Attached files
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EX-32.2 - YUHE INTERNATIONAL, INC. | v179189_ex32-2.htm |
EX-31.1 - YUHE INTERNATIONAL, INC. | v179189_ex31-1.htm |
EX-31.2 - YUHE INTERNATIONAL, INC. | v179189_ex31-2.htm |
EX-32.1 - YUHE INTERNATIONAL, INC. | v179189_ex32-1.htm |
UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x
|
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
|
For the fiscal year ended December 31, 2009 . |
or
¨
|
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 000-83125
YUHE
INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
87-0569467
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
301
Hailong Street
Hanting
District, Weifang, Shandong Province
The
People’s Republic of China
|
||
(Address including zip code of
principal executive offices)
|
Registrant’s
telephone number, including area code (86) 536 736 3688
Securities
registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act: Common stock, $0.001 par
value
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. ¨ Yes No x
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d)
of the Act. Yes ¨ No x
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 o
Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405
of this chapter) is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer o | Smaller reporting company x |
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes ¨ No x
The
aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2009, based upon the closing
price of the common stock as reported by the OTC Bulletin Board under the symbol
“YUII” on such date, was approximately $64,461,000.
There were 15,722,180 shares of the registrant’s
common stock issued and outstanding as of March 1, 2010.
YUHE
INTERNATIONAL, INC.
FORM 10-K
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009
INDEX
Table
of Contents
Page
|
||
PART
I
|
||
Item 1.
|
Description
of Business
|
2
|
Item 1A.
|
Risk
Factors
|
18
|
Item 1B.
|
Unresolved
Staff Comments
|
18
|
Item 2.
|
Properties
|
19
|
Item 3.
|
Legal
Proceedings
|
22
|
Item 4.
|
Reserved
|
23
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PART II
|
||
Item 5.
|
Market
for Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
|
23
|
Item 6.
|
Selected
Financial Data
|
25
|
Item 7
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
25
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
36
|
Item 8.
|
Financial
Statements and Supplementary Data
|
36
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
37
|
Item 9A.
|
Controls
and Procedures
|
38
|
Item 9B
|
Other
Information
|
42
|
PART
III
|
||
Item 10.
|
Directors
and Executive Officers and Corporate Governance
|
42
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Item 11.
|
Executive
Compensation
|
47
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
49
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Item 13.
|
Certain
Relationships and Related Transactions
|
51
|
Item 14.
|
Principal
Accountant Fees and Services
|
59
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PART IV
|
||
Item 15.
|
Exhibits,
Financial Statement Schedules
|
60
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Signatures
|
65
|
Use
of Terms
As
used herein, references to “we”, “our”, “us”, and the “Company” refer to Yuhe
International, Inc. and its subsidiaries except in the "Management's Discussion
And Analysis And Results of Operation" below where all historical financial
information prior to March 12, 2008 refers to Weifang Yuhe Poultry Co. Ltd., PRC
Yuhe, which includes the accounts of Weifang Taihong Feed Co. Ltd.,
Taihong.
Forward-Looking
Statement
This
Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934. These statements relate to
future events or the Company’s future financial performance. The Company
has attempted to identify forward-looking statements by terminology including
“anticipates,” “believes,” “expects,” “can,” “continue,” “could,” “estimates,”
“intends,” “may,” “plans,” “potential,” “predict,” “should” or “will” or the
negative of these terms or other comparable terminology. Such statements
are subject to certain risks and uncertainties, including the matters set forth
in this report or other reports or documents the Company files with the
Securities and Exchange Commission from time to time, which could cause actual
results or outcomes to differ materially from those
projected. In evaluating these statements, you should
specifically consider various factors, including the risks outlined in the
section of the Registrant’s prospectus entitled “Risk Factors.” These factors
may cause the Company’s actual results to differ materially from any
forward-looking statement as a result of a number of risks and uncertainties,
including without limitation: (a) limited amount of resources devoted to
expanding the Company’s business plan; and (b) the Company’s failure to
implement its business plan within the time period it originally planned to
accomplish. Although the Company believes that the expectations
reflected in the forward-looking statements are reasonable, the Company cannot
guarantee future results, levels of activity, performance or achievements.
Undue reliance should not be placed on these forward-looking statements which
speak only as of the date hereof. The Company’s expectations are as of the
date this Form 10-K is filed, and the Company does not intend to update any of
the forward-looking statements after the date this Annual Report on Form 10-K is
filed to confirm these statements to actual results or to changes in the
Company’s expectations, unless required by law.
- 1
-
PART
I
ITEM
1. DESCRIPTION
OF BUSINESS.
Overview
Through
the Company’s operating subsidiaries, the Company is a supplier of day-old
chicken raised for meat production, or broilers, in the People’s Republic of
China, the “PRC” or “China”. The Company purchases parent breeding stock from
breeder farms, raises them to produce hatching eggs, and hatches the eggs to
day-old broilers. Currently, the Company has 28 breeder farms with 15 in
operation and two hatcheries with a total annual capacity of 1.2 million sets of
breeders and 120 hatchers through its wholly-owned subsidiary, Weifang Yuhe
Poultry Co. Ltd., “PRC Yuhe”. The remaining 13 breeder farms were purchased in
December 2009 and are undergoing renovations. They are expected to be in full
operation by the third quarter of 2010. The Company’s day-old broilers are
primarily purchased by broiler farms and integrated chicken companies for the
purpose of raising them to market-weight broilers. The Company’s customers are
located in the ten provinces and special municipalities centered around Shandong
Province, which are Jiangsu, Anhui, Henan, Hebei, Jilin, Liaoning, Heilongjiang,
Tianjin, Beijing, and Shanghai. In connection with the Company’s day-old broiler
business, the Company also operates a feed stock company named Weifang Taihong
Feed Co. Ltd., or “Taihong”, whose primary purpose is to supply feed stock to
the Company’s breeders. The Company’s operations are conducted exclusively by
its subsidiaries, PRC Yuhe and Taihong, in China.
The Company’s principal executive
office is located at 301 Hailong Street, Hanting District, Weifang, Shandong
Province, The People’s Republic of China. The Company’s Internet address is
http://www.yuhepoultry.com.
Unless
otherwise noted, all historical information prior to March 12, 2008 refers to
PRC Yuhe and Taihong. Effective on April 4, 2008, the Company amended its
articles of incorporation to effect a 1-for-14.70596492 reverse stock split of
its common stock. For ease of reading, all references to shares will
be based on the post split basis.
History
and Background
First
Growth Investors, Inc.
First
Growth Investors, Inc., “First Growth”, was incorporated under the laws of the
State of Nevada on September 9, 1997. First Growth was formed to buy and sell
vintage wines. Since 2003 First Growth was not engaged in any substantive
business activities or operations prior to the acquisition of Bright Stand
described below.
The
Company entered into a Stock Purchase Agreement, the “Stock Purchase Agreement”,
with Halter Financial Investments, L.P., a Texas limited partnership, “Halter
Financial”, dated as of November 6, 2007, pursuant to which it agreed to sell to
Halter Financial 951,996 shares of its common stock for $425,000.
- 2
-
Halter
Financial and the then serving members of the Board of Directors of First Growth
entered into arm’s length negotiations regarding the acquisition of Halter
Financial’s ownership interest. The amount paid was based on the business
prospects of First Growth and the perceived value of a control position in
similarly situated publicly-traded shell corporations. The transaction closed on
November 16, 2007. As a result of the transaction, Halter Financial held 951,996
shares, or 87.5% of the Company’s 1,087,994 shares, of common stock then
outstanding following the completion. The 87.5% interest purchased by Halter
Financial was fairly valued at $425,000. Halter Financial advised First Growth
that its purchase price was based on the results of its research into the prices
paid by other groups to acquire control positions in publicly-traded
shell companies similarly situated as First Growth at the time Halter
Financial acquired its position in First Growth. The Stock Purchase Agreement
also required the Company’s Board of Directors to declare and pay a special cash
dividend of $3.088 per share to the Company’s shareholders on November 19, 2007.
Halter Financial did not participate in such dividend. The dividend was payable
to shareholders of record on November 15, 2007, which was prior to the date the
shares were issued to Halter Financial under the Stock Purchase Agreement. The
dividend payment date was November 19, 2007. The dividend was payable to the
Company’s shareholders who held 135,999 shares of the Company’s common stock and
resulted in a total dividend distribution of $420,000. The funds for the
dividend came from the $425,000 proceeds received from the sale of common stock
to Halter Financial. Mr. Richard Crimmins was appointed as an officer and
director of First Growth at the request of Halter Financial as a result of the
change in control transaction whereby Halter Financial became First Growth’s
principal shareholder. Richard Crimmins is neither an officer, director nor
shareholder of Halter Financial. Prior to November 2007, neither Halter
Financial nor its affiliates had a material relationship with any of First
Growth’s shareholders. After Halter Financial became a 87.5% shareholder of
First Growth pursuant to the Stock Purchase Agreement, there was a potential
conflict of interest associated with an affiliate of Halter Financial, HFG
International, Limited, advising Bright Stand about its purchase of a U.S. shell
company, First Growth. Despite this potential conflict of interest, HFG
International, Limited has informed the Company that its advice to Bright Stand
was based on its research results into the prices paid by other groups to
acquire control positions in publicly traded shell companies, which were
similarly situated as First Growth at the time Bright Stand acquired First
Growth.
Bright
Stand International Co., Ltd.
Bright
Stand International Co., Ltd., “Bright Stand”, was incorporated on August 3,
2007 and has a registered capital of $100. Bright Stand did not have any
operating activities from August 3, 2007 (inception) to March 12, 2008. Kunio
Yamamoto, a Japanese citizen, was the sole shareholder of Bright Stand through
March 12, 2008.
Weifang
Yuhe Poultry Co., Ltd.
PRC Yuhe
is the wholly-owned subsidiary of Bright Stand. PRC Yuhe was founded in March
1996 by Gao Zhentao and Sun Haoguo, with each of them owning, respectively, 60%
and 40% of its equity interest. From its formation through its acquisition by
Bright Stand, PRC Yuhe was effectively controlled by Gao Zhentao, the Company’s
chief executive officer. The principal business of PRC Yuhe is breeding poultry,
hatchlings and selling chicken.
- 3
-
Weifang
Taihong Feed Co., Ltd.
Taihong
was founded in May 2003 by Shandong Yuhe Food Group Co., Ltd., “Yuhe Group”, a
PRC company based in Shandong Province, and Gao Zhenbo, the brother of the
Company’s chief executive officer, Gao Zhentao, with Yuhe Group and Mr. Gao
owning, respectively, 56.25% and 43.75% of its equity interest. Yuhe Group is an
entity controlled by the Company’s chief executive officer, Gao Zhentao, and his
brother, Gao Zhenbo. The principal business of Taihong is the production and
sale of feed and feed additives, primarily to PRC Yuhe. On September 14, 2007
Yuhe Group transferred all of its interests in Taihong to PRC Yuhe in a
reorganization of equity interest under common control. The 43.75% equity stake
in Taihong owned by Gao Zhenbo was subsequently transferred to Bright Stand in
the course of the corporate reorganization transactions described
below.
Corporate
Reorganization Transactions
HFG
International, Limited, an affiliate of Halter Financial, was engaged by Bright
Stand to provide consulting services related to Bright Stand’s efforts to
complete a combination transaction with a US domiciled publicly-traded “shell
corporation” and other post transaction matters. HFG International, Limited
introduced Bright Stand to First Growth. There is no correlation between the
decision of Bright Stand to engage HFG International, Limited to provide
consulting services to Bright Stand and the decision of Halter Financial to
acquire a control position in First Growth. After Halter Financial became a
87.5% shareholder of First Growth pursuant to a Stock Purchase Agreement, there
was a potential conflict of interest associated with an affiliate of Halter
Financial, HFG International, Limited, advising Bright Stand about its purchase
of a U.S. shell company, First Growth. Despite this potential conflict of
interest, HFG International, Limited has informed the Company that its advice to
Bright Stand was based on its research results into the prices paid by other
groups to acquire control positions in publicly traded shell companies, which
were similarly situated as First Growth when Bright Stand acquired First Growth.
After a diligence review by counsel for Bright Stand, the principal shareholder
of Bright Stand elected to enter into the exchange transaction contemplated
by the equity transfer agreement filed as Exhibit 10.2 to the
Registration Statement on Form S-1/A filed on December 19, 2008.
Bright
Stand entered into a share transfer agreement with all the existing shareholders
of PRC Yuhe on October 18, 2007 to acquire all the equity of PRC Yuhe with
cash consideration equal to the appraised fair market value of PRC Yuhe in the
amount of RMB 81,450,000, or $11,306,522. The sellers of PRC Yuhe included Yuhe
Group, Mr. Gao Zhentao and Mr. Gao Zhenbo. Bright Stand obtained the approval
from the Shandong Province counterpart of the Ministry of Commerce for this
transaction on November 9, 2007, and the acquisition closed on January 31, 2008.
There is no longer any connection between the Company and Yuhe Group, except
that Gao Zhentao, the Company’s chief executive officer and, his brother Gao
Zhenbo, are shareholders and directors of Yuhe Group. Sun Haoguo does not have
any relationship with Yuhe Group and two of three members of the Supervisory
Board of PRC Yuhe, Zheng Chaoyang is an Administrative Department Officer of
Yuhe Group and Zhang Lishun is an Administrative Department Officer of Yuhe
Group.
Bright
Stand entered into a share transfer agreement with Gao Zhenbo, a former
shareholder of Taihong on October 18, 2007 to acquire 43.75% of the
outstanding equity of Taihong for cash consideration equal to 43.75% of the net
asset value of Taihong in the amount of RMB 2,244,000, or $312,530. The
remaining 56.25% of Taihong is owned by PRC Yuhe. Bright Stand obtained the
approval from the Shandong provincial counterpart of the Ministry of Commerce
for this transaction on November 9, 2007, and the acquisition closed on January
31, 2008.
- 4
-
Effective
March 12, 2008, the Company closed an Equity Transfer Agreement with Bright
Stand and Kunio Yamamoto, a Japanese person, the sole former shareholder of
Bright Stand. Pursuant to the terms of the Equity Transfer Agreement, the
Company acquired all of the outstanding capital stock of Bright Stand from Mr.
Yamamoto in exchange for 8,626,318 shares of the Company’s common stock. At the
closing, Bright Stand became the Company’s wholly-owned subsidiary. Immediately
following the date of the Equity Transfer Agreement, Mr. Yamamoto held 8,626,318
shares of the Company’s common stock. Neither Halter Financial nor Mr. Yamamoto
had any role in identifying the accredited investors who purchased the Company’s
unregistered securities on March 12, 2008.
There is
no direct or indirect connection between Mr. Yamamoto and the former
shareholders of PRC Yuhe and Taihong, including Mr. Gao Zhentao, Mr. Gao Zhenbo,
and Mr. Sun Haoguo. The acquisitions of PRC Yuhe and Taihong by Bright Stand
closed on January 31, 2008 after obtaining the relevant approval from the
Shandong Province counterpart of the Ministry of Commerce. There is no direct or
indirect connection between Mr. Yamamoto and the former shareholders of First
Growth. Mr. Yamamoto does not currently have any roles with the Company, except
as the Company’s shareholder. Mr. Gao Zhenbo and Mr. Sun Haoguo do not currently
have any roles with the Company.
Equity
Investment by Private Placement Investors
On March
12, 2008, the Company consummated with 25 accredited investors, the “Investors”,
a private placement of 5,829,018 shares of its common stock for an aggregate
purchase price of approximately $18,000,000. The Investors were (i) Pinnacle
Fund, L.P., (ii) Pinnacle China Fund L.P., (iii) Black River Commodity Select
Fund Ltd., (iv) Black River Small Capitalization Fund Ltd., (v) Marion Lynton,
(vi) Ardsley Partners Fund II, LP, (vii) Ardsley Offshore Fund, Ltd, (viii)
Ardsley Partners Institutional Fund, LP; (ix) Investment Hunter, LLC, (x)
Guerrilla Partners LP, (xi) Hua-Mei 21st Century Partners, LP, (xii) Ruoling
Wang, (xiii) Guli Ping, (xiv) Wu Mijia, (xv) Dehua Qian, (xvi) Southwell
Partners, L.P, (xvii) Westpark Capital, L.P, (xviii) Straus Partners, LP, (xix)
Straus-GEPT Partners, LP, (xx) Atlas Allocation Fund, LP, (xxi) Chestnut Ridge
Partners, LP, (xxii) Ancora Greater China Fund, LP, (xxiii) Kevin B. Halter Jr,
(xxiv) Octagon Capital Partners, and (xxv) Howard H. Lu.
The
agreements the Company entered into with the Investors included a Securities
Purchase Agreement, a Registration Rights Agreement, Make Good Escrow Agreements
and various ancillary agreements and certificates, disclosure schedules and
exhibits in connection therewith. The following is a summary of their material
terms.
Securities Purchase
Agreement
Among
other things, under the Securities Purchase Agreement, Mr. Yamamoto has
delivered a certain number of shares of the Company’s common stock owned by him
to the investors pro-rata in accordance with their respective investment amount
for no additional consideration if: (i) the Company’s after tax net income for
the Company’s fiscal year ended on December 31, 2009 is less than 95% of
$13,000,000; and (ii) the Company’s earnings per share reported in the fiscal
year ending on December 31, 2009 is less than $0.74 on a fully diluted basis,
the “Low Performance Events”. Mr. Yamamoto has placed an aggregate of
3,359,889 shares of common stock, “Make Good Shares”, into an escrow account
pursuant to the terms of the Make Good Escrow Agreement by and among the
Company, Mr. Yamamoto, the Investors and the escrow agent named therein. If the
Company does not achieve the targets in 2009, 50% of the Make Good Shares will
be conveyed to all private placement Investors and Halter Financial pro-rata in
accordance with their respective investment amount for no additional
consideration. If the foregoing Low Performance Events do not occur, all the
Make Good Shares will be transferred to Mr. Yamamoto. As the Company has
achieved its 2008 earnings target, on July 31, 2009, Roth Capital executed a
Form of Release and instructed the Escrow Agent to release 1,679,992 shares of
common stock, the 2008 Make Good Shares, to Mr. Kunio Yamamoto, who received
such shares in or about August, 2009. HFG International Limited also
executed a Form of Release to release 235,196 shares of the Company’s common
stock to Mr. Kunio Yamamoto, who received such shares on or about April 27,
2009.
- 5
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Covenants: The Securities
Purchase Agreement contains certain covenants on the Company’s part, including
the following:
(a)
Board of Directors.
Within 180 days following the closing, the Company is required to nominate a
minimum of five members to its Board of Directors, a majority of which must be
“independent,” as defined under the Nasdaq Marketplace Rules, and to take all
actions and obtain all authorizations, consents and approvals as are required to
be obtained in order to effect the election of those nominees.
(b)
Chief Financial
Officer. Within 180 days following the closing, the Company is required
to hire a chief financial officer, “CFO”, who is a certified public accountant,
fluent in English and familiar with US GAAP and auditing procedures and
compliance for US public companies.
(c)
Investor Relations
Firm. Within 60 days following the closing, the Company is required to
hire one of the following investor relations firms: CCG Elite, Hayden
Communications or Integrated Corporate Relations.
In
connection with the above three post-closing covenants, the Company has
deposited an aggregate of $1,750,000, $750,000 as board holdback escrow amount,
$750,000 as CFO holdback escrow amount, and $250,000 as investor relations firm
holdback amount, from the gross proceeds of the private placement in the escrow
account pursuant to the Holdback Escrow Agreement by and among the Company, the
investors and the escrow agent named therein. If the Company fails to comply
with any of the above covenants in a timely fashion, it will incur liquidated
damages of 1% on a daily pro-rata basis for any portion of a month of the gross
proceeds of the private placement, or 2% if it suffers a holdback event relating
to Board of Directors or CFO in a 30-day period, to be subtracted from the
holdback escrow fund, until its compliance with such covenants.
The
Company filed a current report on form 8-K on June 13, 2008 with the SEC.
Pursuant to the relevant escrow agreement, the above mentioned $1,750,000 was
released to the Company on or about June 14, 2008.
- 6
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Registration Rights
Agreement
With
respect to the 5,829,018 shares issued to the investors at closing on March 12,
2008, the Company is required to file a resale registration statement on Form
S-1 or any other appropriate form (i) within 60 days following the closing for
purposes of registering the resale of these shares, (ii) within 15 days with
respect to any additional registration statement, (iii) within 15 days with
respect to any additional registration statements required to be filed due to
SEC Restrictions, (iv) within 30 days following the date on which it becomes
eligible to utilize Form S-3 to register the resale of common stock, or (v)
within 45 days following the date the Make Good Shares are delivered by Mr.
Yamamoto to the investors. Among other things, the Company will be required to
pay the investors liquidated damages if it fails to file a registration
statement by the above filing deadlines or if it does not promptly respond to
comments received from the SEC. The liquidated damages accrue at a rate of 0.5%
per month of the aggregate investment proceeds received from the investors,
capped at 5% of the total investment proceeds. The Company filed a Registration
Statement on Form S-1 on May 12, 2008. On December 29, 2008,
the Company’s Registration Statement was declared effective by the Securities
and Exchange Commission, registering a total of 4,730,251 shares of the
Company’s common stock for re-sale by certain selling shareholders, instead of
5,829,018 shares as contemplated by the registration rights agreement following
the Company’s discussion with the Securities and Exchange
Commission.
Lockup
Agreement
The
Company and Mr. Yamamoto entered into a lockup agreement, pursuant to which Mr.
Yamamoto irrevocably agrees from and after the date of such agreement and
through and including March 12, 2010, that he will not offer, pledge, encumber,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of, directly or indirectly, or announce the
offering of, any of his shares, including any securities convertible into, or
exchangeable for, or representing the rights to receive, or engage in any short
sales with respect to any security issued by the Company. The Lockup Agreement
may not be waived or amended without the consent of a majority of the holders of
a majority of the shares issued in the private placement.
Name
Change to Yuhe International, Inc., Reverse Stock Split and Migration to
NASDAQ
Effective
April 4, 2008, the Company amended its articles of incorporation to (i) change
its name from “First Growth Investors, Inc.” to “Yuhe International, Inc.”, and
(ii) effect a 1-for-14.70596492 reverse stock split of its common stock. The
Company’s Board of Directors and shareholders approved the name change and the
reverse stock split pursuant to the Nevada Revised Statutes. The number of
authorized shares of common stock remains unchanged at 500 million.
The
change of the Company’s name and the reverse stock split were reflected in the
Amended and Restated Articles of Incorporation filed on April 4, 2008 with the
Secretary of State of Nevada, a copy of which was attached as Exhibit 3.1 to an
8K filed on April 10, 2008. The name change became effective with NASDAQ’s
Over-the-Counter Bulletin Board at the opening of trading on April 7, 2008,
under the new stock symbol of “YUII.OB”.
- 7
-
On
October 21, 2009, The NASDAQ Stock Market, the “Exchange”, informed the Company
that the Exchange had approved the listing of the Company’s common stock on the
Exchange. The Company’s common stock ceased trading on the
Over-the-Counter Bulletin Board and commenced trading on the Exchange on October
30, 2009 under the trading symbol “YUII”.
Appointment
of Investor Relations Firm
On April
20, 2008, the Company appointed CCG Elite Investor Relations as its investor
relations firm, which was effective on May 1, 2008.
Appointment
of Chief Executive Director
On June
13, 2008, the Company entered into an employment contract with Mr. Gao Zhentao,
the Company’s Chief Executive Officer, “CEO”. The employment agreement was
effective as of March 12, 2008, the date Mr. Gao was appointed CEO, and has an
initial term of three years.
Appointment
of Chief Financial Officer
On June
13, 2008, Mr. Hu Gang was appointed the Chief Financial Officer, “CFO”, of the
Company. The Company has entered into an employment agreement with Mr. Hu,
effective as of June 13, 2008, his appointment date, and has an initial term of
three years.
Appointment
of Directors
On June
13, 2008, the Company appointed the following directors:-
(i)
Mr. Peter Li, aged 44, was appointed Independent Director, chair of the Audit
Committee and member of the Compensation and Nominating Committees;
(ii)
Mr. Liu Yaojun, aged 32, was appointed Independent Director, chair of the
Compensation Committee and member of the Nominating and Audit
Committees;
(iii)
Mr. Greg Huett, aged 46, was appointed Independent Director , chair of the
Nominating Committee and member of the Audit and Compensation Committees;
and
(iv)
Mr. Han Chengxiang, aged 44, was appointed Director and member of the Nominating
Committee.
The
Company filed a current report on form 8-K on June 13, 2008 with the SEC.
Pursuant to the Holdback Escrow Agreement, an aggregate of $1,750,000, $750,000
as board holdback escrow amount, $750,000 as CFO holdback escrow amount, and
$250,000 as investor relations firm holdback amount, was released to the Company
on or about June 14, 2008.
- 8
-
Corporate
Structure
The
Company has an offshore holding structure commonly used by foreign investors
with operations in China. The Company is a Nevada corporation which owns 100% of
the securities of Bright Stand, which in turn owns 100% of the securities of PRC
Yuhe and Taihong.
As of
December 31, 2009, Mr. Kunio Yamamoto was the Company’s significant shareholder:
Mr. Yamamoto owned 48.7%, of the total outstanding shares of the Company’s
common stock.
The
following chart depicts the Company’s organizational structure:
- 9
-
The
Company’s Business: Day-Old Broilers
The
Company’s business is part of the commercial broiler supply chain, which is
illustrated below.
- 10
-
The
figure above illustrates the entire supply chain of broiler chicken. Day-old
broilers are one-day-old broilers that are sold to broiler raisers. Day-old
broilers sold by the Company’s wholly-owned subsidiary, PRC Yuhe, are the
Company’s primary source of revenue.
The
Company purchases parent breeding chicken from grandparent breeder farms and
raises them to maturity. Once these parent breeding chicken have matured, they
produce hatching eggs that the Company incubates and then sells the resulting
day-old broiler chicks to its customers.
Under
normal circumstances, female parent breeder chicken become productive from the
26 th week,
and are no longer commercially productive after the 66th week. Typically a
breeder is capable of producing approximately 167 eggs which will be hatched to
137 broilers over its production lifetime and the breeders are maintained by the
Company for a period of 420 days. The Company sources its parent breeder chicken
from licensed suppliers located in Beijing, and Shandong and Jiangsu provinces
and these suppliers are required to have a vaccination certificate and a breeder
production certificate for the sale of the breeders. The Company’s hatching eggs
typically must be incubated for a period of 21 days.
The
following figure shows the production timeline in the broiler business. At least
28 weeks usually pass from the Company’s receipt of a day-old parent breeder to
the Company’s sale of the first day-old broilers.
- 11
-
The
Company operates in two elements of the broiler supply chain: day-old broiler
production and feed production. These activities are operated under two separate
subsidiaries, PRC Yuhe and Taihong, respectively.
In 2009,
PRC Yuhe generated 99.3% of the Company’s revenues. Taihong’s sale of
feed to unaffiliated third parties generated 0.7%. Taihong is also the primary
supplier of feed to PRC Yuhe. In addition to selling day-old broilers, the
Company also sells related chicken products, non-productive parent breeders, and
a small amount of feed for livestock and poultry. While the Company produces
substantially all of its inventory of hatching eggs through its own parent
breeders, it occasionally purchases additional hatching eggs from unaffiliated
third parties to meet market requirements.
The
Company provides a 98% guaranteed survival rate by delivering an additional 2%
of its day-old broilers. For example, the Company delivers two additional
day-old broilers to its customers for every order of 100 day-old broilers, the
cost for these two additional broilers has already been included in the
Company’s cost of sales and therefore no further liability needs to be accrued.
Any loss of broiler chicken solely caused by customers is excluded from the
guarantee. Guarantee expense for 2009 was $0. In 2008, the total guarantee
expense was $65,769.
- 12
-
The
Company will provide additional compensation to its customers if the survival
rate falls below 96% after taking into consideration the additional 2% broilers
given out.
According
to paragraph Accounting Standards Codification (“ASC”) Topic 310, a loss
contingency should be accrued for if it is probable that a liability had been
incurred at the date of the financial statements and the amount of loss can be
reasonably estimated. The Company determined that a product liability need not
be accrued for the reporting period because there is only a remote chance that
the survival rate will fall below 96% based on historical experience. In 2008,
$65,769 was recorded as guarantee expense to customers; guarantee expense for
2009 was $0.
The
Day-Old Broiler Industry in China; Competition
The
market for day-old broilers in China is highly fragmented. Shandong Province has
the highest number of day-old broilers in China. The Company’s market share was
approximately 3% in China in 2009 and the Company sold 110,000,000 day-old
broilers in 2009.
Day-old
broilers are very weak physically and need to be transported in closely
controlled temperature conditions during delivery. Therefore, producers of
broiler chicks usually only sell locally or to surrounding areas, which limits
the Company’s current effective sales market and competition to North
China.
Shandong
Minhe Animal Husbandry Co., Ltd., also located in Shandong Province, is one of
the Company’s major competitors for sales of day-old broilers. They are slightly
larger than the Company in terms of their annual day-old broiler production
volume. Another regional competitor of the Company’s is Jilin Deda, which is
located in Jilin Province in north-eastern China and is smaller than the Company
in terms of annual day-old broiler production volume. However, Jilin Deda is an
integrated chicken company, so it does not generally sell day-old broilers to
unaffiliated third parties.
The
Company competes against its competitors based on product quality and its
after-sales services and extensive marketing network. The Company’s “Yuhe” brand
has been named by the Shandong Province Administration of Industry and Commerce
as a “Well Known Brand”. PRC Yuhe was certified as ISO 9001:2000 compliant for
quality management systems.
The
Company has sales representatives in every district of Shandong Province.
Although the Company’s prices are relatively higher than prices of many of its
competitors, the Company typically lowers its price by RMB 0.1 to 0.2 per
day-old broiler in order to attract new customers. The Company is able to sell
its products at a relatively higher price because its products have a good
survival rate and require a shorter period to raise to market size. The
Company’s experience and advance breeding technique contribute to the health and
quality of parent breeders. The Company has a high gross margin because it
focuses on the production of day-old broilers through maintaining the health and
quality of its parent breeders, which involves only a small maintenance cost, to
produce healthy day-old broilers that have a high survival rate and require a
shorter period to raise to market size. The higher the number of day-old
broilers is being produced, the lower the unit cost. As such, the Company is
able to maintain itself as a relative low cost producer while charging
relatively higher prices for its products.
- 13
-
Breeder
Supply
PRC
Yuhe’s suppliers (including distributors of suppliers) in 2009 were as follows:
|
|
|
2009
|
||||
Suppliers
|
Suppliers of
|
|
Amount
|
|
% of
|
||
($
,000)
|
Total
|
||||||
Wang
Jianbo
|
Eggs
|
3,649
|
11.99%
|
||||
Tang
Xinming
|
Corn
|
2,745
|
9.02%
|
||||
Ma
Suping
|
Soybean
|
2,712
|
8.91%
|
||||
Gao
Ping
|
Eggs
|
2,589
|
8.51%
|
||||
Liu
Dianbao
|
Eggs
|
1,325
|
4.35%
|
||||
Xu
Zhenming
|
Eggs
|
1,182
|
3.88%
|
||||
Shanghai
Shen De Equipment Co., Ltd.
|
Equipment
|
834
|
2.74%
|
||||
Zhang
Chun Mao
|
Coal
|
833
|
2.74%
|
||||
Shandong
Yisheng Poultry Co., Ltd.
|
Chicken
breeders
|
704
|
2.31%
|
||||
Jiang
Zhaolin
|
Eggs
|
548
|
1.80%
|
||||
Total
|
|
17,121
|
56.25%
|
Operations
The main
raw materials needed for the production of the Company’s day-old broilers are
parent breeders, feed, and medicines and vaccines. PRC Yuhe purchases parent
breeders from multiple suppliers. The Company has historically been able to
procure adequate stocks of parent breeders with a 5-8% discount from its
principal suppliers as a result of its eight- to ten-year relationship with them
and the Company’s large, stable orders. The Company purchases its parent
breeders from its long-term suppliers in Shandong Province, Jingsu Province and
Beijing.
Taihong
sells breeder feed to PRC Yuhe at cost, and these supplies have historically
accounted for all of PRC Yuhe’s feed requirements. The main raw materials for
Taihong’s feed are corn, soybean meal and nutritional elements for feed
production. Taihong purchases feed ingredients from numerous sources, but
primarily from wholesalers who collect the feed ingredients directly from
farmers. Taihong’s feed is produced in three separate phases. First, pre-mix
feed is produced from micro-nutritional elements, such as vitamins and minerals.
Second, concentrate feed is mixed by blending pre-mix feed and protein such as
soybean meals. Finally, whole feed is produced by mixing concentrate feed, corn
and soybean meal. Every raw material Taihong uses has more than three suppliers.
Taihong is not a large purchaser in the market for these materials, so to
strengthen its bargaining power, Taihong will sometimes cooperate with other
purchasers to place joint orders. The Company believes that its sources of
supply for these materials are adequate for its present needs and does not
anticipate any difficulty in acquiring these materials in the immediate
future.
