Attached files
file | filename |
---|---|
EX-32 - Yanglin Soybean, Inc. | v165650_ex32.htm |
EX-31.2 - Yanglin Soybean, Inc. | v165650_ex31-2.htm |
EX-31.1 - Yanglin Soybean, Inc. | v165650_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For
the quarterly period ended September 30, 2009
o
|
TRANSITION REPORT
PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For
the transition period from _______ to _______
Commission
file number 000-52127
YANGLIN
SOYBEAN, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
20-4136884
|
(State
or other jurisdiction of
incorporation
or organization)
|
(IRS
Employer
Identification
No.)
|
99
Fan Rong Street, Jixian County, Heilongjiang 155900 P.R. China
(Address
of principal executive offices)
Registrant’s
telephone number, including area code: (86) 469-467-8077
(Former
Name, Former Address And Former Fiscal Year, If Changed Since Last
Report)
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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definitions of “accelerated
filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Smaller
Reporting Company x
|
(Do
not check if a Smaller Reporting Company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
As of
November 12, 2009, the Company has 20,116,282 shares of Common Stock,
$0.001 par value per share, outstanding.
Yanglin
Soybean, Inc.
INDEX
Page
|
|||
Part
I — Financial Information
|
3
|
||
Item
1.
|
Financial
Statements
|
4
|
|
a) Consolidated
Balance Sheets as of September 30, 2009 (unaudited) and December 31,
2008
|
4
|
||
b)
Consolidated Statements of Operations and Comprehensive (Loss) Income for
the three and nine months ended September 30, 2009 and 2008
(unaudited)
|
5
|
||
c)
Consolidated Statements of Stockholders’ Equity for the nine months ended
September 30, 2009 (unaudited)
|
6
|
||
d)
Consolidated Statements of Cash Flows for the nine months ended September
30, 2009 and 2008 (unaudited)
|
7
|
||
e)
Notes to Consolidated Financial Statements (unaudited)
|
9
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
39
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
56
|
|
Item
4.
|
Controls
and Procedures
|
56
|
|
Part
II — Other Information
|
57
|
||
Item
1
|
Legal
Proceedings
|
57
|
|
Item
1A.
|
Risk
Factors
|
57
|
|
Item
2
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
57
|
|
Item
3
|
Defaults
upon Senior Securities
|
57
|
|
Item
4
|
Submission
of Matters to a Vote of Security Holders
|
57
|
|
Item
5
|
Other
Information
|
57
|
|
Item
6.
|
Exhibits
|
57
|
|
Signatures
|
58
|
-2-
SPECIAL
CAUTIONARY NOTICE REGARDING
FORWARD-LOOKING
STATEMENTS
Certain
matters discussed in this report, including matters discussed under the caption
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, or the Securities Act, and the Securities
Exchange Act of 1934, as amended, or the Exchange Act, and involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by such
forward-looking statements. The words "anticipate," "believe," "estimate,"
"may," "expect" and similar expressions are generally intended to identify
forward-looking statements. Our actual results may differ materially from the
results anticipated in these forward-looking statements due to a variety of
factors, including, without limitation as discussed under the captions
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and elsewhere in this report, as well as other factors which may be
identified from time to time in our other filings with the Securities and
Exchange Commission, or the SEC, or in the documents where such forward-looking
statements appear. All written or oral forward-looking statements attributable
to us are expressly qualified in their entirety by these cautionary
statements. Forward-looking statements contained in this report reflect our
views and assumptions only as of the date this report is signed. Except as
required by law, we assume no responsibility for updating any forward-looking
statements.
We
qualify all of our forward-looking statements by these cautionary statements. In
addition, with respect to all of our forward-looking statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
-3-
PART 1-FINANCIAL
INFORMATION
ITEM
1-FINANCIAL STATEMENTS
YANGLIN
SOYBEAN, INC.
CONSOLIDATED
BALANCE SHEETS
AS
AT SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
(Stated
in US Dollars)
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
|
$ | 24,142,807 | $ | 30,365,413 | ||||
Cash-restricted
|
457,138 | 484,000 | ||||||
Trade
receivables, net
|
23,981 | 8,043 | ||||||
Inventories
|
2,424,767 | 3,896,334 | ||||||
Advances
to suppliers
|
35,311 | 10,597,701 | ||||||
Prepaid
VAT and other taxes
|
3,459,424 | 920,083 | ||||||
Other
receivables
|
167,693 | 114,990 | ||||||
Total
current assets
|
30,711,121 | 46,386,564 | ||||||
Property,
plant and equipment, net
|
28,578,401 | 31,529,936 | ||||||
Intangible
assets, net
|
4,469,470 | 4,619,716 | ||||||
Prepaid
deposits for equipment and construction
|
- | 13,021 | ||||||
TOTAL
ASSETS
|
$ | 63,758,992 | $ | 82,549,237 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities
|
||||||||
Short-term
bank loans
|
$ | - | $ | 6,711,214 | ||||
Loans
from related parties - current
|
52,695 | 55,149 | ||||||
Accounts
payable
|
4,594 | 13,753 | ||||||
Other
payables
|
837,379 | 683,403 | ||||||
Customers
deposits
|
1,682,219 | 1,187,582 | ||||||
Accrued
liabilities
|
710,879 | 591,979 | ||||||
Total
current liabilities
|
3,287,766 | 9,243,080 | ||||||
Long-term
liabilities
|
||||||||
Loan
from related parties - non-current
|
327,934 | 434,678 | ||||||
TOTAL
LIABILITIES
|
3,615,700 | 9,677,758 | ||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Convertible
preferred stock - Series A $0.001 par value, 50,000,000 shares authorized;
10,000,000 shares issued and outstanding as of September 30, 2009 and
December 31, 2008
|
10,000 | 10,000 | ||||||
Common
stock - $0.001 par value, 100,000,000 shares authorized; 20,000,003 shares
issued and outstanding as of September 30, 2009 and December 31,
2008
|
20,000 | 20,000 | ||||||
Additional
paid-in capital
|
38,389,635 | 38,389,635 | ||||||
Statutory
reserves
|
5,628,636 | 5,628,636 | ||||||
Retained
earnings
|
8,769,210 | 21,664,524 | ||||||
Accumulated
other comprehensive income
|
7,325,811 | 7,158,684 | ||||||
Total
stockholders’ equity
|
60,143,292 | 72,871,479 | ||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 63,758,992 | $ | 82,549,237 |
The
accompanying notes are an integral part of these consolidated financial
statements
-4-
YANGLIN
SOYBEAN, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009, AND 2008
(Stated
in US Dollars) (unaudited)
For The Three Months Ended
|
For The Nine Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
sales
|
$ | 39,570,374 | $ | 48,687,504 | $ | 122,358,237 | $ | 190,237,176 | ||||||||
Cost
of sales
|
(43,915,230 | ) | (45,254,311 | ) | (132,058,859 | ) | (175,551,015 | ) | ||||||||
Gross
(loss) profit
|
(4,344,856 | ) | 3,433,193 | (9,700,622 | ) | 14,686,161 | ||||||||||
Operating
expenses
|
||||||||||||||||
Selling
expenses
|
(26,764 | ) | (61,756 | ) | (156,317 | ) | (180,726 | ) | ||||||||
General
and administrative expenses
|
(668,239 | ) | (560,057 | ) | (2,018,987 | ) | (1,758,068 | ) | ||||||||
Impairment
loss of long-lived assets
|
(584,699 | ) | - | (584,699 | ) | - | ||||||||||
(Loss)
gain on disposal of property, plant and equipment
|
- | 74 | (230,025 | ) | 7,144 | |||||||||||
Total
operating expenses
|
(1,279,702 | ) | (567,739 | ) | (2,990,028 | ) | (1,931,650 | ) | ||||||||
(Loss)
income from operations
|
(5,624,558 | ) | 2,865,454 | (12,690,650 | ) | 12,754,511 | ||||||||||
Interest
expenses
|
(95,900 | ) | (195,075 | ) | (341,417 | ) | (708,978 | ) | ||||||||
Interest
income
|
18,676 | 27,353 | 137,988 | 81,151 | ||||||||||||
Other
expenses
|
(204 | ) | (131 | ) | (1,235 | ) | (14,479 | ) | ||||||||
(Loss)
income from operations before income taxes
|
(5,701,986 | ) | 2,697,601 | (12,895,314 | ) | 12,112,205 | ||||||||||
Income
taxes
|
- | - | - | - | ||||||||||||
Net
(loss) income
|
$ | (5,701,986 | ) | $ | 2,697,601 | $ | (12,895,314 | ) | $ | 12,112,205 | ||||||
Foreign
currency translation adjustment
|
66,069 | 112,368 | 167,127 | 3,985,176 | ||||||||||||
Comprehensive
(loss) income
|
$ | (5,635,917 | ) | $ | 2,809,969 | $ | (12,728,187 | ) | $ | 16,097,381 | ||||||
(Loss)
earnings per share
|
||||||||||||||||
Basic
|
$ | (0.29 | ) | $ | 0.13 | $ | (0.64 | ) | $ | 0.61 | ||||||
Diluted
|
$ | (0.29 | ) | $ | 0.07 | $ | (0.64 | ) | $ | 0.32 | ||||||
Weighted
average shares outstanding
|
||||||||||||||||
Basic
|
20,000,003 | 20,000,003 | 20,000,003 | 20,000,003 | ||||||||||||
Diluted
|
20,000,003 | 40,661,881 | 20,000,003 | 38,339,885 |
The
accompanying notes are an integral part of these consolidated financial
statements
-5-
YANGLIN
SOYBEAN, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(Stated
in US Dollars) (unaudited)
Additional
|
Accumulated
other
|
|||||||||||||||||||||||||||||||||||
Preferred stock
|
Common stock
|
paid-in
|
Statutory
|
Retained
|
comprehensive
|
|||||||||||||||||||||||||||||||
Number of share
|
Amount
|
Number of share
|
Amount
|
capital
|
reserves
|
earnings
|
income
|
Total
|
||||||||||||||||||||||||||||
Balance,
January 1, 2009
|
10,000,000 | $ | 10,000 | 20,000,003 | $ | 20,000 | $ | 38,389,635 | $ | 5,628,636 | $ | 21,664,524 | $ | 7,158,684 | $ | 72,871,479 | ||||||||||||||||||||
Net
loss
|
(12,895,314 | ) | (12,895,314 | ) | ||||||||||||||||||||||||||||||||
Foreign
currency translation adjustment
|
167,127 | 167,127 | ||||||||||||||||||||||||||||||||||
Balance,
September 30, 2009
|
10,000,000 | $ | 10,000 | 20,000,003 | $ | 20,000 | $ | 38,389,635 | $ | 5,628,636 | $ | 8,769,210 | $ | 7,325,811 | $ | 60,143,292 |
The
accompanying notes are an integral part of these consolidated financial
statements
-6-
YANGLIN
SOYBEAN, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Stated
in US Dollars) (unaudited)
For The Nine Months Ended
|
||||||||
September 30,
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
(loss) income
|
$ | (12,895,314 | ) | $ | 12,112,205 | |||
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
||||||||
Depreciation
|
2,463,971 | 1,546,582 | ||||||
Amortization
|
161,345 | 149,074 | ||||||
Bad
debt expense
|
(93 | ) | - | |||||
Impairment
loss of long-lived assets
|
584,699 | - | ||||||
Loss
(gain) on disposal of property, plant and equipment
|
230,025 | (7,144 | ) | |||||
Changes
in operating assets and liabilities:
|
||||||||
Trade
receivable
|
(16,112 | ) | (72,740 | ) | ||||
Inventories
|
1,481,436 | 16,323,716 | ||||||
Advances
to suppliers
|
10,581,995 | (8,306,554 | ) | |||||
Amounts
due to construction
|
- | (2,386,790 | ) | |||||
Prepaid
VAT and other taxes
|
(2,535,093 | ) | 1,798,972 | |||||
Other
receivables
|
(52,409 | ) | 1,080,275 | |||||
Accounts
payable
|
(9,182 | ) | 46,545 | |||||
Other
payables
|
1 | (1,223,490 | ) | |||||
Customers
deposits
|
491,431 | (1,185,324 | ) | |||||
Cash-restricted
|
26,862 | 16,000 | ||||||
Accrued
liabilities
|
117,592 | (96,592 | ) | |||||
Net
cash provided by operating activities
|
631,154 | 19,794,735 | ||||||
Cash
flows from investing activities
|
||||||||
Purchase
of property, plant and equipment
|
(87,400 | ) | (296,071 | ) | ||||
Proceeds
from sale of property, plant and equipment
|
- | 7,144 | ||||||
Payment
of intangible assets
|
- | (1,127,332 | ) | |||||
Net
cash used in investing activities
|
(87,400 | ) | (1,416,259 | ) | ||||
Cash
flows from financing activities
|
||||||||
Proceeds
from short-term bank loans
|
6,575,842 | - | ||||||
Principal
payments for short-term bank loans
|
(13,301,136 | ) | (8,608,086 | ) | ||||
Principal
payments for loans from related parties
|
(110,322 | ) | - | |||||
Net
cash flows used in financing activities:
|
(6,835,616 | ) | (8,608,086 | ) | ||||
Net
(decrease) increase in cash
|
(6,291,862 | ) | 9,770,390 | |||||
Effect
of foreign currency translation on cash
|
69,256 | 1,080,627 | ||||||
Cash-
beginning of period
|
30,365,413 | 9,210,121 | ||||||
Cash-
end of period
|
$ | 24,142,807 | $ | 20,061,138 |
-7-
YANGLIN
SOYBEAN, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(Stated
in US Dollars) (unaudited) (continued)
Supplementary
cash flow information:
|
||||||||
Interest
paid
|
$ | 341,417 | $ | 708,978 |
The
accompanying notes are an integral part of these consolidated financial
statements
-8-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES
|
Yanglin
Soybean, Inc (the “Company”) was incorporated in the State of Nevada on May 26,
1921. Prior to October 3, 2007, the Company had only nominal operations and
assets. On October 3, 2007, the Company executed a reverse-merger with Faith
Winner Investments Limited (“Faith Winner (BVI)”) by an exchange of shares
whereby the Company issued 18,500,000 common shares at $0.001 par value in
exchange for all Faith Winner (BVI) shares. As a result of the shares exchange,
Faith Winner (BVI) became a wholly-owned subsidiary of the Company. The exchange
transaction was accounted for as a reverse acquisition in accordance with
Statements of Financial Accounting Standards (“SFAS”) No. 141. “Business
Combinations”. The reverse-merger also included an equity financing of
$21,500,000 by the issuance of 10,000,000 Series A Convertible Preferred Stock
at $2.15 per share to 10 accredited investors.
The
Company is in the business of manufacturing, distribution, and selling of
non-genetically modified soybean products, including soybean oil, soybean salad
oil, and soybean meal throughout the Province of Heilongjiang and other parts of
People's Republic of China ("PRC"). The Company conducts its
operations through the following subsidiaries: (a) a wholly-owned subsidiary in
the British Virgin Islands: Faith Winner (BVI), (b) a wholly-owned subsidiary of
Faith Winner (BVI) located in Mainland China: Faith Winner (Jixian) Agriculture
Development Company (“WFOE”) and (c) an entity located in Mainland China:
Yanglin Soybean Group Co., Ltd. (“Yanglin”) which is controlled by the Company
through contractual arrangements with WFOE, as if Yanglin were a wholly-owned
subsidiary of the Company.
