THE LEBRECHT GROUP
A PROFESSIONAL LAW CORPORATION
Brian A. Lebrecht, Esq. Craig V. Butler, Esq. *
Edward H. Weaver, Esq.**
Admitted only in California*
Admitted only in Utah**
March 5, 2008
U.S. Securities and Exchange Commission
Division of Corporation Finance
100 F Street, NE
Washington, D.C. 20549
Mail Stop 4561
Attn: Linda van Doorn
Re: China Agro Sciences Corp.
Forms 10-K and 10-K/A for the period ended September 30, 2006
Filed January 16, 2007 and January 24, 2007
File No. 0-49687
Dear Ms. van Doorn:
We herein provide the following responses to your comment letter dated January 24, 2008, regarding the above-listed forms for China Agro Sciences Corp. (the “Company”). I have summarized your comments in bold followed by the Company’s response.
Part I
Explanatory Note
1. | We have reviewed the changes made in your amendment #2 to Form 10-K. Please revise to remove reference to SEC comments. |
In order to make the corrections required by these comments the Company will be filing a third amended Form 10-K/A for the year ended September 30, 2006 (the “Amended Filing”).
The Explanatory Note contained in the Company’s latest Form 10-K/A states as follows:
“China Agro Sciences, Inc. has restated its Annual Report on Form 10-K. This Annual Report is for the year ended September 30, 2006, and was originally filed with the Commission on Form 10-K on January 16, 2007, and as a First Amended Annual Report on Form 10-K/A on January 24, 2007. The purpose of this amended Annual Report is to make corrections to the Annual Report based on comments received by the Commission. There are changes made throughout this documents, but primarily to the Items entitled Description of Business, Risk Factors, Management’s Discussion and Analysis and the Financial Statements.”
The Explanatory Note in the Amended Filing will state the following:
“China Agro Sciences, Inc. has restated its Annual Report on Form 10-K. This Annual Report is for the year ended September 30, 2006, and was originally filed with the Commission on Form 10-K on January 16, 2007, and as a First Amended Annual Report on Form 10-K/A on January 24, 2007. The purpose of this amended Annual Report is to make corrections to the Annual Report, primarily to the Items entitled Description of Business, Risk Factors, Management’s Discussion and Analysis and the Financial Statements.”
Financial Statements -- General
2. | Please revise to identify the appropriate columns in your financial statements as restated. |
In the Amended Filing the Company will identify the appropriate columns as “restated,” as set forth in the attached restated financial statements.
3. | Given the fact that you have restated your financial statements, please file the required Form 8-K pursuant to Item 4.02. The 8-K should include the date of the conclusion regarding non-reliance, the financial statement years and periods that should no longer be relied upon, a brief description of the facts underlying your conclusion, and a statement whether your audit committee or its alternative has discussed this matter with your independent accountants. |
The Company will file the required Form 8-K.
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Statement of Changes in Stockholders’ Equity |
4. | We note that in your amendment, you have omitted information pertaining to the year ended September 30, 2005. In your next amendment, please include the missing period. |
In the Amended Filing the Company will include the statement of changes in stockholders’ equity for the year ended September 30, 2005, as set forth in the attached restated financial statements.
Note 4. Long-Term Debt |
5. | Please expand your disclosure to include all pertinent information related to this obligation, including, but not limited to, when the agreement was entered into, the maturity date, and the future minimum payments for the next five years and thereafter. |
In the Amended Filing the Company will include the pertinent information related to the long-term debt obligation, including, but not limited to, when the agreement was entered into, the maturity date, and the future minimum payments for the next five years and thereafter. The following will be included in Note 4 to the Company’s restated financial statements:
“The Company entered into a loan agreement in July 2005. This obligation bears interest at 0.3% over the prime rate in effect in the PRC and is payable interest only through July 2009, followed by annual principal installments of approximately 233,000 RMB ($29,000) commencing in August 2010, plus interest.
Future principal loan payments are as follows:
Year ended September 30th (using current year exchange rates) | |||
2010 | $ 29,397 | ||
2011 | 29,397 | ||
Thereafter | 264,573 | ||
6. | Also, clarify whether the annual installments of 233,000 RMB represent principal and interest or principal only with interest being in addition to this amount. |
See response to Comment #5, above.
Note 12. Restatement of Previously Issued Financial Statements |
7. | Please revise to remove reference to SEC comments. |
The Company will remove the reference in the Amended Filing, as set forth in the attached restated financial statements.
