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Form 10-Q
NORTH AMERICAN GAMING & ENTERTAINMENT CORP - NAGM
Filed: AugustMay 15, 20092010 (period: September 30, 2009)
March 31, 2010)
Quarterly report which provides a continuing view of a company's financial position
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X]
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
March 31, 2010
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from to
Commission File No. 000-05474
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION
Delaware
75-2571032
------------------------------- ---------------------------------
(State
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Seventeen Floor, Xinhui Mansion, Gaoxin Road,
Hi-Tech Zone, Xi'An P. R. China 710075
-----------------------------------------
(Address
(Address of principal executive offices)
(86) 29-88331685
--------------------------
(Issuer's
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X] YES [ ] NO
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.
[ ] YES [X] NO
APPLICABLE TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15 (d) of the Exchange Act after the distribution ofsecurities under a plan confirmed by a court.
[ ] YES [ ] NO
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: September 30, 2009: 24,216,058
March 31, 2010: 28,716,058
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
Table of Contents
10-Q - NORTH AMERICAN GAMING AND ENTERAINMENT CORPORATION FORM 10-Q
PART I
ITEM 1. FINANCIAL STATEMENTS 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
ITEM 4T.CONTROLS AND PROCEDURES 18
PART II
Items 1 through 5 not applicable.
ITEM 6. EXHIBITS 20
SIGNATURES 21
EX-1 (EXHIBIT 31.1)
EX-2 (EXHIBIT 32.1)
ITEM 1. FINANCIAL STATEMENTS
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
(An Exploration Stage Company)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
| March 31, |
| December 31, |
|
|
| 2010 |
| 2009 |
|
|
| (Unaudited) |
| (Audited) |
ASSETS |
CURRENT ASSETS |
| Cash and cash equivalents |
| $ 11,556 |
| $ 27,279 |
| Accounts receivable |
| 1,373,365 |
| 1,098,386 |
| Other current assets and prepayments |
| 29,423 |
| 33,770 |
TOTAL CURRENT ASSETS |
| 1,414,344 |
| 1,159,435 |
Property and equipment, net |
| 191,534 |
| 200,690 |
Long term investment |
| 292,985 |
| 292,903 |
Land use rights, net |
| 17,017,327 |
| 17,115,077 |
Goodwill |
| 3,338,178 |
| 3,337,249 |
Long term receivable |
| 1,195,379 |
| 1,193,431 |
Deferred tax asset |
| 207,408 |
| 218,602 |
TOTAL ASSETS |
| $ 23,657,155 |
| $ 23,517,387 |
LIABILITIES AND STOCKHOLDERS' EQUITY |
CURRENT LIABILITIES |
| Other payables and accrued expenses |
| $ 1,897,724 |
| $ 1,882,945 |
| Notes payable - related party |
| 434,137 |
| 434,137 |
| Due to related parties |
| 4,004,918 |
| 3,996,369 |
| Due to former stockholders |
| 2,438,367 |
| 2,418,796 |
| Deferred tax liability |
| 254,477 |
| 214,948 |
TOTAL CURRENT LIABILITIES |
| 9,029,623 |
| 8,947,195 |
STOCKHOLDERS' EQUITY |
Series C convertible preferred stock ($0.01 par | |||||
value, 10,000,000 shares authorized, 500,000 |
shares issued and outstanding |
| and December 31, 2009, preferential treatment |
|
|
|
|
| in distributions upon liquidation) |
| 5,000 |
| 5,000 |
|
|
|
|
|
|
Common stock($0.01 |
authorized, |
| 28,716,058 and 24,216,058 shares outstanding as of |
|
|
|
| March 31, 2010 and December 31, 2009, respectively) | 462,886 |
| 417,886 |
|
|
|
|
|
|
| Additional paid-in capital |
| 24,062,890 |
| 23,974,728 |
| Treasury stock (17,572,494 shares, at cost) |
| (489,258) |
| (489,258) |
| Non-controlling interests |
| 527,058 |
| 531,674 |
| Accumulated deficits during the exploration stage | (13,442,346) |
| (13,366,785) |
| Accumulated other comprehensive income |
| 3,501,302 |
| 3,496,947 |
TOTALSTOCKHOLDERS' EQUITY |
| 14,627,532 |
| 14,570,192 |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
| $ 23,657,155 |
| $ 23,517,387 |
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
(An Exploration Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For the |
|
|
|
| 2010 |
| 2009 |
| Accumulated |
REVENUE |
| Rental of land use rights | $ 274,635 |
| $ - |
| $ 1,372,507 |
OPERATING EXPENSES |
| General and administrative expenses | 43,839 |
| 31,306 |
| 954,507 |
| Legal and professional fees | 59,489 |
| 11,007 |
| 604,308 |
| Depreciation |
| 9,211 |
| 9,464 |
| 111,457 |
| Amortization of land use rights | 102,500 |
| 102,379 |
| 1,275,674 |
Total Operating Expenses |
| 215,039 |
| 154,156 |
| 2,945,946 |
INCOME (LOSS) FROM OPERATIONS | 59,596 |
| (154,156) |
| (1,573,439) |
OTHER INCOME |
| Interest income |
| 168 |
| 27 |
| 5,241 |
| Interest expense |
| (332) |
| - |
| (13,717) |
| Imputed interest expense |
| (88,162) |
| (100,220) |
| (1,031,903) |
| Bad debt expense |
| - |
| - |
| (73,192) |
| Other expense |
| (733) |
| (271) |
| (36,825) |
Total Other Expense |
| (89,059) |
| (100,464) |
| (1,150,396) |
INCOME (LOSS) |
| NON-CONTROLLING INTERESTS | (29,463) |
| (254,620) |
| (2,723,835) |
DEFERRED INCOME TAX EXPENSE | (50,715) |
| - |
| (47,063) |
NON-CONTROLLING INTERESTS |
| 4,617 |
| 9,682 |
| 191,115 |
LOSS FROM CONTINUING OPERATIONS | (75,561) |
| (244,938) |
| (2,579,783) |
DISCONTINUED OPERATIONS |
Loss on disposal of subsidiary | - | - | (8,027,234) |
NET LOSS |
|
| (75,561) |
| (244,938) |
| (10,607,017) |
OTHER COMPREHENSIVE INCOME |
| 4,355 |
| 17,110 |
| 3,496,947 |
COMPREHENSIVE INCOME (LOSS) | $ (71,206) |
| $ (227,828) |
| $(7,110,070) |
NET LOSS PER SHARE |
| Basic |
|
| (0.0027) |
| (0.0101) |
|
|
| Diluted |
|
| (0.0001) |
| (0.0004) |
|
|
|
|
|
|
|
|
|
|
|
Weightedaverage number of shares |
| During the period - basic | 27,966,058 |
| 24,216,058 |
|
|
| During the period - diluted | 636,966,058 |
| 633,216,058 |
|
|
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
(An Exploration Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the |
Accumulated |
|
|
|
|
|
|
| 2010 |
| 2009 |
|
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
Net loss from continuing operations |
| $ (75,561) |
| $ (244,938) |
| $(2,579,783) |
Net loss from discontinued operations |
| - |
| - |
| (8,027,234) |
| Total net loss |
|
|
| (75,561) |
| (244,938) |
| (10,607,017) |
Adjusted to reconcile net loss to net cash used in |
operating activities: |
Loss on | - | - | 8,027,234 |
|
| Depreciation |
|
|
| 9,211 |
| 9,464 |
| 111,457 |
|
| Amortization of land use rights |
| 102,500 |
| 102,379 |
| 1,275,674 |
|
| Imputed interest expenses |
|
| 88,162 |
| 100,220 |
| 1,031,902 |
|
| Bad debt provision |
|
| - |
| - |
| 73,192 |
|
| Deferred tax expense |
|
| 50,715 |
| - |
| 47,063 |
|
| Issuance of common stock for services |
| 45,000 |
| - |
| 45,000 |
|
| Non-controlling interests |
|
| (4,617) |
| (9,682) |
| (191,115) |
Change of |
|
| Accounts receivable |
|
| (274,635) |
| - |
| (1,372,507) |
|
| Other current assets and prepayments |
| 4,356 |
| (40,833) |
| 224,930 |
|
| Other payables and accrued expenses |
| 14,256 |
| (103,770) |
| 189,281 |
| Net cash used in operating activities | (40,613) |
