Attached files
file | filename |
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EX-32.1 - AgFeed Industries, Inc. | v192937_ex32-1.htm |
EX-32.2 - AgFeed Industries, Inc. | v192937_ex32-2.htm |
EX-31.1 - AgFeed Industries, Inc. | v192937_ex31-1.htm |
EX-31.2 - AgFeed Industries, Inc. | v192937_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
x |
Quarterly
report pursuant Section 13 or 15(d) of
the Securities Exchange Act of 1934
|
For the
quarterly period ended June 30, 2010
o |
Transition
report pursuant Section 13 or 15(d) of
the Securities Exchange Act of 1934
|
For the
transition period from ___________ to ___________
001-33674
(Commission
file number)
AGFEED
INDUSTRIES, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
20-2597168
|
|
(State
or other jurisdiction of incorporation
or
organization)
|
(I.R.S.
Employer Identification No.)
|
Rm.
A1001-1002, Tower 16
Hengmao
Int’l Center
333
S. Guangchang Rd.
Nanchang,
Jiangxi Province
China
|
330003
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(86)
0791-6669093
(Registrant’s
telephone number, including area code)
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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such
files). Yes o No o
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
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act..
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Smaller
reporting company o
|
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
On August
9, 2010, 50,046,759 shares of the registrant's common stock were
outstanding.
TABLE
OF CONTENTS
PART
I – FINANCIAL INFORMATION
|
3 | ||||
Item 1.
|
Financial
Statements
|
3 | |||
Item 2.
|
Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
|
20 | |||
Item 3.
|
Quantitative and Qualitative
Disclosures About Market Risk
|
31 | |||
Item 4.
|
Controls and
Procedures
|
32 | |||
Part II.
|
OTHER
INFORMATION
|
32 | |||
Item 1.
|
Legal
Proceedings
|
32 | |||
Item 1A.
|
Risk
Factors
|
33 | |||
Item 2.
|
Unregistered Sales of Equity
Securities and Use of Proceeds
|
33 | |||
Item 3.
|
Defaults Upon Senior
Securities
|
33 | |||
Item 4.
|
(Removed and
Reserved)
|
33 | |||
Item 5.
|
Other
Information
|
33 | |||
Item 6.
|
Exhibits
|
33 | |||
SIGNATURES
|
|
34 |
2
AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements
June
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 24,027,490 | $ | 37,580,154 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $609,980 and
$415,765
|
17,415,553 | 14,397,793 | ||||||
Advances
to suppliers
|
289,829 | 1,173,941 | ||||||
Other
receivables
|
1,820,684 | 2,186,643 | ||||||
Inventory
|
27,287,750 | 23,835,412 | ||||||
Prepaid
expenses
|
1,388,865 | 1,325,150 | ||||||
Debt
issue costs
|
19,785 | 34,706 | ||||||
|
||||||||
Total
current assets
|
72,249,956 | 80,533,799 | ||||||
PROPERTY
AND EQUIPMENT, net
|
33,913,168 | 26,991,851 | ||||||
CONSTRUCTION-IN-PROCESS
|
5,595,137 | 7,615,132 | ||||||
INTANGIBLE
ASSETS, net
|
43,944,086 | 43,808,499 | ||||||
OTHER
ASSETS
|
7,149,532 | 3,998,739 | ||||||
|
||||||||
TOTAL
ASSETS
|
$ | 162,851,879 | $ | 162,948,020 | ||||
|
||||||||
LIABILITIES AND
EQUITY
|
||||||||
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Short-term
loan
|
$ | 4,419,000 | $ | 4,401,000 | ||||
Accounts
payable
|
6,800,705 | 6,162,385 | ||||||
Other
payables
|
2,282,587 | 1,892,858 | ||||||
Unearned
revenue
|
328,855 | 582,266 | ||||||
Accrued
expenses
|
144,092 | 83,649 | ||||||
Accrued
payroll
|
734,515 | 975,485 | ||||||
Tax
and welfare payable
|
472,577 | 396,370 | ||||||
Interest
payable
|
155,614 | 120,419 | ||||||
Convertible
notes, net of discount of $46,561
|
953,439 | - | ||||||
|
||||||||
Total
current liabilities
|
16,291,384 | 14,614,432 | ||||||
|
||||||||
CONVERTIBLE
NOTES, net of debt discount of $81,675
|
- | 918,325 | ||||||
|
||||||||
TOTAL
LIABILITIES
|
16,291,384 | 15,532,757 | ||||||
|
||||||||
COMMITMENTS
AND CONTINGENCIES (Note 10)
|
- | - | ||||||
|
||||||||
EQUITY:
|
||||||||
AgFeed
stockholders' equity:
|
||||||||
Common
stock, $0.001 per share; 75,000,000 shares
authorized; 45,420,558 issued and 45,053,263 outstanding at
June 30, 2010 44,510,558
issued and 44,143,263 outstanding at December 31,
2009
|
45,421 | 44,511 | ||||||
Additional
paid-in capital
|
112,903,436 | 109,281,086 | ||||||
Deferred
compensation
|
(3,086,560 | ) | - | |||||
Other
comprehensive income
|
4,475,896 | 4,176,450 | ||||||
Statutory
reserve
|
5,207,997 | 4,685,115 | ||||||
Treasury
stock (367,295 shares)
|
(1,811,746 | ) | (1,811,746 | ) | ||||
Retained
earnings
|
28,800,347 | 31,210,563 | ||||||
Total
AgFeed stockholders' equity
|
146,534,791 | 147,585,979 | ||||||
Noncontrolling
interest (deficit)
|
25,704 | (170,716 | ) | |||||
Total
equity
|
146,560,495 | 147,415,263 | ||||||
|
||||||||
TOTAL
LIABILITIES AND EQUITY
|
$ | 162,851,879 | $ | 162,948,020 |
The
accompanying notes are an integral part of these consolidated financial
statements.
