UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2007
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _____ to _____
Commission file number: 333-109458
CHINA GROWTH DEVELOPMENT, INC.
(Name of registrant as specified in its charter)
Delaware 13-4204191
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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5499 North Federal Highway, Suite D, Boca Raton, Florida 33487
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (561) 989-3600
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None Not applicable
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Securities registered under Section 12(g) of the Exchange Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [X] No
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company:
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked prices of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter. $795,804 on June 29, 2007.
Indicated the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date. 879,073 shares of common
stock are issued and outstanding as of March 31, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980). None.
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TABLE OF CONTENTS
PAGE NO.
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Part I
Item 1. Business. .................................................. 3
Item 1A. Risk Factors. .............................................. 13
Item 1B. Unresolved Staff Comments. ................................. 17
Item 2. Properties. ................................................ 17
Item 3. Legal Proceedings. ......................................... 17
Item 4. Submission of Matters to a Vote of Security Holders. ....... 18
Part II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities. ................................................ 18
Item 6. Selected Financial Data. ................................... 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation. ........................ 19
Item 7A. Quantative and Qualitative Disclosures About Market Risk. .. 26
Item 8. Financial Statements and Supplementary Data. ............... 26
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure. ....................... 26
Item 9A.(T) Controls and Procedures. ................................... 26
Item 9B. Other Information. ......................................... 27
Part III
Item 10. Directors, Executive Officers and Corporate Governance. .... 27
Item 11. Executive Compensation. .................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. ................ 35
Item 13. Certain Relationships and Related Transactions, and
Director Independence. ..................................... 36
Item 14. Principal Accountant Fees and Services. .................... 36
Part IV
Item 15. Exhibits, Financial Statement Schedules. ................... 37
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1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this annual report contain or may contain
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
forward-looking statements were based on various factors and were derived
utilizing numerous assumptions and other factors that could cause our actual
results to differ materially from those in the forward-looking statements. These
factors include, but are not limited to, our ability to consummate the pending
transaction with Taiyuan Rongan Business Trading Company, Limited, or, if that
transaction does not close, our ability to enter into a business combination
with an operating company, our degree of financial leverage, our ability to
raise sufficient working capital, and other factors. Most of these factors are
difficult to predict accurately and are generally beyond our control. You should
consider the areas of risk described in connection with any forward-looking
statements that may be made herein. Readers are cautioned not to place undue
reliance on these forward-looking statements and readers should carefully review
this annual report in its entirety, including the risks described in Item 1A. -
Risk Factors. Except for our ongoing obligations to disclose material
information under the Federal securities laws, we undertake no obligation to
release publicly any revisions to any forward-looking statements, to report
events or to report the occurrence of unanticipated events. These
forward-looking statements speak only as of the date of this annual report, and
you should not rely on these statements without also considering the risks and
uncertainties associated with these statements and our business.
OTHER PERTINENT INFORMATION
The information which appears on our web site at www.teekatan.com is
not part of this report. All share and per share information contained herein
gives proforma effect to the one for 100 reverse stock split of our outstanding
common stock effective at close of business on December 13, 2007.
INDEX OF CERTAIN DEFINED TERMS USED IN THIS REPORT
o "China Growth Development, " "we," "us," "ours," and similar terms
refers to China Growth Development, Inc., a Delaware corporation formerly known
as Teeka Tan Products, Inc. which is qualified to transact business in the State
of Florida under the name "Teeka Tan Products, Inc.," and our subsidiary,
o "Teeka Tan" refers to Teeka Tan, Inc., a Florida corporation and a
wholly-owned subsidiary of China Growth Development,
o "Taiyuan Rongan" refers to Taiyuan Rongan Business Trading Company,
Limited, a privately held Chinese company, and
o "PRC" or "China" refers to the People's Republic of China.
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PART I
ITEM 1. BUSINESS.
We market and distribute Teeka Tan(R) Suncare Products, a broad line of
high quality, value-priced sun care products. We also distribute the line of
Safe Sea Sunscreen with Jellyfish Sting Protective Lotion under a non-exclusive
agreement with its manufacturer. We sell these products directly to resorts,
hotels and retailers with beach locations in south Florida, the Bahamas, New
York, North Carolina, South Carolina, Maryland and New Jersey. Our customers are
primarily beach front stores and hotels with high volume tourist traffic. We
market our products through the use of our in house sales representative as well
as independent distributors.
THE SUN CARE INDUSTRY
Globally, the sun care market is the fastest growing sector in the
cosmetics and toiletries segment. Self-tanning was the largest category, showing
a 14% increase from 2005 to 2006, and the United States is responsible for
nearly 50% of those sales. Sun protection also made strides in sales gains, not
in response to the warnings for skin cancer, but to the growing awareness of the
premature aging effects of overexposure. Of the sun care sectors, sun protection
is still the largest, accounting for approximately 75.4% of sales based upon the
most recent information available to us. There is still a notable concentration
in the market, with three top brands responsible for 49.4% of all sales.
While somewhat seasonal with approximately 80% of sun care product
sales occuring between mid-April through just after Labor Day, some sun care
product sales occur year-round. Snowbirds and spring-breakers are buying sun
care in the off-season months at an increasing rate and drug stores are the
primary trade class reaping the rewards of this trend.
Since skin aging, wrinkling and cancer have been widely recognized for
years as adverse effects of sun exposure (www.aad.org), new products probably
fueled the recent 10.3% increase in suntan preparations after years of flat or
declining sales. Supermarket News (February 13, 2006) reported that new sunblock
spray forms, first introduced in 2005, have been popular for their convenience,
coverage and fast-drying capabilities. Tinted sun products, herbal and oil-free
formulations, and products that combine sun protection with moisturizers and
insect repellents have also sparked interest (Chain Drug Review, September 26,
2005). Improvements in sunless tanning products are reported to be dramatic and
include more natural-looking results, improved scent, a faster drying time and a
color time reduction (Brand Strategy, May 8, 2006).
Future suntan product sales are projected to follow the present upward
trend. Consumers are expected to become more aware of the dangers of ultraviolet
rays, so product ease-of-use should continue to evolve and baby boomers will not
refrain from active outdoor lifestyles (Household & Personal Products Industry,
March 2006). Euromonitor International (published in Household & Personal
Products Industry, March 2006) reported that 2005 sales of all U.S. channels
were $1.1 billion, apportioned as $820 million for sun protection, $313 million
for sunless tanning and $22.5 million for aftersun. By 2010, sales are estimated
to reach $1.25 billion, a 13.6% increase. Sunless tanning products are the
fastest growth segment of the sun care category and could make impressive gains;
projected sales are $340 million by 2006 alone, an annual gain of 8.6%.
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Based on data we have reviewed, it appears that private label products
such as our line, may not have fully replicated these improvements. ACNielsen
private label data for suntan preparations for the 52-week period ending
December 31, 2005 shows gains of only 0.5% in dollar sales and 0.4% in unit
sales. Also, aftersun products have struggled to gain sales due to consumer
substitution of general body moisturizers and an overall lack of marketing
support from manufacturers and retailers (Brand Strategy, May 8, 2006).
OUR TEEKA TAN(R) PRODUCT LINE
Our Teeka Tan(R) product line consists of:
o Suntan and Sunscreen products:
o Our tanning oils include Dark Tanning Oil SPF 6 and Dark
Tanning Oil with Carrot Oil (no sunscreen). The products contain aloe
vera, , Vitamins E, A and D and carrot oil and are designed to produce
deep, dark and long-lasting tans. The products are package in 8 oz.
sizes with a suggested retail price of $7.99,
o Our tanning lotions including our Dark Tanning Lotion SPF 4,
Dark Tanning Lotion SPF 8 and Moisturizing Sunscreen Lotion SPF 15.
These products contain aloe and Vitamin E and are designed to offer
long lasting, water resistant, broad spectrum UVA and UVB protection.
The lotions are packaged in 4 oz. sizes with a suggested retail price
of $6.99,
o Our sunscreens including our Sport 30 Sunscreen Lotion SPF
30 and Moisturizing Sunscreen Lotion SPF 45. These gentle lotions are
formulated with advanced sunscreen ingredients and provide long
lasting, water resistant, broad spectrum UVA and UVB protection. The
sunscreens are packaged in 4 oz. sizes with a suggested retail price of
$7.99, and
o Our Kids Sunscreen Lotion SPF 45. This hypoallergenic
product for children offers long lasting, water resistant, broad
spectrum UVA and UVB protection. The 4 oz. package has a suggested
retail price of $7.99.
o After sun products:
o Our Aloe Vera Cooling Gel soothes, cools and moisturizes
skin which has been exposed to the sun while helping to prevent
peeling. The gel is packaged in a 8oz. size with a suggested retail
price of $6.99,
o Our After Sun Tan Extender Moisturizing Lotion is formulated
with cocoa butter, aloe, Vitamin E and other natural skin conditioners
to soothe, moisturize and replenish the skin. The light, non-greasy
lotion helps nourish and soften the skin to prevent peeling and
contains antioxidants which help repair and moisturize sun damaged
skin. The product is packaged in an upscale, cosmetic-type container
and the 8 oz. size has a suggested retail price of $8.99., and
o Our After Sun Skin Replenisher contains carrot oil, cocoa
butter, collagen and silk amino acids and is designed to be used
regularly as a daily moisturizer. The product is packaged in an
upscale, cosmetic type container and the 8 oz. size has a suggested
retail price of $8.99.
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o Lip Balm SPF 30. This product which provides UVA and UVB
protection moisturizes and helps protect lips and other delicate areas
from over exposure to the sun. The product contains vitamins A, B, C
and E, is hypoallergenic and water resistant. The 1 oz. tube has a
suggested retail price of $2.99.
All of our products, which have a unique fragrance and are PABA-free
and contain no mineral oil, are packaged in brightly colored, attractive
functional packaging designed to create an exciting brand image.
SAFE SEA SUNSCREEN WITH JELLYFISH STING PROTECTIVE LOTION
In March 2006 we entered into an agreement to distribute the Safe Sea
line of sun care products. The line of Safe Sea Sunscreen with Jellyfish Sting
Protective Lotion includes:
o Safe Sea with 30+SPF sunscreen,
o Safe Sea with 50 SPF sunscreen,
o Safe Sea with 30 SPF sunscreen,
o Safe Sea lotion with 15 SPF, and
o Safe Sea sting lotion without sunscreen.
The Safe Sea line was designed to protect against most marine stingers,
including jellyfish, sea lice and fire coral, by chemically deactivating the
stinging mechanisms of these marine creatures. The Safe Sea product line
contains a patented mix of chemicals that mimics the protective coating of the
clown fish. Clown fish use jellyfish tentacles as shelter and are immune to its
sting.
Under the original terms of the five year agreement we had the
exclusive rights to distribute the products in retail consumer markets in the
U.S., Mexico and the Caribbean. We agreed to make certain minimum annual
purchases and to pay a licensing fee of $75,000 per year for the first two years
of the agreement, and thereafter a licensing fee of $50,000 per year. As
additional consideration for the agreement, we issued Nidaria Technology Ltd. a
five year warrant to purchase 10,000 shares of our common stock at an exercise
price of $5.00 per share. We also agreed to a five year marketing budget of at
least $1 million and minimum amounts of products over the next five years.
During the first quarter of fiscal 2007 at our request the terms of the
agreement were amended to provide that it is non-exclusive and certain minimum
quantity purchase requirements and obligation to spend marketing funds were
cancelled. While our total sales have increased as a result of sales of the Safe
Sea Jellyfish Sting Protective Lotion, we believe that the number of legacy
sales were not sufficient to justify the additional financial commitments we
made at the onset of the relationship.
NEW PRODUCT DEVELOPMENT
In May 2006 we engaged Shark Defense LLC, a research group focused on
the identification and production of shark-repelling semiochemicals, to assist
us in connection with our development of a sunscreen product containing a shark
repellent. Semiochemicals are chemical messengers or "clues" sharks may use to
orient, survive and reproduce in their specific environments. Certain
semiochemicals have the ability to trigger a flight reaction in sharks, but
these trace chemicals present unique difficulties for isolation and detection.
Under the initial research agreement we paid Shark Defense LLC $6,000 to
experiment on the efficacy of a sunscreen formulation containing a chemical
shark repellent. Phase 1 of the experiment represented a study of encroachments
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and interactions by juvenile lemon sharks with submerged latex models of human
legs and feet. Lemon sharks were chosen as the species is abundant in the
eastern Caribbean and is considered aggressive toward humans. Phase 1 results
demonstrated a reduction in the number of investigatory bites on the latex
models when the sunscreen-shark repellent formulation was utilized.
Following the conclusion of the first phase of the research project, in
July 2006 we hired Shark Defense LLC to assist us in the preparation and filing
of a provisional patent application for the formula, as well as experimental
design and technical support. Under the terms of this agreement we issued Shark
Defense LLC 5,000 shares of our common stock, valued at $30,000. Phase 2 of the
experiment used more stringent conditions and its primary objective was to
identify the most appropriate repellent-sunscreen mixture for commercial
application. The results of the Phase 2 experiment showed a strong trend toward
shark preference for control (untreated) baits over baits treated with the
repellent-sunscreen mixture. Phase 2, however, provided evidence that the
repellency period only lasts for 10 to 20 minutes under the present formulation
and that the formulation must be improved to accommodate the additional
water-soluble shark repellent compounds. The information gained from the Phase 2
experiment, while promising and appears to support the initial hypotheses that
there is a significant difference in the feeding activity between the control
bait and the treated bait, requires validation by further experimentation to
gain the statistical confidence necessary for commercial application. In January
2007 we engaged an individual to provide scientific advisory services to us and
to liaison and coordinate the trials under the terms of a one year agreement. As
compensation we issued him 1,000 shares of our common stock valued at $4,000.
As this project is in its early stages, we are unable to predict at
this time when we might introduce a sunscreen product with a shark repellent, if
at all. Dr. Gruber, who spearheaded the efforts at Shark Defense LLC, retired
during fiscal 2007. Although our trials have slowed with his departure, if
sufficient capital is available to continue our efforts we may seek alternative
sources to continue the trials. As of the date of this annual report, however,
work on this project has been suspended.
MARKETING AND DISTRIBUTION
Mass marketed personal care products such as sun care products
generally rely on image building and massive marketing campaigns to sell
products. These products contain simple chemical ingredients and are then
marketed in elaborate packaging which usually costs more than the ingredients of
the product. As the products of most of our competitors contains similar
ingredients as our products, our marketing strategies are directed at the
smaller, specialty retailers. We believe that research shows consumer brand
loyalty is over 50% for major sun care brands, but when consumers travel that
number is reduced to approximately 25%. A key focus of our marketing strategy is
our belief that vacationers and other potential customers may be drawn to our
products as alternatives to other better known brands as a way to add a unique,
"local" aspect to their vacation.
Our customers are primarily beach front stores and hotels with high
volume tourist traffic. At present, our products are sold in excess of 200
locations. We currently distribute our products to five of the six major tourist
areas in Florida, including the Florida Keys, South Florida, Central Florida
(Orlando), West Coast and the Florida Panhandle. In 2006 we expanded
distribution into the Panama City/ Destin area of the Florida Panhandle. The
Florida Keys has long been a major part of our branding and expansion strategy.
In the Florida Keys, we believe that we enjoy considerable brand recognition and
a key component of our success to date has been our product sales in resort
locations throughout the Keys.
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The largest areas of distribution outside the State of Florida have
included distributor accounts in the Dominican Republic, and the Bahamas. We
also ship product to retailers in the Bahamas, New York, North Carolina, South
Carolina, Maryland and New Jersey. During fiscal 2006 we signed agreements with
several new distributors in an effort to expand our sales base. In 2007 we
concentrated the bulk of our sales efforts through independent distributor
channels in an effort to try and expand sales. The competitive nature of the
suncare market as well as the presence of major brands with greater resources
than us may make additional market penetration costly and unpredictable.