In 2009,
the Company began to purchase feed from Shandong Purina Feed Company, a
subsidiary of Cargill. By the end of 2009, about 50% of the Company’s feed is
using Purina products. Based on the contract with Purina, the feed cost will not
be higher than the Taihong feed cost. In the Company’s on-going operation,
Purina will supply the majority of the Company feed, Taihong will supply the
residue part. Taihong will continue to operate as the back-up feed supply
source.
- 14
-
The
Company obtains its medicines from suppliers in Beijing and Shandong, and its
vaccines locally in Harbin, Heilongjiang Province and from foreign companies in
the United States and Israel. Every such material the Company uses has more than
three suppliers.
The
Company considers the health of its flocks to be its primary concern, and as
such, the Company undertakes vaccination programs for its birds. Every breeder
is vaccinated with at least ten types of vaccine, including those against avian
flu. The Company’s birds are raised in enclosed buildings, not in the open where
they would be more prone to exposure to potential disease carriers. The
Company’s breeder farms are also distributed among various locations at least
five kilometers from each other so as to minimize the risks of co-infection.
None of the Company’s birds has been infected with the H5N1 virus, and no cases
of H5N1 have been found in Shandong Province, where the Company’s farms are
located. The Company is also one of the few companies in China to immunize its
embryos using the Inovoject® system provided by Embrex, Inc. The Inovoject®
system would enhance the quality of the day-old broilers and increase their
viability. The system can also improve disease resistance and bird health at the
time when they are placed on the breeder farm. The Company conducted a test
internally and estimated that the survival rate would be 1-2 % lower without
using the Inovoject system. PRC Yuhe was certified as ISO 9001:2000 compliant
for quality management systems on May 8, 2003.
Customers
and Distribution
Through
PRC Yuhe, the Company’s customers are principally comprised of distributors and
end users such as integrated chicken companies, broiler raising companies
and individual broiler raisers. Approximately one hundred percent of the
Company’s total sales are made through third party distributors and thirty-two
percent of the Company’s sales are to five largest distributors. Forty-two
percent of the Company’s sales volume is to distributors with five to ten years
of relationship with us.
The
Company’s reference to “customers” includes both distributors and end users.
However, under the section “Customers and Distribution” in this Report, the
Company’s reference to “customers” includes the Company’s end users only as
the Company is constantly considering increasing and funding its sales network
into new geographic areas in an effort to expand its sales to end
users.
If any
distributor resells the Company’s product, such distributor will make profits
from the resale as well as be entitled to a year end bonus paid by the Company
at the rate of RMB 0.05-0.1 per day-old broiler. The Company sets the price to
third party distributors and end users according to the market price based
on supply and demand and the competitiveness of the market. The Company sets the
price according to its own policies and is not subject to any distributors’
control.
The
Company is constantly considering increasing and funding its sales network into
new geographic areas. The Company expects to purchase new facilities to
generate sufficient production capacity and expand roughly at the same rate
as it expects to increase its sales network. The Company shall fund the
cost of increasing its sales network internally as it recruits more sales
representatives. The Company considers that costs of acquiring new
production facilities and its ability to raise capital for expansion at a
particular time can affect its geographical expansion and sales. The Company
also considers that shortage of labor would also affect its geographical
expansion and sales. The impact of labor shortage can be immediate and
longer-term. The Company is monitoring the availability of professionals and
experienced workers to meet its production demand.
- 15
-
The
Company anticipates that it will use a penetration pricing strategy when first
entering a new geographic area. Historically, the Company’s penetration price
has been RMB 0.1 to RMB 0.2 per bird lower than its list price, which was still
higher than the prevailing market price in the market the Company was seeking to
enter.
For the
remaining feed produced by Taihong that is not sold to PRC Yuhe, Taihong retains
sales agents in various key locations to sell the feed. Because Taihong’s excess
feed production is not large, its feed is sold primarily in Shandong
Province.
As a part
of the Company’s after-sales service and customer relations initiative, the
Company regularly visits its customers to educate them on broiler-raising
techniques, conducts regular training courses and provides them with a 24-hour
help line. The Company also provides guarantees to its customers that the
survival rate of its day-old broilers will be not less than 98% within one week
of their delivery.
The table
below sets out the Company’s top ten major direct customers. Sales to PRC Yuhe’s
major end users in 2009 and 2008 were as follows:
|
|
2009
|
|||
Customers
|
|
Amount
|
|
% of
|
|
|
|
($ ,000)
|
|
Total
|
|
Wei
Yunchao
|
5,067
|
10.71%
|
|||
Wang
Jianbo
|
3,733
|
7.89%
|
|||
Li
Chuanwang
|
3,096
|
6.55%
|
|||
Jia
Deliang
|
1,926
|
4.07%
|
|||
Tian
Liqiu
|
1,261
|
2.67%
|
|||
Geng
Naiwei
|
983
|
2.08%
|
|||
Chen
Shiwen
|
946
|
2.00%
|
|||
Yang
Lunhao
|
939
|
1.99%
|
|||
Wang
Yaocheng
|
902
|
1.91%
|
|||
Song
Fuquan
|
892
|
1.89%
|
|||
Total
|
19,744
|
41.75%
|
Employees
As of
December 31, 2009, PRC Yuhe and Taihong had 1,230 full-time employees. Among
these full-time employees, 120 employees, who are key technical and operational
personnel, have directly signed employment contracts with the Company. The
remaining employees who are unskilled workers have signed their employment
contracts with Weifang Chuangfu Labor Co., Ltd., an outside labor contracting
company that provides employees to meet the Company’s staffing needs. The
Company compensates the employees of Weifang Chuangfu Labor Co., Ltd. directly
for the services that these employees render to it and pays Weifang Chuangfu
Labor Co., Ltd. a yearly service fee. Bright Stand has no
employees.
- 16
-
R&D
and Intellectual Property
PRC Yuhe
and Taihong have not made any R&D expenditure in the last two fiscal
years.
PRC Yuhe
is the registered owner of two PRC trademarks consisting of the stylized Chinese
characters “Yu He” and accompanying logo in live agricultural products. The
registration period is ten years and the expiry dates for the two trademarks are
October 27, 2015 and April 6, 2010, respectively. In the PRC, trademark
registrations can be indefinitely renewed for ten-year periods. As the
registrant of these two trademarks, PRC Yuhe has the exclusive legal right to
use each trademark within the PRC on the goods for which it is registered. PRC
Yuhe has the right to prevent others from using a confusingly similar mark on
any good which is similar to any of those for which these two trademarks are
registered. Through a license agreement with PRC Yuhe, Taihong has the license
to use the same trademarks. PRC Yuhe and Taihong have no other patents,
trademarks, other licenses, franchises, concessions or royalty agreements. The
Company does not consider “Yu He” to be a consumer brand because it is not well
recognized by customers who purchase chickens in retail food markets, although
this brand is recognized by end users who raise broilers to market size for sale
to customers, retail food markets and restaurants.
Environmental
Laws
The
Company’s breeders farms are located in rural areas where there are no specific
requirements imposed on the Company by relevant environmental protection
agencies. Fecal wastes are treated and converted by the Company to fertilizers
and sold to farmers. PRC Yuhe and Taihong have never been penalized by any
environmental protection agencies. The Company therefore does not incur any
significant environmental law compliance costs.
Governmental
Approvals
The
production activities of PRC Yuhe and Taihong are primarily regulated by the
Farming Bureau of Shandong Province. Under relevant laws and regulations, both
PRC Yuhe and Taihong must obtain relevant production permits from the Farming
Bureau of Shandong Province to carry out their respective businesses. In
addition, PRC Yuhe, as a company engaging in the breeder business, must obtain
an immunization certificate from the local Farming Bureau in Weifang City. PRC
Yuhe’s breeder production permit from the Animal Husbandry Bureau of Shandong
Province is valid from August 5, 2008 to August 4, 2011. The immunization
certificate from the local farming bureau in Weifang City was issued on November
10, 2005 and does not have an expiry date. Taihong’s feed production permit was
issued on December 12, 2007 and is valid for a period of three
years.
Generally,
the primary breeder stock is imported and the import volume is closely
controlled by the PRC government. The Company has not seen an increasing trend
of the import volume.
- 17
-
PRC Yuhe
is currently entitled to an exemption from Chinese enterprises income tax, or
“EIT”, because it has been recognized as “a national leading agricultural
enterprise”. In accordance with the relevant regulations regarding the tax
exemption, PRC Yuhe is tax-exempt as long as it continues to be recognized as
“the national leading agricultural enterprise”. On January 31, 2008, the Chinese
operating subsidiaries PRC Yuhe and Taihong were acquired by Bright
Stand.
On March
16, 2007, the National People’s Congress of China enacted a new tax law, or “the
New Tax Law”, whereby both FIEs and domestic companies will be subject to a
uniform income tax rate of 25%. On November 28, 2007, the State Council of China
promulgated the Implementation Rules. Both the New Tax Law and the
Implementation Rules have become effective on January 1, 2008 and provide tax
exemption treatment for enterprises engaged in agricultural industries, such as
farming, foresting, fishing and animal husbandry. As an enterprise engaged in
the farming industry, the Company is eligible for relevant exemption treatment
and does not need to pay company income tax. In 2008, the local tax authorities
informed the Company that it is eligible for relevant preferential tax
treatment. However, any decision by relevant tax authorities in the future that
the Company is not eligible for tax exemption treatment may materially and
adversely affect its profits, business and financial performance.
Seasonality
The
Company’s operating results and operating cash flows historically have been
subject to seasonal variations. Demand for the Company’s day-old broilers
generally decreases in May and June. Since the Company’s ultimate clients are
mostly farmers and the second quarter is their busy season for reaping, farmers
have little idle time to raise broilers during these months.
Another
low season for the Company’s products is from the second half of December to the
first half of January, which the Company believes is caused by a Chinese
cultural taboo on animal slaughter during the Chinese New Year holiday, which
occurs between late January and early February. Because it usually takes
approximately 45 days for a day-old broiler to reach market weight, the Company
experiences reduced demand for its day-old broilers during the period from 30 to
60 days prior to the Chinese New Year holiday period. In addition, since most
farmers are likely to rest during the Chinese New Year holiday, rather than
work, February would be another low season for the Company’s products.
ITEM
1A. RISK FACTORS.
Not
applicable.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
Not
Applicable.
- 18
-
ITEM
2. PROPERTIES
Land use
rights are carried at cost and amortized on a straight-line basis over the
period of rights of 50 years commencing from the date of acquisition of
equitable interest. According to the laws of PRC, the Chinese government owns
all of the land in the PRC. Companies or individual are authorized to possess
and use the land only through land usage rights approved by the PRC
government.
Facilities
Except
for its breeder farms, PRC Yuhe owns buildings/fixtures and land use rights of
all the other lands used for its operations. Taihong leases all the land and
buildings used for its operations from PRC Yuhe.
PRC Yuhe
owns the land use rights to five parcels of land in Weifang, Shandong Province,
totaling approximately 155,956 square meters. PRC Yuhe has obtained from the
relevant governmental authorities the Land Use Right Certificates of these five
parcels of land. PRC Yuhe has also obtained Building Ownership Certificates for
all the buildings and fixtures erected on those aforementioned five parcels of
land. The first parcel comprises 25,040 square meters and is the location of
hatchery factory No 1 operated by PRC Yuhe. The second parcel of property
comprises 31,450 square meters and is the location of the Company’s corporate
headquarters and living quarters for the Company’s staff. The third parcel
comprises 21,470 square meters which, together with all the buildings erected on
it, has been leased to Taihong for its operation of the feed mill. The exclusive
rights to use each of the foregoing three parcels of land are valid for a period
of 50 years and will expire in 2052 and 2053. The fourth parcel of property
comprises 24,636 square meters and is the location of hatchery factory No 2
operated by PRC Yuhe. The exclusive rights to use the fourth parcel of land are
valid for a period of 50 years and will expire in 2057. The fifth
parcel of property comprises of 53,360 square meters and the Company is in the
process of applying for a land use certificate
PRC Yuhe
has recently purchased in December 2009 13 breeder farms covering a total area
of 37 hectares (560 mu) and acquired all the ground buildings thereon and the
land use rights thereto for 36 years. It already paid 80% of the
purchase price on or before December 31, 2009 and will pay the remaining balance
within 2 months after formal delivery of these farms, which is expected to take
place in March 2010. It will apply to obtain the relevant Land Use
Right Certificates and the Building Ownership Certificate for these 13 breeder
farms in due course.
As to the
other 13 breeder farms, Yuhe PRC does not directly own land or land use rights
for these breeder farms, but leases approximately 374,000 square meters of land
to house these farms. PRC Yuhe has built on the leased land various buildings to
house its breeder farms. These buildings are considered temporary
structures. Because PRC Yuhe does not own these lands for these 13
breeder farms, it did not apply for and was not granted the Land Use Right
Certificate and Building Ownership Certificate for these breeder farm lands it
leased and the buildings it has erected on the leased land. However, PRC Yuhe
has the right to use the breeder farm lands as specified in the Lease Agreement,
which typically last about twenty to forty years. During the term of the
relevant Lease Agreement, all the buildings and fixtures erected by PRC Yuhe on
the leased breeder farm lands are protected by PRC law and PRC Yuhe can freely
dispose of them.
- 19
-
As of
December 31, 2009, both PRC Yuhe and Taihong are not covered by any insurance.
It is the Company’s understanding that other large agricultural factory entities
in China in the same industry are not covered by insurance as well. The Company
would like to insure both day-old broilers and parent breeders, which are its
main asset; however, such insurance policies are not available in
China.
As of
December 31, 2009, the Group had capital commitment amounting to $19,632,305 in
relation to the construction cost, land acquisition and farm acquisition for PRC
Yuhe and the Group paid deposits of $1,568,907 related to these commitments and
recorded under Deposits paid for acquisition of long term
assets. Further details are set out in the financial
statements.
The
following is a summary of some of the Company’s investment in acquisition of
land and farm construction as of December 31, 2009.
Land for
Hatchery Farm No. 3
On June
10, 2008, PRC Yuhe entered into an agreement with Shandong Meiweite Food Ltd.
and purchased land use rights for 45 years to an area covering 26,666 square
meters. According to the agreement, the total consideration for the
sale and purchase is RMB 10 million, or approximately equivalent to $1.5
million, and a sum of RMB 9 million, or approximately equivalent to $1.3
million, has been paid according to the terms of such agreement. PRC Yuhe will
manage and utilize the land to build a new hatchery, bringing the total number
of hatchery farms to three by the end of May 2010.
Purchase
of Breeding Farms Nos. 3 & 4
On June
7, 2008, PRC Yuhe entered into an agreement with Shandong Anrui Poultry Feed
Ltd. and purchased land and the building on it for a total consideration of RMB
17 million, or approximately $2.5 million, and a sum of RMB 16 million, or
approximately $2.4 million, has been paid according to the terms of such
agreement. PRC Yuhe will utilize this facility as one of its breeding
farms without the need to pay for lease payments after such agreement was
signed. PRC Yuhe will have avoided annual lease payments of $500,000.
The capacity of this breeding farm is 100,000 sets of parent
breeders.
Construction
of Breeding Farm No. 1
On August
15, 2008, PRC Yuhe completed construction work and facilities to set up the
southern farm of breeding farm No 1. On August 30, 2008, PRC Yuhe
purchased 100,000 sets of parent breeders and began to feed. By the end of
December 2008, PRC Yuhe has spent RMB 29 million, approximately equivalent to
$4.5 million, to build breeding farm No 1. The breeding farm can be split
into the southern and the northern regions. The northern farm construction
work and facilities have been set up by the end of February 2010. The
capacity of the northern factory is 130,000 sets of parent
broilers. The residual payment is RMB 6 million, approximately
equivalent to $0.9 million, for the building and facilities; and RMB 4.9
million, approximately equivalent to $0.72 million, in machinery and is
scheduled to be paid progressively from March 2010.
- 20
-
Construction
of Breeding Farm Nos. 2, 3, 5, 6, 7
On
December 6, 2008, PRC Yuhe entered into a construction agreement with a
contractor to build and renovate five of its breeding farms for a total
consideration of RMB2.6 million, approximately equivalent to $380,000. The
construction has been completed at the end of October 2009. The
residual scheduled payment is RMB600,000, approximately equivalent to $87,750,
and is scheduled to be paid by the end of March 2010.
Construction
of Steel Structural Surface for Hatchery Farm No. 3
On
December 10, 2008, PRC Yuhe entered into a construction agreement with a
contractor to build the steel structure for its hatchery farm No. 3 for a total
consideration of RMB3.9 million, approximately equivalent to $570,410. The
estimated completion date of construction is postponed to May 2010 because of
the cold weather and construction will start once the weather is getting
warm. The residual scheduled payment is RMB2 million, approximately
equivalent to $292,520 and is scheduled to be paid two months after completion
of construction.
Construction
of Breeding Farm and Steel Structural Surface
On June
23, 2009, PRC Yuhe entered into two construction agreements with contractors to
build part of the above breeding farms and construct the steel structure for a
total consideration of RMB 6,112,300, approximately equivalent to $893,980, and
RMB5,887,800, approximately equivalent to $861,140, respectively. The
constructions have been completed as of December 31, 2009. As of
December 31, 2009, the Company has paid RMB5,340,000, approximately equivalent
to $781,020, and RMB5,140,000, approximately equivalent to $751,770,
respectively to these two suppliers. The residual scheduled payments
are RMB772,300, approximately equivalent to $112,960, and RMB747,800,
approximately equivalent to $109,370, and are scheduled to be paid in May
2010.
Acquisition
of 13 breeder farms
On
December 24, 2009, PRC Yuhe entered into an agreement to purchase thirteen
breeder farms at a total consideration of RMB103,870,000, approximately
equivalent to $15,191,891. As of December 31, 2009, PRC Yuhe has paid
80% of the total consideration, or RMB 83,000,000, approximately equivalent to
$12,139,472. The remaining balance will be paid within two months after formal
delivery of the farms, expected in early Oct 2010. The farms cover a total area
of 37 hectares (560 mu), for which PRC Yuhe acquired all the ground buildings as
well as the land use rights for 36 years. The purchase price also includes
in-house breeding facilities which supply feed, water and air to the parent
breeders. PRC Yuhe expects to spend RMB17,000,000, approximately equivalent to
$2,490,000 for renovation.
Purchase
of Land Use Right, Building and Facilities
On December 26, 2009, PRC Yuhe entered
into an agreement with Yejiazhuangzi Villagers Commission to purchase the land
use rights for 50 years of a 5.3 hectare (80 mu) parcel of land for RMB18.0
million, approximately equivalent to $2,632,657, which was paid at the end of
2009. PRC Yuhe also paid an additional RMB2 million, approximately equivalent to
$292,517 for a building and other facilities within the area. The construction
of this new breeder farm commenced in February 2010 and is expected to finish by
the second quarter of 2010. The total capital expenditure for construction and
equipment is expected to be approximately RMB17 million, approximately
equivalent to $2,486,000.
- 21
-
Construction
of Breeding Farm No. 1 northern region
On March
1, 2010, PRC Yuhe completed construction work and facilities of breeding farm
no. 1 northern region. This breeder farm covers an area of 20.6 acres
(125 mu) and has capacity for 130,000 parent breeders.
Equipment Leasing and Rental
Arrangement
On
November 11, 2008, PRC Yuhe entered into equipment leasing agreement and
property rental agreement, collectively, the “Agreements”, with Shandong
Nongbiao Purina Feed Co., Ltd., “Shandong Nongbiao Purina”. Shandong Nongbiao
Purina will construct a feed production facility on a property leased from PRC
Yuhe and become the exclusive feed supplier for PRC Yuhe. Pursuant to the terms
and conditions of the Agreements, Shandong Nongbiao Purina will lease certain
equipment for feed production from, and install them at the premises owned by
PRC Yuhe. The lease term for both the equipment leasing agreement and property
rental agreement is 10 years. After completion of the feed production facility,
the lease term commenced on July, 2009 when the production
began. Shandong Nongbiao Purina shall pay to PRC Yuhe an annual
rental payment for the leased land, premises and facilities of RMB 1,500,000,
approximately equivalent to $219,390. As at December 31, 2009, rental
payment of $109,695, approximately equivalent to RMB750,000, has been received
from Shandong Nongbiao Purina. The rent payable by Shandong Nongbiao
Purina under the rental agreement will be offset against the prepaid equipment
rental costs of RMB10,000,000, approximately equivalent to
$1,462,290. As at December 31, 2009, Shandong Nongbiao Purina
advanced USD1,040,340, approximately equivalent to RMB7,113,000, to PRC Yuhe as
rental payment and was recorded as advances from customers.
In
connection with the execution of the Agreements, Shandong Yuhe Food Group Co.,
Ltd., “Yuhe Group”, a PRC company based in Shandong Province, would be the
guarantor of PRC Yuhe for RMB 4,500,000, approximately equivalent to $658,000,
for the first five years and for RMB 3,000,000, approximately equivalent to
$439,000, for the next five years. No guarantee fee is required according to the
above Agreements.
ITEM
3. LEGAL PROCEEDINGS.
Neither
the Company nor any of its direct or indirect subsidiaries is a party to, nor is
any of its property the subject of, any legal proceedings other than ordinary
routine litigation incidental to their respective businesses. There are no
proceedings pending in which any of the Company’s officers, directors, promoters
or control persons are adverse to it or any of the Company’s subsidiaries or in
which they are taking a position or have a material interest that is adverse to
it or any of its subsidiaries.
Neither
the Company nor any of its subsidiaries is a party to any administrative or
judicial proceeding arising under federal, state or local environmental laws or
their Chinese counterparts.
- 22
-
ITEM
4. RESERVED.
PART
II
ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Market
Information
Prior to
its migration for trading in Nasdaq, the Company’s common stock was quoted under
the symbol, “YUII.OB” on the OTC Bulletin Board. Trading in the common stock in
the over-the-counter market had been limited and sporadic and the quotations set
forth below were not necessarily indicative of actual market conditions. The
following sets forth high and low bid price quotations for each calendar quarter
during the last two fiscal years that trading occurred or quotations were
available. All prices reflect inter-dealer prices without retail mark-up,
mark-down, or commission and may not necessarily reflect actual transactions.
The following share prices are quoted on OTC Bulletin Board trading system and
Nasdaq. The high and low sales prices for the periods presented have
not been adjusted to reflect the 1: 14.70596492 reverse stock split effected on
April 4, 2008.
On
October 21, 2009, The NASDAQ Stock Market, the “Exchange”, informed the Company
that the Exchange had approved the listing of the Company’s common stock on the
Exchange. The Company’s common stock has ceased trading on the
Over-the-Counter Bulletin Board and commenced trading on the Exchange on October
30, 2009 under the trading symbol “YUII”.
High*
|
Low*
|
|||||||
2008
– Quarter Ended:
|
||||||||
March
31, 2008
|
0.47
|
0.47
|
||||||
June
30, 2008
|
6.13
|
2.25
|
||||||
September
30, 2008
|
8.50
|
2.05
|
||||||
December
31, 2008
|
6.50
|
4.00
|
||||||
2009
– Quarter Ended:
|
||||||||
March
31, 2009
|
4.00
|
0.31
|
||||||
June
30, 2009
|
4.10
|
1.81
|
||||||
September
30, 2009
|
6.30
|
3.20
|
||||||
December
31, 2009
|
9.69
|
5.44
|
*
|
Source:
Yahoo Finance
|
- 23
-
The most
recent market trade of the Company’s common stock occurred on March 26, 2009 at
the price of $9.25 per share.
As
of December 31, 2009, there were 15,722,180 shares
outstanding.
Securities
Authorized for Issuance under Equity Compensation Plans
The
Company has not reserved any securities for issuance under any equity
compensation plan, as it currently has not adopted any equity compensation
plan.
Dividend
Policy
Prior to
the Company’s entering into the Equity Transfer Agreement, none of Bright Stand,
PRC Yuhe or Taihong has declared any dividends.
The
Company entered into a Stock Purchase Agreement, the “Stock Purchase Agreement”,
with Halter Financial Investments, L.P., a Texas limited partnership, “Halter
Financial”, dated as of November 6, 2007, pursuant to which it agreed to sell to
Halter Financial 951,996 shares of its common stock for $425,000. The
transaction closed on November 16, 2007. As a result of the transaction, Halter
Financial held 951,996 shares, or 87.5% of the Company’s 1,087,994 shares, of
common stock then outstanding following the completion of all matters referred
to above. The Stock Purchase Agreement also required the Company’s Board of
Directors to declare and pay a special cash dividend of $3.088 per share to the
Company’s shareholders on November 19, 2007. Halter Financial did not
participate in such dividend. The dividend was payable to shareholders of record
on November 15, 2007, which was prior to the date the shares were issued to
Halter Financial under the Stock Purchase Agreement. The dividend payment date
was November 19, 2007. The dividend was payable to the Company’s shareholders
who held 135,999 shares of the Company’s common stock and resulted in a total
dividend distribution of $420,000. The funds for the dividend came from the
$425,000 proceeds received from the sale of common stock to Halter
Financial.
Any
future determination as to the declaration and payment of dividends on the
Company’s common stock will be made at the discretion of the Company’s board of
directors out of funds legally available for such purpose. The Company is under
no contractual obligations or restrictions to declare or pay dividends on its
common stock. In addition, the Company currently has no plans to pay such
dividends. However, even if it wishes to pay dividends, because its cash flow is
dependent on dividend distributions from its affiliated entities in China, the
Company may be restricted from distributing dividends to its holders of common
stock in the future if at the time it was unable to obtain sufficient dividend
distributions from PRC Yuhe or Taihong. The board of directors currently intends
to retain all earnings for use in the business for the foreseeable
future.
- 24
-
ITEM
6. SELECTED FINANCIAL DATA
Not
required for smaller reporting companies.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following
description of the Company’s results of operations and financial condition in
conjunction with the Company’s consolidated audited financial statements
presented in this report. Unless otherwise specified, all dollar amounts are in
U.S. dollars.
Overview
The
Company is in the middle of the broiler chicken supply chain. The Company
purchases baby parent breeding stocks from primary breeder farms, raises them
for hatching eggs and sells live day-old broilers to the market. The Company’s
business segment along the broiler supply chain has the highest margin along the
supply chain. The Company produces high quality day-old broilers supported by
its know-how in the areas of feed ingredient composition, immunizations system
and breeding techniques, gained through over a decade of
experience.
Unless
otherwise noted, all dollar figures provided herein are translated into United
States Dollars from Renminbi at year-end exchange rates as to assets and
liabilities and average exchange rates as to revenues and expenses. Capital
accounts are translated at their historical exchange rates when the capital
transactions occurred.
Unless
otherwise noted, all historical financial information prior to March 12, 2008
refers to PRC Yuhe, which includes the accounts of Taihong.
- 25
-
The
following is a discussion of the Company’s results of operations for the year
ended December 31, 2009 compared to the year ended December 31,
2008.
For
The Year Ended December 31, 2009 Compared to The Year Ended December 31,
2008
Year
to Date
|
All amounts,
|
As a
|
All amounts,
|
As a
|
All amounts,
|
As a
|
Increase/
|
Increase/
|
Increase/
|
Increase/
|
other than
|
percentage of
|
other than
|
percentage of
|
other than
|
percentage of
|
(Decrease)
|
(Decrease)
|
(Decrease)
|
(Decrease)
|
|
percentage, in
|
net revenues
|
percentage, in
|
net revenues
|
percentage, in
|
net revenues
|
Dollar ($)
|
Percentage
|
Dollar ($)
|
Percentage
|
|
U.S. dollars
|
|
U.S. dollars
|
|
U.S. dollars
|
|
|
|
|
|
|
For
the year
|
For
the year
|
For
the year
|
For
the year
|
For
the year
|
For
the year
|
For
the year
|
For
the year
|
For
the year
|
For
the year
|
|
ended
|
ended
|
ended
|
ended
|
ended
|
ended
|
ended
|
ended
|
ended
|
ended
|
|
December
31
|
December
31
|
December
31
|
December
31
|
December
31
|
December
31
|
December
31
|
December
31
|
December
31
|
December
31
|
|
2009
|
2009
|
2008
|
2008
|
2008
|
2008
|
2009
|
2009
|
2009
|
2009
|
|
|
(As
reported)
|
|
(Pro
forma)
|
|
(As
reported)
|
|
(Pro
forma)
|
|
||
Sales
revenue
|
47,245,758
|
100.00%
|
34,626,282
|
100.00%
|
36,117,611
|
100.00%
|
12,619,476
|
36.44%
|
11,128,147
|
30.81%
|
Costs
of revenue
|
30,504,187
|
64.56%
|
21,572,722
|
62.30%
|
22,910,160
|
63.43%
|
8,931,465
|
41.40%
|
7,594,027
|
33.15%
|
Gross
profit
|
16,741,571
|
35.44%
|
13,053,560
|
37.70%
|
13,207,451
|
36.57%
|
3,688,011
|
28.25%
|
3,534,120
|
26.76%
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
434,056
|
0.92%
|
425,460
|
1.23%
|
454,457
|
1.26%
|
8,596
|
2.02%
|
(20,401)
|
-4.49%
|
General
and administrative expenses
|
2,963,536
|
6.27%
|
1,725,590
|
4.98%
|
1,628,392
|
4.51%
|
1,237,946
|
71.74%
|
1,335,144
|
81.99%
|
Operating
income
|
13,343,979
|
28.24%
|
10,902,510
|
31.49%
|
11,124,602
|
30.8%
|
2,441,469
|
22.39%
|
2,219,377
|
19.95%
|
Interest
income
|
237
|
0.00%
|
249,738
|
0.72%
|
249,743
|
0.69%
|
(249,501)
|
-99.91%
|
(249,506)
|
-99.91%
|
Other
income
|
16,371
|
0.03%
|
12,251
|
0.04%
|
17,855
|
0.05%
|
4,120
|
33.63%
|
(1,484)
|
-8.31%
|
Gain
on disposal of fixed assets
|
24,567
|
0.05%
|
84,663
|
0.24%
|
84,663
|
0.23%
|
(60,096)
|
-70.98%
|
(60,096)
|
-70.98%
|
Interest
expenses
|
608,789
|
1.29%
|
702,573
|
2.03%
|
788,740
|
2.18%
|
(93,784)
|
-13.35%
|
(179,951)
|
-22.81%
|
Other
expenses
|
-
|
0.00%
|
21,704
|
0.06%
|
21,704
|
0.06%
|
(21,704)
|
-100.00%
|
(21,704)
|
-100.00%
|
Income
tax benefits
|
17,756
|
0.04%
|
-
|
0.00%
|
-
|
0.00%
|
17,756
|
0.00%
|
17,756
|
0.00%
|
Net
income
|
12,794,121
|
27.08%
|
10,524,885
|
30.40%
|
10,666,419
|
29.53%
|
2,269,236
|
21.56%
|
2,127,702
|
19.95%
|
The
Company has consolidated the results of PRC Yuhe and Taihong into its
Consolidated Financial Statements from January 1, 2009 to December 31, 2009 and
February 1, 2008 to December 31, 2008. For comparative purposes, the Company has
provided a pro forma Consolidated Statement of Operations from January 1, 2008
to December 31, 2008 (please refer to F-27–F-29) to provide
comparable presentation to its reported results for the twelve months ended
December 31, 2009 and 2008. The Company believes that providing this pro forma
financial statement as if it had consolidated PRC Yuhe and Taihong as of January
1, 2008 may assist investors in assessing performance between periods and in
developing expectations of future performance.
- 26
-
Net
revenue (As reported). Sales revenue increased by $12.6 million, or 36%, to
$47.2 million for the year ended December 31, 2009 from $34.6 million for the
period from February 1, 2008 to December 31, 2008.
Net
revenue (Pro forma). Sales revenue increased by $11.1 million, or 30%, to
$47.2 million for the year ended December 31, 2009 from $36.1 million for the
year ended December 31, 2008. The increase was driven by the increase in sales
volume of the Company’s day-old broilers by 33 million birds, or 43%, from 76
million birds for the year ended December 31, 2008 to 109.9 million birds for
the year ended December 31, 2009. The increase in sales volume was a result of
capacity expansion in 2008 and 2009. The increase in sales volume was partially
offset by a decrease in unit selling price. The selling price of day-old
broilers decreased slightly from RMB 2.9 per bird for the year ended December
31, 2008 to RMB 2.74, or 5.5%, per bird for the year ended December 31, 2009.
The
slight decrease in the selling price is primarily due to supply of day old
broilers exceeding demand for chicken meat. First, the financial crisis affected
the demand of chicken meat and consequently caused a drop in demand for day old
broilers in 2009; second, the supply of day old broilers reached a peak point in
2009. Bird flu in 2006 led to a shortage in supply of broilers in 2007, and led
to a surge in importing volume of grand parent broilers which reach a peak point
in 2007. The output of these grand-parent broilers caused an over supply of day
old broilers in 2009.