3
AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
Revenues
|
$ | 37,661,955 | $ | 38,527,770 | $ | 90,521,022 | $ | 71,957,044 | ||||||||
Cost
of goods sold
|
35,102,677 | 33,306,111 | 81,642,462 | 60,931,980 | ||||||||||||
Gross
profit
|
2,559,278 | 5,221,659 | 8,878,560 | 11,025,064 | ||||||||||||
Operating
expenses
|
||||||||||||||||
Selling
expenses
|
983,317 | 999,342 | 2,013,940 | 1,863,209 | ||||||||||||
General
and administrative expenses
|
3,508,696 | 1,960,520 | 7,173,081 | 3,717,692 | ||||||||||||
Total
operating expenses
|
4,492,013 | 2,959,862 | 9,187,021 | 5,580,901 | ||||||||||||
Income
(loss) from operations
|
(1,932,735 | ) | 2,261,797 | (308,461 | ) | 5,444,163 | ||||||||||
Non-operating
income (expense):
|
||||||||||||||||
Other
expense
|
(354,534 | ) | (189,205 | ) | (450,907 | ) | 3,476 | |||||||||
Interest
income
|
38,062 | 52,554 | 86,073 | 113,116 | ||||||||||||
Interest
and financing costs
|
(139,930 | ) | (624,514 | ) | (264,841 | ) | (777,428 | ) | ||||||||
Foreign
currency transaction gain (loss)
|
(34,437 | ) | 5,133 | (20,634 | ) | 3,302 | ||||||||||
Total
non-operating expense
|
(490,839 | ) | (756,032 | ) | (650,309 | ) | (657,534 | ) | ||||||||
Income
(loss) before provision for income taxes
|
(2,423,574 | ) | 1,505,765 | (958,770 | ) | 4,786,629 | ||||||||||
Provision
for income taxes
|
641,139 | 285,958 | 1,094,719 | 501,508 | ||||||||||||
Net
income (loss) including noncontrolling interest
|
(3,064,713 | ) | 1,219,807 | (2,053,489 | ) | 4,285,121 | ||||||||||
Less:
Net income (loss) attributed to noncontrolling interest
|
(109,961 | ) | (6,445 | ) | (166,155 | ) | 40,029 | |||||||||
Net
income (loss) attributed to AgFeed
|
(2,954,752 | ) | 1,226,252 | (1,887,334 | ) | 4,245,092 | ||||||||||
Other
comprehensive income (loss)
|
||||||||||||||||
Foreign
currency translation gain (loss)
|
298,682 | 5,953 | 299,446 | (147,901 | ) | |||||||||||
Comprehensive
Income (loss)
|
$ | (2,656,070 | ) | $ | 1,232,205 | $ | (1,587,888 | ) | $ | 4,097,191 | ||||||
Weighted
average shares outstanding :
|
||||||||||||||||
Basic
|
45,015,351 | 39,549,944 | 44,942,821 | 38,746,009 | ||||||||||||
Diluted
|
45,015,351 | 41,446,344 | 44,942,821 | 39,581,891 | ||||||||||||
Earnings
(loss) per share attributed to AgFeed common stockholders:
|
||||||||||||||||
Basic
|
$ | (0.07 | ) | $ | 0.03 | $ | (0.04 | ) | $ | 0.11 | ||||||
Diluted
|
$ | (0.07 | ) | $ | 0.03 | $ | (0.04 | ) | $ | 0.11 |
The
accompanying notes are an integral part of these consolidated financial
statements.
4
AGFEED
INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Six
Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income (loss) including noncontrolling interest
|
$ | (2,053,489 | ) | $ | 4,285,121 | |||
Adjustments to reconcile net income (loss) including
noncontrolling interest to net cash provided by (used in)
operating activities:
|
||||||||
Depreciation
|
1,575,933 | 1,282,959 | ||||||
Amortization
|
43,410 | 38,779 | ||||||
Loss
on disposal of assets
|
1,321,838 | 524,409 | ||||||
Stock
based compensation
|
150,562 | 282,497 | ||||||
Issuance
of common stock for services
|
751,440 | - | ||||||
Amortization
of debt issuance costs
|
14,921 | 196,348 | ||||||
Amortization
of discount on convertible debt
|
35,114 | 462,073 | ||||||
(Increase)
/ decrease in assets:
|
||||||||
Accounts
receivable
|
(2,945,382 | ) | (5,163,082 | ) | ||||
Other
receivables
|
618,255 | 1,530,631 | ||||||
Inventory
|
(3,340,955 | ) | (1,932,432 | ) | ||||
Advances
to suppliers
|
885,238 | (171,112 | ) | |||||
Prepaid
expenses
|
(59,691 | ) | (186,209 | ) | ||||
Other
assets
|
- | 139,541 | ||||||
Increase
/ (decrease) in current liabilities:
|
||||||||
Accounts
payable
|
610,581 | 1,150,362 | ||||||
Other
payables
|
(137,439 | ) | (2,011,532 | ) | ||||
Unearned
revenue
|
(254,731 | ) | (57,926 | ) | ||||
Accrued
expenses
|
58,106 | 138,378 | ||||||
Accrued
payroll
|
(243,862 | ) | (155,514 | ) | ||||
Tax
and welfare payable
|
74,277 | (182,459 | ) | |||||
Interest
payable
|
35,195 | (36,497 | ) | |||||
|
||||||||
Net
cash provided by (used in) operating activities
|
(2,860,679 | ) | 134,335 | |||||
|
||||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchases/deposits
for property and equipment
|
(10,759,297 | ) | (6,336,942 | ) | ||||
Purchase
of intangible assets
|
- | (35,309 | ) | |||||
Cash
paid for purchase of subsidiaries
|
- | (1,266,374 | ) | |||||
Cash
from the sale of subsidiary
|
- | 307,650 | ||||||
|
||||||||
Net
cash used in investing activities
|
(10,759,297 | ) | (7,330,975 | ) | ||||
|
||||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from the sale of common stock
|
- | 10,000,000 | ||||||
Offering
costs paid
|
- | (1,380,720 | ) | |||||
Proceeds
from short-term loans
|
- | 4,541,500 | ||||||
Capital
contributed by noncontrolling interest holders
|
401,282 | 118,664 | ||||||
Purchase
of noncontrolling interest in majority owed hog farms
|
(406,103 | ) | - | |||||
|
||||||||
Net
cash provided by (used in) financing activities
|
(4,821 | ) | 13,279,444 | |||||
|
||||||||
Effect
of exchange rate changes on cash and cash equivalents
|
72,133 | (10,101 | ) | |||||
|
||||||||
NET
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
|
(13,552,664 | ) | 6,072,703 | |||||
|
||||||||
CASH
& CASH EQUIVALENTS, BEGINNING BALANCE
|
37,580,154 | 24,839,378 | ||||||
|
||||||||
CASH
& CASH EQUIVALENTS, ENDING BALANCE
|
$ | 24,027,490 | $ | 30,912,081 | ||||
|
||||||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Interest
paid
|
$ | 204,969 | $ | 147,982 | ||||
Income
taxes paid
|
$ | 492,843 | $ | 416,012 |
The
accompanying notes are an integral part of these consolidated financial
statements.
5
AGFEED INDUSTRIES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
Note
1 - Organization and Basis of Presentation
The
unaudited consolidated financial statements were prepared by AgFeed Industries,
Inc. pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”). The information furnished herein reflects all
adjustments (consisting of normal recurring accruals and adjustments) which are,
in the opinion of management, necessary to fairly present the operating results
for the respective periods. Certain information and footnote disclosures
normally present in annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America (“US GAAP”) were omitted pursuant to such rules and regulations. These
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and footnotes included in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2009. The results
for the six months ended June 30, 2010 are not necessarily indicative of the
results to be expected for the full year ending December 31, 2010.