Beginning in January 2007 our products are sold exclusively online at
Drugstore.com. In 2007 we also saw some limited expansion, primarily in North
and South Carolina through the use of our distributors.
It is a generally accepted strategy in the retail industry that to
generate impulse purchases, retailers create dynamic product positions and
placements away from the product's traditional category location. This strategy
is applied to certain sun care products such as sunscreen, which is an impulse
purchase, as opposed to after sun and burn relief and sunless and indoor
products, which are planned purchases. We have applied this product positioning
strategy throughout Walgreen's Drug Stores. Approaching store managers whose
planograms are full and suggesting alternative placement of secondary displays
such as Teeka Tan(R) After Sun near the pharmacy or our tanning products in the
bathing suit isle has led to incremental sales and invitations to the main sun
care set.
We sell market products primarily through direct sales efforts. We
presently employ one full time sales person who is responsible for opening new
accounts as well as servicing existing accounts and shipping re-orders to our
existing accounts. Our sales representative drives a Chrysler PT Cruiser which
has been customized with special tropical-themed graphics covering the entire
vehicle and bearing our name, logo and a representative product picture. We
believe this distinctive, eye-catching vehicle augments our efforts to establish
our brand. Our sales and marketing is supported by our website at
www.teekatan.com which provides educational information regarding sun care
products.
We have developed a line of merchandising materials to be used for
giveaways, displays and promotions. For giveaways we developed tank tops,
t-shirts, visors and sample size bottles of products. We also offer six
different merchant display options ranging in size from a cardboard countertop
unit that carries 30 items and has a wholesale cost of $70 to a custom-wooden
floor display that has more than 350 items and a wholesale cost of over $1,000.
Each display is provided to the retailer with the purchase of product, but
remains our property. Promotional pieces we currently use include banners for
display in stores and recreational areas and stickers that can be applied on
retail doors, packages and marketing materials.
CUSTOMERS
We grant credit to our customers at the time of sale. Our payment terms
are generally net 30. The terms of our sales to Drugstore.com are 2% 30 days,
net 45 days. We record sales at the time the product is shipped. During Fiscal
2007 one customer represented approximately 14% of our total sales.
Our practice is not to accept returned goods unless authorized by our
senior management. An exception to this policy are end of season returns which
is in accordance with industry practices. We permit certain customers, including
Walgreens, to return unsold products at the end of the sun care season,
generally immediately prior to Thanksgiving. At the time of the return we issue
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a credit memo to the customers account for the original sales price of returned
products. For each of fiscal 2007 and 2006 the total amount of return goods we
accepted from our customers was $7,428 and $2,000, respectively. In addition,
under the terms of the vendor agreement with Drugstore.com we agreed to a 1%
merchandise allowance fee for defective merchandise, which such amount can be
deducted from the payments due us by Drugstore.com at its sole discretion.
SEASONALITY
Sales of sun care products tend to be seasonal in nature, with a
disproportionate percentage of sun care product purchases occurring in the
second and third quarters. The pattern of weather's influence on sales of sun
care products can also result in either a yearly increase or decrease in sales,
depending upon the weather. This sales and weather seasonality may affect our
operating results from quarter to quarter and year to year. Seasonality in our
business makes it more difficult to prepare period to period comparisons for our
business. In addition, our operations and a majority of our customers are
located in Florida or other hurricane-prone areas. Because of these geographical
concentrations we are particularly susceptible to the risk of damage to, or
total destruction of, our headquarters and surrounding transportation
infrastructure caused by a hurricane as well as decreases in sales relating to
weather related events.
MANUFACTURING
Our proprietary products are manufactured by a contract manufacturer of
sun care products which affixes our labels and ships the product to us for
distribution. We do not have any written contracts with the contract
manufacturer, instead we rely on purchase orders. By this approach, we purchase
on an as needed basis and do not have any minimum purchase requirements, but our
contract manufacturer is free to increase its prices at any time. Inasmuch as
there are other manufacturers who would be appropriate suppliers, we do not
believe the absence of a contract poses any material risk.
All our products are developed and tested by our manufacturer; we do
not have an independent program of research or product development.
COMPETITION
We operate in a very competitive industry which is dominated by a
limited number of companies and dominated by brands such as Panama Jack,
Coppertone, Banana Boat, Hawaiian Tropic, Neutrogena, and Australian Gold. These
dominant brands are owned by companies which are significantly larger and better
capitalized than our company. We also compete against various private label
store brands, including Target, Walgreens, CVS and similar companies. While our
initial barrier to entry in the market has been relatively low through our use
of a third party manufacturer, in order to be successful we must steadily
increase our brand awareness and market penetration. As a result of the small
size of our company and limited marketing budget, there are no assurances we
will be successful in competing in our market segment or in developing any brand
recognition or loyalty.
INTELLECTUAL PROPERTY
To protect our rights to intellectual property, we rely on a
combination of trademark, copyright law, trade secret protection,
confidentiality agreements, and other contractual arrangements with our
employees, suppliers, and others. We have secured a federal registration of our
TeekaTan trademark.
8
These steps may not be adequate to deter misappropriation of our
proprietary information. We may be unable to detect the unauthorized use of, or
take appropriate steps to enforce, our intellectual property rights. Effective
trademark, copyright and trade secret protection may not be available in every
country in which we may offer our products. Failure to adequately protect our
intellectual property could harm our brand, devalue our proprietary content, and
affect our ability to compete effectively. Further, defending our intellectual
property rights could result in the expenditure of significant financial and
managerial resources, which could adversely affect our business, results of
operations, and financial condition.
Although we do not believe any of our products or trademarks infringe
on the intellectual property rights of others, other parties may assert
infringement claims against us or claims that we have violated a patent or
infringed a copyright, trademark, or other proprietary right belonging to them.
Such claims, even if not meritorious, could have an adverse impact on our
operations and financial condition.
We have also obtained the right to the Internet address
www.teekatan.com. As with phone numbers, we do not have and cannot acquire any
property rights in an Internet address. We do not expect to lose the ability to
use the Internet address; however, there can be no assurance in this regard and
the loss of this address may have a material adverse effect on our financial
position and results of operations.
GOVERNMENT REGULATION
The U.S. Food and Drug Administration ("FDA") regulates the ingredients
which may be used in suntan lotions, their combination, and their concentration,
for both safety and effectiveness. The FDA also sets standards for rating
sunscreens' effectiveness in blocking UV rays.
All sunscreens are required to have an "SPF" or sun protection factor
number on the label. A higher SPF means it protects longer. Products with an SPF
of 2 to 11 are deemed to provide minimal sun protection, products with an SPF of
12 to 30 are deemed to be moderate sun protection products, and those with SPF
values of 30 or above are deemed to be high sun protection products. The SPF
value is determined by testing on 20 to 25 live humans, using a solar simulator.
In addition to the SPF value, labeling must identify active and other
ingredients, indications for use, certain warnings, for example exposure to
eyes, directions for use, and specific information if it is claimed to be "water
resistant". FDA regulations prescribe both the information to be presented and
the format for such presentation.
The manufacture and labeling of our products are subject to compliance
with certain FDA regulations, including that ingredients must consist of
approved substances, the products must be produced in FDA approved facilities,
and the TeekaTan labels must be filed with the FDA. We have been advised by our
contract manufacturer that the effective ingredients in our products produced by
them have been approved by the FDA for use in sun tan lotions, and our contract
manufacturer's facility has been approved by the FDA. In addition, our contract
manufacturer has advised us that the labels which are applied to all our bottles
and tubes supplied by it have been filed with the FDA under the contract
manufacturer's name and that all labels meet FDA regulations.
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In September 2007 the FDA proposed a new regulation that sets standards
for formulating, testing and labeling over-the-counter (OTC) sunscreen drug
products with ultraviolet A (UVA) and ultraviolet B (UVB) protection. The
proposed regulation creates a consumer-friendly rating system for UVA products
designed to help consumers identify the level of UVA protection offered by a
product. The FDA proposal provides a ratings system for UVA sunscreen products
on a scale of one to four stars. One star would represent low UVA protection,
two stars would represent medium protection, three stars would represent high
protection, and four stars would represent the highest UVA protection available
in an OTC sunscreen product. If a sunscreen product does not provide at least a
low level (one star) of protection, FDA is proposing to require that the product
bear a "no UVA protection" marking on the front label near the SPF value.
Ratings would be derived from two tests the FDA proposes to assess the
effectiveness of sunscreens in providing protection against UVA light. The first
test measures a product's ability to reduce the amount of UVA radiation that
passes through it. The second test measures a product's ability to prevent
tanning. This test is nearly identical to the SPF test used to determine the
effectiveness of UVB sunscreen products. In addition, a "Warnings" statement in
the "Drug Facts" box will be required of all sunscreen product manufacturers.
The warning will say: "UV exposure from the sun increases the risk of skin
cancer, premature skin aging, and other skin damage. It is important to decrease
UV exposure by limiting time in the sun, wearing protective clothing, and using
a sunscreen." The warning is intended to increase awareness that sunscreens are
only one part of a sun protection program.
When finalized, the proposed regulation would amend the existing OTC
sunscreen rule published in 1999 that established regulations related to UVB
light and mandated that OTC UVB sunscreen products be labeled with a SPF. The
FDA also is amending its existing 1999 rule to increase the SPF from SPF30+ to
SPF50+. Previously, FDA had recognized SPF values up to 30+. Under the proposed
amendment, the range would be SPF2 to SPF50+. SPF50 provides more UVB protection
than lower SPF values. We believe this new rule will be adopted by 2010. We do
not anticipate that it will have a material effect on our operations.
EMPLOYEES
As of March 31, 2008, we have three employees, including two of our
executive officers, Brian John and Richard Miller. We have a full-time sales
representative and Messrs. John and Miller provide part-time services to us.
PENDING TRANSACTION WITH TAIYUAN RONGAN
On November 12, 2007 we entered into a Stock for Stock Equivalent
Exchange Agreement and Plan with Taiyuan Rongan and all of its current capital
contributors (the "Taiyuan Rongan Shareholders") pursuant to which at closing
the Taiyuan Rongan Shareholders will assign 80% of the 100% of capital
contributions in Taiyuan Rongan to our company in exchange for an aggregate of
31,500,000 shares of our common stock and common stock purchase warrants to
purchase an aggregate of 1,400,000 shares of our common stock at an exercise
price of $0.50 per share. As a finder's fee, Taiyuan Rongan paid Mr. Frank
Benedetto, a member of our Board of Directors, a fee of $25,000.
10
Under the terms of the agreement, as a condition precedent to closing
we were required to undertake a one for 100 (1:100) reverse stock split of our
outstanding common stock and satisfy or otherwise extinguish the $200,000
principal amount convertible note which is presently in default. As an
additional condition precedent, Taiyuan Rongan must receive and deliver
documentation of the approvals for the transaction from the various divisions of
the Chinese government.
In anticipation of the closing, Messrs. Brian John and Richard A.
Miller, our executive officers and directors, have terminated their employment
agreements and forgiven all accrued but unpaid compensation due each of them.
The reverse stock split was effective at close of business on December 13, 2007
and at the request of Taiyuan Rongan we also changed our corporate name to China
Growth Development, Inc. We have been advised that the approvals have been
received from the Chinese government. The note, however, remains outstanding and
we do not have sufficient funds to satisfy it. Subsequent to the execution of
the agreement with Taiyuan Rongan, the note was purchased from the original
holder by two parties who were introduced by representatives of Taiyuan Rongan.
In order for this transaction to close, this note must either be converted by
the holders in accordance with its terms or Taiyuan Rongan will be required to
waive this closing condition. Based upon our current discussions with
representatives of Taiyuan Rongan, it has expressed a desire to close this
transaction following the filing of this annual report, however, the issue of
the note has not been discussed by the parties. We are therefore unable to
speculate as to the likelihood of a closing of this transaction.
If the agreement closes, the closing will result in a change of control
of our company and our primary business and operations will be that of Taiyuan
Rongan. At closing, our executive officers and directors will resign and
executive officers and directors designated by Taiyuan Rongan will be elected.
We will also issue Mirador Consulting, an affiliate of Messrs. John and Miller,
a one year common stock purchase warrant to purchase 500,000 shares of our
common stock at an exercise price of $1.00 per share.
ABOUT TAIYUAN RONGAN
Following is a brief description of the business and operations of
Taiyuan Rongan. A more complete description, including historical financial
information, will be contained in a Current Report on Form 8-K which we will
file following the closing of the transaction, assuming such a closing occurs.
Taiyuan Rongan, which is engaged in the business of leasing units in
shopping malls to commercial tenants, is a privately-registered business entity
which was formed in 2005. Taiyuan Rongan, a real estate developer based in
Taiyuan, Shanxi, China, holds approximately 76% of the issued and outstanding
capital contributions of companies organized in China that own and operate six
shopping malls. The shopping malls are located in the Chaoyang Street district
in the city of Taiyuan, Shanxi Province, China. Taiyuan Rongan maintains onsite
management in each of the shopping centers.
11
The shopping malls currently operated by Taiyuan Rongan are as follows:
Approximate Number and
Mall Description Type of Tenants
--------------------- ------------------------ ------------------------
Yudu Minpin Shopping Five story building with 500 commercial tenants
Mall total space of 14,000 engaged in the retail,
square meters. wholesale and distribution
of clothes, shoes,
cosmetics, beddings, and
similar merchandise.
Jingpin Clothing City Five story building with 500 commercial tenants
7,000 total square engaged in the retail,
footage. wholesale and distribution
of clothes, shoes,
cosmetics, bedding and
similar merchandise.
Longma Shopping Mall Five story building with 260 commercial tenants
a total space of 17,000 engaged in the retail and
square meters. wholesale of brand name
clothing and apparel.
XinDongCheng Clothing Five story building 800 commercial tenants
DistributionMall consisting of 48,000 engaged in the retail of
square meters of space clothing and footwear.
and an additional 11,600
square meters of
basement space.
Taiyuan Clothing City Six story building with 1,600 commercial tenants
43,000 square meters of engaged in the retail,
space. wholesale and distribution
of clothes, shoes,
cosmetics, bedding and
similar merchandise.
Longma Shopping Mall Six story building with 400 commercial tenants
West Wing 43,000 square meters of engaged in the retail and
space. wholesale of brand name
clothing and apparel
|
Taiyuan Rongan has approximately 400 employees, including 10 senior
managers.
12
OUR HISTORY
We were organized under the laws of Delaware in April 2002 initially
under the name IHealth, Inc. In February 2003 we formed our wholly-owned
subsidiary Teeka Tan, Inc., a Florida corporation. During fiscal 2002 and fiscal
2003 our activities were primarily limited to development of our business plan,
launching our TeekaTan product line, and development of our marketing model. We
began to report revenues during the last part of fiscal 2003 from sales of our
TeekaTan sun care products. In December 2005 we changed our name to Teeka Tan
Products, Inc. to better align our corporate image with our business operations.
On December 13, 2007 in connection with the pending transaction with
Taiyuan Rongan described above we changed our name to China Growth Development,
Inc.
ITEM 1A. RISK FACTORS
An investment in our common stock involves a significant degree of
risk. You should not invest in our common stock unless you can afford to lose
your entire investment. You should consider carefully the following risk factors
and other information in this annual report before deciding to invest in our
common stock.
WE HAVE AN ACCUMULATED DEFICIT AND WE ANTICIPATE CONTINUING LOSSES THAT WILL
RESULT IN SIGNIFICANT LIQUIDITY AND CASH FLOW PROBLEMS WHICH WILL REQUIRE US TO
RAISE ADDITIONAL WORKING CAPITAL.