For the
breakdown of the total revenue, $43.9 million, or 93%, of the total sales, came
from day old broilers sales; $2.2 million, or 4.7% of the total sales, came from
the sale of retired parent broilers ; $0.45 million, or 1%, of the total sales,
came from sales of non-fecundated eggs; $0.37 million, or 0.8%, of the total
sales, came from chicken dung and other business; $0.32 million, or 0.7%, of the
total sales, came from external feed sales of Taihong.
Cost of
revenues (As reported). The Company’s cost of revenues increased by $8.9
million, or 41%, to $30.5 million for the year ended December 31, 2009 from
$21.6 million for the period from February 1, 2008 to December 31,
2008.
Cost of
revenues (Pro forma). The Company’s cost of revenues increased by $7.6 million,
or 33%, to $30.5 million for the year ended December 31, 2009 from $22.9 million
for the year ended December 31, 2008. The main reason for the increase in the
cost of revenues was the increase in sales volume, which was partially offset by
a decrease in unit cost of day-old broilers. The unit cost of day-old
broilers decreased 10% from the year ended December 31, 2008 to the year
ended December 31, 2009. The Company benefited from economies of scale resulting
from expanded productivity; therefore, the allocated cost to each unit
decreased. In addition, during 2009, the Company revised its production plan by
retiring some parent broilers early, and purchasing more good quality eggs at a
lower cost from outside suppliers, which led to the unit cost declining by 10%.
Although there was a $47,000 loss in the selling of parent broilers,, this loss
was offset by the Company’s ability to leverage off the decline in the price of
eggs purchased from third parties. With the Company’s management’s sound
prediction of fluctuation in the price of eggs, the Company gained from the
lowered cost of purchasing eggs from third parties rather than producing on its
own. The Company has taken the follow measures to ensure the quality
of the purchased eggs. First, the Company only chose qualified egg suppliers;
secondly, the Company chose eggs that were produced by younger breeders which
typically have superior quality, and thirdly, the Company injected high quality
vaccine timely to maintain the health of the purchased
eggs. Purchasing eggs from third parties was not the main source of
the Company’s day old broiler supply; this strategy served as an alternative to
reduce the Company’s cost.
- 27
-
As a
percentage of net revenues, the cost of revenues increased by 3% , from 62% for
the year ended December 31, 2008, to 65% for the year ended December 31,
2009.
Gross
profit (As reported). The Company’s gross profit increased by $3.6 million, or
28%, to $16.7 million for the year ended December 31, 2009 from $13.1 million
for the period from February 1, 2008 to December 31, 2008.
Gross
profit (Pro forma). The Company’s gross profit increased by $3.5 million, or
27%, to $16.7 million for the year ended December 31, 2009 from $13.2 million
for the year ended December 31, 2008. Gross profit as a percentage of net
revenues was 35.4% for the year ended December 31, 2009, as compared to 36.6%
for the year ended December 31, 2008. The decrease was mainly attributable
to the decline in sales price of the Company’s day-old broilers, as discussed
above.
General
and administrative expenses (As reported). The general and administrative
expenses increased by $1.24 million, or 72%, to $2.96 million for the year ended
December 31, 2009 from $1.73 million for the period from February 1, 2008 to
December 31, 2008. During 2009, bad debts expense was $56,000, compared to the
bad debts recovery of $0.81 million in 2008.
General
and administrative expenses (Pro forma). The general and administrative expenses
increased by $1.33 million, or 82%, to $2.96 million for the year ended December
31, 2009 from $1.63 million for the year ended December 31, 2008. The
increase was primarily due to bad debt recovery of $1.03 million in 2008 as a
result of collection of bad debt allowance previously provided on accounts
receivables, notes receivable and other receivable in 2008. The increase in
general and administrative expense was also due to public company related
expenses, which increased by $0.2 million, or 13%, to $1.7 million for the year
ended December 31, 2009 from $1.5 million for the year ended December 31, 2008.
One reason is the stock based compensation expense in 2009 covering 12 months of
compensation for officers while the stock based compensation in 2008 only
occurred in the second half of 2008.
The
general and administrative expenses comprised mainly of public company related
expenses of $1.7 million, including stock based compensation of $0.545 million,
representing 59% of total general and administrative expenses, human resources
and related expenses of $0.3 million, representing 10% of total general and
administrative expenses, facilities and utility expenses of $0.36 million,
representing 12% of total general and administrative expense, and travel
expenses of $0.3 million, representing 10% of total general and administrative
expenses.
- 28
-
Selling
Expenses (As reported). The Company’s selling expenses increased by $9,000, or
2%, to $434,000 for the year ended December 31, 2009 from $425,000 for the
period from February 1, 2008 to December 31, 2008.
Selling
Expenses (Pro forma). The Company’s selling expenses decreased by $20,000, or
4%, to $434,000 for the year ended December 31, 2009 from $454,000 for the same
period in 2008. Selling expenses comprised mainly of packaging and
transportation expenses of $0.3 million, representing 69% of total selling
expenses; human resources and related expenses of $50,000, representing 12% of
total selling expenses; and travel and office expenses of $60,000, representing
14% of total selling expense. The decrease in selling expenses was primarily due
to the decrease in packaging and transportation expenses. The unit price of
package decreased from RMB 3.5 in year 2008 to RMB 3 in year 2009. As a
percentage of net revenues, selling expenses decreased by 0.3%, to 0.9% for the
year ended December 31, 2009 from 1.2% for the same period in 2008. The
Company’s selling expense did not increase in proportion with sales growth
because the Company distributed its products through distributors.
Interest
expenses (As reported). Interest expenses decreased by $94,000, or 13%, to
$609,000 for the year ended December 31, 2009 from $703,000 for the period from
February 1, 2008 to December 31, 2008. The decrease was due to the increase in
capitalized interest re construction in progress. Capitalized interest for
the year ended December 31, 2009 and 2008 was $663,000 and $437,000,
respectively. If interest was not capitalized, interest expense
on bank loans would have been $1,272,000 and $1,140,000 for the years ended
December 31, 2009 and 2008.
Interest
expenses (Pro forma). Interest expenses decreased by $180,000, or 23%, to
$609,000 for the year ended December 31, 2009 from $789,000 for the year ended
December 31, 2008. If interest was not capitalized, interest expense on bank
loans would have been $1,272,000 and $1,140,000 for the years ended December 31,
2009 and 2008. As the Company continues to expend its operation by acquiring
more farm facilities and equipment in the coming years, the amount of
capitalized bank interest is not expected to decline in the near
future.
Net
profit (As reported). Net profit increased by $2.27 million, or 22%, to $12.79
million for the year ended December 31, 2009 from net profit of $10.52 million
for the period from February 1, 2008 to December 31, 2008, as a result of the
factors described above.
Net
profit (Pro forma). Net profit increased by $2.13 million, or 20%, to
$12.79 million for the year ended December 31, 2009 from net profit of $10.67
million for the year ended December 31, 2008, as a result of the factors
described above.
Liquidity
and Capital Resources
The
Company expects that its strong positive working capital of $834,000 of December
31, 2009 and positive cash flow provided by operating activities of $20,583,000
will meet its foreseeable working capital needs for the next 12 months from the
date of this report as management believes the Company would be able to renew
the $9.4 million bank loans that will be due in the next 12 months.
- 29
-
General
As of
December 31, 2009, the Company had cash and cash equivalents of approximately
$14.05 million. The following table provides detailed information about the
Company’s net cash flow for the year ended December 31, 2009.
Year ended
|
||||
December
31, 2009
|
||||
Net
cash provided by operating activities
|
$
|
20,582,948
|
||
Net
cash used in investing activities
|
(20,361,273
|
)
|
||
Net
cash provided by financing activities
|
384,648
|
|||
Effect
of foreign currency translation on cash
|
28,619
|
|||
Net
cash inflow
|
634,942
|
|||
Cash
at beginning of period
|
13,412,205
|
|||
Cash
at end of period
|
$
|
14,047,147
|
Operating
Activities. Net cash provided by operating activities was $20.6 million for the
year ended December 31, 2009. Net cash provided by operating activities was
primarily attributable from net income of $13 million; a decrease of $4.11
million of advance from customers; an increase of $0.76 million of accounts
payable; and non cash adjustment for depreciation and amortization of $2.1
million; and non cash compensation of $0.73 million. In addition,
inventory level has remained fairly consistent at $6.6 million; therefore, no
significant impact to operating cash flow during the year ended December 31,
2009.
Investing
Activities. Net cash used in investing activities for the year ended December
31, 2009 was $20.4 million. It was mainly proceeds from related parties of $3.71
million for the year ended December 31, 2009; capital expenditure in the
building of breeder farms and payment of rental deposits for the breeder farms
totaling $18.19 million for the year ended December 31, 2009. The following
is a summary of the $18.19 million cash used in deposits paid and acquisition of
property, plant and equipment:
|
Year ended
|
|||
December
31,2009
|
||||
Rental
deposits
|
$
|
-
|
||
Deposits
paid for construction of breeding farm
|
-
|
|||
Deposits
paid for purchase of equipment
|
13,821,572
|
|||
Purchase
of equipment
|
4,348,099
|
|||
Capitalized
interest
|
-
|
|||
Others
|
17,525
|
|||
Total
deposit paid and acquisition of property, plant and
equipment
|
$
|
18,187,196
|
- 30
-
Financing
Activities. Net cash provided by financing activities for the year ended
December 31, 2009 was $384,648. Net cash used in financing activities was
attributable to the decrease by $209,828 of net payment to related parties for
working capital purposes and the increase by $594,476 of rental payment received
on the capital lease.
Loan
Facilities
As at
December 31, 2009, maturities of the Company’s bank loans are as
follows:
|
As of
December
31, 2009
|
|||
2010
|
9,433,686
|
|||
2011
|
1,360,206
|
|||
$
|
10,793,892
|
All
amounts, other than percentages, are in U.S. dollars
Type
|
Contracting Party
|
Valid period
|
Duration
|
Amount
|
|||
|
|
|
|
||||
Bank loan
|
Hanting Kaiyuan
Rural Credit Cooperative
|
January 7, 2009-Jan 7, 2011
|
15 months
|
$
|
1,067,689
|
||
Bank loan
|
Nansun Rural Credit
|
Nov 28,2008-Nov 28, 2010
|
21 months
|
4,826,537
|
|||
Bank loan
|
Nansun Rural Credit
|
Dec 10, 2008-Dec 9, 2011
|
26 months
|
292,517
|
|||
Bank loan
|
Nansun Rural Credit
|
May 17, 2008-May 17, 2010
|
33 months
|
3,656,467
|
|||
Bank loan
|
Shuangyang Rural Credit
|
Oct 16,2008 -Oct 13, 2010
|
21 months
|
950,682
|
|||
Total
|
$
|
10,793,892
|
The
Company has loan facilities from twelve institutions and the following are the
material terms of such bank loans
Loan
from Hanting Kaiyuan Rural Credit Cooperative:
On
January 8, 2009, PRC Yuhe renewed the loan agreement with Hanting Kaiyuan Rural
Credit Cooperative. Pursuant to the loan agreement, Hanting Kaiyuan Rural Credit
Cooperative loaned PRC Yuhe $1,067,689 at an interest rate of 7.56% per annum.
PRC Yuhe is obligated under such loan agreement to pay interest monthly and
repay the loan on its maturity date, January 7, 2011. The loan is secured by the
plant and equipment of PRC Yuhe with a net book of $1,365,530 as of December 31,
2009.
Loans
from Nansun Rural Credit:
PRC Yuhe
renewed four loan agreements with Nansun Rural Credit on November 28,
2008. The interest rate for the loan agreements is 13.82% per annum
for the renewed bank loan agreement, compared to the original rate of 9.21%,
which enjoyed government support. The total amount of these four bank loans
is $4,826,537.
The other
four loans with an outstanding balance of $3,656,467 from Nansun Rural Credit
have an interest rate reduced from 12.1% to 8.64% due to the interest rate
adjustment by the PRC government.
- 31
-
The last
bank loan from Nansun Rural Credit with an outstanding balance of $292,517 was
borrowed in October 2008 with an interest rate reduced from 10.46% to 7.56% per
annum.
All loans
are secured by the land use right and building of PRC Yuhe and Taihong with a
net book value of $11,182,321 as of December 31, 2009.
Loan
from Shuangyang Rural Credit:
Taihong
renewed the loan agreements with Shuangyang Rural Credit on October 13 2008,
amounting to $950,682. The interest rate for the loans is 9.83% per annum.
Taihong is obligated under such loan agreements to pay interest monthly and
repay the loans on their maturity date, October 13, 2010. The loans are secured
by the plant and equipment of Taihong with a net book value of $1,724,956
as of December 31, 2009.
Due to
related companies:
As of
December 31, 2009, the Company has $1,208 due to Halter Financial Investments
LP. The amounts due to this related company are unsecured, interest
free and have no fixed repayment date. These loans are used for
working capital purposes.
Obligations
Under Material Contracts
Below is
a table setting forth the Company’s material contractual obligations as of
December 31, 2009:
|
Payment due by period
|
|||||||||||||||||||
Contractual Obligations
|
Total
|
Less than 1
year
|
1-3 years
|
3-5 years
|
More than
5 years
|
|||||||||||||||
Long-Term
Debt Obligations
|
$ | 10,793,892 | $ | 9,433,686 | $ | 1,360,206 | - | - | ||||||||||||
Due
to Related Companies
|
$ | 1,208 | $ | 1,208 | - | - | - | |||||||||||||
Operating
Lease Obligations
|
$ | 1,603,769 | $ | 70,380 | $ | 211,140 | 140,760 | $ | 1,181,489 | |||||||||||
Capital
Lease Obligations
|
- | - | - | - | - | |||||||||||||||
Purchase
Obligations
|
$ | 3,931,412 | $ | 3,931,412 | - | - | - | |||||||||||||
Other
Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under
GAAP
|
- | - | - | - | - | |||||||||||||||
Total
|
$ | 16,330,281 | $ | 13,436,686 | $ | 1,571,346 | 140,760 | $ | 1,181,489 |
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the Company’s management to
make assumptions, estimates and judgments that affect the amounts reported in
the financial statements, including the notes thereto, and related disclosures
of commitments and contingencies, if any. The Company considers its critical
accounting policies to be those that require the more significant judgments and
estimates in the preparation of financial statements, including the
following:
- 32
-
l
|
Inventory - Inventories
consisting of raw materials, work in progress and finished goods are
stated at the lower of cost and net realizable value. The cost of
inventories is determined using the weighted average cost method, and
includes expenditures incurred in acquiring the inventories and bringing
them to their existing location and condition. Net realizable value is the
estimated selling price in the ordinary course of business less any
applicable selling expenses. Finished goods are comprised of direct
materials, direct labor and an appropriate proportion of overhead. At each
balance sheet date, inventories that are worth less than cost are written
down to their net realizable value, and the difference is charged to the
cost of revenues of that
period.
|
l
|
Trade receivable –
Trade receivables are recognized and carried at the original invoice
amount less an allowance for any uncollectible amounts. An estimate for
doubtful accounts is made when collection of the full amount is no longer
probable. Bad debts are written off as
incurred.
|
l
|
Note receivables – Note
receivables are stated at the original principal amount less an allowance
for any uncollectible amounts. Management provides for an allowance when
collection of the full amount is no longer probable by establishing an
allowance equivalent to 30% of gross amount of notes receivables due over
6 months and 60% of gross amount of notes receivables due over 1 year.
Full provision will be made for notes receivables due over 2
years.
|
l
|
Plant and equipment -
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 plant and equipment
are as follows:
|
Buildings
|
20
years
|
|
Machinery
|
10
years
|
|
Vehicles
|
5
years
|
|
Furniture
and equipment
|
3
years
|
The cost
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 income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.
l
|
Valuation of long-lived assets
- Long-lived assets held and used by the Company 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 technology
or other industry changes. Determination of recoverability of assets to be
held and used is by comparing the carrying amount of an asset to future
net undiscounted cash flows to be generated by the
assets.
|
- 33
-
If such
assets are considered to be impaired, the impairment to be recognized is
measured as 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 costs to sell. During the reporting
periods, there was no impairment loss.
l
|
Intangible assets -
Intangible assets represent land use rights in the PRC. Land use rights
are carried at cost and amortized on a straight-line basis over the period
of rights of 50 years commencing from the date of acquisition of equitable
interest. According to the laws of PRC, the government owns all of the
land in the PRC. Companies or individuals are authorized to possess and
use the land only through land usage rights approved by the PRC
government.
|
l
|
Guarantee
Expense - The Company accounts for its liability for products
guaranteed in accordance with ASC Topic 460. Under that standard,
the aggregate changes in the liability for accruals related to product
warranties issued during the reporting period must be charged to expense
as incurred.
|
The
Company guarantees a 98% survival rate of its product by delivering additional
2% of the product. The guarantee expires seven days after delivery.
If the survival rate falls below 96%, the Company provides an additional
guarantee compensation to customers. Based on historical experience, the
likelihood that survival rate falls below 96% is remote and therefore no accrued
guarantee liability was recorded at period end. The Company records
guarantee expense as incurred.
l
|
Revenue recognition -
Net revenue is recognized when the third-party distributors and broiler
farms and integrated chicken companies take delivery and acceptance of
products. The Company treats both the distributors and broiler farms
and integrated chicken companies as end customers. The price is
fixed or determinable as stated in the sales contract, and the
collectability is reasonably assured. Customers do not have a
general right of return on products
delivered.
|
l
|
Use of estimates- The
preparation of the Company’s financial statements in conformity with
accounting principles generally accepted in the United States of America
(“GAAP”) requires management to make estimates and assumptions that affect
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The financial statements
include some amounts that are based on management’s best estimates and
judgments. These accounts and estimates include, but are not limited to,
the valuation of accounts receivable, other receivables, inventories,
deferred income taxes, and the estimation on useful lives of plant and
equipment. These estimates may be adjusted as more current information
becomes available, and any adjustment could be
significant.
|
l
|
Significant Estimates -
Relating to Specific Financial Statement Accounts and Transactions Are
Identified - The financial statements include some amounts that are based
on management’s best estimates and judgments. The most significant
estimates relate to allowance for uncollectible accounts receivable,
inventory work in process valuation and obsolescence, depreciation, useful
lives, taxes, and contingencies. These estimates may be adjusted as more
current information becomes available, and any adjustment could be
significant .
|
- 34
-
l
|
Income tax – The
Company accounts for income taxes 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 Company is able
to realize their benefits, or that future realization is
uncertain.
|
The Group
is operating in the PRC, and in accordance with the relevant tax laws and
regulations of PRC, the corporate income tax rate is 25%. Weifang Yuhe Poultry
Co., Ltd is a poultry company, and in accordance with the relevant regulations
regarding the favorable tax treatment for an outstanding poultry company, the
Company is entitled to income tax exemption effective as of January 1,
2008.
The
corporate income tax for the subsidiary, Weifang Taihong Feed Co., Ltd is
25%.
l
|
Fair value of financial
instruments – ASC Topic 825 requires entities to disclose the fair
values of financial instruments except when it is not practicable to do
so. Under ASC Topic 825, it is not practicable to make this disclosure
when the costs of formulating the estimated values exceed the benefit when
considering how meaningful the information would be to financial statement
users.
|
The fair
values of all assets and liabilities do not differ materially from their
carrying amounts. None of the financial instruments held are derivative
financial instruments and none were acquired or held for trading purposes during
the years ended December 31, 2009 or 2008.
l
|
Statutory reserve – In
accordance with the relevant laws and regulations of the PRC and the
articles of associations of the Company’s PRC subsidiaries, PRC Yuhe and
Taihong are required to allocate 10% of their net income reported in the
PRC statutory accounts, after offsetting any prior years’ losses, to the
statutory surplus reserve, on an annual basis. When the balance
of such reserve reaches 50% of the respective registered capital of the
subsidiaries, any further allocation is optional. The statutory
surplus reserves can be used to offset prior years’ losses, if any, and
may be converted into registered capital, provided that the remaining
balances of the reserve after such conversion is not less than 25% of
registered capital. The statutory surplus reserve is
non-distributable.
|
Effects of
Inflation
Inflation
and changing prices have not had a material effect on the Company’s business and
the Company does not expect that inflation or changing prices will materially
affect its business in the foreseeable future. However, the impact of inflation
on PRC Yuhe and Taihong may not be readily recoverable in the prices of the
Company’s products.
- 35
-
Off
Balance Sheet Arrangements
The
Company does not have any off balance sheet arrangements that have or are
reasonably likely to have a current or future effect on its financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity or capital expenditures or capital resources that is material to an
investor in its securities.
Seasonality
The
Company’s business has been subject to material seasonal variations in
operations for the normal life cycle of 66 weeks of the breeder stock. Breeder
stock produces eggs at their mature stage, around weeks 28 - 60 and therefore,
the Company’s business will have seasonal variation on the early and aged stage
of the breeder stock. In addition, the Company normally raises a new batch of
breeder stock after the aged breeder stock retires and is sold. This impact of
seasonality can be resolved when the Company expands its batches of breeder
stocks.
The
Company has been subject to seasonal variations. Since the Company’s ultimate
clients are mostly farmers and the second quarter is their busy season for
reaping, farmers have little idle time to raise broilers during these months, so
the demand for the Company’s day-old broilers generally decreases in May and
June.
Another
low season for the Company’s products is from the second half of December to the
first half of January, during which the Company experiences reduced demand for
its day-old broilers during the period from 30 to 60 days prior to the Chinese
New Year holiday period. In addition, since most farmers are likely to rest
during the Chinese New Year holiday, rather than work, February is traditionally
a low season for the Company’s products.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
required for smaller reporting companies.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a)
Financial Statements
The
following financial statements are set forth at the end hereof.
1. Report
of Independent Registered Public Accounting Firm
2. Consolidated
Balance Sheets as of December 31, 2009 and 2008
3. Consolidated
Statements of Income and Comprehensive Income (Loss) for the years ended
December 31, 2009 and 2008
4. Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2009
and 2008
- 36
-
5. Consolidated
Statements of Cash Flows for the years ended December 31, 2009 and
2008
6. Notes
to Consolidated Financial Statements.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Grant
Thornton was appointed by the Company effective December 8, 2009 as its
independent registered public accounting firm for the fiscal year ended December
31, 2009. On March 5, 2010, the Company was notified by Grant Thornton that it
was resigning as the Company’s independent registered public accounting firm
effective immediately. The resignation of Grant Thornton was approved by the
Company’s Audit Committee and Board of Directors.
Prior to
March 5, 2010, Grant Thornton had not previously audited the financial
statements of the Company or any of its subsidiaries. During the fiscal years
ended December 31, 2008 and 2009, and the interim period through March 5, 2010,
there was no disagreement between the Company and Grant Thornton regarding any
of the matters described in Item 304(a)(1)(iv) of Regulation S-K.
As
reported in the Company’s Annual Report on Form 10-K/A filed on June 3, 2009,
the Company concluded that certain related party loans between the Company and
Shandong Yuhe Food Group Co., Ltd., “Yuhe Food”, constituted prohibited
transactions under Section 402 of the Sarbanes-Oxley Act of 2002.
Although
all such related party loans had been repaid as of the end of 2009, because the
Company continued to make payments under certain arrangements to Yuhe Food, such
payments resulted in related party loans in January and February
2010.
Grant
Thornton noted during its audit procedures that the Company has been unable to
eliminate the occurrence of related party loans between the Company and Yuhe
Food, and the Company concluded that a material weakness continued to exist with
respect to the Company’s compliance with Section 402 of the Sarbanes-Oxley Act
of 2002. The Company’s remedial efforts as previously reported on Form 10-K/A
have not successfully remediated the material weakness. Grant Thornton also
communicated to the Company certain audit adjustments related to the Company’s
financial statements for the year ended December 31, 2009, which indicated a
material weakness of the Company’s internal control over financial reporting.
The Company agreed with such assessment. These notifications by Grant Thornton
constitute “reportable events” as described in Item 304(a)(1)(v) of Regulation
S-K.
Once the
Company was informed that such payments constituted impermissible related party
transactions, the Company caused such related party loans to be repaid promptly.
The Company's Audit Committee has discussed ways to improve the Company’s
internal controls and eliminate the improper payment arrangement.
The
Company provided Grant Thornton with a copy of the disclosures regarding the
material weaknesses contained in the Company’s Current Report on Form 8-K filed
on March 11, 2010, which disclosures are substantially similar to the
disclosures in this Item, and requested that Grant Thornton furnish it with a
letter addressed to the Securities and Exchange Commission stating whether it
agreed with such disclosures. The letter was filed by the Company as
Exhibit 99.1 to such Form 8-K.
- 37
-
The
Company’s Audit Committee and Board of Directors have discussed the reportable
events with Grant Thornton. The Company has authorized Grant Thornton to respond
fully to the inquiries of any successor independent registered public accounting
firm concerning the reportable events.
The Audit
Committee of the Board of Directors of the Company has appointed Child, Van
Wagoner & Bradshaw, PLLC (“CVB”), and CVB has accepted the appointment, as
the Company’s independent registered public accounting firm to replace Grant
Thornton effective March 9, 2010.
During
the Company’s fiscal years ended December 31, 2008 and December 31, 2009 and the
interim period through March 9, 2010, CVB served as the Company’s independent
registered public accounting firm from March 31, 2008 until CVB was dismissed by
the Company on December 7, 2009. CVB audited the Company’s consolidated
financial statements for the fiscal year ended December 31, 2008.
ITEM
9A. CONTROLS AND PROCEDURES
(a)
|
Disclosure controls and
procedures
|
The
Company’s management, under the supervision and with the participation of its
chief executive officer and chief financial officer, Messrs. Gao Zhentao and Hu
Gang, respectively, evaluated the effectiveness of the Company’s disclosure
controls and procedures as of December 31, 2009, the end of the period covered
by this Report. The term “disclosure controls and procedures,” as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls
and other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports, such as this Form 10-K,
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by a company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the company’s management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding required disclosure. Based on
that evaluation, Messrs. Gao and Hu concluded that the Company’s disclosure
controls and procedures were effective as of December 31, 2009.
- 38
-
(b)
|
Management’s report on internal
control over financial
reporting
|
Management
of the Company, under the supervision of the chief executive officer and chief
financial officer, is responsible for establishing and maintaining adequate
internal control over financial reporting.
Internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f)
promulgated under the Exchange Act, is a process designed by, or under the
supervision of, the chief executive officer and chief financial officer and
effected by the board of directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in
accordance with U.S. GAAP. Internal control over financial reporting
includes those policies and procedures that:
(i)
|
Pertain
to the maintenance of records that, in reasonable detail,
accurately
and
fairly reflect the transactions and dispositions of the Company’s
assets;
|
(ii)
|
Provide
reasonable assurance that transactions are recorded as necessary
to
permit
preparation of financial statements in accordance with U.S.
GAAP,
and
that the Company’s receipts and expenditures are being made only in
accordance
with
appropriate authorization of the Company’s management and board of
directors; and
|
(iii)
|
Provide
reasonable assurance regarding prevention or timely detection
of
unauthorized
acquisition, use or disposition of the Company’s assets that
could
have a material effect on the financial
statements.
|
In making
its assessment of internal control over financial reporting, management, under
the supervision and with the participation of the chief executive officer and
chief financial officer, used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control—Integrated Framework.
Pursuant
to Rule 15d-15 of the Exchange Act, the Company’s management, under the
supervision and with the participation of its chief executive officer and chief
financial officer, Messrs. Gao Zhentao and Hu Gang, respectively, evaluated the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2009. Based on this evaluation, the Company’s chief
executive officer and chief financial officer concluded that the Company did not
maintain effective internal control over financial reporting as of December 31,
2009.
A
material weakness in internal control over financial reporting is defined as 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 the Company’s annual or interim financial statements will not be
prevented or detected on a timely basis.
- 39
-
Management
concluded that a material weakness existed as of December 31, 2009 with respect
to compliance with Section 402 of the Sarbanes-Oxley Act of 2002. As reported in
the Company’s Annual Report on Form 10-K/A filed on June 3, 2009, the Company
concluded that certain related party loans between the Company and Shandong Yuhe
Food Group Co., Ltd., “Yuhe Food”, constituted prohibited transactions under
Section 402 of the Sarbanes-Oxley Act of 2002. Although all such
related party loans had been repaid as of the end of 2009, because the Company
continued to make payments under certain arrangements to Yuhe Food, such
payments resulted in related party loans in January and February
2010. As of December 31, 2009, the Company had caused loans
previously made to related parties to be fully repaid. However,
because of the Company’s inability to eliminate the occurrence of other related
party loans in January and February 2010, which were subsequently repaid in full
in February 2010, the Company concluded that a material weakness continued to
exist with respect to its compliance with Section 402 of the Sarbanes-Oxley Act
of 2002. In addition, there were certain audit adjustments identified by Grant
Thornton related to the Company’s financial statements for the year ended
December 31, 2009 indicating a material weakness of the Company’s internal
control over financial reporting. The adjustments mainly related to transferring
amounts from work-in-progress to fixed assets, separating the current portion of
long term debt from long term debt, and verifying the nature of capital leases
and operating leases.
In order
to address the foregoing material weaknesses, the Company has taken or is taking
the following remedial measures:
●
|
The
Company will no longer make payments to any related parties
that
would
be classified as a loan; and
|
|
●
|
Hiring
an independent forensic accountant to review prior
related
party payments and to suggest ways to eliminate their recurrence,
and
based
on the result of this review, discussing the hiring of a new controller
who
will
report directly to the board of directors with responsibility for
reviewing payments to
eliminate
any related party loan or related party transaction or any other
impermissible
activity.
|
The
Company believes that the foregoing steps will remediate the material weaknesses
identified above, and the Company will continue to monitor the effectiveness of
these steps and make any changes that the Company’s board of directors deems
appropriate.
Separately,
the Company has determined to adopt the measures set forth below to generally
improve its corporate governance and oversight:
- 40
-
●
|
The
Company is in the process of arranging additional training for
its
accounting
staff;
|
|
●
|
The
Company is engaging external professional accounting
or
consultancy firms to assist it in the preparation of the US GAAP
accounts;
|
|
●
|
Due
to the scarcity of qualified candidates with extensive
experience
in U.S. GAAP reporting and accounting in the region, the
Company
has not yet been able to hire sufficient internal audit
resources.
The
Company intends to enhance its internal audit function by increasing its
search
for
qualified candidates with assistance from recruiters and through
referrals;
and
|
|
●
|
The
Company has allocated significant financial and human resources
to
strengthen
its internal control structure and has been actively working
with
external
consultants to assess its data collection, financial reporting
and
control
procedures and to strengthen its internal control over financial
reporting.
|
Other
than as described above, there were no changes in the Company’s internal control
over financial reporting identified in connection with the evaluation performed
that occurred during the period covered by this Report that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
Inherent
Limitations on Effectiveness of Controls
The
Company’s management, including the chief executive officer and chief financial
officer, does not expect that the Company’s disclosure controls and procedures
or its internal control over financial reporting will prevent or detect all
error and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control system’s objectives will be met. The design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their
costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people or by
management override of the controls. The design of any system of
controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Projections
of any evaluation of controls effectiveness to future periods are subject to
risks. Over time, controls may become inadequate because of changes
in conditions or deterioration in the degree of compliance with policies or
procedures.
- 41
-
ITEM
9B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive
Officers, Director and Key Employees
The
following table sets forth information about the Company’s executive officers,
directors and key employees as of December 31, 2009. Unless expressly
disclosed, all officers above are employed full time by us:-
Name
|
Age
|
Position
|
||
Executive
Officers
|
||||
Gao
Zhentao**
|
48
|
Chief
Executive Officer and Chairman of the Board of
Directors
|
||
Han
Chengxiang
|
45
|
Chief
Production Officer
|
||
Hu
Gang
|
34
|
Chief
Financial Officer
|
||
Directors
|
||||
Peter
Li
|
45
|
Director
*
|
||
Liu
Yaojun
|
33
|
Director
*
|
||
Greg
Huett
|
47
|
Director
*
|
||
Han
Chengxiang
|
48
|
Director
|
||
Key
Employees
|
||||
Tan
Yi
|
53
|
Marketing
Director of PRC Yuhe
|
||
Ding
Wengui
|
46
|
Chief
Technology Officer of PRC
Yuhe
|
* Not
full time
**Other
than spending approximately 4 hours per week, or approximately 10% of his
professional time, as executive director of Yuhe Group, Mr. Gao Zhentao is
employed full time by the Company as the Chief Executive Officer and
Chairman.
Executive
Officers
Gao Zhentao. Mr. Gao has been
the Company’s Chief Executive Officer and Chairman of its Board of Directors
since March 12, 2008. Prior to joining us, Mr. Gao served as the Chief Executive
Officer and Chairman of the Board of Directors of PRC Yuhe from 1996 to 2009. He
was one of the co-founders of PRC Yuhe and Taihong. Mr. Gao is a member of the
Agricultural Work Committee of the Weifang City People’s Congress and a member
of the Standing Committee of the Hanting District People’s Congress. Mr. Gao has
also served as the vice-chairman of the Shandong Province Farming Association
since 2006, and as vice-chairman of the Poultry Subcommittee of the National
Farming Association of China since 2007. Mr. Gao is the
controlling shareholder, legal representative and executive director of
Shandong Yuhe Food Group Co., Ltd., “Yuhe Group,” and holds 80% of Yuhe Group’s
shares.