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8. | Please review to clarify that the grant was originally accounted for as income and is now accounted for as a reduction of previously acquired fixed assets. |
Note 12 to the restated financial statements to be included with the Amended Filing will state the following regarding the government grant:
“The restated financial statements reflect:
1. The reclassification as a reduction of fixed assets of $349,888 of a government grant that was originally accounted for as income and the related reduction in depreciation expense of $34,989.
2. After further review of the related documents, it was determined that $323,363 of the government grant that was originally accounted for as income was due to be repaid and, accordingly, was reclassified to long-term debt (see Note 4).”
The Amended Filing will also contain an adjustment footnote to the government grant as indicated in the Statements of Operations contained in Note 12 to the attached financial statements.
9. | Please explain to us why you have changed the accrual for equipment leased from a related party from the amount previously recorded. Also, expand your disclosure in each of the footnotes that relate to this. |
Note 12 to the restated financial statements to be included with the Amended Filing will state the following regarding the accrual for equipment lease:
“The restated financial statements reflect:
3. The determination by the Company that it had been charged for an entire year of equipment rental from an affiliate, whereas it only had use of the equipment for four months.”
The Amended Filing will also contain an adjustment footnote to the cost of sales as indicated in the Statements of Operations contained in Note 12 to the attached financial statements.
10. | Please explain to us why a portion of the government grant has been reclassified as long-term debt. |
See response to Comment #8, above.
11. | Please revise to present a single adjustment to general and administrative expense in the amount of $101,249 and describe the two adjustments in a single corresponding footnote. |
The Amended Filing will contain an adjustment footnote to the general and administrative expense in the Statements of Operations contained in Note 12 to the attached financial statements. The adjustment footnote states as follows:
“Reclassification of the accumulated depreciation related to government grant of $34,493 and segregate interest expense from general and administrative expense of $66,756.”
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12. | Please clarify to us how each of the amounts related to the change in accounting for the government grant relate to one another. We note that $314,900 and $323,363 do not add up to $655,739. |
The amounts related to the chang in accounting for the government grant relate to each other as follows:
The net reduction in the amount classified as "government grant" is as follows: | ||||
Reduction in property and equipment | $ | 349,888 | ||
Amount reclassifed as long term debt | $ | 323,363 | ||
Foreign currency conversion | $ | (17,512) | ||
$ | 655,739 | |||
Note: | ||||
The amount referred to by the SEC of $314,900 consists of the following: | ||||
Reduction in property and equipment | $ | 349,888 | ||
Adjustment to depreciation | $ | (34,988) | ||
$ | 314,900 |
13. | Please explain to us why the adjustment of an equipment lease accrual would result in an additional cash outflow from financing activities. |
The accrual of equipment leasing was included cash flow, financing acitivities in the previously filed financial statement since it was from a related party. Therefore related adjustment need to be made on the restated financial statements.
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Item 9A – Controls and Procedures |
14. | As disclosed in Note 12, you have restated previously issued financial statements. As a result, please revise your disclosures to describe the effect of the restatement on your officers’ conclusions regarding the effectiveness of the company’s disclosure controls and procedures. See Item 307 of Regulation S-K. If your officers conclude that the disclosure controls and procedures were effective, despite the restatement, describe the basis for your officers’ conclusions. |
After a review of the Company’s controls and procedures by the Company’s management based on the fact the Company has had to restate its financial statement, the Company’s management has determined that its controls and procedures were not effective. As a result the Company is including the following language under Item 9A of the Amended Filing:
“We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of September 30, 2006, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission's rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2006, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.
In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure our financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5) or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following three material weaknesses which have caused management to conclude that, as of September 30, 2006, our disclosure controls and procedures were not effective at the reasonable assurance level:
1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
2. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
3. We had a number of audit adjustments last fiscal year. Audit adjustments are the result of a failure of the internal controls to prevent or detect misstatements of accounting information. The failure could be due to inadequate design of the internal controls or to a misapplication or override of controls. Management evaluated the impact of our audit adjustments last year and has concluded that the control deficiency that resulted represented a material weakness.
To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Remediation of Material Weaknesses
To remediate the material weaknesses in our disclosure controls and procedures identified above, we have continued to refine our internal procedures to begin to implement segregation of duties and to reduce the number of audit adjustments.
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Changes in Internal Control over Financial Reporting
Except as noted above, there were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.”