Organization and Lines of
Business
AgFeed
Industries, Inc. formerly known as Wallace Mountain Resources Corp.,
(hereinafter referred to as the “Company” or “AgFeed”) was incorporated in the
State of Nevada on March 30, 2005.
The
Company is engaged in the research and development, manufacturing, marketing,
distribution and sale of pre-mix fodder blended feed and feed additives
primarily for use in China's domestic pork husbandry market. The Company
operates production plants in Nanchang, Shanghai, Nanning, Shandong, and Hainan
provinces. The Company sells to distributors and large-scale swine
farms. The Company is also engaged in the business of raising,
breeding and selling hogs for use in China's pork production and hog breeding
markets through two breeder farms and 29 meat hog producing farms located in
Jiangxi, Shanghai, Hainan, Guangxi, and Fujian provinces.
Basis of
Presentation
The
accompanying consolidated financial statements include the accounts of AgFeed
Industries, Inc. and its wholly-owned and majority-owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles US GAAP. The Company’s functional currency is the
Chinese Yuan
Renminbi
(“RMB”); however the accompanying consolidated financial statements have been
translated and presented in United States Dollars ("USD").
Noncontrolling
Interest
In 2008,
the Company purchased interests in 29 producing hog farms and one feed
company ranging from 55% to 100% (The Company subsequently purchased the
noncontrolling interest in certain of these hog farms).
Certain
amounts presented for prior periods previously designated as minority interest
have been reclassified to conform to the current year presentation. Effective
January 1, 2009, the Company adopted Financial Accounting Standards
(“FASB”) Accounting Standards Codification (“ASC”) Topic 810, “Consolidation,”
which established new standards governing the accounting for and reporting of
noncontrolling interests (NCIs) in partially owned consolidated subsidiaries and
the loss of control of subsidiaries. Certain provisions of this standard
indicate, among other things, that NCIs (previously referred to as minority
interests) be treated as a separate component of equity, not as a liability (as
was previously the case), that increases and decreases in the parent’s ownership
interest that leave control intact be treated as equity transactions rather than
as step acquisitions or dilution gains or losses, and that losses of a partially
owned consolidated subsidiary be allocated to the NCI even when such allocation
might result in a deficit balance. This standard also required changes to
certain presentation and disclosure requirements. The provisions of the standard
were applied to all NCIs prospectively, except for the presentation and
disclosure requirements, which were applied retrospectively to all periods
presented.
6
AGFEED INDUSTRIES,
INC.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
The net
income (loss) attributed to the NCI was been separately designated in the
accompanying statements of income and other comprehensive income. Losses
attributable to the NCI in a subsidiary may exceed the NCI’s interests in the
subsidiary’s equity. The excess attributable to the NCI is attributed to those
interests. The NCI shall continue to be attributed its share of losses even if
that attribution results in a deficit NCI balance.
Foreign Currency
Translation
The
accounts of the Company’s Chinese subsidiaries are maintained in RMB and the
accounts of the U.S. parent company are maintained in USD. The accounts of the
Chinese subsidiaries were translated into USD in accordance with Accounting
Standards Codification (“ASC”) Topic 830 “Foreign Currency Matters,” with the
RMB as the functional currency for the Chinese subsidiaries. According to Topic
830, all assets and liabilities were translated at the exchange rate on the
balance sheet date, stockholders’ equity is translated at historical rates and
statement of income items are translated at the weighted average exchange rate
for the period. The resulting translation adjustments are reported under other
comprehensive income in accordance with ASC Topic 220, “Comprehensive Income.”
Gains and losses resulting from the translations of foreign currency
transactions and balances are reflected in the statements of
income.
Note
2 – Summary of Significant Accounting Policies
Use of
Estimates
The
preparation of financial statements in conformity with US GAAP 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 period. Actual results could differ from those
estimates.
Reclassification
Cash and Cash
Equivalents
Cash and
cash equivalents include cash in hand and cash in time deposits, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
Accounts
Receivable
The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves.
Advances to
Suppliers
The
Company makes advances to certain vendors for purchases of material. The
advances are interest free and unsecured.
7
AGFEED INDUSTRIES,
INC.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
Inventory
Inventory
is stated at the lower of cost, as determined by weighted-average method, or
market. Management compares the cost of inventories with their market value, and
an allowance is made for writing down the inventories to their market value, if
lower. Costs of raised animals include proportionate costs of breeding,
including depreciation of the breeding herd, plus the costs of maintenance
through the balance sheet date. Purchased pigs are carried at purchase cost plus
costs of maintenance through the balance sheet date.
Inventory
consisted of the following at June 30, 2010 and December 31, 2009:
June
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(audited)
|
||||||||
Raw
material
|
$ | 7,754,572 | $ | 7,638,999 | ||||
Work
in Process
|
143,833 | 84,494 | ||||||
Finished
Goods - feed
|
922,754 | 460,349 | ||||||
Finished
Goods - hogs
|
18,771,927 | 15,703,127 | ||||||
27,593,086 | 23,886,969 | |||||||
Less:
reserve for obsolescence
|
(305,336 | ) | (51,557 | ) | ||||
$ | 27,287,750 | $ | 23,835,412 |
Property &
Equipment
Property
and equipment are stated at cost. Expenditures for maintenance and repairs are
expensed as incurred; additions, renewals and betterments are capitalized. When
property and equipment are retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the respective accounts, and any
gain or loss is included in operations. Depreciation of property and equipment
is provided using the straight-line method for substantially all assets with
estimated lives as follows:
Office
equipment
|
5
years
|
|
Operating
equipment
|
10 years
|
|
Vehicles
|
5
years
|
|
Swine
for reproduction
|
3.5 years
|
|
Buildings
|
20
years
|
The
following are the details of property and equipment at June 30, 2010 and
December 31, 2009:
June
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(audited)
|
||||||||
Office
equipment
|
$ | 550,125 | $ | 525,991 | ||||
Operating
equipment
|
8,164,330 | 4,655,298 | ||||||
Vehicles
|
950,845 | 871,058 | ||||||
Swines
for reproduction
|
13,410,505 | 13,432,353 | ||||||
Buildings
|
16,129,584 | 11,659,693 | ||||||
Total
|
39,205,389 | 31,144,393 | ||||||
Less
accumulated depreciation
|
(5,292,221 | ) | (4,152,542 | ) | ||||
$ | 33,913,168 | $ | 26,991,851 |
8
AGFEED INDUSTRIES,
INC.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
Construction-in-Process
Construction-in-process
consists of amounts expended for building construction. Once building
construction is completed, the cost accumulated in construction-in-process is
transferred to property and equipment.
