LIUYANG FIREWORKS LIMITED (Formerly New Legend Group Limited) CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2009 (Unaudited)
Notice of Auditor Review of Interim Financial Statements
In accordance with National Instrument 51-102, Part 4, subsection 4.4(3)(a) the Company discloses that its auditors, Lo Porter Hetu, Certified Gernal Accountants, have not reviewed the unaudited comparative financial statements for the three and six months ended June 30, 2008. However, the auditor has reviewed the unaudited finnacial statements for the three and six months ended June 30, 2009.
LIUYANG FIREWORKS LIMITED (Formerly New Legend Group Limited) INDEX TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
June 30, 2009 (Unaudited)
Page
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY CONSOLIDATED STATEMENT OF CASH FLOWS NOTES TO THE UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1 2 3 4 5 - 14
LIUYANG FIREWORKS LIMITED (Formerly New Legend Group Limited)
CONSOLIDATED INTERIM BALANCE SHEET As at June 30, 2009 (Unaudited) 2009 June 30 Canadian $
ASSETS CURRENT Cash and cash equivalents Short term investment Accounts receivable Inventory (Note 4) Taxes recoverable Prepaid expenses Due from related parties (Note 5) Due from shareholders PROPERTY AND EQUIPMENT (Note 6) DEFERRED CHARGES $ LIABILITIES CURRENT Bank indebtedness (Note 7) Accounts payable and accrued liabilities Due to related parties (Note 5) Unearned revenue
2008 December 31 Canadian $
$
5,020,519 5,090,791 677,033 297,103 163,651 441,932 11,691,029 9,380,870 21,071,899
$
1,935,403 3,590 3,482,817 1,180,036 266,208 120,754 419,454 326,098 7,734,360 9,829,493 498,405
$
18,062,258
$
5,106,000 2,510,096 225,190 18,108 7,859,394 10,577,397
$
2,924,055 2,909,431 19,098 5,852,584 -
NON-CONTROLLING INTEREST (Note 9) SHAREHOLDER'S EQUITY Share capital (Note 8) Reserve Accumulated other comprehensive income Retained earnings
2,069,057 4,088 108 561,855 2,635,108 $ 21,071,899 $
6,703,500 588,051 2,453,546 2,464,577 12,209,674 18,062,258
APPROVED ON BEHALF OF THE BOARD Signed: Richard Helbig Signed: John Nelson Director Director
1
The accompanying notes form an integral part of the financial statements
LIUYANG FIREWORKS LIMITED (Formerly New Legend Group Limited)
CONSOLIDATED INTERIM STATEMENT OF INCOME AND COMPREHENSIVE INCOME For the period ended June 30, 2009 (Unaudited)
Three-month June 30, 2009 Canadian $
REVENUE COST OF SALES GROSS PROFIT EXPENSES General and administrative Selling Amortization $ 2,197,591 1,270,917 926,674
Three-month June 30, 2008 Canadian $
$ 2,241,354 1,188,837 1,052,517
Six-month June 30, 2009 Canadian $
$ 4,731,187 2,780,829 1,950,358
Six-month June 30, 2008 Canadian $
$ 3,088,426 1,658,613 1,429,813
504,221 53,753 70,826 628,800
233,287 271,682 37,580 542,548 509,969
828,750 154,698 164,747 1,148,195 802,163
402,807 339,224 48,593 790,623 639,190
INCOME (LOSS) FROM OPERATIONS OTHER INCOME (EXPENSES) Interest income Realized foreign exchange loss
297,874
(15) (884) (899)
945 (18,877) (17,932) 492,037 16,126 475,911 475,911 (638,728) (162,817) $
226 (29,082) (28,856) 773,307 131,585 641,722 (68,966) 572,756 (565,852) 6,904 $
2,084 (28,342) (26,258) 612,932 20,592 592,340 592,340 126,661 719,001 -
