China Redstone Group (PINK:CGPI)

Business Updates

China Redstone began developing approximately 7,000 cemetery plots on approximately 11 acres of land located in the leased area of its property in the second quarter of fiscal 2011. By starting construction on all 7,000 cemetery plots in advance instead of in batches of 500 plots, the Company was able to reduce the construction costs by approximately 5%. The total estimated capital expenditures for the 7,000 plots are approximately $19.6 million, of which $18.2 million has already been paid through December 31, 2010. Management expects to complete this project, including construction of the walls, roads and other infrastructure, by calendar second quarter of 2011.

The Company started construction of the Guanying Temple, located in the leased land in November 2010. This temple will serve as a spiritual center where current and prospective clients can visit. In addition, it will house over 10,000 urns, which will be sold to customers at an average price of approximately $750 each. Management anticipates the completing construction by the end of fiscal 2011, with a grand opening scheduled for September 2011. The total construction cost will be approximately $3.6 million, $1.5 million of which has been paid as of December 31, 2010.

Fiscal 2011 Guidance

Based on the strong results recorded in the first nine months of fiscal 2011, Management reaffirms guidance of

Guidance assumes 7,000 plots sold at an average sales price of $5,000 to $6,250.

Land Use Rights

In addition, the Chongqing municipal government has committed to enable Foguang to secure the land use rights to approximately 1,194,804 square meters of land surrounding Longqiao Lake, which portions of Guiyuan II overlook. However, as of the date of this Form-10-Q, Foguang has yet to officially receive such land use rights. Based on comparable land use rights granted by the government to others, Foguang estimates that its payment obligations may be between $2.25 million to $2.7 million for the land use rights.  However, such obligations should not impact Foguang’s ongoing liquidity because it has sufficient cash flow from its operations for the estimated payment obligations.   Foguang is planning to develop this land as a memorial park, with mausoleums and temples, to complement and enhance Guiyuan II (the “Longqiao Lake Project”). Foguang also intends to cultivate and produce flower seedlings around the Longqiao Lake area as part of the project. Some of the seedlings will be used for the development of Guiyuan II, and the remaining seedlings will be sold either to the Changshou district government for urban landscaping or to outside parties for profit.

We would sill like clarity on why CGPI does not just acquire these rights, as it claims to have "sufficient cash flow from its operations."

CGPI shifts strategy:
 
In 2011, Foguang originally had plans to develop tourism, leisure, entertainment, dining accommodation, transportation and other comprehensive services and facilities in a project known as the Liang Jiang Yu Project. Foguang entered into the contract for tourism development with Chongqing Bo Gao Tourism Company (“Bo Gao”) pursuant to the Tourism Development Contract dated February 27, 2009 and a Supplemental Contract dated April 13, 2009 (collectively, “Tourism Development Contract”).  The scope of the project contemplated the construction of 10 to 20 entertainment boats, a welcome center, a large sailboat and nine docks. The total price of this project was $64,000,000. Foguang made a total prepayment of $8,682,600 and would pay the remaining balance of the project at the completion of the project. Pursuant to the terms of the Tourism Development Contract, Bo Gao was responsible to obtain a loan in the amount of 20 million RMB from the local government.  Neither Bo Gao nor Foguang obtained such loan from the local government. In September 2009, Foguang took over as the sole developer of this project. As of September 30, 2010, such project had been temporarily suspended by Foguang due to funds being used to focus on its cemetery operations. As of December 31, 2010, Foguang made a decision to terminate and divest this project entirely in order to focus on its cemetery operations. Foguang is currently taking bids for the project and initial findings show that it should be able to recover the full costs incurred to date. Foguang will have no liability in this project going forward and believes that the divesture of the project will occur during fiscal year 2012.

We would like more information on nature of this project to determinet if costs are recoverable.  We also would like to know why this loan could not be obtained.