- 42
-
Han Chengxiang has been the
Company’s Chief Production Officer since March 12, 2008. Prior to joining us,
Mr. Han served as the Chief Production Officer of PRC Yuhe from 1998 to 2009.
Prior to joining PRC Yuhe in 1998, Mr. Han served as the vice factory manager
and then the factory manager of Weifang Zhonglianghuawei Food Co., Ltd. from
1996 to 1998. Prior to that, Mr. Han served as the chief production officer and
then the vice factory manager of Weifang Broiler Group Co., Ltd. from 1990 to
1996. Mr. Han Chengxiang was appointed Director of the Company and
member of the Nominating Committee of the Company on June 13, 2008. Pursuant to
an employment agreement entered into by the Company with Mr. Han, dated June 13,
2008. Mr. Han is receiving an annual salary of $17,142 and is entitled to PRC
statutory holidays, and leave for maternity, marriage and mourning with pay
in accordance with relevant government laws and regulations.
Hu Gang has been the Company’s
Chief Financial Officer since June 13, 2008. . Prior to joining the Company, Mr.
Hu was the Chief Financial Officer of Sino-Gas International Holding Inc
from December 2007 to March 2008. Prior to that, between August 2004 and October
2007, Mr. Hu served as the Finance Director of FedEx Office Greater China
operations. Between August 2002 and July 2004, Mr. Hu served as the accounting
supervisor and group leader of DuPont China Holding Ltd. Mr. Hu graduated from
Shanghai Finance and Economics University, PRC, with a B.A. in International
Accounting.
Directors
On June
13, 2008, Mr. Peter Li
was appointed Independent Director of the Company, chair of the Audit Committee
and member of the Compensation and Nominating Committees of the Company. Mr. Li
is currently CFO of Holly System Limited, a Nasdaq listed company. Prior to
that, between 2004 and 2008, he served as the Chief Financial Officer of Yucheng
Technologies Limited, a Nasdaq-Listed Leading IT service company in
China.
On June
13, 2008, Mr. Liu Yaojun
was appointed Independent Director of the Company, chair of the Compensation
Committee and member of the Nominating and Audit Committees of the Company. Mr.
Liu is currently a partner at Global Law Office, a law firm based in Beijing,
the PRC. Prior to that, between 2003 and 2006, Mr. Liu served as an attorney at
Jingtian Gongcheng Law Firm, a law firm based in Beijing, the PRC.
On June
13, 2008, Mr. Greg Huett
was appointed Independent Director of the Company, chair of the Nominating
Committee and member of the Audit and Compensation Committees of the Company.
Mr. Huett is currently the Chief Executive Officer of Great Creations LLC, a
consumer packaged goods company. Prior to that, from 1981 to 2007 Mr. Huett
worked at Tyson Foods, where he last served as the Group Vice President of
Tyson’s International division.
On June
13, 2008, Mr. Han
Chengxiang was appointed Director of the Company and member of the
Nominating Committee of the Company. Mr. Han is currently the Chief Production
Officer of the Company. Prior to joining the Company, Mr. Han served as the
Chief Production Officer of PRC Yuhe from 1998 to 2008.
- 43
-
Key
Employees
Tan Yi has served as Marketing
Director of PRC Yuhe since 1995. Prior to joining PRC Yuhe in 1995, Mr. Tan
served in various marketing roles with a gas company located in Harbin Province
from 1990 to 1994.
Ding Wengui has been the chief
technology officer of the Company’s subsidiary PRC Yuhe since 2006. Prior to
this he served as the general manager of PRC Yuhe’s production division. Prior
to joining PRC Yuhe in 2005, Mr. Ding worked at Qingdao Zhengda Co., Ltd., a
broiler chicken company located in Shandong Province from 1993 to 2005, where he
ultimately served as the vice general manager of its production division. Prior
to joining Qingdao Zhengda Co., Ltd. in 1993, Mr. Ding worked at Heilongjiang
Tieli Agricultural Co., Ltd., a company located in Heilongjiang Province from
1983 to 1993. Mr. Ding holds a degree in agriculture from the Heilongjiang Bayi
Agricultural University.
Involvement in
Certain Legal Proceedings
To the
Company’s knowledge, during the past five years, none of the Company’s directors
or executive officers was involved in any of the following: (1) any bankruptcy
petition filed by or against any business of which such person was a general
partner or executive officer either at the time of the bankruptcy or within two
years prior to that time; (2) any conviction in a criminal proceeding or being
subject to a pending criminal proceeding, excluding traffic violations and other
minor offenses; (3) being subject to any order, judgment, or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring, suspending or
otherwise limiting his/her involvement in any type of business, securities or
banking activities; and (4) being found by a court of competent jurisdiction in
a civil action, the Securities and Exchange Commission, or SEC, or the
Commodities Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed,
suspended or vacated.
Board
Composition and Committees
The
Company’s board of directors currently consists of five members: Gao Zhentao,
Han Chengxiang, Peter Li, Liu Yaojun and Greg Huett.
The
Company’s board of directors has appointed a compensation committee on June 13,
2008. The Company’s compensation committee comprises three members and is
responsible for the administration of all salary, bonus and incentive
compensation plans for the Company’s officers and key employees. The
compensation committee will also determine the discretionary annual bonus to be
paid to Mr. Gao. The factors that the compensation committee will consider in
determining Mr. Gao’s bonus will be revenue increase as well as the survival
rate, productivity and hatching rate of the broilers. The members of the
Company’s compensation committee are Liu Yaojun, Peter Li and Greg
Huett. No bonus was paid to any senior officer including Mr. Gao in
2009.
The
Company’s board of directors appointed an audit committee on June 13, 2008. The
Company’s audit committee members are Peter Li, Liu Yaojun, and Greg Huett. Mr.
Li qualifies as an “audit committee financial expert” as defined in Item 401(h)
of Regulation S-K, and is “independent” as the term is used in Item 7(d)(3)(iv)
of Schedule 14A under the Exchange Act.
- 44
-
The
Company’s board of directors appointed a nominating committee on June 13, 2008.
The Company’s nominating committee members are Greg Huett, Liu Yaojun, Peter Li
and Han Chengxiang.
Supervisory
Board and Shareholder’s Congress
As
required by PRC Company Law (2005), each of PRC Yuhe and Taihong, as PRC
companies, must establish a "Supervisory Board" and a "Shareholder Congress" as
its internal corporate organs.
(i)
Shareholder Congress.
Shareholder
Congress comprises all the shareholder(s) of a PRC company and is the organ with
the highest authority. Its authority is higher than that of both the Board of
Directors and the Supervisory Board.
As
stipulated by PRC Company Law (2005), the Shareholder Congress has, among
others, the following powers or functions:
1.
to elect and replace directors and supervisors of the company;
2.
to pass resolutions on matters such as the merger, division, dissolution,
liquidation or change of the corporate form of the company; and
3.
to amend the articles of association of the company.
The
Shareholder Congress of PRC Yuhe consists of Bright Stand, and the Shareholder
Congress of Taihong consists of Bright Stand and PRC Yuhe.
(ii)
Supervisory Board.
All the
members of the Supervisory Board serve for a term of three years. At the
Shareholder Congress, the shareholders of PRC Yuhe were obligated to
approve the appointment of one Supervisory Board member who was elected by
the workers of PRC Yuhe as required by current Chinese laws and regulations
and also appointed two other members. There are no other nominations or
arrangements for nomination of Supervisory Board member. The current
members of the Supervisory Board of PRC Yuhe are Zhang Jinhua, Zheng Chaoyang
and Zhang Lishun, and their business background and relationships with Yuhe are
as follows :-
(a)
Zhang Jinhua
Mr. Zhang
graduated from Shandong Light Industrial University with a professional
degree in economics and business administration in July 1999. Mr. Zhang has
been the Chairman of the Supervisory Board of PRC Yuhe since November
2007 and secretary to the Company’s board of directors since March 2008.
Mr. Zhang is receiving a monthly salary of RMB 8,000, or approximately
$1,169, for his services as secretary to the Company's board of
directors. Mr. Zhang does not receive any salary for being a member of the
Supervisory Board.
- 45
-
Prior to
joining the Company, Mr. Zhang was a factory supervisor and branch factory
general manager of Shandong Lorain Foodstuff (Group) Co., Ltd. from March 2003
to June 2007 and was a Development Planning Department manager of Yuhe Group
from July 2007 to March 2008. Mr. Zhang was receiving a monthly salary of RMB
1,800, or approximately $263, for his services as a Development Planning
Department manager.
(b)
Zheng Chaoyang
Mr. Zheng
is currently an Administrative Department officer of Yuhe Group and has held
those positions since July 1997. Prior to joining Yuhe Group in July 1997, Mr.
Zheng was a sole proprietor engaging in the retail business from 1985 to 1997.
Mr. Zheng is receiving a monthly salary of RMB 1,700, or approximately $248, for
his services as an Administrative Department Officer. Mr. Zheng does not receive
any salary for being a member of the Supervisory Board.
(c)
Zhang Lishun
Mr. Zhang
is a university graduate and a senior political worker. Mr. Zhang is currently
an Administrative Department officer of Yuhe Group and has held these positions
since February 2004. Prior to joining Yuhe Group in February 2004, Mr. Zhang was
the chief officer at the security section of Shandong Hailong Holdings Limited
from July 1985 to February 2004. Mr. Zhang is receiving a monthly salary of
RMB 1,500, or approximately $219, for his services as an Administrative
Department Officer. Mr. Zhang does not receive any salary for being a member of
the Supervisory Board.
The
Supervisory Board has, among others, the following powers:
1.
to examine the company's financial affairs;
2.
to propose the convening of extraordinary shareholders’ meetings;
and
3.
to institute proceedings against the directors and senior management personnel
on behalf of the company.
Code
of Ethics
The Board
of Directors has adopted a Code of Ethics which is applicable to all officers,
directors and employees. The Code of Ethics was filed as Exhibit 14.1 to
the Report on Form 10-K for fiscal year ended December 31, 2008 filed on March
31, 2009. The Code of Ethics will also be posted on the corporate
governance page of the Company’s website at http: //www.yuhepoultry.com
- 46
-
ITEM
11. EXECUTIVE COMPENSATION
Summary Compensation
Table
The
following table presents compensation information for the Company’s fiscal years
ended December 31, 2009 and 2008 paid to or accrued for the Company’s chief
executive officer, chief financial officer and its other most highly compensated
officer. The Company refers to these executive officers as its “named executive
officers.”
Annual Compensation
|
||||||||||||||
Name and Principal Position
|
Year
|
Base Salary
|
Bonus
|
All Other
Compensation
|
Total
|
|||||||||
Gao Zhentao (1)
Chief Executive Officer
|
2009
2008
|
219,234
105.110
|
0
0
|
0
0
|
219,234
105,110
|
|||||||||
Han
Chengxiang
Chief
Production Officer
|
2009
2008
|
17,518
17,518
|
0
0
|
0
0
|
17,518
17,518
|
|||||||||
Hu
Gang
Chief
Financial Officer
|
2009
2008
|
182,478
72,993
|
0
|
0
|
182,478
72,993
|
(1) | Gao Zhentao receives an annual salary in the sum of $8,000 from the Yuhe Group. |
|
(i) Mr. Gao Zhentao
The Company entered into an employment contract
with Gao Zhentao, its Chief Executive Officer, “CEO”, on June 13, 2008.
The employment agreement was effective as of March 12, 2008, the date Mr.
Gao was appointed CEO, and has an initial term of three years, “Mr. Gao’s
Initial Term”. Following Mr. Gao’s Initial Term, the agreement may be
extended on an annual basis by agreement of the parties. As the principal
executive officer, Mr. Gao is responsible for the Company’s overall
management. Mr. Gao will receive an annual base salary of RMB 1,200,000,
or approximately $175,387, which will be reviewed on an annual basis by
the compensation committee of the Company’s board of directors, plus an
annual discretionary bonus, as determined by said compensation
committee, and separation benefits . During Mr. Gao’s
employment, he will be entitled to insurance and other benefits including,
among others, medical and disability coverage and life insurance as are
afforded to other of the Company’s senior executives. By entering into the
employment agreement, Mr. Gao agreed to a 12-month non-competition
clause post termination.
(ii) Mr. Han Chengxiang
Mr. Han Chengxiang was appointed Director and
member of the Nominating Committee on June 13, 2008. Mr. Han is currently
the Company’s Chief Production Officer. Prior to joining us, Mr. Han
served as the chief production officer of PRC Yuhe from 1998 to 2009.
Pursuant to an employment agreement entered into by the Company with Mr.
Han, dated June 13, 2008, Mr. Han is receiving an annual salary of $17,142
and is entitled to PRC statutory holidays, and leave for maternity,
marriage and mourning with pay in accordance with relevant government
laws and regulations.
|
- 47
-
(iii)
Mr. Hu Gang
On
June 13, 2008, Mr. Hu Gang was appointed the Company’s Chief Financial
Officer, “CFO”. The Company entered into an employment agreement with Mr.
Hu, effective as of June 13, 2008, his appointment date, which has an
initial term of three years, “Mr. Hu’s Initial Term”. Following Mr. Hu’s
Initial Term, the agreement may be extended on an annual basis by
agreement of the parties. As the principal financial officer, Mr. Hu is
responsible for the Company’s financial management. Mr. Hu will receive an
annual base salary of RMB 1,000,000, or approximately $146,156, during the
first year, RMB 1,500,000, or approximately $219,234, during the second
year, and RMB 1,800,000, or approximately $263,081, during the third year,
of Mr. Hu’s Initial Term. In addition, the agreement provides for an
annual discretionary bonus, as determined by the compensation
committee of the Company’s board of directors, stock options and
separation benefits. By entering into the employment agreement, Mr. Hu
agreed to a 12-month non-competition clause post
termination.
|
Employment
contracts and change of control arrangements
All
executive officers and key employees of PRC Yuhe and Taihong are under
employment contracts. None of the executive officers or key employees has a
change-of-control related arrangement with us. These contracts typically have
period of validity of between three to ten years and one-month notice
period for early termination. The executive officers and key employees as of
December 31, 2009 have the following initial term of employment in their
respective employment contracts:-
Executive
Officers
|
Initial
term
|
Gao
Zhentao
|
3
years
|
Han
Chengxiang
|
10
years
|
Hu
Gang
|
3
years
|
Key
Employees
|
Initial
term
|
Tan
Yi
|
5
years
|
Ding
Wengui
|
5
years
|
Jiang
Yingjun
|
8
years
|
Zhao
Beijing
|
8
years
|
Wang
Jianbo
|
10
years
|
Gao
Aiping
|
10
years
|
Copies of
these employment contracts have also been filed with the Registration Statement
on Form S-1/A on December 19, 2008 and are incorporated by reference
herein.
- 48
-
Security
ownership guidelines
The
Company does not have a stock grant policy or any stock ownership
guidelines.
Accounting
and tax treatment
Given the
Company’s current levels of compensation, the accounting and tax considerations
have not significantly impacted the Company’s forms of compensation. The board
considers as one factor the impact of accounting and tax treatment on
compensation in the Company’s compensation programs.
Director
Compensation
None of
the directors who served during the past two fiscal years received any form of
compensation from the Company. The Company’s former sole director,
Gao Zhentao, is also an officer of Yuhe and received no additional compensation
for being a director.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
following table sets forth certain information regarding the Company’s common
stock beneficially owned on March 1, 2010, and as adjusted after giving
effect to the sale of the shares being sold in this offering for (i) each
shareholder the Company knows to be the beneficial owner of 10% or more of its
common stock, (ii) each of its “named executive officers” and directors, and
(iii) all executive officers and directors as a group.
Beneficial
ownership is determined in accordance with the rules of the SEC. In general, a
person is deemed to be a “beneficial owner” of a security if that person has or
shares the power to vote or direct the voting of such security, or the power to
dispose or to direct the disposition of such security. A person is also deemed
to be a beneficial owner of any securities of which the person has the right to
acquire beneficial ownership within 60 days. Unless otherwise indicated by the
footnotes below, the Company believes, based on the information furnished to it
and subject to community and marital property laws, all persons named have sole
voting and investment power with respect to such shares, except as otherwise
noted. Percentage of ownership is based on 15,722,180 shares of the Company’s
common stock outstanding as of March 1, 2010.
- 49
-
The
following table excludes any shares of the Company’s common stock which may be
issued for the round up of fractional shares and the special treatment to
preserve round lot shareholders.
Number of
Shares
Beneficially
Owned
|
Percent of
Shares
Beneficially
Owned
|
|||||
Greater
than 5% Shareholders
|
||||||
Kunio
Yamamoto 1
|
7,654,817
|
48.7
|
%
|
|||
Directors
and Executive Officers
|
||||||
Gao
Zhentao 1
|
0
|
*
|
%
|
|||
Han
Chengxiang 1
|
0
|
*
|
%
|
|||
Hu
Gang 1
|
0
|
*
|
%
|
|||
Peter
Li 1
|
0
|
*
|
%
|
|||
Liu
Yaojun 1
|
0
|
*
|
%
|
|||
Greg
Huett 1
|
0
|
*
|
%
|
|||
Jiang
Yingjun 1
|
0
|
*
|
%
|
|||
Richard
Crimmins 6
|
0
|
*
|
%
|
|||
All
Executive Officers and Directors as a group
|
0
|
*
|
%
|
*
|
Less
than 1%
|
(1)
|
Address
is c/o Weifang Yuhe Poultry Co. Ltd., 301 Hailong Street, Hanting
District, Weifang, Shandong Province, The People’s Republic of
China.
|
- 50
-
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Security Interest in Personal Real
Estate. On November 9, 2006, PRC Yuhe borrowed $292,517 from Wei Fang Han
Ting Rural Credit Cooperatives Union, which was secured by a mortgage on the
personal residence of Gao Zhentao, the Company’s chief executive officer. There
is currently a principal balance of $292,517 outstanding on the loan, which
accrues interest at the rate of 0.63% per month. Accrued interest on the loan is
payable on a monthly basis, and all outstanding principal and interest will
become due and payable on November 26, 2011.
Salary paid by the Group.
Since PRC Yuhe’s inception, the salary of the Company’s chief executive officer,
Gao Zhentao, was paid by Shandong Yuhe Food Group Co., Ltd., “Yuhe Group”, a PRC
company based in Weifang, Shandong Province that is controlled by the Company’s
chief executive officer and his brother, Gao Zhenbo. In 2007 this salary
totaled $8,000. In 2008 and 2009, this salary was kept in the same
level
Share Exchange Agreement Transaction
Between Mr. Kunio Yamamoto and First Growth. The Company entered into an
Equity Transfer Agreement, the “Equity Transfer Agreement”, dated as of March
12, 2008, with Mr. Kunio Yamamoto, the sole shareholder of Bright Stand, to
exchange all of the issued and outstanding shares of Bright Stand owned by him
in exchange for the Company’s issuing to Mr. Yamamoto 8,626,318 unregistered
shares, of the Company’s common stock. As a result of the transaction, Mr.
Yamamoto holds 8,626,318 shares, or 88.8 % of the Company’s 9,714,312 shares, of
common stock then outstanding following the completion of all matters referred
to above.
Mr. Gao
is the controlling shareholder, legal representative and executive director of
Shandong Yuhe Food Group Co., Ltd., "Yuhe Group", holding 80% of its shares. Mr.
Gao does not have any affiliation or relationship with any of the Company’s
competitors, suppliers, customers, distributors and similar companies, including
without limitation, Hefeng Green Agriculture Co., Ltd., Shandong Yuhe New
Agriculture Academy of Sciences, and Weifang Hexing Breeding Co.,
Ltd.
In
previous years when the Company needed working capital, it received advances
from time to time from related companies and related companies also paid some
expenses on the Company’s behalf. The Company provided advances to and paid some
expenses for other related parties when they needed working capital. The related
parties serve as a source of temporary financing for each other in order to save
on significant interest expenses.
The
amounts due from related parties are an accumulation of some trade transactions
and advances to related companies for working capital purposes. There are no
agreements signed between the related companies and no fixed repayment dates,
although the lenders have the right to demand repayment in full at anytime.
- 51
-
Related Party
|
Terms
|
Yuhe International,
Inc.
Balance as at
December 31, 2009
|
PRC Yuhe
Balance as at
December 31, 2008
|
PRC Yuhe
Balance as at
December 31, 2007
|
|||||||||||
Loans to Former Owners of PRC Yuhe
|
|||||||||||||||
|
|||||||||||||||
Mr.
Gao Zhentao,
Director
and former
owner
of PRC Yuhe
|
The
first oral loan agreement between PRC Yuhe as lender and Mr. Gao Zhentao
as borrower was made in or about December 2006. Since then, there have
been a number of borrowings and repayments under identical terms between
these parties.
Unsecured,
interest free loans, have no fixed repayment date. For allowing Mr. Gao to
make payments for his business trips and other expenses purpose. Balance
in the sum of $74,125 was repaid on February 19, 2008.
Remedies
available to the creditor are prescribed pursuant to the laws of the
PRC.
|
$
|
-
|
$
|
-
|
$
|
74,125
|
||||||||
Mr.
Gao Zhenbo,
Director
of PRC
Yuhe
and former
owner
of Taihong
|
The
first oral loan agreement between PRC Yuhe as lender and Mr. Gao Zhenbo as
borrower was made before January 1, 2005. Since then, there have been a
number of borrowings and repayments under identical terms between these
parties.
|
||||||||||||||
Unsecured,
interest free loans, have no fixed repayment date. For allowing Mr. Gao to
make payments for his business trips and other expenses purpose. Balance
in the sum of $76,716 was repaid on February 19, 2008.
Remedies
available to the creditor are prescribed pursuant to the laws of the
PRC.
|
$
|
-
|
$
|
-
|
$
|
76,716
|
- 52
-
Mr.
Tan Yi,
Director
of PRC
Yuhe
|
The
first oral loan agreement between PRC Yuhe as lender and Mr. Tan Yi as
borrower was made on or about January 31, 2005. Since then, there have
been a number of borrowings and repayments under identical terms between
these parties.
|
||||||||||||||
Unsecured,
interest free loans, have no fixed repayment date. For allowing
Mr. Tan to make payments for his business trips and other expenses
purpose. Balance in the sum of $78,092 was repaid on February 19,
2008.
|
|||||||||||||||
Remedies
available to the creditor are prescribed pursuant to the laws of the
PRC.
|
$
|
-
|
$
|
-
|
$
|
78,092
|
|||||||||
Loans to
Companies in which Former Owner of PRC Yuhe Served as a
Director
|
|||||||||||||||
Hexing
Green Agriculture
Co.,
Ltd, a company in
which
Mr. Gao Zhentao
served
as a director
|
The
first oral loan agreement between PRC Yuhe as lender and Hexing Green
Agriculture Co., Ltd. as borrower was made on or about September 30, 2005.
Since then, there have been a number of borrowings and repayments under
identical terms between these parties.
|
||||||||||||||
Unsecured,
interest free loans, have no fixed repayment date. For working capital
purposes. The management expects to receive the loan balance on demand in
December 2009.
Remedies
available to the creditor are prescribed pursuant to the laws of the
PRC.
|
$
|
-
|
$
|
75.754
|
$
|
70,990
|
- 53
-
Shandong
Yuhe Food
Group
Co., Ltd., a
company
in which Mr.
Gao
Zhentao served as a
director
|
The
first oral loan agreement between PRC Yuhe and Taihong as lenders and
Shandong Yuhe Food Group Co., Ltd. as borrower was made before January 1,
2005. Since then, there have been a number of borrowings and repayments
under identical terms among these parties.
Unsecured,
interest free loans, have no fixed repayment date. For working capital
purposes. The management expects to receive the loan balance on demand in
December 2009.
Remedies
available to the creditor are prescribed pursuant to the laws of the
PRC.
|
$
|
-
|
$
|
3,580,553
|
$
|
5,617,363
|
||||||||
Shandong
Yuhe New
Agriculture
Academy of
Sciences,
a company in
which
Mr. Gao Zhentao
served
as a director
|
The
first oral loan agreement between PRC Yuhe as lender and Shandong Yuhe New
Agriculture Academy of Sciences as borrower was made before January 1,
2005. Since then, there have been a number of borrowings and repayments
under identical terms between these parties.
|
||||||||||||||
Unsecured,
interest free loans, have no fixed repayment date. For working capital
purposes. The management expects to receive the loan balance on demand in
December 2009.
Remedies
available to the creditor are prescribed pursuant to the laws of the
PRC.
|
$
|
-
|
$
|
50,257
|
$
|
48,384
|
- 54
-
Weifang
Hexing
Breeding
Co., Ltd., a
company
in which Mr.
Gao
Zhentao served as a
director
|
The
first oral loan agreement between Taihong as lender and Weifang Hexing
Breeding Co., Ltd. as borrower was made before January 1, 2005. Since
then, there have been a number of borrowings and repayments under
identical terms between these parties.
Unsecured,
interest free loans, have no fixed repayment date. For working capital
purposes. The balance in the sum of $214,954 was repaid on March 31,
2008.
Remedies
available to the creditor are prescribed pursuant to the laws of the
PRC.
|
$
|
-
|
$
|
-
|
$
|
53,723
|
||||||||
Weifang
Jiaweike Food
Co.,
Ltd., a company in
which
Mr. Gao Zhentao
served
as a director
|
The
first oral loan agreement between Taihong as lender and Weifang Jiaweike
Food Co., Ltd. as borrower was made on or about September 3, 2005. Since
then, there have been a number of borrowings and repayments under
identical terms between these parties.
Unsecured,
interest free loans, have no fixed repayment date. For working capital
purposes. The management expects to receive the loan balance on demand in
December 2009.
Remedies
available to the creditor are prescribed pursuant to the laws of the
PRC.
|
$
|
-
|
$
|
25
|
$
|
26
|
- 55
-
Due
from related companies shown under non-current assets
on
balance sheet
|
$
|
-
|
$
|
3,706,589
|
$
|
5,790,486
|
|||||||||
Loans
from Companies in which Former Owner of PRC Yuhe Served as a
Director
|
|||||||||||||||
Weifang
Hexing Breeding
Co.,
Ltd, a company in
which
Mr. Gao Zhentao
served
as a director
|
The
first oral loan agreement between Weifang Hexing Breeding Co., Ltd. as
lender and PRC Yuhe as borrower was made before January 1, 2005. Since
then, there have been a number of borrowings and repayments under
identical terms between these parties.
|
||||||||||||||
Unsecured,
interest free loans, have no fixed repayment date. For working capital
purposes. Balance in the sum of $2,169,237 was repaid on June 30,
2007.
Remedies
available to the creditor are prescribed pursuant to the laws of the
PRC.
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||||||
Weifang
Jiaweike Food
Co.,
Ltd, a company in
which
Mr. Gao Zhentao
served
as a director
|
The
first oral loan agreement between Weifang Jiaweike Food Co., Ltd. as
lender and PRC Yuhe as borrower was made before January 1, 2005. Since
then, there have been a number of borrowings and repayments under
identical terms between these parties.
Unsecured,
interest free loans, have no fixed repayment date. For working capital
purposes. Balance in the sum of $473,220 was repaid on June 30,
2007.
Remedies
available to the creditor are prescribed pursuant to the laws of the
PRC.
|
$
|
-
|
$
|
-
|
$
|
-
|
- 56
-
Weifang
Hexing Breeding
Co.,
Ltd, a company in
which
Mr. Gao Zhentao
served
as a director
|
The
first oral loan agreement between Weifang Hexing Breeding Co., Ltd. as
lender and PRC Yuhe as borrower was made on or about March 12, 2008. Since
then, there have been a number of borrowings and repayments under
identical terms between these parties.
|
||||||||||||||
Unsecured,
interest free loans, have no fixed repayment date. For working capital
purposes.
Remedies
available to the creditor are prescribed pursuant to the laws of the
PRC.
|
$
|
-
|
$
|
185,885
|
$
|
-
|
|||||||||
Others
|
Unsecured,
interest free loan, has no fixed repayment date. For working capital
purposes.
|
$
|
1,208
|
$
|
24,748
|
$
|
-
|
||||||||
Due
to related companies in which Former Owner of PRC
Yuhe
Served as a Director
|
$
|
-
|
$
|
210,633
|
$
|
-
|
|||||||||
Loan from Bright Stand
International Limited
|
|||||||||||||||
Bright
Stand International
Limited,
a company in
which
Mr. Gao Zhentao
served
as a director
|
Unsecured,
interest free loan, has no fixed repayment date. The Balance was
eliminated upon consolidation between Yuhe International and Bright Stand
as a result of the reverse merger.
Remedies
available to the creditor are prescribed pursuant to the laws of the
PRC.
|
$
|
-
|
$
|
-
|
$
|
*1,000,000
|
||||||||
Loan
from Bright Stand International Limited
|
$
|
-
|
$
|
-
|
$
|
1,000,000
|
|||||||||
Due
to related companies shown under current liabilities on balance sheet
|
$
|
1,208
|
$
|
210,633
|
$
|
1,000,000
|
- 57
-
* This is
the cash deposits to PRC Yuhe by Bright Stand as capital injection, since
registration was not completed at December 31, 2007, and was classified as Loan
accounts instead of Common Stock.
Providing Guarantees on Behalf of A
Former Owner of PRC Yuhe. PRC. Yuhe provided a guarantee in
favor of Shandong Yuhe Food Group Co., Ltd., a former owner of PRC Yuhe, in the
amount of $2,128,399. The guarantee expired in January 2008.
Acquisition by Halter
Financial . The Company entered into a Stock Purchase Agreement, the
“Stock Purchase Agreement”, with Halter Financial Investments, L.P., a Texas
limited partnership, “Halter Financial”, dated as of November 6, 2007, pursuant
to which the Company agreed to sell to Halter Financial 951,996 unregistered
shares of the Company’s common stock for $425,000. The transaction closed on
November 16, 2007. As a result of the transaction, Halter Financial held 951,996
shares, or 87.5% of the Company’s 1,087,994 shares of common stock then
outstanding following the completion. The Stock Purchase Agreement also required
the Company’s Board of Directors to declare and pay a special cash dividend of
$3.088 per share to the Company’s shareholders on November 19, 2007. Halter
Financial did not participate in such dividend. The dividend was payable to
shareholders of record on November 15, 2007, which was prior to the date the
shares were issued to Halter Financial under the Stock Purchase Agreement. The
dividend payment date was November 19, 2007. The dividend was payable to certain
shareholders and resulted in a total dividend distribution of $420,000. The
funds for the dividend came from the $425,000 proceeds received from the sale of
common stock to Halter Financial. Halter Financial is a Texas limited
partnership of which Halter Financial Investments GP, LLC, a Texas limited
liability company is the sole general partner. The limited partners of HFI are:
(i) TPH Capital, L.P., a Texas limited partnership of which TPH Capital GP, LLC
is the general partner and Timothy P. Halter is the sole member of TPH Capital
GP, LLC; (ii) Bellfield Capital, L.P., a Texas limited partnership of which
Bellfield Capital Management, LLC is the sole general partner and David Brigante
is the sole member of Bellfield Capital Management, LLC; (iii) Colhurst Capital
LP, a Texas limited partnership of which Colhurst Capital GP, LLC is the general
partner and George L. Diamond is the sole member of Colhurst Capital GP, LLC;
and (iv) Rivergreen Capital, LLC of which Marat Rosenberg is the sole member. As
a result, each of the foregoing persons may be deemed to be a beneficial owner
of the shares held of record by Halter Financial. Halter Financial has
advised the Company that there is no correlation between the decision of Bright
Stand to engage HFG International, Limited to provide consulting services to
Bright Stand and the decision of Halter Financial to acquire a control position
in First Growth. After Halter Financial became an 87.5% shareholder of First
Growth pursuant to a Stock Purchase Agreement, there was a potential conflict of
interest associated with an affiliate of Halter Financial, HFG International,
Limited, advising Bright Stand about its purchase of a U.S. shell company, First
Growth. Despite this potential conflict of interest, HFG International, Limited
has informed the Company that its advice to Bright Stand was based on its
research results into the prices paid by other groups to acquire control
positions in publicly traded shell companies, which were similarly situated as
First Growth at the time Bright Stand acquired First Growth.
The
Halter Financial transaction was described under related party transactions due
to the special dividend payment to former officers and other former major
shareholders
Equity Investment by Certain
Investors . Effective March 12,
2008, the Company closed a Securities Purchase Agreement, the “Securities
Purchase Agreement”, with certain investors. Pursuant to the terms of such
Securities Purchase Agreement, such investors collectively invested
approximately $18,000,000 into the Company at the price of $3.088 per share in
exchange for the Company’s issuance of 5,829,018 shares to such investors. Mr.
Yamamoto also sold 971,500 shares of common stock to such investors for
$3,000,000. Immediately following the closing of the Securities Purchase
Agreement, Mr. Yamamoto owned 7,654,818 shares of the Company’s common stock,
and the investors owned 6,800,518 shares of the Company’s common
stock.