Long-Lived
Assets
The
Company applies the provisions of ASC Topic 360, “Property, Plant, and
Equipment,” which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. ASC 360 requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets’ carrying amounts. In that event, a
loss is recognized based on the amount by which the carrying amount exceeds the
fair value of the long-lived assets. Loss on long-lived assets to be disposed of
is determined in a similar manner, except that fair values are reduced for the
cost of disposal. Based on its review, the Company believes that as of June 30,
2010 and December 31, 2009, there was no significant impairment of its
long-lived assets.
Intangible
Assets
The
following are the details of intangible assets at June 30, 2010 and December 31,
2009:
June
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(audited)
|
||||||||
Right
to use land
|
$ | 771,092 | $ | 825,007 | ||||
Customer
list
|
294,600 | 293,400 | ||||||
Computer
software
|
222,732 | 159,894 | ||||||
Intangible
related to hog farm acquisitions
|
42,919,071 | 42,744,247 | ||||||
Total
|
44,207,495 | 44,022,548 | ||||||
Less
Accumulated amortization
|
(263,409 | ) | (214,049 | ) | ||||
Intangibles,
net
|
$ | 43,944,086 | $ | 43,808,499 |
Per the
People's Republic of China's (“PRC”) governmental regulations, the PRC
Government owns all Chinese land. The Company leases land per real estate
contracts with the government of the PRC for periods of 30 to 50 years.
Accordingly, the right to use land for these feed companies is amortized over 50
years or the lease term, if shorter, and the computer software is amortized over
three to nine years. For hog farms, the Company generally signed land leases
with original owners of the farms.
Revenue
Recognition
The
Company's revenue recognition policies are in compliance with SEC Staff
Accounting Bulletin (SAB) 104. Revenue is recognized when services are rendered
to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations of the
Company exist and collectability is reasonably assured. Payments received before
all of the relevant criteria for revenue recognition are satisfied are recorded
as unearned revenue. The Company is not subject to VAT withholdings. The Company
gives volume rebates to certain customers based on volume achieved. The Company
accrues sales rebates based on actual sales volume.
9
AGFEED INDUSTRIES,
INC.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
Advertising
Costs
The
Company expenses the cost of advertising as incurred or, as appropriate, the
first time the advertising takes place. Advertising costs for the three and six
months ended June 30, 2010 and 2009 were not significant.
Research and
Development
The
Company expenses its research and development costs as incurred. Research and
development costs for the three and six months ended June 30, 2010 and 2009 were
not significant.
Stock-Based
Compensation
The
Company records stock-based compensation in accordance with ASC Topic 718,
“Compensation – Stock Compensation.” ASC 718 requires companies to measure
compensation cost for stock-based employee compensation at fair value at the
grant date and recognize the expense over the employee’s requisite service
period. The Company recognizes in the statement of operations the grant-date
fair value of stock options and other equity-based compensation issued to
employees and non-employees. There were 210,000 options outstanding as of June
30, 2010.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC Topic 740, “Income
Taxes.” ASC 740 requires a company to use the asset and liability method of
accounting for income taxes, whereby deferred tax assets are recognized for
deductible temporary differences, and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion, or all of, the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Under ASC
740, a tax position is recognized as a benefit only if it is “more likely than
not” that the tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination.
For tax positions not meeting the “more likely than not” test, no tax benefit is
recorded. The adoption had no effect on the Company’s consolidated financial
statements.
Foreign Currency
Transactions and Comprehensive Income
US GAAP
requires that recognized revenue, expenses, gains and losses be included in net
income. Certain statements, however, require entities to report specific changes
in assets and liabilities, such as gain or loss on foreign currency translation,
as a separate component of the equity section of the balance sheet. Such items,
along with net income, are components of comprehensive income. The functional
currency of the Company’s Chinese subsidiaries is the RMB. The unit of Renminbi
is in Yuan. Translation gains are classified as an item of other comprehensive
income in the stockholders’ equity section of the consolidated balance
sheet.
Basic and Diluted Earnings
(Loss) Per Share
Earnings
per share is calculated in accordance with the ASC Topic 260, “Earnings Per
Share.” Basic earnings per share is based upon the weighted average number of
common shares outstanding. Diluted earnings per share is based on the assumption
that all dilutive convertible shares and stock warrants were converted or
exercised. Dilution is computed by applying the treasury stock method. Under
this method, warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the
period.
10
AGFEED INDUSTRIES,
INC.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
The
following is a reconciliation of the number of shares (denominator) used in the
basic and diluted earnings (loss) per share computations for the three and six
months ended June 30, 2010 and 2009:
Three
months ended June 30,
|
2010
|
2009
|
||||||||||||||
Per
Share
|
Per
Share
|
|||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||
Basic
earnings (loss) per share
|
45,015,351 | $ | (0.07 | ) | 39,549,994 | $ | 0.03 | |||||||||
Effect
of dilutive stock options and warrants
|
- | - | 1,896,400 | - | ||||||||||||
Diluted
earnings (loss) per share
|
45,015,351 | $ | (0.07 | ) | 41,446,344 | $ | 0.03 |
Six
months ended June 30,
|
2010
|
2009
|
||||||||||||||
Per
Share
|
Per
Share
|
|||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||
Basic
earnings (loss) per share
|
44,942,821 | $ | (0.04 | ) | 38,746,009 | $ | 0.11 | |||||||||
Effect
of dilutive stock options and warrants
|
- | - | 835,882 | - | ||||||||||||
Diluted
earnings (loss) per share
|
44,942,821 | $ | (0.04 | ) | 39,581,891 | $ | 0.11 |
Statement of Cash
Flows
In
accordance ASC Topic 230, “Statement of Cash Flows,” cash flows from the
Company’s operations are calculated based upon the local currencies using the
average translation rates. As a result, amounts related to assets and
liabilities reported on the consolidated statements of cash flows will not
necessarily agree with changes in the corresponding balances on the consolidated
balance sheets.
Segment
Reporting
ASC Topic
280, “Segment Report,” requires use of the “management approach” model for
segment reporting. The management approach model is based on the way a company’s
management organizes segments within the company for making operating decisions
and assessing performance. The Company determined it has two
reportable segments (See Note 9). The Company had previously reported
its feed operations as three separate segments since the three operations were
located in different Provinces. The Company determined its feed
operations should be reported as one segment.
11
AGFEED INDUSTRIES,
INC.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
Fair Value of Financial
Instruments
For
certain of the Company’s financial instruments, including cash and cash
equivalents, restricted cash, accounts receivable, advances to suppliers,
accounts payable, accrued liabilities and short-term debt, the carrying amounts
approximate their fair values due to their short maturities. In addition, the
Company has long-term debt with financial institutions. The carrying amounts of
the line of credit and other long-term liabilities approximate their fair values
based on current rates of interest for instruments with similar
characteristics.
|
·
|
Level
1 inputs to the valuation methodology are quoted prices for identical
assets or liabilities in active
markets.
|
·
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
·
|
Level
3 inputs to the valuation methodology are unobservable and significant to
the fair value measurement.
|
The
Company analyzes all financial instruments with features of both liabilities and
equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC
815.