We have incurred losses since our inception, and have an accumulated
deficit of $2,359,115 at December 31, 2007. Our operations have been financed
primarily through the issuance of equity and debt. For the years ended December
31, 2007 and 2006, we reported net losses of $653,109 and $645,702,
respectively, and for the year ended December 31, 2007 cash used in operations
was $48,830. We had approximately $1,700 of cash at December 31, 2007. We do not
presently have sufficient sales to fund our ongoing operating expenses or to
satisfy our debt obligation in the amount of approximately $281,000 at March 31,
2008 which is presently past due. Until such time as we are able to increase our
sales to the level necessary to pay our ongoing expenses and generate a profit,
our continued existence is dependent upon, among other things, our ability to
raise additional working capital. Given the size of our company there are no
assurances that we will be successful in obtaining additional capital as needed,
or that such capital will be available on terms acceptable to us. If we do not
raise funds as needed, our ability to provide for current working capital needs,
grow our company, and continue our business and operations is in jeopardy and we
could be forced to cease operations. In this event, you could lose all of your
investment in our company.
THERE ARE NO ASSURANCES THAT THE PENDING TRANSACTION WITH TAIYUAN RONGAN WILL
CLOSE. IF A CLOSING DOES OCCUR, IT WILL RESULT IN A CHANGE OF CONTROL OF OUR
COMPANY AND OUR PRIMARY BUSINESS AND OPERATIONS WILL NO LONGER BE THE MARKETING
AND DISTRIBUTION OF SUNCARE PRODUCTS.
As is common in similar types of transactions, there were a number of
conditions precedent to the closing of the pending transaction with Taiyuan
Rongan, the majority of which have been satisfied. We were required, however, to
satisfy or otherwise retire the $200,000 principal amount convertible note which
is presently in default as described below and, accordingly, this condition has
not been satisfied. In the event the transaction with Taiyuan Rongan should
close, this will result in a change of control of our company. The Taiyuan
Rongan Shareholders will own a majority of our outstanding capital stock. Our
13
current offices and directors will resign and officers and directors designed by
Taiyuan Rongan will be appointed. The principal business of our company will be
that of Taiyuan Rongan. There is presently a limited amount of public
information available about Taiyuan Rongan and there is no historical financial
information presently available. All of Taiyuan Rongan's business and operations
are in China and it faces significantly different challenges than our company.
Other than the change of control and change of officers and directors, we cannot
predict at this time the impact of this transaction on our company in the event
it should close. Given that a condition precedent has not been satisfied
approximately four months after the execution of the agreement, investors in our
company should not place undue reliance on this pending transaction when making
an investment decision regarding our securities.
WE ARE PAST DUE ON A CONVERTIBLE NOTE AND THE SATISFACTION OF THIS NOTE IS A
CONDITION PRECEDENT TO THE CLOSING OF THE TAIYUAN RONGAN TRANSACTION.
At the time of the execution of the definitive agreement with Taiyuan
Rongan, we were past due under the repayment of a $200,000 principal amount
unsecured note which was due in August 2007. The note, together with accrued but
unpaid interest, is convertible into shares of our common stock at a conversion
price of $7.50 per share. Subsequent to the execution of the definitive
agreement, the note was sold by the holder to two entities which were introduced
by an intermediary in the Taiyuan Rongan transaction. As a condition precedent
to the closing, we were required to satisfy this note. We do not have sufficient
funds to pay the principal and accrued interest and at March 31, 2008 we owed
these note holders approximately $81,000 in accrued but unpaid interest. We do
not know if the note holders will convert the note to enable us to satisfy this
condition precedent to the closing of the transaction with Taiyuan Rongan.
Unless this should occur, or unless Taiyuan Rongan should consent to the waiver
of this condition precedent to closing, the transaction with Taiyuan Rongan will
not close.
OUR AUDITORS HAVE EXPRESSED DOUBTS ABOUT OUR ABILITY TO CONTINUE AS A GOING
CONCERN.
At December 31, 2007 we had a working capital deficit $241,023 and the
report of our independent registered public accounting firm on our financial
statements for the year ended December 31, 2007 contains an explanatory
paragraph as to our ability to continue as a going concern as a result of our
net loss, working capital deficiency, stockholders' deficiency and cash used in
operations. Our consolidated financial statements, which appear elsewhere in
this annual report, are prepared assuming we will continue as a going concern.
We do not generate sufficient sales to fund our operations. As long as our cash
flow from operations remains insufficient to fund our operations, we will
continue depleting our cash and other financial resources. Our failure to
achieve profitable operations in future periods will adversely affect our
ability to continue as a going concern. In this event, you could lose all of
your investment in our company. The financial statements included in this annual
report do not include any adjustments to reflect future adverse effects on the
recoverability and classification of assets or amounts and classification of
liabilities that may result if we are not successful.
WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY, AND WE CANNOT GUARANTEE THAT WE CAN
SUCCESSFULLY COMPETE.
The sun care industry is very competitive, and we compete with a number
of established brands including Hawaiian Tropic, Coppertone, Panama Jack, Banana
Boat, Neutrogena, and Australian Gold. We are at a competitive disadvantage in
attracting retailers and new customers due to our relatively small size and the
14
limited scope of our product lines. Our competitors are larger and more
diversified than our company, and have greater financial resources. We cannot
predict the degree of success, if any, with which we will meet competition in
the future.
OUR INDUSTRY IS SEASONAL, OUR OPERATIONS ARE LOCATED IN FLORIDA AND WE ARE
RELIANT ON SALES MADE IN THE STATE OF FLORIDA. AS A RESULT OF THIS SEASONALITY
AND RELIANCE, OUR RESULTS OF OPERATIONS IN FUTURE PERIODS COULD BE ADVERSELY
IMPACTED BY ADVERSE WEATHER.
Sales of sun care products tend to be seasonal in nature, with a
disproportionate percentage of sun care product purchases occurring in the
second and third quarters. The pattern of weather's influence on sales of sun
care products can also result in either a yearly increase or decrease in sales,
depending upon the weather. This sales and weather seasonality may affect our
operating results from quarter to quarter and year to year. Seasonality in our
business makes it more difficult to prepare period to period comparisons for our
business. In addition, our operations and a majority of our customers are
located in Florida. During fiscal 2004 four hurricanes made land-fall in the
State of Florida, three of which adversely impacted our operations to varying
degrees. During fiscal 2005, an additional four hurricanes made land-fall in
Florida, with Hurricane Wilma moving directly through South Florida and causing
significant infrastructure damage and disruption to the area. While we were not
impacted by any hurricane related events during either fiscal 2006 or fiscal
2007, because we are located in Florida, which is a hurricane-sensitive area, we
are particularly susceptible to the risk of damage to, or total destruction of,
our offices and surrounding transportation infrastructure caused by a hurricane.
In addition, sales of our products were adversely impacted in fiscal 2004 and
fiscal 2005 as a result of the hurricanes that made land-fall in Florida and we
expect that similar impacts will be felt in future periods if Florida or any of
the geographic areas in which we sell our products are adversely impacted by
hurricanes.
WE DO NOT MAINTAIN PRODUCT LIABILITY COVERAGE BUT RELY INSTEAD ON UMBRELLA
COVERAGE PROVIDED THROUGH OUR CONTRACT MANUFACTURER. WE COULD BECOME LIABLE FOR
UNINSURED PRODUCT LIABILITY CLAIMS WHICH WOULD ADVERSELY EFFECT OUR ABILITY TO
CONTINUE AS A GOING CONCERN.
We rely on a $5 million umbrella product liability coverage policy held
by our third party contract manufacturer. While we believe that this policy is
presently sufficient to provide insurance coverage for us in the event claims
should be made by consumers regarding our product, there can be no assurances
that claims may not be brought against us which are not covered by this policy.
The defense by us of uninsured product liability claims could require
substantial financial resources and would result in a diversion of our
management's efforts away from our day to day operations. Because of our limited
financial resources, even if we were not found liable under a claim, the efforts
in defending our company would have a material adverse effect on our liquidity
and results of operations. In addition, if we were found to be liable for an
uninsured product liability claim, our ability to continue as a going concern
would be in doubt.
WE DO NOT HAVE ANY INDEPENDENT DIRECTORS AND WE HAVE NOT VOLUNTARILY IMPLEMENTED
VARIOUS CORPORATE GOVERNANCE MEASURES, IN THE ABSENCE OF WHICH, STOCKHOLDERS MAY
HAVE MORE LIMITED PROTECTIONS AGAINST INTERESTED DIRECTOR TRANSACTIONS,
CONFLICTS OF INTEREST AND SIMILAR MATTERS.
15
Recent Federal legislation, including the Sarbanes-Oxley Act of 2002,
has resulted in the adoption of various corporate governance measures designed
to promote the integrity of the corporate management and the securities markets.
Some of these measures have been adopted in response to legal requirements.
Others have been adopted by companies in response to the requirements of
national securities exchanges, such as the NYSE or The NASDAQ Stock Market, on
which their securities are listed. Among the corporate governance measures that
are required under the rules of national securities exchanges are those that
address board of directors' independence, audit committee oversight, and the
adoption of a code of ethics. Our Board of Directors is comprised of three
individuals who are also our executive officers. Our executive officers make
decisions on all significant corporate matters such as the approval of terms of
the compensation of our executive officers and the oversight of the accounting
functions.
Although we have adopted a Code of Ethics and Business Conduct we have
not yet adopted any of these other corporate governance measures and, since our
securities are not yet listed on a national securities exchange, we are not
required to do so. We have not adopted corporate governance measures such as an
audit or other independent committees of our board of directors as we presently
do not have any independent directors. If we expand our board membership in
future periods to include additional independent directors, we may seek to
establish an audit and other committees of our board of directors. It is
possible that if our Board of Directors included independent directors and if we
were to adopt some or all of these corporate governance measures, stockholders
would benefit from somewhat greater assurances that internal corporate decisions
were being made by disinterested directors and that policies had been
implemented to define responsible conduct. For example, in the absence of audit,
nominating and compensation committees comprised of at least a majority of
independent directors, decisions concerning matters such as compensation
packages to our senior officers and recommendations for director nominees may be
made by a majority of directors who have an interest in the outcome of the
matters being decided. Prospective investors should bear in mind our current
lack of corporate governance measures in formulating their investment decisions.
OUR COMMON STOCK IS CURRENTLY QUOTED ON THE OTCBB, BUT TRADING IN OUR STOCK IS
LIMITED. BECAUSE OUR STOCK CURRENTLY TRADES BELOW $5.00 PER SHARE, AND IS QUOTED
ON THE OTC BULLETIN BOARD, OUR STOCK IS CONSIDERED A "PENNY STOCK" WHICH CAN
ADVERSELY EFFECT ITS LIQUIDITY.
The market for our common stock is extremely limited and there are no
assurances an active market for our common stock will ever develop. Accordingly,
purchasers of our common stock cannot be assured any liquidity in their
investment. In addition, the trading price of our common stock is currently
below $5.00 per share and we do not anticipate that it will be above $5.00 per
share in the foreseeable future. Because the trading price of our common stock
is less than $5.00 per share, our common stock is considered a "penny stock,"
and trading in our common stock is subject to the requirements of Rule 15g-9
under the Securities Exchange Act of 1934. Under this rule, broker/dealers who
recommend low-priced securities to persons other than established customers and
accredited investors must satisfy special sales practice requirements. SEC
regulations also require additional disclosure in connection with any trades
involving a "penny stock," including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and its
associated risks. These requirements severely limit the liquidity of our
securities in the secondary market because few broker or dealers are likely to
undertake these compliance activities.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY DELAY OR PREVENT A
TAKE-OVER WHICH MAY NOT BE IN THE BEST INTERESTS OF OUR STOCKHOLDERS.
16
Provisions of our Certificate of Incorporation and bylaws may be deemed
to have anti-takeover effects, which include when and by whom special meetings
of our stockholders may be called, and may delay, defer or prevent a takeover
attempt. In addition, certain provisions of the Delaware General Corporation Law
also may be deemed to have certain anti-takeover effects which include that
control of shares acquired in excess of certain specified thresholds will not
possess any voting rights unless these voting rights are approved by a majority
of a corporation's disinterested stockholders.
In addition, we recently amended our Certificate of Incorporation to
include a series of blank check preferred stock. Our Certificate of
Incorporation, as amended, authorizes the issuance of up to 10,000 shares of
preferred stock with such rights and preferences as may be determined by our
board of directors. Our board of directors may, without stockholder approval,
issue preferred stock with dividends, liquidation, conversion or voting rights
that could adversely affect the voting power or other rights of our common
stockholders.
THE EXERCISE OF OUTSTANDING WARRANTS AND THE CONVERSION OF AN OUTSTANDING NOTE
WILL BE DILUTIVE TO OUR EXISTING STOCKHOLDERS.
At March 31, 2008 we had 879,073 shares of our common stock issued and
outstanding and the following securities which are convertible or exercisable
into shares of our common stock were outstanding on such date:
o 30,000 shares of our common stock issuable upon the exercise of
common stock purchase warrants with exercise prices ranging from $5.00 to $7.50
per share; and
o 37,486 shares of our common stock issuable upon conversion of
principal of $200,000 together with accrued interest of $81,142 under an
unsecured promissory note which is presently past due.
The issuance of the additional shares of our common stock upon the
possible exercise of these warrants and/or the conversion of the notes may
materially adversely affect the market price of our common stock and will have a
dilutive effect on our existing stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable to a smaller reporting company.
ITEM 2. PROPERTIES.
At the present time, we utilize the 2,500 square feet of office space
leased from a third party by Mirador Consulting, Inc., an affiliate of Messrs.
John, Miller and Benedetto, our executive officers. We paid $1,000 per month for
the use of such space on a month-to-month basis under an oral agreement until
October 2007. Since the execution of the agreement with Taiyuan Rongan in
November 2007 as described earlier in this annual report, Mirador Consulting,
Inc. is providing the space to us at no cost.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings and, to our
knowledge, none of our officers, directors or principal stockholders are party
to any legal proceeding in which they have an interest adverse to US.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Because we do not have a class of securities registered under either
Section 12(b) or Section 12(g) of the Securities Exchange Act of 1934 we are not
subject to the proxy rules. On November 26, 2007 our executive officers and
directors which are the holders of a majority of our issued and outstanding
common stock approved the Certificate of Amendment to our Certificate of
Incorporation changing the name of our company from Teeka Tan Products, Inc. to
China Growth Development, Inc. and approving a one for 100 reverse stock split
of our common stock by written consent in lieu of a meeting of stockholders in
accordance with the relevant sections of the Delaware General Corporation Law,
both of which such actions were effective at close of business on December 13,
2007. . In accordance with the Delaware law, we provided written notice of these
actions to our stockholders who did not execute the written consent.
PART II
ITEM 5. STOCKHOLDER MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is quoted on the OTCBB under the symbol CGDI. The
reported high and low sales prices for the common stock as reported on the OTCBB
are shown below for the periods indicated. The quotations reflect inter-dealer
prices, without retail mark-up, markdown or commission, and may not represent
actual transactions.
HIGH LOW
---- ---
Fiscal 2006
First quarter ended March 31, 2006 $10.00 $4.00
Second quarter ended June 30, 2006 $10.50 $6.50
Third quarter ended September 30, 2006 $9.50 $4.00
Fourth quarter ended December 31, 2006 $9.40 $3.00
Fourth quarter ended December 31, 2006 $9.40 $3.00
Fiscal 2007
First quarter ended March 31, 2007 $9.40 $3.00
Second quarter ended June 30, 2007 $5.00 $2.00
Third quarter ended September 30, 2007 $3.50 $1.00
Fourth quarter ended December 31, 2007 $9.70 $0.20
|
On March 27, 2008, the last sale price of our common stock as reported
on the OTCBB was $0.85. As of March 19, 2008, there were approximately 23 record
owners of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock.