The
Company, its subsidiaries and Yanglin are collectively referred to as “the
Group”.
Faith
Winner (BVI) and WFOE have entered into a series of agreements respectively with
Yanglin and as a result of such agreements WFOE gained control of all of
Yanglin’s assets, management and business as if Yanglin were a wholly-owned
subsidiary of WFOE. These agreements included a loan agreement, a consigned
management agreement, two consignment agreements of equity interests, an
exclusive purchase option agreement, a registered trademark transfer contract
and a trademark licensing agreement. The consignment agreements were entered
into on September 1, 2007, and the other agreements were all signed on September
24, 2007. The exclusive purchase option agreement and the consigned management
agreement were amended as of April 3, 2009.
-9-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES
(Continued)
|
Pursuant
to the above-mentioned agreements, WFOE made a loan (“the Loan”) of $17 million
on October 10, 2007 and it was utilized by Yanglin for working capital needs. In
return, the Company obtained management control and an exclusive right to
acquire all of the equity of Yanglin. The rights of existing shareholders of
Yanglin were assigned by the consignment of equity interests to Faith Winner
(BVI). The exclusive purchase agreement and the loan agreement restrict both
Yanglin and its shareholders from significant decisions including but not
limited to any amendments of articles of association or rules of Yanglin, any
change in registered capital, any transfer, mortgage or disposal of Yanglin’s
assets or income in a way that would affect WFOE’s security interest, entering
any material contract (exceeding RMB5 million in value) and distributing any
dividends to the shareholders. Pursuant to the consigned management agreement
between WFOE and Yanglin, Yanglin agreed to entrust the business operations of
Yanglin and its management to WFOE until WFOE formally acquires all equity or
substantially all the assets of Yanglin. Under the consigned management
agreement as amended on April 3, 2009, WFOE will provide financial, technical
and human resources management services to Yanglin which will enable WFOE to
control Yanglin's operations, assets and cash flows. In turn, WFOE will be
entitled to 5% of Yanglin’s revenue on a yearly basis.
Under the
Registered Trademark Transfer Agreement, Yanglin agreed to transfer to WFOE all
of its rights in connection with the two trademarks, including without
limitation the title of the trademarks and right to license (the “Transferred
Trademark”) for a purchase price of $1,000,000, which is subject to a purchase
price adjustment based on the minimum appraised value on intellectual
property (“IP”) rights allowed under PRC laws and regulations for such transfer.
Under the Trademark Licensing Agreement, WFOE agreed to grant an exclusive
license to Yanglin, for a term of 10 years, to use the Transferred Trademark for
an annual licensing fee equal to 1% of Yanglin’s revenue of that year. The
license fee and the management fee aforesaid – total of 6% of the revenue of
Yanglin-entitled by WFOE are designed to approximate Yanglin’s annual net profit
before tax. Any excess profit in Yanglin will not be distributed as dividend
according to the contractual arrangements until WFOE exercises the Option
Agreement to acquire all shareholders’ equity interest of Yanglin. If the 6% of
license and management fees exceed the net profit before tax of Yanglin,
the amount entitled to WFOE is limited to the actual annual net profit before
tax of Yanglin under the contracts.
-10-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
1.
|
ORGANIZATION
AND PRINCIPAL ACTIVITIES
(Continued)
|
According
to the exclusive purchase option agreement, WFOE has the exclusive purchase
option to purchase all or part of Yanglin’s shareholders’ equity interest in
Yanglin when and as permitted under PRC laws and regulations and no other party
has the right to purchase any equity from the shareholders of Yanglin. The
agreement provides that, unless otherwise required under PRC laws and
regulations, the consideration for the equity transfer or the asset transfer
under the agreement will be $17 million or such greater amount as required by
the then applicable PRC law and regulations (the “Option Price”). Under the
loan agreement and the exclusive purchase option agreement, the money received
as the Option Price by the shareholders of Yanglin upon execution of the option
shall be used to satisfy the repayment of the Loan. Therefore, the actual
consideration of the investment in Yanglin is exactly the amount of the Loan.
Under such contractual arrangements, all of the assets and equity including any
residual profits of Yanglin are totally controlled by WFOE and will be formally
captured upon exercise of the exclusive purchase option.
The loan
of $17 million to Yanglin is considered as an investment in Yanglin by the
Company through a series of contractual arrangements by way of the Loan. As a
result of entering into the aforementioned agreements, WFOE should be deemed to
control Yanglin as a Variable Interest Entity.
-11-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
2.
|
GENERAL
|
(a)
|
Basis
of presentation
|
The
accompanying unaudited interim consolidated financial statements as of
September 30, 2009 and for the three and nine months then ended September
30, 2009 and 2008 have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and pursuant to the instructions to Form 10-Q and Article 8 of
Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same
basis as the annual audited consolidated financial statements. The unaudited
interim consolidated balance sheet as of September 30, 2009, the unaudited
interim consolidated statements of operations for the three and nine months
ended September 30, 2009 and 2008, the unaudited interim consolidated statement
of stockholders’ equity for the nine months ended September 30, 2009, and the
unaudited interim condensed consolidated statements of cash flows for the nine
months ended September 30, 2009 and 2008 are unaudited, but include all
adjustments, consisting only of normal recurring adjustments, which we consider
necessary for a fair presentation of the financial position, operating results
and cash flows for the periods presented. The results for the nine months
ended September 30, 2009 are not necessarily indicative of results to be
expected for the year ending December 31, 2009 or for any future interim
period. The consolidated balance sheet at December 31, 2008 has been
derived from audited consolidated financial statements; however, the notes to
the consolidated financial statements do not include all of the information
and notes required by accounting principles generally accepted in the United
States of America for complete consolidated financial statements. The
accompanying unaudited interim consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31,
2008 as filed with the SEC.
On
September 30, 2009, the Company adopted changes issued by the Financial
Accounting Standards Board (“FASB”) to the authoritative hierarchy of
GAAP. These changes establish the FASB Accounting Standards
Codification (“ASC”) as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with GAAP. Rules
and interpretive releases of the SEC under authority of federal securities laws
are also sources of authoritative GAAP for SEC registrants. The FASB
will no longer issue new standards in the form of Statements, FASB Staff
Positions (“FSP”), or Emerging Issues Task Force Abstracts; instead the FASB
will issue Accounting Standards Updates (“ASUs”). ASUs will not be
authoritative in their own right as they will only serve to update the
ASC. These changes and the ASC itself do not change
GAAP. Other than the manner in which new accounting guidance is
referenced, the adoption of these changes had no impact on the Company’s
consolidated financial statements.
-12-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
2.
GENERAL (Continued)
(b)
|
Principles
of consolidation
|
The share
exchange transaction has been accounted for as a recapitalization of the
Company, where the Company (the legal acquirer) is considered the accounting
acquiree and Faith Winner (BVI) (the legal acquiree) is considered the
accounting acquirer. As a result of this transaction, the Company is deemed to
be a continuation of the business of Faith Winner (BVI).
Accordingly,
the accompanying financial statements are those of the accounting acquirer,
Faith Winner (BVI). The historical stockholders’ equity of the accounting
acquirer prior to the share exchange has been retroactively restated as if the
share exchange transaction occurred as of the beginning of the first period
presented.
Name of Company
|
Place of incorporation
|
Attributable
interest
|
||||
Faith
Winner Investments Ltd
|
British
Virgin Islands
|
100 | % | |||
Faith
Winner (Jixian) Agriculture Development (“WFOE”)
Company
|
PRC
|
100 | % | |||
Heilongjiang
Yanglin Soybean Group Co. Ltd (“Yanglin”)
|
PRC
|
100 | % | |||
*Deemed
variable interest entity member
|
(c)
|
Use
of estimates
|
The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Items subject to such estimates and
assumptions include the carrying value and estimated useful lives of long-lived
assets; valuation allowances for receivables; inventory and deferred tax
assets.
-13-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
2.
|
GENERAL
(Continued)
|
(d)
|
Economic
and political risks
|
The
Group’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy.
The
Group’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Group’s results may be adversely affected by changes in the political
and social conditions in the PRC, and by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation, among other
things.
(e)
|
Intangible
assets
|
Intangible
assets include land use rights and railway use rights.
Land use
rights are stated at cost less accumulated amortization. Amortization
is provided over the respective useful lives, using the straight-line
method. Estimated useful lives range from 22 to 50
years.
Railway
use rights are stated at cost less accumulated amortization. Amortization is
provided over the respective useful lives, using the straight-line method.
Estimated useful life is 10 years.
(f)
|
Property,
plant and equipment
|
Property,
plant and equipment are carried at cost less accumulated
depreciation. Depreciation is provided over their estimated useful
lives, using the straight-line method. Estimated useful lives of the property,
plant and equipment are as follows:
Buildings
|
10
- 35 years
|
Machinery
and equipment
|
3.5
- 30 years
|
Office
equipment
|
4 -
20 years
|
Motor
vehicles
|
6 -
10 years
|
The costs
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of operations. The cost of maintenance and repairs is charged to operations when
incurred, whereas significant renewals and betterments are
capitalized.
-14-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
2.
|
GENERAL
(Continued)
|
(g)
|
Accounting
for the impairment of long-lived
assets
|
The
long-lived assets held and used by the Group are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. It is reasonably possible that these assets could
become impaired as a result of changes in technologies or situations related to
the industry. Determination of recoverability of assets to be held
and used is done by comparing the carrying amount of an asset to the future
net undiscounted cash flows to be generated by the asset.
If such
assets are considered to be impaired, the impairment losses to be recognized are
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less estimated costs of disposal.
For the
three and nine months period ended September 30, 2009, the Group recognized a
$584,699 impairment loss on certain manufacturing facilities.
(h)
|
Inventories
|
Inventories
consist of finished goods, and raw materials, and are stated at the lower of
cost or market value. The cost of inventories is measured using a weighted
average method. Substantially all inventory costs are determined using the
weighted average basis. Finished goods are comprised of direct materials, direct
labor and an appropriate proportion of production overheads.
(i)
|
Trade
receivables
|
Trade
receivables are recognized and carried at the original invoice amount less an
allowance for any uncollectible amounts. An allowance for doubtful accounts is
maintained for all customers after considering a variety of factors, including
the length of time past due, significant one-time events and the company’s
historical experience.
-15-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
2.
|
GENERAL
(Continued)
|
(j)
|
Foreign
currency translation
|
The
accompanying unaudited financial statements are presented in United States
dollars. The reporting currency of the Group is the U.S. dollar
(USD). WFOE and Yanglin use its local currency, Renminbi (RMB), as its
functional currency. Results of operations and cash flow are translated at
average exchange rates during the period, and assets and liabilities are
translated at the end of period exchange rates. Translation adjustments
resulting from this process are included in accumulated other comprehensive
income in stockholders’ equity. Transaction gains and losses that arise from
exchange rate fluctuations from transactions denominated in a currency other
than the functional currency are included in the results of operations as
incurred.
The PRC
government imposes significant exchange restrictions on fund transfers out of
the PRC that are not related to business operations. These restrictions have not
had a material impact on the Group because it has not engaged in any significant
transactions that are subject to the restrictions.
The
exchange rates used to translate amounts in RMB into USD for the purposes of
preparing the consolidated financial statements were as follows:
September 30, 2009
|
September 30, 2008
|
|||||||
The
closing rate at
|
||||||||
RMB
: USD exchange rate
|
6.8376
|
6.8551
|
||||||
Average
nine months ended
|
||||||||
RMB
: USD exchange rate
|
6.8425
|
6.9989
|
||||||
Average
three months ended
|
||||||||
RMB
: USD exchange rate
|
6.8411
|
6.8529
|
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. There
is no assurance that the RMB amounts could have been, or could be, converted
into USD at the rates used in translation.
-16-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
2.
|
GENERAL
(Continued)
|
(k)
|
Revenue
recognition
|
Revenue
is recognized upon the delivery of goods to customers. Revenue is recognized
when all of the following criteria are met: Persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
seller’s price to the buyer is fixed or determinable, and collection is
reasonably assured.
(l)
|
Costs
of sales
|
Cost of
sales consists primarily of direct material costs, direct labor cost, and
applicable overhead costs attributable to the production of
products. Permanent write-down of inventory to the lower of cost or
market value is also reflected in the cost of revenues. As of September 30,
2009, and for the three and nine months ended September 30, 2009, there were no
write-downs of inventories, since any write-downs below market are deemed
temporary by management.
(m)
|
Advertising
|
The Group
expenses all advertising expenses as incurred. Advertising expenses
included in selling expenses were $146 and $4,418 for the nine months ended
September 30, 2009 and 2008, respectively. Advertising expenses for the three
months ended September 30, 2009 and 2008 were $146 and $70,
respectively.
(n)
|
Shipping
and handling
|
All
shipping and handling costs are expensed as incurred and included in selling
expense. Total shipping and handling expenses were $62,195 and
$70,558 for the nine months ended September 30, 2009 and 2008, respectively.
Shipping and handling expenses for the three months ended September 30, 2009 and
2008 were $19,465 and $17,501, respectively.
(o)
|
Pension
and Employee Benefits
|
Full time
employees in PRC entities participate in a government mandated multi-employer
defined contribution plan pursuant to which certain pension benefits, medical
care, unemployment insurance, employee housing fund and other welfare benefits
are provided to employees. Chinese labor regulations require the Group to accrue
for these benefits based on certain percentages of the employees' salaries.
Management believes full time employees who have passed the probation period are
entitled to such benefits. The total provisions for employee pension
were $99,194 and $124,640 for the nine months ended September 30, 2009, and
2008, respectively. The total provisions for employee pension for the three
months ended September 30, 2009, and 2008 were $33,072 and $42,883,
respectively.
-17-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
2.
|
GENERAL
(Continued)
|
(p)
|
Income
taxes
|
The Group
accounts for income tax using an asset and liability approach and allows for
recognition of deferred tax benefits in future years. Under the asset
and liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. A valuation allowance is provided for deferred tax assets
if it is more likely than not these items will either expire before the Group is
able to realize their benefits, or the future realization is
uncertain.
The Group
applied the provisions of ASC 740.10, “Accounting For Uncertainty In
Income Taxes”, which provides clarification related to the process associated
with accounting for uncertain tax positions recognized in our unaudited interim
condensed consolidated financial statements. ASC 740.10 prescribes a
more-likely-than-not threshold for financial statement recognition and
measurement of a tax position taken, or expected to be taken, in a tax return.
ASC 740.10 also provides guidance related to, among other things,
classification, accounting for interest and penalties associated with tax
positions, and disclosure requirements
The Group
recognizes accrued interest and penalties related to unrecognized tax benefits
in the provision for income taxes in our condensed consolidated statements of
operation. The Group’s policy for recording interest and penalties associated
with audits is to record such items as a component of income tax
expense.
(q)
|
Statutory
reserves
|
Pursuant
to the applicable laws in PRC, PRC entities are required to make appropriations
to three non-distributable reserve funds, namely the statutory surplus reserve,
statutory public welfare fund, and discretionary surplus reserve, based on
after-tax net earnings as determined in accordance with the PRC GAAP, after
offsetting any prior years’ losses. Appropriation to the statutory surplus
reserve should be at least 10% of the after-tax net earnings until the reserve
is equal to 50% of the Company's registered capital. Appropriation to
the statutory public welfare fund is 5% to 10% of the after-tax net
earnings. The statutory public welfare fund is established for
the purpose of providing employee facilities and other collective benefits to
the employees and is non-distributable other than in
liquidation. Beginning from January 1, 2006, enterprises have no
further requirements to make the appropriation to the statutory public welfare
fund. The Group does not make appropriations to the discretionary
surplus reserve fund.