INCOME BEFORE INCOME TAXES INCOME TAXES NET INCOME BEFORE THE FOLLOWING NON-CONTROLLING INTEREST (Note 9) NET INCOME OTHER COMPREHENSIVE INCOME (LOSS) Foreign currency translation adjustment (Note 3) COMPREHENSIVE INCOME $
296,975 53,920 243,054 (68,966) 174,088 (863,130) (689,041) $ -
BASIC EARNINGS PER SHARE DILUTED EARNINGS PER SHARE
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
NA
43,197,917
43,197,917
NA
2
The accompanying notes form an integral part of the financial statements
LIUYANG FIREWORKS LIMITED (Formerly New Legend Group Limited)
CONSOLIDATED INTERIM STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the period ended June 30, 2009 (Unaudited)
Registered Capital Balance, beginning of period Issuance of share capital Transfer to non-controlling interest Addition to reserve Transfer to reserve Distribution of earnings Other comprehensive income (loss) Net income Balance, end of period $
Non-controlling interest $ $
Reserve
Accumulated Other Comprehensive Income ("AOCI") Retained Earnings 2,453,546 $ (1,887,586) (565,852) 108 $
Total Retained Earnings and AOCI
2009 June 30, Canadian $
2008 June 30, Canadian $ 7,936,235 126,661 610,273 8,673,169
6,703,500 $ 2,069,057 (6,703,500) 2,069,057 $
588,051 $ (849,284) 265,321 4,088 $
2,464,577 $ (2,928,569)
453,090 572,756 561,855 $
4,918,123 $ 12,209,674 $ 2,069,057 (4,816,155) (12,368,938) 265,321 453,090 453,090 (565,852) (565,852) 572,756 572,756 561,962 $ 2,635,108 $
$
3
The accompanying notes form an integral part of the financial statements
LIUYANG FIREWORKS LIMITED (Formerly New Legend Group Limited)
CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS For the period ended June 30, 2009 (Unaudited)
Three-month June 30, 2009 Canadian $
OPERATING ACTIVITIES Net income Items not affecting cash: Non-controlling interest Amortization of equipment
Three-month June 30, 2008 Canadian $
Six-month June 30, 2009 Canadian $
Six-month June 30, 2008 Canadian $
$
174,088 68,966 70,827 313,881
$
475,911 37,580 513,490 848,912 1,362,402
$
572,756 68,966 164,747 806,469 (1,579,088) (772,619)
$
592,340 48,593 640,932 801,552 1,442,484
Changes in non-cash working capital (Note 10)
(910,709) (596,828)
INVESTING ACTIVITIES Additions to property and equipment Short term investment Deferred charges
(845) 796,009 795,164
-
(22,379)
3,590 498,405 479,616
(2,196,325) (2,196,325)
FINANCING ACTIVITIES Bank indebtedness Dividends paid Insurance of share capital Share issuance costs Due from related parties Due from shareholders
2,102,124 3,107,019 (1,088,722) (189,641) 597,354 4,528,134
279,087 4,000 (1,093,021) (1,089,021)
2,181,945 (453,090) 3,107,019 (1,088,722) (148,897) 677,707 4,275,963
279,087 -
2,198,543
(1,074,465)
1,124,078
FOREIGN CURRENCY TRANSLATION ADJUSTMENT INCREASE (DECREASE) IN CASH FLOW Cash - beginning of year CASH - END OF YEAR Supplementary information Interest paid Income taxes paid $ $ $
(950,573) 3,775,898 1,244,621 5,020,519 $
(496,298) (222,917) 651,548 428,631 $
(897,844) 3,085,116 1,935,403 5,020,519 $
(403,165) (32,928) 461,559 428,631
47,931 53,920
$ $
40,875 16,126
$ $
89,169 131,585
$ $
47,689 20,592
4
The accompanying notes form an integral part of the financial statements
LIUYANG FIREWORKS LIMITED (Formerly New Legend Group Limited)
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS For the period ended June 30, 2009 (Unaudited)
1.
