CHINA YIDA HOLDING CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
China Yida Holding Co. (“the Company”, “we”, “us”, “our”) engages in tourisim and advertisement business through its subsidiaries in Peoples Republic of China.
On November 19, 2007, Chen Minhua, Fan Yanling, Extra Profit International Limited, Luck Glory International Limited, and Zhang Xinchen (collectively, the Keenway Shareholders”), Keenway Limited, Hong Kong Yi Tat and we entered into a definitive Share Exchange Agreement (“Exchange Agreement”) which resulted in Keenway becoming our wholly owned subsidiary (the “Merger”). The Merger was accomplished by means of a share exchange in which the Keenway Shareholders exchanged all of their stock in Keenway for the transfer and additional issuance of our common stock. Under the terms of the Exchange Agreement and as a result of the Merger, Keenway became our wholly owned subsidiary.
In exchange for all of their shares of Keenway common stock, the Keenway Shareholders received 2,272,581 newly issued shares of our common stock and 91,045 shares of our common stock which was transferred from certain InteliSys Shareholders; Immediately following the closing of the Merger, the Keenway Shareholders own approximately 94.5% of our issued and outstanding shares on a fully diluted basis. This transaction closed on November 19, 2007.
Keenway Limited was incorporated under the laws of the Cayman Islands on May 9, 2007 for the purpose of functioning as an off-shore holding company to obtain ownership interests in Hong Kong Yi Tat International Investment Co., Ltd.
Hong Kong Yi Tat was established on July 28, 2000, under the laws of Hong Kong Special Administration Region,.
Fujian Jintai Tourism Developments Co.Ltd (“Jintai”) is incorporated on October 29, 2001 under the laws of PRC and located in Taining County, Fujian Province in China. It mainly engages in tourism developments, ethnic culture communication, timeshare resort operation, souvenirs sales, and related tourism services. It has gained 30 years of management rights (from 2001 to 2031) to manage the Big Golden Lake in Fujian province, one of the 7 best Danxia landforms in China.
The Company owns 100% shares of Jintai, and holds variable interest in Fujian Jiaoguang Media Co. Ltd .
Fuzhou Hongda Co. Ltd. (“Hongda”) is incorporated on July 6, 2007, under the laws of PRC and located in Fuzhou City. Hongda is a 100% owned company of Jintai.
Fuzhou Fuyu Media Co. Ltd. (“Fuyu”) is incorporated on July 31, 2007, under the laws of PRC and located in Fuzhou City. On November 5, 2007, Fuyu is acquired by Hongda which is owned by Jintai, thus becomes 100% owned by the Company through Jintai.
Fujian Jiaoguang Media Co. Ltd (“Jiaoguang”) is incorporated on October 9, 2004 under the laws of PRC and located in Fuzhou City, Fujian Province in China. It mainly engages in advertisement, publishing, exhibition, cultural communication and coordinating cultural performance as an agent. It has gained 7 years of managing rights of Fujian Education TV advertisement (from 2003 to 2010), and has option to renew for another 5 years term.
On December 30, 2004, Jiaoguang and its shareholders entered into a set of Contractual Arrangements with the Company. The relationships with the Company and its shareholders are governed by the Contractual Arrangements.
The Contractual Arrangements are comprised of a series of agreements, including a Consulting Agreement and an Operating Agreement, through which the Company has the right to advise, consult, manage and operate Jiaoguang, and collect and own all of Jiaoguang’s respective net profits. Additionally, under a Proxy and Voting Agreement and a Voting Trust and Escrow Agreement, the shareholders of Jiaoguang have vested their voting control over Jiaoguang to the Company. In order to further reinforce the Company’s rights to control and operate Jiaoguang, Jiaoguang and its shareholders have granted the Company, under an Option Agreement, the exclusive right and option to acquire all of their equity interests in the Jiaoguang or, alternatively, all of the assets of the Jiaoguang. Further, the shareholders of Jiaoguang have pledged all of their rights, titles and interests in the Jiaoguang to the Company under an Equity Pledge Agreement.
The Company has adopted FASB Interpretation No. 46R "Consolidation of Variable Interest Entities" ("FIN 46R"), an Interpretation of Accounting Research Bulletin No. 51. FIN 46R requires a Variable Interest Entity (VIE) to be consolidated by a company if that company is subject to a majority of the risk of loss for the VIE or is entitled to receive a majority of the VIE's residual returns. VIEs are those entities in which the Company, through contractual arrangements, bears the risks of, and enjoys the rewards normally associated with ownership of the entities, and therefore the company is the primary beneficiary of these entities. The results of subsidiaries or variable interest entities acquired during the year are included in the consolidated income statements from the effective date of acquisition.
ACCOUNTING AFTER INITIAL MEASUREMENT OF VIE - Subsequent accounting for the assets, liabilities, and non-controlling interest of a consolidated variable interest entity are accounted for as if the entity were consolidated based on voting interests and the usual accounting rules for which the VIE operates are applied as they would to a consolidated subsidiary as follows:
■carrying amounts of the VIE are consolidated into the financial statements of the Company as the primary beneficiary (referred as "Primary Beneficiary" or "PB");
■inter-company transactions and balances, such as revenues and costs, receivables and payables between or among the Primary Beneficiary and the VIE(s) are eliminated in their entirety; and
INITIAL MEASUREMENT OF VIE- The Company initially measures the assets, liabilities, and non-controlling interests of the VIEs at their fair values at the date of the acquisitions.
Because Jiaoguang and the Company’s contractual relationship comply with FIN 46R, the Company consolidated Jiaoguang’s financial statements as VIE.
FUJIAN YUNDING TOURISM INDUSTRIAL CO. LTD (“Yunding”) is incorporated on January 21, 2009 under the laws of PRC and located in Fujian Province in China. It mainly engages in tourism developments, ethnic culture communication, timeshare resort operation, souvenirs sales, and related tourism services. It has gained 40 years of management right (from 2009 to 2049) to manage the Yunding resort in Fujian province.