Under Delaware law, our Board of Directors may not authorize payment of a
dividend unless it is either paid out of surplus, as calculated in accordance
with the Delaware General Corporation Law, or, if we do not have a surplus, it
is paid out of our net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. Given our current financial condition
it is not likely we will declare dividends on our common stock in the
foreseeable future. Even if we should have funds available to pay dividends in
the future, we currently expect to retain future earnings, if any, to finance
the growth and development of our business.
18
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth securities authorized for issuance under
any equity compensation plans approved by our stockholders as well as any equity
compensation plans not approved by our stockholders as of December 31, 2007.
NUMBER OF
SECURITIES
REMAINING
AVAILABLE
NUMBER OF FOR FUTURE
SECURITIES WEIGHTED ISSUANCE
TO BE AVERAGE UNDER EQUITY
ISSUED UPON EXERCISE COMPENSATION
EXERCISE OF PRICE OF PLANS
OUTSTANDING OUTSTANDING (EXCLUDING
OPTIONS, OPTIONS, SECURITIES
WARRANTS WARRANTS REFLECTED
AND RIGHTS AND RIGHTS IN COLUMN
Plan category (A) (B) (A)) (C)
----------------------------------- ----------- ----------- ------------
Plans approved by our stockholders: 0 n/a 0
Plans not approved by stockholders: 0 n/a 0
2006 Equity Compensation Plan 0 n/a 76,000
|
A description of our 2006 Equity Compensation Plan in this report under
Part III, Item 11. Executive Compensation - Stock Option Plans.
RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable to a smaller reporting company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
We market and distribute Teeka Tan(R) Suncare Products, a broad line of
high quality, value-priced sun care products. We are also a distributor of the
Safe Sea Jellyfish Sting Protective Lotion under a licensing agreement with its
manufacturer. We sell these products directly to resorts, hotels and retailers
with beach locations in south Florida, the Bahamas, New York, North Carolina,
South Carolina, Maryland and New Jersey. Our customers are primarily beach front
stores and hotels with high volume tourist traffic. We market our products
through the use of our in house sales representative as well as independent
distributors.
We formed our company in 2002 and during fiscal 2002 and fiscal 2003
our activities were primarily limited to development of our business plan,
launching our TeekaTan product line, and development of our marketing model. We
began to report revenues during the last part of fiscal 2003 from sales of our
TeekaTan sun care products and exited development stage operations at the end of
fiscal 2003. We operate in a very competitive market which is dominated by
significantly larger companies with established brands and distribution
channels. Our ability to grow our company has been adversely impacted by our
19
lack of working capital and we do not have sufficient capital to undertake any
effective marketing of our products. During Fiscal 2007 did not spend any funds
on advertising and marketing as compared to approximately $16,000 spent in
Fiscal 2006. Our sales increased approximately 88% in Fiscal 2006 from Fiscal
2005 while our sales were flat from Fiscal 2006 to Fiscal 2007. Despite efforts,
we were unable to raise additional capital under terms acceptable to our company
and, as a result, we did not have funds to advertise during Fiscal 2007. We
believe this lack of advertising is the primary cause for the lack of company
growth during the year.
On November 12, 2007 we entered into a Stock for Stock Equivalent
Exchange Agreement and Plan with Taiyuan Rongan and the Taiyuan Rongan
Shareholders pursuant to which at closing the Taiyuan Rongan Shareholders will
assign 80% of the 100% of capital contributions in Taiyuan Rongan to our company
in exchange for an aggregate of 31,500,000 shares of our common stock and common
stock purchase warrants to purchase an aggregate of 1,400,000 shares of our
common stock at an exercise price of $0.50 per share, both giving effect to the
reverse stock split described below.
Under the terms of the agreement, as a condition precedent to closing
were required to undertake a one for 100 (1:100) reverse stock split of out
outstanding common stock. This stock split was effective on December 13, 2007.
In addition, we are required to satisfy or otherwise extinguish a convertible
note with a balance at March 31, 2008 of approximately $281,000 which is
presently in default. This note is convertible into shares of our common stock
at $7.50 per share. As described elsewhere herein, we do not have the funds to
satisfy this note and do not know if the holders will convert the note in
accordance with it terms.
As a condition precedent to closing Taiyuan Rongan must deliver
documentation of the approvals for the transaction from the various divisions of
the Chinese government which we have been advised has been received. The closing
of the agreement is also subject to customary closing conditions. At closing,
our executive officers and directors will resign and executive officers and
directors designated by Taiyuan Rongan will be elected. We will also issue
Mirador Consulting, an affiliate of Messrs. John and Miller, a one year common
stock purchase warrant to purchase 500,000 shares of our common stock at an
exercise price of $1.00 per share.
We have been advised by representatives of Taiyuan Rongan that it is
the intent to close this transaction following the filing of this annual report,
however, as a result of the uncertainty surrounding the past due note we are
unable to speculate as to the likelihood that this transaction will close.
However, in the event it should close, there will be a change of control of our
company. Thereafter, our primary business and operations would then be that of
Taiyuan Rongan.
If the transaction with Taiyuan Rongan does not close, it is likely
that we will seek other companies with which to enter into a business
combination as an alternative means to grow our company. While we believe in the
overall viability of our business model, in order to grow our business,
implement our marketing initiatives and satisfy our current obligations, we need
to raise additional working capital and to date we have been unsuccessful in
securing the capital. Because of our inability to raise sufficient capital to
grow our company, we believe it is in the best interests of our stockholders to
diversify our operations through a business combination with an operation
company. There are no assurances, however, that we could identify and close and
a business combination with an operating company. If this were ultimately the
case, it is possible that we could be forced to curtail some or all of our
operations and investors could lose their entire investment in our company.
20
GOING CONCERN
We have generated minimal revenue since our inception in April 2002,
and have incurred net losses of approximately $2.4 million since inception
through December 31, 2007. As a result, our current operations are not an
adequate source of cash to fund future operations. The report of our independent
registered public accounting firm on our financial statements for the year ended
December 31, 2007 contains an explanatory paragraph regarding our ability to
continue as a going concern based upon our net losses, working capital deficit,
stockholders' deficit and cash used in operations. Our ability to continue as a
going concern is dependent upon our ability to obtain the necessary financing to
meet our obligations and repay our liabilities when they become due and to
generate profitable operations in the future. We plan to continue to provide for
our capital requirements through the sale of equity securities and debt,
however, we have no firm commitments from any third party to provide this
financing and we cannot assure you we will be successful in raising working
capital as needed. There are no assurances that we will have sufficient funds to
execute our business plan, pay our obligations as they become due or generate
positive operating results.
CRITICAL ACCOUNTING POLICIES
We have identified the policies outlined below as critical to our
business operations and an understanding of our results of operations. The list
is not intended to be a comprehensive list of all of our accounting policies. In
many cases, the accounting treatment of a particular transaction is specifically
dictated by accounting principles generally accepted in the United States, with
no need for management's judgment in their application. The impact and any
associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis or Plan of Operations
where such policies affect our reported and expected financial results. For a
detailed discussion on the application of these and other accounting policies,
see the Notes to the Consolidated Financial Statements appearing elsewhere in
this annual report. Note that our preparation of the financial statements
requires us to make estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of our financial statements, and the reported amounts of revenue and
expenses during the reporting period. There can be no assurance that actual
results will not differ from those estimates.
Revenue Recognition
Revenue is recognized on sales of products when the customer receives
title to the goods, generally upon delivery. Revenue is recorded on a gross
basis, since we are responsible for fulfillment, including the acceptability of
the products and services ordered by the customer. In the event we place any
merchandise on consignment, the related sales from such merchandise will be
recorded when such merchandise is sold by the retailer.
Shipping and Handling Costs
Amounts billed to customers in sales transactions related to shipping
and handling represent revenues earned for the goods provided and are included
in sales. Costs of shipping and handling are included in the cost of goods sold.
Provision for Slow Moving and Obsolete Inventory
We write down our inventory for estimated unmarketable inventory or
obsolescence equal to the difference between the cost of inventory and the
estimated market value based on assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
21
Accounts Receivable; Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If the
financial condition of customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements". The objective of SFAS 157 is to increase consistency and
comparability in fair value measurements and to expand disclosures about fair
value measurements. SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 applies under other
accounting pronouncements that require or permit fair value measurements and
does not require any new fair value measurements. The provisions of SFAS No. 157
are effective for fair value measurements made in fiscal years beginning after
November 15, 2007. The adoption of this statement did not have a material effect
on our financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115". This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. Most of the
provisions of SFAS No. 159 apply only to entities that elect the fair value
option. However, the amendment to SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" applies to all entities with
available-for-sale and trading securities. SFAS No. 159 is effective as of the
beginning of an entity's first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the
provision of SFAS No. 157, "Fair Value Measurements". The adoption of this
statement did not have a material effect on our financial statements.
In December 2007, FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements - an amendment of ARB No. 51". This
statement improves the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting standards that
require; the ownership interests in subsidiaries held by parties other than the
parent and the amount of consolidated net income attributable to the parent and
to the noncontrolling interest be clearly identified and presented on the face
of the consolidated statement of income, changes in a parent's ownership
interest while the parent retains its controlling financial interest in its
subsidiary be accounted for consistently, when a subsidiary is deconsolidated,
any retained noncontrolling equity investment in the former subsidiary be
initially measured at fair value, entities provide sufficient disclosures that
clearly identify and distinguish between the interests of the parent and the
interests of the noncontrolling owners. SFAS No. 160 affects those entities that
have an outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. Early adoption is prohibited. The adoption of this statement is not
expected to have a material effect on our financial statements.
OFF BALANCE SHEET TRANSACTIONS
We are not a party to any off balance sheet transactions.
22
RESULTS OF OPERATIONS
Fiscal year ended December 31, 2007 ("Fiscal 2007") as compared to the fiscal
year ended December 31, 2006 ("Fiscal 2006")
Following are certain key indicators:
FISCAL 2007 FISCAL 2006
----------- -----------
Cost of goods sold as a percentage of sales ........ 63.5% 63.2%
Gross profit margins ............................... 37.3% 36.8%
Total operating expenses as a percentage of sales .. 292% 292%
General and administrative expenses as a percentage
of sales .......................................... 178% 179%
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Sales
Sales were essentially flat for Fiscal 2007 as compared to Fiscal 2006.
During Fiscal 2007 approximately 55% of our sales were attributable to sales of
our Teeka Tan line of sun care products as compared to approximately 61% during
Fiscal 2006, and approximately 45% of our sales were attributable to our
distribution of the Safe Sea Jellyfish Sting Protective Lotion as compared to
approximately 39% during Fiscal 2006. During Fiscal 2007 one customer accounted
for approximately 14% of our sales. We did not have a similar customer
concentration in Fiscal 2006.
Cost of Goods Sold and Gross Profit
Our cost of goods sold includes costs associated with containers,
testing, labels, lotion, freight and pallet expense. Our cost of goods sold as a
percentage of sales for Fiscal 2007 was comparable to Fiscal 2006. As a result
our gross profit margin remained relatively constant from period to period.
Total Operating Expenses
While our total operating expenses for Fiscal 2007 were relatively
unchanged from Fiscal 2006, the expenses we incurred were significantly
different. General and administrate expenses were approximately $2,500 less in
Fiscal 2007 than Fiscal 2006 which was primarily attributable to increases in
consulting fees, legal and accounting fees, including legal fees associated with
the pending transaction with Taiyuan Rongan, wages and subcontractor expense.
These increases were offset by decreases in stock compensation expense,
advertising expense, insurance, general office overhead, travel, meals and
entertainment. During Fiscal 2007 we also recognized non-cash expenses of
approximately $97,000 related to compensation under a consulting agreement for
which there was no comparable expense in Fiscal 2006. During Fiscal 2007 we also
fully expensed approximately $80,000 associated with our licensing agreement
with Safe Sea which had been accrued prior to the amendment to the agreement.
This expense was offset by a one-time gain of $75,000 as a result of the
amendment which terminated the requirement that we pay annual licensing fees.
In March 2007 we hired a Director of Sales and our operating expenses
include approximately $16,000 related to his base salary and other compensation
expense associated with the stock issued to him as additional compensation which
was being amortized over the one year term of the agreement. In May 2007 we
agreed to issue him an additional 3,000 shares of common stock valued at $9,000
pursuant to his employment agreement; however, in June 2007 we terminated this
23
employee prior to the issuance of the shares. During Fiscal 2007 we recognized
an expense of $21,250 which equals the unamortized value of the initial 500,000
shares of common stock issued to the former employee at the time of his hire and
our financial statements include a liability of $9,000 which represents the
value of the 300,000 shares of common stock which remains unissued.
During Fiscal 2006 we granted options to certain employees and
permitted those employees to pay the exercise price of the options through the
delivery of promissory notes. In Fiscal 2007 we forgave a total of $71,250 of
subscription receivable owed from two employees. The amount of this forgiveness
is compensatory to the employees and recognized compensation expense of $71,250
in Fiscal 2007 as a result of the forgiveness.
During Fiscal 2007 salary expense officers remained relatively constant
from Fiscal 2006. At December 31, 2006 we owed Messrs. John and Miller an
aggregate of $270,833 of accrued but unpaid compensation payable to them under
the terms of their employment agreements. In March 2007 they converted this
accrued but unpaid compensation into an aggregate of 5,416,600 shares of our
common stock based upon a conversion price of $0.05 per share which was equal to
the fair market value of the stock. On October 31, 2007, Messrs. John and Miller
forgave a total of $250,000 of salary accrued during Fiscal 2007 under the terms
of their employment agreement. Effective November 7, 2007 Messrs. John and
Miller forgave the $5,754 of accrued compensation for the period of November 1,
2007 through the date of the agreement and they each terminated the employment
agreement with our company in preparation of the pending closing of the
transaction with Taiyuan Rongan as described elsewhere in this report. As a
result of this termination, we are no longer accruing salaries for our executive
officers. For accounting purposes, under generally accepted accounting
principles these forgiveness were reflected as a reduction in the liability of
accrued payroll - officers and an increase in paid in capital. In addition, we
imputed compensation for Messrs. John and Miller for the period from the
termination of their employment agreements through December 31, 2007 of $15,200
as an in-kind contribution.
Total other (income) expenses
Total other (income) expenses for Fiscal 2007 primarily represented
interest expense of $29,196 as compared to interest expense of $20,138 for
Fiscal 2006. This interest relates to a $200,000 principal amount convertible
debenture which is currently in default. During Fiscal 2007 we also recognized
other income of $2,500 from the sale of miscellaneous assets and a loss of
$4,395 on the sale of a vehicle previously used by a sales representative.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate funds to support its
current and future operations, satisfy its obligations and otherwise operate on
an ongoing basis. At December 31, 2007, we had a working capital deficiency of
$241,023 as compared to a working capital deficiency of $457,765 at December 31,
2006. The change in our current assets at December 31, 2007 from December 31,
2006 included increases in accounts receivable, net, and due from third party
which was offset by decreases in cash, prepaid license and inventory.
At December 31, 2007 we had inventory of $59,353, a decrease of $61,910
from December 31, 2006. Approximately 65% of our inventory at December 31, 2007
is our Teeka Tan line of sun care products and the remaining approximate 35% is
Safe Sea Jellyfish Sting Protective Lotion, as compared to 51% and 49%,
respectively, at December 31, 2006.
24
During Fiscal 2007 we sold a vehicle owned by us to a former employee
for $3,600 which resulted in a loss on disposal of fixed assets of $4,395. We
extended the purchaser 36 month interest free terms on the sale. The purchaser
owes us $3,200 on this transaction and is satisfying this liability through
monthly payments of $100.