| (187,160) |
| (1,144,906) |
CASH FLOWS FROM INVESTING ACTIVITIES |
|
| Issuance of note receivable |
| - |
| - |
| (133,000) |
|
| Purchase of property and equipment |
| - |
| (2,016) |
| (51,151) |
|
| Due from stockholder |
|
| - |
| - |
| 25,584 |
|
| Due from related parties |
|
| (1,616) |
| (11,343) |
| (1,438,910) |
Acquisition of | - | - | (1,310,532) | |||||
Net cash | - | - | (1,406,430) |
| Net cash used in investing activities |
| (1,616) |
| (13,359) |
| (4,314,439) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
| Capital contribution by stockholders |
| - |
| - |
| 128,205 |
|
| Proceeds from notes payable |
| - |
| - |
| 573,146 |
|
| Proceeds for recapitalization |
| - |
| - |
| ��(71,372) |
|
| Additional paid-in capital |
| - |
| - |
| (481,477) |
|
| Advances from stockholders |
| 18,895 |
| 5,486 |
| 328,029 |
|
| Advances from related parties |
| 7,436 |
| 227,270 |
| 3,636,135 |
|
| Investment from minority stockholders |
| - |
| - |
| (619,747) |
| Net cash provided by financing activities |
| 26,331 |
| 232,756 |
| 3,492,919 |
EFFECT OF EXCHANGE RATES ON CASH |
| 175 |
| 4,033 |
| (87,997) |
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (15,723) |
| 36,270 |
| (2,054,423) |
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 27,279 |
| 23,961 |
| 2,065,978 |
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ 11,556 |
| $ 60,231 |
| $ 11,556 |
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.
NORTH AMERICAN GAMING AND ENTERTAINMENT CORPORATION AND SUBSIDIARIES
(An Exploration Stage Company)
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
The accounting policies and methods of computation followed in these condensed consolidated financial statements are the same as those applied in the consolidated financial statements for the year ended December 31, 2008.
2009.
In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) considered necessary to present fairly the Company's financial position as of September 30, 2009,March 31, 2010, the results of operations for the three and
nine monthmonths periods ended September 30,March 31, 2010 and March 31, 2009, and September 30, 2008, and cash flows for the three and nine month periods ended September 30, 2009March 31, 2010 and September 30, 2008.March 31, 2009. The results for the three and nine month periods ended September 30, 2009March 31, 2010 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 30, 2009.
31, 2010.
These unaudited condensed consolidated financial statements should be read in conjunction with the Company's annual report on Form 10-KSB10-K as filed with the Securities and Exchange Commission.
NOTE 2 ORGANIZATION
North American Gaming and Entertainment Corporation ("North American") was incorporated under the laws of the State of Delaware in 1969. North American has had no operations or significant assets from incorporation through the year
ended December 31, 2006.
2006 and until the set up of the Company in 2007.
Hong Kong Wah Bon Enterprise Limited ("Wah Bon") was incorporated in Hong Kong on July 7, 2006 as an investment holding company.
Shanxi Tai Ping Yang Xin Neng Yuan Development Company Limited ("Tai Ping Yang") was incorporated as a limited liability company in the People's Republic of China ("PRC") on July 20, 2007 with its principal activity as an investment
holding company.
Chang Jiang Mining & New Energy Co. Ltd. ("Chang Jiang") (formerly Chang Jiang Shi You Neng Yuan Fa Zhang Company Limited) was incorporated as a limited liability company in the PRC on March 19, 1999. The Company became a joint stock company in January 2006 with its business activities in investment holding and the development of a theme park in Xian,PRC.
In August 2005, Chang Jiang contributed a piece of land valued at $7,928,532 in lieu of cash to the registered capital of Shanxi Huanghe Wetland Park Company Limited ("Huanghe"), representing 92.93% of the equity of Huanghe. Huanghe was incorporated as a limited liability company in the PRC on August 9, 2005 as Shanxi Chang Jiang Petroleum and Energy Development Co., Limited, and is engaged in the development of a theme park in Xian, PRC.
On February 5, 2007, Chang Jiang entered into an agreement with a third party to acquire 40% of the equity interest in Dongfang Mining Company Limited ("Dongfang Mining") at a consideration of $3,117,267, payable in cash. Dongfang
Mining is engaged in the exploration of lead, zinc and gold for mining in Xian,PRC.
On March 22, 2007, Chang Jiang entered into an agreement with the majority stockholder of Chang Jiang to exchange its 92.93% interest in Huanghe for 20% equity interest in Dongfang Mining owned by this related party.
Page 6
On August 15, 2007, 97.2% of the stockholders of Chang Jiang entered into a definitive agreement with Tai Ping Yang and the stockholders of Tai Ping Yang in which they disposed their ownership in Chang Jiang to Tai Ping Yang for 98% of ownership in Tai Ping Yang and cash of $1,328,940, payable on or before December 31, 2007.
On September 2, 2007, Wah Bon acquired 100% ownership of Tai Ping Yang for a cash consideration of $128,205.
The acquisitions of Tai Ping Yang and Chang Jiang were accounted for as a reorganization of entities under common control.
On May 30, 2007, amended to July 5, 2007, North American entered into a Material Definitive Agreement, pursuant to which the shareholders of Chang Jiang exchanged all their shares in Chang Jiang for 500,000 shares of series C convertible preferred stock ("series C shares") in North American, which carries the right of 1,218 votes per share and is convertible into 609,000,000
(pre609,000,000(pre a one for ten reverse split) common shares. North American will effect a one for ten reverse stock split after the closing of this transaction and upon obtaining regulatory approval and approval of the North American shareholders and the holders will not convert its series C convertible preferred stock until
afteruntilafter the completion of the reverse stock split. In connection with the exchange, Chang Jiang will also deliver $370,000 to North American and certain non-affiliates of North American will transfer to North American or its designee a total of 3,800,000 shares of common stock, par value of $0.01 per share, of North American which had been held for longer than 2 years by such non-affiliates, in exchange for the issuance by North American to each of such non-affiliates of 2,250,000 shares of common stock of North American. Issued and outstanding share of series C preferred stock shall automatically be converted into that number of fully paid and non- assessable shares of common stock based upon the conversion rate upon the filing by the Company of an amendment to its Certificate of Incorporation, increasing the numbern umber of authorized shares of common stock to 800,000,000 shares, changing the Company's name to China Changjiang Mining & New Energy Co., Ltd. and implementing a one for ten reverse stock split. The transaction was closed on February 4, 2008 and Wah Bon becomes a wholly owned subsidiary of North American.