As
provided in WFOE’s and Yanglin’s Articles of Association, WFOE’s and Yanglin’s
net income after taxation can only be distributed as dividends after
appropriation has been made for the following:
(i)
|
Making
up cumulative prior years’ losses, if
any;
|
(ii)
|
Allocations
to the “Statutory surplus reserve” of at least 10% of net income after
taxation, as determined under PRC accounting rules and regulations, until
the fund amounts to 50% of the Company's registered capital, which is
restricted for set off against losses, expansion of production and
operation or increase in registered
capital;
|
(iii)
|
Allocations
to the discretionary surplus reserve, if approved in the shareholders’
general meeting.
|
-18-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
2.
|
GENERAL
(Continued)
|
The
Company established a statutory surplus reserve as well as a statutory common
welfare fund and commenced to appropriate 10% and 5%, respectively, of the PRC
net income after taxation to these reserves. The amounts included in the
statutory reserves consisted of surplus reserve of $3,752,424 and common welfare
fund of $1,876,212 as of September 30, 2009.
(r)
|
Comprehensive
income (loss)
|
Comprehensive
income (loss) is defined to include all changes in equity except those resulting
from investments by owners and distributions to owners. Among other
disclosures, all items that are required to be recognized under current
accounting standards as components of comprehensive income (loss) are required
to be reported in a financial statement that is presented with the same
prominence as other financial statements. The Group’s current component of other
comprehensive income (loss) is the foreign currency translation
adjustment.
-19-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
2. GENERAL
(Continued)
(s)
|
Earnings per
share
|
The
Company reports earnings per share in accordance with the provisions of FASB ASC
260.10, "Earnings Per Share.” FASB ASC 260.10 requires presentation of
basic and diluted earnings per share in conjunction with the disclosure of the
methodology used in computing such earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common
stockholders by the weighted average common shares outstanding during the
period. Diluted earnings per share takes into account the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised and converted into common stock using the treasury
method.
(t)
|
Subsequent
events
|
The
Company evaluated subsequent events through November 12, 2009, which
represents the date the financial statements were available for
issuance.
(u)
|
Recent
accounting pronouncements
|
In April
2009, the FASB issued ASC 820.10, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly”. ASC 820.10 provides additional
guidance for estimating fair value when the volume and level of activity for the
asset or liability have significantly decreased and also includes guidance on
identifying circumstances that indicate a transaction is not orderly for fair
value measurements. ASC 820.10 shall be applied prospectively with retrospective
application not permitted. This ASC shall be effective for interim and
annual periods ending after June 15, 2009, with early adoption permitted
for periods ending after March 15, 2009. An entity early adopting this ASC
820.10 must also early adopt ASC 320.10, “Recognition and Presentation of
Other-Than-Temporary Impairments”. Additionally, if an entity elects to early
adopt either ASC 825.10,, “Interim Disclosures about Fair Value of Financial
Instruments” or ASC 320.10, it must also elect to early adopt ASC 820.10. The
adoption of ASC 820.10 did not have a material impact on the Company’s
consolidated financial statements.
In April
2009, the FASB issued ASC 805, “Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies”. ASC 805
addresses the initial recognition, measurement and subsequent accounting for
assets and liabilities arising from contingencies in a business combination, and
requires that such assets acquired or liabilities assumed be initially
recognized at fair value at the acquisition date if fair value can be determined
during the measurement period. If the acquisition-date fair value cannot be
determined, the asset acquired or liability assumed arising from a contingency
is recognized only if certain criteria are met. This FASB Staff Positions
(“FSP”) also requires that a systematic and rational basis for subsequently
measuring and accounting for the assets or liabilities be developed depending on
their nature. This ASC is effective for assets or liabilities arising from
contingencies in business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company does not anticipate that the adoption of this
statement will have a material impact on its consolidated financial statements,
absent any material business combinations.
-20-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
2.
|
GENERAL
(Continued)
|
In June
2009, the FASB issued ASC 860, “Accounting for Transfers of Financial Assets”,
which requires entities to provide more information regarding sales of
securitized financial assets and similar transactions, particularly if the
entity has continuing exposure to the risks related to transferred financial
assets. ASC 860 eliminates the concept of a “qualifying special-purpose entity,”
changes the requirements for derecognizing financial assets and
requires additional disclosures. ASC 860 is effective for fiscal years
beginning after November 15, 2009. The Company has not completed the assessment
of what impact ASC 860 will have on the Company’s consolidated financial
statements.
In
June 2009, the FASB issued ASC810.10, guidance to change financial reporting by
enterprises involved with variable interest entities (“VIEs”) which
modifies how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should
be consolidated. This pronouncement clarifies that the determination of whether
a company is required to consolidate an entity is based on, among other
things, an entity’s purpose and design and a company’s ability to direct the
activities of the entity that most significantly impact the entity’s
economic performance. The guidance requires an ongoing reassessment of whether a
company is the primary beneficiary of a variable interest entity. This
guidance also requires additional disclosures about a company’s involvement in
variable interest entities and any significant changes in risk exposure due
to that involvement. This guidance is effective for fiscal years beginning after
November 15, 2009. The Company has not completed the assessment of what
impact this guidance will have on the Company’s consolidated financial
statements.
In August
2009, the FASB issued ASU No. 2009-05, “Measuring Liabilities at Fair Value”.
ASU 2009-05 amended ASC 820, “Fair Value Measurements”. Specifically, ASU
2009-05 provides clarification that in circumstances in which a quoted price in
an active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the following
methods: 1) a valuation technique that uses a) the quoted price of the identical
liability when traded as an asset or b) quoted prices for similar liabilities or
similar liabilities when traded as assets and/or 2) a valuation technique that
is consistent with the principles of ASC 820 (e.g. an income approach or market
approach). ASU 2009-05 also clarifies that when estimating the fair value of a
liability, a reporting entity is not required to adjust to include inputs
relating to the existence of transfer restrictions on that liability. The
Company does not anticipate that the adoption of this statement will have a
material impact on its consolidated financial statements.
In
October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue
Arrangements” and ASU No. 2009-14, “Certain Revenue Arrangements That Include
Software Elements.” These amendments address how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting, and how the arrangement consideration should be allocated among the
separate units of accounting. These amendments may be applied retrospectively or
prospectively for new or materially modified arrangements and early adoption is
permitted. The Company does not anticipate that the adoption of this statement
will have a material impact on its consolidated financial
statements.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on our consolidated financial statements
upon adoption.
-21-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
3.
|
FAIR
VALUE
|
The
Company has categorized our assets and liabilities recorded at fair value based
upon the fair value hierarchy specified by FASB ASC 820.
The
levels of fair value hierarchy are as follows:
|
·
|
Level
1 inputs utilize quoted prices (unadjusted) in active markets for
identical assets or liabilities that we have the ability to
access.
|
|
·
|
Level
2 inputs utilize other-than-quoted prices that are observable, either
directly or indirectly. Level 2 inputs include quoted prices for similar
assets and liabilities in active markets, and inputs such as interest
rates and yield curves that are observable at commonly quoted
intervals.
|
·
|
Level
3 inputs are unobservable and are typically based on our own assumptions,
including situations where there is little, if any, market
activity.
|
In
certain cases, the inputs used to measure fair value may fall into different
levels of the fair value hierarchy. In such cases, the Company categorizes such
financial asset or liability based on the lowest level input that is significant
to the fair value measurement in its entirety. Our assessment of the
significance of a particular input to the fair value measurement in its entirety
requires judgment and considers factors specific to the asset or
liability.
Both
observable and unobservable inputs may be used to determine the fair value of
positions that are classified within the Level 3 category. As a result, the
unrealized gains and losses for assets within the Level 3 category
presented in the tables below may include changes in fair value that were
attributable to both observable (e.g., changes in market interest rates) and
unobservable (e.g., changes in historical company data) inputs.
The
following are the major categories of assets measured at fair value on a
nonrecurring basis during the nine month period ended September 30, 2009,
using quoted prices in active markets for identical assets (Level 1);
significant other observable inputs (Level 2); and significant unobservable
inputs (Level 3):
Level 1:
Quoted Prices
in Active
Markets for
Identical
Assets
|
Level 2:
Significant
Other
Observable
Inputs
|
Level 3:
Significant
Unobservable
Inputs
|
Total at
September 30, 2009
|
Total
Impairment
for the Nine
Months Ended
September 30, 2009
|
||||||||||||||||
Land
use rights
|
$ | -0- | $ | -0- | $ | 3,531,255 | $ | 3,531,255 | $ | -0- | ||||||||||
Railroad
use rights
|
-0- | -0- | 938,215 | 938,215 | -0- | |||||||||||||||
Total
|
$ | -0- | $ | -0- | $ | 4,469,470 | $ | 4,469,470 | $ | -0- |
-22-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
4.
|
CREDIT
RISK AND CUSTOMERS AND VENDORS
CONCENTRATIONS
|
Financial
instruments which potentially expose the Group to concentrations of credit risk,
is cash and accounts receivable as of September 30, 2009 and December 31, 2008.
The Group performs ongoing evaluations of its cash position and credit
evaluations to ensure sound collections and minimize credit losses
exposure.
As of
September 30, 2009 and December 31, 2008, respectively, the
Group’s non-restricted cash were all with banks in the PRC where there
is currently no rule or regulation mandated on obligatory insurance of bank
accounts.
As of
September 30, 2009 and December 31, 2008, respectively, the Group’s restricted
cash was with a trust account in the U.S. Cash accounts at financial
institutions in the U.S. may exceed the federal depository insurance coverage
limits. In October 2008, the FDIC increased its insurance from $100,000 per
depositor to $250,000 and to an unlimited amount for non-interest bearing
accounts. The coverage increase, which is temporary, extends through December
31, 2013.
For the
three and nine months ended September 30, 2009 and 2008, respectively, all of
the Group’s sales were generated within the PRC. In addition, all accounts
receivable as of September 30, 2009 and December 31, 2008 are from entities
within the PRC.
For the
three months ended September 30, 2009, no customer accounted for 10% or more of
the Group’s revenue.
For the
three months ended September 30, 2009, no vendor accounted for 10% or more of
the Group’s purchases.
5.
|
CASH-RESTRICTED
|
Cash-restricted represents
restricted cash maintained in a trust account in the United States for the
purpose of payment for investor and public relations affairs.
-23-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
6.
|
TRADE
RECEIVABLES, NET
|
Details
of trade receivables are as follows:
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
(unaudited)
|
||||||||
Trade
receivables, gross
|
$ | 25,197 | $ | 9,352 | ||||
Provision
for allowance for doubtful accounts
|
(1,216 | ) | (1,309 | ) | ||||
Net
balance at end of period
|
$ | 23,981 | $ | 8,043 |
An
analysis of the allowance for doubtful accounts for the three and nine months
ended September 30, 2009 is as follows:
The nine
months ended
September 30,
2009
|
The three
months ended
September 30,
2009
|
|||||||
Balance
at beginning of period/year
|
$ | 1,309 | $ | 1,152 | ||||
Addition
of bad debt expense
|
(93 | ) | 64 | |||||
Balance
at end of period
|
$ | 1,216 | $ | 1,216 |
An
allowance for doubtful accounts is established when collection of the full
amount is no longer probable. Management reviews and adjusts this
allowance periodically based on historical experience, the current economic
climate as well as its evaluation of the collectability of outstanding accounts.
The Group evaluates the credit risks of its customers utilizing historical data
and estimations of future performance.
-24-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
7.
|
INVENTORIES
|
Inventories
comprise of the following:
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
(unaudited)
|
||||||||
Finished
goods
|
$ | 1,511,808 | $ | 904,375 | ||||
Raw
materials
|
912,959 | 2,991,959 | ||||||
|
|
|||||||
Balance
at end of period
|
$ | 2,424,767 | $ | 3,896,334 |
8.
|
OTHER
RECEIVABLES
|
Details
of other receivables are as follows:
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
(unaudited)
|
||||||||
Advances
for materials
|
$ | 41,126 | $ | 32,271 | ||||
Prepayment
for customers' transportation costs
|
20,647 | - | ||||||
Advances
for travel
|
2,297 | 11,417 | ||||||
Loans
to employees
|
- | 57,902 | ||||||
Prepayment
for certification and guarantee
|
96,525 | - | ||||||
Sundry
|
7,098 | 13,400 | ||||||
|
|
|||||||
Balance
at end of period
|
$ | 167,693 | $ | 114,990 |
Loans to
employees are unsecured, interest-free, and repayable on demand.
-25-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
9.
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
Property,
plant and equipment comprise of the following at September 30, 2009 and December
31, 2008 respectively:
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
(unaudited)
|
||||||||
Buildings
|
$ | 9,308,056 | $ | 5,908,205 | ||||
Machinery
and equipment
|
28,746,071 | 15,826,005 | ||||||
Office
equipment
|
131,934 | 130,512 | ||||||
Motor
vehicles
|
1,168,240 | 1,165,410 | ||||||
39,354,301 | 23,030,132 | |||||||
Less:
accumulated depreciation
|
(10,775,900 | ) | (7,725,246 | ) | ||||
28,578,401 | 15,304,886 | |||||||
Construction
in progress
|
- | 16,225,050 | ||||||
Balance
at end of period
|
$ | 28,578,401 | $ | 31,529,936 |
Impairment Loss of Property
and Equipment
The Group
analyzes the assets for impairment when events or circumstances occur that
indicate the carrying value may not be recoverable. The Group considers a
property to be impaired when the sum of future undiscounted cash flows during
its remaining estimated holding period is less than the carrying value of the
asset. For impaired assets, the Group records an impairment charge equal to the
excess of the property’s carrying value over its fair value.
During
the quarter ended September 30, 2009, the Group reviewed the idle production
facility for impairment and identified certain assets to be
technologically outdated and thereby indicating a reduction in value.
Assets exhibiting these characteristics were tested for impairment based on
management’s estimate of expected future undiscounted cash flows from
operations. The fair value of the plant and equipment is generally determined
based on a discounted cash flow analysis. Based on management’s assessment, the
Group recognized a pre-tax impairment charges totaling $584,699 for the three
and nine months ended September 30, 2009. There were no impairment charges
recorded during the three and nine months ended September 30,
2008.
Included
in the above balances are assets deemed as temporary idle by the management,
comprising of the following:
Buildings
|
$ | 139,513 | ||
Machinery
and equipment
|
3,036,685 | |||
Office
equipment
|
3,750 | |||
3,179,948 | ||||
Less:
accumulated depreciation
|
(2,609,572 | ) | ||
Net
book value
|
$ | 570,376 |
-26-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
9.
|
PROPERTY,
PLANT AND EQUIPMENT, NET
(continued)
|
Depreciation
expense is included in the statement of operations and comprehensive (loss)
income as follows:
Three months
ended
September 30,
2009
|
Three months
ended
September 30,
2008
|
Nine months
ended
September
30, 2009
|
Nine months
ended
September
30, 2008
|
|||||||||||||
Cost
of sales
|
$ | 790,223 | $ | 476,791 | $ | 1,908,398 | $ | 1,107,195 | ||||||||
General
and administrative expenses
|
82,700 | 112,290 | 555,573 | 439,387 | ||||||||||||
Total
depreciation expense
|
$ | 872,923 | $ | 589,081 | $ | 2,463,971 | $ | 1,546,582 |
Building,
machinery and equipment are pledged as collateral for certain loans as of
December 31, 2008. As of September 30, 2009, such liens were removed
from the assets as all bank loans were paid off. In the event that the Company
borrows money, such assets will need to be pledged pursuant to a new loan
agreement with Agricultural Development Bank of China.