Our current liabilities at December 31, 2007 decreased $300,390, or
approximately 48%, from December 31, 2006. This decrease from period to period
is primarily attributable to a decrease in accrued officers' salaries as a
result of the conversion into equity of certain of those amounts as described
above and a decrease in licensing fees which were offset by an increase in
accounts payable. The increase in accounts payable is the result of our lack of
working capital which results in the slower payment of our obligations.
At December 31, 2007 we have an outstanding note payable in the
principal amount of $200,000 which was due August 26, 2007 together with accrued
interest on this note of $76,156. The note is currently in default and at March
31, 2008 the balance due under the note is $281,142. Subsequent to the execution
of the definitive agreement with Taiyuan Rongan, the note was sold by the holder
to two entities which were introduced by an intermediary in the Taiyuan Rongan
transaction. The principal and accrued interest are convertible at the option of
the holder into shares of our common stock at a conversion price of $7.50 per
share. Given that the market price of our common stock is far lower than this
conversion price, it is unlikely. As a condition precedent to the closing, we
are required to satisfy this note, however, we do not have sufficient funds to
pay the principal and accrued interest. While the note is unsecured, should the
failure of the note holders to convert the note could adversely impact our
ability to close the pending transaction with Taiyuan Rongan.
During Fiscal 2007, our cash and cash equivalents decreased $14,880.
This decrease consisted of $48,830 used in operating activities offset by
$33,950 provided by financing activities.
Cash flows used in operating activities for Fiscal 2007 decreased to
$48,830 as compared to $254,429 for Fiscal 2006. In Fiscal 2007, we used cash
provided by operations to fund our net loss of $653,109, together with an
increase in accounts receivable of $17,368, accounts payable and accrued
expenses of $16,246, accrued interest of $29,197 and accrued payroll of
$255,723. These increases were offset by decreases in inventory of $61,910 and
deposits of $1,450 and add back of non-cash items of $257,121. For Fiscal 2006,
we used cash provided by operations to fund our net loss of $645,702, together
with increases in accounts receivable of $12,086, inventory of $46,970, accrued
interest of $20,139 and accrued payroll of $270,833. These increases were offset
by a decrease in accounts payable and accrued expenses and the add back of
non-cash items of $163,688.
Cash flows used in financing activities were $33,950 for Fiscal 2007 as
compared to $221,000 for Fiscal 2006. The decrease is primarily attributable to
reduced proceeds during Fiscal 2007 from the sale of our securities as compared
to Fiscal 2006.
The report of our independent registered public accounting firm on our
consolidated financial statements as of December 31, 2007 contains an
explanatory paragraph expressing uncertainty with respect to our ability to
continue as a going concern. We are not generating significant revenues to fund
operations, and had an accumulated deficit of $2,359,115 at December 31, 2007.
While we do not presently have any commitments for capital expenditures, as set
forth above at March 31, 2008 we have a $200,000 principal amount and
approximately $81,000 outstanding under a debenture which was due in August 2007
25
and is presently in default. At present we do not have sufficient funds to
satisfy this obligation nor do we have sufficient working capital to fund our
operating expenses for the next 12 months.
While we believe in the viability of our business model, we have been
unable to raise sufficient working capital to provide funds for marketing and
expansion of our company. If the transaction with Taiyuan Rongan does not close,
it is likely we will continue to seek to close a merger or other business
combination with an operating company in an effort to provide greater value for
our stockholders. Because we do not have sufficient funds to pay our operating
expenses and the costs associated with such a search, we are reliant on our
executive officers to provide capital to us as needed. They are not, however,
contractually bound to provide any specific amount of funds. Without sufficient
working capital we could be required to cease operations in which event you
would lose your entire investment in our company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable to a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements are contained in pages F-1 through F-14,
which appear at the end of this annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A(T). CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures. We maintain
"disclosure controls and procedures" as such term is defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934. In designing and evaluating our
disclosure controls and procedures, our management recognized that disclosure
controls and procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of disclosure
controls and procedures are met. Additionally, in designing disclosure controls
and procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Based on his evaluation as of the
end of the period covered by this Annual Report on Form 10-K, and with the
participation of our consultant who also provides outsourced accounting services
to us, our President who also serves as our principal financial and accounting
officer, has concluded that our disclosure controls and procedures were
effective.
Management's Report on Internal Control Over Financial Reporting. Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) of the Securities
Exchange Act of 1934. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or the
degree of compliance with the policies or procedures may deteriorate.
26
Our management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2007. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated
Framework. Based on the assessment using those criteria, our management
concluded that the internal control over financial reporting was effective at
December 31, 2007. This annual report does not include an attestation report of
our registered public accounting firm regarding internal control over financial
reporting. Our management's report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management's report in
this annual report.
Changes in Internal Control over Financial Reporting. There have been
no changes in our internal control over financial reporting during our fourth
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE POSITIONS
----------------------- --- -------------------------------------------
Brian S. John 39 President, CEO and Director
Richard A. Miller 40 Vice President, Chief Operating Officer and
Director
Frank V. Benedetto, Jr. 36 Secretary, treasurer and Director
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Brian S. John. Mr. John has been an officer and director of our company
since our inception. He is also president of Mirador Consulting, Inc., a
corporate consulting firm in Boca Raton, Florida, which he founded in 2001. From
May 2001 to March 2002, he served as vice president and director of Disease
Sciences, Inc. From December 2000 to May 2001, he was self employed as an
independent business consultant. From March 1998 until December 2000, Mr. John
was sales manager for International Internet, working particularly for its
CigarCigar.com / StogiesOnline.com division. From December 1996 until March
1998, he was a stockbroker with various brokerage firms, most recently
registered as a representative at GKN Securities, where he held both a Series 7
and a Series 63 license. From May 1991 until April 1996, Mr. John served as
northeast area sales director for Dine-A-Mate, Inc., an entertainment and dining
guide that was later acquired by CUC International. Mr. John studied Liberal
Arts at Kutztown State University, Kutztown, Pennsylvania, from 1986 until 1991.
Richard A. Miller. Mr. Miller has served as Vice President, Chief
Operating Officer and a director of our company since April 2002. He also serves
as corporate secretary of Mirador Consulting, Inc., which he joined in March
2002. From February 2000 to March 2002, Mr. Miller served as a consultant to
Pacific Continental Securities, a securities brokerage firm in New York City,
helping to train brokers and serve and maintain investment banking clients, and
as a consultant to Dayton Scott, a corporate consulting firm, from 1999 to 2000.
In 1998, he was a recruiting manager for Robert Half International in New York
City; and from 1997 to 1998, he was a registered representative for VTR Capital
27
in New York. In December 2001 Mr. Miller filed a Petition for Chapter 7
bankruptcy protection in the United States District Court for the Eastern
District of New York and he received a discharge of debtor in June 2002. Mr.
Miller received a B.S. in Marketing from the State University of New York at
Oswego in 1990.
Frank V. Benedetto Jr. Mr. Benedetto has been Secretary, Treasurer and
a director of our company since April 2002. Mr. Benedetto also works with
Mirador Consulting, an affiliate of Messrs. John and Miller. From September 2001
to April 2002, he was employed by Disease Sciences, Inc. a biotech research
company in Boca Raton, Florida. From April 2001 to September 2001 Mr. Benedetto
was a registered representative with National Securities, a securities brokerage
firm in Fort Lauderdale, Florida, and from September 2000 to April 2001, he was
a registered representative with First Liberty Securities in Fort Lauderdale,
Florida. From 1999 to 2000, he was a registered representative with Joseph
Charles, a securities brokerage firm in Boca Raton, Florida. From 1996, he
served as president of Skyline Limousine, which he sold in 1997. Mr. Benedetto
graduated from Lynn University in Boca Raton in 1994 with a BS in behavioral
sciences.
Our officers are elected annually at the first board of directors
meeting following the annual meeting of stockholders, and hold office until
their respective successors are duly elected and qualified, unless sooner
displaced. There are no family relationship between any of the executive
officers and directors.
Messrs. John and Miller are part-time employees of our company and each
devote only approximately 25% of their time to our business and operations.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
We are not currently subject to Section 16(a) of the Securities
Exchange Act of 1934, and, therefore, our directors and executive officers, and
persons who own more than 10% of our common stock are not required to file with
the Securities and Exchange Commission reports disclosing their initial
ownership and changes in their ownership of our common stock.
CODE OF BUSINESS CONDUCT AND ETHICS
In February 2006 we adopted a Code of Ethics and Business Conduct which
is applicable to our employees and which also includes a Code of Ethics for our
CEO and principal financial officers and persons performing similar functions. A
code of ethics is a written standard designed to deter wrongdoing and to promote
o honest and ethical conduct,
o full, fair, accurate, timely and understandable disclosure in
regulatory filings and public statements,
o compliance with applicable laws, rules and regulations,
o the prompt reporting violation of the code, and
o accountability for adherence to the code.
28
A copy of our Code of Business Conduct and Ethics has been filed with
the Securities and Exchange Commission as an exhibit to our annual report. We
will provide a copy, without charge, to any person desiring a copy of the Code
of Business Conduct and Ethics, by written request to us at 5499 North Federal
Highway, Suite D, Boca Raton, Florida 33487, Attention: Corporate Secretary.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors has not established any committees, including an
Audit Committee, a Compensation Committee or a Nominating Committee, any
committee performing a similar function. The functions of those committees are
being undertaken by the entire board as a whole. Because we do not have any
independent directors, our Board of Directors believes that the establishment of
committees of the Board would not provide any benefits to our company and could
be considered more form than substance.
We do not have a policy regarding the consideration of any director
candidates which may be recommended by our stockholders, including the minimum
qualifications for director candidates, nor has our Board of Directors
established a process for identifying and evaluating director nominees. We have
not adopted a policy regarding the handling of any potential recommendation of
director candidates by our stockholders, including the procedures to be
followed. Our Board has not considered or adopted any of these policies as we
have never received a recommendation from any stockholder for any candidate to
serve on our Board of Directors. Given our relative size and lack of directors
and officers insurance coverage, we do not anticipate that any of our
stockholders will make such a recommendation in the near future. While there
have been no nominations of additional directors proposed, in the event such a
proposal is made, all members of our Board will participate in the consideration
of director nominees.
None of our directors is an "audit committee financial expert" within
the meaning of Item 401(e) of Regulation S-B. In general, an "audit committee
financial expert" is an individual member of the audit committee or Board of
Directors who:
o understands generally accepted accounting principles and financial
statements,
o is able to assess the general application of such principles in
connection with accounting for estimates, accruals and reserves,
o has experience preparing, auditing, analyzing or evaluating
financial statements comparable to the breadth and complexity to our
financial statements,
o understands internal controls over financial reporting, and
o understands audit committee functions.
Our Board of Directors is comprised of individuals who were integral to
our formation and who are involved in our day to day operations. While we would
prefer that one or more of our directors be an audit committee financial expert,
the individuals whom we have been able to attract to our Board do not have the
requisite professional backgrounds. As with most small companies until such time
our company further develops its business, achieves a stronger revenue base and
has sufficient working capital to purchase directors and officers insurance, we
do not have any immediate prospects to attract independent directors. When we
are able to expand our Board of Directors to include one or more independent
29
directors, we intend to establish an Audit Committee of our Board of Directors.
It is our intention that one or more of these independent directors will also
qualify as an audit committee financial expert. Our securities are not quoted on
an exchange that has requirements that a majority of our Board members be
independent and we are not currently otherwise subject to any law, rule or
regulation requiring that all or any portion of our Board of Directors include
"independent" directors, nor are we required to establish or maintain an Audit
Committee or other committee of our Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes all compensation recorded by us in the
last completed fiscal year for:
o our principal executive officer or other individual serving in a
similar capacity,
o our two most highly compensated executive officers other than our
principal executive officer who were serving as executive officers
at December 31, 2007 as that term is defined under Rule 3b-7 of the
Securities Exchange Act of 1934, and whose compensation exceeded
$100,000, and
o up to two additional individuals whose compensation exceeded
$100,000 and for whom disclosure would have been required but for
the fact that the individual was not serving as an executive officer
at December 31, 2007.
For definitional purposes in this annual report these individuals are
sometimes referred to as the "named executive officers."
SUMMARY COMPENSATION TABLE
--------------------------
NON-EQUITY
INCENTIVE NONQUALIFIED ALL
NAME AND STOCK OPTION PLAN DEFERRED OTHER
PRINCIPAL SALARY BONUS AWARDS AWARDS COMPENSATION COMPENSATION COMPENSATION TOTAL
POSITION YEAR ($) ($) ($) ($) ($) EARNINGS ($) ($) ($)
(A) (B) (C) (D) (E) (F) (G) (H) (I) (J)
------------------ ---- ------- ----- ------ ------ ------------ ------------ ------------ -------
Brian S. John,
CEO (1) 2007 0 0 0 0 0 0 0 0
2006 135,417 0 0 0 0 0 0 136,417
Richard A. Miller,
VP, COO (1) 2007 0 0 0 0 0 0 0 0
2006 135,417 0 0 0 0 0 0 135,417
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(1) While parties to the employment agreements described below, historically we
have not paid either Mr. John or Mr. Miller the compensation due them under
these agreements and these amounts have been accrued. At December 31, 2006 we
owed Messrs. John and Miller an aggregate of $270,833 of accrued but unpaid
compensation payable to them under the terms of their employment agreements. In
March 2007 they converted this accrued but unpaid compensation into an aggregte
of 5,416,660 shares of our common stock based upon a conversion price of $0.05
per share which was equal to the fair market value of the stock. In 2007 we
30
accrued $135,461 in compensation for each of them. In November 2007 pursuant to
the terms of the Termination and Forgiveness of Accrued Salaries entered into
with each of them, both Mr. John and Mr. Miller forgave all compensation amounts
due them which is reflected on our balance sheet at December 31, 2007 as a
contribution to capital. In addition, we imputed compensation for Messrs. John
and Miller for the period from the termination of their employment agreements
through December 31, 2007 of $15,200 as an in-kind contribution.
EMPLOYMENT AGREEMENTS AND NARRATIVE REGARDING EXECUTIVE COMPENSATION
In April 2002 we entered into five year employment agreements with each
of Messrs. John and Miller. Under the terms of such contracts, as amended,
Messrs. John and Miller were each entitled to a salary of:
o $35,000 for the 12-month period ended April 14, 2003;
o $50,000 for the 12-month period ended April 14, 2004;
o $75,000 for the 12-month period ending April 14, 2005;
o $100,000 for the 12-month period ending April 14, 2006; and
o $150,000 for the 12-month period ending April 14, 2007.
The contracts could be terminated by us with or without cause on 30
days' notice. In the event Mr. John or Mr. Miller voluntarily resigned or was
dismissed for cause, his compensation ceased as of the date of termination, but
their rights to any other compensation benefits (such as stock options, if any)
would be governed by the terms of such plan.
The terms of these employment agreements were determined by our Board
of Directors, the members of which include our executive officers who are
parties to these agreements. Our Board of Directors believed that the
compensation payable to our executive officers was appropriate in light of the
risks and uncertainty of our business, the history of accrual of previous
compensation by such individuals, the compensation levels of other executives in
similarly sized companies and their ability to command at least this level of
salary in other commercial operations. These individuals had complete authority
in determining the amount of compensation to be paid and the other terms of the
employment agreements. Our Board of Directors did not consult with any
consultants or other third parties in determining the amount of compensation to
be paid under these employment agreements.
At October 31, 2007 we owed Messrs. John and Miller an aggregate of
$250,000 of accrued but unpaid compensation payable to them under the terms of
employment agreements. On October 31, 2007 we entered into an agreement with
Messrs. John and Miller whereby the executive officers forgave this amount which
will be treated as a contribution to our capital.