Company’s Statements
· | The Company is responsible for the adequacy and accuracy of the disclosure in the filing; |
· | Staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and |
· | The Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. |
Please do not hesitate to contact me if you have any questions. Thank you for your time and attention to this matter.
Sincerely,
/s/ Craig V. Butler
Craig V. Butler, Esq.
IRVINE OFFICE: SALT LAKE CITY OFFICE:
9900 RESEARCH DRIVE 406 W. SOUTH JORDAN PARKWAY
IRVINE SUITE 160
CALIFORNIA • 92618 SOUTH JORDAN
UTAH • 84095
(949) 635-1240 • FAX (949) 635-1244www.thelebrechtgroup.com(801) 983-4948 • FAX (801) 983-4958
C
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Paritz & Company, P.A.
CHINA AGRO SCIENCES CORP.
CONSOLIDATED FINANCIAL STATEMENTS
WITH
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
YEARS ENDED SEPTEMBER 30, 2006 AND 2005
Paritz & Company, P.A. | 15 Warren Street, Suite 25 Hackensack, New Jersey 07601 (201)342-7753 Fax: (201) 342-7598 E-Mail: paritz @paritz.com |
Certified Public Accountants |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
China Agro Sciences Corp.
We have audited the accompanying consolidated balance sheet of China Agro Sciences Corp. as of September 30, 2006 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years ended September 30, 2006 and 2005. Our audits also included the financial statement schedule I. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Agro Sciences Corp. as of September 30, 2006, and the results of its operations and its cash flows for the years ended September 30, 2006 and 2005 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ Paritz & Company, P.A.
Hackensack, New Jersey
October 30, 2006, except for Note 12 which
is dated December 5, 2007
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CHINA AGRO SCIENCES CORP.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2006
(U.S. $)
Restated | ||||
ASSETS | ||||
CURRENT ASSETS: | ||||
Cash | $ | 103,817 | ||
Accounts receivable | 2,013,529 | |||
Inventories | 399,636 | |||
Other current assets | 20,943 | |||
TOTAL CURRENT ASSETS | 2,537,925 | |||
Property and equipment, net of accumulated depreciation (Notes 2 and 9) | 5,305,803 | |||
TOTAL ASSETS | $ | 7,843,728 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
CURRENT LIABILITIES: | ||||
Accounts payable | $ | 1,815,719 | ||
Due to affiliated company | 344,136 | |||
TOTAL CURRENT LIABILITIES | 2,159,855 | |||
LONG-TERM DEBT | 323,363 | |||
STOCKHOLDERS’ EQUITY | ||||
Common stock, $0.001 par value | ||||
100,000,000 shares authorized | ||||
20,000,000 shares issued and outstanding | 20,000 | |||
Additional paid in capital | 3,738,900 | |||
Retained earnings | 1,372,662 | |||
Accumulated other comprehensive income | 228,948 | |||
TOTAL STOCKHOLDERS’ EQUITY | 5,360,510 | |||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 7,843,728 | ||
See notes to financial statements
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CHINA AGRO SCIENCES CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(U.S. $)
YEAR ENDED SEPTEMBER 30, | ||||||||||
2006 | 2005 | |||||||||
Restated | ||||||||||
SALES | $ | 12,749,788 | $ | - | ||||||
COST OF SALES (Note 8) | 9,837,089 | - | ||||||||
GROSS PROFIT | 2,912,699 | - | ||||||||
COSTS AND EXPENSES: | ||||||||||
General and administrative expenses | 914,385 | 287,204 | ||||||||
Interest expense | 66,756 | - | ||||||||
TOTAL COSTS AND EXPENSES | 981,141 | 287,204 | ||||||||
NET INCOME (LOSS) | $ | 1,931,558 | $ | (287,204 | ) | |||||
BASIC AND DILUTED EARNINGS PER COMMON SHARE | $ | 0.097 | N/A | |||||||
WEIGHTED AVERAGE NUMBER OF COMMON | ||||||||||
SHARES OUTSTANDING | 20,000,000 | N/A | ||||||||
See notes to financial statements
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CHINA AGRO SCIENCES CORP.