The Company was reincorporated from the state of Delaware to the state of Nevada with the intent to effect a statutory merger of the Delaware corporation "North American Gaming and Entertainment Corporation", into a recently formed
Nevada corporation under the name "China Changjiang Mining & New Energy Co., Ltd.", and to swop all issued and outstanding shares in the Delaware corporation for comparable shares in the Nevada corporation and dissolve the
Delaware corporation. The said new corporation was filed on September 19, 2008 in Nevada. Up to the present, the statutory merger is in progress.
The members have limited liability for the obligations or debts of the entity.
The merger of North American and Wah Bon was treated for accounting purposes as a capital transaction and recapitalization by Wah Bon ("the accounting acquirer") and re-organization by North American ("the accounting acquiree"). The financial statements have been prepared as if the reorganization had occurred retroactively.
Accordingly, the financial statements include the following:
(1)The balance sheet consisting of the net assets of the acquirer at historical cost and the net assets of the acquiree at historical cost.
(2)The statement of operations including the operations of the acquirer for the periods presented and the operations of the acquiree from the date of the merger.
North American, Wah Bon, Tai Ping Yang, Chang Jiang and Dongfang Mining are hereafter referred to as the "Company".
The Company is considered to be an exploration stage company. This requires that information is presented to show the cumulative results of the Company since its inception as an exploration stage company. Even though members of the Company have been in existence prior to 2007, the Company considers itself to have become an exploration stage company when it acquired Dongfang Mining on March 22, 2007. The accumulated columns shown on the condensed consolidated statements of operations and comprehensive loss and the condensed consolidated statements cash flows have been provided to show cumulative balances from March 22, 2007 through September 30, 2009.
Page 7
NOTE 3 PRINCIPLES OF CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements as of September 30,March 31, 2010 and 2009 and 2008 include the unaudited condensed consolidated financial statements of North American, its 100% owned subsidiary Wah Bon, 100%
owned subsidiary Tai Ping Yang, 97.2% owned subsidiary Chang Jiang and 60% owned subsidiary Dongfang Mining. The minoritynon-controlling interests represent the minority shareholders' 2.8% and 40% share of the results of Chang Jiang and Dongfang Mining, respectively.
All significant inter-company accounts and transactions have been eliminated in consolidation.
NOTE 4 COMMITMENTS AND CONTINGENCIES
(A)Capital commitments
The Company's cash balances with financial institutions in the U.S are insured up to FDIC limits.
As of December 31, 2008,the Company had capital commitments of $2,190,630 with
two suppliers for contracts in respect to the exploration of lead, zinc and
gold for mining in Xian, PRC. As the permit of mining for gold, lead and zinc
has not yet been obtained as of September 30, 2009, the contract was not
implemented before the end of September 2009, but will still be effective
throughout 2009.
In August 2008, the Company signed the Contract of Specific Survey of Gold with The First Geological Team, Bureau of Geology and Minerals Exploration & Exploitation of ShanxiShaanxi Province. The total amount of the project at September
30, 2009 is $323,018, of which $146,943 was paid before March 31, 2010. The remaining $176,075 is supposedexpected to be paid in full duringbefore the next
fiscal year.end of 2010.
(B)Operating lease commitments.
commitments
The prior headquarters formerly located in the 5th floor of High-Tech Mansion,
Gaoxin Road,High-Tech Zone,Xi'An, had a rental lease of approximately $3,500 (RMB25,000) per month, from June, 2006 to January, 2009. The newcurrent headquarters office is removed towas located in the Xinhui Mansion, Gaoxin Road, High-Tech Zone, Xi'An,Xi’An,PRC with the rental lease from February, 2009 to January, 2011 at a rental rate of
approximately $10,975 (RMB75,000)$11,029 per year.
The rental expense of headquarters for the ninethree months ended September 30,2009March 31, 2010 and 20082009 was $746$2,757 and $10,965,$5,338, respectively. For the next three months of 2009 and the whole year of 2010, the Company has
outstanding commitments of approximately $ 2,744 and $10,975, respectively,
with regards to the operating leases of its facilities.
NOTE 5 STOCKHOLDERS' EQUITY
On February 4, 2008, the Company issued 500,000 shares of series C convertible preferred stock to Wah Bon's shareholder.
Each of the preferred shares is entitled to receive preferential treatment in connection with the payment of dividends, distributions upon liquidation and voting rights. Each preferred share carries the right to vote the equivalent of 1,218 votes of common shares. Each preferred share will be automatically converted into 1,218 common shares upon approval and an amendment to the Certificate of Incorporation to increase the number of authorized shares.
There are no preferred dividends in arrears as of September 30, 2009.
March 31, 2010.
No called or redeemed conditions were prescribed for the preferred stock.
On January 10 and 21, 2010, the Company issued 4,500,000 shares of common stock to 2 persons, Mr. Donald R. Monroe and Mr. Stanley F. Wilson. Each individual now holds 2,250,000 of pre-split outstanding common stock upon the issuance of the stock. It is the arrangement of signed agreement concerning the exchange of common stock.
NOTE 6 RELATED PARTY TRANSACTIONS
The related parties owed the Company $1,770,868$1,195,379 as of September 30, 2009, which
consisted of eight related companies and four related persons, each owing the
Company amounts totaling $ 1,383,271 and $387,597, respectively,March 31, 2010, for advances made on an unsecured basis, repayable on demand and interest free.
The Company owed $2,404,016$2,438,367 to two former stockholders of Chang Jiang as of September 30, 2009,March 31, 2010, for advances with no stated interest rates, made on an unsecured basis and repayable on demand. Interest was imputed at a rate of 5.4%
5.94%
per annum on the amounts due.
Page 8
The Company owed a total of $3,974,510$4,004,918 to ten related parties as of September
30, 2009. This consisted of nine related companies and four related person,
each of whom owed the Company amounts totaling $2,369,413 and $1,605,097,
respectively,March 31, 2010, for the advances with no stated interest rates, that were made on an unsecured basis and repayable on demand. Interest was imputed at a rate of 5.4%5.94% per annum on the amount due.
The related parties owed the Company $1,754,586$1,193,431 as of December 31, 2008, which
consisted of nine related companies and four related persons, each owing the
Company amounts totaling $1,355,694 and $398,892, respectively,2009, for advances made on an unsecured basis, repayable on demand and interest free.
The Company owed $2,396,560$2,418,796 to two former stockholders of Chang Jiang as of December 31, 2008,2009 for advances with no stated interest rates, made on an unsecured basis, repayable on demand and repayableon demand. Interestinterest free. Imputed interest was imputedcharged at a rate of 7%6.47 % per annumyear on the amounts due.
The Company owed a total of $3,446,160$3,996,369 to six related parties as of December 31, 2008. This consisted of five related companies and one related person, each
of whom owed the Company amounts totaling $2,086,486 and $1,359,674,
respectively,2009 for the advances with no stated interest rates, made on an unsecured basis, and repayable on demand. Interestdemand and interest free. Imputed interest was imputedcharged at a rate of 7%6.47% per annumyear on the amount due.
Total imputed interest recorded as additional paid-in capital amounted to $257,676$88,162 and $238,775$100,220 for the ninethree months ended September 30,March 31, 2010 and 2009,respectively.
100% of the Company’s accounts receivable balance of $1,373,365 and 2008,
respectively.
$1,098,386 at March 31, 2010 and December 31, 2009, respectively, was from a related party.
