No. 52, “Foreign Currency Translation”). According to the Statement, all assets and liabilities are translated at the current exchange rate on the balance sheet date, stockholder’s equity are translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC 220 (Originally issued as SFAS No. 130, “Reporting Comprehensive Income”) as a component of stockholders’ equity. Derivative Liability – The derivative liability represents the value of warrants to purchase common stock that were issued in connection with certain debt and preferred stock offerings in 2008 and 2009. According to the guidance provided in FASB ASC 815-40-15-5 through 815-40-15-8, we accounted for the value of these warrants as derivative liabilities. The warrants are reported at fair value using the Black-Scholes model. Changes in the value of the warrants are reflected in earnings for the period as a change in derivative liability. New Accounting Pronouncements In June 2009, the FASB issued ASC 105 (previously SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ("GAAP") - a replacement of FASB Statement No. 162 ), which will become the source of authoritative accounting principles generally accepted in the United States recognized by the FASB to be applied to nongovernmental entities. In June 2009, the FASB issued ASC 855 (previously SFAS No. 165, Subsequent Events ), which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or available to be issued. It is effective for interim and annual periods ending after June 15, 2009. There was no material impact upon the adoption of this standard on the Company’s consolidated financial statements. In June 2009, the FASB issued ASC 860 (previously SFAS No. 166, “Accounting for Transfers of Financial Assets”) , which requires additional information regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. SFAS 166 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company does not believe this pronouncement will impact its financial statements. 37 In June 2009, the FASB issued ASC 810 (previously SFAS No. 167) for determining whether to consolidate a variable interest entity. These amended standards eliminate a mandatory quantitative approach to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity in favor of a qualitatively focused analysis, and require an ongoing reassessment of whether an entity is the primary beneficiary. These amended standards are effective for us beginning in the first quarter of fiscal year 2010 and we are currently evaluating the impact that adoption will have on our consolidated financial statements. In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which amends ASC Topic 820, Measuring Liabilities at Fair Value , which provides additional guidance on the measurement of liabilities at fair value. These amended standards clarify that in circumstances in which a quoted price in an active market for the identical liability is not available, we are required to use the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities, or quoted prices for similar liabilities when traded as assets. If these quoted prices are not available, we are required to use another valuation technique, such as an income approach or a market approach. These amended standards are effective for us beginning in the fourth quarter of fiscal year 2009 and are not expected to have a significant impact on our consolidated financial statements. Off Balance Sheet Arrangements We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities. Item 7A. Quantitative and Qualitiative Disclosure about Market Risk Not required for smaller reporting companies. Item 8. Financial Statements and Supplementary Financial Data The consolidated financial statements begin on page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not required for smaller reporting companies.