FUJIAN YI TAT EARTH BUILDINGS TOURISM DEVELOPMENT CO. LTD (“Tulou”) is incorporated on March 23, 2009 under the laws of PRC and located in Fujian Province in China. It mainly engages in tourism developments, ethnic culture communication, timeshare resort operation, and related tourism services in Tulou area. It has gained 40 years of management right (from 2009 to 2049) to manage the Tulou resort in Fujian province. Tulou is 100% owned by Hong Kong Yi Tat.
2. BASIS OF PRESETATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principle of consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries - Jintai, Fuyu, Hongda, Yunding, Tulou, Yintai, Hong Kong Yi Tat, and the accounts of the variable interest entity, Jiaoguang, collectively “the Company”. All significant inter-company accounts and transactions have been eliminated in consolidation.
b.Use of estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amount of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made. However, actual results could differ materially from those results.
c.Cash and cash equivalents
For Statement of Cash Flows purposes, the Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents.
d.Accounts receivable
The Company's policy is to maintain allowances for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. As of June 30, 2009 and December 31, 2008, the Company had accounts receivable of $19,419 and $76,569, respectively. As of June 30, 2009 and December 31, 2008, allowance for doubtful accounts amounted to $15,565 and $0, respectively.
e.Prepayments and advance
The Company advances to certain vendors for purchase of its material and necessary services. As of June 30,2009 and December 31, 2008, the prepayments amounted to $182,589 and $164,169, respectively.
During June 30, 2009, the Company entered into a purchase agreement with the local government to acquire the management center valued approximately RMB 8,000,000 or $1,171,269. The Company has already paid RMB 3,000,000 or $439,266 toward the purchase price, and it was recorded as advance as of June 30, 2009.
f. Property, plant and equipment
Property, plant and equipment are recorded at cost. Gains or losses on disposals are reflected as gain or loss in the year of disposal. The cost of improvements that extend the life of plant, property, and equipment are capitalized. These capitalized costs may include structural improvements, equipment, and fixtures. All ordinary repair and maintenance costs are expensed as incurred.
Depreciation for financial reporting purposes is provided using the straight-line method over the estimated useful lives of the assets: 5 to 20years for house & building; 5 to 8 years for electronic equipment, 8 years for transportation equipment, 5 to 8 years for office furniture.
g. Impairment
The Company applies the provisions of Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS No. 144"), issued by the Financial Accounting Standards Board ("FASB"). FAS No. 144 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.
The Company tests long-lived assets, including property, plant and equipment, intangible assets and construction in progress, 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. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares 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, the Company measures 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 the Company utilizes to evaluate potential investments. The Company estimates fair value based on the information available, judgments and projections are considered necessary. There was no impairment of long-lived assets for the three and six months ended June 30, 2009.
h. Revenue recognition
The Company's revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) 104.Sales revenue is recognized at the date of service rendered to customers when a formal arrangement exists, the price is fixed or determinable, the services rendered, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue. Unearned revenue amounted to $80,529 and $6,597 as of June 30, 2009 and December 31, 2008, respectively.
The Company sells the television air time to third parties. The Company records advertising sales when advertisements are aired. The Company also sells admission and activities tickets for a resort which the Company has the management right. The tourist revenue is recognized when a ticket is purchased.
The Company has no product return or sales discount allowance because service rendered and accepted by customers are normally not returnable and sales discount is normally not granted after service is rendered.
i. Advertising costs
The Company expenses the cost of advertising as incurred or, as appropriate, the first time the advertising takes place. Advertising costs for the six months ended June 30, 2009 and 2008 were $187,919 and $42,086, respectively.
There is a contract in force for the period of August 1, 2003 to July 31, 2010 between a related party (Xinhengji, XHJ) and a Television Station (Owned by The Chinese Government) that provides for prepaid airtime to be purchased and utilized by the related party in return for payment of RMB 5,000,000 and purchase of suitable programming for the station in the amount of an additional RMB 5,000,000 (Educational Programming). XHJ is 80% owned by a shareholder of the company and 20% owned by the shareholder’s mother.
XHJ has signed a contract with the Company to assign the Company to manage the commercial of the TV station. The Company is responsible for paying the air time for RMB5,000,000. XHJ is responsible for paying RMB 5,000,000 to purchase the TV programs and entitled to revenue other than the commercial revenue. It also states that if the Company helps XHJ to purchase the TV programs and if pays equaling or more than RMB 5,000,000 then the Company does not have to pay RMB 5,000,000 for airtime anymore. The amount paid over RMB 5,000,000 by the Company will be the Company’s expenses and will not be reimbursed by XHJ. The advertising costs incurred are charged as cost of sales against specific airtime segments.
j. Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
k. Foreign currency translation
The Company uses the United States dollar ("U.S. dollars") for financial reporting purposes. The Company's subsidiaries maintain their books and records in their functional currency, being the primary currency of the economic environment in which their operations are conducted. In general, for consolidation purposes, the Company translates the subsidiaries' assets and liabilities into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statement of income is translated at average exchange rates during the reporting period. Gain or loss on foreign currency transactions are reflected on the income statement. Gain or loss on financial statement translation from foreign currency are recorded as a separate component in the equity section of the balance sheet, as component of comprehensive income. The functional currency of the Company‘s subsidiaries in China is the Chinese Renminbi and the functional currency of the US parent is the US dollar.
l. Fair values of financial instruments
Statement of Financial Accounting Standard No. 107, "Disclosures about Fair Value of Financial Instruments", requires that the Company disclose estimated fair values of financial instruments.
The Company's financial instruments primarily consist of cash and cash equivalents, accounts receivable, other receivables, prepaid expenses, accounts payable, other payable, tax payable, and short and long term loans.