- 58
-
Agreements with Placement
Agents. On March 12, 2008, as part of the compensation to the Company’s
placement agent, Roth Capital Partners, LLC, in connection with their services
under the Securities Purchase Agreement, the Company issued to Roth Capital
Partners, LLC and WLT Brothers Capital, Inc. warrants to acquire an aggregate of
476,014 shares of common stock, exercisable at any time after the date falling 6
months after their issuance. The warrants have a strike price equal to $3.705,
have a term of three years starting from March 12, 2008 and permit cashless or
cash exercise at all times after they are exercisable until they expire on March
12, 2011. On October 27, 2008, the Company issued 178,848 new shares
to Roth Capital Partners, LLC based on its cashless exercise of 333,198 warrants
issued to it as compensation for its services as co-placement
agent. In February 2010, the Company issued 87,383 new shares to WLT
Brothers Capital, Inc based on its cashless exercise of 142,816 warrants issued
to it as compensation for its services as co-placement agent. The issuance of
these securities was deemed to be exempt from registration pursuant to Section
4(2) of the Securities Act. The shares of common stock issuable upon the
exercise of the warrants have registration rights. In addition, Roth Capital
Partners, LLC and WLT Brothers Capital, Inc. received cash compensation in the
amount of $1.47 million. The above may have been disclosed as a promoter
under S-K 404(c).
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The
following table sets forth the aggregate fees for professional audit services
rendered by Child, Van Wagoner & Bradshaw, PLLC, for the audit of the
Company’s annual financial statements for the fiscal years 2009 and 2008
respectively, and fees billed for other services provided by Child, Van Wagoner
& Bradshaw, PLLC for fiscal years 2009 and 2008. The Audit Committee has
approved all of the following fees.
Fiscal
Year Ended
|
||||||||
2009
|
2008
|
|||||||
Audit
Fees
|
$
|
81,176
|
$
|
68,654
|
||||
Audit
related Fees
|
$
|
33,000
|
$
|
20,987
|
(1)
|
|||
Tax
Fees
|
$
|
10,000
|
$
|
(2)
|
||||
Total
Fees
|
$
|
124,176
|
$
|
89,641
|
(1)
|
Includes
fees for services related to the performance of the audit or review of the
Company’s financial statements
|
(2)
|
Includes
fees for service related to tax compliance, tax advice, and tax
planning
|
- 59
-
Audit
Committee’s Pre-Approval Policy
During
fiscal year ended December 31, 2009, the audit committee of the Company’s board
of directors adopted policies and procedures for the pre-approval of all audit
and non-audit services to be provided by the Company’s independent auditor and
for the prohibition of certain services from being provided by the independent
auditor. The Company may not engage its independent auditor to render any
audit or non-audit service unless the service is approved in advance by the
audit committee or the engagement to render the service is entered into pursuant
to the audit committee’s pre-approval policies and procedures. On an
annual basis, the audit committee may pre-approve services that are expected to
be provided to the Company by the independent auditor during the fiscal
year. At the time such pre-approval is granted, the audit committee
specifies the pre-approved services and establishes a monetary limit with
respect to each particular pre-approved service, which limit may not be exceeded
without obtaining further pre-approval under the policy. For any
pre-approval, the audit committee considers whether such services are consistent
with the rules of the Securities and Exchange Commission on auditor
independence.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)
|
The
following documents are filed as part of this
report:
|
(1)
|
Financial
Statements
|
|
The
consolidated financial statements filed as part of this Form 10-K are
located as set forth in the index on page F-1 of this
report.
|
(2)
|
Financial
Statement Schedules
|
|
Not
applicable.
|
(3)
|
Exhibits
|
The list
of exhibits included in the attached Exhibit Index is hereby incorporated herein
by reference.
- 60
-
The
following is a list of exhibits filed as part of this Annual Report on Form
10-K. Where so indicated by footnote, exhibits that were previously filed are
incorporated by reference.
Exhibit
Number
|
Description
of Document
|
|
3.1
|
Articles
of Incorporation of the registrant as filed with the Secretary of State of
Nevada, as amended to date. [Incorporated by reference to Exhibit 3.1 to
the registrant’s current report on Form 8-K filed on April 10,
2007]
|
|
4.1
|
Registration
Rights Agreement dated March 12, 2008 by and among First Growth Investors,
Inc., and certain investors. [Incorporated by reference to Exhibit 10.4 to
the registrant’s current report on Form 8-K filed on March 17,
2008]
|
|
5.1
|
Opinion
of Thomas G. Kimble & Associates, PC as to the legality of the shares.
[Incorporated by reference to exhibit 5.1 to the registrant’s Registration
Statement on Form S-1 filed on May 12, 2008]
|
|
5.2
|
Opinion
of Long An Law Firm. [Incorporated by reference to exhibit 5.2 to the
registrant’s Registration Statement on Form S-1 filed on May 12,
2008]
|
|
10.1
|
Stock
Purchase Agreement dated November 6, 2007 between First Growth Investors,
Inc. and Halter Financial Investments, L.P. [Incorporated by
reference to Exhibit 10.1 to the registrant’s current report on Form 8-K
filed on November 6, 2007]
|
|
10.2
|
Equity
Transfer Agreement dated March 12, 2008 between First Growth Investors,
Inc. and Kunio Yamamoto. [Incorporated by reference to Exhibit 10.2 to the
registrant’s current report on Form 8-K filed on March 17,
2008]
|
|
10.3
|
Securities
Purchase Agreement dated March 12, 2008 by and among First Growth
Investors, Inc., Bright Stand International Limited, Weifang Yuhe Poultry
Co., Ltd., Kunio Yamamoto and certain investors. [Incorporated by
reference to Exhibit 10.3 to the registrant’s current report on Form 8-K
filed on March 17, 2008]
|
|
10.4
|
Make
Good Escrow Agreement dated March 12, 2008 by and among First Growth
Investors, Inc., Kunio Yamamoto, certain investors, Roth Capital Partners,
LLC and Tri-State Title and Escrow, LLC. [Incorporated by reference to
Exhibit 10.5 to the registrant’s current report on Form 8-K filed on March
17, 2008]
|
|
10.5
|
Holdback
Escrow Agreement dated March 12, 2008 by and among First Growth Investors,
Inc., certain investors, and Tri-State Title and Escrow, LLC.
[Incorporated by reference to Exhibit 10.6 to the registrant’s current
report on Form 8-K filed on March 17, 2008]
|
|
10.6
|
Warrant
dated Mach 12, 2008 issued by First Growth Investors, Inc. to Roth Capital
Partners, LLC [Incorporated by reference to Exhibit 10.7 to the
registrant’s current report on Form 8-K filed on March 17,
2008]
|
- 61
-
10.7
|
Make
Good Escrow Agreement dated March 12, 2008 by and among First Growth
Investors, Inc., Kunio Yamamoto, HFG International, Limited, and Interwest
Transfer Company, Inc. [Incorporated by reference to Exhibit 10.8 to the
registrant’s current report on Form 8-K filed on March 17,
2008]
|
|
10.8
|
Lock-up
Agreement dated March 12, 2008 between Kunio Yamamoto and First Growth
Investors, Inc. [Incorporated by reference to Exhibit 10.9 to the
registrant’s current report on Form 8-K filed on March 17,
2008]
|
|
10.09
|
Labour
Contract dated July 15, 2000 entered into between Weifang Taihong Feed
Co., Ltd. and Gao Aiping. [Incorporated by reference to Exhibit
10.12 to the registrant’s Registration Statement on Form S-1/A filed on
December 19, 2008]
|
|
10.10
|
Labour
Contract dated December 25, 2000 entered into between Weifang Taihong Feed
Co., Ltd. and Wang Jianbo. [Incorporated by reference to
Exhibit 10.13 to the registrant’s Registration Statement on Form S-1/A
filed on December 19, 2008]
|
|
10.11
|
Labour
Contract dated July 10, 2001 entered into between Weifang Yuhe Poultry Co.
Ltd. and Zhao Beijing. [Incorporated by reference to Exhibit
10.14 to the registrant’s Registration Statement on Form S-1/A filed on
December 19, 2008]
|
|
10.12
|
Commitment
to Product Quality and Customer Services Agreement dated February 12, 2004
entered for and on behalf of Weifang Yuhe Poultry Co.
Ltd. [Incorporated by reference to Exhibit 10.15 to the
registrant’s Registration Statement on Form S-1/A filed on December 19,
2008]
|
|
10.13
|
Contract
of land dated April 12, 2005 entered into between Yejiazhuang Village,
Dabucum Village and Weifang Yuhe Poultry Co.,
Ltd. [Incorporated by reference to Exhibit 10.16 to the
registrant’s Registration Statement on Form S-1/A filed on December 19,
2008]
|
|
10.14
|
Lease
Agreement dated June 25, 2005 entered into between Standing Weifang Farm
and Weifang Yuhe Poultry Co., Ltd. [Incorporated by reference
to Exhibit 10.17 to the registrant’s Registration Statement on Form S-1/A
filed on December 19, 2008]
|
- 62
-
10.15
|
Labour
Contract dated July 11, 2005 entered into between Weifang Yuhe Poultry Co.
Ltd. and Ding Wengui. [Incorporated by reference to Exhibit
10.18 to the registrant’s Registration Statement on Form S-1/A filed on
December 19, 2008]
|
|
10.16
|
Labour
Contract dated October 15, 2005 entered into between Weifang Yuhe Poultry
Co. Ltd. and Jiang Yingjun. [Incorporated by reference to
Exhibit 10.19 to the registrant’s Registration Statement on Form S-1/A
filed on December 19, 2008]
|
|
10.17
|
Summary
of loan agreements with Nansun Rural Credit in respect of loan agreement
dated November 28, 2005. [Incorporated by reference to Exhibit
10.20 to the registrant’s Registration Statement on Form S-1/A filed on
December 19, 2008]
|
|
10.18
|
Feed
Purchase Contract dated January 1, 2006 entered into between Weifang
Taihong Feed Co., Ltd. and Weifang Yuhe Poultry Co.,
Ltd. [Incorporated by reference to Exhibit 10.21 to the
registrant’s Registration Statement on Form S-1/A filed on December 19,
2008]
|
|
10.19
|
Labour
Contract dated March 10, 2006 entered into between Weifang Yuhe Poultry
Co., Ltd. and Tan Yi. [Incorporated by reference to Exhibit 10.22 to the
registrant’s Registration Statement on Form S-1/A filed on December 19,
2008]
|
|
10.20
|
Summary
of Loan Agreement dated November 10, 2006 with Hanting Rural Credit
Cooperative. [Incorporated by reference to Exhibit 10.23 to the
registrant’s Registration Statement on Form S-1/A filed on December 19,
2008]
|
|
10.21
|
Summary
of Loan Agreement dated May 12, 2007 with Shuangyang Rural Credit.
[Incorporated by reference to Exhibit 10.24 to the registrant’s
Registration Statement on Form S-1/A filed on December 19,
2008]
|
|
10.22
|
Summary
of Loan Agreement dated July 1, 2007 with Hanting Kaiyuan Rural Credit
Cooperative. [Incorporated by reference to Exhibit 10.25 to the
registrant’s Registration Statement on Form S-1/A filed on December 19,
2008]
|
|
10.23
|
Labour
Contract dated December 1, 1998 entered into between Weifang Yuhe Poultry
Co. Ltd. and Han Chengxiang. [Incorporated by reference to
Exhibit 10.26 to the registrant’s Registration Statement on Form S-1/A
filed on December 19, 2008]
|
|
10.24
|
Labour
Contract dated June 13, 2008 entered into between Yuhe International, Inc.
and Han Chengxiang. [Incorporated by reference to Exhibit 10.27
to the registrant’s Registration Statement on Form S-1/A filed on December
19, 2008]
|
|
10.25
|
Labour
Contract dated June 13, 2008 entered into between Yuhe International, Inc.
and Jiang Yingjun. [Incorporated by reference to Exhibit 10.12 to the
registrant’s Registration Statement on Form S-1/A filed on December 19,
2008]
|
|
10.26
|
Employment
Agreement dated June 13, 2008 entered into between Yuhe International,
Inc. and Gao Zhentao [Incorporated by reference to Exhibit 10.1 to the
registrant’s current report on Form 8-K filed on June 13,
2008]
|
- 63
-
10.27
|
Employment
Agreement dated June 13, 2008 entered into between Yuhe International,
Inc. and Hu Gang [Incorporated by reference to Exhibit 10.2 to the
registrant’s current report on Form 8-K filed on June 13,
2008]
|
|
10.28
|
Supplemental
Feed Purchase Agreement dated August 5, 2008 entered into between Weifang
Taihong Feed Co., Ltd. and Weifang Yuhe Poultry Co.,
Ltd. [Incorporated by reference to Exhibit 10.12 to the
registrant’s Registration Statement on Form S-1/A filed on December 19,
2008]
|
10.29
|
Form
of Stock Option Agreement [Incorporated by reference to Exhibit 10.1 to
the registrant’s quarterly report on Form 10-Q filed on August 14,
2008]
|
|
10.30
|
Summaries
of Oral Loan Agreements as disclosed under section “Transactions with
Related Persons”. [Incorporated by reference to Exhibit 10.33
to the registrant’s Registration Statement on Form S-1/A filed on December
19, 2008]
|
|
10.31
|
Capital
Transfer Agreement dated November 28, 2007. [Incorporated by
reference to Exhibit 10.12 to the registrant’s Registration Statement on
Form S-1/A filed on December 19, 2008]
|
|
10.32
|
Translation
of Equipment Leasing Agreement dated November 11, 2008 in English.
[Incorporated by reference to Exhibit 99.1 to the registrant’s 8-K filed
on November 21, 2008]
|
|
10.33
|
Translation
of Tenancy Agreement dated November 11, 2008 in English. [Incorporated by
reference to Exhibit 99.2 to the registrant’s 8-K filed on November 21,
2008]
|
|
14.1
|
Code
of Ethics. [Incorporated by reference to Exhibit 14.1 to the registrant's
2008 10-K filed on March 31, 2009]
|
|
23.1
|
Consent
of Thomas G. Kimble and Associates, PC, included in Exhibit
5.1.[Incorporated by reference to Exhibit 23.2 to the registrant’s
Registration Statement S-1 filed on May 12, 2008]
|
|
23.2
|
Consent
of Long An Law Firm.[Incorporated by reference to Exhibit 23.3 to the
registrant’s Registration Statement on Form S-1 filed on May 12,
2008]
|
|
*24.1
|
Power
of Attorney (included on the signature page of this registration
statement).
|
|
*31.1
|
Certification
of the Chief Executive Officer pursuant to Rules 13a-14(a) and
15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
*31.2
|
Certification
of the Chief Financial Officer pursuant to Rules 13a-14(a) and
15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
*32.1
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
*32.2
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
*
|
Filed
herewith
|
- 64
-
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the Company caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date:
March 31, 2009
Yuhe International, Inc.
|
||
By:
|
/s/
Gao Zhentao
|
|
Gao Zhentao
|
||
Chief Executive Officer
|
||
(On behalf of the Registrant and as
Principal Executive Officer)
|
By:
|
/s/
Hu Gang
|
|
Hu Gang
|
||
Chief Financial Officer
|
||
(On behalf of the Registrant and as
Principal Financial Officer)
|
||
By:
|
/s/
Jiang Yiqiang
|
|
Jiang Yiqiang
|
||
Chief Accounting Officer
|
||
(On behalf of the Registrant and as
Principal Accounting Officer)
|
- 65
-
POWER
OF ATTORNEY
KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints Gao Zhentao, Hu Gang and Jiang Yiqiang, and
each of them acting individually, as his true and lawful attorneys-in-fact and
agents, each with full power of substitution, for him in any and all capacities,
to sign any and all amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, with full power of each to act alone, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully for all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or his or their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act, this report on Form 10-K has been
signed by the following persons in the capacities and on the dates
indicated:
Dated March 31, 2010
|
/s/ Gao Zhentao
|
Gao Zhentao
|
|
Chief Executive Officer and Director
|
|
Dated March 31, 2010
|
/s/ Hu Gang
|
Hu Gang
|
|
Chief Financial Officer
|
|
Dated March 31, 2010
|
/s/ Jiang Yiqiang
|
Jiang Yiqiang
|
|
Chief Accounting Officer
|
|
Dated March 31, 2010
|
/s/ Peter Li
|
Peter Li
|
|
Director
|
|
Dated March 31, 2010
|
/s/ Liu Yaojun
|
Liu Yaojun
|
|
Director
|
|
Dated March 31, 2010
|
/s/ Greg Huett
|
Greg Huett
|
|
Director
|
|
Dated March 31, 2010
|
/s/ Han Chengxiang
|
Han Chengxiang
|
|
Director
|
- 66
-
YUHE
INTERNATIONAL, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
YUHE
INTERNATIONAL, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Index to
consolidated financial statements
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets
|
F-3
- F-4
|
Consolidated
Statements of Income and Comprehensive Income
|
F-5
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
F-6
|
Consolidated
Statements of Cash Flows
|
F-7
- F-8
|
Notes
to Consolidated Financial Statements
|
F-9
- F-45
|
YUHE
INTERNATIONAL, INC.
F-2
YUHE
INTERNATIONAL, INC.
CONSOLIDATED
BALANCE SHEETS
(Stated
in US Dollars)
December
31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 14,047,147 | $ | 13,412,205 | ||||
Accounts
receivable, net of allowances of $18,868 and $18,845
|
838 | 902 | ||||||
Inventories
|
6,560,783 | 6,644,961 | ||||||
Advances
to suppliers
|
359,179 | 4,472,509 | ||||||
Deferred
tax assets
|
17,766 | - | ||||||
Total
current assets
|
20,985,713 | 24,530,577 | ||||||
Plant
and equipment, net
|
29,556,712 | 27,112,276 | ||||||
Deposits
paid for acquisition of long term assets
|
16,082,613 | 2,280,988 | ||||||
Notes
receivable, net and other receivable, net
|
33,635 | 74,720 | ||||||
Unlisted
investments held for sale
|
300,172 | 299,427 | ||||||
Intangible
assets, net
|
2,851,411 | 2,909,752 | ||||||
Due
from related companies
|
- | 3,706,589 | ||||||
Net
investment in direct financing lease
|
382,742 | - | ||||||
Long
term prepaid rent
|
6,570,038 | 604,973 | ||||||
Total
assets
|
$ | 76,763,036 | $ | 61,519,302 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 5,740,912 | $ | 4,606,055 | ||||
Current
portion of long term loans
|
9,433,686 | 1,356,832 | ||||||
Other
payable
|
1,343,901 | 937,535 | ||||||
Accrued
expenses and payroll related liabilities
|
2,366,134 | 2,125,587 | ||||||
Advances
from customers
|
678,366 | 673,528 | ||||||
Other
taxes payable
|
150,764 | 141,541 | ||||||
Loan
from director
|
292,517 | 291,792 | ||||||
Other
liabilities
|
143,949 | 143,591 | ||||||
Due
to related companies
|
1,208 | 210,633 | ||||||
Total
current liabilities
|
20,151,437 | 10,487,094 | ||||||
Non-current
liabilities
|
||||||||
Long-term
loans
|
1,360,206 | 9,410,289 | ||||||
Total
liabilities
|
21,511,643 | 19,897,383 |
F-3
YUHE
INTERNATIONAL, INC.
CONSOLIDATED
BALANCE SHEETS
(Stated
in US Dollars)
Stockholders'
Equity
|
||||||||
Preferred
stock, $.001 par value, 1,000,000 shares
authorized,
no shares issued and outstanding
|
- | - | ||||||
Common
stock at $.001 par value; authorized 500,000,000
shares
authorized, 15,722,180 shares issued and outstanding
|
15,722 | 15,722 | ||||||
Additional
paid-in capital
|
30,672,849 | 29,944,016 | ||||||
Retained
earnings
|
23,316,794 | 10,522,673 | ||||||
Accumulated
other comprehensive income
|
1,246,028 | 1,139,508 | ||||||
Total
stockholders’ equity
|
55,251,393 | 41,621,919 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 76,763,036 | $ | 61,519,302 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements
F-4
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Stated
in US Dollars)
December
31
|
||||||||
2009
|
2008
|
|||||||
Net
revenue
|
$ | 47,245,758 | $ | 34,626,282 | ||||
Cost
of revenue
|
(30,504,187 | ) | (21,572,722 | ) | ||||
|
|
|||||||
Gross
profit
|
16,741,571 | 13,053,560 | ||||||
Operating
Expenses
|
||||||||
Selling
|
(434,056 | ) | (425,460 | ) | ||||
General
and administrative expenses
|
(2,963,536 | ) | (1,725,590 | ) | ||||
|
|
|||||||
Total
operating expenses
|
(3,397,592 | ) | (2,151,050 | ) | ||||
Income
from operations
|
13,343,979 | 10,902,510 | ||||||
Non-operating
income (expenses)
|
||||||||
Interest
income
|
237 | 249,738 | ||||||
Other
income (expenses)
|
849 | (21,704 | ) | |||||
Gain
on disposal of fixed assets
|
24,567 | 84,663 | ||||||
Investment
income
|
15,522 | 12,251 | ||||||
Interest
expenses
|
(608,789 | ) | (702,573 | ) | ||||
|
|
|||||||
Total
other income (expenses)
|
(567,614 | ) | (377,625 | ) | ||||
Net
income before income taxes
|
12,776,365 | 10,524,885 | ||||||
Income
tax benefits
|
17,756 | - | ||||||
|
|
|||||||
Net
income
|
$ | 12,794,121 | $ | 10,524,885 | ||||
Other
comprehensive income
|
||||||||
Foreign
currency translation
|
106,520 | 1,139,508 | ||||||
Comprehensive
income
|
$ | 12,900,641 | $ | 11,664,393 | ||||
Earnings
per share
|
||||||||
Basic
|
$ | 0.81 | $ | 0.74 | ||||
Diluted
|
$ | 0.81 | $ | 0.73 | ||||
Weighted
average shares outstanding
|
||||||||
Basic
|
15,722,180 | 14,233,268 | ||||||
Diluted
|
15,792,540 | 14,476,504 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements
F-5
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Stated
in US Dollars)
Common
stock
|
||||||||||||||||||||||||
Shares
outstanding
|
Amount
|
Additional
paid-in capital
|
Retained
Earnings
|
Accumulated
other comprehensive income
|
Total
Stockholders’Equity
|
|||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Balance
at December 31, 2007
|
8,626,320 | $ | 8,626 | $ | 2,041,474 | $ | (2,212 | ) | $ | - | $ | 2,047,888 | ||||||||||||
Additional
capital contribution
|
- | - | 12,149,750 | - | - | 12,149,750 | ||||||||||||||||||
Recapitalization
|
1,087,994 | 1,088 | (2,082 | ) | - | - | (994 | ) | ||||||||||||||||
Share
issued in private placement at $3.088 per share
|
5,829,018 | 5,829 | 17,994,171 | - | - | 18,000,000 | ||||||||||||||||||
Cost
of raising capital
|
- | - | (2,640,477 | ) | - | - | (2,640,477 | ) | ||||||||||||||||
Stock
based compensation
|
- | - | 401,359 | - | - | 401,359 | ||||||||||||||||||
Cashless
exercise of warrants
|
178,848 | 179 | (179 | ) | - | - | - | |||||||||||||||||
Net
income for the year
|
- | - | - | 10,524,885 | - | 10,524,885 | ||||||||||||||||||
Foreign
currency translation difference
|
- | - | - | - | 1,139,508 | 1,139,508 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Balance
at December 31, 2008
|
15,722,180 | $ | 15,722 | $ | 29,944,016 | $ | 10,522,673 | $ | 1,139,508 | $ | 41,621,919 | |||||||||||||
Stock
based compensation
|
- | - | 728,833 | - | - | 728,833 | ||||||||||||||||||
Net
income for the year
|
- | - | - | 12,794,121 | - | 12,794,121 | ||||||||||||||||||
Foreign
currency translation difference
|
- | - | - | - | 106,520 | 106,520 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Balance
at December 31, 2009
|
15,722,180 | $ | 15,722 | $ | 30,672,849 | $ | 23,316,794 | $ | 1,246,028 | $ | 55,251,393 |
F-6
YUHE
INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Stated in US
Dollars)
Year
Ended
|
||||||||
December
31
|
||||||||
2009
|
2008
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
income
|
$ | 12,794,121 | $ | 10,524,885 | ||||
Adjustments
to reconcile net income to net cash used in operating
activities:
|
||||||||
Stock
based compensation
|
728,833 | 401,359 | ||||||
Depreciation
|
2,033,341 | 1,668,059 | ||||||
Amortization
|
65,541 | 59,209 | ||||||
Capitalized
interest in construction in progress
|
(662,711 | ) | (437,221 | ) | ||||
Bad
debts expense (recovery)
|
56,220 | (813,000 | ) | |||||
Gain
on disposal of fixed assets
|
(24,567 | ) | (84,663 | ) | ||||
Income
from unlisted investment
|
(15,522 | ) | (12,251 | ) | ||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
66 | (25 | ) | |||||
Advances
to suppliers
|
4,113,119 | (11,781,086 | ) | |||||
Inventories
|
100,646 | (1,652,341 | ) | |||||
Deferred
tax assets
|
(17,756 | ) | - | |||||
Deferred
expenses
|
- | (1,000 | ) | |||||
Accounts
payable
|
760,193 | (408,001 | ) | |||||
Other
payable
|
403,821 | (739,165 | ) | |||||
Payroll
and payroll related liabilities
|
(104,315 | ) | 626,620 | |||||
Accrued
expenses
|
339,891 | (459,221 | ) | |||||
Advances
from customers
|
3,161 | 455,983 | ||||||
Other
taxes payable
|
8,866 | 9,386 | ||||||
Net
cash provided by (used in) operating activities
|
20,582,948 | (2,642,473 | ) | |||||
Cash
flows from investing activities
|
||||||||
Deposit
paid and acquisition of property, plant and equipment
|
(18,187,196 | ) | (4,580,275 | ) | ||||
Advance
to notes receivable
|
- | (3,432,603 | ) | |||||
Proceeds
from disposal of fixed assets
|
27,834 | 118,216 | ||||||
Acquisition
of subsidiaries
|
- | (10,567,946 | ) | |||||
Proceeds
from notes receivable
|
44,637 | 4,309,226 | ||||||
Proceeds
received from related parties receivables
|
3,713,806 | 1,106,240 | ||||||
Purchase
of leased land use rights
|
(5,960,354 | ) | - | |||||
Net
cash used in investing activities
|
(20,361,273 | ) | (13,047,592 | ) | ||||
F-7
YUHE
INTERNATIONAL, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Stated in US Dollars)
Cash
flows from financing activities
|
||||||||
Proceeds
from loan payable
|
1,067,114 | 1,300,726 | ||||||
Repayment
of loan payable
|
(1,067,114 | ) | (1,099,842 | ) | ||||
Proceeds
from related party payable
|
- | 260,454 | ||||||
Repayment
of related party payable
|
(209,828 | ) | (58,629 | ) | ||||
Proceeds
from capital lease
|
594,476 | - | ||||||
Capital
contribution by shareholder
|
- | 12,149,750 | ||||||
Proceeds
from issuance of common stock, net of issuance cost
|
- | 15,359,523 | ||||||
Net
cash flows provided by financing activities:
|
384,648 | 27,911,982 | ||||||
Effect
of foreign currency translation on cash and cash
equivalents
|
28,619 | 140,120 | ||||||
Net
increase in cash
|
634,942 | 12,362,037 | ||||||
Cash-
beginning of year
|
13,412,205 | 1,050,168 | ||||||
Cash-
end of year
|
$ | 14,047,147 | $ | 13,412,205 | ||||
Cash
paid during the period for:
|
||||||||
Interest
paid
|
$ | 1,405,500 | $ | 1,199,467 | ||||
Income
taxes paid
|
$ | - | $ | - | ||||
Supplemental
disclosure
|
||||||||
Transfer
of construction in progress to fixed assets
|
$ | 4,009,791 | $ | 7,022,128 | ||||
Property,
plant and equipment acquired with accounts payable
|
$ | 362,802 | $ | - | ||||
Supplemental
disclosure of non-cash investing activities:
|
||||||||
Dividend
received for increasing the investments in Hanting Rural Credit
Cooperative
|
$ | - | $ | 6,074 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements
F-8
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
Basis
of presentation
|
The
consolidated financial statements included herein, presented in accordance with
United States generally accepted accounting principles and stated in US dollars,
have been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission. These statements reflect all adjustments,
consisting of normal recurring adjustments, which, in the opinion of management,
are necessary for fair presentation of the information contained
therein.
2.
|
Organization
and Basis of Preparation of Financial
Statements
|
Yuhe
International, Inc.
Yuhe
International, Inc., formerly known as First Growth Investors, Inc., “Yuhe” or
“the Company”, was originally organized under the laws of the State of Nevada on
September 9, 1997. Prior to its business combination with Bright Stand, the
Company was not engaged in any business activities and had no operations, income
producing assets or significant operating capital. At December 31, 2007, the
Company was at development stage until its business combination with Bright
Stand on March 12, 2008.
On March
12, 2008, the Company completed a reverse acquisition transaction with Bright
Stand International Limited, “Bright Stand”, and Kunio Yamamoto, a Japanese
person and the sole former shareholder of Bright Stand.
This
share exchange transaction resulted in Bright Stand’s former shareholder
obtaining a majority voting interest in the Company. Generally accepted
accounting principles require that the company whose shareholders retain the
majority interest in a combined business be treated as the acquirer for
accounting purposes, resulting in a reverse acquisition with Bright Stand as the
accounting acquirer and Yuhe International Inc. as the acquired party.
Accordingly, the share exchange transaction has been accounted for as a
recapitalization of the Company. The equity section of the accompanying
financial statements has been restated to reflect the recapitalization of the
Company due to the reverse acquisition as of the first day of the first period
presented. The historical financial statements for periods prior to March 12,
2008, are those of Bright Stand except that the equity section and earnings per
share have been retroactively restated to reflect the reverse
acquisition.
F-9
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Organization
and Basis of Preparation of Financial Statements -
continued
|
Bright
Stand International Limited, “Bright Stand”
On August
3, 2007, Bright Stand International Limited, “Bright Stand” was incorporated
with limited liability in the British Virgin Islands. On January 31, 2008,
Bright Stand International Limited completed the acquisition of 100% common
stock of Weifang Yuhe Poultry Co., Ltd., “PRC Yuhe” and 43.75% of Weifang
Taihong Feed Co., Ltd., “Taihong”. As a result, Bright Stand owned 100% of PRC
Yuhe and owned 43.75% direct interest of Taihong and 56.25% indirect interest of
Taihong through PRC Yuhe. PRC Yuhe and Taihong became the wholly-owned
subsidiaries of Bright Stand.
Weifang
Yuhe Poultry Co., Ltd., “PRC Yuhe”
Weifang
Yuhe Poultry Co., Ltd., “PRC Yuhe”, was established in Weifang, Shandong of the
People’s Republic of China, the “PRC”, as a limited company on March 8, 1996.
PRC Yuhe is a supplier of day-old chickens raised for meat production, or
broilers, in the People’s Republic of China.
Weifang
Taihong Feed Co., Ltd., “Taihong”
Weifang
Taihong Feed Co., Ltd. was established in Weifang, Shandong of the People’s
Republic of China, the “PRC”, as a limited company on May 26, 2003. Taihong is a
feed stock company whose primary purpose is to supply feed stock for PRC Yuhe’s
breeder chickens.
The
Company’s operations are conducted through its subsidiaries in the People’s
Republic of China, PRC Yuhe, and Taihong. The Company and its subsidiaries,
hereinafter, collectively referred to as “the Group”, are engaged in the
business of chicken and feed production.
F-10
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
3.
|
Summary
of significant accounting policies
|
(a)
Principles of consolidation
The
consolidated financial statements, prepared in accordance with generally
accepted accounting principles in the United States of America, include the
assets, liabilities, revenues, expenses and cash flows of the Company and all
its subsidiaries. This basis of accounting differs in certain material respects
from that used for the preparation of the books and records of the Company’s
principal subsidiaries, which are prepared in accordance with the accounting
principles and the relevant financial regulations applicable to enterprises with
limited liabilities established in the PRC, “PRC GAAP”, the accounting standards
used in the place of their domicile. The accompanying consolidated
financial statements reflect necessary adjustments not recorded in the books and
records of the Company’s subsidiaries to present them in conformity with
generally accepted accounting principles in the United States of
America.
The
consolidated financial statements of the Company include the accounts of Yuhe
International, Inc, Bright Stand International Limited, Weifang Yuhe Poultry
Co., Ltd and Weifang Taihong Feed Co., Ltd. after the date of acquisitions. All
significant intercompany accounts, transactions and cash flows are eliminated on
consolidation.
(b) 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 at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Management makes these estimates using
the best information available at the time the estimates are made; however
actual results could differ materially from those estimates.