DESCRIPTION OF OPERATIONS Liuyang Fireworks Limited (the “Company”), formerly New Legend Group Limited.(“New Legend”), was incorporated under the Laws of the Bermuda on January 13, 2006 as a Capital Pool Company. On June 24, 2009, New Legend completed a qualifying transaction by acquiring Strive Best Limited. (“Strive Best”), a company incorporated on March 18, 2008 under the BVI Business Companies Act 2004 of the British Virgin Islands, and its subsidiary Ease Asia Industrial Limited incorporated on April 22, 2008. The acquisition was accomplished through an exchange of shares which resulted in the former shareholders Strive Best obtaining control of the Company. Accordingly, this transaction was recorded as a reverse takeover (“RTO”) for accounting purposes as Strive Best was deemed to be the acquirer and these consolidated financial statements are deemed to be a continuation of the financial statements of Strive Best while the capital structure is that of the Company. The carrying amounts of Strive Best’s assets and liabilities are included in these consolidated financial statements and the 2008 comparative figures comprise the assets and operations of Strive Best and it's subsidiary Hunan Liuyang Fireworks Limited. Concurrent with this transaction, the Company changed its name from New Legend to Liuyang Fireworks Ltd., effected a change in directors, management and business, and its common shares resumed trading as a Tier 1 industrial Issuer on the TSX Venture Exchange. The company’s primary business is development, manufacturing and distribution of fireworks and related products throughout the People's Republic of China ("the "PRC") and internatinal market. The Far Ocean group of companies (the "Far Ocean Group") consists of Far Ocean Enterprises Limited ("Enterprises"), Far Ocean Fireworks Manufacturing and Displaying Co. Ltd. ("Manufacturing") and Far Ocean Printing Co. Ltd. ("Printing"). The group, located in Liuyang, Hunan, is engaged in the manufacturing and distributing of fireworks and related products. A majority of the group's products are produced for export purposes. The company operates manufacturing facilities located in Hunan Liuyang, PRC through Hunan Liuyang Fireworks Limited. (Far Ocean JV), a Sino-foreign joint venture company incorporated on March 5, 2009 under the laws of China with a registered capital of CDN $1,651,125 pursuant to the terms of a joint venture agreement (the “JV Agreement”) among Far Ocean JV, the Far Ocean group of companies are principals of Far Ocean JV and have contributed an aggregate of CDN $809,051 in equipment and property (the “Contributed Assets”), accounting for 49% of the registered capital, and Ease Asia has contributed CDN $842,073 in cash, accounting for 51% of the registered capital. As part of a re-structuring plan, beginning on or about May 27, 2009, the Far Ocean group of companies has entered into an agreement with Far Ocean JV that will allow the economic benefit of certain of its assets, including permits and licenses which are difficult to transfer (the “Excluded Assets”) be maintained, preserved and made available to Far Ocean JV under contractual arrangements until they can be transferred in accordance with Chinese law. Certain of the operations of the Far Ocean group of companies that may be transferred to Far Ocean JV will be transferred and assigned to Far Ocean JV and the Far Ocean group of companies will cease such operations.
5
LIUYANG FIREWORKS LIMITED (Formerly New Legend Group Limited)
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS For the period ended June 30, 2009
2.