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(U.S. $)
COMMON STOCK | ADDITIONAL PAID-IN CAPITAL | RETAINED EARNINGS (DEFICIT) Restated | OTHER COMPREHENSIVE INCOME Restated | TOTAL Restated |
BALANCE – SEPTEMBER 30, 2004 | $ | 3,738,900 | $ | - | $ | (271,692 | ) | $ | (802 | ) | $ | 3,466,406 | ||||||||
Net loss | - | - | (287,204 | ) | 20,227 | (266,977 | ) | |||||||||||||
BALANCE – SEPTEMBER 30, 2005 | 3,738,900 | - | (558,896 | ) | 19,425 | 3,199,429 | ||||||||||||||
Common stock, $0.001 par value, 100,000,000 shares authorized, 20,000,000 shares issued and outstanding | 20,000 | - | - | - | 20,000 | |||||||||||||||
Preferred stock, $0.001 par value, 5,000,000 shares authorized, 0 shares issued and outstanding | - | - | - | - | - | |||||||||||||||
Effect of stock splits and return of shares | (3,738,900 | ) | 3,738,900 | - | - | - | ||||||||||||||
Foreign currency translation adjustment | - | - | - | 209,523 | 209,523 | |||||||||||||||
Net income | - | - | 1,931,558 | - | 1,931,558 | |||||||||||||||
BALANCE – SEPTEMBER 30, 2006 | $ | 20,000 | $ | 3,738,900 | $ | 1,372,662 | $ | 228,948 | $ | 5,360,510 | ||||||||||
See notes to financial statements
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CHINA AGRO SCIENCES CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. $)
YEAR ENDED SEPTEMBER 30, | ||||||||||||
2006 2005 | ||||||||||||
Restated | ||||||||||||
OPERATING ACTIVITIES: | ||||||||||||
Net income (loss) | $ | 1,931,558 | $ | (287,204 | ) | |||||||
Adjustments to reconcile net income (loss) | ||||||||||||
to net cash provided by operating activities: | ||||||||||||
Depreciation | 420,667 | 236,918 | ||||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (2,013,529 | ) | 11,397 | |||||||||
Inventories | (274,069 | ) | 125,830 | |||||||||
Prepaid expenses | 35,560 | (9,897 | ) | |||||||||
Other current assets | (6,036 | ) | 142,979 | |||||||||
Accounts payable | 691,793 | 434,240 | ||||||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | 785,944 | 654,263 | ||||||||||
INVESTING ACTIVITIES: | ||||||||||||
Government grant for property and equipment purchase | 349,888 | - | ||||||||||
Acquisition of property and equipment | (317,958 | ) | (632,826 | ) | ||||||||
NET CASH USED IN INVESTING ACTIVITIES | 31,930 | (632,826 | ) | |||||||||
FINANCING ACTIVITIES: | ||||||||||||
Short-term bank loan | - | (363,000 | ) | |||||||||
Loan from local government | - | 311,066 | ||||||||||
Loans from affiliated company | (1,036,017 | ) | 69,244 | |||||||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | (1,036,017 | ) | 17,310 | |||||||||
EFFECT OF EXCHANGE RATE ON CASH | 244,710 | 20,227 | ||||||||||
INCREASE IN CASH | 26,567 | 58,974 | ||||||||||
CASH – BEGINNING OF YEAR | 77,250 | 18,276 | ||||||||||
CASH – END OF YEAR | $ | 103,817 | $ | 77,250 | ||||||||
Supplemental disclosures of cash flow information: | ||||||||||||
Cash paid during the year for: | ||||||||||||
Interest | $ | 66,707 | $ | - | ||||||||
Non-cash financing activities: | ||||||||||||
Sale of inventory to an affiliated company in repayment of debt | $ | - | $ | 125,393 | ||||||||
See notes to financial statements
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CHINA AGRO SCIENCES CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
1 NATURE OF OPERATIONS AND ACCOUNTING POLICIES
Merger transaction
On February 10, 2006, the Company entered into a letter of intent with the stockholders of DaLian RunZe Chemurgy Co., Ltd. (“DRC” or the “Purchasers”). The Purchasers agreed to pay a total of $515,000 to the Company and the Company’s controlling stockholders, including the Lebrecht Group, APLC (“TLG”), legal counsel for the Company. Upon signing the letter of intent, the Purchasers paid $300,000 as a deposit and the remaining amount was paid at the closing of the transaction. Subsequent to entering into this letter of intent, the Purchasers were replaced with China Agro Sciences Corp., (“China Agro”) a Florida corporation, and the terms of the letter of intent remained the same.