(c)
Reclassification
Certain
reclassifications have been made to prior-period comparative financial
statements to conform to the current period presentation. These
reclassifications had no effect on previously reported results of operations or
financial position.
F-11
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
3.
|
Summary
of significant accounting policies -
continued
|
Reclassifications
have been made to bad debts (expense) recovery in the consolidated statements of
income and comprehensive income for the year ended December 31, 2008 to conform
to the year ended December 31, 2009 presentation.
(d)
Intangible assets
Intangible
assets represent land use rights in the PRC. Land use rights are
carried at cost and amortized on a straight-line basis over the period of rights
of 50 years commencing from the date of acquisition of equitable interest.
According to the PRC laws, the government owns all of the land in the PRC.
Companies or individuals are authorized to possess and use the land only through
land usage rights approved by the PRC government.
(e)
Economic and political risks
The
Company’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
Company’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
Company’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.
(f) Plant
and equipment
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 plant and equipment are as follows:
F-12
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
3.
|
Summary
of significant accounting policies -
continued
|
Buildings
|
20
years
|
Machinery
|
10
years
|
Vehicle
|
5
years
|
Furniture
and equipment
|
3
years
|
|
The
cost 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 income. The cost of maintenance and repairs is charged
to income as incurred, whereas significant renewals and betterments are
capitalized.
|
(g)
Guarantee Expense
The
Company accounts for its liability for product guaranteed in accordance with the
FASB accounting standard, the aggregate changes in the liability for accruals
related to product warranties issued during the reporting period must be charged
to expense as incurred.
The
Company guarantees a 98% survival rate of its product by delivering additional
2% of the product. The guarantee expires seven days after delivery. If the
survival rate falls below 96%, the Company provides additional guarantee
compensation to customers. Based on historical experience, the likelihood that
survival rate falls below 96% is remote and therefore no accrued guarantee
liability was recorded at year-end. Guarantee expense for the years ended
December 31, 2009 and 2008 were $0 and $65,769, respectively.
(h)
Accounting for the impairment of long-lived assets
The
long-lived assets held and used by the Company 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 technology or other industry
changes. Determination of recoverability of assets to be held and
used is done by comparing the carrying amount of an asset to future net
undiscounted cash flows to be generated by the assets.
If such
assets are considered to be impaired, the impairment to be recognized is
measured as 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 costs to sell. During the
reporting periods, there was no impairment loss.
F-13
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
3.
|
Summary
of significant accounting policies -
continued
|
(i)
Inventories
Inventories
consisting of raw materials, work in progress and finished goods are stated at
lower of cost or net realizable value. The cost of inventories is
determined using weighted average cost method, and includes expenditure incurred
in acquiring the inventories and bringing them to their existing location and
condition. Net realizable value is the estimated selling price in the ordinary
course of business less any applicable selling expenses. Finished goods are
comprised of direct materials, direct labor and an appropriate proportion of
overhead. At each balance sheet date, inventories that are worth less
than cost are written down to their net realizable value, and the difference is
charged to the cost of revenues of that period.
(j) Trade
receivables
Trade
receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An estimate for doubtful accounts is
made when collection of the full amount is no longer probable. Management
adopted an allowance policy which provides an allowance equivalent to 30% of
gross amount of accounts receivables due over 6 months and 60% of gross amount
of accounts receivables due over 1 year. Full provision will be made for
accounts receivables due over 2 years. Bad debts are written off as incurred. It
is a common industry practice in the PRC that customers pay in advance prior to
delivery of the products. As a result, the Company maintains a low
level of trade receivables.
(k) Notes
receivable
Notes
receivable are stated at the original principal amount less allowance for any
uncollectible amounts. Management provides for an allowance when collection of
the full amount is no longer probable by establishing an allowance equivalent to
30% of gross amount of notes receivables due over 6 months and 60% of gross
amount of notes receivable due over 1 year. Full provision will be made for
notes receivable due over 2 years.
(l) Cash
and cash equivalents
The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The Company maintains
bank accounts only in the PRC. The Company does not maintain any bank accounts
in the United States of America. Cash deposits in PRC banks are not
insured by any government agency or entity.
F-14
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
3.
|
Summary
of significant accounting policies -
continued
|
(m)
Revenue recognition
Revenue
from sales of the Company’s products is recognized when the significant risks
and rewards of ownership have been transferred to the third-party distributor
and larger producers at the time when the products are delivered to and accepted
by them, the sales price is fixed or determinable as stated in the sales
contract, and collection is reasonably assured.
Customers
do not have a general right of return on products delivered.
(n) Cost
of revenues
Cost of
revenues consists primarily of material costs, employee compensation,
depreciation and related expenses, which are directly attributable to the
production of products. Write-down of inventory to lower of cost or
market is also recorded in cost of revenues.
(o)
Advertising
The
Company expensed all advertising costs as incurred. The advertising
expenses were $4,149 and $0 for the years ended December 31, 2009 and 2008,
respectively.
(p)
Retirement benefit plans
The
employees of the Company are members of a state-managed retirement benefit plan
operated by the government of the PRC. The Company is required to
contribute a specified percentage of payroll costs to the retirement benefit
scheme to fund the benefits. The only obligation of the Company with respect to
the retirement benefit plan is to make the specified contributions.
Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statements of income as
incurred. The retirement benefit expenses for the years ended December 31, 2009
and 2008 were $89,819 and $75,049 respectively.
F-15
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
3.
|
Summary
of significant accounting policies -
continued
|
(q)
Income tax
The
Company accounts for income taxes 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 Company is able to realize their benefits, or that
future realization is uncertain.
The
Company is operating in the PRC, and in accordance with the relevant tax laws
and regulations of the PRC, the corporation income tax rate is 25%. Weifang Yuhe
Poultry Co., Ltd is a poultry company, and in accordance with the relevant
regulations regarding the favorable tax treatment for an outstanding poultry
company, the Company is entitled to a tax free treatment.
The
corporate income tax for the subsidiary, Weifang Taihong Feed Co., Ltd is
25%.
(r)
Shipping and handling fees
Shipping
and handling fees are expensed when incurred. During the years ended
December 31, 2009 and 2008, Shipping and handling charges included in the
selling expenses were $30,609 and $11,686 respectively.
(s)
Foreign currency translation
The
accompanying financial statements are presented in United States dollars. The
functional currency of the Company and Bright Stand is US$ and the functional
currency of PRC Yuhe and Taihong is Renminbi (RMB). The financial
statements of PRC Yuhe and Taihong are translated into United States dollars
from RMB at year-end exchange rates as to assets and liabilities and average
exchange rates as to revenues and expenses. Capital accounts are translated at
their historical exchange rates when the capital transactions
occurred.
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No
representation is made that the RMB amounts could have been, or could be,
converted into US$ at the rates used in translation.
F-16
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
3.
|
Summary
of significant accounting policies -
continued
|
(t)
Comprehensive income
Comprehensive
income 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 are required to be
reported in a financial statement that is presented with the same prominence as
other financial statements. The component of comprehensive income
includes foreign currency translation adjustment.
(u) Fair
value of financial instruments
A FASB
accounting standard requires entities to disclose the fair values of financial
instruments except when it is not practicable to do so. Under this accounting
standard, it is not practicable to make this disclosure when the costs of
formulating the estimated values exceed the benefit when considering how
meaningful the information would be to financial statement users.
The fair
values of all assets and liabilities do not differ materially from their
carrying amounts. None of the financial instruments held are derivative
financial instruments and none were acquired or held for trading purposes during
the years ended December 31, 2009 or 2008.
(v) Basic
and diluted earnings per share
The
Company reports basic earnings per share in accordance with the FASB accounting
standard. Basic earnings per share is computed using the weighted average number
of shares outstanding during the periods presented. The weighted average number
of shares of the Company represents the common stock outstanding during the
reporting periods.
Diluted
earnings per share is based on the assumption that all dilutive options were
converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, options are assumed to be exercised at the time of
issuance, and as if funds obtained thereby were used to purchase common stock at
the average market price during the year.
F-17
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
3.
|
Summary of significant accounting policies - continued |
(w)
Statutory reserve
In
accordance with the relevant laws and regulations of the PRC and the articles of
association of the Company’s PRC subsidiaries, PRC Yuhe and Taihong are required
to allocate 10% of their net income reported in the PRC statutory accounts,
after offsetting any prior years’ losses, to the statutory surplus reserve, on
an annual basis. When the balance of such reserve reaches 50% of the
respective registered capital of the subsidiaries, any further allocation is
optional. The statutory surplus reserves can be used to offset prior
years’ losses, if any, and may be converted into registered capital, provided
that the remaining balance of the reserve after such conversion is not less than
25% of registered capital. The statutory surplus reserve is
non-distributable.
4.
|
Recently
adopted accounting pronouncements
|
Accounting Standards
Codification
In June
2009, the Financial Accounting Standards Board (“FASB”) issued a standard that
established the FASB Accounting Standards Codification (the “ASC”), which
effectively amended the hierarchy of U.S. generally accepted accounting
principles (“GAAP”) and established only two levels of GAAP, authoritative and
non-authoritative. All previously existing accounting standard documents were
superseded, and the ASC became the single source of authoritative,
nongovernmental GAAP, except for rules and interpretive releases of the
Securities and Exchange Commission (the “SEC”), which are sources of
authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC
accounting literature not included in the ASC became non-authoritative. The ASC
was intended to provide access to the authoritative guidance related to a
particular topic in one place. New guidance issued subsequent to June 30, 2009
will be communicated by the FASB through Accounting Standards Updates. The ASC
was effective for financial statements for interim or annual reporting periods
ending after September 15, 2009. The Company adopted and applied the provisions
of the ASC for its quarterly reporting ended June 30, 2009, and has eliminated
references to pre-ASC accounting standards throughout the consolidated financial
statements. The adoption of the ASC did not have a material impact on the
Company’s consolidated financial statements.
F-18
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
4.
|
Recently
adopted accounting pronouncements –
continued
|
Subsequent
Events
In May
2009, the FASB issued new guidance on the treatment of subsequent events which
is intended to establish general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. Specifically, management of
a reporting entity is required to evaluate subsequent events through the date
that financial statements are issued and disclose the date through which
subsequent events have been evaluated, as well as the date the financial
statements were issued. This new guidance was effective for fiscal years and
interim periods ended after June 15, 2009, and must be applied prospectively.
The Company adopted this guidance in the quarter ended June 30, 2009. Subsequent
events have been evaluated through March 25, 2010, the date the consolidated
financial statements were issued as further discussed in this accounting
standard.
Fair Value and
Other-Than-Temporary Impairments
In April
2009, the FASB issued new guidance intended to provide additional application
guidance and enhanced disclosures regarding fair value measurements and
impairments of securities. New guidance related to 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 provides additional
guidelines for estimating fair value in accordance with pre-existing guidance on
fair value measurements. New guidance on recognition and presentation of
other-than-temporary impairments provides additional guidance related to the
disclosure of impairment losses on securities and the accounting for impairment
losses on debt securities, but does not amend existing guidance related to
other-than-temporary impairments of equity securities. The new guidance was
effective for fiscal years and interim periods ended after June 15, 2009. As
such, the Company adopted this guidance for the quarter ended June 30, 2009.
Adoption of the new guidance did not have a material impact on the Company’s
consolidated financial statements.
Financial
Instruments
In April
2009, the FASB issued an accounting standard that requires disclosures about
fair value of financial instruments not measured on the balance sheet at fair
value in interim financial statements as well as in annual financial statements.
Prior to this accounting standard, fair values for these assets and liabilities
were only disclosed annually. This standard applies to all financial instruments
within its scope and requires all entities to disclose the method(s) and
significant assumptions used to estimate the fair value of financial
instruments. This standard does not require disclosures for earlier periods
presented for comparative purposes at initial adoption, but in periods after the
initial adoption, this standard requires comparative disclosures only for
periods ending after initial adoption. The adoption of this standard did not
have a material impact on the disclosures related to its consolidated financial
statements.
F-19
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
5.
|
Recently Issued Accounting Pronouncements Not Yet
Adopted
|
Fair Value
Measurement
In August
2009, the FASB issued an Accounting Standards Update (“ASU”) regarding measuring
liabilities at fair value. This ASU provides additional guidance clarifying the
measurement of liabilities at fair value in circumstances in which a quoted
price in an active market for the identical liability is not available; under
those circumstances, a reporting entity is required to measure fair value using
one or more of valuation techniques, as defined. This ASU is effective for the
first reporting period, including interim periods, beginning after the issuance
of this ASU. The adoption of this ASU did not have a material impact on the
Company’s consolidated financial statements.
Decreases in Ownership of a
Subsidiary – a Scope Clarification
In
January 2010, the FASB issued an accounting standard update to address the
accounting and reporting for Decreases in ownership of a subsidiary. This
amendment to Topic 810 clarifies, but does not change, the scope of current US
GAAP. It clarifies the decrease in ownership provisions of Subtopic 810-10 and
removes the potential conflict between guidance in that Subtopic and asset
derecognition and gain or loss recognition guidance that may exist in other US
GAAP. An entity will be required to follow the amended guidance beginning in the
period that it first adopts FAS 160 (now included in Subtopic 810-10). For those
entities that have already adopted FAS 160, the amendments are effective at the
beginning of the first interim or annual reporting period ending on or after
December 15, 2009. The amendments should be applied retrospectively to the first
period that an entity adopted FAS 160. The Company does not expect the
provisions of ASU 2010-02 to have a material effect on the financial position,
results of operations, or cash flows of the Company.
Distributions to
Shareholders with Components of Stock and Cash
In
January 2010, the FASB issued an accounting standard update to address the
accounting for distributions to shareholders with components of stock and cash
(A Consensus of the FASB Emerging Issues Task Force). This amendment to Topic
505 clarifies the stock portion of a distribution to shareholders that allows
them to elect to receive cash or stock with a limit on the amount of cash that
will be distributed is not a stock dividend for purposes of applying Topics 505
and 260 for interim and annual periods ending on or after December 15, 2009, and
should be applied on a retrospective basis. The Company does not expect the
provisions of ASU 2010-01 to have a material effect on the financial position,
results of operations, or cash flows of the Company.
F-20
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
5.
|
Recently
Issued Accounting Pronouncements Not Yet Adopted -
continued
|
Own-Share Lending
Arrangements in Contemplation of Convertible Debt issuance or Other
Financing
In
October 2009, the FASB issued an accounting standard update to address
equity-classified share lending arrangements on an entity’s own shares, when
executed in contemplation of a convertible debt offering or other financing.
This accounting update addresses how to account for the share-lending
arrangement and the effect, if any, that the loaned shares have on
earnings-per-share calculations. The share lending arrangement is required to be
measured at fair value and recognized as an issuance cost associated with the
convertible debt offering or other financing. Earnings-per-share calculations
would not be affected by the loaned shares unless the share borrower defaults on
the arrangement and does not return the shares. If counterparty default is
probable, the share lender is required to recognize an expense equal to the then
fair value of the unreturned shares, net of the fair value of probable
recoveries. This accounting update is effective for share lending agreements
entered into after June 15, 2009, and effective for fiscal years and interim
periods within those years beginning on or after December 15, 2009 for all other
outstanding arrangements, with retrospective application to those arrangements
on the effective date. The Company is currently evaluating the impact of this
statement upon its adoption on the Company’s 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.
F-21
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
6.
|
Acquisition
of subsidiaries
|
On
January 31, 2008, Bright Stand acquired 100% common stock of Weifang
Yuhe Poultry Co., Limited for $11,306,522 (RMB 81,450,000) and 43.75% of Weifang
Taihong Feed Co., Ltd for $312,530 (RMB 2,244,000) and total
amount was $11,619,052.
The
following table presents the unaudited results of operations of the Company as
if the Yuhe acquisitions had been consummated as of January 1, 2008 and the
results are shown for the year ended December 31, 2008 includes certain pro
forma adjustments, including depreciation and amortization on the assets
acquired, and other adjustments.
For
The Year Ended December 31,
|
||||
2008
|
||||
(Pro
forma)
|
||||
Revenues
|
$ | 36,117,611 | ||
Net
income
|
$ | 10,666,419 | ||
Earnings
per share
|
||||
Basic
|
$ | 0.75 | ||
Diluted
|
$ | 0.74 | ||
Weighted
average shares outstanding
|
||||
Basic
|
14,233,268 | |||
Diluted
|
14,476,504 |
F-22
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
7.
|
Inventories
|
Inventories
consist of the following:
December
31
|
December
31
|
|||||||
2009
|
2008
|
|||||||
Raw
materials
|
$ | 5,275,629 | $ | 5,281,429 | ||||
Work
in progress
|
1,285,154 | 1,272,217 | ||||||
Finished
goods
|
- | 91,315 | ||||||
$ | 6,560,783 | $ | 6,644,961 | |||||
8.
|
Unlisted
investments
|
Unlisted
investments at December 31, 2009 represent the 3% investments in Hanting Rural
Credit Cooperative, “Hanting” recorded at cost. For the years ended
December 31, 2009 and 2008, the Company recorded $15,522 and $12,251,
respectively as income from unlisted investment for dividends received from
Hanting. Management of the Company has reviewed the investment in
Hanting for impairment and determined there is no indication that the carrying
amount of Hanting may not be recoverable.
F-23
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
9.
|
Plant
and equipment, net
|
Plant and
equipment consists of the following:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
At
cost
|
||||||||
Buildings
|
$ | 19,071,808 | $ | 14,951,197 | ||||
Machinery
|
6,006,596 | 5,064,593 | ||||||
Motor
vehicles
|
120,069 | 119,786 | ||||||
Furniture
and equipment
|
102,154 | 82,815 | ||||||
25,300,627 | 20,218,391 | |||||||
Less:
accumulated depreciation
|
(3,716,677 | ) | (1,678,071 | ) | ||||
21,583,950 | 18,540,320 | |||||||
Construction
in progress
|
7,972,762 | 8,571,956 | ||||||
$ | 29,556,712 | $ | 27,112,276 | |||||
During
the year ended December 31, 2009, depreciation expenses amounted to $2,033,341
among which $1,840,897 and $192,444 were recorded as cost of sales and
administrative expense, respectively. During the year ended December
31, 2008 depreciation expenses amounted to $1,668,059 among which $1,431,939 and
$236,120 were recorded as cost of sales and administrative expense,
respectively.
Capitalized
interest expense included in construction in progress totaled $662,711 and
$437,221 for the years ended December 31, 2009 and 2008,
respectively.
As of
December 31, 2009 and 2008, buildings and machinery of the Company with net book
value of $6,600,351 and $7,741,962 were pledged as collateral under certain loan
arrangements.
F-24
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
10.
|
Deposits
paid for acquisition of long term
assets
|
Deposits
paid consist of the following:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Deposits
paid for purchase of land use right
|
$ | - | $ | 1,458,959 | ||||
Deposit
paid for purchase of buildings
|
12,139,473 | - | ||||||
Deposits
paid for construction in progress
|
218,336 | - | ||||||
|
|
|||||||
Deposits
paid for capital commitment
|
12,357,809 | 1,458,959 | ||||||
Deposits
paid for purchase of equipment
|
3,724,804 | 822,029 | ||||||
|
|
|||||||
Total
Deposits paid for acquisition of long term assets
|
$ | 16,082,613 | $ | 2,280,988 |
11.
|
Intangible
assets, net
|
Intangible
assets consist of the following:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Land
use rights, at cost
|
$ | 2,977,098 | $ | 2,969,714 | ||||
Less:
accumulated amortization
|
(125,687 | ) | (59,962 | ) | ||||
$ | 2,851,411 | $ | 2,909,752 | |||||
As of
December 31, 2009 and 2008, land use rights of the Company with net book value
of $2,851,411. The entire amount was pledged as collateral under certain
loan arrangements.
During
the years ended December 31, 2009 and 2008, amortization expenses included in
the cost of sales were $65,541 and $59,209 respectively.
F-25
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
11.
|
Intangible
assets, net – continued
|
The
estimated aggregate amortization expenses for the land use right for the five
succeeding years are as follows:
Year
|
||||
2010
|
$ | 65,576 | ||
2011
|
65,576 | |||
2012
|
65,576 | |||
2013
|
65,576 | |||
2014
|
65,576 | |||
thereafter
|
2,523,531 | |||
$ | 2,851,411 |
12.
|
Due
to related companies
|
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Weifang
Hexing Breeding Co., Ltd. "Weifang Hexing" -
Gao
Zhentao, a director of the Company is also a director
of
Weifang Hexing
|
$ | - | $ | 185,885 | ||||
Others
|
1,208 | 24,748 | ||||||
$ | 1,208 | $ | 210,633 | |||||
The
amounts due to related companies are unsecured, interest free and have no fixed
repayment date. These loans are used for working capital
purposes.
13.
|
Loan
from director
|
Loan from
director totaled $292,517 at December 31, 2009 and represents bank loan borrowed
by a director on behalf of the Company. The loan is due on November
26, 2011 and bears interest at 7.56% per annum.
F-26
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
14.
|
Due
from related companies
|
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Hexing
Green Agriculture Co., Ltd., "Hexing Green", -
Mr.
Gao Zhentao, a director of the Company is also a
director
of Hexing Green
|
$ | - | $ | 75,754 | ||||
Shandong
Yuhe Food Co., Ltd, "Yuhe Food"- Mr. Gao
Zhentao,
a director of the Company is also a director of
Yuhe
Food
|
- | 3,580,553 | ||||||
Shandong
Yuhe New Agriculture of Sciences,
"Shandong
Yuhe"- Mr. Gao Zhentao, a director of the
Company
is also a director of Shandong Yuhe
|
- | 50,257 | ||||||
Weifang
Jiaweike Food Co., Ltd, "Weifang Jiaweike" -
Mr.
Gao Zhentao, a director of the Company is also a
director
of Weifang Jiaweike
|
- | 25 | ||||||
$ | - | $ | 3,706,589 | |||||
The
amounts due from related companies are unsecured, interest free and have no
fixed repayment date.
15.
|
Other
payable
|
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Interest
payable
|
$ | 69,193 | $ | 69,021 | ||||
Deposits
received
|
471,344 | 473,448 | ||||||
Others
|
803,364 | 395,066 | ||||||
$ | 1,343,901 | $ | 937,535 | |||||
Deposit
received represent deposits collected from customers as security for
non-payment.
Other
payable represents apartment rental reimbursement to staff and insurance
payable.
F-27
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
16.
|
Long-term
loans
|
The
long-term loans are denominated in Chinese Renminbi and are presented in US
dollars as follows:
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Loans
from Nansun Rural Credit, interest rate at 7.56%
to
13.82% per annum, balance due on March 10, May 17,
May
28, Nov 29, 2010 and Dec 10, 2011
|
$ | 8,775,521 | 8,753,757 | |||||
Loan
from Shuangyang Rural Credit, interest rate at
9.83%
per annum, due on October 13, 2010
|
950,682 | 948,324 | ||||||
Loan
from Hanting Kaiyuan Rural Credit Cooperative,
interest
rate at 7.56% per annum, renew the due date
from
January 10, 2009 to January 7, 2011
|
1,067,689 | 1,065,040 | ||||||
10,793,892 | 10,767,121 | |||||||
Less:
current portion of long-term loans
|
(9,433,686 | ) | (1,356,832 | ) | ||||
$ | 1,360,206 | 9,410,289 | ||||||
Future
maturities of long-term loans as at December 31, 2009 are as
follows:
December
31,
|
||||
2010
|
$ | 9,433,686 | ||
2011
|
1,360,206 | |||
$ | 10,793,892 |
17.
|
Accrued
expenses and payroll related
liabilities
|
December
31,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Salary
|
$ | 1,254,780 | $ | 1,142,094 | ||||
Employee
benefits
|
102,385 | 97,520 | ||||||
Others
|
224,185 | 157,607 | ||||||
Accrued
expenses
|
784,784 | 728,366 | ||||||
$ | 2,366,134 | $ | 2,125,587 |
Payroll
and payroll related liabilities represent accrued payroll and welfare benefits
to employees.
F-28
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
18.
|
Income
tax
|
The
Company was incorporated in Nevada and is subject to U.S. income tax at the
statutory tax rate of 34%. No provision for income taxes have been
made as the Company has a taxable loss for the years ended December 31, 2009 and
2008. The Company has accumulated net operating loss carry forward of
$1,130,405 as of December 31, 2009. A full valuation allowance of $384,338 has
been provided against the deferred tax asset as of December 31,
2009.
Bright
Stand was incorporated in the British Virgin Islands and is not subject to
income taxes under the current laws of the British Virgin Islands.
PRC Yuhe
is operating in the PRC, and in accordance with the relevant tax laws and
regulations of PRC, the corporation income tax rate is 25%. However, PRC Yuhe is
an agricultural company, and in accordance with the relevant regulations
regarding the tax exemption, it is tax-exempt as long as it is registered as an
agricultural entity.
Taihong
is operating in the PRC, and in accordance with the relevant tax laws and
regulations of PRC, the corporation income tax rate is 25%.
The
Company uses the asset and liability method, where deferred tax assets and
liabilities are determined based on the expected future tax consequences of
temporary differences between the carrying amounts of assets and liabilities for
financial and income tax reporting purposes. Taihong has a net operating loss
carry forward and temporary difference, which resulted in deferred tax asset of
$12,691 and $5,075, respectively, as of December 31, 2009. The
Company realized the deferred tax assets as of December 31, 2009 as there has
been sufficient positive evidence existing to support reversal of the valuation
allowance previously recognized.
F-29
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
18.
|
Income
tax - continued
|
The
provision for income taxes consists of the following:
For
The Year Ended
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
PRC
(current)
|
$ | - | $ | - | ||||
Deferred
tax
|
||||||||
-Deferred
tax benefit
|
(17,756 | ) | - | |||||
Income
Tax (Benefit)
|
$ | (17,756 | ) | $ | - | |||
Actual
income tax expenses reported in the consolidated statements of income and
comprehensive income differ from the amounts computed by applying the PRC
statutory income tax rate of 25% to income before income taxes for the years
ended December 31, 2009 and 2008 for the following reasons:
For
The Year Ended
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
Income
before income taxes
|
$ | 12,776,365 | $ | 10,524,885 | ||||
Computed “expected”
income tax expense at 25%
|
3,194,091 | 2,631,221 | ||||||
Tax
effect on permanent differences
|
(32,746 | ) | - | |||||
Change
in valuation allowance
|
(51,203 | ) | (60,204 | ) | ||||
Parent
company losses for which no benefit has been recognized
|
432,941 | 258,236 | ||||||
Effect
of tax holiday
|
(3,560,839 | ) | (2,829,253 | ) | ||||
Income
Tax (Benefit)
|
$ | (17,756 | ) | $ | - | |||
F-30
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
18.
|
Income
tax - continued
|
The tax
effects of temporary differences and carryforwards that give rise to significant
portions of deferred tax assets at December 31, 2009 and 2008, were as
follows:
For
The Year Ended
|
||||||||
December
31,
|
||||||||
Deferred
tax assets
|
2009
|
2008
|
||||||
Net
operating loss carryforwards
|
$ | 12,691 | $ | 46,041 | ||||
Bad
debt allowance
|
5,075 | 5,062 | ||||||
17,766 | 51,103 | |||||||
Valuation
Allowance
|
- | (51,103 | ) | |||||
Total
deferred tax assets
|
$ | 17,766 | $ | - | ||||
On
January 1, 2008, the Company adopted FASB ASC 740.10, which prescribes a
more-likely-than-not threshold for financial statement recognition and
measurement of a tax position taken in the tax return. This interpretation also
provides guidance on de-recognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, accounting
for income taxes in interim periods and income tax disclosures.
Through
December 31, 2009, the management considered that the Company had no uncertain
tax positions which affected its consolidated financial position and results of
operations or cash flow, and will continue to evaluate for the uncertain
position in future. There are no estimated interest costs and penalties provided
in the Company’s financial statements for the years ended December 31, 2009 and
2008.
Cumulative
undistributed earnings of foreign subsidiaries, for which no U.S. income or
foreign withholding taxes have been recorded, approximated $21.9 million at
December 31, 2009. As the company intends to indefinitely reinvest
all such earnings, no provision has been made for income taxes that may become
payable upon distribution of such earnings as allowed under ASC 740.30,
“Accounting for Income Taxes-Other considerations or special
areas”.
F-31
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
19.
|
Fair
value of financial
instruments
|
The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties. The carrying amounts
of financial assets and liabilities, such as cash and cash equivalents, trade
accounts receivable, other receivables, accounts payable, and other payables,
approximate their fair values because of the short maturity of these instruments
and market rates of interest.
20.
|
Common
stock and warrants
|
(a) Common
Stock
On March
12, 2008, the Company issued 8,626,320 shares of its common stock (all share
information has been adjusted pursuant to the reverse stock split), par value
$0.001 per share, to the sole stockholder of Bright Stand to effect the Reverse
Merger Acquisition. At the same time, the Company issued 5,829,018 shares of
common stock to the investors for gross proceeds of $18 million in the private
placement.
The
Company's issued and outstanding number of common stock immediately prior to the
Reverse merger Acquisition is 1,087,994 shares.
Effective
on April 4, 2008, the Company effected a 1-for-14.70596492 reverse stock split
of its common stock.
After the
reverse acquisition, the total common stock issued and outstanding of the
Company is 15,543,330 shares.
F-32
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
20.
|
Common
stock and warrants – continued
|
(b) Warrants
The
Company granted warrants to acquire an aggregate of 476,014 shares of common
stock to Roth Capital Partners, LLC and WLT Brothers Capital, Inc., for their
services in connection with the private placement on March 12, 2008. The
warrants have a strike price equal to $3.706, have a term of three years
starting from March 12, 2008 and permit cashless or cash exercise at all times
that they are exercisable. The warrants are exercisable at any time 6 months
after their issuance. The Company valued the options by Black-Scholes
option-pricing model with the amount of $2,398,975 which recorded as cost of
raising capital against additional paid-in capital.
The
Company estimated the fair value of each warrant award on the date of grant
using the Black-Scholes option-pricing model and the assumption noted in the
following table. Expected volatility is based on the historical and implied
volatility of a peer group of publicly traded entities. The expected term of
options gave consideration to historical exercises, post-vesting cancellations
and the options’ contractual term. The risk-free rate for the expected term of
the option is based on the U.S. Treasury Constant Maturity at the time of grant.
The assumptions used to value options granted during the year ended December 31,
2009 and 2008 were as follows:
Year
Ended
December
31, 2009 and 2008
|
||||
Risk
free interest rate
|
3 | % | ||
Expected
volatility
|
109 | % | ||
Expected
life (years)
|
3 |
On
October 27, 2008, the Company issued 178,848 of common shares to Roth Capital
Partners, LLC based on its cashless exercise of 333,198 warrants issued to
it. The total number of warrants outstanding as at December 31, 2009
and 2008 was 142,816.
F-33
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
20.
|
Common
stock and warrants – continued
|
(c) Additional
paid-in capital
Prior to
the Reverse Merger, the stockholder of Bright Stand contributed additional
capital of $12,149,766 to Bright Stand for the acquisition of PRC Yuhe.
Subsequent to the contribution of capital, Bright Stand entered into a reverse
acquisition with Yuhe International, Inc. and raised $18 million gross proceeds
in the private placement as described in Note 20 (a).
The terms
of outstanding warrants as of December 31, 2009 are as follows:
Warrants
outstanding
|
Warrants
exercisable
|
|||||||||||||||||||||||
Range
of exercise prices
|
Number
outstanding
|
Weighted
average remaining contractual life (years)
|
Weighted
average exercise price
|
Number
exercisable
|
Weighted
average remaining contractual life (years)
|
Weighted
average exercise price
|
||||||||||||||||||
$3.706
|
142,816 | 1.19 | $ | 3.706 | 142,816 | 1.19 | $ | 3.706 |
21.
|
Stock
options
|
On June
13, 2008, the Company granted to the Chief Financial Officer (CFO) of the
Company an option to purchase 150,000 shares of the Company’s common stock at an
exercise price of $3.708 per share for the 3 year’s employment. The options
shall vest with respect to 33.3% of the total number of shares purchasable upon
exercise thereof one year after the grant date and 33.3% on the second and third
anniversary of the grant date, Mr. Hu will be fully vested in the option by that
date and shall cease to vest if he ceases to be Chief Financial Officer of the
Company for any reason.
On the
same date, the Company granted to three independent directors of the Company an
option to purchase 77,717 shares of the Company’s common stock at an exercise
price of $3.708 per share for the 3 year’s employment. The options shall vest
with respect to 33.3% of the total number of shares purchasable upon exercise
thereof one year after the grant date and 33.3% on the second and third
anniversary of the grant date, the directors will be fully vested in the option
by that date and shall cease to vest if the three independent directors cease to
be independent directors of the Company for any reason.
F-34
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
21.
|
Stock
options– continued
|
The
options granted to the CFO and the three independent directors will expire on
the fifth anniversary of the grant date and cease to vest if they cease to be
the CFO or independent directors of the company for any reason.