ACQUISITIONS Acquisition of Strive Best On June 24, 2009, the Company acquired all of the issued and outstanding shares in Strive Best through the issuance of 4,754,089 of its post-consolidated common shares. As the transaction resulted in the shareholders of Strive Best owning 96.9% of the then issued shares of the Company, the acquisition has been accounted for as a capital transaction resulting from a reverse take over as described above. As the shares of the Company were thinly traded, they were not considered to represent the best estimate of the fair value of the net assets acquired. Accordingly, the acquisition fair value of the net liabilities assumed was recorded based on carrying amount as follow: Cash Other Assets Less: Liabilities assumed Net assets acquired (liabilities assumed) Transaction costs Excess of net assets acquired over transaction costs Consolidation of Variable Interest Entity (Far Ocean Group) Pursuant to an co-operative agreement dated May 27, 2009, Far Ocean Group of companies allow the economic benefit of certain of its assets, including permits and licenses which are difficult to transfer (the “Excluded Assets”) be maintained, preserved and made available to Far Ocean JV. Accordingly, management determined that Far Ocean JV had a variable interest in and was the primary beneficiary of Far Ocean Group. The Company has consolidated Far Ocean Group of companies effective from June 24, 2009. As at June 30, 2009, the Far Ocean group of companies had net assets at carrying value of $11,989,518 that was attributed to its shareholders. Upon consolidation the interests represented by these shareholders was accounted for and becoming non-controlling interest in the Company's consolidated financial statements. Details of the net asset consolidated attributable to this non-controlling interest are as follows: Cash Accounts receivable Property, plant and equipment Other assets Less liabilities $ 3,342,765 5,040,031 9,214,672 2,285,393 (7,893,343) 11,989,518
$ 1,643,501 892,834 (34,807) 2,501,528 (449,962) 2,051,566
$
Acquisition of Far Ocean Joint Venture On March 5, 2009, Strive Best acquired a 51% controlling interest in its subsidiary, Hunan Liuyang Fireworks JV, through a capital contribution of CAD$842,074 in cash. The non-controlling shareholder, Far Ocean Group, acquired the 49% interest through transfer of CAD$809,051 in property, plant and equipment at their carrying value.
6
LIUYANG FIREWORKS LIMITED (Formerly New Legend Group Limited)
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS For the period ended June 30, 2009
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Generally accepted accounting principles The unaudited interim consolidated financial statements for the company are based on the accounting policies consistent with those disclosed in Note 2 to the 2008 annual consolidated financial statements of the Company. In accordance with Canadian generally accepted accounting principles, these interim financial statements do not include all of the financial statement disclosures required for annual financial statements and should be read in conjunction with the 2008 annual consolidated financial statements of the Company. In management's opinion, the financial statements reflect all adjustments that are necessary for a fair presentation of the results for the interim periods presented. b) Principles of consolidation These consolidated financial statements include the assets and operations of the Company, Strive Best, Far Ocean JV and the Far Ocean Group. The Company does not own any shares of the Far Ocean Group. However, the Company has a contractual agreement with the Far Ocean Group whereby the Company has an interest in and is the primary beneficiary of the Far Ocean Group's operations effective January 1, 2009. All significant intercompany balances and transactions have been eliminated on consolidation. c) Cash and cash equivalents The Company considers cash equivalents to be all cash and highly liquid investments with maturities of three months or less from the date of purchase and that are readily convertible to known amounts of cash. d) Short term investments The Company's investments consist of term deposits, and are classified as held to maturity for accounting purposes and are carried on the balance sheets at amortized cost using the effective interest method. Investments with maturities of greater than ninety days and less than one year are classified as short term investments. e) Accounts receivable Trade receivables are stated at original invoice amount less allowance made for doubtful receivables based on a review of all outstanding amounts at the period end. An allowance for doubtful receivables is made when there is objective evidence that the group will not be able to collect all amounts when they are due. Bad debts are written off when identified. f) Impairment of long-lived assets Long-lived assets are reviewed for impairment when events and circumstances indicate that the carrying amount of an asset may not be recoverable. The Company’s policy is to record an impairment loss when it is determined that the carrying amount of the assets exceeds the sum of the expected undiscounted future cash flows resulting from use of the asset and its eventual disposition. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds its fair value and is recognized as an expense in the period of impairment. Long-lived assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.