As of
June 30, 2010 and December 31, 2009, the Company did not identify any assets and
liabilities that are required to be presented on the balance sheet at fair
value.
On July
1, 2009, the Company adopted Accounting Standards Update (“ASU”) No. 2009-01,
“Topic 105 - Generally Accepted Accounting Principles - amendments based on
Statement of Financial Accounting Standards No. 168, “The FASB Accounting
Standards Codification™ and the Hierarchy of Generally Accepted Accounting
Principles” (“ASU No. 2009-01”). ASU No. 2009-01 re-defines authoritative GAAP
for nongovernmental entities to be only comprised of the FASB Accounting
Standards Codification™ (“Codification”) and, for SEC registrants, guidance
issued by the SEC. The Codification is a reorganization and compilation of all
then-existing authoritative GAAP for nongovernmental entities, except for
guidance issued by the SEC. The Codification is amended to effect non-SEC
changes to authoritative GAAP. Adoption of ASU No. 2009-01 only changed the
referencing convention of GAAP in Notes to the Consolidated Financial
Statements.
On
February 25, 2010, the FASB issued ASU 2010-09 Subsequent Events Topic 855
“Amendments to Certain Recognition and Disclosure Requirements,” effective
immediately. The amendments in the ASU remove the requirement for an SEC filer
to disclose a date through which subsequent events have been evaluated in both
issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of US GAAP. The FASB believes these amendments remove
potential conflicts with the SEC’s literature. The adoption of this ASU did not
have a material impact on the Company’s consolidated financial
statements.
On March
5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815
“Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the
guidance within the derivative literature that exempts certain credit related
features from analysis as potential embedded derivatives requiring separate
accounting. The ASU specifies that an embedded credit derivative feature related
to the transfer of credit risk that is only in the form of subordination of one
financial instrument to another is not subject to bifurcation from a host
contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives —
Recognition. All other embedded credit derivative features should be analyzed to
determine whether their economic characteristics and risks are “clearly and
closely related” to the economic characteristics and risks of the host contract
and whether bifurcation is required. The ASU is effective for the Company on
July 1, 2010. Early adoption is permitted. The adoption of this ASU will not
have a material impact on the Company’s consolidated financial
statements.
12
AGFEED INDUSTRIES,
INC.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
In April
2010, the FASB codified the consensus reached in Emerging Issues Task Force
Issue No. 08-09, “Milestone Method of Revenue Recognition.” FASB ASU
No. 2010-17 provides guidance on defining a milestone and determining when
it may be appropriate to apply the milestone method of revenue recognition for
research and development transactions. FASB ASU No. 2010-17 is
effective for fiscal years beginning on or after June 15, 2010, and is
effective on a prospective basis for milestones achieved after the adoption
date. The Company does not expect this ASU will have a material impact on
its financial position or results of operations when it adopts this update on
January 1, 2011.
Note
3 – Convertible Notes and Warrants
On
February 25, 2008, the Company entered into a Securities Purchase Agreement with
Apollo Asia Opportunity Master Fund, L.P., Jabcap Multi-Strategy Master Fund
Limited, J-Invest Ltd., and Deutsche Bank AG London Branch (collectively the
“Investors”) in connection with a private placement providing for, among other
things, the issuance of senior convertible notes (the “Notes”) for $19 million
and warrants (the “Warrants”) to purchase up to 380,000 shares of the Company’s
common stock $0.001 par value per share. The Notes mature on February 25, 2011,
bear interest at 7% and are convertible into shares of the Company’s common
stock at an initial conversion price of $10.00 per share. The conversion price
is subject to a “weighted average ratchet” anti-dilution adjustment. The
conversion price is also subject to adjustment on a proportional basis, to the
extent that the Company’s audited net income for the fiscal years ending 2008
and 2009 is less than $30 million and $40 million, respectively; subject to a
per share floor price of $5.00. Due to the Company not generating $30
million net income for the year ended December 31, 2008, the conversion price on
the Notes was reduced to $5.00. Due to the re-pricing of the conversion price,
the Company recorded financing cost of $267,748 during the year ended December
31, 2008 which represented the difference between the fair value of the
conversion feature at a $5.00 conversion price and the original $10.00
conversion price. The fair value was determined by using the Black-Scholes
pricing model with the following assumptions: expected life of 2.2 years, a risk
free interest rate of 2.0%, a dividend yield of 0% and volatility of
102%.
The Notes
impose penalties on the Company for any failure to timely deliver any shares of
its common stock issuable upon conversion.
In
connection with the issuance of the Notes and the Warrants issued to the
Investors on February 25, 2008, the Company paid $1,716,666 in debt issuance
cost which is amortized over the life of the Notes. For the three and six months
ended June 30, 2010 and 2009, the Company amortized $7,502 and $14,921 and
$168,155 and $196,348, respectively, of the aforesaid issuance costs as interest
and financing costs in the accompanying consolidated statements of
operations.
The Notes
contain certain limitations on conversion. For example, they provide no
conversion may be made if, after giving effect to the conversion, an Investor
would own over 9.99% of the Company’s outstanding shares of common stock. In
addition, the Notes provide no conversion may be made if the conversion would
cause the Company to breach of its obligations under the rules and regulations
of the Nasdaq Global Market, unless the Company obtains stockholder approval for
such issuances as required by such rules and regulations.
The
Warrants are immediately exercisable, expire on February 25, 2011 and entitle
their holders to purchase up to $3,800,000 of shares of common stock at an
initial exercise price of $10.00 per share.
The
exercise price of the Warrants is subject to a “weighted average ratchet”
anti-dilution adjustment. The exercise price is also subject to adjustment, on a
proportional basis, to the extent that the Company’s audited net income for the
fiscal years ending 2008 and 2009 is less than $30 million and $40 million,
respectively; subject to a per share floor price of $5.00. Due to the Company
not generating $30 million net income for the year ended December 31, 2008, the
exercise price on the Warrants was reduced to $5.00. Due to the re-pricing of
the exercise price, the Company recorded financing cost of $22,782 in 2008 which
represented the difference between the fair value of the $5.00 exercise price
and the original $10.00 exercise price. The fair value was determined by using
the Black-Scholes pricing model with the following assumptions: expected life of
2.2 years, a risk free interest rate of 2.0%, a dividend yield of 0% and
volatility of 102%.