-27-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
10.
|
INTANGIBLE
ASSETS, NET
|
Intangible
assets are as follows:
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
(unaudited)
|
||||||||
Land
use rights, at cost
|
$ | 4,004,294 | $ | 3,994,597 | ||||
Railway
use rights, at cost
|
1,199,251 | 1,151,125 | ||||||
Less:
accumulated amortization
|
(734,075 | ) | (526,006 | ) | ||||
Balance
at end of period
|
$ | 4,469,470 | $ | 4,619,716 |
Land
use rights were pledged as collateral for certain loans as of December 31, 2008.
As of September 30, 2009, such liens were removed from land use right as
all bank loans were paid off. In the event that the Company borrows money, such
assets will need to be pledged pursuant to a new loan agreement with
Agricultural Development Bank of China.
Amortization
expenses are included in the statement of operations and comprehensive income
(loss) as follows:
Three months
ended
September 30,
2009
|
Three months
ended
September 30,
2008
|
Nine months
ended
September
30, 2009
|
Nine months
ended
September
30, 2008
|
|||||||||||||
Cost
of sales
|
31,970 | 21,775 | 97,232 | 63,992 | ||||||||||||
General
and administrative expenses
|
21,823 | 85,082 | 64,113 | 85,082 | ||||||||||||
Total
amortization expense
|
53,793 | 106,857 | 161,345 | 149,074 |
The
estimated aggregate amortization expenses for intangible assets for the five
succeeding years are as follows:
Year
|
||||
Remainder
of 2009
|
$ | 53,820 | ||
2010
|
215,280 | |||
2011
|
215,280 | |||
2012
|
215,280 | |||
2013
|
215,280 | |||
thereafter
|
3,554,530 | |||
|
||||
Total
|
$ | 4,469,470 |
-28-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
11.
|
SHORT-TERM
BORROWING
|
A)
|
Short-term bank loans
are as follows:
|
September
30,
|
December
31,
|
Collaterals
|
|||||||
2009
|
2008
|
||||||||
(unaudited)
|
|||||||||
Loans
from Agricultural Development Bank of China, interest rates at 5.31% per
annum, due October 29, 2009
|
$ | - | $ | 6,711,214 |
Building,
machinery and equipment and land use rights
|
||||
Balance
at end of period
|
$ | - | $ | 6,711,214 |
These
loans were obtained and used by Yanglin for working capital. Interest expense
for the nine months ended September 30, 2009 and 2008 were $316,182 and
$672,509, respectively. Interest expense for the three months ended September
30, 2009 and 2008 were $88,017 and $189,305, respectively.
B)
|
Credit
lines
|
The
Group has a credit line of up to $28 million (equivalent to RMB 190 million)
with Agricultural Development Bank of China.
The
term of the credit line is for one year. The loan borrowed within this
credit line can only be used to purchase soybeans. The interest rate
is 6.93% and subject to adjustment depending on the interest rate of loans
adjusted by the People’s Bank of China. The loans would be secured by the
Group’s assets, i.e., building, machinery and land use
rights.
-29-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
12.
|
OTHER
PAYABLES
|
Other
payables are as follows:
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
(unaudited)
|
||||||||
Due
for construction
|
$ | 824,342 | $ | 670,368 | ||||
Others
|
13,037 | 13,035 | ||||||
Balance
at end of period
|
$ | 37,379 | $ | 683,403 |
Due
for construction represents the balances due to respective contractors, which
consist primarily of retainer payable which are expected to be paid after the
Company accepts the work performed.
13.
|
LOANS
FROM RELATED PARTIES
|
Loans
from related parties are as follows:
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
(unaudited)
|
||||||||
Loans
from certain employees, interest rates at 7.722% and 9.405% per annum
respectively, with various installments, due October 28,
2016
|
$ | 380,629 | $ | 489,827 | ||||
Current
portion due within one year
|
(52,695 | ) | (55,149 | ) | ||||
Balance
at end of period
|
$ | 327,934 | $ | 434,678 |
These
loans were obtained and used by Yanglin for working capital. All of the
installments due during 2009 were paid on their due
dates. Interest paid for the nine months ended September 30, 2009 and
2008 was $25,235 and $36,466, respectively and interest paid for the three
months ended September 30, 2009 and 2008 was $7,883 and $12,148,
respectively.
-30-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
13.
|
LOANS
FROM RELATED PARTIES
(Continued)
|
These
loans are between Yanglin, Mr, Shulin Liu, the CEO of Yanglin, and certain
employees and officers of Yanglin. Mr. Shulin Liu gifted 12 houses to these
employees and officers for their long-term services, and these employees and
officers personally obtained mortgage loans from the Industrial and
Commercial Bank of China, using these houses as collateral. The
employees simultaneously loaned the proceeds to Yanglin to be used as
working capital. These employees and officers have been making principal and
interest payments on the loans directly to the bank and Yanglin reimburses them
for the full amount.
The
future principal payments under the bank loans as of September 30, 2009 are as
follows:
Within
1 year
|
$ | 52,695 | ||
Between
1 to 5 years
|
205,028 | |||
More
than 5 years
|
122,906 | |||
Total
|
$ | 380,629 |
-31-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
14.
|
CONVERTIBLE
PREFERRED STOCK AND WARRANTS
|
On
October 3, 2007, the Company sold 10,000,000 shares of Series A Convertible
Preferred Stock and various stock purchase warrants for a cash consideration
totaling $21.5 million dollars. The number of shares, exercise price
and contractual term eligible to be purchased with the warrants are
summarized in the following table:
Series of warrant
|
Number of shares
|
Exercise price
|
Contractual term
|
||||||
Series
A
|
10,000,000
|
$
|
2.75
|
5.00
years
|
|||||
Series
B
|
5,000,000
|
$
|
3.50
|
5.00
years
|
|||||
Series
J
|
7,801,268
|
$
|
2.37
|
1.50
years
|
|||||
Series
C
|
7,801,268
|
$
|
3.03
|
5.00
years
|
|||||
Series
D
|
3,900,634
|
$
|
3.85
|
5.00
years
|
On
April 3, 2009, series J warrant expired. The series C and D warrants
were exercisable only if the J warrants are exercised. Therefore,
since the J warrants have expired, C and D warrants also
expired.
Series A
Convertible Preferred Stock has liquidation rights senior to common stock and to
any other class or series of stock issued by the Company not designated as
ranking senior to or pari passu with Series A Convertible Preferred
Stock. In the event of a liquidation of the Company, holders of
Series A Convertible Preferred Stock are entitled to receive a distribution
equal to $2.15 per share prior to any distribution to the holders of common
stock or any other stock that ranks junior to the Series A Convertible Preferred
Shares. Series A Convertible Preferred Stock is entitled to non-cumulative
dividends only upon declaration of dividends by the Company. To date,
no dividends have been declared or accrued. Series A Convertible
Preferred Stock will participate based on their respective “as-if” conversion
rates if the Company declares any dividends. Holders of Series A
Convertible Preferred Stock also have voting rights required by applicable law
and the relevant number of votes shall be equal to the number of shares of
Common Stock issuable upon conversion of Series A Convertible Preferred
Stock.
The gross
proceeds of the sale was $21.5 million. The proceeds from the sale were
allocated to Series A Convertible Preferred Stock, warrants and beneficial
conversion features based on the fair value of the securities. The
value of Series A Convertible Preferred Stock was determined by reference to the
market price of the common stock into which it converts, and the gross value of
the warrants was calculated using the Black-Scholes model with the following
assumptions: expected life of 5 year, volatility of 27% and an
interest rate of 4.24%.
The
Company recognized a beneficial conversion feature discount on Series A
Convertible Preferred Stock at its intrinsic value, which was the fair value of
the common stock at the commitment date for Series A Convertible Preferred Stock
investment, less the effective conversion price but limited to the $21.5 million
of proceeds received from the sale. The Company recognized the $8.0 million
beneficial conversion feature as an increase in paid in capital in the
accompanying consolidated balance sheet on the date of issuance of Series A
Convertible Preferred Stocks since these shares were convertible at the issuance
date.
In
connection to the Series A Convertible Preferred Stock as described above, on
October 10, 2007, the Company also issued 1,000,000 Series E warrants at an
exercise price of $2.58 per share and 500,000 Series F warrants at an exercise
price of $3.01 per share to an investment banker and financial advisor
respectively. These warrants have a five years term. The
fair value of Series E warrants was $532,800 and Series F warrants was $205,452,
and was recorded as offering cost of Series A Convertible Preferred
Stock transaction.
-32-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
14.
|
CONVERTIBLE
PREFERRED STOCK AND WARRANTS
(Continued)
|
The fair
value of the Series E and F warrants was calculated using the Black-Scholes
model with the following assumptions: expected life of 5 year,
expected dividend rate of 0%, volatility of 27% and an interest rate of
4.24%.
The
agreement also provides that if the Company doesn’t file, or if the registration
statements aren’t declared effective throughout the required period, or if the
Company ceases to trade on certain exchanges as defined, the Company shall pay
damages equal to 1.5% of the amount invested for each calendar month capped at a
cumulative damage payment amount of 15%. Further, if the Company
fails to obtain a listing on NASDAQ or the New York Stock Exchange, then
1,000,000 shares of common stock of the Company will be given to the
investors. The Company is accounting for these penalties in
accordance with ASC 450 “Accounting for Contingencies”, whereby the penalty
will not be recorded as a liability until and if it is probable the penalty will
be incurred. No penalty has been recorded in the accompanying consolidated
financial statements as of September 30, 2009.
Pursuant
to the Registration Rights Agreement dated as of October 3, 2007 by and among
the Company and certain holders (the Holders), the Company agreed to have a
registration statement registering certain of the securities of the Holders
declared effective with the Securities and Exchange Commission (“SEC”) on or
prior to the Effectiveness Date defined in the Registration Rights Agreement,
which was December 31, 2008, or pay the liquidated damages.
Although
the registration statement was not declared effective as of December 31,
2008, pursuant to a Waiver and Release dated December 31, 2008, the
Holders have waived their right to the liquidated damages for the Company’s
failure to have the registration statement declared effective on or prior
to the Effectiveness date under Registration Rights Agreement.
In
exchange for the waiver and release of the liquidated damages, the Company
entered into an Agreement dated December 31, 2008 (the Agreement). Under the
Agreement, the Company agreed to hire and engage, by February 28, 2009, three
(3) independent directors as defined by NASDAQ Rule 4200(a)(15) and who are
acceptable to the Holders. Further, the Company shall comply with all of the
provisions of NASDAQ Rule 4350 by February 28, 2009. If these requirements are
not met, the Company shall pay to each Holder five percent (5%) of its initial
investment under the Securities Purchase Agreement by and among the Company and
the Holders dated October 3, 2007. On February 27, 2009, the Company signed an
addendum to the Agreement with the Holders, which extended the deadline for
hiring and engaging three (3) independent directors to March 13, 2009. On March
9, 2009, the Company adopted a form of new Bylaws, appointed three (3)
independent directors, established three (3) standing committees under the Board
of Directors (audit committee, compensation committee and governance and
nominating committee), and approved the articles of the three (3)
above mentioned standing committees and the Code of Conduct and Ethics, and
thus has been compliant with the provisions of NASDAQ Rule 4350. In addition,
the Company agreed to effect and announce, no later than June 30, 2009, a change
to the Company’s current independent audit firm and engage a new independent
audit firm listed as a Top 10 audit firm according to Public Accounting Report’s
2008 Annual Audit Rankings to audit the 2009 financial statements and review the
interim financial statements. The Company has engaged UHY LLP, Inc.
as its independent audit firm starting with the quarter ended June 30,
2009.
If these
requirements were not met, the Company had to pay to each Holder ten percent
(10%) of its initial investment under the Securities Purchase Agreement.
Furthermore, the Company and the Holders agreed to extend the required
Effectiveness Date of the Company’s Registration Statement filed with the
Securities and Exchange Commission to September 30, 2009. The Company has
complied with these requirements as of September 30, 2009 and the
Registration Statement was declared effective by the SEC on June 29,
2009.
-33-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
15.
|
EARNINGS
(LOSS) PER SHARE
|
The
calculation of the basic and diluted earnings (loss) per share attributable to
the common stock holders is based on the following data:
Three
months ended
|
Nine
months ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Numerator
|
||||||||||||||||
Earnings
(loss):
|
||||||||||||||||
Earnings
(loss) for the purpose of basic earnings (loss) per share
|
$ | (5,701,986 | ) | $ | 2,697,601 | $ | (12,895,314 | ) | $ | 12,112,205 | ||||||
Effect
of dilutive potential common stock
|
- | - | - | - | ||||||||||||
Earnings
(loss) for the purpose of dilutive earnings (loss) per
share
|
$ | (5,701,986 | ) | $ | 2,697,601 | $ | (12,895,314 | ) | $ | 12,112,205 | ||||||
Denominator
|
||||||||||||||||
Number
of shares:
|
||||||||||||||||
Weighted
average number of common stock for the purpose of basic earnings (loss)
per share
|
20,000,003 | 20,000,003 | 20,000,003 | 20,000,003 | ||||||||||||
Effect
of dilutive potential common stock - conversion of convertible preferred
stock
|
- | 9,999,999 | - | 9,999,999 | ||||||||||||
Effect
of dilutive potential common stock - conversion of
warrants
|
- | 10,661,879 | - | 8,339,883 | ||||||||||||
Weighted
average number of common stock for the purpose of dilutive earnings (loss)
per share
|
20,000,003 | 40,661,881 | 20,000,003 | 38,339,885 |
Because
the Company reported a net loss for the three and nine months ended September
30, 2009, common stock equivalents were anti-dilutive; therefore, the
amounts reported for basic and diluted loss per share are the same.
The
computation of basic loss per share for the three and nine months ended
September 30, 2009 and 2008 excludes the following potentially dilutive
warrants because their inclusion would be anti-dilutive.
Three
Months Ended September 30,
|
Nine
Months Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Common
Stock Purchase Warrants
|
||||||||||||||||
Series
A
|
10,000,000
|
-
|
10,000,000
|
-
|
||||||||||||
Series
B
|
5,000,000
|
-
|
5,000,000
|
-
|
||||||||||||
Series
C
|
-
|
7,801,268
|
-
|
7,801,268
|
||||||||||||
Series
D
|
-
|
3,900,634
|
-
|
3,900,634
|
||||||||||||
Series
E
|
1,000,000
|
1,000,000
|
1,000,000
|
1,000,000
|
||||||||||||
Series
F
|
500,000
|
500,000
|
500,000
|
500,000
|
||||||||||||
16,500,000
|
13,201,902
|
16,500,000
|
13,201,902
|
-34-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
16.
|
INCOME
TAXES
|
The
Company was incorporated in Nevada and is subject to U.S. income tax. No
provision for income taxes have been made as the Company has a taxable loss for
the three and nine months ended September 30, 2009 and 2008. The
Company has accumulated net losses of $8,499,513 as of September 30, 2009. A
full valuation allowanace of $2,889,834 has been provided against the deferred
tax asset as of September 30, 2009.