7
LIUYANG FIREWORKS LIMITED (Formerly New Legend Group Limited)
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS For the period ended June 30, 2009
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) g) Property and equipment Property and equipment is stated at cost less accumulated amortization. Property and equipment is amortized over its estimated useful life at the following rates and methods: Buildings Equipment Motor vehicles Office equipment Furniture Land use rights h) Inventory Inventories are recorded at the lower of cost and net realizable value. Costs of materials are determined on an average per unit basis. The cost of work-in-progress and finished goods inventories include materials, labour and production overhead. In establishing the appropriate provision for inventory obsolescence, management estimates the likelihood that inventory carrying values will be affected by changes in market demand, technology and design, which would make inventory on hand obsolete. i) Revenue recognition Revenue from product sales is recognized when products are shipped to customers and ownership is transferred to customers, when the price is fixed or determinable and when the ultimate collection is reasonably assured. Customer prepayments are recorded as advances from customers and revenue is not recognized until the shipment of goods occurs. j) Future income taxes The Far Ocean Group and Far Ocean JV (and therefore the Company as well) follows the asset and liability method of accounting for future income taxes. Under this method, future income tax assets and liabilities are recorded based on temporary differences between the carrying amount of balance sheet items and their corresponding tax bases. In addition, the future benefits of income tax assets, including unused tax losses, are recognized, subject to a valuation allowance, to the extent that it is more likely than not that such future benefits will ultimately be realized. Future income tax assets and liabilities are measured using enacted tax rates and laws expected to apply when the tax liabilities or assets are to be either settled or realized. k) Foreign currency translation The Company's functional currency is Chinese Renminbi ("RMB"). The consolidated accounts of the Company are presented in Canadian dollars and are translated into Canadian dollars using the current rate method. Under this method, assets and liabilities are translated at the period-end exchange rates. Revenue and expenses (including amortization) are translated at the average rate of the period in which such items are recognized. Exchange gains and losses from foreign currency translations were previously recorded in the shareholders' equity as a cumulative translation adjustment. In accordance with the new Canadian reporting standards which came into effect, changes in unrealized foreign currency translation adjustments are now reported as part of Other Comprehensive income. 20 years 5 years 5 years 10 years 5 years 20 years straight-line method straight-line method straight-line method straight-line method straight-line method straight-line method
8
LIUYANG FIREWORKS LIMITED (Formerly New Legend Group Limited)
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS For the period ended June 30, 2009
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) l) Earnings per share The Company applies the treasury stock method in calculating earnings per share. Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share excludes all dilutive potential common shares if their effect is anti-dilutive. m) Comprehensive income Comprehensive income is the change in equity of an enterprise during a period arising from transactions and other events and circumstances from non-owner resources. It includes items that would normally not be included in net earnings such as changes in the foreign currency translation adjustment relating to self-sustaining foreign operations and unrealized gains or losses on available-for-sale financial instruments. n) Measurement uncertainty The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Such estimates include providing for amortization of equipment and intangible asset as well as the estimated useful lives of equipment and intangible assets. Actual results could differ from these estimates. o) Financial instruments The Company classifies its financial instruments into one of the following categories: held-for-trading (assets and liabilities), assets available-for-sale, loans and receivables, assets held-to-maturity and other financial liabilities. All financial instruments are measured at fair value on initial recognition. Transaction costs are included in the initial carrying amount of financial instruments except for held-for-trading items in which case transaction costs are expensed as incurred. Measurement in subsequent period depends on the classification of the financial instrument. Financial assets and liabilities "held-for-trading" are subsequently measured at fair value with changes in fair value recognized in operations. Financial assets "available-for-sale" are subsequently measured at fair value with changes in fair value recognized in other comprehensive income. Financial assets "held-to-maturity", "loans and receivables", and "other financial liabilities" are subsequently amortized using the effective interest rate method. Financial instruments that are derivative contracts are considered "held-for-trading" unless they are designated as a hedge. Cash and cash equivalents, and short term investments are classified as "assets held for trading" which are measured at fair value due to the short-term nature of these instruments. Accounts receivable and certain other assets that are financial instruments are classified as "loan and receivables". Short term bank loans, accounts payable, interest payable, and advance from customer are classified as "other financial liabilities". The group currently does not have any financial instruments designated as hedges.