As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheet. This is attributed to the short maturities of the instruments and that interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective balance sheet dates.
m. Earning per share (EPS)
Earnings per share is calculated in accordance with the Statement of Financial Accounting Standards No. 128 (SFAS No. 128), Earnings per share. SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB 15). Earnings per share for all periods presented has been restated to reflect the adoption of SFAS No. 128. Basic earnings per share is based upon the weighted average number of common shares outstanding. Diluted earnings per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
n. Segment reporting
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure About Segments of an Enterprise and Related Information" requires use of the "management approach" model for segment reporting. The management approach model is based on the way a company's management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
During the six months ended June 30, 2009 and 2008, the Company is organized into two main business segments: tourism and advertisement. The following table presents a summary of operating information and certain balance sheet information for the six months ended June 30, 2009 and 2008:
| | | Six months ended June 30, | |
| | | 2009 | | | 2008 | |
| | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Others include reconciling amounts including certain assets which are excluded from segments and adjustments to eliminate inter company transactions.
o. Statement of cash flows
In accordance with Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows," cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.
p. Recent accounting pronouncements
In June 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Emerging Issues Task Force (EITF) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under the FSP, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. This FSP is effective for us beginning July 1, 2009 and the Company does not expect that FSP EITF No. 03-6-1 would have a material impact on the financial statements.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 require companies to disclose in interim financial statements the fair value of financial instruments within the scope of FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments. However, companies are not required to provide in interim periods the disclosures about the concentration of credit risk of all financial instruments that are currently required in annual financial statements. The fair-value information disclosed in the footnotes must be presented together with the related carrying amount, making it clear whether the fair value and carrying amount represent assets or liabilities and how the carrying amount relates to what is reported in the balance sheet. FSP FAS 107-1 and APB 28-1 also requires that companies disclose the method or methods and significant assumptions used to estimate the fair value of financial instruments and a discussion of changes, if any, in the method or methods and significant assumptions during the period. The FSP shall be applied prospectively and is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 107-1 and APB 28-1 must also early adopt FSP FAS 157-4 as well as FSP FAS 115-2 and FAS 124-2. The Company will adopt the disclosure requirements of this pronouncement for the quarter ended June 30, 2009, in conjunction with the adoption of FSP FAS 157-4, FSP FAS 115-2 and FAS 124-2.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" (“SFAS 165”). SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 will be effective for interim or annual period ending after June 15, 2009 and will be applied prospectively. The Company will adopt the requirements of this pronouncement for the quarter ended June 30, 2009. The Company does not anticipate the adoption of SFAS 165 will have an impact on its consolidated results of operations or consolidated financial position.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”), which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. SFAS 167 also requires additional disclosures about a company’s involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS 167 is effective for fiscal years beginning after November 15, 2009.
q. Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
3. OTHER RECEIVABLE
Other assets amounted to $7,275 and $76,759 as of June 30, 2009 and December 31, 2008, respectively. Other assets is mainly comprised of advances to employees and other unrelated parties, interest free, and due on demand.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following as of June 30, 2009 and December 31:
| | | June 30, 2009 | | | December 31, 2008 | |
| Building | | | 34,834,172 | | | $ | 34,872,855 | |
| Electronic Equipments | | | 210,419 | | | | 193,494 | |
| Transportation Equipments | | | 146,391 | | | | 63,442 | |
| Office Furniture | | | 52,537 | | | | 8,946 | |
| Subtotal | | | 35,243,519 | | | | 35,103,887 | |
| | | | | | | | | |
| Less: Accumulated Depreciation | | | (1,678,536 | ) | | | (965,278 | ) |
| | | | | | | | | |
| Total | | | 33,564,983 | | | $ | 34,173,009 | |
Depreciation expenses for the six months ended June 30, 2009 and 2008 were $714,095 and, $196,280, respectively. Depreciation expenses for the three months ended June 30, 2009 and 2008 were $359,759 and, $99,633, respectively.
5. CONSTRUCTION IN PROGRESS
Construction in progress amounted to $18,795,560 and $1,979,725 of June 30, 2009 and December 31, 2008. It is mainly constructions for the new tourist resort which the Company has acquired management right from January 2009. The amount of capitalized interest included in construction in progress amounted $80,571 and $0 for the six months ended June 30, 2009 and 2008. The Company will begin depreciating these assets when they are placed in service.
6. INTANGIBLE ASSETS
Intangible assets were as of June 30, 2009 and December 31 as follows:
| | | June 30, 2009 | | | December 31, 2008 | |
| Intangible asset | | | | | | |
| Management right of tourist resort | | $ | 5,124,301 | | | $ | 5,130,084 | |
| Advertising board | | | 6,588,387 | | | | 6,595,823 | |
| Accumulated amortization | | | (3,109,149 | ) | | | (2,367,574 | ) |
| Total | | $ | 8,603,539 | | | $ | 9,358,555 | |
The Company acquired 30 years tourist resort management right at August 2001 from unrelated parties by paying cash. The Company entered an agreement with one third party on February 29, 2008 and obtained five-year use rights of 30 outside advertising boards in Fuzhou city amounting to $6,588,387 (RMB45,000,000).The term of the contact is in excess of twelve months and inures exclusive operation rights for the registrant in the future 5 years. The registrant expects the future economic benefits from the advertising revenue through the 30 outside boards.
In accordance with SFAS 142 the advertising board is a non monetary asset without physical substance that provides probable future economic benefits and has costs that can be reliably measured. An intangible asset is identifiable if it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.
Intangible assets of the Company are reviewed annually as to whether their carrying value has become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of June 30, 2009 the Company expects these assets to be fully recoverable.