13
AGFEED INDUSTRIES,
INC.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
The
Warrants contain certain limitations on exercise. For example, they provide that
no exercise may be made if, after giving effect to the exercise, an Investor
would own over 9.99% of the Company’s outstanding shares of common stock. In
addition, the Warrants provide that no exercise may be made if it would cause
the Company to be in breach of its obligations under the rules and regulations
of the Nasdaq Global Market, unless the Company obtains stockholder approval for
such issuances as required by such rules and regulations.
The
Warrants granted to the Investor on February 25, 2008 and conversion feature in
the above Notes are not considered derivative instruments that need to be
bifurcated from the original security since the Warrants and the conversion
price of the Notes have a floor of $5.00, which means the Company can determine
the maximum shares that could be issued upon conversion. The Company determined
the fair value of the detachable warrants issued in connection with the Notes to
be $1,269,442, using the Black-Scholes option pricing model and the following
assumptions: expected life of 1 year, a risk free interest rate
of 2.10%, a dividend yield of 0% and volatility of 70%. In addition,
the Company determined the value of the beneficial conversion feature to be
$2,770,442. The combined total discount for the Notes is $4,039,885 and is
being amortized over the term of the Notes. For the three and six months ended
June 30, 2010 and 2009, the Company amortized $17,654 and $34,114 and $395,724
and $462,072, respectively, of the aforesaid discounts as interest and financing
costs in the accompanying consolidated statements of operations.
During
the years ended December 31, 2009 and 2008, $2,800,000 and $15,200,000,
respectively, of the Notes were converted into 560,000 and 1,520,000,
respectively, shares of common stock.
Note
4 – Short-Term Loans
Short
term loans at June 30, 2010 and December 31, 2009 are follows:
June
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(audited)
|
||||||||
Short
term bank loan payable to Shanghai Pudong Development Bank. The
loan accrues interest at 5.84%. The note was renewed in May
2010 and is due May 4, 2011. The loan is collateralized by
buildings and land use
|
$ | 4,419,000 | $ | 4,401,000 |
Note
5 – Stockholders’ Equity
Common
Stock
On
January 4, 2010, the Company approved grants of 760,000 shares of restricted
stock to certain officers, directors and key employees. The restricted
stock awards have vesting schedules ranging from 1 to 3 years. The
value of the awards granted was $3,838,000 which was calculated using the fair
market value of the Company’s stock price at the date of grant. This
amount is being expensed over the vesting period as the restrictions
lapse. The expense recognized during the three and six months ended
June 30, 2010 was $375,720 and $751,440, respectively. The amount
that has not been expensed is shown as deferred compensation as a contra-equity
account in the accompanying consolidated balance sheet.
On April
23, 2010, the Company issued 150,000 shares of its common stock to Southridge
for Southridge’s surrender of its existing warrant to purchase 400,000 shares of
the Company’s common stock. The warrant was subsequently cancelled by
the Company. The warrant and common stock issued to Southridge were
related to equity financing; therefore the charge related to the value of these
equity instruments was recorded to additional paid-in capital.
14
AGFEED INDUSTRIES,
INC.
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
Equity Credit
Agreement
On
September 9, 2009, the Company entered into an Equity Credit Agreement with
Southridge Partners II, LP (“Southridge”), which was amended and restated as of
November 9, 2009, providing for, among other things, the issuance of shares of
its common stock at any time and from time to time during the next two years for
gross proceeds of up to $50,000,000. In connection with the closing of the
transaction, the Company also issued Southridge a warrant to purchase an
additional 400,000 shares of its common stock during a five year period at an
exercise price of $5.75 per share. The fair value of the warrant was
charged to additional paid in capital as it was issued in connection with an
equity instrument. As
described above, Southridge surrendered the warrant to the Company in April
2010.
Note
6 – Employee Common Welfare
Note
7 – Statutory Common Welfare Fund
As
stipulated by the Company Law of the PRC, net income after taxation can only be
distributed as dividends after appropriation has been made for the
following:
i.
|
Making
up cumulative prior years’ losses, if any;
|
|
ii.
|
Allocations
to the “Statutory surplus reserve” of at least 10% of income after tax, as
determined under PRC accounting rules and regulations, until the fund
amounts to 50% of the Company’s registered capital;
|
|
iii.
|
Allocations
of 5-10% of income after tax, as determined under PRC accounting rules and
regulations, to the Company’s “Statutory common welfare fund”, which is
established for the purpose of providing employee facilities and other
collective benefits to the Company’s employees; and
|
|
iv.
|
Allocations
to the discretionary surplus reserve, if approved in the stockholders’
general meeting.
|
Pursuant
to the new Corporate Law effective on January 1, 2006, there is now only one
"Statutory surplus reserve" requirement. The reserve is 10% of income after tax,
not to exceed 50% of registered capital.
The
Company appropriated $522,882 and $602,388 as reserve for the statutory surplus
reserve and welfare fund for the six months ended June 30, 2010 and 2009,
respectively.
15
AGFEED
INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
Note
8 – Stock Options and Warrants
Stock
Options
Following
is a summary of stock option activity:
Options
outstanding
|
Weighted
Average Exercise Price
|
Weighted
average remaining contractual life
|
Aggregate
Intrinsic Value
|
|||||||||||||
Outstanding,
December 31, 2009
|
210,000 | $ | 8.42 | 3.74 | $ | 51,000 | ||||||||||
Granted
|
- | - | ||||||||||||||
Forfeited
|
- | - | ||||||||||||||
Exercised
|
- | - | ||||||||||||||
Outstanding,
June 30, 2010
|
210,000 | $ | 8.42 | 3.24 | $ | - | ||||||||||
Exercisable,
June 30, 2010
|
53,332 | $ | 9.20 | 3.04 | $ | - |
Number
of
Options
|
Exercise
Price
|
|||||
30,000 | $ | 3.30 | ||||
20,000 | $ | 8.85 | ||||
160,000 | $ | 9.32 | ||||
210,000 |
Warrants
Following
is a summary of the warrant activity:
Warrants
outstanding
|
Weighted
Average Exercise Price
|
Weighted
average remaining contractual life
|
Aggregate
Intrinsic Value
|
|||||||||||||
Outstanding,
December 31, 2009
|
2,607,635 | $ | 4.72 | 3.61 | $ | 2,142,218 | ||||||||||
Granted
|
- | - | ||||||||||||||
Forfeited/canceled
|
(403,200 | ) | $ | 5.74 | ||||||||||||
Exercised
|
- | - | ||||||||||||||
Outstanding,
June 30, 2010
|
2,204,435 | $ | 4.53 | 2.92 | $ | 247,250 | ||||||||||
Exercisable,
June 30, 2010
|
2,204,435 | $ | 4.53 | 2.92 | $ | 247,250 |
16
AGFEED
INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
The
exercise price for warrants outstanding at June 30, 2010 is as
follows:
Number
of
Warrants
|
Exercise
Price
|
|||||
575,000 | $ | 2.50 | ||||
1,409,435 | $ | 4.50 | ||||
220,000 | $ | 10.00 | ||||
2,204,435 |
The
Company’s predominant businesses are the research and development, manufacture,
marketing, distribution, and sale of pre-mix, concentrates and complete feeds
and feed additives primarily for use in China’s domestic pork husbandry market
and the raising, breeding, and selling of pigs. The Company operates
in two segments: animal feed nutrition and hog
production.