On
October 3, 2007, the Company's foreign subsidiaries became Controlled Foreign
Corporations whose undistributed earnings may be subject to U.S. income
tax. Should the earnings be remitted as dividends, the Company may be subject to
additional U.S. taxes, net of allowable foreign tax credits. The Company
considers undistributed earnings of foreign subsidiaries amounting to
approximately $17,268,722 as of September 30, 2009, to be permanently reinvested
outside of the United States and, accordingly, no provision for U.S. deferred
taxes have been recorded with respect to such earnings as allowed under ASC
740.30, “Accounting for Income Taxes-Other considerations or special
areas”.
Faith
Winner was incorporated in the British Virgin Islands and is not subject to
income taxes under the current laws of the British Virgin
Islands.
WFOE and
Yanglin, being registered in the PRC, are subject to PRC’s Enterprise Income Tax
(“EIT”). Under applicable income tax laws and regulations, an enterprise located
in PRC, including the district where the Company’s operations are located, is
subject to a 25% enterprise income tax rate. However,
Yanglin has been named as a National Key Leading Enterprise in Agriculture and
awarded a tax exemption through 2009. Subsequent to December 31,
2009, a review by the central government of China is required for an extension
of the tax exemption status.
-35-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
16.
|
INCOME
TAXES (Continued)
|
The
Company has incurred a net loss of $ 12,645,915 in its PRC subsidiaries in the
nine months ended September 30, 2009, which may be carried forward for the next
five years (i.e., as a deduction against taxable income) and thus reduce income
tax expenses. A full valuation allowance of $3,161,479 has been provided against
the deferred tax asset as of September 30, 2009. Provided that the
Company could maintain the status of National Key Leading Enterprise in
Agriculture for the next five years, the Company will not be subject to any
income tax and, thus, the benefits of such carry-over losses can not be
realized. If the Company can not obtain the status of National Key Leading
Enterprise in Agriculture for the next five years, it may realize the benefits
of such carry-over losses.
Management
does not anticipate any potential future adjustments which would result in a
material change to its financial tax position. As a result, there is
no unrecognized tax benefit.
As of
September 30, 2009, the Group did not accrue any interest and penalties in
connection with ASC 740.10.
-36-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
17.
|
PARENT-ONLY
FINANCIAL STATEMENTS
|
As
mentioned in note 1 to the financial statements, as a result of entering into
the contractual agreements, WFOE is deemed to control Yanglin as a Variable
Interest Entity (“VIE”). These agreements may have the restrictions on the
ability of Yanglin to transfer funds to the Company through intercompany loans,
advances and cash dividends which consist of additional paid in capital,
statutory reserves and retained earnings of $53,098,143 and $65,744,088,
respectively as at September 30, 2009 and December 31, 2008.
The
following presents unconsolidated financial information of the Company
only:
Balance
Sheets as of September 30, 2009 and December 31, 2008
September 30, 2009
|
December 31, 2008
|
|||||||
Cash restricted
|
$ | 457,138 | $ | 484,000 | ||||
Investments
in subsidiaries
|
59,775,413 | 72,421,357 | ||||||
Total
assets
|
$ | 60,232,551 | $ | 72,905,357 | ||||
Other
current liabilities
|
256,386 | $ | 33,878 | |||||
Total
liabilities
|
$ | 256,386 | $ | 33,878 | ||||
Total
shareholders’ equity
|
59,976,165 | 72,871,479 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 60,232,551 | $ | 72,905,357 |
-37-
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars) (Unaudited)
17.
|
PARENT-ONLY
FINANCIAL STATEMENTS
(Continued)
|
Statements
of Operations for the nine months ended September 30:
2009
|
2008
|
|||||||
Investment
(loss) income
|
$ | (12, 645,944 | ) | $ | 12,152,205 | |||
General
and administrative expenses
|
(249,370 | ) | (40,000 | ) | ||||
(Loss)
income from operation before income taxes
|
(12,895,314 | ) | 12,112,205 | |||||
Income
taxes
|
- | - | ||||||
Net
(loss) income
|
$ | (12,895,314 | ) | $ | 12,112,205 |
18.
|
SUBSEQUENT
EVENT
|
Subsequent
to September 30, 2009, 116,279 shares of the Series A Convertible Preferred
Stock were converted into the same number of shares of common
stock.
-38-
ITEM
2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the notes
to those financial statements appearing elsewhere in this Form 10-Q. This
discussion contains forward-looking statements that involve significant risks
and uncertainties. As a result of many factors, such as those set forth under
"Forward Looking Statements" and "Item 1A. Risk Factors" and elsewhere in this
Form 10-Q, our actual results may differ materially from those anticipated in
these forward-looking statements.
Company
Overview
We are a
leading, comprehensive non-genetically modified (non-GM) soybean processor
in People’s Republic of China (“PRC”). We currently manufacture ordinary
soybean oil, salad oil and soybean meal in bulk package, which are sold
throughout China directly to our customers or through
distributors. Approximately 80% of our customers are located in
Northern China.
Our
operating facilities are located in Jixian County, a major soybean production
area in Heilongjiang Province, which is the main soybean growing region in
China. We maintain healthy, long-term relationship with local farmers and
soybean vendors, which helps to ensure the stability of our supply of raw
materials. Farmers deliver soybeans directly to our factories, thus we can
enjoy savings in transportation and purchasing costs. Our relationship with
customers (mostly distributors) are also well established, so we are able
to require them to pay the full amount in advance, minimizing accounts
receivables and supplementing our working capital.
The
manufacturing process includes sifting, crushing, heating and pressing soybeans,
extracting and separating oil from crushed soybeans, cleansing, hydrating and
packaging of oil as well as drying and packaging soybean meal. Our main products
include ordinary soybean oil, salad oil and soybean meal. We plan to broaden our
product line to include high end products such as squeezed oil, powdered soy oil
and protein concentrates, textured protein and defatted soybean
powder. We also plan to significantly expand the
production of salad oil. Equipment for manufacturing squeezed oil has been
installed, the production line for salad oil has been expanded and production of
these products began at the end of 2007. The production facilities for powdered
soybean oil have been built and are now in the trial production phase. The
pilot production of protein concentrates has already begun. we have provided
small quantities of commercial grade product to customers in order to solicit
feedback, so we can adjust the specifications of the product to satisfy the
specific needs of the customers. Defatted soy powder and textured protein
will be launched at a later date, depending on trends in the
market.
We sell
our products under the “Yanglin” brand name to various regions of the PRC
through our many distribution channels. In the three months ended September
30, 2009, we generated total revenue of approximately $39.6 million with a net
loss of $5.7 million. For the first nine months of 2009, the revenue and
net loss were $122.4 million and $12.9 million, respectively.
Our goal
is to become the market leader in China’s non-GM soybean industry of China, and
believe that we can accomplish this objective in the near future. We are
considering future expansion and acquisition opportunities, with the goal of
significantly increasing our processing capacity.
We are
also working to improve and strengthen our management and internal control over
financial reporting. We have engaged Ernst & Young as a consultant on our
Sarbanes-Oxley compliance project in 2007, and they had finished their review of
our internal control over financial reporting in 2008. This project reinforced
our ability to protect the interests of the company and its shareholders, while
improving management effectiveness and efficiency. We also hired outside
consultants recently to enhance our reporting capability.
-39-
Major Performance
Factors
Revenue
We derive
most of our revenue from the sales of 3 main products: soybean oil (4th grade),
salad oil and soybean meal. The revenue may be affected by the following
factors:
è
|
Processing
capacity of soybean;
|
è
|
Pricing
of the products;
|
è
|
Market
demand
|
Processing capacity of
soybean. Our current annual processing capacity of soybean is 520,000
metric tons. We processed approximately 274,000 metric tons in the first nine
months of 2009. Due to challenges created by the Chinese government’s reserve
purchase of soybean and the impact of enormous imports of soybean on domestic
soybean product markets (please refer to “cost of sales and gross profit”
section in the Results of Operations chapter below), we anticipate the total
processing volume of 2009 to be less than in 2008; thus the current
production capacity will be sufficient for 2009.
Pricing of the products. In general, our products
are priced consistently with market prices, with consideration for cost of
sales. However, prices are affected by several factors, including but not
limited to: pricing trends for domestic soybeans, the cost and volume of
imported soybeans, temporary sudden changes in supply-demand relationship, and
general economic factors and income level of consumers.
Market demand. Revenue growth
potential depends on market demand for our products. We believe that high growth
potential for our sales revenue exists due to several factors: 1) total market
demand for our products exceeds current production levels; 2) our products are
recognized as of high quality; 3) we maintain excellent relationships with our
customers; and, 4) we generally sell almost all of our production
volume.
Cost
of Sales
Cost
of sales generally consists of four major parts: raw materials, labor,
production overhead and manufacturing related depreciation. Raw materials refers
mainly to soybeans, and accounts for over 90% of the cost of sales (COS). Labor
cost are relatively low and comprise a very small portion of COS. Production
overhead includes auxiliary materials, utility expenses, machinery maintenance
costs, inspection costs and other related expenses. Depreciation costs are
applied to manufacturing facilities and equipment, such as production lines,
steam generators, factory buildings, etc.
Cost of
sales is determined primarily by the following factors, either directly or
indirectly:
è
|
Availability
and price of raw materials, especially soybeans.
|
è
|
Operating
efficiency of production
facilities.
|
Availability and price of raw
materials, especially soybeans. Raw materials costs accounts for a more
than 90% of cost of sales. Soybeans is the only major raw material,
so its price fluctuation will have a material impact on our cost. The price
of soybeans may be affected by a series of factors, including the production
volume of soybeans on national and international scale, weather, government
policies, and soybean transactions on commodity markets. Meanwhile, if there is
a shortage in the supply of raw materials, our production facilities will have
to operate at less than maximum efficiency. Our processing volume represents a
relatively small portion of the total soybean supply of Heilongjiang Province,
generally speaking the availability of raw materials is always high and thus
have little influence over our cost. However, because the price of soybean is
mainly determined by the market, and government policy may have a material
influence on it, for example, the national strategic purchase from late 2008 to
June 2009 had effectively raised soybean prices to a high level. Soybean prices
have a significant impact on our cost of sales.
-40-
Output ratio and operating efficiency of
production facilities. Output ratio is the ratio between the input of raw
materials (mostly soybeans) and the output of finished products. The more units
of finished products we can produce using a single unit of raw material, the
higher the output ratio. As labor, production overhead, and manufacturing
related depreciation expenses are mostly fixed, the more we produce, the lower
the unit cost. Our output ratio and operating efficiency are continuously
improving, due to the recent purchase and renovation of facilities and
equipment, the enhanced competence and proficiency of our staff and the
improvement of our management skills.
Gross
(Loss) Profit
Gross
(loss) profit is the result of the combined effects of the following
factors: (a) the selling price of our products, (b) the sales volume and the
individual profit margin of each product, and (c) the cost of sales. As we are a
middle stream processor, and the profit margin of middle stream processing is
usually relatively stable, under normal circumstances our gross
profit margin will be in the range from 7% to 9%, based on previous
experience. However, if exceptional circumstances exist, gross margin may be
seriously affected. Due to extremely unfavorable environmental factors, such as
the national purchase of soybean by the Chinese government at higher than market
price, and the low cost imports of soybean at large volume, we have suffered a
gross loss in the nine months ended September 30, 2009 (please refer to the
discussion on results of operations below).
Operating
Expenses
Operating
expenses consist of selling expenses and general & administrative expenses.
Generally speaking, operating expenses occupy only a small portion of total
costs and expenses.
Selling
expenses generally include business development expenses, sales meeting
expenses, loading and handling, advertising, sales-related staff salaries and
welfare expenses, and travel expenses. We expect these expenses to rise
considerably in the future, as we recruit more sales staff, expand our sales
network, establish new sales channels and, invest in promotion and advertising
to sell our products.
General
and administrative expenses cover the depreciation of office buildings and
equipment, office expenses and supplies, and management and administrative
salaries, etc. These expenses are typically fixed. General and administrative
expenses may increase, as we revise our organizational structure and improve our
management systems. As a public company, we need to maintain internal control
over financial reporting to comply with the Sarbanes-Oxley Act, which will
involve substantial redesign and restructuring of our internal control system
and processes. We expect that this will cause a material increase in
management expenses.
Income
Tax
We are
incorporated in the State of Nevada and Faith Winner (BVI) is incorporated under
the laws of the British Virgin Islands. We conduct all our operations
under certain contractual arrangements with Yanglin, a PRC company.
Although
we are subject to United States taxation, we do not anticipate incurring
significant United States income tax liability for the foreseeable future
because:
|
·
|
We
do not conduct any material business or maintain any branch office in the
United States;
|
-41-
|
·
|
The
earnings generated from our non-U.S. operating companies are generally
eligible for a deferral from United States taxation until such earnings
are repatriated to the United States;
and,
|
|
·
|
We
believe that we will not generate a significant amount of income
inclusions under the income imputation rules applicable to a United States
company that owns "controlled foreign corporations" for United States
federal income tax purposes.
|
Therefore,
we have made no provision for U.S. federal income taxes or tax benefits on the
undistributed earnings and/or losses.
Yanglin,
a PRC company, has income tax liabilities in the PRC. PRC enterprise income tax
is calculated based on taxable income determined under PRC tax regulations. In
accordance with Income Tax Law applicable to domestic companies, we are
generally subject to an enterprise income tax rate of 25%.
However,
as Yanglin has been recognized as a Key Leading Enterprise in the
Industrialization of Agriculture Industry by China’s central government, we
enjoy a complete exemption from income taxes. Our status is reviewed every two
years, and the next review has been postponed by the government until the end of
2009, which is for evaluating the tax status of 2010 and 2011.
Results of
Operations
The
Three Months Ended September 30, 2009 Compared with the Three Months Ended
September 30, 2008
Consolidated
Statement of Operations and
Comprehensive
(Loss) Income
|
The
three
months
Ended
Sep. 30,
2009
($)
|
The
three
months
ended
Sep. 30,
2008
($)
|
|||||||
(unaudited)
|
(unaudited)
|
||||||||
Net
Sales
|
$ | 39,570,374 | $ | 48,687,504 | |||||
Cost
of sales
|
(43,915,230 | ) | (45,254,311 | ) | |||||
Gross
(loss) profit
|
(4,344,856 | ) | 3,433,193 | ||||||
Selling
expenses
|
(26,764 | ) | (61,756 | ) | |||||
General
and administrative expenses
|
(668,239 | ) | (560,057 | ) | |||||
Impairment
loss
|
(584,699 | ) | - | ||||||
(Loss)
gain on disposal of property, plant and equipment
|
- | 74 | |||||||
(Loss)
income from operations
|
(5,624,558 | ) | 2,865,454 | ||||||
Interest
income
|
18,676 | 27,353 | |||||||
Interest
expense
|
(95,900 | ) | (195,075 | ) | |||||
Other
expenses
|
(204 | ) | (131 | ) | |||||
(Loss)
income from operations before income tax
|
(5,701,986 | ) | 2,697,601 | ||||||
Income
tax
|
- | - | |||||||
Net
(Loss) Income
|
(5,701,986 | ) | 2,697,601 | ||||||
Foreign
currency translation adjustment
|
66,069 | 112,368 | |||||||
Comprehensive
(loss) income
|
$ | (5,635,917 | ) | $ | 2,809,969 |
-42-
Net
Sales
For The Three Months Ended Sep. 30,
|
Period to Period Change
|
|||||||||||||||
Item
|
2009 Amount ($)
|
2008 Amount ($)
|
Amount ($)
|
%
|
||||||||||||
Soybean meal
|
$ | 22,283,057 | $ | 32,469,832 | $ | (10,186,775 | ) | -31.4 | % | |||||||
Soybean
oil
|
10,374,699 | 11,217,242 | (842,543 | ) | -7.5 | % | ||||||||||
Salad
Oil
|
1,901,192 | 5,000,430 | (3,099,238 | ) | -62.0 | % | ||||||||||
Squeezed
oil
|
320,953 | - | 320,953 | - | ||||||||||||
Soy
protein concentrates
|
1,047,108 | - | 1,047,108 | - | ||||||||||||
Low-temp
soy meal
|
3,643,364 | - | 3,643,364 | - | ||||||||||||
Total
Net Sales
|
$ | 39,570,374 | $ | 48,687,504 | $ | (9,117,130 | ) | -18.7 | % |
Net sales
was $39,570,374 for the three months ended September 30, 2009, a decrease of
$9,117,130 or 18.7% from $48,687,504 for the three months ended September 30,
2008. An analysis by product shows that the revenue of soybean meal, soybean oil
and salad oil dropped period over period at rates of 31.4%, 7.5% and 62.0%
respectively. This was mainly due to the decrease in selling prices of our
products, resulting from unfavorable changes in economic and industrial
environments.