On November 7, 2007 we entered into a Termination and Forgiveness of
Accrued Salary with Messrs. John and Miller whereby each voluntarily terminated
his employment agreement with us and forgave all accrued but unpaid salary from
November 1, 2007 through November 7, 2007 of $5,723. The terminations of the
employment agreements did not result in the requirement to pay either Mr. John
or Mr. Miller any compensation or severance benefits.
31
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table provides information concerning unexercised
options, stock that has not vested and equity incentive plan awards for each
named executive officer outstanding as of December 31, 2007:
OPTION AWARDS STOCK AWARDS
------------------------------------------------------------- ----------------------------------------
Equity
incentive
Market Equity plan
value incentive awards:
Equity of plan Market or
incentive shares awards: payout
plan Number or Number of value of
awards: of units unearned unearned
Number of Number of Number of shares of shares, shares,
securities securities securities or units stock units or units or
underlying underlying underlying of stock that other other
unexercised unexercised unexercised Option that have rights rights
options options unearned exercise Option have not not that have that have
(#) (#) options price expiration vested vested not not
Name exercisable unexercisable (#) ($) date (#) ($) vested (#) vested (#)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
---------- ----------- ------------- ----------- -------- ---------- -------- ------ ---------- ----------
Brian S.
John 0 0 0 0 0 0 0 0 0
Richard A.
Miller 0 0 0 0 0 0 0 0 0
|
2006 EQUITY COMPENSATION PLAN
In April 2006 our Board of Directors adopted our 2006 Equity
Compensation Plan ("2006 Equity Plan"). The purpose of the plan is to provide us
with flexibility and to conserve our cash resources in compensating certain of
our sales, administrative and professional employees and consultants. We have
reserved a total of 100,000 shares of our common stock for issuance under the
plan. As of December 31, 2007 we have granted options to purchase an aggregate
of 24,000 shares of our common stock all of which have been exercised. At
December 31, 2007 we have 76,000 shares which remain available under the 2006
Equity Plan.
The issuance of shares under the plan is restricted to persons who are
closely-related to us and who provide services in connection with the sales and
marketing of our products or otherwise in connection with our business. Shares
must be issued only for bona fide services. Shares may be awarded under the plan
pursuant to individually negotiated compensation contracts as determined and/or
approved by the board of directors or compensation committee. The eligible
participants include directors, officers, employees and non-employee consultants
and advisors. We anticipate that a substantial portion of the shares to be
issued under the plan will be issued as compensation to our employees and
consultants and advisors who provide services in the sales, marketing and
promotion of our products.
32
Our plan is administered by our Board of Directors. The Board of
Directors determines, from time to time, the individuals to whom plan options
will be granted, the terms and provisions of the plan options, the dates such
plan options will become exercisable, the number of shares subject to each plan
option, the purchase price of such shares and the form of payment of such
purchase price. All other questions relating to the administration of our plans,
and the interpretation of the provisions thereof are to be resolved at the sole
discretion of the Board of Directors.
The Board of Directors may amend, suspend or terminate 2006 Equity Plan
at any time, except that no amendment shall be made which:
o increases the total number of shares subject to the plan or changes
the minimum purchase price therefore (except in either case in the
event of adjustments due to changes in our capitalization),
o affects outstanding options or any exercise right thereunder,
o extends the term of any option beyond 10 years, or
o extends the termination date of the plan.
Unless the plan is either suspended or terminated by the Board of
Directors, the 2006 Equity Plan terminates 10 years from the date of the plan's
adoption. Any termination of the plan does not affect the validity of any
options previously granted thereunder.
Plan options under the 2006 Equity Plan may either be options
qualifying as incentive stock options under Internal Revenue Code or
non-qualified options. In addition, the 2006 Equity Plan allows for the
inclusion of a reload option provision, which permits an eligible person to pay
the exercise price of the option with shares of common stock owned by the
eligible person and receive a new option to purchase shares of common stock
equal in number to the tendered shares. Furthermore, compensatory stock amounts
may also be issued. Additionally, deferred stock grants and stock appreciation
rights may also be granted under the 2006 Equity Plan. Any incentive option
granted under the 2006 Equity Plan must provide for an exercise price of not
less than 100% of the fair market value of the underlying shares on the date of
grant, but the exercise price of any incentive option granted to an eligible
employee owning more than 10% of our outstanding common stock must not be less
than 110% of fair market value on the date of the grant.
Subject to the limitation on the aggregate number of shares issuable
under the plan, there is no maximum or minimum number of shares as to which a
stock grant or plan option may be granted to any person. Shares used for stock
grants and plan options may be authorized and unissued shares or shares
reacquired by us, including shares purchased in the open market. Shares covered
by plan options which terminate unexercised will again become available for
grant as additional options, without decreasing the maximum number of shares
issuable under the 2006 Equity Plan, although such shares may also be used by us
for other purposes.
33
The 2006 Equity Plan provides that, if our outstanding shares are
increased, decreased, exchanged or otherwise adjusted due to a share dividend,
forward or reverse share split, recapitalization, reorganization, merger,
consolidation, combination or exchange of shares, an appropriate and
proportionate adjustment shall be made in the number or kind of shares subject
to the plan or subject to unexercised options and in the purchase price per
share under such options. Any adjustment, however, does not change the total
purchase price payable for the shares subject to outstanding options. In the
event of our proposed dissolution or liquidation, a proposed sale of all or
substantially all of our assets, a merger or tender offer for our shares of
common stock, the Board of Directors may declare that each option granted under
the plan shall terminate as of a date to be fixed by the Board of Directors;
provided that not less than 30 days written notice of the date so fixed shall be
given to each participant holding an option, and each such participant shall
have the right, during the period of 30 days preceding such termination, to
exercise the participant's option, in whole or in part, including as to options
not otherwise exercisable.
The 2006 Equity Plan provides that, with respect to incentive stock
options, the aggregate fair market value (determined as of the time the option
is granted) of the shares of common stock, with respect to which incentive stock
options are first exercisable by any option holder during any calendar year
shall not exceed $100,000. The purchase price for shares subject to incentive
stock options must be at least 100% of the fair market value of our common stock
on the date the option is granted, except that the purchase price must be at
least 110% of the fair market value in the case of an incentive option granted
to a person who is a "10% stockholder." A "10% stockholder" is a person who owns
(within the meaning of Section 422(b)(6) of the Internal Revenue Code) at the
time the incentive option is granted, shares possessing more than 10% of the
total combined voting power of all classes of our outstanding shares. The 2006
Equity Plan provides that fair market value shall be determined by the Board in
accordance with procedures which it may from time to time establish. If the
purchase price is paid with consideration other than cash, the Board will
determine the fair value of such consideration to us in monetary terms. As the
2006 Equity Plan was not approved by our stockholders prior to April 11, 2007,
incentive stock options may not be awarded under the plan and any incentive
stock options previously awarded under the plan were automatically converted
into non-qualified options upon terms and conditions determined by the Board, as
nearly as is reasonably practicable, in its sole determination, the terms and
conditions of the incentive stock options being so converted. The exercise price
of non-qualified options shall be determined by the Board of Directors, but
cannot be less than the par value of our common stock on the date the option is
granted.
All plan options are nonassignable and nontransferable, except by will
or by the laws of descent and distribution, and during the lifetime of the
optionee, may be exercised only by such optionee, except as provided by the
Board. If an optionee dies while our employee or within three months after
termination of employment by us because of disability, or retirement or
otherwise, such options may be exercised, to the extent that the optionee shall
have been entitled to do so on the date of death or termination of employment,
by the person or persons to whom the optionee's right under the option pass by
will or applicable law, or if no such person has such right, by his executors or
administrators. Options are also subject to termination by the Board under
certain conditions.
34
In the event of termination of employment because of death while an
employee, or because of disability, the optionee's options may be exercised not
later than the expiration date specified in the option or one year after the
optionee's death, whichever date is earlier, or in the event of termination of
employment because of retirement or otherwise, not later than the expiration
date specified in the option or one year after the optionee's death, whichever
date is earlier. If an optionee's employment by us terminates because of
disability and such optionee has not died within the following three months, the
options may be exercised, to the extent that the optionee shall have been
entitled to do so at the date of the termination of employment, at any time, or
from time to time, but not later than the expiration date specified in the
option or one year after termination of employment, whichever date is earlier.
If an optionee's employment shall terminate for any reason other than death or
disability, optionee may exercise the options to the same extent that the
options were exercisable on the date of termination, for up to three months
following such termination, or on or before the expiration date of the options,
whichever occurs first. In the event that the optionee was not entitled to
exercise the options at the date of termination or if the optionee does not
exercise such options (which were then exercisable) within the time specified
herein, the options shall terminate. If an optionee's employment shall terminate
for any reason other than death, disability or retirement, all right to exercise
the option shall terminate not later than 90 days following the date of such
termination of employment, except as otherwise provided under the plan.
Non-qualified options are not subject to the foregoing restrictions unless
specified by the Board of Directors or Committee.
DIRECTOR COMPENSATION
Our Board of Directors is comprised of Messrs. John, Miller and
Benedetto, who are also executive officers of our company, do not receive any
compensation for their Board services.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
At March 22, 2008 we had 879,073 shares of common stock issued and
outstanding. The following table sets forth information known to us as of March
22, 2008 relating to the beneficial ownership of shares of our common stock by:
o each person who is known by us to be the beneficial owner of more
than 5% of our outstanding common stock;
o each director;
o each named executive officer; and
o all named executive officers and directors as a group.
Unless otherwise indicated, the business address of each person listed
is in care of 5499 North Federal Highway, Suite D, Boca Raton, Florida 33487.
The percentages in the table have been calculated on the basis of treating as
outstanding for a particular person, all shares of our common stock outstanding
on that date and all shares of our common stock issuable to that holder in the
event of exercise of outstanding options, warrants, rights or conversion
privileges owned by that person at that date which are exercisable within 60
days of that date. Except as otherwise indicated, the persons listed below have
sole voting and investment power with respect to all shares of our common stock
owned by them, except to the extent that power may be shared with a spouse.
35
AMOUNT AND NATURE OF PERCENTAGE
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
------------------------------------------ -------------------- ----------
Brian S. John ............................ 177,084 20.1%
Richard M. Miller ........................ 177,084 20.1%
Frank V. Benedetto, Jr ................... 125,000 14.2%
All named executive officers and directors
as a group (three persons) ............... 479,168 54.5%
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
In March 2008 we sold Mr. John, our CEO and a principal stockholder of
our company, one of the vehicles previously used by a sales person for a
purchase price of $1,000. No independent valuation of the vehicle was obtained
prior to the transaction and it is unknown if the price paid by Mr. John is at
or below the fair market value of the vehicle. We will recognize a loss of
approximately $5,189 during the first quarter of fiscal 2008 on the carrying
value of this asset.
DIRECTOR INDEPENDENCE
No member of our Board of Directors is an "independent" director within
the meaning of Marketplace Rule 4200 of The NASDAQ Stock Market.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Webb & Company, P.A. served as our independent registered public
accounting firm for fiscal 2007 and fiscal 2006. The following table shows the
fees that were billed for the audit and other services provided by this firm for
fiscal 2007 and 2006.
FISCAL 2007 FISCAL 2006
----------- -----------
Audit Fees ................................... $28,408 $21,605
Audit-Related Fees ........................... 0 0
Tax Fees ..................................... 0 500
All Other Fees ............................... 0 0
------- -------
Total .............. $28,408 $22,105
|
Audit Fees -- This category includes the audit of our annual financial
statements, review of financial statements included in our Form 10-QSB Quarterly
Reports and services that are normally provided by the independent auditors in
connection with engagements for those fiscal years. This category also includes
advice on audit and accounting matters that arose during, or as a result of, the
audit or the review of interim financial statements.
Audit-Related Fees -- This category consists of assurance and related
services by the independent auditors that are reasonably related to the
performance of the audit or review of our financial statements and are not
reported above under "Audit Fees." The services for the fees disclosed under
this category include consultation regarding our correspondence with the SEC and
other accounting consulting.
36
Tax Fees -- This category consists of professional services rendered by
our independent auditors for tax compliance and tax advice. The services for the
fees disclosed under this category include tax return preparation and technical
tax advice.
All Other Fees -- This category consists of fees for other
miscellaneous items.
Our Board of Directors has adopted a procedure for pre-approval of all
fees charged by the our independent auditors. Under the procedure, the Board
approves the engagement letter with respect to audit, tax and review services.
Other fees are subject to pre-approval by the Board, or, in the period between
meetings, by a designated member of Board. Any such approval by the designated
member is disclosed to the entire Board at the next meeting. The audit and tax
fees paid to the auditors with respect to fiscal year 2007 were pre-approved by
the entire Board of Directors.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as a part of this report or are
incorporated by reference to previous filings, if so indicated:
2.1 Form of Stock For Stock Equivalent Exchange Agreement and Plan with
Taiyuan Rongan Business Trading Company, Limited (8)
3.1 Certificate of Incorporation of Ihealth, Inc. filed April 1, 2002 (1)
3.2 Certificate of Amendment to Certificate of Incorporation filed
February 9, 2003 (1)
3.3 By-laws (1)
3.4 Certificate of Amendment to the Certificate of Incorporation filed on
December 16, 2005 (2)
3.5 Certificate of Amendment to the Certificate of Incorporation filed on
March 6, 2007 (10)
3.6 Certificate of Amendment to the Certificate of Incorporation filed on
November 27, 2007 (9)
3.7 Certificate of Correction filed on December 4, 2007 (9)
4.1 Form of Series A Warrant (1)
4.2 Form of Series B Warrant (1)
4.3 Form of Series C Warrant (1)
4.4 Form of $0.15 common stock purchase warrant (3)
4.5 Form of warrant issued to The Chesapeake Group, Inc. (7)
10.1 Employment agreement with Brian S. John dated April 15, 2002 (1)
10.2 Amendment to Mr. John's employment agreement dated
December 20, 2003 (1)
10.3 Amendment No. 2 to Mr. John's employment agreement dated
February 5, 2004 (1)
10.4 Amendment No. 3 to Mr. John's employment agreement, dated April 1, 2004
(1)
10.5 Employment agreement with Richard A. Miller dated April 15, 2002 (1)
10.6 Amendment to Mr. Miller's employment agreement dated December 20, 2003
(1)
37
|
10.7 Amendment No. 2 to Mr. Miller's employment agreement dated
February 5, 2004 (1)
10.8 Amendment No. 3 to Mr. Miller's employment agreement, dated
April 1, 2004 (1)
10.9 $200,000 principal amount convertible debenture (1)
10.10 Rescission Offer (1)
10.11 Term Sheet for Exclusive Distribution Agreement with Nidaria Technology
Ltd. (5)
10.12 2006 Equity Compensation Plan (7)
10.13 Form of Stock Assignment and Agreement with SYVAX, Inc. d/b/a Shark
Defense (7)
10.14 Extension of Maturity Date of Convertible Debenture (7)
10.15 Form of $3,000 demand note issued on October 31, 2006 (7)
10.16 Investor Relations Agreement dated November 30, 2006 by and between
Teeka Tan Products, Inc. and The Chesapeake Group, Inc. (7)
10.17 Scientific Advisor Agreement dated January 29, 2007 by and between
Teeka Tan Products, Inc. and Patrick Rice (10)
10.18 Termination and Forgiveness of Accrued Salary dated November 7, 2007
between Teeka Tan Products, Inc., Brian S. John and Richard A. Miller
(8)
14.1 Code of Business Conduct and Ethics (4)
21.1 Subsidiaries of the registrant (1)
23.1 Consent of Webb & Company, P.A. *
31.1 Section 302 Certificate of Chief Executive Officer *
31.2 Section 302 Certificate of principal financial and accounting officer *
32.1 Section 906 Certificate of Chief Executive Officer *
|
* filed herewith
(1) Incorporated by reference to the registration statement on Form SB-2,
SEC file number 333-109548, as amended.
