BUSINESS COMBINATION

9 Months Ended

Sep. 30, 2011

BUSINESS COMBINATION [Text Block]

6. BUSINESS COMBINATION

On March 31, 2011, pursuant to the terms of the Equity Sale and Purchase Agreement dated February 28, 2011, by and among Shandong TFS and two original individual stockholders of Longyun, the Group completed its acquisition of 100% of the equity interest of Longyun (the “Acquisition”). The total consideration was RMB58 million, approximately US$8,846,160 in cash.

Longyun is primarily engaged in marketing and trading of goods, and plans to expand its business to the management and leasing of commercial properties. As a result of the acquisition, the Group has enhanced its trading business in the near term and expects to enhance its real estate business when Longyun expands to the management and leasing of commercial properties.

Fair Value Determination and Allocation of Consideration Transferred

For the Acquisition, the Group was obligated to pay a consideration of RMB58 million (approximately $8,846,000) in cash in exchange for 100% equity interest and assumed US$3.2 million of debt of the acquired business. As of September 30, 2011, the Group has paid Rmb55.5 million to the original stockholders of Longyun. The acquisition was accounted for under the purchase method of accounting, and Longyun was included in the Group’s consolidated financial statements from the acquisition date of March 31, 2011. With the assistance of an independent third-party valuation specialist, management reassessed the fair value of the major assets acquired and the liabilities assumed and concluded that a bargain purchase gain amounting to approximately US$7.1 million resulted from the acquisition. Accordingly, the Group recognized the gain as a component of other income in the consolidated statement of income for the nine months ended September 30, 2011. Management believes that the Group was able to negotiate a bargain purchase price as a result of the prevailing economic environment and its access to the liquidity necessary to complete the acquisition.

The allocation of purchase price to identifiable tangible assets and assumed liabilities has not yet been finalized. As such, the estimate is subject to change once the Group makes a final determination of the fair value of tangible assets acquired and liabilities assumed, which will be completed within one year from the acquisition date.

The following summarizes the consideration paid for the Acquisition, and the preliminary fair values of the assets acquired and liabilities assumed recognized at the acquisition date:

		Acquisition
		(in thousands)
		(Unaudited)
Cash and cash equivalents	$	1,595
Trade receivables		108
Inventory		115
Tangible non-current assets		22,923
Other assets		33
Total assets acquired		24,774
Current liabilities		3,237
Deferred tax liability		5,575
Total liabilities assumed		8,812
Net identifiable assets acquired		15,962
Less: cash consideration transferred		8,846
Gain on business combination	$	7,116

Tangible non-current assets acquired during the transaction mainly include commercial properties of which the fair value is classified as Level 2 within the fair value hierarchy. With assistance of an independent valuation specialist, the management adopted the market approach, which rests on the wide acceptance of the market transactions as the best indicator and pre-supposes that evidence of relevant transactions in the market place can be extrapolated to similar properties, subject to allowances for variable factors. The Group’s management believes the result of valuation reflects the best estimates at the date the valuations were performed.

Pro Forma Results

The following table presents the estimated unaudited pro forma consolidated results as if the acquisition of Longyun occurred on January 1, 2010. The result includes the impact of preliminary fair value adjustment on property and the related adjustments on deferred taxes. The unaudited pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on date assumed above:

	Three months ended Sep 30				Nine months ended Sep 30
	2011		2010		2011		2010
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Total revenue	36,771,902		14,939,159		136,649,382		29,039,023
(Loss) from operations	(1,382,941	)	(378,056	)	(3,001,786	)	(1,459,089	)
Net income (loss)	(1,471,447	)	(461,939	)	949,698		(1,654,488	)