9
LIUYANG FIREWORKS LIMITED (Formerly New Legend Group Limited)
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS For the period ended June 30, 2009
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) p) New accounting standards Capital disclosures: In December 2006, the CICA issued Handbook Section 1535, Capital Disclosures. This section establishes standards for disclosing information about an entity's objectives, policies and processes for managing capital. This standard is effective for interim and annual financial statements relating to fiscal years commencing on or after October 1, 2007 on a prospective basis. The group has adopted this new standard effective January 1, 2008, resulting in changes in disclosure only. Financial instruments - disclosure and presentation: In December 2006, the CICA issued Handbook Section 3862, Financial Instruments - Disclosures, and Section 3863, Financial Instruments - Presentation. These standards enhance existing disclosures in previously issued Section 3861, Financial Instruments - Disclosure and Presentation. Section 3862 places greater emphasis on disclosures about risks related to recognized and unrecognized financial instruments and how those risks are managed. Section 3863 carries forward the same presentation standards as Section 3861. These new standards are effective for interim and annual financial statements relating to fiscal years commencing on or after October 1, 2007 on a prospective basis. The group has adopted this new standard effective January 1, 2008, and the financial statements were not materially affected. Financial statement presentation: In April 2007, the CICA Accounting Standards Board amended Section 1400, General Standards of Financial Statement Presentation. These amendments require management to disclose any uncertainties that cast significant doubt on the entity's ability to continue as a going concern. In assessing whether the going concern assumption is appropriate, management must take into account all available information about the future, which at least, but is not limited to, 12 months from the balance sheet date. The group has adopted this new standard effective January 1, 2008 on a prospective basis, and the financial statements were not materially affected.
4.
INVENTORY
June 30, 2009 December 31, 2008 $ 297,165 107,404 775,467 1,180,036
Raw material Work in process Finished goods
$
249,725 222,465 204,843 677,033
$
$
For the six-month period ended June 30, 2009, the amount of inventories recognized as expense was $2,780,829. There was no write-down of inventories recognized as an expense, nor any reversals of any prior write-down that reduced the amount of inventories recognized as expense.
10
LIUYANG FIREWORKS LIMITED (Formerly New Legend Group Limited)
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS For the period ended June 30, 2009 5 DUE TO/FROM RELATED PARTIES The amount represents the following advances made before completion of the Company's reverse takeover transaction to two related companies that have significant shareholders in common with the Company: a) Advanced $441,932 (RMB 2,596,545) to a company in which an officer and major shareholder own significant shares. b) Advances from various shareholders and directors totaling $225,190 (RMB 1,323,090). These individuals were related by family relationship. Other than as indicated above, the above advances are unsecured, non-interest bearing and have no fixed terms of repayment. 6. PROPERTY AND EQUIPMENT
Cost Accumulated Amortization $ 469,172 225,999 70,824 21,327 8,728 166,524 962,574 $ Net Book Value June 30, 2009 3,269,865 233,101 126,933 21,635 12,930 5,716,406 9,380,870 Net Book Value December 31, 2008 $ 3,498,431 198,048 6,092 23,896 14,722 6,088,304 9,829,493
Building Equipment Motor vehicle Office equipment Furniture Land use rights Total
$
3,739,037 459,100 197,757 42,962 21,658 5,882,930 10,343,444
$
$
$
$
Land use rights represent the amount paid at cost to acquire the right to use specific land where the buildings are located for a period of 20 years. 7. BANK INDEBTEDNESS Short term loans are owing to Changsha Commercial Bank and Agriculture Bank and bear interest at rates ranging from 6.372% to 11.205% per annum. They are secured by certain capital assets. 8. SHARE CAPITAL Number of shares outstanding Balance, December 31, 2008 Shares redeemed at RTO Consolidation of New Legend shares at 12:1 Issuance of shares at a price of $0.60 per share for debt Issuance of shares at a price of $0.60 per share for debt Shares issued to Strive Best's original 50,000 shares Shares issued on private placement at $0.60 per share Share issuance costs paid by Far Ocean Group prior to RTO Balance, June 30, 2009 50,000 $ (50,000) 735,000 122,500 64,535 37,097,518 5,178,364 43,197,917 $ Amount 50,760 50,760 3,107,018 (1,088,721) 2,069,057