(2) Incorporated by reference to the Current Report on Form 8-K as filed on
December 19, 2005.
(3) Incorporated by reference to the Quarterly Report on Form 10-QSB for
the period ended March 31, 2005.
(4) Incorporated by reference to the Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2005.
(5) Incorporated by reference to the Current Report on Form 8-K as filed on
March 14, 2006.
(6) Incorporated by reference to the registration statement on Form S-8,
SEC file number 333-133244 as filed
(7) Incorporated by reference to the registration statement on Form SB-2,
SEC file number 139922, filed on January 1, 2007.
(8) Incorporated by reference to the Current Report on Form 8-K as filed on
November 14, 2007.
(9) Incorporated by reference to the Current Report on Form 8-K as filed on
December 13, 2007.
(10) Incorporated by reference to the Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2006.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHINA GROWTH DEVELOPMENT, INC.
By: /s/ Brian S. John
-----------------
Brian S. John, Chief Executive Officer, President,
director, principal executive officer and
principal accounting and financial office
Date: April 9, 2008
|
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Brian S. John Chief Executive Officer,
----------------- President and director April 9, 2008
Brian S. John
/s/ Richard S. Miller Vice President, Chief
--------------------- Operating Officer and April 9, 2008
Richard S. Miller director
/s/ Frank V. Benedetto, Jr. Director April 9, 2008
---------------------------
Frank V. Benedetto, Jr.
|
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of:
China Growth Development, Inc. and subsidiary
We have audited the accompanying consolidated balance sheets of China Growth
Development, Inc. (F/K/A Teeka Tan Products, Inc.) and subsidiary as of December
31, 2007 and 2006, and the related statements of operations, changes in
stockholders' deficiency and cash flows for the two years then ended. 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 audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly in all material respects, the financial position of China Growth
Development, Inc. (F/K/A Teeka Tan Products, Inc.) and subsidiary as of December
31, 2007 and 2006 and the results of its operations and its cash flows for the
two years then ended in conformity with accounting principles generally accepted
in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 11 to
the consolidated financial statements, the Company had a net loss of $653,109, a
working capital deficiency of $241,023, a stockholders' deficiency of $230,677
and used cash in operations of $48,830. This raises substantial doubt about its
ability to continue as a going concern. Management's plans concerning this
matter are also described in Note 11. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
WEBB & COMPANY, P.A.
Certified Public Accountants
Boynton Beach, Florida
March 28, 2008
F-1
CHINA GROWTH DEVELOPMENT, INC. AND SUBSIDIARY
(FKA TEEKA TAN PRODUCTS, INC. AND SUBSIDIARY)
CONSOLIDATED BALANCE SHEETS
December 31,
2007 2006
ASSETS
CURRENT ASSETS:
Cash ........................................... $ 1,707 $ 16,587
Accounts receivable, net ....................... 18,336 14,827
Due from third party ........................... 3,400 -
Prepaid license ................................ - 13,767
Inventory ...................................... 59,353 121,263
----------- -----------
Total currents assets ........................ 82,796 166,444
Property and equipment, net ...................... 10,346 24,899
Deposits ......................................... - 1,450
----------- -----------
TOTAL ASSETS ................................... $ 93,142 $ 192,793
=========== ===========
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Account payable .................................. $ 38,663 $ 31,417
Accrued licenses ................................. - 75,000
Accrued interest ................................. 76,156 46,959
Accrued payroll officers' ....................... 9,000 270,833
Note payable ..................................... 200,000 200,000
----------- -----------
Total current liabilities .................... 323,819 624,209
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock $.0001 par value 10,000 shares ... - -
Shares authorized 0 shares issued and outstanding
Common stock $.0001 par value 200,000,000 shares
authorized 879,073 and 817,906 shares issued and
outstanding, respectively ....................... 88 82
Additional paidin capital ........................ 2,128,350 1,567,000
Deferred compensation ............................ - (162,492)
Subscription receivable .......................... - (130,000)
Accumulated deficit .............................. (2,359,115) (1,706,006)
----------- -----------
TOTAL STOCKHOLDERS' DEFICIT .................... (230,677) (431,416)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT .... 93,142 192,793
=========== ===========
|
See accompanying notes to consolidated financial statements.
F-2
CHINA GROWTH DEVELOPMENT, INC. AND SUBSIDIARY
(FKA TEEKA TAN PRODUCTS, INC. AND SUBSIDIARY)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
December 31,
2007 2006
--------- ---------
Sales ............................................ $ 244,677 $ 245,312
Cost of goods sold ............................... 153,376 155,077
--------- ---------
Gross Profit ................................... 91,301 90,235
OPERATING EXPENSES:
General and administrative expenses ............ 435,838 438,341
Salary expense officers' ....................... 270,923 270,833
Depreciation ................................... 6,558 7,820
--------- ---------
TOTAL OPERATING EXPENSES ....................... 713,319 716,994
--------- ---------
Net loss from operations ......................... (622,018) (626,759)
Other (Income) and Expenses
Other Income ................................... (2,500) -
Loss on sale of fixed assets ................... 4,395 -
Interest expense ............................... 29,196 20,138
Interest income ................................ - (1,195)
--------- ---------
Total other (income) expenses .................... 31,091 18,943
Net loss before income taxes ................... (653,109) (645,702)
--------- ---------
Income taxes ................................... - -
NET LOSS ......................................... $(653,109) $(645,702)
--------- ---------
Weighted average number of common shares
outstanding Basic and Fully Diluted ............ 868,788 604,853
========= =========
Basic and Fully diluted net loss per share ....... $ (0.75) $ (1.07)
========= =========
|
See accompanying notes to consolidated financial statements.
F-3
CHINA GROWTH DEVELOPMENT, INC. AND SUBSIDIARY
(FKA TEEKA TAN PRODUCTS, INC. AND SUBSIDIARY)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFECIT
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
Common Stock Additional
------------------ Paid-in Deferred Subscription Accumulated
Shares Amount Capitial Compensation Receviable Defecit Total
------- -------- ---------- ------------ ------------ ------------ ---------
Balance December 31, 2005 ................... 559,006 $ 56 $ 271,515 $ - $ - $(1,060,304) $(788,733)
Sale of common stock ........................ 50,200 5 250,995 - - - 251,000
Common stock options ........................ - - 39,284 - - - 39,284
Common Stock issued to employees ............ 20,000 2 129,998 - (130,000) - -
Common Stock issued for services ............ 15,000 2 79,998 (50,000) - - 30,000
Warrants issued for services ................ - - 134,270 (134,270) - - -
Amortization of deferred compensation ....... - - - 21,778 - - 21,778
Capital contribution ........................ - - 487,257 - - - 487,257
Reclassification of rescission common stock . 173,700 17 173,683 - - - 173,700
Net Loss .................................... - - - - - (645,702) (645,702)
------- -------- ---------- ----------- ----------- ----------- ---------
Balance December 31, 2006 ................... 817,906 $ 82 $1,567,000 $ (162,492) $ (130,000) $(1,706,006) $(431,416)
Conversion of salary to common stock ........ 54,167 5 270,828 - - - 270,833
Common stock to employee .................... 5,000 1 24,999 (25,000) - - -
Common stock issued to consultants .......... 5,000 - 19,600 - - - 19,600
Sale of common stock for cash ............... 2,000 - 10,000 - - - 10,000
Forgiveness of salary ....................... - - 255,723 - - - 255,723
In-Kind contribution of salary .............. - - 15,200 - - - 15,200
Amortization of licenses .................... - - - 65,432 - - 65,432
Amort of financing agreement ................ - - - 97,060 - - 97,060
Amortization of stock issued to employee .... - - - 25,000 - - 25,000
Cancellation of stock subscription .......... (5,000) - (35,000) - 35,000 - -
Cash received for stock subscription ........ - - - - 23,750 - 23,750
Forgiveness of stock subscription receivable. - - - - 71,250 - 71,250
Net loss for the year ended December 31, 2007 - - - - - (653,109) (653,109)
------- -------- ---------- ----------- ----------- ----------- ---------
879,073 $ 88 $2,128,350 $ - $ - $(2,359,115) $(230,677)
======= ======== ========== =========== =========== =========== =========
See accompanying notes to consolidated financial statements.
F-4
|
CHINA GROWTH DEVELOPMENT, INC. AND SUBSIDIARY
(FKA TEEKA TAN PRODUCTS, INC. AND SUBSIDIARY)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended
December 31,
2007 2006
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................... $(653,109) $(645,702)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation ..................................... 6,558 7,820
Decrease in reserve for uncollectible accounts
receivable ...................................... 13,859 3,573
Loss on sale of fixed assets ..................... 4,395 -
Gain on settlement of licensing fees ............. (75,000) -
Stock compensation ............................... 207,092 69,284
Amortization of prepaid licenses ................. 13,767 61,233
Amortization of warrants ......................... - 21,778
Imputed compensation ............................. 15,200 -
Forgiveness of subscription receivable ........... 71,250 -
Changes in operating assets and liabities
Increase in accounts receivable .................. (17,368) (12,086)
(Increase) / decrease in inventory .............. 61,910 (46,970)
Decrease in deposits ............................. 1,450 -
Increase / (decrease) in accounts payable and
accrued expenses ................................ 16,246 (4,331)
Increase in accrued interest ..................... 29,197 20,139
Increase in accrued payroll ...................... 255,723 270,833
--------- ---------
CASH FLOWS USED IN OPERATING ACTIVITIES .......... (48,830) (254,429)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of note payable related party ......... - (30,000)
Proceeds from third party ........................ 200 -
Proceeds from issuance of common stock ........... 10,000 251,000
Proceeds from subscription receivable ............ 23,750 -
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES ............... 33,950 221,000
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS ......... (14,880) (33,429)
CASH AND CASH EQUIVALENTS, Beginning ............... 16,587 50,016
--------- ---------
CASH AND CASH EQUIVALENTS, Ending .................. $ 1,707 $ 16,587
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Interest paid ...................................... $ - $ -
========= =========
Income taxes ....................................... $ - $ -
========= =========
|
During 2007, two Officers converted $270,828 of accrued Officers salary into
common stock.
During 2007, two Officers forgave $255,823 of accrued Officers salary.
During 2007, the Company issued a note receivable in the amount of $3,400 to a
third party pursuant to the sale of the car.
See accompanying notes to consolidated financial statements.
F-5
CHINA GROWTH DEVELOPMENT, INC. AND SUBSIDIARY
(FKA TEEKA TAN PRODUCTS, INC. AND SUBSIDIARY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2007
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
IHealth Inc. was a Delaware corporation formed in April 2002. In December 2005,
Ihealth, Inc changed its name to Teeka Tan Products Inc. Teeka Tan Products Inc
is engaged in the business of marketing and retailing a broad line of high
quality value-priced sun care products in Florida through its wholly owned
subsidiary Teeka Tan, Inc. Teeka Tan Products Inc. and Teeka Tan, Inc. are
hereafter referred to as (the "Company"). On December 13, 2007 the Company
changed its name to China Growth Development, Inc.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Teeka Tan, Inc. Intercompany accounts and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue is recognized when earned, as products are completed and delivered to
customers. If the Company had any merchandise on consignment, the related sales
from merchandise on consignment would be recorded when the retailer sold such
merchandise.
SHIPPING AND HANDLING COSTS
Amounts billed to customers in sales transactions related to shipping and
handling represent revenues earned for the goods provided and are included in
sales. Costs of shipping and handling are included in the cost of goods sold.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid temporary cash investments with an
original maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
The Company is required to estimate the collectability of its accounts
receivable. The Company's reserve for doubtful accounts is estimated by
management based on a review of historic losses and the age of existing
receivables from specific customers.
CONCENTRATION OF CREDIT RISK
During 2007 91% and 9%, of the Company's products were produced by two
manufacturers. During 2006 94% and 6%, of the Company's products were produced
by two manufacturers.
During 2007, one customer accounted for 14% of the Company's sales. During 2006,
no one customer accounted for more the 10% of the Company's sales.
At December 31, 2007 one customer accounted for 56% of the Company's accounts
receivable.
F-6
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORIES
The Company's inventories consist of purchased finished goods, labels and
bottles. Inventories are stated at lower of cost or market. Cost is determined
on the first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the individual assets. The estimated useful life of property and
equipment is between three to five years.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Total advertising costs charged to
operations for the years ended December 31 2007 and 2006 amounted to $1,015, and
$19,555 respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash, receivables,
accounts payable, accrued expenses and notes payable approximate fair value
based on the short-term maturity of these instruments.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes as set
forth in SFAS 109, "Accounting for Income Taxes." Under the liability method,
deferred taxes are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse. Income tax
expense for the year ended December 31, 2007 and 2006 is summarized as follows:
2007 Current Deferred Total
------- -------- -----
Federal $ - $ - $ -
State - - -
------- -------- -----
$ - $ - $ -
======= ======== =====
2006
Federal $ - $ - $ -
State - - -
------- -------- -----
$ - $ - $ -
======= ======== =====
|
F-7
Income tax expense for the years ended December 31, 2007 and 2006 differed from
amounts computed by applying the statutory U.S. federal corporate and state
income tax rate of 34% to income before income tax benefit as a result of the
following:
Expected income tax expense (benefit) from operations .. $(245,765)
Temporary differences .................................. 1,345
Permanent differences .................................. 99,209
Valuation allowance .................................... 145,211
---------
$ -
=========
|
The effects of the temporary differences that gave rise to significant portions
of deferred tax assets and liabilities at December 31, 2007 and 2006 are as
follows:
Deferred tax assets:
2007 2006
--------- ---------
Net operating loss carryforward (benefit)... $(444,438) $(299,227)
--------- ---------
Total gross deferred tax assets ............ (444,438) (299,227)
Less valuation allowance ................... 444,438 299,227
--------- ---------
Net deferred tax assets .................... $ - $ -
========= =========
|
The Company has a net operating loss carryforward of approximately $1,188,241
available to offset future taxable income through 2027. The valuation allowance
at December 31, 2007 and 2006 was $444,438 and $299,227, respectively. The net
change in the valuation allowance for the year ended December 31, 2007 was an
increase of $145,211.
LOSS PER SHARE
The Company has adopted SFAS 128, "Earnings per Share." Loss per common share
are computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding during the period. Stock options
were not included in the computation of loss per share for the periods presented
because their inclusion is anti-dilutive. During the year ended December 31,
2007 and 2006 the Company had convertible notes and accrued interest of $276,156
and $246,959, That would have converted into 36,821 and 32,928 shares of common
stock, respectively. During the years ended 31, 2007 and 2006 the Company had
common stock warrants that would have converted into 30,000 of common stock.
BUSINESS SEGMENTS
The Company operates in one segment and therefore segment information is not
presented.
STOCK BASED COMPENSATION
Effective January 1, 2006 The Company adopted SFAS No. 123R "Share-Based
Payment" ("SFAS 123R"), a revision to SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). Prior to the adoption of SFAS 123R the Company
accounted for stock options in accordance with APB Opinion No. 25 "Accounting
for Stock Issued to Employees" (the intrinsic value method), and accordingly,
recognized no compensation expense for stock option grants.