Total amortization expenses for the three months ended June 30, 2009 and 2008 amounted to $371,740 and $1,685,765 respectively. Total amortization expenses for the six months ended June 30, 2009 and 2008 amounted to $743,982 and $1,826,920 respectively. Amortization expenses for next five years after June 30, 2009 are as follows:
| 1 year | | $ | 1,488,487 | |
| 2 year | | | 1,488,487 | |
| 3 year | | | 1,488,487 | |
| 4 year | | | 1,049,262 | |
| 5 year | | | 170,810 | |
| Thereafter | | | 2,918,006 | |
| Total | | $ | 8,603,539 | |
7. OTHER PAYABLE
Other payables are payables due to unrelated parties other than supplier vendors. The amount was $802,179 and $456,181, due on demand and interest free as of June 30, 2009 and December 31, 2008, respectively.
Tax payables consist of the following as of:
| | | June 30, 2009 | | | December 31, 2008 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Cultural construction fee | | | | | | | | |
| | | | | | | | |
9. LOAN PAYABLE
As of June 30, 2009 and December 31, 2008, the short term loan payables were as follows:
| | | June 30, 2009 | | | December 31, 2008 | |
| | | | |
| Merchant Bank of Fuzhou | | $ | 1,171,269 | | | $ | 1,172,591 | |
As of June 30, 2009 and December 31, 2008, the long term loan payables were as follows:
| | | June 30, 2009 | | | December 31, 2008 | |
| | | | |
| Taining Credit Union | | $ | 2,487,257 | | | | - | |
As of June 30, 2009, the Company had a loan payable of $1,171,269 to Merchant bank of Fuzhou in China, with an annual interest rate of 8.66% from November 14, 2008 to November 13, 2009. The loan is guaranteed by a related party 80% owned by the same shareholder of the Company.
As of June 30, 2009, the Company had a loan payable of $2,487,257 to Taining Credit Union in China, with an annual interest rate of 7.02% from March 30, 2009 to March 20, 2012. The loan is guaranteed by the management right of Great Golden Lake.
There are no interest expense for the three months ended June 30, 2009 as compared to $25,262 in the previous year 2008.
There are no interest expense for the six months ended June 30, 2009 as compared to $88,083 in the previous year 2008.
10. OTHER (INCOME) EXPENSES
Other (income) expenses consists of the following for the six months ended June 30, 2009 and 2008:
| Other (income) expense | | 2009 | | | 2008 | |
| Other expense, net | | $ | 18,335 | | | $ | (2,976 | ) |
| Interest expense | | | - | ) | | | 88,083 | |
| Interest income | | | (25,428 | ) | | | (4,680 | ) |
| | | | | | | | | |
| Total other (income) expense, net | | $ | (7,093 | ) | | $ | 80,428 | |
11. INCOME TAXES
The Company is registered in Hong Kong, China and has operations in primarily two tax jurisdictions - the PRC and China (HK). For certain operations in the HK and PRC, the Company has incurred net accumulated operating losses for income tax purposes. The Company believes that it is more likely than not that these net accumulated operating losses will not be utilized in the future.
The provision for income taxes from operations income consists of the following for the six months ended June 30, 2009 and 2008:
| | | 2009 | | | 2008 | |
| | | | | | | |
| | | | | | | |
| PRC Current Income Expense | | $ | 2,837,612 | | | $ | 247,382 | |
| | | | | | | | | |
| Total Provision for Income Tax | | $ | 2,837,612 | | | $ | 247,382 | |
The following is a reconciliation of the provision for income taxes at the PR and HK tax rate to the income taxes reflected in the Statement of Income:
| | June 30, 2009 | June 30, 2008 |
| Tax expense (credit) at statutory rate – HK | 17.5% | 17.5% |
| Foreign income tax rate | 25% | 25% |
| Foreign income tax benefit – PRC | (21%) | (23%) |
| Tax expense at actual rate | 4% | 2% |
People’s Republic of China (PRC)
Pursuant to the PRC Income Tax Laws, the Company's subsidiary is generally subject to Enterprise Income Taxes ("EIT") at a statutory rate of 33%, which comprises 30% national income tax and 3% local income tax before 2008. Beginning January 1, 2008, the new Enterprise Income Tax ("EIT") law will replace the existing laws for Domestic Enterprises ("DES") and Foreign Invested Enterprises ("FIEs"). The new standard EIT rate of 25% will replace the 33% rate currently applicable to both DES and FIEs. The Company’s applicable EIT rate under new EIT law is 25% which was approved by local Tax department.
As of June 30, 2009, the deferred income tax asset and liability for the Company are $164,664 and $15,565,respectively.
12. SHAREHOLDERS’ EQUITY
1) SHARE EXCHANGE AGREEMENT
On November 19, 2007, Chen Minhua, Fan Yanling, Extra Profit International Limited, Luck Glory International Limited, and Zhang Xinchen (collectively, the Keenway Shareholders”), Keenway Limited, Hong Kong Yi Tat and we entered into a definitive Share Exchange Agreement (“Exchange Agreement”) which resulted in Keenway becoming our wholly owned subsidiary (the “Merger”). The Merger was accomplished by means of a share exchange in which the Keenway Shareholders exchanged all of their stock in Keenway for the transfer and additional issuance of our common stock.
In exchange for all of their shares of Keenway common stock, the Keenway Shareholders received 2,272,581 newly issued shares of our common stock and 91,045 shares of our common stock which was transferred from certain InteliSys Shareholders; Immediately following the closing of the Merger, the Keenway Shareholders own approximately 94.5% of our issued and outstanding shares on a fully diluted basis.