100% of the Company’s revenue earned during the three months ended March 31, 2010 was from a related party.
NOTE 7 SEGMENTS REPORTING
The Company operatesoperated in onlytwo reportable segments (mining and real estate)for the three months ended March 31,2010.
The Company evaluates segment performance based on income from operations. As a result, the components of operating income for one reportable segment miningmay not be comparable to another segment.
Segments key financial information for mineral ores,
whichthe three months ended March 31, 2010 and 2009 is still at an exploration stage. Thoughas follows:
Real Estate
Mining
Total
-----------
----------
-----------
For the landthree months ended March 31,2010
Revenue
$ 274,635
$0
$ 274,635
Income (loss) from continuing operations before
Income tax expense and minority interests
112,854
(142,317)
(29,463)
Depreciation of fixed assets
0
9,211
9,211
Amortization of intangible assets
102,500
0
102,500
Imputed interest expense
0
88,162
88,162
Interest income
0
168
168
Deferred income tax gain (expense)
(53,745)
3,030
(50,715)
Land use rights, account for
mostnet
17,017,327
0
17,017,327
Total identifiable assets
$18,598,100
$5,059,055
$23,657,155
For the three months ended March 31,2009
Revenue
$ 0
$ 0
$ 0
Loss from continuing operations before income
tax expense and minority interests
(102,379)
(152,241)
(254,620)
Depreciation of thefixed assets owned by the Company, the Company has targeted mining now
and new energy in the near future.
0
9,464
9,464
Amortization of intangible assets
102,379
0
102,379
Imputed interest expense
0
100,220
100,220
Interest income
0
27
27
Deferred income tax gain (expense)
0
0
0
Land use rights, net
17,402,909
0
17,402,909
Total identifiable assets
$17,402,909
$5,950,261
$23,351,170
All of the Company's long-lived assets and
customers are located in the PRC. Accordingly, no geographic information is presented.
NOTE 8 CONCENTRATIONS AND RISKS
During the ninethree months ended September 30,March 31, 2010 and 2009, and 2008, 100% of the Company's business and assets were located in the PRC.
NOTE 9 RECENT ACCOUNTING PRONOUNCEMENTS
Effective for the interim condensed consolidated financial statements as of
September 30, 2009, the Financial Accounting Standards Board (FASB) Accounting
Standards Codification (ASC) became the primary source of authoritative
accounting principles recognized by the FASB to be applied in the preparation
of financial statements in accordance with GAAP. Rules and interpretations of
the SEC and are also sources of authoritative GAAP for SEC registrants. The ASC
supersedes all existing non-SEC accounting and reporting standards but does not
change GAAP. The adoption of ASC did not have a material effect on the
condensed consolidated financial statements.
In March 2008, the FASB issued ASC 815 (SFAS No. 161), "Disclosures about
Derivative Instruments and Hedging Activities-an amendment of FASB Statement
No. 133". SFAS No. 161 gives financial statement users better information about
the reporting entity's hedges by providing for qualitative disclosures about
the objectives and strategies for using derivatives, quantitative data about
the fair value of and gains and losses on derivative contracts, and details of
credit-risk-related contingent features in their hedged positions. SFAS No. 161
is effective for financial statements issued for fiscal years beginning after
November 15, 2008 and interim periods within those years. The Company does not
expect the adoption of SFAS No. 161 to have a material effect on the condensed
consolidated financial statements.
In December 2007, the FASB released ASC 805 (SFAS No. 141(R)), "Business
Combinations". This standard revises and enhances the guidance set forth in
SFAS No. 141(R) by establishing a definition for the "acquirer," providing
additional guidance on the recognition of acquired contingencies and non-
controlling interests, and broadening the scope of the standard to include all
transactions involving a transfer in control, irrespective of the consideration
involved in the transfer. SFAS No. 141(R) is effective for business
combinations for which the acquisition date occurs in a fiscal year beginning
on or after December 15, 2008. Although the standard will not have any impact
on the current condensed consolidated financial statements, application of the
new guidance could be significant to the Company in the context of future
merger and acquisition activity.
Page 9
In December 2007, the FASB released ASC 810 (SFAS No. 160), "Non-Controlling
Interests in Consolidated Financial Statements-an amendment of ARB No. 51".
This statement amends ARB 51 to establish accounting and reporting standards
for the non-controlling interest in a subsidiary and for the deconsolidation of
a subsidiary. It clarifies that a non-controlling interest in a subsidiary is
an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. SFAS No. 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The Company does not expect the standard to have a
material impact on the condensed consolidated financial statements.
In May 2009, the FASB released ASC 855 (SFAS No. 165), "Subsequent Events,"
which establishes general standards of accounting for and disclosure of events
that occur after the balance sheet date but before the financial statements are
issued or available to be issued. Effective for our interim financial
statements as of September 30, 2009, we reviewed events occurring through the
filing date of this document.
In June 2009, the FASB released ASC 860 (SFAS No. 166), "Accounting for
Transfers of Financial Assets - an Amendment of FASB Statement No. 140," to
improve the relevance, representational faithfulness, and comparability of the
information that we provide in our financial statements about a transfer of
financial assets; the effects of a transfer on our financial position,
financial performance, and cash flows; and our continuing involvement, if any,
in transferred financial assets. Additionally, this statement removes the
concept of a qualifying special-purpose entity from SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," and removes the exception from applying FASB Interpretation No.
46, "Consolidation of Variable Interest Entities," to qualifying special-
purpose entities. SFAS No. 166 is effective for fiscal years, and interim
periods within those fiscal years, beginning after November 15, 2009. The
Company does not expect the standard to have a material impact on the condensed
consolidated financial statements.
In June 2009, the FASB released ASC 810 (SFAS No. 167), "Amendments to FASB
Interpretation No. 46(R),"new guidance which addresses the effects on certain provisions of FASB Interpretation No. 46, "Consolidationcurrent accounting guidance relating to the consolidation of Variable Interest Entities,"variable interest entities, as a result of the elimination of the qualifying special-purpose entity concept in
SFAS No. 166, "Accounting for Transfers of Financial Assets."concept. It addresses concerns about the application of certain key provisions of Interpretation
46(R),current accounting guidance, including those in which the accounting and disclosures under the
Interpretation do not always provide timely and useful information about a company'scompany’s involvement in a variable interest entity. This statementguidance requires us to perform an analysis to determine whether any of our variable interests give us a controlling financial interest in a variable interest entity. In addition, this statementguidance requires ongoing assessments of whether we are the primary beneficiary of a variable interest entity. SFAS No. 167This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after NovemberNo vember 15, 2009. The Company doesThis guidance is not expect the standardexpected to have a material impact on our Consolidated Financial Statements
In January 2010, the condensed consolidated financial statements.
FASB released new guidance requiring entities to make new disclosures about recurring and nonrecurring fair value measurements, including significant transfers into and out of Level 1 and Level 2 fair value measurements. This guidance also requires information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2009, except for the detailed Level 3 rollforward disclosures, which is effective for fiscal years, and interim periods within those fiscal years, beginning on after December 15, 2010. Early adoption is permitted. We intend to comply with the disclosure provisions of this new guidance.