As at
December 31, 2009, the total number of stock options outstanding was 383,151
shares. The Company recognizes compensation expense, net of estimated
forfeitures, over the requisite service period, which is the period during which
the grantee is required to provide services in exchange for the
award. The Company has elected to recognize compensation cost for
awards with only a service condition that has a graded vesting schedule on a
straight-line basis over the requisite service period for the entire
award.
The
Company uses the Black-Scholes option pricing model to calculate the grant-date
fair value of an award, with the following assumptions: no dividend yield,
expected volatility of 109.40%, and a risk-free interest rate of 3.00%. In
determining volatility of the Company’s options, the Company used the average
volatility of the Company’s stock. Fair value per the Black-Scholes model is
$2,186,499. In accordance with FASB ASC 718, the Company has recorded
stock-based compensation expense during the years ended December 31, 2009 and
2008 of $728,833 and $401,359, respectively, in connection with the issuance of
this option.
The
weighted average grant date fair value of options granted was $5.71 per
share. The weighted average exercise price of these options was
$3.708 per share. The total number of stock options outstanding as at
December 31, 2009 and December 31, 2008 was 383,151 shares.
Following
is a summary of the status of options outstanding at December 31,
2009:
Options
outstanding
|
Options
exercisable
|
|||||||||||||||||||||||
Range
of exercise prices
|
Number
outstanding
|
Weighted
average remaining contractual life (years)
|
Weighted
average exercise price
|
Number
exercisable
|
Weighted
average remaining contractual life (years)
|
Weighted
average exercise price
|
||||||||||||||||||
$3.708
|
383,151 | 3.45 | $ | 3.708 | 127,589 | 3.45 | $ | 3.708 |
F-35
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
22.
|
Earnings
per share
|
Basic
earnings per share is computed on the basis of the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per
share is computed on the basis of the weighted average number of shares of
common stock plus the effect of dilutive potential common shares outstanding
during the period. The following table sets forth the computation of basic
and diluted net income per share:
For
The Year Ended
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
Net
income attributable to the common stockholders
|
$ | 12,794,121 | $ | 10,524,885 | ||||
Weighted
average outstanding shares of common stock
|
15,722,180 | 14,233,268 | ||||||
Dilutive
effect of options, warrants, and contingently issuable
shares
|
70,360 | 243,236 | ||||||
Common
stock and common stock equivalents
|
15,792,540 | 14,476,504 | ||||||
Earnings
per share:
|
||||||||
Basic
|
$ | 0.81 | $ | 0.74 | ||||
Diluted
|
$ | 0.81 | $ | 0.73 |
23.
|
Significant
concentrations and risk
|
(a) Customer
Concentrations
The
Company has the following concentrations of business with each customer
constituting greater than 10% of the Company’s gross sales:
For
The Year Ended
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
Wei
Yunchao
|
10.71 | % | * |
*
Constitute less than 10% of the Company’s gross sales.
The
Company has not experienced any significant difficulty in collecting its
accounts receivable in the past and is not aware of any financial difficulties
being experienced by its major customers.
F-36
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
23.
|
Significant
concentrations and risk - continued
|
The
Company has the following concentrations of business with each supplier
constituting greater than 10% of the Company’s purchase:
For
The Year Ended
|
||||||||
December
31,
|
||||||||
2009
|
2008
|
|||||||
Ma
Zhuping
|
*
|
27.60 | % | |||||
Wang Jianbo
|
10.99 | % | * |
*
Constitute less than 10% of the Company’s purchase.
(b) Credit
Risk
Financial
instruments that potentially subject the Company to significant concentration of
credit risk consist primarily of cash and cash equivalents. As of
December 31, 2009, substantially all of the Company’s cash and cash equivalents
were held by major financial institutions located in the PRC, which management
believes are of high credit quality.
(c) Company’s
operations are in China
All of
the Company’s products are produced in China. The Company’s
operations are subject to various political, economic, and other risks and
uncertainties inherent in China. Among other risks, the Company’s
operations are subject to the risks of transfer of funds; domestic and
international customs and tariffs; changing taxation policies; foreign exchange
restrictions; and political conditions and governmental
regulations.
F-37
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
24.
|
Business
and geographical segments
|
The
Company’s operations are classified into two principal reportable segments that
provide different products or services. PRC Yuhe is engaged in the
business of breeding chicken while Taihong is engaged in the business of feed
production, in which most of the products were used internally. Separate
management of each segment is required because each business unit is subject to
different production and technology strategies.
Reportable
Segments
For
The Year Ended December 31, 2009
|
For
The Year Ended December 31, 2008
|
For
The Year Ended December 31,
|
||||||||||||||||||||||||||||||
Production
of chicks
|
Production
of feed
|
Corporate
|
Production
of chicks
|
Production
of feed
|
Corporate
|
Total
|
||||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||||||||||
External
revenue
|
$ | 46,920,680 | $ | 325,078 | $ | - | $ | 34,166,334 | $ | 459,948 | $ | - | $ | 47,245,758 | 34,626,282 | |||||||||||||||||
Intersegment
revenue
|
- | 9,270,123 | - | - | 11,885,562 | - | 9,270,123 | 11,885,562 | ||||||||||||||||||||||||
Interest
income
|
229 | 8 | - | 245,573 | 34 | 4,131 | 237 | 249,738 | ||||||||||||||||||||||||
Interest
expense
|
- | (608,789 | ) | - | (33,739 | ) | (668,834 | ) | - | (608,789 | ) | (702,573 | ) | |||||||||||||||||||
Depreciation
and amortization
|
(1,971,067 | ) | (127,815 | ) | - | (1,611,941 | ) | (115,327 | ) | - | (2,098,882 | ) | (1,727,268 | ) | ||||||||||||||||||
Net
profit/(loss) after tax
|
14,243,358 | 282,527 | (1,731,764 | ) | 11,317,014 | 240,818 | (1,032,947 | ) | 12,794,121 | 10,524,885 | ||||||||||||||||||||||
Expenditures
for long-lived assets
|
8,830,361 | 69,539 | - | 12,582,823 | 108,771 | - | 8,899,900 | 12,691,594 |
Note:
Intersegment revenue of $9,270,123 was eliminated in consolidation.
The
Company’s operations are located in the PRC. All revenue is from customers in
the PRC. All of the company’s assets are located in the PRC.
Accordingly, no analysis of the Company’s sales and assets by geographical
market is presented.
F-38
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
25.
|
Commitments
and contingencies
|
Operating
Leases - In the normal course of business, the Company leases the land for hen
house under operating lease agreements. The Company rents land, primarily for
the feeding of the chicken. The operating lease agreements generally contain
renewal options that may be exercised at the Company’s discretion after the
completion of the base rental terms. The Company was obligated under operating
leases requiring minimum rentals as follows:
As
of December 31,
|
||||
2010
|
$ | 70,380 | ||
2011
|
70,380 | |||
2012
|
70,380 | |||
2013
|
70,380 | |||
2014
|
70,380 | |||
Thereafter
|
1,251,869 | |||
Total
minimum lease payments
|
1,603,769 | |||
During
the years ended December 31, 2009 and 2008, rental expenses were $165,269 and
$155,349 respectively.
F-39
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
25.
|
Commitments
and contingencies - continued
|
Total
Considera-
tion
|
Total
Amount Paid as of December 31, 2009
|
Remaining
Balance as of December 31, 2009
|
Expected
Date of Payment
|
Starting
Date of Project
|
Date
/ Expected Date of Completion
|
Notes
|
|||||||||||||||||||
Constructions
of:
|
|
||||||||||||||||||||||||
Breeding
Farm No. 1
and
No. 28
|
$ | 6,120,000 | $ | 4,500,000 | $ | 1,620,000 |
Progressively
from May 2010
|
May
2005
|
Set
up by
the
end of
February
2010
|
-
|
|||||||||||||||
Breeding
Farm No.
2,
3, 5, 6 and 7
|
380,000 | 292,250 | 87,750 |
March
31, 2010
|
December
6, 2008
|
Completed
by
October
31,
2009
|
- | ||||||||||||||||||
Steel
Structural
Surface
for
Hatchery
No. 3
|
570,410 | 277,890 | 292,520 |
July
31, 2010
|
December
10, 2008
|
May
2010
|
- | ||||||||||||||||||
Breeding
Farm
and
Steel Structural
Surface
|
1,755,120 | 1,532,790 | 222,330 |
End
of March 2010
|
June
23, 2009
|
December
31,
2009
|
- | ||||||||||||||||||
Acquisition
of 13
Breeder
Farms
|
15,191,891 | 12,139,472 | 3,052,419 |
End
of May 2010
|
- |
Acquired
on
December
24,
2009
|
Expected
to spend $2.49m for renovation
|
||||||||||||||||||
Purchase
of Land Use Right, Building and Facilities:
|
|||||||||||||||||||||||||
Land
Use Rights
|
2,632,657 | 2,632,657 | - | - | - |
Acquired
on
December
26,
2009
|
The
land use rights is for 50 years of a 5.3 hectare (80 mu) and a building
and other facilities within the area
|
||||||||||||||||||
Building
and Facilities
|
292,517 | 292,517 | - | - | - |
Acquired
on
December
26,
2009
|
|||||||||||||||||||
Construction
of Breeding Farm and Equipment
|
2,486,000 | - | 2,486,000 |
Progressively
from May 2010
|
May
2010
|
January
2011
|
- | ||||||||||||||||||
Total
|
$ | 29,428,595 | $ | 21,667,576 | $ | 7,761,019 |
F-40
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
25.
|
Commitments
and contingencies - continued
|
Construction
of Breeding Farm No. 1
On August
15, 2008, PRC Yuhe completed construction work and facilities to set up the
southern farm of breeding farm No 1. On August 30, 2008, PRC Yuhe
purchased 100,000 sets of parent breeders and began to feed. By the end of
December 2008, PRC Yuhe has spent RMB 29 million, approximately equivalent to
$4.5 million, to build breeding farm No 1. The breeding farm can be split
into the southern and the northern regions. The northern farm construction
work and facilities have been set up by the end of February 2010. The
capacity of the northern factory is 130,000 sets of parent
broilers. The residual payment is RMB 6 million, approximately
equivalent to $0.9 million, for the building and facilities; and RMB 4.9
million, approximately equivalent to $0.72 million, in machinery and is
scheduled to be paid progressively from May 2010.
Construction
of Breeding Farm No. 2, 3, 5, 6, and 7
On
December 6, 2008, PRC Yuhe entered into a construction agreement with a
contractor to build and renovate five of its breeding farms for a total
consideration of RMB2.6 million, approximately equivalent to $380,000. The
construction has been completed at the end of October 2009. The
residual scheduled payment is RMB600,000, approximately equivalent to $87,750
and is scheduled to be paid by the end of March 2010.
F-41
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
25.
|
Commitments
and contingencies - continued
|
Construction
of Steel Structural Surface for Hatchery No. 3
On
December 10, 2008, PRC Yuhe entered into a construction agreement with a
contractor to build the steel structure for its hatchery farm No. 3 for a total
consideration of RMB3.9 million, approximately equivalent to $570,410. The
estimated completion date of construction is postponed to May 2010 because of
the cold weather and construction will start once the weather is getting
warm. The residual scheduled payment is RMB2 million, approximately
equivalent to $292,520 and is scheduled to be paid two months after completion
of construction.
Construction
of Breeding Farm and Steel Structural Surface
On June
23, 2009, PRC Yuhe entered into two construction agreements with contractors to
build part of the above breeding farms and construct the steel structure for a
total consideration of RMB 6,112,300, approximately equivalent to $893,980, and
RMB5,887,800, approximately equivalent to $861,140, respectively. The
constructions have been completed as of December 31, 2009. As of
December 31, 2009, the Company has paid RMB5,340,000, approximately equivalent
to $781,020, and RMB5,140,000, approximately equivalent to $751,770,
respectively to these two suppliers. The residual scheduled payments
are RMB772,300, approximately equivalent to $112,960, and RMB747,800,
approximately equivalent to $109,370, and are scheduled to be paid in March
2010.
Acquisition
of 13 Breeder Farms
On
December 24, 2009, PRC Yuhe entered into an agreement to purchase thirteen
breeder farms at a total consideration of RMB103,870,000, approximately
equivalent to $15,191,891. As of December 31, 2009, PRC Yuhe has paid
80% of the total consideration, or RMB 83,000,000, approximately equivalent to
$12,139,472. The remaining balance will be paid within two months after formal
delivery of the farms, expected in early March 2010. The farms cover a total
area of 37 hectares (560 mu), for which PRC Yuhe acquired all the ground
buildings as well as the land use rights for 36 years. The purchase price also
includes in-house breeding facilities which supply feed, water and air to the
parent breeders. PRC Yuhe expects to spend RMB17,000,000, approximately
equivalent to $2,490,000 for renovation.
Purchase
of Land Use Right, Building and Facilities
On
December 26, 2009, PRC Yuhe entered into an agreement with Yejiazhuangzi
Villagers Commission to purchase the land use rights for 50 years of a 5.3
hectare (80 mu) parcel of land for RMB18.0 million, approximately equivalent to
$2,632,657, which was paid at the end of 2009. PRC Yuhe also paid an additional
RMB2 million, approximately equivalent to $292,517 for a building and other
facilities within the area. The construction of this new breeder farm commenced
in February 2010 and is expected to finish by the second quarter of 2010. The
total capital expenditure for construction and equipment is expected to be
approximately RMB17 million, approximately equivalent to
$2,486,000.
F-42
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
25.
|
Commitments
and contingencies - continued
|
Construction
of Breeding Farm No. 28
On March
1, 2010, PRC Yuhe completed construction work and facilities of breeding farm
no. 28. This breeder farm covers an area of 20.6 acres (125 mu) and
has capacity for 130,000 parent breeders.
26.
|
Equipment
Leasing and Rental Arrangement
|
On
November 11, 2008, PRC Yuhe entered into equipment leasing agreement and
property rental agreement, collectively, the “Agreements”, with Shandong
Nongbiao Purina Feed Co., Ltd., “Shandong Nongbiao Purina”. Shandong Nongbiao
Purina will construct a feed production facility on a property leased from PRC
Yuhe and become the exclusive feed supplier for PRC Yuhe. Pursuant to the terms
and conditions of the Agreements, Shandong Nongbiao Purina will lease certain
equipment for feed production from, and install them at the premises owned by
PRC Yuhe. The lease term for both the equipment leasing agreement and property
rental agreement is 10 years. After completion of the feed production facility,
the lease term commenced on July, 2009 when the production
began. Shandong Nongbiao Purina shall pay to PRC Yuhe an annual
rental payment for the leased land, premises and facilities of RMB 1,500,000,
approximately equivalent to $219,390. As at December 31, 2009, rental
payment of $109,695, approximately equivalent to RMB750,000, has been received
from Shandong Nongbiao Purina. The rent payable by Shandong Nongbiao
Purina under the rental agreement will be offset against the prepaid equipment
rental costs of RMB10,000,000, approximately equivalent to
$1,462,290. As at December 31, 2009, Shandong Nongbiao Purina
advanced $1,040,340, approximately equivalent to RMB7,113,000, to PRC Yuhe as
rental payment and was recorded as advances from customers.
In
connection with the execution of the Agreements, Shandong Yuhe Food Group Co.,
Ltd., “Yuhe Group”, a PRC company based in Shandong Province, would be the
guarantor of PRC Yuhe for RMB 4,500,000, approximately equivalent to $658,000,
for the first five years and for RMB 3,000,000, approximately equivalent to
$439,000, for the next five years. No guarantee fee is required according to the
above Agreements.
The
leasing arrangement with Purina is accounted for as operating lease with the
exception of the lease of equipment. The equipment leased to Purina
are accounted for as direct financing lease because the equipment has economic
useful life of 10 years and the term of the equipment lease is for 10
years.
The
following lists the components of the net investment in direct financing as of
December 31:
F-43
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
26.
|
Equipment
Leasing and Rental Arrangement
-continued
|
2009
|
2008
|
|||||||
Minimum
lease payments receivable
|
$ | 544,903 | $ | - | ||||
Less:
Unearned income
|
(162,161 | ) | - | |||||
Net
investment in direct financing lease
|
$ | 382,742 | $ | - |
As of
December 31, 2009, future minimum lease payments to be received for each of the
five succeeding fiscal years are as follows, $0 in 2010 to 2013 and $25,611 in
2015. There were no minimum lease payments to be received in 2010 to
2013 because Purina has advanced $551,379 for the equipment rental as of
December 31, 2009.
There are
no contingent rentals included in income for the years ended December 31, 2009
and 2008.
27.
|
Make
Good Escrow Agreements
|
On March
12, 2008, the Company’s majority stockholder, Mr. Yamamoto, entered into an
escrow agreement with the private placement investors. Mr. Yamamoto will deliver
a certain number of shares of the Company’s common stock owned by him to the
investors pro-rata in accordance with their respective investment amount for no
additional consideration if:
(i) the
Company’s after tax net income for its fiscal year ending on December 31, 2008
is less than $9,000,000 and fiscal year ending on December 31, 2009 is less than
95% of $13,000,000; and
(ii) the
Company’s earnings per share reported in the fiscal year ending on December 31,
2009 is less than $0.74 on a fully diluted basis (the “Low Performance
Events”).
Mr.
Yamamoto has placed an aggregate of 3,359,889 shares of common stock, “Make Good
Shares”, into an escrow account pursuant to the terms of the Make Good Escrow
Agreement by and among the Company, Mr. Yamamoto, the Investors and the escrow
agent named therein. In the event the Company does not achieve the targets in
2008 and 2009, Make Good Shares will be conveyed to the Investors pro-rata in
accordance with their respective investment amount for no additional
consideration. In the event that the foregoing Low Performance Events do not
occur, the Make Good Shares will be transferred to Mr. Yamamoto.
According
to the Consolidated Statements of Income and Comprehensive Income of the Company
in its Form 10-K for the fiscal year ended December 31, 2008 filed by the
Company with the Securities and Exchange Commission on March 31, 2009, the
Company’s After Tax Net Income for the fiscal year ended December 31, 2008 was
reported as $10,524,885, which has exceeded the 2008 Guaranteed After Tax Net
Income, as agreed in the Make Good Escrow Agreements described
below.
F-44
YUHE
INTERNATIONAL, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
27.
|
Make
Good Escrow Agreements -continued
|
On July
31, 2009, Roth Capital instructed the Escrow Agent to release 1,679,992 shares
of common stock, the 2008 Make Good Shares, to Mr. Kunio Yamamoto. In
August, 2009, 1,679,992 shares of the Company’s common stock were released to
Mr. Kunio Yamamoto.
The
Company entered into a separate Make Good Escrow Agreement, dated March 12,
2008, with Mr. Kunio Yamamoto, Interwest Transfer Company, Inc., the “Escrow
Agent”, and HFG International Limited, “HFG”. HFG has executed a Form of
Release to release 235,196 shares of the Company’s common stock to Mr. Kunio
Yamamoto. On or about April 27, 2009, 235,196 shares of the Company’s
common stock were released by HFG to Mr. Kunio Yamamoto.
28.
|
Subsequent
events
|
The
Company evaluated subsequent events through the date the accompanying financial
statements were issued, which was March 31, 2010.
Cashless exercise of
warrants
In March
2010, the Company issued 87,383 of common shares to WLT Brothers Capital, Inc
based on its cashless exercise of 142,816 warrants issued to it.
Due from related
companies
Subsequent
to December 31, 2009, the Company has made payment approximately aggregated to
$2,998,000 (RMB20,500,000) to Weifang Hexing Breeding Co., Ltd., of which
$2,691,000 (RMB18,400,000) had been paid subsequently to the Company’s suppliers
in January and February, 2010. The residue part, $307,000
(RMB2,100,000) has been paid back to the Company by February 2010.
F-45
YUHE
INTERNATIONAL, INC.
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F-46
YUHE
INTERNATIONAL, INC.
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Basis
of Presentation
On March
12, 2008, Yuhe International, Inc. entered into a Share Exchange Agreement with
Bright Stand International Co. Ltd. and its stockholders, pursuant to which Yuhe
International, Inc. acquired all of the issued and outstanding capital stock of
Bright Stand International Co. Ltd. in exchange for a total of 8,626,236 shares
of the Company’s common stock, constituting 56% shares of Yuhe International,
Inc. issued and outstanding common stock at the time of the merger agreement,
$0.001 par value per share.
Yuhe
International, Inc. completed the acquisition of Bright Stand International Co.
Ltd., pursuant to the Merger Agreement, in March 2008. The acquisition was
accounted for as a reverse merger effected by a share exchange, wherein Bright
Stand International Co. Ltd. is considered the acquirer for accounting and
financial reporting purposes.
The
unaudited pro forma consolidated statement of operations reflects the results of
operations of the company had the merger consummated on January 1, 2008. These
pro forma consolidated statements of operations have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the transaction occurred on
the date indicated and are not necessarily indicative of the results that may be
expected in the future.
Due to
the fact that there was not any trading and shareholding relationship between
Yuhe International, Inc. with Bright Stand International Co. Ltd. before the
share exchange, in the opinion of management, no pro forma adjustment directly
attributable to the share exchange contemplated by the Agreement is to be made
to the unaudited pro forma consolidated statements of operations of Yuhe
International, Inc.
F-47
YUHE
INTERNATIONAL, INC.
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Pro forma for the
period from
January 1, 2008 to
January 31, 2008
|
As reported from
February 1, 2008 to
December 31, 2008
|
Pro forma
adjustment
|
2008 Pro forma
Total
|
||||||||||
Net
revenue
|
$
|
1,491,329
|
$
|
34,626,282
|
$
|
$
|
36,117,611
|
||||||
Cost
of revenue
|
(1,337,438
|
)
|
(21,572,722
|
)
|
(22,910,160
|
)
|
|||||||
Gross
profit
|
153,891
|
13,053,560
|
13,207,451
|
||||||||||
Operating
expenses
|
|||||||||||||
Selling
|
(28,997
|
)
|
(425,460
|
)
|
(454,457
|
)
|
|||||||
General
and administrative
|
(122,695
|
)
|
(2,538,590
|
)
|
(2,661,285
|
)
|
|||||||
Bad
debts recovery
|
219,893
|
813,000
|
1,032,893
|
||||||||||
Total
operating income (expenses)
|
68,201
|
|
(2,151,050
|
)
|
(2,082,849
|
)
|
|||||||
Income
from operations
|
222,092
|
10,902,510
|
11,124,602
|
||||||||||
Non-operating
income (expense)
|
|||||||||||||
Interest
income
|
5
|
249,738
|
249,743
|
||||||||||
Other
income
|
5,604
|
96,914
|
102,518
|
||||||||||
Interest
expenses
|
(86,167
|
)
|
(702,573
|
)
|
(788,740
|
)
|
|||||||
Other
expenses
|
-
|
(21,704
|
)
|
(21,704
|
)
|
||||||||
Total
other income (expense)
|
(80,558
|
) |
(377,625
|
) |
(458,183
|
) | |||||||
Net
Income before income tax
|
141,534
|
10,524,885
|
10,666,419
|
||||||||||
Income
Tax
|
-
|
-
|
-
|
||||||||||
Net
income
|
$
|
141,534
|
$
|
10,524,885
|
$
|
$
|
10,666,419
|
||||||
Earnings
per share
|
|||||||||||||
Basic
|
$
|
0.02
|
$
|
0.74
|
$
|
$
|
0.74
|
||||||
Diluted
|
$
|
0.02
|
$
|
0.73
|
$
|
$
|
0.73
|
||||||
Weighted
average shares outstanding
|
|||||||||||||
Basic
|
8,626,318
|
14,233,268
|
14,233,268
|
||||||||||
Diluted
|
8,626,318
|
14,476,504
|
14,476,504
|
F-48
WEIFANG
YUHE POULTRY CO., LTD
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE PERIOD FROM JANUARY 1, 2008 TO JANUARY 31, 2008
(Stated
in US dollars)
Weifang
Yuhe F-1
WEIFANG
YUHE POULTRY CO., LTD
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 2008
TO JANUARY 31, 2008
(Stated
in US dollars)
|
Page
|
|
Condensed
Consolidated Balance Sheet - unaudited
|
F-3
to F-4
|
|
Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss) -
unaudited
|
F-5
|
|
Condensed
Consolidated Statements of Changes in Stockholders’ Equity -
unaudited
|
F-6
|
|
Condensed
Consolidated Statements of Cash Flows - unaudited
|
F-7
to F-8
|
|
Notes
to Condensed Consolidated Financial Statements - unaudited
|
F-9
to F-23
|
Weifang
Yuhe F-2
WEIFANG
YUHE POULTRY CO., LTD
CONDENSED
CONSOLIDATED BALANCE SHEET - unaudited
AS
AT JANUARY 31, 2008
(Stated
in US Dollars)
ASSETS
|
||||
Current
assets
|
||||
Cash
and cash equivalents
|
$
|
1,051,106
|
||
Accounts
receivable
|
1,475
|
|||
Inventories
|
4,624,425
|
|||
Advances
to suppliers
|
305,013
|
|||
Total
current assets
|
$
|
5,982,019
|
||
Deposits
paid
|
1,084,265
|
|||
Other
receivables, net
|
3,001,699
|
|||
Unlisted
investments
|
279,738
|
|||
Plant
and equipment, net
|
15,323,245
|
|||
Intangible
assets, net
|
2,832,869
|
|||
Due
from related companies
|
3,775,469
|
|||
Due
from directors
|
233,037
|
|||
Deferred
expenses
|
602,918
|
|||
Total
assets
|
$
|
33,115,259
|
||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||
Current
liabilities
|
||||
Accounts
payable
|
$
|
4,800,664
|
||
Current
portion of long-term loans
|
4,383,951
|
|||
Loans
payable
|
1,770,862
|
|||
Payroll
and payroll related liabilities
|
545,565
|
|||
Accrued
expenses
|
473,020
|
|||
Advances
from customers
|
209,694
|
|||
Tax
payables
|
125,645
|
|||
Due
to related companies
|
320,913
|
|||
Total
current liabilities
|
$
|
12,630,315
|
See
accompanying notes to condensed consolidated financial statements
Weifang
Yuhe F-3
WEIFANG
YUHE POULTRY CO., LTD
CONDENSED
CONSOLIDATED BALANCE SHEET – unaudited (Continued)
AS
AT JANUARY 31, 2008
(Stated
in US Dollars)
Long-term
liabilities
|
||||
Long-term
loans
|
$
|
6,165,365
|
||
Total
liabilities
|
$
|
18,795,680
|
||
Commitments
and contingencies
|
$
|
-
|
||
Minority
interests
|
$
|
278,766
|
||
STOCKHOLDERS’
EQUITY
|
||||
Registered
capital
|
$
|
3,019,003
|
||
Additional
paid-in capital
|
7,009,523
|
|||
Retained
earnings
|
3,058,878
|
|||
Accumulated
other comprehensive income
|
953,409
|
|||
$
|
14,040,813
|
|||
Total
liabilities and stockholders’ equity
|
$
|
33,115,259
|
See
accompanying notes to condensed consolidated financial statements
Weifang
Yuhe F-4
WEIFANG
YUHE POULTRY CO., LTD
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE
INCOME (LOSS) – unaudited
FOR
THE PERIOD FROM JANUARY 1, 2008 TO JANUARY 31, 2008
(Stated
in US Dollars)
Net
revenues
|
$
|
1,491,329
|
||
Cost
of revenues
|
(1,337,438
|
)
|
||
Gross
profit
|
$
|
153,891
|
||
Operating
expenses:
|
||||
Selling
expenses
|
(28,997
|
)
|
||
General
and administrative expenses
|
(122,695
|
)
|
||
Bad
debts recovery
|
219,893
|
|||
Total
operating income
|
68,201
|
|||
Income
from operations
|
$
|
222,092
|
||
Non-operating
(expenses) income:
|
||||
Other
income
|
5,604
|
|||
Interest
income
|
5
|
|||
Interest
expenses
|
(86,167
|
)
|
||
Total
other (expenses)
|
(80,558
|
)
|
||
Income
before income taxes
|
$
|
141,534
|
||
Income
taxes
|
-
|
|||
Net
income before minority interests
|
$
|
141,534
|
||
Minority
interests (earnings)
|
(73,398
|
)
|
||
Net
income
|
$
|
68,136
|
||
Other
comprehensive income
|
-
|
|||
Foreign
currency translation adjustment
|
201,390
|
|||
Comprehensive
income
|
$
|
269,526
|
See
accompanying notes to condensed consolidated financial statements
Weifang
Yuhe F-5
WEIFANG
YUHE POULTRY CO., LTD
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY –
unaudited
FOR
THE PERIOD FROM JANUARY 1, 2008 TO JANUARY 31, 2008
(Stated
in US Dollars)
Accumulated
|
||||||||||||||||||||
Additional
|
Other
|
|||||||||||||||||||
Registered
|
paid-in
|
Retained
|
Comprehensive
|
|||||||||||||||||
capital
|
capital
|
earnings
|
Income
|
Total
|
||||||||||||||||
Balance,
January 1, 2008
|
$
|
482,713
|
$
|
7,009,523
|
$
|
2,990,742
|
$
|
752,019
|
$
|
11,243,997
|
||||||||||
Net
income
|
-
|
-
|
68,136
|
-
|
68,136
|
|||||||||||||||
Injection
of additional capital from Bright Stand (Note
12)
|
2,536,290
|
-
|
-
|
-
|
2,536,290
|
|||||||||||||||
Foreign
currency translation adjustment
|
-
|
-
|
-
|
201,390
|
201,390
|
|||||||||||||||
Balance,
January 31, 2008
|
$
|
3,019,003
|
$
|
7,009,523
|
$
|
3,058,878
|
$
|
953,409
|
$
|
14,040,813
|
See
accompanying notes to condensed consolidated financial statements
Weifang
Yuhe F-6
WEIFANG
YUHE POULTRY CO., LTD
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR
THE PERIOD FROM JANUARY 1, 2008 TO JANUARY 31, 2008 – unaudited
(Stated
in US Dollars)
Cash
flows from operating activities
|
||||
Net
income
|
$
|
68,136
|
||
Adjustments
to reconcile net income to net cash used in operating
activities
|
||||
Depreciation
|
121,213
|
|||
Amortization
|
5,200
|
|||
Minority
interests
|
73,398
|
|||
Change
in assets and liabilities
|
||||
Advances
to suppliers
|
212,910
|
|||
Prepaid
expenses
|
64,556
|
|||
Deposits
paid
|
111,147
|
|||
Inventories
|
(607,144
|
)
|
||
Deferred
expenses
|
(41,232
|
)
|
||
Accounts
payable
|
(768,683
|
)
|
||
Payroll
and payroll related liabilities
|
(304,784
|
)
|
||
Accrued
expenses
|
104,606
|
|||
Advances
from customers
|
15,465
|
|||
Other
tax payables
|
(9,266
|
)
|
||
Net
cash used in operating activities
|
$
|
(954,478
|
)
|
|
Cash
flows from investing activities
|
||||
Deposits
paid and acquisition of property, plant & equipment
|
$
|
(206,700
|
)
|
|
Decrease
in other receivables
|
(238,310
|
)
|
||
Advances
from related parties receivables
|
2,321,943
|
|||
Net
cash provided by investing activities
|
$
|
1,876,933
|
Weifang
Yuhe F-7
WEIFANG
YUHE POULTRY CO., LTD
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS – unaudited (Continued)
FOR
THE PERIOD FROM JANUARY 1, 2008 TO JANUARY 31, 2008
(Stated
in US Dollars)
Cash
flows from financing activities
|
||||
Repayments
of loan payables
|
$
|
(1,555,807
|
)
|
|
Proceeds
from capital contributions
|
2,536,290
|
|||
Repayment
to related parties
|
(900,140
|
)
|
||
Net
cash provided by financing activities
|
$
|
80,343
|
||
Effect
of foreign currency translation on cash and cash
equivalents
|
853
|
|||
Increase
in cash and cash equivalents
|
1,003,651
|
|||
Cash
and cash equivalents-beginning of period
|
47,455
|
|||
Cash
and cash equivalents-end of period
|
$
|
1,051,106
|
||
Supplementary
cash flow information:
|
||||
Interest
paid in cash
|
$
|
180
|
See
accompanying notes to condensed consolidated financial statements
Weifang
Yuhe F-8
WEIFANG
YUHE POULTRY CO., LTD
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
1. Organization
and principal activities
Weifang
Yuhe Poultry Co., Ltd, “the Company”, was established in Weifang, Shandong of
the People’s Republic of China, the PRC, as a limited company on March 8, 1996.
The Company currently operates through itself and one subsidiary located in
Mainland China: Weifang Taihong Feed Co., Ltd., “Taihong”.
Taihong
was established in Weifang, Shandong of the People’s Republic of China, the PRC,
as a limited company on May 26, 2003. Pursuant to a group reorganization on
September 14, 2007, the Company became the holding company of
Taihong.
The
Company and its subsidiary (hereinafter, collectively referred to as “the
Group”) are engaged in the business of chick and feed production.
2. Summary
of significant accounting policies
(a) Method
of Accounting
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
The Company's functional currency is the Chinese Renminbi; however the
accompanying consolidated financial statements have been translated and
presented in United States Dollars ($).