As a result of the exchange agreement, the reorganization was treated as an acquisition by the accounting acquiree that is being accounted for as a recapitalization and as a reverse merger by the legal acquirer for accounting purposes. Pursuant to the recapitalization, all capital stock shares and amounts and per share data have been retroactively restated. Accordingly, the financial statements include the following:
| | | Common | | Common Stock | | Additional Paid-in Capital | | Total |
| Shares |
Balance, January 1, 2007 (1) | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | |
Balance, December 31, 2007 | | | | | | | | | | | |
| (1) | The amount shown for paid in capital would be valued in terms of the issued capital of the nominal acquiree (the new subsidiary). The above amount of $8,601,847 represents the capital amount of Keenway Limited. |
| (2) | This amount represents the value of shares issued by the shell company prior to reverse acquisition recorded as a difference between the opening balance of equity of Keenway Limited as of January 1, 2007 and December 31, 2007. Any transaction after the reverse acquisition is not part of this amount. |
2) SECURITY ISSUANCE AGREEMENT
On November 19, 2007, the Company entered into a Stock Purchase Agreement and Share Exchange with Keenway Limited and its certain shareholders (the “Stock Purchase Agreement”). At the time of the Stock Purchase Agreement, it was the intent of all the parties involved to deliver to the shareholders of Keenway 99% of the outstanding shares of the Company common stock. However, the Company had 100,000,000 shares authorized and could only issue 2,363,111 shares to the persons receiving shares in the Stock Purchase Agreement which resulted in an issuance of 94.5% of the shares to the shareholders listed in the Stock Purchase Agreement. Accordingly, following the Closing of the Stock Purchase Agreement, the Company conducted two 10-for-1 reverse stock splits in order to reduce the number of shares outstanding to be able to issue shares to the persons receiving shares under the Stock Purchase Agreement. On February 28, 2009, the Company authorized the issuance of 1,118,776 shares (in the same proportion) to the shareholders of the Stock Purchase Agreement. This was defined as a Corrective Issuance in Section 5.12 of the Securities Purchase Agreement that closed on March 7, 2009.
The Company entered into a Financing transaction with Pope Investments II LLC, an accredited investor, and certain other accredited investors. Pursuant to the Financing Documents, we sold units of securities that consisted of an aggregate of 3,333,334 shares of common stock and warrants exercisable into 1,666,667 shares of common stock for a total purchase price of $14,000,000. The purchase price of one unit was $1.05. The company paid $972,750 to the various parties as fund raising cost directly from the fund raised amounting of $14,000,000 which was closed on March 7, 2008.
Pursuant to terms, the warrants can be converted into 1,666,667 shares of common stock at an exercise price of $1.05 per share and can be exercised beginning on September 6, 2008 and will expire on September 6, 2011. Cashless exercise available with payment in common shares of the company if shares underlying the warrant are not registered. And Call provision (at the option of the grantor) in the warrants is available if the company attains certain EPS at December 31, 2008.
Additionally, majority shareholders of the Company and the Company entered into a Lock-Up Agreement whereby both parties agreed not to sell any securities for a period of 12 months after the initial registration statement associated with this financing is declared effective. Lastly, our Chairman and the Company entered into a Make Good Agreement whereby he has pledged 3,333,334 shares of his common stock of the Company as security for the Company reaching certain earnings thresholds for the fiscal years ended 2008 and 2009. If the Company meets these thresholds, the Make Good Shares will be released from escrow and returned to the Chairman. Alternatively, if the Company fails to meet the earnings requirements, the Make Good Shares will be released to the Investors as additional compensation.
The assumptions used for warrants issued with the share purchasing in Black Scholes calculation are as follow:
| Risk-free interest rate | 2.5% |
| Expected life of the options | 3 year |
| Expected volatility | 514.17% |
| Expected dividend yield | 0 % |
Warrants outstanding at June 30, 2009 and related weighted average price and intrinsic value are as follows:
| Exercise Prices | | | Total Warrants Outstanding | | | Weighted Average Remaining Life (Years) | | | Total Weighted Average Exercise Price | | | Warrants Exercisable | | | Weighted Average Exercise Price | | | Aggregate Intrinsic Value | |
| | | | | | | | | | | | | | | | | | | | |
| $ | 1.05 | | | | 1,666,667 | | | | 1.75 | | | $ | 1.05 | | | | 1,666,667 | | | $ | 1.05 | | | $ | - | |
3) REVERSE SPLIT
The Company conducted 4:1 reverse split during the quarter ended June 30, 2009. All statements are reversely stated.
13. MAJOR CUSTOMERS AND VENDORS
There were no major customers which accounting over 10% of the total net revenue for the three and six months ended June 30, 2009. There are no major vendors which accounting over 10% of the total purchase for the three and six months year ended June 30, 2009.
15. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Company’s practical operations are all carried out in the PRC. Accordingly, The Company’s business, financial condition, and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC's economy.
The Company’s operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company’s results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
16. COMMITMENTS AND LEASES
The Company incurred rent expenses $49,685 and $4,752 for the three and six months ended June 30, 2009 and 2008.
The Company and its subsidiaries made no commitments of leases for future, so there is no lease commitment in the future.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q. The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to future events or our future performance. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this prospectus. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.
Overview
We were originally incorporated on June 4, 1999 as Apta Holdings, Inc. (“Apta”) in the State of Delaware. Apta was a wholly owned subsidiary of ARCA Corp. and Apta subsequently acquired all of ARCA’s assets and liabilities as part of ARCA’s merger with another company.
On November 19, 2007, Chen Minhua, Fan Yanling, Extra Profit International Limited, Luck Glory International Limited, and Zhang Xinchen (collectively, the Keenway Shareholders”), Keenway Limited, Hong Kong Yi Tat and we entered into a definitive Share Exchange Agreement (“Exchange Agreement”) which resulted in Keenway becoming our wholly owned subsidiary (the “Merger”). The Merger was accomplished by means of a share exchange in which the Keenway Shareholders exchanged all of their stock in Keenway for the transfer and additional issuance of our common stock. Under the terms of the Exchange Agreement and as a result of the Merger:
| · | Keenway became our wholly owned subsidiary; |
| · | In exchange for all of their shares of Keenway common stock, the Keenway Shareholders received 2,272,581 newly issued shares of our common stock and 91,045 shares of our common stock which was transferred from certain InteliSys Shareholders; |
| · | Immediately following the closing of the Merger, the Keenway Shareholders own approximately 94.5% of our issued and outstanding shares on a fully diluted basis. |
This transaction closed on November 19, 2007.