NOTE 10 GOING CONCERN
As reflected in the accompanying condensed consolidated financial statements, the
Company has an accumulated deficit during the exploration stage of $13,970,124$13,397,346 at September 30, 2009,March 31, 2010, which includesincluded a net loss of $707,896$75,561 for the ninethree months ended September 30, 2009.March 31, 2010. The Company's current liabilities exceedexceeded its current assets by $8,459,300.$7,615,279 and the Company used cash in operations of $40,613. These factors raise substantial doubt about its ability to continue as a going concern. In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying condensed consolidated balance sheetsheets is dependent upon continued operations of the company,Company, which in turn is dependent upon the Company's ability to raise additional capital, obtain financingfi nancing and succeed in its future operations. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classificationsclassification of recorded asset amounts or amounts and classificationsclassification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Management has taken steps to revise its operating and financial requirements, which it believes are sufficient to provide the Company with the ability to continue as a going concern. TheThough the Company began to generate revenue in 2009, the Company is also actively pursuing additional funding and potential merger or acquisition candidates and strategic partners, which would enhance stockholders' investment.investments. Management believes that the above actions will allow the Company to continue operations through the 2009
fiscal year.
Page 10
The Company has successfully replaced the old license of mining exploration
with a new one, whose exploration period ranges from January 1, 2009 to January
1, 2011.
next nine months.
NOTE 11 THE INVESTMENT
In order to carry out the Corporate Strategy of developing the mining and new
energy,September 2008, the Company, along with ShanxiShaanxi Changfa Industry Stock Co.,Ltd. ("Changfa"),established a new company named ShanxiShaanxi Changjiang MiningPower & New Energy Co., Ltd.("Shanxi"(“Changjiang power”).The. The Company owns a 20% share of the registered capital of Shanxi,Changjiang power while Changfa owns the remaining 80% share. Theshare, when all the capital was contributed. According to the contract, the Changfa shall contribute capital until the end of 2011. At March 31, 2010, the net asset was rmb6,586,417 ($964,859), which means the Company held 31% share of the Changjiang Power. Practically, the Company has significant influence on ShanxiChangjiang Power as it has assigned finance and other directors in Shanxi.Changjiang Power. The Company has recorded this investment under the equity method. Snce the income and expense was immaterialChangjiang Power had no revenue for the ninethree months ended September
30, 2009,March 31,2010 and since the expense of $1,317 was immaterial, no adjustment has been made. As of September 30, 2009,March 31, 2010 and December 31,2009, the balance of this investment was $292,869.
Page 11
The information of Changjiang Power is shown as follows:
March 31,2010
December 31,2009
Current assets
$280,888
$282,126
Non current assets
682,654
682,465
Current liabilities
0
0
Net assets
963,542
964,591
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Forward Looking Statements
We make certain forward-looking statements in this report. Statements that are not historical facts included in this Form 8-K are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties that could cause actual results to differ from projected results. Such statements address activities, events or developments that the Company expects, believes, projects, intends or anticipates will or may occur, including such matters as future capital, debt restructuring, pending legal proceedings, business strategies, expansion and growth of the Company's operations, and cash flow. Factors that could cause actual results to differ materially ("Cautionary Disclosures") are described throughout this Form 8-K. Cautionary Disclosures include, among others:ot hers: general economic conditions in China and elsewhere, the Company's ability to license, extract, refine and sell minerals and precious metals through our intended operations in China, the strength and financial resources of the Company's competitors, environmental and governmental regulation, labor relations, availability and cost of employees, material and equipment, regulatory developments and compliance,
fluctuations in currency exchange rates and legal proceedings. Statements concerning our future operations, prospects, strategies, financial condition, future economic performance (including growth and earnings), demand for our services, and other statements of our plans, beliefs, or expectations, including the statements contained under the captions "Risk Factors," "Management's Discussion and Analysis or Plan of Operation," "Description of Business," as well as captions elsewhere in this document, are forward-looking
statements. In some cases these statements are identifiable through the use of words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "should," "will," "would," and similar expressions. We intend such forward-looking statements to be covered by the safe harbor provisions contained in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and in Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). All written and oral forward-looking statements attributable to the Company are expressly qualified in their entirety by the Cautionary Disclosures. The Company disclaims any
obligation to update or revise any forward-looking statement to reflect events or circumstances occurring hereafter or to reflect the occurrence of anticipated or unanticipated events.
The nature of our business makes predicting the future trends of our revenues, expenses, and net income difficult. Thus, our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. The risks and uncertainties involved in our business could affect the matters referred to in any forward-looking statements and it is possible that our actual results may differ materially from the anticipated results indicated in these forward-looking statements. Important factors that could cause actual
results to differ from those in the forward-looking statements include, without limitation, the factors discussed in the section entitled "Risk Factors" and the following:
- the effect of political, economic, and market conditions and geopolitical events;
- legislative and regulatory changes that affect our business;
- the availability of funds and working capital;
- the actions and initiatives of current and potential competitors;
- investor sentiment; and
- our reputation.
Page 12
We do not undertake any responsibility to publicly release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this report. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by any forward-looking statements.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto as filed with the SEC and other financial information contained elsewhere
in this Form 8-K.
10-Q.
OVERVIEW
We operate in two segments. We are an exploration stage mining company andalthough we have had no mining revenues and do not expect mining revenues until we begin the process of extracting minerals which will not start until the end of 2009,2010, if at all. We have sustained considerable losses from our exploration and other activities to date.
Effective August 20, 2001, the Company sold its interests in video gaming business for cash and notes receivable. During 2003, the Company sold the notes receivable for cash. As a result, the Company had no on-going operations or revenues. ThereafterAt that time£¬ the Company was a "shell" as defined by Rule 405 under the Securities Act and Rule 12b-2 under the Exchange Act. Its only activity was to explore for acquisition opportunities and the financing required buying and supporting an operating business.
On February 4, 2008, (the "Closing Date") we acquired HONGKONG WAH BON ENTERPRISE LIMITED ("Wah Bon") and its three subsidiaries: SHANXISHAANXI TAI PING YANG XIN NENG YUAN DEVELOPMENT COMPANY LIMITED ("Tai Ping Yang")Yang "); SHANXISHAANXI CHANG JIANG SI YOU NENG YUAN FA ZHANG GU FENG YOU XIANG GONG SI ("Chang Jiang") and DONGFANG MINING COMPANY LIMITED ("Dongfang"Dongfang Mining".). Wah Bon owns 100% of Tai Ping Yang. Tai Ping Yang owns 97.2% of Chang Jiang; and Chang Jiang owns 60% of Dongfang.Dongfang Mining. The minority interests represent the minority shareholders' 2.8% and 40%41.68% share of the results of Chang Jiang and Dongfang Mining respectively.
We replaced our Board of Directors and officers. A filing on Form 14F was filed
with the Securities & Exchange Commission on December 7, 2007. The new
directors are all located in China, and the officers of Dongfang are familiar
with the mining industry in China. All of our assets are in China.
Our subsidiary, Chang Jiang, had acquired a 60% interest in Dongfang Mining in
two separate transactions. On February 5, 2007 we acquired 40% of the net
assets of Dongfang Mining. The acquisition of 40% of Dongfang Mining was
accounted for as a purchase under SFAS No. 141, Business Combinations.
Accordingly, the 40% of operating results of Dongfang Mining have been included
in the consolidated statements of operation and comprehensive losses after the
effective date
of the acquisition of February 5, 2007.