(b) Principles of
consolidation
The
consolidated financial statements are presented in US Dollars and include the
accounts of the Company, Taihong, a subsidiary which the company has a 56.25%
ownership. All significant inter-company balances and transactions are
eliminated in consolidation.
The
Company acquired its subsidiary on September 14, 2007 through a reorganization
between entities under common control. Accordingly, the transaction was
accounted for similar to a pooling of interests in accordance with SFAS 141
“Business Combination” Appendix D and is presented as if it had occurred at the
beginning of the first period presented. The following table depicts the
identity of the subsidiary:
Weifang
Yuhe F-9
Name of Company
|
Place & date of
Incorporation
|
Attributable Equity
Interest %
|
Registered
Capital
|
||||||||
Weifang
Taihong Feed Co., Ltd.
|
PRC/
May
26 2003
|
56.25
|
$
|
965,379
|
(RMB8,000,000)
|
(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 at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Management makes these estimates using the best
information available at the time the estimates are made; however actual results
could differ materially from those estimates.
Weifang
Yuhe F-10
WEIFANG
YUHE POULTRY CO., LTD
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2. Summary
of significant accounting policies (Continued)
(d) Economic and
political risks
The
Company’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
Company’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
Company’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) Plant
and equipment
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 plant and equipment are as follows:
Buildings
|
20
years
|
Machinery
|
10
years
|
Vehicle
|
5
years
|
Furniture
and equipment
|
3
years
|
The cost
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 income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.
(f) Intangible
assets
Intangible
assets represent land use rights in the PRC. Land use rights are carried at cost
and amortized on a straight-line basis over the period of rights of 50 years
commencing from the date of acquisition of equitable interest. According to the
laws of the PRC, the government owns all of the land in the PRC. Companies or
individual are authorized to possess and use the land only through land usage
rights approved by the PRC government.
Weifang
Yuhe F-11
WEIFANG
YUHE POULTRY CO., LTD
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2. Summary of significant accounting
policies (Continued)
(g) Guarantee
Expense
The
Company accounts for its liability for product guaranteed in accordance with
FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others.” Under FIN 45, the aggregate changes in the liability for accruals
related to product warranties issued during the reporting period must be charged
to expense as incurred.
The
Company guarantees a 98% survival rate of its product by delivering additional
2% of the product. The guarantee expires seven days after delivery. If the
survival rate falls below 96%, the Company provides additional guarantee
compensation to customers. Based on historical experience, the likelihood that
survival rate falls below 96% is remote and therefore no accrued guarantee
liability was recorded at period end. The Company records guarantee expense as
incurred. There was no guarantee expense for the period from January 1, 2008 to
January 31, 2008.
(h) Accounting
for the impairment of long-lived assets
The
long-lived assets held and used by the Company 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 technology or other industry changes.
Determination of recoverability of assets to be held and used is done by
comparing the carrying amount of an asset to future net undiscounted cash flows
to be generated by the assets.
If such
assets are considered to be impaired, the impairment to be recognized is
measured as 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 costs to sell. During the reporting
periods, there was no impairment loss.
(i) Inventories
Inventories
consisting of raw materials, work in progress and finished goods are stated at
lower of cost or net realizable value. The cost of inventories is determined
using weighted average cost method, and includes expenditure incurred in
acquiring the inventories and bringing them to their existing location and
condition. Net realizable value is the estimated selling price in the ordinary
course of business less any applicable selling expenses. Finished goods are
comprised of direct materials, direct labor and an appropriate proportion
of overhead. At each balance sheet date, inventories that are worth less
than cost are written down to their net realizable value, and the difference is
charged to the cost of revenues of that period.
(j) Trade
receivables
Trade
receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An estimate for doubtful accounts is
made when collection of the full amount is no longer probable. Management
adopted an allowance policy which provides an allowance equivalent to 30% gross
amount of accounts receivables due over 6 months and 60% of gross amount of
accounts receivables due over 1 year. Full provision will be made for accounts
receivables due over 2 years. Bad debts are written off as incurred. It is a
common industry practice in the PRC that customers pay in advance before
delivery of the products. As a result, the Company maintains a low level of
trade receivables.
Weifang
Yuhe F-12
WEIFANG
YUHE POULTRY CO., LTD
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2. Summary
of significant accounting policies (Continued)
(k) Cash and
cash equivalents
The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The Company maintains
bank accounts only in the PRC. The Company does not maintain any bank accounts
in the United States of America. Cash deposits in PRC banks are not insured by
any government agency or entity.
(l) Revenue
recognition
Revenue
from sales of the Company's products is recognized when the significant risks
and rewards of ownership have been transferred to the third-party distributor
and larger producers at the time when the products are delivered to and accepted
by them, the sales price is fixed or determinable as stated in the sales
contract, and collection is reasonably assured.
(m) Cost of
revenues
Cost of
revenues consists primarily of material costs, employee compensation,
depreciation and related expenses, which are directly attributable to the
production of products. Write-down of inventory to lower of cost or market is
also recorded in cost of revenues.
(n) Advertising
The Group
expensed all advertising costs as incurred. There were no advertising expenses
for the period from January 1, 2008 to January 31, 2008.
(o) Retirement
benefit plans
The
employees of the Group are members of a state-managed retirement benefit plan
operated by the government of the PRC. The Group is required to contribute a
specified percentage of payroll costs to the retirement benefit scheme to fund
the benefits. The only obligation of the Group with respect to the retirement
benefit plan is to make the specified contributions.
Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statements of income as
incurred. The retirement benefit expenses for the period from January 1, 2008 to
January 31, 2008 were $5,843.
Weifang
Yuhe F-13
WEIFANG
YUHE POULTRY CO., LTD
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary
of significant accounting policies
(Continued)
|
|
(p)
|
Income
tax
|
The
Company accounts for income taxes 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 Company is able to realize
their benefits, or that future realization is uncertain.
The
Company is operating in the PRC, and in accordance with the relevant tax laws
and regulations of PRC, the corporation income tax rate is 25%. However, the
Company is a poultry company, and in accordance with the relevant regulations
regarding the favorable tax treatment for an outstanding poultry company, the
Company is entitled to a tax free treatment until January 31, 2008.
The
corporate income tax for the subsidiary, Weifang Taihong Feed Co., Ltd is
25%.
(q)
|
Shipping
and handling fees
|
Shipping
and handling fees are expensed when incurred. Shipping and handling charges
included in the selling expenses for the period from January 1, 2008 to January
31, 2008 was $5,330.
(r)
|
Minority
interests
|
Minority
interests refer to the 43.75% investment by third parties in the equity of
Taihong and are not held by the Company.
(s)
|
Foreign
currency translation
|
The
accompanying financial statements are presented in United States dollars. The
functional currency of the Company is the Renminbi (RMB). The financial
statements are translated into United States dollars from RMB at year-end
exchange rates as to assets and liabilities and average exchange rates as to
revenues and expenses. Capital accounts are translated at their historical
exchange rates when the capital transactions occurred.
January
31, 2008
|
|
Balance
sheet
|
RMB
7.20180 to US$1.00
|
Statement
of income and comprehensive income
|
RMB
7.25883 to US$1.00
|
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US$ at
the rates used in translation.
Weifang
Yuhe F-14
WEIFANG
YUHE POULTRY CO., LTD
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
|
Summary
of significant accounting policies
(Continued)
|
(t)
|
Comprehensive
income
|
Comprehensive
income 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 are required to be reported in a financial
statement that is presented with the same prominence as other financial
statements. The Company’s current component of comprehensive income is the
foreign currency translation adjustment.
(u)
|
Fair
value of financial
instruments
|
SFAS No.
107, “Disclosures about Fair Value of Financial Instruments” (“SFAS 107”)
requires entities to disclose the fair values of financial instruments except
when it is not practicable to do so. Under SFAS No. 107, it is not practicable
to make this disclosure when the costs of formulating the estimated values
exceed the benefit when considering how meaningful the information would be to
financial statement users.
The fair
values of all assets and liabilities do not differ materially from their
carrying amounts. None of the financial instruments held are derivative
financial instruments and none were acquired or held for trading purposes during
the period for January 1, 2008 to January 31, 2008.
(v)
|
Recent
accounting pronouncements
|
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS No.
141R”). SFAS No. 141R amends SFAS 141 and provides revised guidance for
recognizing and measuring identifiable assets and goodwill acquired, liabilities
assumed, and any noncontrolling interest in the acquiree. It also provides
disclosure requirements to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. It is effective
for fiscal years beginning on or after December 15, 2008 and will be applied
prospectively. The Company is currently evaluating the impact of adopting SFAS
No. 141R on its consolidated financial statements.
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
160, “Noncontrolling Interests in Consolidated Financial Statements — an
amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 requires that ownership
interests in subsidiaries held by parties other than the parent, and the
amount of consolidated net income, be clearly identified, labeled, and presented
in the consolidated financial statements. It also requires once a subsidiary is
deconsolidated, any retained noncontrolling equity investment in the former
subsidiary be initially measured at fair value. Sufficient disclosures are
required to clearly identify and distinguish between the interests of the parent
and the interests of the noncontrolling owners. It is effective for fiscal years
beginning on or after December 15, 2008 and requires retroactive adoption of the
presentation and disclosure requirements for existing minority interests. All
other requirements shall be applied prospectively. The Company is currently
evaluating the impact of adopting SFAS No. 160 on its consolidated financial
statements.
Weifang
Yuhe F-15
WEIFANG
YUHE POULTRY CO., LTD
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
3.
|
Inventories
|
Inventories
consist of the following:
Raw
materials
|
$
|
706,405
|
||
Work
in progress
|
3,870,136
|
|||
Finished
goods
|
47,884
|
|||
$
|
4,624,425
|
4.
|
Other
receivables, net
|
Other
receivables, net consist of the following:
Loan
receivables
|
$
|
3,234,413
|
||
Other
receivables
|
230,459
|
|||
Less:
Allowances
|
(436,173
|
)
|
||
$
|
3,001,699
|
Other
receivables are unsecured, interest free and have no fixed repayment
date.
Recovery
of bad debts of other receivable for the period ended January 31 2008 included
in other income $61,368.
Allowance
is made when collection of the full amount is no longer probable. Management
reviews and adjusts this allowance periodically based on historical experience,
current economic climate as well as its evaluation of the collectibility of
outstanding accounts. The Group evaluates the credit risks of its customers
utilizing historical data and estimates of future performance.
Weifang
Yuhe F-16
WEIFANG
YUHE POULTRY CO., LTD
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
5.
|
Unlisted
investments
|
Unlisted
investments at January 31, 2008 are the 3% investments in Hanting Rural Credit
Cooperative, “Hanting”. It is stated at cost because the Group does not have
significant influence or control over this investment. The management of the
Company has reviewed the investment in Hanting for any impairment and determined
there is no indication that the carrying amount of Hanting may not be
recoverable.
6.
|
Plant
and equipments, net
|
Plant and
equipment consists of the following:
At
cost
|
||||
Buildings
|
$
|
9,849,070
|
||
Machinery
|
5,408,153
|
|||
Motor
vehicles
|
432,291
|
|||
Furniture
and equipment
|
276,570
|
|||
$
|
15,966,084
|
|||
Less:
accumulated depreciation
|
(5,063,219
|
)
|
||
Construction
in progress
|
4,420,380
|
|||
$
|
15,323,245
|
Depreciation
expenses included in the cost of sales during the period from January 1, 2008 to
January 31, 2008 was $83,448, and included in the general and administrative
expenses for the period ended January 31, 2008 was $37,765.
As of
January 31, 2008, buildings and machinery of the Group were pledged as
collateral under certain loan arrangements.
There was
no interest capitalized for the construction in progress during the period from
January 1, 2008 to January 31, 2008.
Weifang
Yuhe F-17
WEIFANG
YUHE POULTRY CO., LTD
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
7.
|
Intangible
assets, net
|
Intangible
assets consist of the following:
Land
use rights, at cost
|
$
|
3,117,798
|
||
Less:
accumulated amortization
|
284,929
|
|||
$
|
2,832,869
|
As of
January 31, 2008, land use rights of the Group were pledged as collateral under
certain loan arrangements.
Amortization
expense included in the cost of revenues during the period from January 1, 2008
to January 31, 2008 was $5,200.
8.
|
Due
from related companies
|
Hefeng
Green Agriculture Co., Ltd, “Hefeng Green ” - Mr. Gao
Zhentao, a director of the Company is also a director of Hefeng
Green
|
$
|
72,263
|
||
Shandong
Yuhe Food Group Co., Ltd, “Yuhe Group” - Mr. Gao Zhentao, a
director of the Company is also a director of Yuhe
Group
|
3,653,930
|
|||
Shandong
Yuhe New Agriculture Academy of Sciences, “Shandong Yuhe” - Mr. Gao
Zhentao, a director of the Company is also a director of
Shandong Yuhe
|
49,251
|
|||
Weifang
Jiaweike Food Co., Ltd, “Weifang Jiaweike” - Mr. Gao Zhentao, a
director of the Company is also a director of Weifang
Jiaweike
|
25
|
|||
$
|
3,775,469
|
The
amounts due from related companies are unsecured, interest free and have no
fixed repayment date.
Weifang
Yuhe F-18
WEIFANG
YUHE POULTRY CO., LTD
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
9.
|
Due
from directors
|
Details
of due from directors are as follows:
Mr.
Tan Yi
|
$
|
79,491
|
||
Mr.
Gao Zhenbo
|
78,091
|
|||
Mr.
Gao Zhentao
|
75,455
|
|||
$
|
233,037
|
The
amounts due from directors are unsecured, interest free and have no fixed
repayment date.
10.
|
Loan
payable
|
Loans
payable are loans from unrelated companies for temporary fund for operation
purposes. They are unsecured, interest free and have no fixed repayment
date.
11.
|
Due
to related companies
|
Weifang
Hexing Breeding Co., Ltd, "Weifang Hexing" - Mr. Gao Zhentao, a
director of the Company is also a director of Weifang
Hexing
|
$
|
301,965
|
||
Shandong
Yuhe Food Group Co., Ltd, "Yuhe Group" - Mr. Gao
Zhentao, a director of the Company is also a director Yuhe
Group
|
18,948
|
|||
$
|
320,913
|
The
amounts due to related companies are unsecured, interest free and have no fixed
repayment date. These loans are used for working capital purposes.
Bright
Stand is the legal and accounting acquirer of the Group. Bright Stand becomes
the sole shareholder of the company after January 31, 2008 business
combination.
Weifang
Yuhe F-19
WEIFANG
YUHE POULTRY CO., LTD
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
12.
|
Registered
capital
|
As of
January 31, 2008, capital contributions paid-up amounted to $3,019,003 (RMB
22,224,004).
Prior to
the effective closing date of the acquisition transaction as discussed in Note
19, Bright Stand International Limited contributed $2,536,290 additional capital
to the Company for working capital purposes.
13.
|
Long-term
liabilities
|
The
long-term liabilities are denominated in Chinese Renminbi and are presented in
US dollars as follows:
Loans
from Nansun Rural Credit, interest rate at 9.22% to 10.51% per
annum, due from Nov 28, 08 to May 17, 10
|
$
|
8,350,383
|
||
Loans
from Shuangyang Rural Credit, interest rate at 9.33% per annum, due
on Oct 12, 08
|
904,625
|
|||
Loans
from Hanting Kaiyuan Rural Credit Cooperative, interest rate at 9.22%
to 13.31% per annum, due from Nov 28, 08 to Jan 10,
09
|
1,015,963
|
|||
Loans
from Hanting Rural Credit Cooperative, interest rate at 8.19% per annum,
due from Nov 8, 09
|
278,345
|
|||
10,549,316
|
||||
Less:
current portion of long-term liabilities
|
(4,383,951
|
)
|
||
6,165,365
|
Future
maturities of long-term loans as at January 31, 2008 are as
follows:
Remainder
of 2008
|
$
|
4,383,951
|
||
2009
|
2,686,040
|
|||
2010
|
3,479,326
|
|||
$
|
10,549,317
|
Weifang
Yuhe F-20
WEIFANG
YUHE POULTRY CO., LTD
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
14.
|
Income
tax
|
The
Company is operating in the PRC, and in accordance with the relevant tax laws
and regulations of PRC, the corporation income tax rate is 25%. However, the
Company is an agricultural company, and in accordance with the relevant
regulations regarding the tax exemption, the Company is tax-exempt as long as it
is registered as an agricultural entity.
Taihong
is operating in the PRC, and in accordance with the relevant tax laws and
regulations of PRC, the corporation income tax rate is 25%.
The Group
uses the asset and liability method, where deferred tax assets and liabilities
are determined based on the expected future tax consequences of temporary
differences between the carrying amounts of assets and liabilities for financial
and income tax reporting purposes. There are no material timing differences and
therefore no deferred tax asset or liability at January 31, 2008
The
provision for income taxes consists of the following:
Current
tax
|
||||
PRC
|
$
|
-
|
||
Deferral
tax provision
|
-
|
|||
$
|
-
|
All of
the Group’s income (loss) before income taxes is from PRC sources. Actual income
tax expenses reported in the consolidated statements of income and comprehensive
income differ from the amounts computed by applying the PRC statutory income tax
rate of 25% to income (loss) before income taxes during the period from January
1, 2008 to January 31, 2008 for the following reasons:
Income
before income taxes
|
$
|
141,534
|
||
Computed
“expected” income tax expense at 25%
|
$
|
35,384
|
||
Tax
effect on net taxable temporary differences
|
(41,942
|
)
|
||
Effect
of cumulative tax losses and tax holiday
|
6,558
|
|||
$
|
-
|
Weifang
Yuhe F-21
WEIFANG
YUHE POULTRY CO., LTD
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
15.
|
Related
parties transactions
|
The
following material transactions with related parties during the years were in
the opinion of the directors, carried out in the ordinary course of business and
on normal commercial terms:
Sales
of goods to a related company
|
$
|
695,851
|
Sales to
Weifang Hexing Breeding Co., Ltd, a related company, during the period from
January 1, 2008 to January 31, 2008.
During
2008, Weifang Jiaweike Food Co., Ltd. was disposed of to the Weifang Hexing
Breeding Co., Ltd, a related company where Mr. Gao Zhentao, a director of
the Company is also the director. (note 5)
16.
|
Significant
concentrations and risk
|
(a)
|
Customer
Concentrations
|
The Group
has the following concentrations of business with each customer constituting
greater than 10% of the Company’s gross sales:
Wang
Jianbo
|
24.89
|
%
|
||
Wei
Yunchao
|
22.10
|
%
|
||
Li
Yubo
|
18.03
|
%
|
The Group
has not experienced any significant difficulty in collecting its accounts
receivable in the past and is not aware of any financial difficulties being
experienced by its major customers.
The Group
has the following concentrations of business with each supplier constituting
greater than 10% of the Company’s gross purchases:
Ma
Suping
|
15.94
|
%
|
||
Lu
Xingzhong
|
10.20
|
%
|
(b)
|
Credit
Risk
|
Financial
instruments that potentially subject the Group to significant concentration of
credit risk consist primarily of cash and cash equivalents. As of January 31,
2008, substantially all of the Group’s cash and cash equivalents were held by
major financial institutions located in the PRC, which management believes are
of high credit quality.
Weifang
Yuhe F-22
WEIFANG
YUHE POULTRY CO., LTD
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
16.
|
Significant
concentrations and risk (Continued)
|
(c)
|
Group’s
operations are in China
|
All of
the Group’s products are produced in China. The Group’s operations are subject
to various political, economic, and other risks and uncertainties inherent in
China. Among other risks, the Group’s operations are subject to the risks of
transfer of funds; domestic and international customs and tariffs; changing
taxation policies; foreign exchange restrictions; and political conditions
and governmental regulations.
17.
|
Business
and geographical segments
|
The
Company’s operations are classified into two principal reportable segments that
provide different products or services. Weifang is engaged in the business
of chick while Taihong is engaged in the business of feed production, in which
most of the product were used internally. Separate management of each
segment is required because each business unit is subject to different
production and technology strategies.
Reportable
Segments
Production
of chick
|
Production
of feeds
|
Total
|
||||||||||
External
revenue
|
1,443,425
|
47,904
|
1,491,329
|
|||||||||
Intersegment
revenue
|
737,602
|
737,602
|
||||||||||
Interest
income
|
5
|
-
|
5
|
|||||||||
Interest
expense
|
(34,819
|
)
|
(51,348
|
)
|
(86,167
|
)
|
||||||
Depreciation
and amortization
|
116,071
|
10,342
|
126,413
|
|||||||||
Net
profit (loss) after tax
|
(26,232
|
)
|
167,766
|
141,534
|
||||||||
Assets
|
||||||||||||
Expenditures
for long-lived assets
|
206,176
|
524
|
206,700
|
Note:
Intersegment revenue of $737,602 was eliminated in consolidation.
Weifang
Yuhe F-23
WEIFANG
YUHE POULTRY CO., LTD
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
18.
|
Commitments
and contingencies
|
Operating
Leases - In the normal course of business, the Company leases the land
for hen house under operating lease agreements. The Company rents land,
primarily for the feeding of the chickens. The operating lease agreements
generally contain renewal options that may be exercised at the Company's
discretion after the completion of the base rental terms. The Company was
obligated under operating leases requiring minimum rentals as
follows:
Up
to January 31,
|
||||
2008
|
$
|
134,319
|
||
2009
|
146,530
|
|||
2010
|
135,049
|
|||
2011
|
77,648
|
|||
2012
|
77,648
|
|||
Thereafter
|
1,444,031
|
|||
Total
minimum lease payments
|
$
|
2,015,225
|
During
the period for January 1, 2008 to January 31, 2008, rent expenses amounted to
$22,432 was recorded as cost of sales.
19.
|
Subsequent
Events
|
In
January 31, 2008, Bright Stand International Limited, Bright Stand, a company
incorporated in the British Virgin Islands, acquired 100% equity ownership
of the Company and 43.75% equity ownership of Taihong for cash
consideration equal to the appraised fair market value of the Company in the
amount of $11,306,522, or RMB 81,450,000, and $312,530, or RMB 2,244,000.
As a result, the Company and Taihong became wholly-owned subsidiaries
of Bright Stand.
Weifang
Yuhe F-24
Exhibit
Index
Exhibit
Number
|
Description
of Document
|
|
3.1
|
Articles
of Incorporation of the registrant as filed with the Secretary of State of
Nevada, as amended to date. [Incorporated by reference to Exhibit 3.1 to
the registrant’s current report on Form 8-K filed on April 10,
2007]
|
|
4.1
|
Registration
Rights Agreement dated March 12, 2008 by and among First Growth Investors,
Inc., and certain investors. [Incorporated by reference to Exhibit 10.4 to
the registrant’s current report on Form 8-K filed on March 17,
2008]
|
|
5.1
|
Opinion
of Thomas G. Kimble & Associates, PC as to the legality of the shares.
[Incorporated by reference to exhibit 5.1 to the registrant’s Registration
Statement on Form S-1 filed on May 12, 2008]
|
|
5.2
|
Opinion
of Long An Law Firm. [Incorporated by reference to exhibit 5.2 to the
registrant’s Registration Statement on Form S-1 filed on May 12,
2008]
|
|
10.1
|
Stock
Purchase Agreement dated November 6, 2007 between First Growth Investors,
Inc. and Halter Financial Investments, L.P. [Incorporated by
reference to Exhibit 10.1 to the registrant’s current report on Form 8-K
filed on November 6, 2007]
|
|
10.2
|
Equity
Transfer Agreement dated March 12, 2008 between First Growth Investors,
Inc. and Kunio Yamamoto. [Incorporated by reference to Exhibit 10.2 to the
registrant’s current report on Form 8-K filed on March 17,
2008]
|
|
10.3
|
Securities
Purchase Agreement dated March 12, 2008 by and among First Growth
Investors, Inc., Bright Stand International Limited, Weifang Yuhe Poultry
Co., Ltd., Kunio Yamamoto and certain investors. [Incorporated by
reference to Exhibit 10.3 to the registrant’s current report on Form 8-K
filed on March 17, 2008]
|
|
10.4
|
Make
Good Escrow Agreement dated March 12, 2008 by and among First Growth
Investors, Inc., Kunio Yamamoto, certain investors, Roth Capital Partners,
LLC and Tri-State Title and Escrow, LLC. [Incorporated by reference to
Exhibit 10.5 to the registrant’s current report on Form 8-K filed on March
17, 2008]
|
|
10.5
|
Holdback
Escrow Agreement dated March 12, 2008 by and among First Growth Investors,
Inc., certain investors, and Tri-State Title and Escrow, LLC.
[Incorporated by reference to Exhibit 10.6 to the registrant’s current
report on Form 8-K filed on March 17, 2008]
|
|
10.6
|
Warrant
dated Mach 12, 2008 issued by First Growth Investors, Inc. to Roth Capital
Partners, LLC [Incorporated by reference to Exhibit 10.7 to the
registrant’s current report on Form 8-K filed on March 17,
2008]
|
10.7
|
Make
Good Escrow Agreement dated March 12, 2008 by and among First Growth
Investors, Inc., Kunio Yamamoto, HFG International, Limited, and Interwest
Transfer Company, Inc. [Incorporated by reference to Exhibit 10.8 to the
registrant’s current report on Form 8-K filed on March 17,
2008]
|
|
10.8
|
Lock-up
Agreement dated March 12, 2008 between Kunio Yamamoto and First Growth
Investors, Inc. [Incorporated by reference to Exhibit 10.9 to the
registrant’s current report on Form 8-K filed on March 17,
2008]
|
|
10.09
|
Labour
Contract dated July 15, 2000 entered into between Weifang Taihong Feed
Co., Ltd. and Gao Aiping. [Incorporated by reference to Exhibit
10.12 to the registrant’s Registration Statement on Form S-1/A filed on
December 19, 2008]
|
|
10.10
|
Labour
Contract dated December 25, 2000 entered into between Weifang Taihong Feed
Co., Ltd. and Wang Jianbo. [Incorporated by reference to
Exhibit 10.13 to the registrant’s Registration Statement on Form S-1/A
filed on December 19, 2008]
|
|
10.11
|
Labour
Contract dated July 10, 2001 entered into between Weifang Yuhe Poultry Co.
Ltd. and Zhao Beijing. [Incorporated by reference to Exhibit
10.14 to the registrant’s Registration Statement on Form S-1/A filed on
December 19, 2008]
|
|
10.12
|
Commitment
to Product Quality and Customer Services Agreement dated February 12, 2004
entered for and on behalf of Weifang Yuhe Poultry Co.
Ltd. [Incorporated by reference to Exhibit 10.15 to the
registrant’s Registration Statement on Form S-1/A filed on December 19,
2008]
|
|
10.13
|
Contract
of land dated April 12, 2005 entered into between Yejiazhuang Village,
Dabucum Village and Weifang Yuhe Poultry Co.,
Ltd. [Incorporated by reference to Exhibit 10.16 to the
registrant’s Registration Statement on Form S-1/A filed on December 19,
2008]
|
|
10.14
|
Lease
Agreement dated June 25, 2005 entered into between Standing Weifang Farm
and Weifang Yuhe Poultry Co., Ltd. [Incorporated by reference
to Exhibit 10.17 to the registrant’s Registration Statement on Form S-1/A
filed on December 19, 2008]
|
10.15
|
Labour
Contract dated July 11, 2005 entered into between Weifang Yuhe Poultry Co.
Ltd. and Ding Wengui. [Incorporated by reference to Exhibit
10.18 to the registrant’s Registration Statement on Form S-1/A filed on
December 19, 2008]
|
|
10.16
|
Labour
Contract dated October 15, 2005 entered into between Weifang Yuhe Poultry
Co. Ltd. and Jiang Yingjun. [Incorporated by reference to
Exhibit 10.19 to the registrant’s Registration Statement on Form S-1/A
filed on December 19, 2008]
|
|
10.17
|
Summary
of loan agreements with Nansun Rural Credit in respect of loan agreement
dated November 28, 2005. [Incorporated by reference to Exhibit
10.20 to the registrant’s Registration Statement on Form S-1/A filed on
December 19, 2008]
|
|
10.18
|
Feed
Purchase Contract dated January 1, 2006 entered into between Weifang
Taihong Feed Co., Ltd. and Weifang Yuhe Poultry Co.,
Ltd. [Incorporated by reference to Exhibit 10.21 to the
registrant’s Registration Statement on Form S-1/A filed on December 19,
2008]
|
|
10.19
|
Labour
Contract dated March 10, 2006 entered into between Weifang Yuhe Poultry
Co., Ltd. and Tan Yi. [Incorporated by reference to Exhibit 10.22 to the
registrant’s Registration Statement on Form S-1/A filed on December 19,
2008]
|
|
10.20
|
Summary
of Loan Agreement dated November 10, 2006 with Hanting Rural Credit
Cooperative. [Incorporated by reference to Exhibit 10.23 to the
registrant’s Registration Statement on Form S-1/A filed on December 19,
2008]
|
|
10.21
|
Summary
of Loan Agreement dated May 12, 2007 with Shuangyang Rural Credit.
[Incorporated by reference to Exhibit 10.24 to the registrant’s
Registration Statement on Form S-1/A filed on December 19,
2008]
|
|
10.22
|
Summary
of Loan Agreement dated July 1, 2007 with Hanting Kaiyuan Rural Credit
Cooperative. [Incorporated by reference to Exhibit 10.25 to the
registrant’s Registration Statement on Form S-1/A filed on December 19,
2008]
|
|
10.23
|
Labour
Contract dated December 1, 1998 entered into between Weifang Yuhe Poultry
Co. Ltd. and Han Chengxiang. [Incorporated by reference to
Exhibit 10.26 to the registrant’s Registration Statement on Form S-1/A
filed on December 19, 2008]
|
|
10.24
|
Labour
Contract dated June 13, 2008 entered into between Yuhe International, Inc.
and Han Chengxiang. [Incorporated by reference to Exhibit 10.27
to the registrant’s Registration Statement on Form S-1/A filed on December
19, 2008]
|
|
10.25
|
Labour
Contract dated June 13, 2008 entered into between Yuhe International, Inc.
and Jiang Yingjun. [Incorporated by reference to Exhibit 10.12 to the
registrant’s Registration Statement on Form S-1/A filed on December 19,
2008]
|
10.26
|
Employment
Agreement dated June 13, 2008 entered into between Yuhe International,
Inc. and Gao Zhentao [Incorporated by reference to Exhibit 10.1 to the
registrant’s current report on Form 8-K filed on June 13,
2008]
|
|
10.27
|
Employment
Agreement dated June 13, 2008 entered into between Yuhe International,
Inc. and Hu Gang [Incorporated by reference to Exhibit 10.2 to the
registrant’s current report on Form 8-K filed on June 13,
2008]
|
|
10.28
|
Supplemental
Feed Purchase Agreement dated August 5, 2008 entered into between Weifang
Taihong Feed Co., Ltd. and Weifang Yuhe Poultry Co.,
Ltd. [Incorporated by reference to Exhibit 10.12 to the
registrant’s Registration Statement on Form S-1/A filed on December 19,
2008]
|
10.29
|
Form
of Stock Option Agreement [Incorporated by reference to Exhibit 10.1 to
the registrant’s quarterly report on Form 10-Q filed on August 14,
2008]
|
|
10.30
|
Summaries
of Oral Loan Agreements as disclosed under section “Transactions with
Related Persons”. [Incorporated by reference to Exhibit 10.33
to the registrant’s Registration Statement on Form S-1/A filed on December
19, 2008]
|
|
10.31
|
Capital
Transfer Agreement dated November 28, 2007. [Incorporated by
reference to Exhibit 10.12 to the registrant’s Registration Statement on
Form S-1/A filed on December 19, 2008]
|
|
10.32
|
Translation
of the Equipment Leasing Agreement dated November 11, 2008 in English.
[Incorporated by reference to Exhibit 99.1 to the registrant’s 8-K filed
on November 21, 2008]
|
|
10.33
|
Translation
of the Tenancy Agreement dated November 11, 2008 in English. [Incorporated
by reference to Exhibit 99.2 to the registrant’s 8-K filed on November 21,
2008]
|
|
14.1
|
Code
of Ethics. [Incorporated by reference to Exhibit 14.1 to the registrant's
2008 10-K filed on March 31, 2009]
|
|
23.1
|
Consent
of Thomas G. Kimble and Associates, PC, included in Exhibit
5.1.[Incorporated by reference to Exhibit 23.2 to the registrant’s
Registration Statement S-1 filed on May 12, 2008]
|
|
23.2
|
Consent
of Long An Law Firm.[Incorporated by reference to Exhibit 23.3 to the
registrant’s Registration Statement on Form S-1 filed on May 12,
2008]
|
|
*24.1
|
Power
of Attorney (included on the signature page of this registration
statement).
|
*31.1
|
Certification
of the Chief Executive Officer pursuant to Rules 13a-14(a) and
15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
*31.2
|
Certification
of the Chief Financial Officer pursuant to Rules 13a-14(a) and
15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
|
*32.1
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
*32.2
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
*
Filed herewith