China
was severely affected by the global economic crisis in late 2008. The index
of commodity selling prices remained stable or suffered a drop for most of the
categories of commodities, including food. According to data provided by the PRC
State Statistics Agency, the indices of retail prices of food in July and August
2009 are 98.9 and 100.6, respectively, and that of the first 8 months of 2009
was 99.8, indicating that there has been little to no increase in overall food
prices over this period. The demand for soybean products was also negatively
affected by economic crisis.
China
has long been importing large volumes of genetically-modified (GM) soybeans from
the U.S. and South America reaching new peaks at the end of 2008. In July and
August 2009, imports climbed to 4.4 million tons and 3.1 million tons from the
U.S. and South America, respectively. The imported beans are sold at much lower
prices than domestically produced soybeans, representing a low cost alternative
for domestic processors, which previously used domestic beans as raw materials.
Importation of GM soybeans significantly influenced price levels in China’s
domestic market for soybean products. This has made it difficult for
domestically processors to sell their products.
These
factors caused a decline in the selling prices of our products and volume in
some products. In the three months ended September 30, 2009, the average selling
prices of soybean meal, soybean oil and salad oil decreased by 30.5%,
33.0% and 33.1%, respectively over the prices in the three months ended
September 30, 2008. Meanwhile, in the three months ended September 30, 2009, we
sold 58,509 tons of soybean meal, 11,860 tons of soybean oil and
2,080 tons of salad oil, achieving growth rates of -1.2%,
38.1% and -43.1%, respectively over the three months ended September 30,
2008, when we sold 59,228 tons of soybean meal, 8,589 tons of soybean oil
and 3,658 tons of salad oil. Consequently, there has been a large decrease in
sales revenue over the same period.
-43-
Cost
of Sales and Gross (Loss) Profit
For The Three Months Ended Sep. 30,
|
Period to Period Change
|
|||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Cost of Sales:
|
Amount ($)
|
% of Sales
Revenue
|
Amount ($)
|
%
of Sales
Revenue
|
Amount ($)
|
%
|
||||||||||||||||||
Soybean meal
|
$ | (24,775,695 | ) | 111.2 | % | $ | (29,852,077 | ) | 91.9 | % | $ | 5,076,382 | -17.0 | % | ||||||||||
Soybean
oil
|
(11,438,024 | ) | 110.2 | % | (10,784,266 | ) | 96.1 | % | (653,758 | ) | 6.1 | % | ||||||||||||
Salad
oil
|
(2,097,343 | ) | 110.3 | % | (4,617,968 | ) | 92.4 | % | 2,520,625 | -54.6 | % | |||||||||||||
Squeezed
oil
|
(359,683 | ) | 112.1 | % | - | - | (359,683 | ) | - | |||||||||||||||
Soy
protein concentrates
|
(1,190,794 | ) | 113.7 | % | - | - | (1,190,794 | ) | - | |||||||||||||||
Low-temp
soy meal
|
(4,053,692 | ) | 111.3 | % | - | - | (4,053,692 | ) | - | |||||||||||||||
Total
Cost of Sales
|
$ | (43,915,230 | ) | 111.0 | % | $ | (45,254,311 | ) | 92.9 | % | $ | 1,339,081 | -3.0 | % | ||||||||||
Gross
(Loss) Profit:
|
||||||||||||||||||||||||
Soybean
meal
|
$ | (2,492,637 | ) | -11.2 | % | $ | 2,617,755 | 8.1 | % | $ | (5,110,392 | ) | -195.2 | % | ||||||||||
Soybean
oil
|
(1,063,325 | ) | -10.2 | % | 432,976 | 3.9 | % | (1,496,301 | ) | -345.6 | % | |||||||||||||
Salad
Oil
|
(196,150 | ) | -10.3 | % | 382,462 | 7.6 | % | (578,612 | ) | -151.3 | % | |||||||||||||
Squeezed
oil
|
(38,730 | ) | -12.1 | % | - | - | (38,730 | ) | ||||||||||||||||
Soy
protein concentrates
|
(143,687 | ) | -13.7 | % | - | - | (143,687 | ) | ||||||||||||||||
Low-temp
soy meal
|
(410,327 | ) | -11.3 | % | - | - | (410,327 | ) | ||||||||||||||||
Total
Gross (Loss) Profit
|
$ | (4,344,856 | ) | -11.0 | % | $ | 3,433,193 | 7.1 | % | $ | (7,778,050 | ) | -226.6 | % |
Our
cost of sales for the three months ended September 30, 2009 fell by
$1,339,081 or 3.0% over the three months ended September 30, 2008, while the
ratio of cost as a percentage to net sales value rose from 92.9% to 111.0% over
the period. We recorded a gross loss of $4,344,856 in the three months ended
September 30, 2009, in comparison to a gross profit of $3,433,193 in the three
months ended September 30, 2008. Our gross profit margin dropped from
7.1% to -11.0% over the same period. The main reasons for the changes in gross
profit were the negative impact of imported soybeans and the national
reserve purchase conducted by the Chinese government.
The
importation of soybeans from the US and South America has effectively kept the
prices in China’s domestic market of soybean products at low levels, as the
products made from GM imported beans can be sold at much lower prices than their
domestic equivalents (please refer to the section “Net Sales” above for
details).
In
response to the negative effect on Chinese soybean farmers of large levels of
imports at low prices, the Chinese government launched a national strategic
reserve purchase in late 2008, especially in Heilongjiang Province, in order to
maintain prices of domestic non-GM soybeans and protect the interests of
domestic farmers. By the time it ended the reserve purchases at the end of
June 2009, the government had purchased over 6 million tons of soybeans,
representing a considerable portion of total production volume of soybeans. The
government offered the farmers a price materially higher than the normal market
price in our local area, thus forcing our cost of raw materials to rise
significantly.
The above
factors negatively affected our gross profit margin from both a cost and
sales price perspective, creating a gross loss. To counter the current
difficulties, we have undertaken a series of measures, including purchasing
soybeans with higher water content (which may be cheaper), implementing strict
cost-saving policies, lowering production capacity utilization ratio, and
granting many employees temporary non-paid vacations,
etc.
-44-
Based
on our current knowledge, we expect that the situation may improve in the
following months, because it is highly unlikely for the Chinese government to
again implement the kind of national purchase as mentioned above in 2010 and the
following years. The government has failed in all of its actions designed
to sell the soybean inventories, which it has built up in the national purchase
launched in late 2008. Therefore, there are great restraints on the
government’s intentions, ability and resources to conduct further purchase. In
addition, if the efforts of the domestic soybean industry to lobby the
government into granting subsidies may succeed, and if the government decides to
grant domestic soybean processors subsidies substantive enough to achieve a
positive gross profit margin, then the difficulties may also be alleviated.
However, the effects of these factors may be offset by those of the following
factors: the reduction in production volume of Chinese domestic soybean due to
unfavorable weather, and the increase in soybean output by the United States,
resulting in more imports to China.
Operating
Expenses
For The Three Months Ended September 30,
|
Period to Period
|
|||||||||||||||||||||||
2009
|
% of Sales
|
2008
|
% of Sales
|
Change
|
||||||||||||||||||||
Amount ($)
|
Revenue
|
Amount ($)
|
Revenue
|
Amount ($)
|
%
|
|||||||||||||||||||
Selling
Expenses
|
$ | (26,764 | ) | 0.1 | % | $ | (61,756 | ) | 0.1 | % | $ | (34,992 | ) | -56.7 | % | |||||||||
General
& Administrative Expenses
|
(668,239 | ) | 1.7 | % | (560,057 | ) | 1.2 | % | 108,182 | 19.3 | % | |||||||||||||
Impairment
Loss
|
(584,699 | ) | 1.5 | % | - | - | 584,699 | - | ||||||||||||||||
(Loss)
gain on disposal of property, plant and equipment
|
- | - | 74 | 0.0 | % | (74 | ) | - | ||||||||||||||||
Total
Operating Expenses
|
$ | (1,279,702 | ) | 3.3 | % | $ | (567,739 | ) | 1.3 | % | $ | 711,963 | 125.4 | % |
Selling
expenses for the three months ended September 30, 2009 decreased by 56.7%
as compared to the three months ended September 30, 2008. This decrease was
mainly due to the cost saving measures taken in areas including travel, sales
meetings, and business entertainment. As a percentage of net sales, selling
expenses remained stable at 0.1% over the period.
General
and administrative expenses, other than impairment loss and gain (loss) on
disposal of property, plant and equipment, for the three months ended September
30, 2009 increased by 19.3% over the three months ended September 30,
2008. Though there were material decreases in items such as travel and
depreciation expenses, the expenses related to listing in the U.S. increased
significantly, comprised mostly of fees paid to auditors and legal counsel. As a
percentage of net sales, general and administrative expenses rose from 1.2% for
the three months ended September 30, 2008 to 1.7% for the three months ended
September 30, 2009.
During
the three months ended September 30, 2009, we determined one of
Yanglin’s salad oil production facility in Plant 1 to be technologically
outdated and the management will make a decision later as to
whether upgrade and retool the equipment to produce another kind of
product or put the line out of operation. As a result, we recorded an
impairment charge totaling $584,699 for the three months ended September
30, 2009.
-45-
Net
(Loss) Income
For The Three Months Ended September 30,
|
Period to Period
|
|||||||||||||||||||||||
2009
|
% of Sales
|
2008
|
%of Sales
|
Change
|
||||||||||||||||||||
Amount ($)
|
Revenue
|
Amount ($)
|
Revenue
|
Amount ($)
|
%
|
|||||||||||||||||||
(Loss)
Income from operations
|
$ | (5,624,558 | ) | -14.2 | % | $ | 2,865,454 | 5.9 | % | $ | (8,490,012 | ) | -296.3 | % | ||||||||||
Interest
expenses
|
(95,900 | ) | 0.2 | % | (195,075 | ) | 0.4 | % | 99,175 | -50.8 | % | |||||||||||||
Interest
income
|
18,676 | 0.0 | % | 27,353 | 0.1 | % | (8,677 | ) | -31.7 | % | ||||||||||||||
Other
expense
|
(204 | ) | 0.0 | % | (131 | ) | 0.0 | % | (73 | ) | 55.7 | % | ||||||||||||
Income
tax
|
- | - | - | - | - | - | ||||||||||||||||||
Net
(loss) income
|
$ | (5,701,986 | ) | -14.4 | % | $ | 2,697,601 | 5.6 | % | $ | (8,399,588 | ) | -311.4 | % |
(Loss)
income from operations decreased by 296.3% for the three months ended
September 30, 2009, to a loss of $5,624,558, from a profit of $2,865,454
for the three months ended September 30, 2008. The loss was primarily due to
aforementioned reasons for the decrease in sales revenue and drop in gross
margin (please refer to the sections “Net Sales” and “Cost of Sales and Gross
Profit” above). Consequently, operating margin fell from 5.9% to negative
14.2%.
Interest
expenses decreased by 50.8% from the three months ended September 30, 2008 to
the three months ended September 30, 2009. As a percentage of net sales,
interest expense was only 0.2% for the three months ended September 30, 2009
compared to 0.4% for the three months ended September 30, 2008. The changes
were mainly caused by a decline in bank borrowings, due to reduced working
capital needs. Interest income fell by 31.7% for the same reason.
Since
Yanglin has been recognized as a “Key Leading Enterprise” in the
industrialization of the agriculture industry by the Chinese government, Yanglin
enjoys a complete exemption from income taxes. This status is usually reviewed
every two years, and according to a government order, the next review has been
postponed to the end of 2009, and Yanglin can still enjoy the tax
exemption status through 2009.
Net
income decreased by 311.4% from the three months ended September 30, 2008 to the
three months ended September 30, 2009. During the same period, net profit margin
fell from 5.6% to negative 14.4%. The causes of this change were similar to the
changes in income from operations (please refer to the section “Cost of
Sales and Gross Profit” above).
(Loss)
Earnings Per Share
|
Three Months Ended September 30,
|
|||||||
|
2009
|
2008
|
||||||
|
Unaduited
|
Unaudited
|
||||||
Net
(Loss) Income for Basic Earnings Per Share
|
(5,701,986 | ) | 2,697,601 | |||||
Basic
Weighted Average Number of Shares
|
20,000,003 | 20,000,003 | ||||||
Net
(Loss) Income per Share – Basic
|
(0.29 | ) | 0.13 | |||||
Net
(Loss) Income for Diluted Earnings Per Share
|
(5,701,987 | ) | 2,697,601 | |||||
Diluted
Weighted Average Number of Shares
|
20,000,003 | 40,661,881 | ||||||
Net
(Loss) Income per Share – Diluted
|
(0.29 | ) | 0.07 |
Basic and
diluted (loss) earnings per share (EPS) for the quarter ended September 30,
2009, were $(0.29) and $(0.29), compared to $0.13 and $0.07 for the third
quarter last year.