On March 15, 2006, the Company entered into an Agreement and Plan of Merger with China Agro whereby, at the closing, China Agro will merge with DaLian Acquisition Corp. (“DaLian”), a wholly-owned subsidiary of the Company formed in 2006 (the “Merger Agreement”), The transaction closed on May 1, 2006, at which time, in accordance with the Merger Agreement, DaLian Holding Corp. (“DHC”) merged into DaLian, whereby DHC remained the surviving entity and DaLian ceased to exist. Upon this merger, the Company issued 13,449,488 shares of its common stock to the former stockholders of DHC.
In addition, certain of the DHC stockholders acquired 5,500,000 shares of the Company from the then majority stockholder, director and sole officer and his holding company. Following the closing, the DHC stockholders owned 18,949,488 shares of the Company’s common stock, or 94.7% of the Company’s outstanding 20,000,000 shares. As a result of the DHC transaction, the Company terminated their status as a business development company and, through DHC, began specializing in the sale and distribution of pesticides and herbicides. The Company’s only operations after this transaction are conducted through their wholly-owned subsidiary (Ye Shen) which controls the assets and operations of Runze, an entity with operations in the People’s Republic of China (“PRC”).
The above transaction was accounted for as a reverse merger and, accordingly, DHC is considered to be the surviving entity.
Business description
The Company specializes in the manufacturing, sale and distribution of herbicides and pesticides to reduce or eliminate the amount of agricultural produce lost to plant diseases and insects. Their manufacturing and distribution operations are based in the PRC, which is where all of the Company’s sales to date have occurred.
Accounting methods
The Company’s financial statements are prepared using the accrual method of accounting. The Company has elected a fiscal year ending on September 30th.
Uses of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted accounting principles 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 financial statements and the reported amounts of net revenue and expenses during each reporting period. Actual results could differ from those estimates.
Cash
The Company maintains cash with financial institutions in the PRC and Hong Kong.
Inventories
Inventories, consisting of raw materials, are valued at the lower of cost as determined by the first-in, first-out method or market.
Property and equipment
Property and equipment are recorded at cost. Depreciation is provided in amounts sufficient to amortize the cost of the related assets over their useful lives using the straight line method for financial reporting purposes, whereas accelerated methods are used for tax purposes.
Maintenance, repairs and minor renewals are charged to expense when incurred. Replacements and major renewals are capitalized. |
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Deferred income taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109") which requires that deferred tax assets and liabilities be recognized for future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. In addition, SFAS 109 requires recognition of future tax benefits, such as carryforwards, to the extent that realization of such benefits is more likely than not and that a valuation allowance be provided when it is more likely than not that some portion of the deferred tax asset will not be realized.
Currency translation
Since the Company operates primarily in the PRC, the Company=s functional currency is the Chinese Yuan (RMB). Revenue and expense accounts are translated at the average rates during the period, and balance sheet items are translated at year-end rates. Translation adjustments arising from the use of differing exchange rates from period to period are included as a component of stockholders= equity. Gains and losses from foreign currency transactions are recognized in current operations.
Research and development costs
Research and development costs are charged to expense as incurred. Research and development costs charged to operations for the years ended September 30, 2006 and 2005 aggregated $ 0 and $287,204, respectively.
2 | PROPERTY AND EQUIPMENT |
A summary of property and equipment and the estimated lives used in the computation of depreciation and amortization as of September 30, 2006 is as follows:
AMOUNT | LIFE | ||
Machinery and equipment | $2,121,078 | 5 - 10 years | |
Furniture, fixtures and office equipment | 19,961 | 5 - 7 years | |
Building and building improvements | 4,021,868 | 40 years | |
Automobile | 26,910 | 5 years | |
6,189,817 | |||
Accumulated depreciation | 884,014 | ||
$5,305,803 |
3 DUE TO AFFILIATED COMPANY
This amount is non-interest bearing and due on demand.
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4 LONG-TERM DEBT
The Company entered into a loan agreement in July 2005. This obligation bears interest at 0.3% over the prime rate in effect in the PRC and is payable interest only through July 2009, followed by annual principal installments of approximately 233,000 RMB ($29,000) commencing in August 2010, plus interest.
Future principal loan payments are as follows:
Year ended September 30th (using current year exchange rates) | |||
2010 | $ 29,397 | ||
2011 | 29,397 | ||
Thereafter | 264,573 | ||
5 GRANTS FROM LOCAL GOVERNMENT
The Company has received grants from the local government during the year ended September 30, 2006 totaling $349,888 which amount was credited to property and equipment.
6 INCOME TAX STATUS
No provision for income taxes has been made, since the Company is not subject to income tax during the first two years of operations in China. However, had the Company been subject to income taxes in China during the year ended September 30, 2006, it would have been subject to an income tax rate of 27% of net income, which would have totaled approximately $520,000.