11
LIUYANG FIREWORKS LIMITED (Formerly New Legend Group Limited)
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS For the period ended June 30, 2009 8. SHARE CAPITAL (Continued) The ending balance of the share capital in the December 31, 2008 comparative was that of the combined total of the Far Ocean group of companies. Upon the completion of the Reverse Takeover by Strive Best, the opening balance of the share capital for the six-month period is that of Strive Best's. In 2008, Strive Best issued 50,000 common shares at $1.0152 per share for gross proceeds of $50,760. On June 24, 2009, such 50,000 common shares were redeemed on the reverse takeover. On June 24, 2009, the Company consolidated its then issued and outstanding common shares of 8,820,000 on a 12:1 basis such that 735,000 common shares were outstanding immediately prior to the reverse takeover. Prior to reverse takeover but after the share consolidation, the Company completed a debt settlement of $73,500 with its creditors by issuing 122,500 common shares (1,470,000 pre-consolidation shares) at $0.60 per share. Concurrently with the reverse takeover, the Company completed another debt settlement of $38,721 by issuing 64,535 common shares at $0.60 per share. On June 24, 2009, in a reverse takeover acquisition, the outstanding shares of Strive Best were exchanged for 41,851,607 common shares of the Company. In the qualifying transaction, Strive Best completed a non-brokered private placement issuing 4,754,089 post consolidated common shares at $0.60 per share for gross proceeds of $2,852,453 (which shares were included in the share exchange issurance of 41,851,607 common shares of the Company). Concurrently with the acquisition of Strive Best, the Company completed a non-brokered private placement issuing 424,275 common shares at $0.60 per shares for gross proceeds of $254,565. The shares issued under the Company's private placement will be subject to concurrent four month hold periods under applicable exchange policies and National instrument 45-102, expiring on October 25, 2009. Securities Held in Escrow Pursuant to the escrow agreement 37,097,518 common shares issue to the shareholders of Strive Best were escrowed subject to release only with regulatory approval to the release provisions of the escrow agreement. The Escrow Agreement provides for release of 10% of the escrowed securities on the date of the Final Exchange Bulletin, and release of 20%, 30% and 40% every 6 months respectively thereafter, until all of the escrowed securities have been released (18 months following the Final Exchange Bulletin). Stock Options Concurrently with the Qualifying Transaction, the Company amended its 2006 Stock Option Plan to convert the existing 10% "rolling plan" to a 20% "fixed plan", subject to shareholder and Exchange approval. Pursuant to the qualifying transaction, all options to acquire securities of Strive Best were surrendered and cancelled. Options to acquire an aggregate of 3,430,049 shares of the Company at an exercise price of $0.60 each expiring after 5 years were granted, which are subject to escrow in accordance with the policies of the Exchange. In addition, existing options to acquire 32,000 shares expired and were cancelled. The Company granted additional incentive options to acquire 1,450,000 shares at an exercise price of $0.60 each, vesting over 3 years and expiring after 5 years. The fair value of options granted during the period was calculated using the Black-scholes model with the following weighted average assumptions and resulting grant date fair value: Risk-Free interest rate Expected dividend yield Expected stock price volatility Expected option life in years Weighted average grant date fair value
1.85% 0% 100% 3 0.37
$
12
LIUYANG FIREWORKS LIMITED (Formerly New Legend Group Limited)
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS For the period ended June 30, 2009 9. NON-CONTROLLING INTEREST Far Ocean Group of companies Balance, beginning of period Reduced by share of loss in joint venture Reduced by income allocation to joint venture per agreement Reduced by direct net payment Balance, end of period $ 11,989,518
(2,645) (620,694) (788,782) $ 10,577,397
The Company signed a Dividend & Distribution Waiver Agreement with the Far Ocean group of companies whereby the shareholders of the Group waived all rights to any dividend or distribution from the retained earnings of these companies for the period from January 1, 2009 onwards except 10% of the dividends and distributions that is to be retained pursuant to the Dividend Assignment Agreement signed at the completion of the Reverse Takeover. As a result, net income recorded by the Far Ocean Group is $68,966, and $620,694 of the net income earned from January 1 to June 30, 2009 is charged against noncontrolling interest.