The preliminary allocation of 40% of the net assets of Dongfang
Mining acquired is as follows:
Cash and cash equivalents $ 227,233
Other receivables and prepaid expenses 46,309
-----------
Total current assets 273,542
Fixed assets, net 7,432
-----------
Total assets 280,974
Less: Accounts payable and accrued liabilities (3,223)
Due to a stockholder (273,444)
-----------
Net assets acquired 4,307
Noncontrolling interest (1,723)
Additional paid in capital (861)
Less: Consideration for acquisition (3,117,267)
-----------
Goodwill $(3,115,544)
-----------
Page 13
Analysis of the net outflow of cash and cash equivalents in respect of
the business combination is as follows:
Total cash consideration $3,117,267
Less: cash consideration payable (1,872,131)
----------
Cash consideration paid 1,245,136
Less: cash and cash equivalents acquired (227,233)
----------
Net cash outflow $1,017,903
----------
The acquisition of 40% of Dongfang Mining was accounted for as a
purchase under SFAS No. 141, Business Combinations. Accordingly, the 40%
of operating results of Dongfang Mining were included in the consolidated
statements of operations and comprehensive income after the effective date
of the acquisition of February 5, 2007.
The following table reflects the unaudited pro forma combined results
of operations for the years ended December 31, 2008, 2007 and 2006,
assuming the acquisition had occurred at the beginning of 2006.
2008 2007 2006
----------- ------------ ------------
Revenues $(1,467,426) $ (8,959,472) $ (1,676,333)
=========== ============ ============
Net loss per share - basic $ (0.06) $ (.37) $ -
=========== ============ ============
Net loss per share - diluted $ - $ - $ -
=========== ============ ============
In accordance with SFAS No. 142 "Goodwill and other intangible assets",
goodwill is not amortized but is supposed to be tested for impairment. The Company is going to perform an assessment on goodwill arising from the acquisition of Dongfang Mining as the marketprice of non-ferrous metals has changedare going down and the whole industry is rebounding.are stagnant comparing with that of 2007 when the the goodwill was recorded. We cannot conclude that there was no impairment to the carrying value of the goodwill in this reporting period.
On March 22, 2007, the Company entered into an agreement with a principal
stockholder of the Company to exchange the Company's 92.93% interest in Shanxi
Huanghe Wetland Park Company Limited ("Huanghe") for 20% equity interest in
Dongfang Mining, which is owned by the stockholder. The acquisition of 20% of
Dongfang Mining from the related party was accounted for as a purchase under
common control. As a result of these transactions, we recorded goodwill of
$3,115,544 in the balance sheet of the Company.
The detailed information on the loss on disposal of Huanghe is as follows:
Cash and cash equivalents $1,406,430
Other current assets 31,687
Fixed assets, net 349,024
Land use rights 8,987,826
----------
Total assets 10,774,967
Less: Accounts payable and accrued liabilities (205,800)
Due to related parties (1,618,037)
Due to a stockholder (4,726)
Noncontrolling interests (918,343)
----------
Book value of net assets disposed 8,028,061
20% of book value of net assets of Dongfang
Mining exchanged (827)
----------
Loss on disposal of Huanghe $8,027,234
==========
Page 14
Net cash outflow on disposal of subsidiary
Proceeds from disposal $ -
Cash and cash equivalents disposed (1,406,430)
-----------
Net cash outflow $(1,406,430)
===========
We have land useexploration rights for a 67.8261.27 sq.km parcel in the Jiao Shan Zhai Mining Area, located in Xunyang County in the ShanxiShaanxi Province of China. Our land use rights are amortized over fifty years of the term of the leases. We have performed tests on the site but we have not yet begun mining activity. We originally planned to constructparticipate in constructing a theme park business on the parcel, but have now directeddelayed those plans while we direct our resources toon the mining opportunities. We have decided to lease out our land use right to Huanghe wet land park Co.Ltd. Therefore all ofwe can focus our assets are recordedmanagement in the mining segment of the financial statements.segment.
The following is a summary of land use rights at September 30, 2009:
March 31, 2010:
Cost $19,162,542
$ 19,170,121
Less: accumulated amortization (1,946,996)
-----------
2,152,794
Land use rights, net $17,215,546
===========
17,017,327
The land use rights are amortized over the fifty year termsyears of the term of leases. The amortization expense for the three months ended September 30,March 31, 2010 and 2009 was $102,500 and 2008 was
$102,452 and $102,315,102,379, respectively.
From 2003 until the present, Dongfang Mining has held licenses for the
exploration of minerals and precious metals in the ShanxiShaanxi Province of the People's Republic of China. Dongfang Mining was granted an exploration right to the lead, zinc and gold mines located at Gan Gou and Guan Zi Gou, Xunyang County, ShanxiShaanxi Province, PRC, on December 31, 2006. The Company engaged Geology and Mineral Bureau of ShanxiShaanxi to conduct a preliminary survey which reported preliminary positive findings for gold, lead and zinc deposits in the mines.
As reflected in the accompanying condensed consolidated financial statements, the Company has an accumulated deficit during the exploration stage of $13,397,346 at March 31, 2010, which includes a net loss of $75,561 for the three months ended March 31, 2010. The Company's current liabilities exceed its current assets
by $7,615,279 and the Company used cash of $40,613 in operations. These factors raise substantial doubt about its ability to continue as a going concern. In view of the matters described above, recoverability of a major
portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the company, which in turn is dependent upon the Company's ability to raise additional capital,
obtain financing and succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
PLAN OF OPERATIONS
Our efforts over the next twelvenine months will be directed towards completing the licensure process to begin the extraction operations from the mines and to acquire the equipment and personnel necessary to commence mining operations. We
have applied for, but not yet obtained, an additional license that will permit the excavation and extraction of the parcel. We expect to obtain that license before the gold
mining license in the near futureend of 2010 and expect to commence extraction operations shortly thereafter.
To date we have financed our activities from loans received from related parties. Until we begin to generate mining revenues we expect to continue to rely on loans from our directors and related parties. Our directors have indicated that they will continue to make loans for the next twelve (12) months, or untilalthough we have made cumulated revenue of $1,372,507 till the Company begins to generate revenues, whichever first occurs.end of March 31,2010. Other than the oral assurances given by the directors, we have no other sources of capital and there can be no guarantee that the Company will be able to meet its obligations or obtain sufficient capital to complete its plan of operations for the next twelvenine (9) months.
Our plan over the next twelve months is: 1.to obtain the gold mining license
and then to obtain the lead & zinc mining license; 2.for 2010 is to finish reconnaissance and evaluation and begin prospecting the known ore bodies and controlling the trench exploration.exploration, in addition, enter in to new energy industry by acquisition ,such as electric power. We intend to stress deep drilling and tunnel exploration validation. We hope this will allow us to enlarge the ore body scale and prove up the anomalous regions. We expect to accomplish this primarily with drilling and tunnel exploration.
Specific implementation methods which are as follows:
- Enhance the validation of geophysical prospecting abnormities,
especially of the I and II class abnormities, make a conclusion on them
as soon as possible to provide basis for next work;
- Carry out geological investigation in adjacent regions, with
attention to the lead & zinc ore bodies;
- Investigate other metallogenic areas, mainly through surface work,
which may be combined with limited tunnel exploration and drilling;
- Finish the rough survey of lead and zinc over the 6.8 square meter area;
Page 15
- Investigate other metallogenic areas, mainly through surface work, which
may be combined with limited tunnel exploration and drilling;
-
Complete the particular survey of gold and obtain the exploitation license
licence
Before year end.
- Enter into electric power industry by controlling the Changjiang Electric
electric
Power & new emerge Co.,ltd.