The
Company’s feed company in Shanghai is located in the Qingcun town, Fengxian
district, Shanghai and sells its products to 658 customers, consisting of 433
distributors and 225 large scale pig farms. Its feed company in Guangxi is
located in Coastal Industrial Park, Liangqin district, Nanning city, Guangxi
Province and sells its products to 713 customers, consisting of 485 distributors
and 228 large scale pig farms. Its feed company in Nanchang is located in Chang
Bei District Industrial Park, in Nanchang, Jiangxi province and sells its
products to 710 customers, consisting of 490 distributors and 220 large scale
pig farms. The hog farms are engaged mainly in raising, breeding, and sale of
pigs all over the country and are located in the PRC provinces of Jiangxi,
Shanghai, Hainan, Guangxi and Fujian.
17
AGFEED
INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
The following tables summarize segment
information for the three and six months ended June 30, 2010 and 2009:
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues
from unrelated entities
|
||||||||||||||||
Animal
feed nutrition
|
$ | 26,369,201 | $ | 11,136,517 | $ | 50,658,950 | $ | 21,249,773 | ||||||||
Hog
production
|
11,292,754 | 27,391,253 | 39,862,072 | 50,707,271 | ||||||||||||
$ | 37,661,955 | $ | 38,527,770 | $ | 90,521,022 | $ | 71,957,044 | |||||||||
Intersegment
revenues
|
||||||||||||||||
Animal
feed nutrition
|
$ | 1,721,014 | $ | 3,775,765 | $ | 5,490,936 | $ | 6,446,171 | ||||||||
Hog
production
|
1,267,008 | 230,593 | 1,784,139 | 318,855 | ||||||||||||
$ | 2,988,022 | $ | 4,006,358 | $ | 7,275,075 | $ | 6,765,026 | |||||||||
Total
revenues
|
||||||||||||||||
Animal
feed nutrition
|
$ | 28,090,215 | $ | 14,912,282 | $ | 56,149,886 | $ | 27,695,944 | ||||||||
Hog
production
|
12,559,762 | 27,621,846 | 41,646,211 | 51,026,126 | ||||||||||||
Less
Intersegment revenues
|
(2,988,022 | ) | (4,006,358 | ) | (7,275,075 | ) | (6,765,026 | ) | ||||||||
$ | 37,661,955 | $ | 38,527,770 | $ | 90,521,022 | $ | 71,957,044 | |||||||||
Gross
profit
|
||||||||||||||||
Animal
feed nutrition
|
$ | 4,768,663 | $ | 3,102,415 | $ | 9,232,737 | $ | 5,687,358 | ||||||||
Hog
production
|
(2,209,385 | ) | 2,119,244 | (354,177 | ) | 5,337,706 | ||||||||||
Holding
company
|
- | - | - | - | ||||||||||||
$ | 2,559,278 | $ | 5,221,659 | $ | 8,878,560 | $ | 11,025,064 | |||||||||
Income
(loss) from operations
|
||||||||||||||||
Animal
feed nutrition
|
$ | 2,962,810 | $ | 1,738,516 | $ | 5,630,163 | $ | 3,126,147 | ||||||||
Hog
production
|
(3,921,133 | ) | 1,026,823 | (3,695,323 | ) | 3,186,452 | ||||||||||
Holding
company
|
(974,412 | ) | (503,542 | ) | (2,243,301 | ) | (868,436 | ) | ||||||||
$ | (1,932,735 | ) | $ | 2,261,797 | $ | (308,461 | ) | $ | 5,444,163 | |||||||
Interest
income
|
||||||||||||||||
Animal
feed nutrition
|
$ | 22,738 | $ | 17,111 | $ | 56,181 | $ | 48,859 | ||||||||
Hog
production
|
10,680 | 5,277 | 17,270 | 10,313 | ||||||||||||
Holding
company
|
4,644 | 30,166 | 12,622 | 53,944 | ||||||||||||
$ | 38,062 | $ | 52,554 | $ | 86,073 | $ | 113,116 | |||||||||
Interest
and financing costs
|
||||||||||||||||
Animal
feed nutrition
|
$ | 97,079 | $ | 15,359 | $ | 179,611 | $ | 15,359 | ||||||||
Hog
production
|
- | 7,145 | - | 7,145 | ||||||||||||
Holding
company
|
42,851 | 602,010 | 85,230 | 754,924 | ||||||||||||
$ | 139,930 | $ | 624,514 | $ | 264,841 | $ | 777,428 | |||||||||
Income
tax expense
|
||||||||||||||||
Animal
feed nutrition
|
$ | 641,139 | $ | 285,958 | $ | 1,094,719 | $ | 501,508 | ||||||||
Hog
production
|
- | - | - | - | ||||||||||||
Holding
Company
|
- | - | - | - | ||||||||||||
$ | 641,139 | $ | 285,958 | $ | 1,094,719 | $ | 501,508 | |||||||||
Net
income (loss)
|
||||||||||||||||
Animal
feed nutrition
|
$ | 2,264,097 | $ | 1,450,299 | $ | 4,437,740 | $ | 2,932,699 | ||||||||
Hog
production
|
(4,206,230 | ) | 844,788 | (4,009,165 | ) | 2,875,117 | ||||||||||
Holding
company
|
(1,012,619 | ) | (1,068,835 | ) | (2,315,909 | ) | (1,562,724 | ) | ||||||||
$ | (2,954,752 | ) | $ | 1,226,252 | $ | (1,887,334 | ) | $ | 4,245,092 | |||||||
Provision
for depreciation
|
||||||||||||||||
Animal
feed nutrition
|
$ | 112,394 | $ | 132,798 | $ | 219,436 | $ | 169,059 | ||||||||
Hog
production
|
651,640 | 539,455 | 1,356,497 | 1,113,900 | ||||||||||||
$ | 764,034 | $ | 672,253 | $ | 1,575,933 | $ | 1,282,959 |
18
AGFEED
INDUSTRIES, INC. AND
SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(unaudited)
As
of
|
As
of
|
|||||||
June
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Total
assets
|
||||||||
Animal
feed nutrition
|
$ | 39,715,595 | $ | 38,142,821 | ||||
Hog
production
|
115,296,223 | 110,718,199 | ||||||
Holding
company
|
7,840,061 | 14,087,000 | ||||||
$ | 162,851,879 | $ | 162,948,020 | |||||
Intangible
assets
|
||||||||
Animal
feed nutrition
|
$ | 3,357,120 | $ | 3,419,141 | ||||
Hog
production
|
40,586,966 | 40,389,358 | ||||||
Holding
company
|
- | - | ||||||
$ | 43,944,086 | $ | 43,808,499 |
Note
10 – Commitments
At June
30, 2010, the Company had commitments to expend approximately $1,254,000 for
construction in process.