7 EARNINGS PER SHARE
Outstanding shares prior to March 15, 2006, the date of the merger, are undeterminable. The total shares issued are therefore used as the average shares outstanding.
8 RELATED PARTY TRANSACTIONS
The Company utilized the manufacturing facilities of DRC to manufacture all of its products during the year ended September 30, 2006. DRC is controlled by the sole officer and director of the Company. The Company incurred costs of $174,000 in connection with this agreement for the year ended September 30, 2006.
The Company believes that the costs to manufacture the products may have been $1.5 Million to $2.0 Million higher if an unrelated party manufactured the goods.
The Company had various advances and repayments to/from DRC. The net amounts paid for the years ended September 30, 2006 was $1,036,017.
9 COMMITMENTS AND CONTINGENCIES
a) All of the Company’s sales for the year ended September 30, 2006 were made to one customer.
b) The Company’s manufacturing facilities have not been granted the necessary operating environmental permits. Additionally, the facilities do not meet the quality control procedures required by its sole customer (see above paragraph).
10 | RISK FACTORS |
Vulnerability due to Operations in PRC
The Company’s operations may be adversely affected by significant political, economic and social uncertainties in the PRC. Although the PRC government has been pursuing economic reform policies for more than 20 years, no assurance can be given that the PRC government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption or unforeseen circumstances affecting the PRC’s political, economic and social conditions. There is also no guarantee that the PRC government’s pursuit of economic reforms will be consistent or effective.
Substantially all of the Company’s businesses are transacted in RMB, which is not freely convertible. The People’s Bank of China or other banks are authorized to buy and sell foreign currencies at the exchange rates quoted by the People=s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other institutions requires submitting a payment application form together with suppliers’ invoices, shipping documents and signed contracts.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentration of credit risk is primarily cash and accounts receivable. As of September 30, 2006, substantially all of the Company’s cash was managed by financial institutions.
Substantially all sales were made to one customer and all accounts receivable were from one customer.
Other Risks
The Company conducts business in an industry that is subject to a broad array of environmental laws and regulations. The Company’s costs to comply with these laws and regulations are charged to expense as incurred.
Since the Company has its primary operations in the PRC, the majority of its revenues will be settled in RMB, not U.S. Dollars. Due to certain restrictions on currency exchanges that exist in the PRC, the Company’s ability to use revenue generated in RMB to pay any dividend payments to it shareholders may be limited.
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11 SUMMARY OF QUARTERLY OPERATING RESULTS (UNAUDITED)
----------------------------------------------Quarter--------------------------------------------------------------------------- | |||||
First | Second | Third | Fourth | TOTAL |
2006
Revenue | $ | 986,894 | $ | 4,827,290 | $ | 4,094,201 | $ | 2,841,403 | $ | 12,749,788 | ||||||||||
Operating income | 169,038 | 1,060,959 | 786,506 | (84,945 | ) | 1,931,558 | ||||||||||||||
Net income | 169,038 | 1,060,959 | 786,506 | (84,945 | ) | 1,931,558 | ||||||||||||||
Basic and diluted earnings per common share | N/A | N/A | 0.039 | 0.004 | ||||||||||||||||
12 RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
The restated financial statements reflect:
1. The reclassification as a reduction of fixed assets of $349,888 of a government grant that was originally accounted for as income and the related reduction in depreciation expense of $34,989.
2. After further review of the related documents, it was determined that $323,363 of the government grant that was originally accounted for as income was due to be repaid and, accordingly, was reclassified to long-term debt (see Note 4).
3. The determination by the Company that it had been charged for an entire year of equipment rental from an affiliate, whereas it only had use of the equipment for four months.