F-8
Under the modified prospective approach, the provisions of SFAS 123R apply to
new awards and to awards that were outstanding on January 1, 2006 that are
subsequently modified, repurchased pr cancelled. Under the modified prospective
approach, compensation cost recognized in the year ended December 31, 2006
includes compensation cost for all share-based payments granted prior to, but
not yet vested as of January 1, 2006, based on the grant -date fair value
estimated in accordance with the original provisions of SFAS 123, and the
compensation costs for all share-based payments granted subsequent to January
31, 2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123R. Prior periods were not restated to reflect the impact
of adopting the new standard.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". The
objective of SFAS 157 is to increase consistency and comparability in fair value
measurements and to expand disclosures about fair value measurements. SFAS 157
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements and does not require any new fair
value measurements. The provisions of SFAS No. 157 are effective for fair value
measurements made in fiscal years beginning after November 15, 2007. The
adoption of this statement is not expected to have a material effect on the
Company's future reported financial position or results of operations.
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FASB Statement No. 115". This statement permits
entities to choose to measure many financial instruments and certain other items
at fair value. Most of the provisions of SFAS No. 159 apply only to entities
that elect the fair value option. However, the amendment to SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities" applies to
all entities with available-for-sale and trading securities. SFAS No. 159 is
effective as of the beginning of an entity's first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided the entity also elects
to apply the provision of SFAS No. 157, "Fair Value Measurements". The adoption
of this statement is not expected to have a material effect on the Company's
financial statements.
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 160, "Noncontrolling Interests in Consolidated Financial Statements - an
amendment of ARB No. 51". This statement improves the relevance, comparability,
and transparency of the financial information that a reporting entity provides
in its consolidated financial statements by establishing accounting and
reporting standards that require; the ownership interests in subsidiaries held
by parties other than the parent and the amount of consolidated net income
attributable to the parent and to the noncontrolling interest be clearly
identified and presented on the face of the consolidated statement of income,
changes in a parent's ownership interest while the parent retains its
controlling financial interest in its subsidiary be accounted for consistently,
when a subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary be initially measured at fair value,
entities provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners. SFAS No. 160 affects those entities that have an outstanding
noncontrolling interest in one or more subsidiaries or that deconsolidate a
subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods
F-9
within those fiscal years, beginning on or after December 15, 2008. Early
adoption is prohibited. The adoption of this statement is not expected to have a
material effect on the Company's financial statements.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2007 consisted of the following:
Accounts receivable ........................... $ 23,536
Less allowance for doubtful accounts .......... (5,200)
--------
Accounts receivable, net ............... $ 18,336
|
During the year ended December 31, 2007 the Company decreased its allowance for
doubtful accounts $13,859. During the year ended December 31, 2006 the Company
increased its allowance for doubtful accounts $3,573.
NOTE 4. PROPERTY AND EQUIPMENT
At December 31, 2007 property and equipment consisted of the following:
Computer equipment ............................ $ 1,882
Automobiles ................................... 15,474
Equipment ..................................... 7,000
Less accumulated depreciation ................. (14,010)
--------
$ 10,346
|
Depreciation expense for the year ended December 31, 2007 and 2006 was $6,558
and $7,820, respectively.
In September 2007 the Company sold an automobile to an employee for a note
receivable of $3,600.The note is payable on demand and does not accrue interest.
The Company recorded a loss on the sale of the automobile of $4,395.
NOTE 5. ACCRUED LICENSES
On March 13, 2006, the Company entered into a licensing agreement. The terms of
the agreement state that the licensing fees are due for each year on the first
date of that year. Licensing fees for the period March 13, 2006 to March 13,
2007 amounted to $75,000. The Company is amortizing the costs of these licenses
over the term of the agreement. For the three months ended March 31, 2007 and
2006 the Company recorded amortization expense of $70,274 and $4,726,
respectively. In May 2007 both parties mutually agreed to cancel the agreement
and to forgive all amounts owed. During the Three and Six months ended June 30,
2007 the Company recognized a $75,000 gain on the forgiveness of the accrued
licensing fees.
NOTE 6. ACCRUED PAYROLL - OFFICERS
As of December 31, 2007, the Company had no payroll liabilities due to senior
management of the Company for compensation. The officers of the Company have
elected to defer the payment of these accrued salaries until such time as we
have sufficient working capital to satisfy these obligations. In March 2007 two
executive officers converted a total of $270,833 of accrued salary into shares
of 54,167 shares of common stock at a price of $5.00 per share which was equal
to the fair value of the stock on the date of conversion. In April 2007 the
Company extended their employment agreement for one year. For the year ended
December 31, 2007 and 2006 the Company recorded an expense of $270,923 and
F-10
$270,833, respectively, for payroll due to senior management. In October, 2007
two executive officers forgave a total of $250,000 of accrued salaries and in
November, 2007 Messrs. forgave an additional $5,723 of accrued compensation. In
addition, effective November 7, 2007 the two executive officers terminated their
employment agreements with the Company. The Company imputed compensation expense
of $15,200 for the two executive officers for period of November to December
2007.
NOTE 7. COMMITMENTS AND CONTINGENCIES
In May 2007 the Company agreed to issue an employee an additional 3,000 share of
common stock valued at $9,000 pursuant to his employment agreement. The Company
terminated the employee in June 2007 and has not issued the employee the common
stock. Management has asserted the employee did not perform services to earn the
common stock. As of December 31, 2007 the Company has accrued a liability of
$9,000 for the value of the Common Stock.
On March 13, 2006, the Company entered into an agreement with Nidaria Technology
Ltd. providing the Company with exclusive distribution rights for Nidaria's Safe
Sea sun care products in the United States, Mexico and Caribbean for a period of
five years. Pursuant to the agreement the Company committed to a five year
marketing budget expenditure of at least $1 million. In addition the Company
agreed to pay Nidaria for the exclusive rights the following additional
compensation:
In May 2007 both parties mutually agreed to cancel the agreement and to forgive
all amounts owed.
NOTE 8. CONVERTIBLE NOTE PAYABLE - STOCKHOLDER
In August 2004 the Company issued a $200,000 convertible debenture to a
principal stockholder of the Company. The debenture pays interest of 10% per
annum, and all principal and accrued interest is due on or before August 26,
2006. Commencing on August 26, 2005 all or any portion of the principal amount
of debenture and any accrued but unpaid interest was convertible at the option
of the holder into shares of our common stock at a conversion price of $7.50 per
share. There was no beneficial conversion feature on the issue of the note
payable. On August 26, 2006 both parties agreed to extend the maturity date of
the note until August 26, 2007. As of December 31, 2007 the note is in default.
Accrued interest at December 31, 2007 was $76,156.
NOTE 9. EQUITY TRANSACTIONS
In April 2006, the Company's Board of Directors adopted the Teeka Tan Products,
Inc. 2006 Equity Compensation Plan (the "Plan"). The Company has reserved
10,000,000 shares of its common stock for issuance under the Plan, which was
adopted to provide the Company with flexibility in compensating certain of its
sales, administrative and professional employees and consultants and to conserve
its cash resources. The issuance of shares under the Plan is restricted to
persons who are closely-related to the Company and who provide it with bona fide
services in connection with the sales and marketing of its products or otherwise
in connection with its business as compensation. The eligible participants
include directors, officers, employees and non-employee consultants and
advisors. Management of the Company anticipates that a substantial portion of
the shares available under the Plan will be issued over time as compensation to
its employees and consultants and advisors who provide services in the sales,
marketing and promotion of the Company's products. The Board of Directors has no
present intent to issue any shares under the Plan to members of the Board who
are also the Company's executive officers.
F-11
In April 2006 the Company issued a total of 15,000 common stock options pursuant
to the Plan at an exercise price of $7.00 per share as compensation to three
employees. The fair market value of the options was estimated on the grant date
using the Black-Scholes option pricing model as required under SFAS 123R with
the following weighted average assumptions: expected dividend yield 5.0%,
volatility 139%, risk-free interest rate of 4.5%, and expected warrant life of
three months. The Company valued these options at $39,284. The Company received
a $35,000, 4% demand promissory note from each of the three employees. During
the three months ended June 30, 2007 a former employee returned 5,000 shares of
common stock and the Company cancelled the subscription receivable. The Company
cp;;ected $15,000 on the remaining $70,000 and forgave $55,000 in December 2007.
In October 2006 the Company issued a total of 5,000 common stock options
pursuant to the Plan at an exercise price of $5.00 per share as compensation to
an employee. The fair market value of the options was estimated on the grant
date using the Black-Scholes option pricing model as required under SFAS 123R
with the following weighted average assumptions: expected dividend yield 0%,
volatility 155%, risk-free interest rate of 5.1%, and expected warrant life of
three months. The value of these option were immaterial. The Company received a
$35,000, 4% demand promissory note from the employee. The Company recorded a
subscription receivable in the amount of $25,000 for this demand notes. Between
January and February, 2007 the Company received $8,750 in payments on the
subscription receivable. In October 2007, the Company forgave the remaining
$16,250 of the subscription receivable.
Reverse Stock Split
On November 12, 2007, the Company's stockholders approved a 1 for 100 reverse
stock split for its common stock. As a result, stockholders of record at the
close of business on December 13, 2007, received one shares of common stock for
every hundred shares held. Common stock, additional paid-in capital and share
and per share data for prior periods have been restated to reflect the stock
split as if it had occurred at the beginning of the earliest period presented.
COMMON STOCK AND WARRANTS
In November, 2006 entered into a one year agreement for certain investor and
public relations services. The Company issued 10,000 shares of common stock with
a fair value of $50,000 on the date of issuance together with 10,000 warrants
with exercise price of $5.00 per share, 10,000 warrants with exercise price of
$6.00 and 10,000 warrants with exercise price of $7.00 per share expiring on
January 31, 2008. The fair value of the warrants was estimated on the grant date
using the Black-Scholes option pricing model as required under SFAS 123 and
EITF-96-18 with the following weighted average assumptions: expected dividend
yield 4.91%, volatility 155%, risk-free interest rate of 4.91%, and expected
warrant life of six months. The Company fair valued these warrants at $56,069.
For the year ended December 31, 2006 the Company recorded $9,009 of amortization
expense associated with the common stock and warrants. In April 2007 both
parties agreed to mutually cancel and the agreement and the public relation firm
returned it warrants. During the year ended December 31, 2007 the Company
expensed $97,060.
During 2007 the Company received a total $23,750 from two employees for payment
of there subscription receivables. In June, 2007 a former employee returned
5,000 shares of common stock and the Company cancelled the subscription
receivable. In December 2007 the Company forgave a total of $71,250 owed by
three employees for there subscription receivables.
In February 2007 the Company issued 2,000 shares of common stock for cash
proceeds of $10,000 to a investor.
F-12
In March 2007 two executive officers converted a total of $270,833 of accrued
salary into shares of 54,167 shares of common stock at a price of $5.00 per
share which was equal to the fair value of the stock on the date of conversion.
In March 2007 the Company issued 5,000 shares of common with a fair value of
$25,000 on the date of issuance to an employee for services. The Company is
amortizing the value over the one year term of the employees employment
agreement. In May 2007 the Company agreed to issue the employee an additional
3,000 share of common stock valued at $9,000 pursuant to his employment
agreement. The Company terminated the employee in June 2007 and has not issued
the employee the common stock. Management has asserted the employee did not
perform services to earn the common stock. As of December 31, 2007 the Company
has accrued a liability of $9,000 for the value of the Common Stock. During the
year ended December 31, 2007 the Company expensed $21,250 the unamortized value
of the common stock received.
In March 2007 the Company issued 2,000 shares of common with a fair value of
$10,000 on the date of issuance to a consultant for services.
In March 2007 the Company issued 1,000 shares of common with a fair value of
$4,000 on the date of issuance to a consultant for services.
In July 2007 the Company issued 2,000 shares of common stock with a fair value
of $5,600 on the date of issuance to a consultant for services.
WARRANTS
During the year ended December 31, 2005 the Company sold a total of 20,000 units
to three investors, Each unit includes a share of common stock at $7.50 per
share of common stock and one warrant at $.15 per share of common stock that is
exercisable for three years from the date of issuance.
The Company issued 10,000 warrants on March 13, 2006, at an exercise price of
$5.00 per share as partial compensation for licensing fees. The fair market
value of the warrants was estimated on the grant date using the Black-Scholes
option pricing model as required under SFAS 123 with the following weighted
average assumptions: expected dividend yield 4.5%, volatility 139%, risk-free
interest rate of 4.5%, and expected warrant life of one year. The Company fair
valued these warrants at $78,201. For the three months ended March 31, 2007 the
Company recorded $3,856 of amortization expense associated with the warrants.
The warrants expire on December 31, 2008.
IMPUTED COMPENSATION
The Company imputed compensation expense of $15,200 for the two executive
officers for period of November and December 2007.
AUTHORIZED SHARES
In September 2003 the Company amended the Certificate of Incorporation
authorizing for the Company to increase its authorized shares to 200,000,000 of
common stock.
PREFERRED STOCK
In March 2007 the Company amended its Certificate of Incorporation to authorize
a class of 10,000 shares of blank check preferred stock, par value $0.0001 per
share. Such shares are issuable with such designations, voting powers, if any,
F-13
preferences and relative, participating, optional or other special rights, and
such qualifications, limitations and restrictions, as are determined by
resolution of the Company's board of directors.
NOTE 10. RELATED PARTY TRANSACTIONS
As of December 31, 2007, the Company had no payroll liabilities due to senior
management of the Company for compensation. The officers of the Company have
elected to defer the payment of these accrued salaries until such time as we
have sufficient working capital to satisfy these obligations. In March 2007 two
executive officers converted a total of $270,833 of accrued salary into shares
of 54,167 shares of common stock at a price of $5.00 per share which was equal
to the fair value of the stock on the date of conversion. In April 2007 the
Company extended their employment agreement for one year. For the year ended
December 31, 2007 and 2006 the Company recorded an expense of $270,923 and
$270,833, respectively, for payroll due to senior management. In October, 2007
two executive officers forgave a total of $250,000 of accrued salary and in
November, 2007 Messrs. forgave an additional $5,723 of accrued compensation. In
addition, effective November 7, 2007 the Two executive officers terminated their
employment agreements with the company. The Company imputed compensation expense
of $15,200 for the two executive officers for period of November and December
2007.
NOTE 11. GOING CONCERN
As reflected in the accompanying financial statements, the Company has a net
loss of $653,110 for the year ended December 31, 2007, a working capital
deficiency of $241,023, a stockholders' deficiency of $230,677. These factors
raise substantial doubt about the Company's ability to continue as a going
concern.
The Company's continued existence is dependent upon its ability to raise capital
and to successfully market and sell its products. The financial statements do
not include any adjustments that might be necessary should the Company be unable
to continue as a going concern.
NOTE 12. SUBSEQUENT EVENT
In September 2007 the Company announced that it had signed a letter of intent to
acquire the Taiyuan Rongan Business Trading Company ("Taiyuan Rongan"), located
in Taiyuan, Shanxi Province, China, in a stock for stock exchange. On November
12, 2007 the Company entered into a Stock for Stock Equivalent Exchange
Agreement and Plan with Taiyuan Rongan and all of its current capital
contributors pursuant to which at closing the Taiyuan Rongan Shareholders will
assign 80% of the 100% of capital contributions in Taiyuan Rongan to the Company
in exchange for an aggregate of 31,500,000 shares of the Company's common stock
and common stock purchase warrants to purchase an aggregate of 1,400,000 shares
of the Company's common stock at an exercise price of $0.50 per share.
In addition, it is a condition of closing of the agreement that an outstanding
$200,000 principal amount convertible promissory note be satisfied prior to
closing by issuing 2,590,934 shares of the Company's common stock (post-split).
The closing of the agreement will result in a change of control of the Company
and at closing, the Company's current executive officers and directors will
resign and executive officers and directors designated by Taiyuan Rongan will be
elected. At closing the Company will also issue Mirador Consulting, an affiliate
of the Company's executive officers, a one year common stock purchase warrant to
purchase 500,000 shares of common stock at an exercise price of $1.00 per share.
F-14
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