Our Business
Through Keenway’s subsidiaries in China, we operate as a major diversified entertainment company in China, currently covering China’s tourism, media and other entertainment-related industries. Our business is to identify, manage, operate and promote tourist attractions, TV channels and stations, and other profitable entertainment-related operations. Since 2004, our company has operated tourist sites and worked with tourist attractions to provide advertising through television ads and other marketing campaigns.
Principal Factors Affecting our Financial Performance
We believe that the following factors affect our financial performance:
| o | Growth of Tourism and Mass Media in China |
China’s tourism market is growing at a record breaking pace with no signs of a slowdown. According to predictions made by the World Trade Organization, China will become the second largest tourist destination by 2010, and will become the most popular tourist destination by 2020. According to these predictions and the Company’s own estimates, the Company expects to see unprecedented growth over the next 12 months. In addition, we expect to see similar growth in the mass media market. Over the past few years, the Chinese mass media industry has sustained a growth rate of 25%. The Company views the Chinese mass media industry as still in its infancy and will continue to grow due to Chinese emerging status as a global leader.
| o | PRC Regulations Promoting Tourism |
The tourism industry in China is highly regulated by the PRC government. However, after China granted the WTO access, China has been relaxing its regulations and the tourism industry in China is expanding rapidly and consists of almost 34% of the total tourism in the Asia-Pacific region.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2009 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2008
The following tables set forth key components of our results of operations for the periods indicated, in dollars, and key components of our revenue for the period indicated, in dollars.
Three months ended June 30, 2009 compared to three months ended June 30, 2008
| | | Three month periods ended June 30, | |
| | | 2009 | | | 2008 | |
| | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Operating and administrative expenses | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total other (income) expense | | | | | | | | |
| | | | | | | | | |
Income before income taxes | | | | | | | | |
Provision for income taxes | | | | | | | | |
| | | | | | | | |
Net Revenue: Net revenue increased by $5,988,833 or approximately 87%, from $6,902,287 for the three months ended June 30, 2008 to $12,891,120 for the three months ended June 30, 2009. Our overall net revenue increased because we are continuing to grow, specifically, our revenue increased due to the increased revenue in our tourism business of Great Golden Lake through increased number of visitors after the completion of additional scenic site constructions and increased revenue in our media business of FETV through increased sales of airtime.
Our revenue from advertisement increased by 2,616,707 or approximately 50% from $5,273,588 for the three months ended June 30, 2008 to $7,890,295 for the three months ended June 30, 2009. This increase was the result of organic growth of advertising sales due to FETV’s steady growth of audience rating, which led to the increasing amount of airtime sales.
Our revenue for our tourism increased by $3,372,125 or approximately 207% from $1,628,699 for the three months ended June 30, 2008 to $5,000,824 for the three months ended June 30, 2009 because we finished most of the infrastructure constructions on the Great Golden Lake to achieve greater visitor volume capacity. At the same time, we also completed the construction of the dam at Great Golden Lake on 2008. The completion of dam has stabilized the water level of Great Golden Lake. The completion of dam also has eliminated the chances of flood or drought to make Great Golden Lake a desirable destination throughout the entire year.
Cost of revenue: Cost of revenue increased by $1,252,316, or approximately 101%, from $1,235,228 for the three months ended June 30, 2008 to $2,487,543 for the three months ended June 30, 2009. The cost of revenue increased because the increased sales tax caused by revenue growth.
Our cost of revenue from media for the three months ended June 30, 2008 was $998,273 and for the three months ended June 30, 2009 it was $1,914,909. This was an increase of $916,636 or 92% arising from increased sales tax caused by revenue growth in media.
Our cost of revenue from tourism for the three months ended June 30, 2009 was $572,634 and for the three months ended June 30, 2008 it was $236,954. This was an increase of $335,680 or 141%. The increase is caused by increased sales tax caused by revenue growth in tourism.
Gross profit: Gross profit increased by $4,736,517, or 84%, from $5,667,060 for the three months ended June 30, 2008 to $10,403,577 for the three months ended June 30, 2009. Our gross profit increased mainly due to the increase in the number of visitors to our Great Golden Lake tourist destination after the completion of additional scenic site constructions in 2008 and cost savings from discontinued marketing campaign on our tourism destinations in 2008.
Operating Expenses: Operating expenses were $1,089,991 for the three months ended June 30, 2008, compared to $1,851,110 for the three months ended June 30, 2009. This represents an increase of $761,119 or 70%, primarily due to business expansions in our newly engaged operations – Earth Building, Yunding and railroad TV program “Journey Through China on the Train.”
Income from Operations: Operating profit was $4,577,068 for the three months ended June 30, 2008 and $8,552,468 for the three months ended June 30, 2009. The increase of $3,975,399 or 87% was primarily the result of increased gross profit. Our income from operations increased because we increased our revenue at a greater rate than our expenses from operations increased.
Net Income: Net income was $4,416,253 for the three months ended June 30, 2008, compared to $6,952,304 for the three months ended June 30, 2009, an increase of $2,536,051 or 57%. Our net income increased because our revenues increased.
FOR THE SIX MONTHS ENDED JUNE 30, 2009 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2008
The following tables set forth key components of our results of operations for the periods indicated, in dollars, and key components of our revenue for the period indicated, in dollars.