-46-
The
Nine Months Ended September 30, 2009 Compared with the Nine Months Ended
September 30, 2008
Consolidated Statement of Operations and
Comprehensive (Loss) Income
|
The nine months
Ended
September 30, 2009
($)
|
The nine months
ended
September 30, 2008
($)
|
||||||
Unaudited
|
Unaudited
|
|||||||
Net
Sales
|
$ | 122,358,237 | $ | 190,237,176 | ||||
Cost
of sales
|
(132,058,859 | ) | (175,551,015 | ) | ||||
Gross
(Loss) Profit
|
(9,700,622 | ) | 14,686,161 | |||||
Selling
expenses
|
(156,317 | ) | (180,726 | ) | ||||
General
and administrative expenses
|
(2,018,987 | ) | (1,758,068 | ) | ||||
Impairment
loss
|
(584,699 | ) | - | |||||
(Loss)
gain on disposal of property, plant and equipment
|
(230,025 | ) | 7,144 | |||||
(Loss)
Income from operations
|
(12,690,650 | ) | 12,754,511 | |||||
Interest
income
|
137,988 | 81,151 | ||||||
Interest
expense
|
(341,417 | ) | (708,978 | ) | ||||
Other
expenses
|
(1,235 | ) | (14,479 | ) | ||||
(Loss)
income from operations before income tax
|
(12,895,314 | ) | 12,112,205 | |||||
Income
tax
|
- | - | ||||||
Net
(Loss) Income
|
(12,895,314 | ) | 12,112,205 | |||||
Foreign
currency translation adjustment
|
167,127 | 3,985,176 | ||||||
Comprehensive
(loss) income
|
$ | (12,728,187 | ) | $ | 16,097,381 |
Net
Sales
For The Nine Months Ended Sep. 30,
|
Period to Period Change
|
|||||||||||||||
Item
|
2009 Amount ($)
|
2008 Amount ($)
|
Amount ($)
|
%
|
||||||||||||
Soybean meal
|
$ | 76,056,194 | $ | 113,332,034 | $ | (37,275,840 | ) | -32.9 | % | |||||||
Soybean
oil
|
32,297,294 | 55,754,467 | (23,457,173 | ) | -42.1 | % | ||||||||||
Salad
Oil
|
5,621,162 | 21,150,675 | (15,529,513 | ) | -73.4 | % | ||||||||||
Squeezed
oil
|
764,432 | 0 | 764,432 | - | ||||||||||||
Soy
protein concentrates
|
1,402,052 | 0 | 1,402,052 | - | ||||||||||||
Low-temp
soy meal
|
6,217,102 | 0 | 6,217,102 | - | ||||||||||||
Total
Net Sales
|
$ | 122,358,237 | $ | 190,237,176 | $ | (67,878,939 | ) | -35.7 | % |
Net sales
revenue was $122,358,237 for the nine months ended September 30, 2009, a
decrease of $67,878,939 or 35.7% from $190,237,176 for the nine months ended
September 30, 2008. An analysis by product shows that the revenue of soybean
meal, soybean oil and salad oil dropped period over period at rates of
32.9%, 42.1% and 73.4%, respectively. This was mainly due to the decrease in
selling prices and sales volume of our products, resulting from unfavorable
changes in economic and industrial environments.
China has
been severely affected by the global economic crisis that began in late
2008. The index of commodity selling prices remained stable or declined for most
of the categories of commodities, including food. According to data provided by
the State Statistics Agency, the indices of the retail prices of food in July
and August 2009 are 98.9 and 100.6, respectively and that of the first 8 months
is 99.8, indicating that there has been little to no increase in overall price
levels of food over the period. The demand for soybean products was also
negatively affected by economic difficulties.
-47-
China
has long been importing genetically-modified (GM) soybeans from the U.S. and
South America reached record high import volumes at the end of 2008. In July and
August 2009, imports increased to 4.4 million tons and 3.1 million tons
from the U.S. and South America, respectively. The imported beans are sold at a
much lower prices than domestically produced soybeans, presenting a low cost
alternative to domestic processors which previously used domestic
soybeans for raw materials. This change significantly influenced price
levels in China’s domestic market for soybean products. This made it hard for
domestic processors to sell their products.
The
above factors caused a decrease in the selling prices of our products. In the
nine months ended September 30, 2009, the average selling prices of soybean
meal, soybean oil and salad oil decreased by 20.2%, 44.2% and 46.2%,
respectively over average prices in the nine months ended September 30, 2008. In
the nine months ended September 30, 2009, we sold 199,887 tons of soybean meal,
38,458 tons of soybean oil and 6,313 tons of salad oil, achieving growth
rates of -15.9%, 3.8% and -51.2%, respectively, over the nine months ended
September 30, 2008, when we sold 237,623 tons of soybean meal, 37,044 tons
of soybean oil and 12,946 tons of salad oil. As a result, there has been a large
decrease in sales revenue over the same period.
Cost
of Sales and Gross (Loss) Profit
For The Nine Months Ended Sep. 30,
|
Period to Period Change
|
|||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Cost of sales:
|
Amount ($)
|
% of Sales
Revenue
|
Amount ($)
|
%
of Sales
Revenue
|
Amount ($)
|
%
|
||||||||||||||||||
Soybean meal
|
$ | (81,997,732 | ) | 107.8 | % | $ | (104,983,766 | ) | 92.6 | % | $ | 22,986,034 | -21.9 | % | ||||||||||
Soybean
oil
|
(34,654,691 | ) | 107.3 | % | (51,377,511 | ) | 92.1 | % | 16,722,820 | -32.5 | % | |||||||||||||
Salad
oil
|
(6,000,401 | ) | 106.7 | % | (19,189,738 | ) | 90.7 | % | 13,189,337 | -68.7 | % | |||||||||||||
Squeezed
oil
|
(853,165 | ) | 111.6 | % | - | (853,165 | ) | - | ||||||||||||||||
Soy
protein concentrates
|
(1,610,850 | ) | 114.9 | % | - | (1,610,850 | ) | - | ||||||||||||||||
Low-temp
soy meal
|
(6,942,020 | ) | 111.7 | % | - | (6,942,020 | ) | - | ||||||||||||||||
Cost
of Sales
|
$ | (132,058,859 | ) | 107.9 | % | $ | (175,551,015 | ) | 92.3 | % | $ | 43,492,156 | -24.8 | % | ||||||||||
Gross
(loss) profit:
|
||||||||||||||||||||||||
Soybean
meal
|
$ | (5,941,538 | ) | -7.8 | % | $ | 8,348,268 | 7.4 | % | $ | (14,289,806 | ) | -171.2 | % | ||||||||||
Soybean
oil
|
(2,357,397 | ) | -7.3 | % | 4,376,956 | 7.9 | % | (6,734,353 | ) | -153.9 | % | |||||||||||||
Salad
oil
|
(379,239 | ) | -6.7 | % | 1,960,937 | 9.3 | % | (2,340,176 | ) | -119.3 | % | |||||||||||||
Squeezed
oil
|
(88,733 | ) | -11.6 | % | - | - | (88,732 | ) | - | |||||||||||||||
Soy
protein concentrates
|
(208,797 | ) | -14.9 | % | - | - | (208,797 | ) | - | |||||||||||||||
Low-temp
soy meal
|
(724,918 | ) | -11.7 | % | - | - | (724,918 | ) | - | |||||||||||||||
Gross
(loss) profit
|
$ | (9,700,622 | ) | -7.9 | % | $ | 14,686,161 | 7.7 | % | $ | (24,386,783 | ) | -166.1 | % |
Our
cost of sales for the nine months ended September 30, 2009 fell by
$43,492,156 or 24.8% over the nine months ended September 30,
2008. The ratio of cost as a percentage to net sales value rose from
92.3% to 107.9% over the same period. Additionally, we recorded a gross loss of
$9,700,622 in the nine months ended September 30, 2009, in comparison to a gross
profit of $14,686,161 in the nine months ended September 30, 2008. Our gross
(loss) profit margin dropped from 7.7% to -7.9% over the same period. The main
reasons for the changes in gross (loss) profit were the negative impact of
imported soybeans and the national reserve purchase conducted by Chinese
government.
-48-
The
import of soybeans from the U.S. and South America has effectively kept prices
in China’s domestic market for soybean products at low levels, as the products
made from the imported soybeans can be sold at much lower prices than their
domestic equivalents (please refer to the section “Net Sales” above for
details).
In
response to the negative effect of higher levels of imports at low price on
Chinese soybean farmers, the Chinese government launched a national strategic
reserve purchase in late 2008, primarily in Heilongjiang Province, in order to
maintain the prices of domestic non-GM soybeans and protect the interests of
domestic farmers. Before ending the reserve purchase at the end of June 2009,
the government had purchased over 6 million tons, representing a considerable
portion of total soybean production. The government offered the farmers at a
price materially higher than the normal market price in our area, thus
causing our cost of raw materials to rise significantly.
The
above factors squeezed our gross profit margin from both a cost and sales price
perspective, creating a gross loss. To counter the current difficulties, we are
undertaking a combination of measures, including purchasing soybeans with higher
water content (which may be cheaper), implementing strict cost-saving policies,
lowering production capacity utilization ratio, and granting many employees
temporary non-paid vacations, etc.
Based
on our current knowledge, we expect that the situation may improve in the
following months, because it is highly unlikely for the Chinese government
will implement the kind of national purchase as mentioned above in 2010 and
the following years. The government has failed in all of its actions
designed to sell the soybean inventories, which it has built up in the national
purchase launched in late 2008. Therefore, there are great restraints
on the government’s intentions, ability and resources to conduct further
purchase. In addition, if the efforts of the domestic soybean industry to lobby
the government into granting subsidies may succeed, and if the government
decides to grant domestic soybean processors subsidies substantive enough to
achieve a positive gross profit margin, then the difficulties may also be
alleviated. However, the effects of these factors may be offset by those of the
following factors: the reduction in production volume of Chinese domestic
soybean due to unfavorable weather, and the increase in soybean output of the
United States, resulting in more imports to China.
Operating
Expenses
For The Nine Months Ended September 30,
|
Period to Period
|
|||||||||||||||||||||||
2009
|
% of Sales
|
2008
|
% of Sales
|
Change
|
||||||||||||||||||||
Amount ($)
|
Revenue
|
Amount ($)
|
Revenue
|
Amount ($)
|
%
|
|||||||||||||||||||
Selling
Expenses
|
$ | (156,317 | ) | 0.1 | % | $ | (180,726 | ) | 0.1 | % | $ | (24,409 | ) | -13.5 | % | |||||||||
General
& Administrative Expenses
|
(2,018,987 | ) | 1.7 | % | (1,758,068 | ) | 0.9 | % | 260,919 | 14.8 | % | |||||||||||||
Impairment
Loss
|
(584,699 | ) | 0.5 | % | - | - | 584,699 | — | ||||||||||||||||
(Loss)
gain on disposal of property, plant and equipment
|
(230,025 | ) | 0.2 | % | 7,144 | 0.0 | % | (237,169 | ) | -3319.8 | % | |||||||||||||
Total
Operating Expenses
|
$ | (2,990,028 | ) | 2.5 | % | $ | (1,931,650 | ) | 1.0 | % | $ | 1,058,378 | 54.8 | % |
Selling
expenses for the nine months ended September 30, 2009 decreased by 13.5% as
compared to the nine months ended September 30, 2008. This decrease was mainly
due to cost saving measures implemented in several areas including travel,
advertising, sales meetings, and business entertainment. As a percentage of net
sales, selling expenses remained stable at 0.1% over the
period.
-49-
General
and administrative expenses, other than impairment loss and (loss) gain on
disposal of property, plant and equipment, for the nine months ended
September 30, 2009 increased by 14.8% over the nine months ended
September 30, 2008. Though there was material decrease in items such as travel,
business entertainment, vehicle usage and communication expenses, the expenses
related to listing in the U.S. increased significantly, mostly due to fees paid
to auditors and legal counsel. As a percentage of net sales, general and
administrative expenses rose from 0.9% for the nine months ended September 30,
2008 to 1.7% for the nine months ended September 30, 2009.
During
the nine months ended September 30, 2009, we determined the salad oil production
facility of plant 1 to be technologically outdated and the management will make
a decision later as to whether upgrade and
retool the equipment to produce another kind of product or put the
line out of operation. As a result, we have recorded non-cash impairment
charges totaling $584,699 for the nine months ended September 30,
2009.
Net
(Loss) Income
For The Nine Months Ended September 30,
|
Period to Period
|
|||||||||||||||||||||||
2009
|
% of Sales
|
2008
|
%of Sales
|
Change
|
||||||||||||||||||||
Amount ($)
|
Revenue
|
Amount ($)
|
Revenue
|
Amount ($)
|
%
|
|||||||||||||||||||
(Loss)
income from operations
|
(12,690,650 | ) | -10.4 | % | 12,754,511 | 6.7 | % | (25,445,161 | ) | -199.5 | % | |||||||||||||
Interest
expenses
|
(341,417 | ) | 0.3 | % | (708,978 | ) | 0.4 | % | 367,561 | -51.8 | % | |||||||||||||
Interest
income
|
137,988 | 0.1 | % | 81,151 | 0.0 | % | 56,837 | 70.0 | % | |||||||||||||||
Other
expense
|
(1,235 | ) | 0.0 | % | (14,479 | ) | 0.0 | % | 13,244 | -91.5 | % | |||||||||||||
Income
tax
|
- | - | - | - | - | - | ||||||||||||||||||
Net
(loss) income
|
(12,895,314 | ) | -10.5 | % | 12,112,205 | 6.4 | % | (25,007,519 | ) | -206.5 | % |
(Loss)
income from operations decreased by 199.5% or $25,445,161 for the nine
months ended September 30, 2009, to a loss of $12,690,650, as compared to a
profit of $12,754,511 for the nine months ended September 30,
2008. The change was primarily due to the same reasons for the
decrease in sales revenue and the drop in gross margin (please refer to the
sections “Net Sales” and “Cost of Sales and Gross Profit” above).
Additionally, operating margin fell from 6.7% to a negative
10.5%.
Interest
expenses decreased by 51.8% from the nine months ended September 30, 2008 to the
nine months ended September 30, 2009. As a percentage of net sales, interest
expense was only 0.3% for the nine months ended September 30, 2009, compared to
0.4% for the nine months ended September 30, 2008. The changes were mainly
caused by the decrease in bank borrowings due to reduced working capital needs.
Interest income increased by 70.0% because we held a large amount of cash
in bank accounts in the first half of 2009.
Because
Yanglin has been recognized as a “Key Leading Enterprise” in the
industrialization of the agriculture industry by the Chinese government, Yanglin
enjoys a complete exemption from income taxes. This status is usually reviewed
in every two years. According to a government order, the next review has
been postponed to the end of 2009. Therefore, Yanglin can enjoy the tax
exemption status through 2009.
Net
(loss) income decreased by 206.5% from the nine months ended September 30, 2008
to the nine months ended September 30, 2009. During the same period, net profit
margin fell from 6.4% to negative 10.5%. This change was due to the same reasons
as the change in income from operations (please refer to the section “Cost
of Sales and Gross Profit” above).
-50-
(Loss)
earnings Per Share
|
Nine Months Ended September 30,
|
|||||||
|
2009
|
2008
|
||||||
|
Unaudited
|
Unaudited
|
||||||
Net
(Loss) Income for Basic Earnings Per Share
|
(12,895,314 | ) | 12,112,205 | |||||
Basic
Weighted Average Number of Shares
|
20,000,003 | 20,000,003 | ||||||
Net
(Loss) Income per Share – Basic
|
(0.64 | ) | 0.61 | |||||
Net
(Loss) Income for Diluted Earnings Per Share
|
(12,895,314 | ) | 12,112,205 | |||||
Diluted
Weighted Average Number of Shares
|
20,000,003 | 38,339,885 | ||||||
Net
(Loss) Income per Share – Diluted
|
(0.64 | ) | 0.32 |
Basic and
diluted (loss) earnings per share (EPS) for the nine months ended September 30,
2009, were $(0.64) and $(0.64), compared to $0.61 and $0.32 for the same period
in 2008.
Liquidity and Capital
Resources
Generally,
we finance our business with cash flow from operations and short-term bank loans
and we use shareholders’ equity investments and retained earnings to meet
capital expenditures.
Working
capital is current assets less current liabilities, and our operational cash
demand consists mainly of raw materials purchases, salaries, production overhead
(auxiliary materials, utilities, etc.) and financing expenses, of which raw
materials (soybean) purchases comprise the majority.