10. CHANGES IN NON-CASH WORKING CAPITAL
June 30, 2009 December 31, 2008 1,027,002 (101,613) 18,556 (896,585) 47,360
Accounts receivable Inventory Taxes recoverable Prepaid expenses Unearned revenue Accounts payable and accrued liabilities
$
(1,607,974) $ 503,003 (30,895) (42,897) (990) (399,335) (1,579,088) $
$
11. FINANCIAL INSTRUMENTS The Company holds various forms of financial instruments which include cash and cash equivalents, accounts receivable, taxes recoverable, due from related parties, bank indebtedness, accounts payable and accrued liabilities. The carrying value of the Company's financial current assets and liabilities approximate their fair values as at June 30, 2009. The Company manages its exposure to this risk by operating in a manner that minimizes its risk exposure to the extent practical. Credit Risk Credit risk is the risk of financial loss to the company if a counter party to a financial instrument fails to meet its contractual obligations. The Company is exposed to credit risk as majority of its customers are located outside of China. Sales to some of the overseas customers are on credit terms granted by management. The Company has been in business with most of these customers since inception and the payment records from them have been excellent. Management considers the risk of default from these parties to be low.
13
LIUYANG FIREWORKS LIMITED (Formerly New Legend Group Limited)
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS For the period ended June 30, 2009
11. FINANCIAL INSTRUMENTS (Continued) Currency Risk Currency risk is the risk to the company's earnings that arise from fluctuations of foreign exchange rates and the degree of volatility of these rates. The Company is exposed to foreign currency exchange risk as it has Chinese currency Renminbi denominated assets and monetary liabilities. As the functional currency of the Company and a significant portion of the cost of production are in Renminbi but a majority of the sales of the Company are conducted in US dollars, the fluctuation of exchange rates of Renminbi may have positive or negative impacts on the results of operations of the Company. Interest Rate Risk The Company is not exposed to interest rate risk as its operation is primarily financed by registered capital. As of June 30, 2009, the Company has utilized only a small credit line. The effect of interest rate fluctuation will have no significant effect on the operation. 12. FUTURE CHANGES IN ACCOUNTING POLICIES International Financial Reporting Standards The Accounting Standards Board (AcSB) establishes financial accounting and reporting standards for use by Canadian companies. It also participates in the development of internationally accepted accounting standards. The AcSB is accountable to the Accounting Standards Oversight Council, an independent body established in September 2000 by the CICA. On February 13, 2008, the AcSB announced the use of the Internationally Financial Reporting Standards (lFRS) will be required for fiscal years beginning on or after January l, 2011 for publicly accountable profit-oriented enterprises including listed companies. IFRS will replace Canada's current GAAP. Companies will be required to provide comparative IFRS information for the previous fiscal year. The group is considering the impact of the adoption of IFRS.
13. COMPARATIVE FIGURES The comparative figures for the period ended June 30, 2008 were prepared by management and have not been reviewed. However, the Company's auditor has reviewed the Company's financial statements for the three and six months interim period ended June 30, 2009.
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