Six months ended June 30, 2009 compared to six months ended June 30, 2008
| | | June 30 | |
| | | 2009 | | | 2008 | |
| Net revenue | | | | | | |
| Advertisement | | $ | 14,482,483 | | | $ | 11,132,918 | |
| Tourism | | | 8,231,543 | | | | 2,621,653 | |
| Total net revenue | | | 22,714,025 | | | | 13,754,571 | |
| Cost of revenue | | | | | | | | |
| Advertisement | | | 3,659,674 | | | | 2,382,838 | |
| Tourism | | | 1,055,196 | | | | 739,989 | |
| Total cost of revenue | | | (4,714,870) | | | | (3,122,828) | |
| Gross profit | | | 17,999,155 | | | | 10,631,744 | |
| Operating expenses | | | | | | | | |
| Selling expenses | | | 1,277,450 | | | | 592,217 | |
| Operating and administrative expenses | | | 1,479,927 | | | | 983,761 | |
| Total operating expenses | | | 2,757,377 | | | | 1,575,978 | |
| Income from operations | | | 15,241,778 | | | | 9,055,766 | |
| Other (income) expense | | | | | | | | |
| Other expense, net | | | 18,335 | | | | (2,976) | |
| Interest expense | | | - | | | | 88,083 | |
| Interest income | | | (25,428) | | | | (4,680) | |
| Total other expense | | | (7,093) | | | | 80,428 | |
| Income before income taxes | | | 15,248,871 | | | | 8,975,338 | |
| Provision for income taxes | | | 2,837,612 | | | | 247,382 | |
| Net income | | | 12,411,259 | | | | 8,727,957 | |
| Other comprehensive income | | | | | | | | |
| Foreign currency translation gain | | | (42,428) | | | | 1,788,184 | |
| Other comprehensive income | | $ | 12,368,831 | | | $ | 10,516,141 | |
| | | | | | | | | |
In accordance with Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows," cash flows from our operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.
Net Revenue: Net revenue increased by $8,959,454 or approximately 65%, from $13,754,571 for the six months ended June 30, 2008 to $22,714,025 for the six months ended June 30, 2009. Our overall net revenue increased because we are continuing to grow, specifically, our revenue increased due to the increased revenue in our tourism business of Great Golden Lake through increased number of visitors after the completion of additional scenic site constructions and increased revenue in our media business of FETV through increased sales of airtime.
Our revenue from advertisement increased by $3,349,565 or approximately 30% from $11,132,918 for the six months ended June 30, 2008 to $14,482,483 for the six months ended June 30, 2009. This increase was the result of organic growth of advertising sales due to FETV’s steady growth of audience rating, which led to the increasing amount of airtime sales.
Our revenue for our tourism increased by $5,609,890 or approximately 214% from $2,621,653 for the six months ended June 30, 2008 to $8,231,543 for the six months ended June 30, 2009 because we finished most of the infrastructure constructions on the Great Golden Lake to achieve greater visitor volume capacity. At the same time, we also completed the construction of the dam at Great Golden Lake on 2008. The completion of dam has stabilized the water level of Great Golden Lake. The completion of dam also has eliminated the chances of flood or drought to make Great Golden Lake a desirable destination throughout the entire year.
Cost of revenue: Cost of revenue increased by $1,592,043, or approximately 51%, from $3,319,107 for the six months ended June 30, 2008 to $4,714,870 for the six months ended June 30, 2009. The cost of revenue increased because the increased sales tax caused by revenue growth.
Our cost of revenue from advertisement for the six months ended June 30, 2008 was $2,382,838 and for the six months ended June 30, 2009 it was $3,659,674. This was an increase of $1,276,836 or 54% arising from increased sales tax caused by revenue growth in media.
Our cost of revenue from tourism for the six months ended June 30, 2009 was $1,055,196 and for the six months ended June 30, 2008 it was $739,989. This was an increase of $315,207 or 43%. The increase is caused by increased sales tax caused by revenue growth in tourism.
Gross profit: Gross profit increased by $7,367,411, or 69%, from $10,631,744 for the six months ended June 30, 2008 to $17,999,155 for the six months ended June 30, 2009. Our gross profit increased mainly due to the increase in the number of visitors to our Great Golden Lake tourist destination after the completion of additional scenic site constructions in 2008 and cost savings from discontinued marketing campaign on our tourism destinations in 2008.
Operating Expenses: Operating expenses were $1,575,978 for the six months ended June 30, 2008, compared to $2,757,377 for the six months ended June 30, 2009. This represents an increase of $1,181,399, or 75%, primarily due to business expansions in our newly engaged operations – Earth Building, Yunding and railroad TV program “Journey through China on the Train.”
Income from Operations: Operating profit was $9,055,766 for the six months ended June 30, 2008 and $15,241,778 for the six months ended June 30, 2009. The increase of $6,186,012, or 68%, was primarily the result of increased gross profit. Our income from operations increased because we increased our revenue at a greater rate than our expenses from operations increased.
Net Income: Net income was $8,727,957 for the six months ended June 30, 2008, compared to $12,411,259 for the six months ended June 30, 2009, an increase of $3,683,302 or 42%. Our net income increased because our revenues increased.
Critical Accounting Policies
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use if estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
While all these significant accounting policies impact its financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our consolidated financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our results of operations, financial position or liquidity for the periods presented in this report.
Recent Accounting Pronouncements
In June 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) Emerging Issues Task Force (EITF) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under the FSP, unvested share-based payment awards that contain rights to receive nonforfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. This FSP is effective for us beginning July 1, 2009 and the Company does not expect that FSP EITF No. 03-6-1 would have a material impact on the financial statements.