The following tables present a summary of the effects of the restatement adjustments on the Company’s consolidated balance sheets at September 30, 2006 and the consolidated statements of operations for the years ended September 30, 2006 and 2005, and the consolidated statements of cash flows for the years ended September 30, 2006 and 2005:
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CHINA AGRO SCIENCES CORP. | ||||||||||||||||||||||
BALANCE SHEET | ||||||||||||||||||||||
FILED WITH 10K | RESTATED | |||||||||||||||||||||
SEPTEMBER 30, | ADJUSTMENTS | SEPTEMBER 30, | ||||||||||||||||||||
2006 | 2006 | |||||||||||||||||||||
ASSETS | ||||||||||||||||||||||
CURRENT ASSETS: | ||||||||||||||||||||||
Cash | 103,817 | 103,817 | ||||||||||||||||||||
Accounts receivable | 2,013,529 | 2,013,529 | ||||||||||||||||||||
Inventory | 399,636 | 399,636 | ||||||||||||||||||||
Other current assets | 20,943 | 20,943 | ||||||||||||||||||||
TOTAL CURRENT ASSETS | 2,537,925 | 2,537,925 | ||||||||||||||||||||
PROPERTY AND EQUIPMENT, NET OF | ||||||||||||||||||||||
ACCUMULATED DEPRECIATION | 5,620,703 | (314,900) | (a) | 5,305,803 | ||||||||||||||||||
TOTAL ASSETS | 8,158,628 | (314,900) | 7,843,728 | |||||||||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||||||
CURRENT LIABILITIES: | ||||||||||||||||||||||
Accounts payable | 1,815,719 | 1,815,719 | ||||||||||||||||||||
Due to affiliated company | 694,136 | (350,000) | (b) | 344,136 | ||||||||||||||||||
TOTAL CURRENT LIABILITIES | 2,509,855 | (350,000) | 2,159,855 | |||||||||||||||||||
LONG-TERM DEBT | 323,363 | (c) | 323,363 | |||||||||||||||||||
TOTAL LIABILITIES | (26,637) | 2,483,218 | ||||||||||||||||||||
STOCKHOLDERS' EQUITY | ||||||||||||||||||||||
Common stock, $0.001 par value, 100,000,000 shares | ||||||||||||||||||||||
authorized, 20,000,000 shares issued and outstanding | 20,000 | 20,000 | ||||||||||||||||||||
Additional paid in capital | 3,738,900 | 3,738,900 | ||||||||||||||||||||
Retained earnings | 1,643,908 | (271,246) | (d) | 1,372,662 | ||||||||||||||||||
Accumulated other comprehensive income | 245,965 | (17,017) | (e) | 228,948 | ||||||||||||||||||
TOTAL STOCKHOLDERS' EQUITY | 5,648,773 | (288,263) | 5,360,510 | |||||||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | 8,158,628 | (314,900) | 7,843,728 | |||||||||||||||||||
(a) Reclassification of the government grant of $349,888 which was specifically made to subsidize the acquisition of fixed assets | ||||||||||||||||||||||
and the related accumulated depreciation of $34,988 | ||||||||||||||||||||||
(b) Adjust accrual for equipment leased from related company | ||||||||||||||||||||||
(c) Reclassification of government grant to long term debt | ||||||||||||||||||||||
(d) Net effect of adjustments on income. | ||||||||||||||||||||||
(e) Changes on foreign currency translation adjustment because the change of net income. | ||||||||||||||||||||||
CHINA AGRO SCIENCES CORP. | ||||||||||||||||||||||
STATEMENTS OF OPERATIONS | ||||||||||||||||||||||
FILED WITH 10K | RESTATED | |||||||||||||||||||||
SEPTEMBER 30, | ADJUSTMENTS | SEPTEMBER 30, | ||||||||||||||||||||
2006 | 2006 | |||||||||||||||||||||
REVENUE | 12,749,788 | 12,749,788 | ||||||||||||||||||||
COST OF SALES | 10,187,089 | (350,000) | (f) | 9,837,089 | ||||||||||||||||||
GROSS PROFIT | 2,562,699 | 350,000 | 2,912,699 | |||||||||||||||||||
COSTS AND EXPENSES: | ||||||||||||||||||||||
General and administrative expenses | 1,015,634 | (101,249) | (g) | 914,385 | ||||||||||||||||||
Government grant | (655,739) | 655,739 | (h) | |||||||||||||||||||
Interest expense | 66,756 | (i) | 66,756 | |||||||||||||||||||
TOTAL COSTS AND EXPENSES | 359,895 | 621,246 | 981,141 | |||||||||||||||||||
NET INCOME (LOSS) | 2,202,804 | (271,246) | (j) | 1,931,558 | ||||||||||||||||||
(f) | Adjust accrual for equipment leased from related company | |||||||||||||||||||||
(g) | Reclassification of the accumulated depreciation related to government grant of $34,493 | |||||||||||||||||||||