We believe we can find adequate skilled mining personnel in the region. We are also exploring possible joint venture or similar arrangements with one of the existing, competitive mining companies that are already operating in the mining area near our parcel. If so, we would reduce our need for the initial expenditures and the delay in commencing mining operations may be shortened.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. Overall, we had an increase in net loss of $707,896$23,473 for the ninethree months ended September 30, 2009.March 31, 2010. During the ninethree months ended September 30,
2009,March 31, 2010, we had net cash used in operating activities of $411,253,$40,613, net cash used
in investing activities of $ 15,251$1,616 and net cash provided by financing activities of $ 530,797.$26,331. At September 30, 2009,March 31, 2010, our cash balance was $45,213,$11,556, as compared to $ 23,96127,279 at the end of December 2008.2009. This was an increasedecrease of $
21,252,$15,723, or approximately 89%58%.
CASH FLOWS FROM OPERATING ACTIVITIES. Net cash used in operating activities of $411,253$40,613 for the ninethree months ended September 30, 2009March 31, 2010 was primarily attributable to the net loss from operations. The adjustments to reconcile the net loss to net cash, included depreciation expense of $27,872,$9,211, amortization of land use rights of $307,230,$102,500, imputed interest expense of $257,676,$88,162, adjustment for noncontrollingnon-controlling interests of $92,125,$4,617, a deferred tax expense of $50,715, an increase of account receivable of $274,635, a decrease in current assets and prepayments of $107,351$4,356 and a decreasean increase in current
liabilitiesother payables and accrued expenses of $242,260.
$14,256.
CASH FLOWS FROM INVESTING ACTIVITIES. Net cash used in investing activities of $15,251$1,616 for the ninethree months ended September 30, 2009March 31, 2010 was primarilyall attributable to the $13,200$1,616 from related parties.
CASH FLOWS FROM FINANCING ACTIVITIES. Net cash of $ 530,797$26,331 provided by financing activities in the ninethree months ended September 30, 2009March 31, 2010 was primarily due to the $5,489$18,895 and $525,308$7,436 increases of due to shareholder and due to
related parties, respectively.
FINANCING. WeThough we have not generated anythe cumulated rental revenues of $1,372,507 as of September 30, 2009 and
soMarch 31, 2010, we are still considered an exploration stage company. We ended September 2009the first quarter of 2010 with $45,213$11,556 of cash and cash equivalents on our balance sheet. Given our current cash usage rate, a risk exists that our available cash on hand and the cash we anticipate generating from operating activities will be insufficient to sustain our operations. Our auditors have expressed substantial concern as to our ability to continue as a going concern.
We have historically been able to issue shares, preferred stock or stock options to pay for certain operating expenses. We believe that our pro-forma working capital on hand as of the date of this report, along with our rental income and ability to raise capital and meet certain operating expense obligations through the issuance of stock or stock equivalents, will provide us with the capital we need through year end 2009.2010. In addition, our directors have indicated a willingness to make loans to the Company to cover expenses, although there is no assurance that they will do so. However, we believe that our ability to operate beyond the end of 20092010 will require us to raise additional capital, of which there can be no assurance. We are, therefore, actively seeking additional
debt or equity financing until we become cash flow positive.
INTERNAL SOURCES OF LIQUIDITY. There is no assurance that funds from our operations, if and when they commence, will meet the requirements of our daily operations in the future. In the event that funds from our operations are
insufficient to meet our operating requirements, we will need to seek other sources of financing to maintain liquidity.
Page 16
EXTERNAL SOURCES OF LIQUIDITY. We intend to pursue all potential financing options in 20092010 as we look to secure additional funds to both stabilize and grow our business operations and begin extraction. Our management
will review any financing options at their disposal and will judge each potential source of funds on its individual merits. We cannot assure you that we will be able to secure additional funds from debt or equity financing, as and when we need to or if we can, that the terms of such financing will be favorable to us or our existing shareholders.
INFLATION. Our management believes that inflation has not had a material effect on our results of operations, and does not expect that it will in fiscal year 2009.
2010.
OFF-BALANCE SHEET ARRANGEMENTS. We do not have any off-balance sheet arrangements.
RESULTS OF OPERATIONSOPERATIONS. Comparison of the ninethree months ended September 30, 2009,March 31, 2010, to the ninethree months ended September 30, 2008:
March 31, 2009:
Operating Expense
The Company recorded an operating lossprofit of $707,896$59,596 for the ninethree months ended September 30, 2009March 31, 2010 compared to a loss of $1,445,862$154,156 for the ninethree months ended September 30, 2008.March 31, 2009. The lossprofit was comprised of rental of land use right of $274,635, during the three months ended March 31,2010, compared to $0 during the three months ended March 31,2009; general and administrative costs of $123,520$43,839 during the ninethree months ended September 30, 2009,March 31, 2010, compared to
general and administrative costs of $226,292$31,306 for the ninethree months ended September 30, 2008.March 31, 2009. Legal and professional fees decreasedincreased to $80,392$59,489 for the ninethree months ended September 30, 2009,March 31, 2010, which was the costs of the audit.audit and other professional services. Depreciation was $27,872$9,211 for the ninethree months ended September 30, 2009March 31, 2010 as compared to $ 27,7499,464 for the ninethree months ended September 30, 2008.March 31, 2009. Land use rights amortization was $307,230$102,500 for the ninethree months ended September 30, 2009.
The operating loss decrease was largely associated with the decrease of
expensesMarch 31, 2010.
Other Income (Expense)
Other expense decreased from $100,464 for the legal and professional fees.
Other Income (Expense)
Other expense increased from $260,440three months ended March 31, 2009 to $89,059 for the ninethree months ended September 30,
2008 to $261,007 for the nine months ended September 30, 2009.March 31, 2010. The Company incurred interest expense of $139$168 for the ninethree months ended September 30, 2009,
March 31, 2010,
compared to $23,004$27 for the ninethree months ended September 30, 2008.March 31, 2009. Imputed interest expense increaseddecreased from $238,775$100,220 for the ninethree months ended September
30,2008March 31,2009 to $257,676$88,162 for the ninethree months ended September 30, 2009.March 31, 2010. The increase
decrease
in imputed interest expense is due to additional borrowingsthe interest rate applied decrease from related and unrelated
parties. The Company recorded interest income of $132 for the nine months ended
September 30, 2009.
7% to 5.94%.
Net Loss
The net loss for the ninethree months ended September 30, 2009March 31, 2010 was $707,896$75,561 as compared to a net loss of $1,445,862$244,938 for the ninethree months ended September 30,
2008.March 31,2009. The decrease of loss for the ninethree months ended September 30, 2009March 31, 2010 mainly came from the decreaseincrease of $592,490$274,635 in legal and professional feesrental revenue compared with the ninethree months ended September 30, 2008.
March 31, 2009.
Other Comprehensive Income
The exchange rate was stable during the ninethree months ended September 30, 2009,March 31, 2010, and only $109,232$4,355 of foreign exchange lossgain was recorded for the ninethree months ended September 30, 2009.March 31, 2010. We converted the report in RMB to that in USD by the
exchange rate at September 30, 2009March 31, 2010, (i.e. 6.8296.8263 for the condensed consolidated balance sheet at September 30 ,2009)March 31, 2010) and by the average exchange rate of the ninethree months (i.e. 6.830456.8273 for the condensed consolidated statement of
operations and comprehensive loss for the period ended September 30 ,2009)March 31, 2010). But the equity items in balance sheet apply the historical exchange rate.