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 require companies to disclose in interim financial statements the fair value of financial instruments within the scope of FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments. However, companies are not required to provide in interim periods the disclosures about the concentration of credit risk of all financial instruments that are currently required in annual financial statements. The fair-value information disclosed in the footnotes must be presented together with the related carrying amount, making it clear whether the fair value and carrying amount represent assets or liabilities and how the carrying amount relates to what is reported in the balance sheet. FSP FAS 107-1 and APB 28-1 also requires that companies disclose the method or methods and significant assumptions used to estimate the fair value of financial instruments and a discussion of changes, if any, in the method or methods and significant assumptions during the period. The FSP shall be applied prospectively and is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity early adopting FSP FAS 107-1 and APB 28-1 must also early adopt FSP FAS 157-4 as well as FSP FAS 115-2 and FAS 124-2. The Company will adopt the disclosure requirements of this pronouncement for the quarter ended June 30, 2009, in conjunction with the adoption of FSP FAS 157-4, FSP FAS 115-2 and FAS 124-2.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" (“SFAS 165”). SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 will be effective for interim or annual period ending after June 15, 2009 and will be applied prospectively. The Company will adopt the requirements of this pronouncement for the quarter ended June 30, 2009. The Company does not anticipate the adoption of SFAS 165 will have an impact on its consolidated results of operations or consolidated financial position.
LIQUIDITY AND CAPITAL RESOURCES
We currently generate our cash flow through operations which we believe will be sufficient to sustain current level operations for at least the next twelve months. In addition, in February 2008, we completed a $14 million financing and we intend to use the proceeds to expand our operations and improve the “Great Golden Lake” and increase the number of visitors we can attract to the destination. In 2009, we intend to continue to work to expand our tourism services and mass media outlets, including the acquisition of a provincial-level education TV station.
To the extent we are successful in rolling out our advertising campaign programs, identifying potential acquisition targets and negotiating the terms of such acquisition, and the purchase price includes a cash component, we plan to use our working capital and the proceeds of any financing to finance such acquisition costs. Our opinion concerning our liquidity is based on current information. If this information proves to be inaccurate, or if circumstances change, we may not be able to meet our liquidity needs.
Over the course of the next few years, we intend to grow and expand our businesses in China’s tourism, media, entertainment and other related industry. We expect to acquire additional tourist areas that will enhance our reputation as a world-class company that develops and manages tourist attractions. These acquisitions will be financed either through our revenues or by financings and sales of our stock or other securities. With respect to the mass media, we expect to grow by acquiring another operating television network.
PLAN OF OPERATIONS
Quantitative and Qualitative Disclosures about Market Risk
Interest Rates. Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. At June 30, 2009, we had $ 8,875,940 in cash and cash equivalents. A hypothetical 10% increase or decrease in interest rates would not have a material impact on our earnings or loss, or the fair market value or cash flows of these instruments.
Foreign Exchange Rates. The majority of our revenues derived and expenses and liabilities incurred are in Renminbi (the currency of the PRC). Thus, our revenues and operating results may be impacted by exchange rate fluctuations in the currency of Renminbi. We have not tried to reduce our exposure to exchange rate fluctuations by using hedging transactions. However, we may choose to do so in the future. We may not be able to do this successfully. Accordingly, we may experience economic losses and negative impacts on earnings and equity as a result of foreign exchange rate fluctuations.
Item 3. Quantitative and Qualitative Disclosures about Market Risks
Not applicable because we are a smaller reporting company.
Item 4T. Controls and Procedures
Management's report on internal control over financial reporting
Our Management is responsible for establishing and maintaining adequate internal control over financial reporting under the supervision of the President and Chief Executive Officer and the Chief Financial Officer. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Management evaluated the design and operation of our internal control over financial reporting as of June 30, 2009, based on the framework and criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and has concluded that such internal control over financial reporting is effective. There are no material weaknesses that have been identified by management.
An evaluation was performed, under the supervision of, and with the participation of, our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-(e) to the Securities and Exchange Act of 1934). Based on that evaluation, the Company’s management, including our Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were adequate and effective, as of June 30, 2009, to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized, and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
We do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the system are met and cannot detect all deviations. Because of the inherent limitations in all control systems, no evaluation of control can provide absolute assurance that all control issues and instances of fraud or deviations, if any, within the Company have been detected.
This report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's report in this report.
Changes in internal control over financial reporting
There were no significant changes in our internal controls over financial reporting that occurred subsequent to our evaluation of our internal control over financial reporting for the three months ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
Item 1A. Risk Factors
Not applicable because we are a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
On April 23, 2009, pursuant to the written consent of our majority shareholders in lieu of a special meeting, we authorized a 4 for 1 for 4 reverse stock split (the “Reverse Split”) on our issued and outstanding common stock. Pursuant to Section 14C of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we filed a preliminary statement and a definitive statement to notify our shareholders on April 27 and May 7, 2009, respectively. FINRA declared the Reverse Split effective on June 16, 2009. As a result of the effectiveness of the Reverse Split, effective on June 16, 2009, our trading symbol was changed to CNDH. As a result, on the effective date of the Reverse Split, our issued and outstanding common stock will be reduced fourfold.
On June 17, 2009, pursuant to the written consent of our majority shareholders in lieu of a special meeting, we authorized the appointment of Mr. Michael Marks, Fucai Huang and Chunyun Yin as our independent directors, and the adoption of the 2009 Equity Incentive Plan in accordance with the Delaware General Corporation Law. Pursuant to Section 14C of the Exchange Act, we filed a preliminary statement and a definitive statement to notify our shareholders of the corporate actions on July 8 and July 20, respectively. The appointment of the new directors and the adoption of the 2009 Equity Incentive Plan went effective on August 10, 2009.
Item 5. Other Information.
On June 17, 2009, the Board of Directors of the Company approved the adoption of the procedures for the selection of director nominees. Pursuant to NASDAQ Rule 5605(e)(1), a majority of the independent directors shall recommend and select the director nominees.
Item 6. Exhibits.
| 31.1 | Certification of Chen Minhua pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| 31.2 | Certification of George Wung pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| 32.1 | Certification of Chen Minhua pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| 32.2 | Certification of George Wung pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | China Yida Holding, Co. |
| | | | |
| Date: August 14, 2009 | By: | /s/ Chen Minhua | |
| | | Chen, Minhua Chief Executive Officer | |
| Date: August 14, 2009 | | /s/ George Wung | |
| | | George Wung Principal Accounting Officer | |