and segregate interest expense from general and administrative expense of $66,756 | ||||||||||||||||||||||
(h) | Reclassification of government loan and grant | |||||||||||||||||||||
(i) | Segregate interest expense from general and administrative expense | |||||||||||||||||||||
(j) | Net effect of adjustments on income | |||||||||||||||||||||
CHINA AGRO SCIENCES CORP. | ||||||||||||||||||||||
STATEMENTS OF CASH FLOWS | ||||||||||||||||||||||
FILED WITH 10K | RESTATED | |||||||||||||||||||||
SEPTEMBER 30, | ADJUSTMENTS | SEPTEMBER 30, | ||||||||||||||||||||
2006 | 2006 | |||||||||||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||||||||
Net income (loss) | 2,202,804 | (271,246) | (l) | 1,931,558 | ||||||||||||||||||
Adjustments to reconcile net income (loss) to net cash | ||||||||||||||||||||||
provided by operating activities: | ||||||||||||||||||||||
Depreciation of property and equipment | 454,948 | (34,281) | (m) | 420,667 | ||||||||||||||||||
Adjustments to reconcile net loss to net | ||||||||||||||||||||||
cash used in operating activities: | ||||||||||||||||||||||
Accounts receivable | (2,013,529) | (2,013,529) | ||||||||||||||||||||
Inventory | (274,069) | (274,069) | ||||||||||||||||||||
Prepaid expenses | 35,560 | 35,560 | ||||||||||||||||||||
Other current assets | (6,036) | (6,036) | ||||||||||||||||||||
Accounts payable | 691,793 | 691,793 | ||||||||||||||||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | 1,091,471 | (305,527) | 785,944 | |||||||||||||||||||
INVESTING ACTIVITIES: | ||||||||||||||||||||||
Government grant to purchase equipment | - | 349,888 | (n) | 349,888 | ||||||||||||||||||
Acquisition of property and equipment | (317,958) | - | (317,958) | |||||||||||||||||||
NET CASH USED IN INVESTING ACTIVITIES | (317,958) | 349,888 | 31,930 | |||||||||||||||||||
FINANCING ACTIVITIES: | ||||||||||||||||||||||
Grants from local government | (311,066) | 311,066 | (o) | - | ||||||||||||||||||
Loans from affiliated company | (686,017) | (350,000) | (p) | (1,036,017) | ||||||||||||||||||
NET CASH USED IN FINANCING ACTIVITIES | (997,083) | (38,934) | (1,036,017) | |||||||||||||||||||
EFFECT OF EXCHANGE RATES ON CASH | 250,137 | (5,427) | (q) | 244,710 | ||||||||||||||||||
INCREASE ( DECREASE ) IN CASH | 26,567 | - | 26,567 | |||||||||||||||||||
CASH - BEGINNING OF PERIOD | 77,250 | 77,250 | ||||||||||||||||||||
CASH - END OF PERIOD | 103,817 | - | 103,817 | |||||||||||||||||||
(l) Net effect of adjustments on income. | ||||||||||||||||||||||
(m) Reclassification of the accumulated depreciation related to government grant | ||||||||||||||||||||||
(n) Reclassification of the government grant which was specifically made to subsidize the acquisition of fixed assets | ||||||||||||||||||||||
(o) Reclassification of government grant to long term debt | ||||||||||||||||||||||
(p) Adjust accrual for equipment leased from related company | ||||||||||||||||||||||
(q) Changes on foreign currency translation adjustment because the change of net income. |
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Schedule 1 – Condensed Financial Information of Registrant
CHINA AGRO SCIENCES CORP.
BALANCE SHEET
SEPTEMBER 30, 2006
ASSETS | ||||
INVESTMENT IN SUBSIDIARIES | $ | 5,360,510 | ||
TOTAL ASSETS | $ | 5,360,510 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
STOCKHOLDERS’ EQUITY | $ | 5,360,510 | ||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 5,360,510 | ||
CHINA AGRO SCIENCES CORP.
STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2006
INCOME FROM EARNINGS OF SUBSIDIARIES | $ | 1,931,558 | ||
NET INCOME BEFORE INCOME TAXES | $ | 1,931,558 | ||
CHINA AGRO SCIENCES CORP.
STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 2006
OPERATING ACTIVITIES: | ||||
Net income | $ | 1,931,558 | ||
Adjustments to reconcile net income to net | ||||
cash provided by operating activities: | ||||
Earnings of subsidiaries | (1,931,558 | ) | ||
NET CASH PROVIDED BY OPERATING ACTIVITIES | - | |||
CASH – BEGINNING OF PERIOD | - | |||
CASH – END OF PERIOD | $ | - | ||
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