As a result, the difference after the translation was concluded to be recorded as foreign exchange translation losses in the condensed consolidated balance sheets.
Comprehensive Loss
The comprehensive loss for the ninethree months ended September 30, 2009March 31, 2010 was $109,232,$71,206, as compared to a comprehensive gainloss of $ 1,051,148$227,828 for the ninethree months ended September 30, 2008.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 4T. CONTROLS AND PROCEDURES.
CONTROLS AND PROCEDURES
Quarterly Evaluation of Controls
As of the end of the period covered by this quarterly report on Form 10- QSB,10-QSB, we evaluated the effectiveness of the design and operation of (i) our disclosure controls and procedures ("Disclosure Controls"), and (ii) our internal control over financial reporting ("Internal Controls"). This evaluation ("Evaluation") was performed by our President and Chief Executive Officer for the quarter ended September 30 , 2009,March 31, 2010, Chen Weidong ("CEO") and by our Chief Financial Officer for the quarter ended September 30 , 2009.March 31, 2010. In this section, we present the conclusions of our CEO based on and as of the date of the Evaluation,evaluation, (i) with respect to the effectiveness of our Disclosure
Controls, and (ii) with respect to any change in our Internal Controls that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect our Internal Controls.
Our auditors, Brock, Schechter & Polakoff, LLP, an independent registered public accounting firm, has issuedreported to management on system deficiencies that constituted material weaknesses and significant deficiencies in the internal controls of the Company. The material weaknesses identified related to a reportlack on an independent board of directors and a lack of an independent audit committee to oversee the effectiveness of our internal control over
financial reporting. In the firm's opinion,reporting process. The significant deficiency identified related to the Company maintained, in all
material respects, effective internal control over financial reporting asnot having sufficient knowledge of December 31, 2008.
the necessary disclosures required under U.S. generally accepted accounting principles.
CEO and CFO Certifications
Attached to this quarterly report, as Exhibits 31.1 and 32.1, are certain certifications of the CEO and CFO, which are required in accordance with the Exchange Act and the Commission's rules implementing such section (the "Rule 13a- 14(a)/15d-14(a) Certifications"). This section of the quarterly report contains the information concerning the Evaluation referred to in the Rule 13a-
14(a)13a-14(a)/15d-14(a) Certifications. This information should be read in conjunction with the Rule 13a- 14(a)/15d-14(a) Certifications for a more complete understanding of the topic presented.
Disclosure Controls and Internal Controls
Disclosure Controls are procedures designed with the objective of ensuring that information required to be disclosed in our reports filed with the Commission under the Exchange Act, such as this quarterly report, is recorded, processed,
summarized and reported within the time period specified in the Commission's rules and forms. Disclosure Controls are also designed with the objective of ensuring that material information relating to the Company is made known to the CEO and the CFO by others, particularly during the period in which the applicable report is being prepared. Internal Controls, on the other hand, are procedures which are designed with the objective of providing reasonable assurance that (i) our transactions are properly authorized, (ii) our assets are safeguarded against unauthorized or improper use, and (iii) our transactions are properly recorded and reported, all to permit the preparation of complete and accurate financial statements in conformity with accounting principles generally accepted in the United States.
Limitations on the Effectiveness of Controls
Our management does not expect that our Disclosure Controls or our Internal Controls will prevent all error and all fraud. A control system, no matter how well developed and operated, can provide only reasonable, but not absolute
assurance that the objectives of the control system are met. Further, the design of the control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances so of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision -making–making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of a system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future Page 18
Scope of the Evaluation
The CEO and CFO's evaluation of our Disclosure Controls and Internal Controls included a review of the controls' (i) objectives, (ii) design, (iii) implementation, and (iv) the effect of the controls on the information
generated for use in this quarterly report. In the course of the Evaluation, the CEO and CFO sought to identify data ��errors, control problems, acts of fraud, and they sought to confirm that appropriate corrective action, including
process improvements, was being undertaken. This type of evaluation is done on a quarterly basis so that the conclusions concerning the effectiveness of our controls can be reported in our quarterly reports on Form 10-QSB10-Q and annual
reports on Form 10-KSB.10-K. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and our Internal Controls, and to make modifications if and as necessary. Our external auditors also review Internal Controls in connection with their audit and review activities. Our intent in this regard is that the Disclosure Controls and the Internal Controls will be maintained as dynamic systems that change (including improvements and corrections) as conditions warrant.
Among other matters, we sought in our Evaluation to determine whether there were any significant deficiencies or material weaknesses in our Internal Controls, which are reasonably likely to adversely affect our ability to record, process, summarize and report financial information, or whether we had identified any acts of fraud, whether or not material, involving management or other employees who have a significant role in our Internal Controls. This information was important for both the Evaluation, generally, and because the Rule 13a-14(a)/15d-14(a) Certifications, Item 5, require that the CEO and CFO disclose that information to our Board (audit committee), and to our independent auditors, and to report on related matters in this section of the quarterly report. In the professional auditing literature, "significant deficiencies" are referred as a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to as "reportable conditions".merit attention by those responsible for oversight of the Company’s financial reporting. These are control issues that could have significant adverse affect on the ability to record, process, summarize and report financial data in the financial statements. A "material weakness" is defined in the auditing literature as a particularly
serious reportable condition where thedeficiency, or a combination of deficiencies, in internal control does not reduce, toover financial reporting, such that there is a relatively low level,reasonable possibility that a material misstatement of the risk that misstatement cause by errorcompany’s annual or fraud may
occur in amounts that would be material in relation to the financialinterim fin ancial statements andwill not be prevented or detected withinon a timely period by employee in the normal course of
performing their assigned functions.basis. We also sought to deal with other controls matters in the Evaluation, and in each case, if a problem was identified; we considered what revisions, improvements and/or corrections to make in accordance with our ongoing procedures.
Conclusions
Based upon the Evaluation, the deficiencies identified by our auditors were not mitigated during the quarter ended March 31, 2010 and material weaknesses and significant deficiencies existed as of March 31, 2010. Other than the deficiencies identified by our auditor, our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives. Our CEO and CFO have concluded that our disclosure controls and procedures are effective at that reasonable assurance level to ensure that material information relating to the Company is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared, and that our Internal Controls are effective at that assurance level to provide reasonable assurance that & nbsp;our financial statements are fairly presented inconformityin conformity with accounting principles generally accepted in the United States. Additionally, there has been no change in our Internal Controls that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to affect, our Internal Controls.
Forward Looking Statements
Certain statements contained in this Report on Form 10-QSB,10-Q, including statements of the Company's current expectations, intentions, plans and beliefs, and statements containing the words "believes", "anticipates," "estimates," "expects," or "may," are forward- looking statements, as defined in Section 21D of the Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risk, uncertainties and other factors which may cause the actual results, performance, timing or achievements of the Company to be materially different from any results, performance, timing or achievements expressed or implied by such forward-looking statements.
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PART II - OTHER INFORMATION
Items 1 through 5 not applicable.
ITEM 6.EXHIBITS
(a) Exhibits required to be filed by Item 601 of Regulation S-B:
31.1 Certification of Chief Executive Officer and Chief Financial Officer Under Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NORTH AMERICAN GAMING ANDENTERTAINMENT CORPORATION
November 16, 2009
/s/
May 15, 2010
/s/ Chen Weidong, President
-
---------------------------
Chen Weidong,
President and Chief Executive Officer
(Principal
(Principal Executive Officer and Principal Financial and Accounting Officer)
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