Because
we usually pay cash to our suppliers upon purchase of soybeans, there is a
higher than normal need for cash around harvest season. Our pattern of
operations is as follows: (i) we will keep a large cash reserve until early
October, the harvest time, and take short-term loans from banks at that time,
(ii) we will build up a substantial inventory of soybeans so that for the period
through the end of the year and for the following half year, we will have
sufficient raw materials to maintain operations and convert finished products to
cash, and (iii) we will repay the short-term loans by the end of June or July
the following year.
Currently
we have a credit line of up to RMB 190 million, or about USD 27.8 million, based
on our credit rating of AA, granted by the Agricultural Development Bank (the
“Bank”). We believe that this will be sufficient for our future working capital
needs at current operation and capacity levels, for the next twelve
months.
The
material terms of the credit line are:
1.
|
The
term of the credit line is one
year.
|
2.
|
Circumstances
under which the funds can be borrowed: The loan borrowed within this
credit line can only be used to purchase crops. In Yanglin’s case, the
loan can only be used to purchase
soybeans.
|
3.
|
Additional
approvals that may be required: When Yanglin applies to actually borrow
the funds, the Bank should confirm the conditions and/or circumstances of
the loan, and report to the appropriate higher level within the Bank to
verify, examine and approve such applications, before actually releasing
any money to Yanglin under the maximum credit
line.
|
4.
|
The
interest rate is 6.93%, subject to adjustment. When the People’s Bank of
China adjusts the interest rate of loans, the Bank has the right and
discretion to adjust the interest rate of the loans
accordingly.
|
5.
|
Whether
the loans would be secured by Yanglin’s assets: The loans would be secured
by Yanglin’s assets, i.e., building, machinery and land use
rights.
|
-51-
6.
|
Secured
loans shall have preference over credit loans; the Company shall
purchase insurance for pledged assets, with the Bank having first
priority.
|
Our
operational cash requirements may be influenced by many factors, including the
fluctuation of raw material prices, cash flow, competition, relationships with
suppliers or customers, availability of credit facilities and financing
alternatives. Under the current operational level, we can satisfy this
demand by short-term loans from the Bank, under the credit line of USD 27.8
million and our own cash reserves, within the next twelve
months.
The
Nine Months Ended September 30, 2009 Compared with the Nine Months Ended
September 30, 2008
Operating
Activities
Cash
provided by operating activities for the nine months ended September 30, 2009
was $631,154, while cash provided by operating activities for the nine months
ended September 30, 2008 was $19,794,735. The difference was a result of many
factors, the most important of which was a net loss, along with an increase in
prepaid VAT and other taxes, though we did materially reduce the cost of
inventories and advances to suppliers.
We
incurred a net loss during the nine months ended September 30, 2009. At the end
of 2008, the Chinese government conducted a national strategic reserve purchase
of soybeans, which was designed to uphold the price of domestically produced
non-GM soybeans (please refer to the section “Net Sales” and “Cost of Sales and
Gross Profit” above). The designated purchase price was much higher than normal
market prices, thus forcing market prices to increase. Consequently, we had to
allocate an additional $2.5 million in cash to prepay VAT and other taxes,
which was proportional to the increase in purchase price of
soybeans.
As a
major measure to improve our cash flow status, we reduced the cash paid as
advances to suppliers by $10.6 million.
Our
cash flows are stable, as we sell primarily on a cash basis, with negligible
trade receivables. We usually sell our products a few days after they are
produced.
Investing
Activities
Net
cash used in investing activities for the nine months ended September 30,
2009 was $87,400, compared to $1,416,259 for the nine months ended September 30,
2008. The major reason for this decrease was that we completed the majority
of our construction projects, including the renovation of Plant 2, by the end of
2008. All cash used in the nine months ended September 30, 2009 was for payments
for plant and equipment.
Financing
Activities
Net cash
used in financing activities was $6,835,616 for the nine months ended September
30, 2009, compared to $8,608,086 for the nine months ended September 30,
2008. The amount of net cash used in the nine months ended September 30,
2009 includes $6.6 million of new bank loans for working capital needs and $13.3
million of repayment for bank loans.
Loans
We
had no short-term bank loans at September 30, 2009, as compared to
$6,711,214 at December 31, 2008. We were able to repay all loans by September
30, 2009 as we reduced the size of operations and the majority of advances to
suppliers.
The
balance of our long-term bank loan from related parties, including the portion
payable within one year, was approximately $380,629 on September 30, 2009,
compared to $489,827 on December 31, 2008. The change was caused by repayment of
the principal, and we did not borrow any additional funds during the third
quarter of 2009.
-52-
Commitments
and Contingencies
We
have no future cash commitments or contingent liabilities as of September
30, 2009.
Critical Accounting Policies
and Estimates
On
September 30, 2009, the Company adopted changes issued by the Financial
Accounting Standards Board (“FASB”) to the authoritative hierarchy of
GAAP. These changes establish the FASB Accounting Standards
Codification (“ASC”) as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with GAASP. Rules
and interpretive releases of the Securities and Exchange Commission (“SEC”)
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. The FASB will no longer issue new standards
in the form of Statements, FASB Staff Positions (“FSP”), or Emerging Issues Task
Force Abstracts; instead the FASB will issue Accounting Standards Updates
(“ASUs”). ASUs will not be authoritative in their own right as they
will only serve to update the ASC. These changes and the ASC itself
do not change GAAP. Other than the manner in which new accounting
guidance is referenced, the adoption of these changes had no impact on the
Company’s consolidated financial statements.
The
preparation of our unaudited interim condensed consolidated financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to exercise its judgment. We exercise
considerable judgment with respect to establishing sound accounting policies and
in making estimates and assumptions that affect the reported amounts of our
assets and liabilities, our recognition of revenues and expenses, and disclosure
of commitments and contingencies at the date of the financial
statements.
On an
ongoing basis, we evaluate our estimates and judgments. Areas in which we
exercise significant judgment include, but are not necessarily limited to, the
estimated useful lives for amortizable intangible assets and property, plant and
equipment, and warrants granted in connection with various financing
transactions in circumstances where the use of that accounting method is deemed
to be appropriate. The long-lived assets held and used by the Group are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of assets may not be recoverable. It is reasonably possible that
these assets could become impaired as a result of changes in technologies or
situations related to the industry. Determination of recoverability
of assets to be held and used is done by comparing the carrying amount of an
asset to the future net undiscounted cash flows to be generated by the
asset. If such assets are considered to be impaired, the impairment losses
to be recognized are measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less estimated costs
of disposal.
We base
our estimates and judgments on a variety of factors including our historical
experience, knowledge of our business and industry, current and expected
economic conditions, the attributes of our services and products and the
regulatory environment. We periodically re-evaluate our estimates and
assumptions with respect to these judgments and modify our approach when
circumstances indicate that modifications are necessary.
While we
believe that the factors we evaluate provide us with a meaningful basis for
establishing and applying sound accounting policies, we cannot guarantee that
the results will always be accurate. Since the determination of these estimates
requires the exercise of judgment, actual results could differ from such
estimates.
Please
refer to our Annual Report on Form 10-K for the year ended December 31,
2008 filed with the SEC for a discussion of our critical accounting policies.
During the three months ended September 30, 2009, there were no material
changes to these policies.
-53-
Economic
and political risks
The
Group’s operations are conducted in the PRC. Accordingly, the Group’s business,
financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy, so the Group’s operations are subject to special
considerations and significant risks not typically associated with companies in
North America and Western Europe. These include risks associated with, among
others, the political, economic and legal environment and foreign currency
exchange. The Group’s results may be adversely affected by changes in the
political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion, remittances abroad, and rates and methods of taxation,
among other things.
Inventories
We apply
weighted average method to measure the cost of inventories on a monthly basis,
to compensate for the frequent fluctuation in soybean prices.
Impairment
of Property and Equipment
We
analyze our assets for impairment when events or circumstances occur that
indicate the carrying value may not be recoverable. We consider a property to be
impaired when the sum of future undiscounted cash flows during our remaining
estimated holding period is less than the carrying value of the asset. For
impaired assets, we record an impairment charge equal to the excess of the
property’s carrying value over its fair value.
Recent
Accounting Pronouncements
In
April 2009, the FASB issued ASC 820.10, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly”. ASC 820.10 provides
additional guidance for estimating fair value when the volume and level of
activity for the asset or liability have significantly decreased and also
includes guidance on identifying circumstances that indicate a transaction is
not orderly for fair value measurements. ASC 820.10 shall be applied
prospectively with retrospective application not permitted. This ASC shall be
effective for interim and annual periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. An entity
early adopting this ASC 820.10 must also early adopt ASC 320.10, “Recognition
and Presentation of Other-Than-Temporary Impairments”. Additionally, if an
entity elects to early adopt either ASC 825.10,, “Interim Disclosures about Fair
Value of Financial Instruments” or ASC 320.10, it must also elect to early adopt
ASC 820.10. The adoption of ASC 820.10 did not have a material impact on the
Company’s consolidated financial statements.
In April
2009, the FASB issued ASC 805, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies”. ASC 805 addresses the initial recognition, measurement and
subsequent accounting for assets and liabilities arising from contingencies in a
business combination, and requires that such assets acquired or liabilities
assumed be initially recognized at fair value at the acquisition date if fair
value can be determined during the measurement period. If the acquisition-date
fair value cannot be determined, the asset acquired or liability assumed arising
from a contingency is recognized only if certain criteria are met. This FSP also
requires that a systematic and rational basis for subsequently measuring and
accounting for the assets or liabilities be developed depending on their nature.
This ASC is effective for assets or liabilities arising from contingencies in
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. The Company does not anticipate that the adoption of this statement
will have a material impact on its consolidated financial statements, absent any
material business combinations.
In June
2009, the FASB issued ASC 860, Accounting for Transfers of Financial Assets,
which requires entities to provide more information regarding sales of
securitized financial assets and similar transactions, particularly if the
entity has continuing exposure to the risks related to transferred financial
assets. ASC 860 eliminates the concept of a “qualifying special-purpose entity,”
changes the requirements for derecognizing financial assets and
requires additional disclosures. ASC 860 is effective for fiscal years
beginning after November 15, 2009. The Company has not completed the assessment
of what impact ASC 860 will have on the Company’s consolidated financial
statements.
-54-
In
June 2009, the FASB issued ASC810.10, guidance to change financial reporting by
enterprises involved with variable interest entities (“VIEs”) which
modifies how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should
be consolidated. This pronouncement clarifies that the determination of whether
a company is required to consolidate an entity is based on, among other
things, an entity’s purpose and design and a company’s ability to direct the
activities of the entity that most significantly impact the entity’s
economic performance. The guidance requires an ongoing reassessment of whether a
company is the primary beneficiary of a variable interest entity. This
guidance also requires additional disclosures about a company’s involvement in
variable interest entities and any significant changes in risk exposure due
to that involvement. This guidance is effective for fiscal years beginning after
November 15, 2009. The Company has not completed the assessment of what
impact this guidance will have on the Company’s consolidated financial
statements.
In August
2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05,
“Measuring Liabilities at Fair Value” . ASU 2009-05 amended ASC 820 (, “Fair
Value Measurements.” Specifically, ASU 2009-05 provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more of the following methods: 1) a valuation technique that uses
a) the quoted price of the identical liability when traded as an asset or b)
quoted prices for similar liabilities or similar liabilities when traded as
assets and/or 2) a valuation technique that is consistent with the principles of
ASC 820 (e.g. an income approach or market approach). ASU 2009-05 also
clarifies that when estimating the fair value of a liability, a reporting entity
is not required to adjust to include inputs relating to the existence of
transfer restrictions on that liability. The Company does not anticipate that
the adoption of this statement will have a material impact on its consolidated
financial statements.
In
October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue
Arrangements and ASU No. 2009-14, Certain Revenue Arrangements That Include
Software Elements. These amendments address how to determine whether an
arrangement involving multiple deliverables contains more than one unit of
accounting, and how the arrangement consideration should be allocated among the
separate units of accounting. These amendments may be applied retrospectively or
prospectively for new or materially modified arrangements and early adoption is
permitted. The Company does not anticipate that the adoption of this statement
will have a material impact on its consolidated financial
statements.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on our consolidated financial statements
upon adoption.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements.
-55-
ITEM
3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
required.
ITEM
4—CONTROLS AND PROCEDURES
a.
Disclosure Controls and Procedures
As
required by Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act, our
management has carried out an evaluation, with the participation and under the
supervision of our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of September 30, 2009.
Disclosure
controls and procedures refer to controls and other procedures designed to
ensure that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC and
that such information is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating and
implementing possible controls and procedures.
Management
conducted its evaluation of disclosure controls and procedures under the
supervision of our chief executive officer and our chief financial officer.
Based upon, and as of the date of this evaluation, our chief executive officer
and chief financial officer concluded that, as of September 30, 2009, our
disclosure controls and procedures were not effective due to the material
weaknesses and significant deficiencies in our internal control over financial
reporting described below.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act. The Company’s internal control system over
financial reporting is a process designed under the supervision of
the Company's Chief Executive Officer and Chief Financial Officer to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of the consolidated financial statements in accordance with
United States generally accepted accounting principles (“U.S. GAAP”).
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 that the degree of compliance
with the policies and procedures may deteriorate.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will
not be prevented or detected on a timely basis. A significant deficiency is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting that is less severe than a material weakness, yet important enough to
merit attention by those responsible for oversight of our financial
reporting.
Our
internal control over financial reporting was not effective as a result of the
following identified material weaknesses:
A)
|
The
Company does not maintain personnel with a sufficient level of accounting
knowledge, experience and training in the selection and application of US
GAAP and related SEC disclosure
requirements.
|
B)
|
The
Company does not have an accounting policy manual based on US
GAAP.
|
-56-
Both
control deficiencies could result in material misstatements of significant
accounts and disclosures that would result in a material misstatement to our
interim or annual consolidated financial statements that would not be prevented
or detected. Accordingly, the management has determined that these control
deficiencies constitute material weaknesses.
Remediation Initiative and
Progress
To
remediate the situation, we need the help of competent professional accounting
advisors, and we have engaged SEC Audit Prep, an accounting consulting firm, to
help with the preparation of the Company’s consolidated financial statements and
deliver training to our own accounting staff on the selection and application of
US GAAP and related SEC disclosure requirements. Meanwhile, the management
has decided that we will draft the accounting manual using our own staff first,
and enlisting the help from professional advisors later, if we find it
necessary.
There
will be significant costs involved for engaging professional accounting
advisors; studying and researching U.S. GAAP; drafting, revising and
approving our accounting manual; and training and educating our accounting
staff with the knowledge of U.S.GAAP.
b.
Changes in Internal Controls over Financial Reporting
During the
quarter ended September 30, 2009, there was no other change in our internal
controls over financial reporting, except as described above, that has
materially affected, or that is reasonably likely to materially affect, our
internal control over financial reporting.
PART
II—OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
None
ITEM
1A—RISK FACTORS
Not
required.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM
5. OTHER INFORMATION.
None.
ITEM
6. EXHIBITS
31.1
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
31.2
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
32
|
Certification
Pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
-57-
SIGNATURES
Pursuant
to the requirements 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.
|
Yanglin Soybean, Inc.
|
|
|
|
|
Date: November 12, 2009
|
By:
|
/s/ SHULIN LIU
|
|
|
Shulin Liu
Chief Executive Officer
(Principal Executive Officer)
|
|
Yanglin Soybean, Inc.
|
|
|
|
|
Date: November 12, 2009
|
By:
|
/s/ SHAOCHENG XU
|
|
|
Shaocheng Xu
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
-58-