Note
11 – Acquisition and Dispositions
During
the six months ended June 30, 2010, the Company purchased the non-controlling
interest of 10% and 20% in two hog farms for $230,063 and $176,040,
respectively. As a result of the purchase of the non-controlling
interest, the excess of the purchase price over the carrying value of the
non-controlling interest of $219,158 and $146,144, respectively, was recorded
against additional paid in capital.
Note
12 – Subsequent Events
During
July and August 2010, the Company issued 4,993,496 shares of its common stock to
Southridge pursuant to the Equity Credit Agreement. The Company
received aggregate gross proceeds of $13,000,000 which will be used for general
corporate purposes, including to finance a portion of the purchase price for the
potential acquisition of M2P2, LLC. Following these transactions, the
Company may from time to time sell to Southridge shares of its common stock for
aggregate proceeds of $37,000,000.
19
CAUTIONARY
STATEMENT FOR FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). We have based these forward-looking
statements on our current expectations and projections about future events, and
they are applicable on as of the dates of such statement. These
forward-looking statements are subject to known and unknown risks, uncertainties
and assumptions about us that may cause our actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“could,” “would,” “expect,” “plan,” anticipate,” believe,” estimate,” continue,”
or the negative of such terms or other similar expressions. Factors
that might cause or contribute to such a discrepancy include, but are not
limited to, those listed under the heading “Risk Factors” and those
listed in our other SEC filings. You should not put undue reliance on
any forward-looking statements. These statements speak only as of the
date of this Quarterly Report on Form 10-Q, even if subsequently made available
on our website or otherwise, and we undertake no obligation to update or revise
these statements to reflect events or circumstances occurring after the date of
this Quarterly Report on Form 10-Q. The following discussion should be
read in conjunction with our Financial Statements and related Notes thereto
included elsewhere in this report. Throughout this Quarterly Report on Form 10-Q
we will refer to AgFeed Industries, Inc., together with its subsidiaries, as
“AgFeed,” the “Company,” “we,” “us,” and “our.”
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Overview
We are
engaged in the animal nutrition premix, concentrate and complete feeds business
and commercial hog production business in China through our operating
subsidiaries.
Our
animal nutrition business consists of the research and development, manufacture,
marketing and sale of premix, concentrate and complete feed for use in the
domestic animal husbandry markets almost exclusively for hog production in
China. Premix is an animal feed additive that is used in commercial animal
production worldwide. We have been almost exclusively in the premix feed
business since 1995 and now operate five premix, concentrate and complete feed
manufacturing facilities located in the cities of Nanchang, Shandong, Shanghai,
Nanning, and Hainan. We are expanding our concentrate and complete feed lines to
meet the growing demand of commercial producers as they modernize their
production technology and focus on the requirements of the food safety
laws.
We
entered the hog breeding and production business in November 2007. In this
business, we mainly produce hogs for processing and sell breeding stock. We
currently have two breeder farms and 29 meat hog producing farms in the Jiangxi,
Shanghai, Hainan, Guangxi and Fujian provinces.
We
developed a system of centralized raw material purchases, accounting and
internal control management, corporate marketing strategies and brand building.
We created, and centrally manage, an animal disease control response team. This
team consists of experienced Chinese and international hog industry
professionals that are used by each of our subsidiaries across both of our lines
of business.
We had
revenues of $90.52 million for the six months ended June 30, 2010 compared to
revenues of $71.96 million for the six months ended June 30, 2009. The increase
(25.8%) was the result of expanding market share in our feed
business.
The hog
to corn ratio is a measurement that describes the market price of a hog in
relation to the price of corn indicating the relative profitability of hog
farming. During the second quarter of 2009 the hog to corn ratio was
5.83 while during the second quarter of 2010 the hog to corn ratio had
deteriorated to 5.08 and dropped as low as 4.98 in mid-April
2010. These ratios illustrate the high cost of hog feed relative to
the market prices of hogs during the period.
20
This
resulted in the margins of both the Company and our customers being
reduced. While we
have supported our customers with extended payment terms from time to time, in
light of the industry wide operating pressures faced during the second quarter
of 2010 we limited this practice thereby reducing accounts receivable
approximately $5.6 million from March 31, 2010.
Animal
Nutrition Business
We
manufacture, distribute, market and sell three main product lines - premix,
concentrate and complete feeds for use in all stages of a pig’s life. We conduct
these operations through our subsidiaries Nanchang Best, Shanghai Best, Guangxi
Huijie, Shandong Feed, and HopeJia. We also provide educational, technical and
veterinary support to our customer base
Our feed
operating companies operate manufacturing facilities in Nanchang, Shanghai,
Nanning, Shandong, and Hainan provinces, primarily serving the hog industry.
Each subsidiary independently conducts local marketing and sales efforts under
the direction of a central executive management team. Nanchang Best and Guangxi
Huijie are primarily responsible for our ongoing research and development
efforts and share their expertise in this area with all of our manufacturing
operations.
During
the first six months of 2010, we added 12 independent owned feed distribution
chain stores now totaling 1,314 that sell our products exclusively. During the
same period, we added 14 commercial farms now totaling 795. Backyard and small
farms that raise less than 100 hogs per year per family supply 75% of China’s
total annual hog production. Through our network of distributors and direct
sales, we are able to market our premix feed to the producers of more than 65%
of China’s annual hog production.
We are
one of a handful of companies that received “Green Certification” from the
Minister of Agriculture of PRC for our premix products under the brand label
“BEST.” This means that these products are safe, environmentally friendly, and
can effectively promote the healthy growth of pigs. According to current
government regulations, pork cannot be certified by the government as “green”
unless it is produced using government certified green feed. Having our feed
certified as green requires us to adhere to strict operational controls and
procedures. This green certification laid the foundation for our hog farms to
produce hogs providing high quality “Green” pork products. It is also an
incentive for other commercial hog farms to enter into sales contracts with our
feed operations.
During
the second quarter of 2010, revenue in the feed division increased to $26.37
million from $11.14 million in the second quarter of 2009, an increase of 137%.
During the second quarter of 2010, revenue continued in line with the results
achieved for the previous calendar quarter. However, during the
second quarter of 2010, revenue in our hog production division decreased to
$11.29 million from $27.39 million in the second quarter of 2009, a decrease of
59%
The
Chinese hog feed market is a 50 million metric ton market where the average
producer’s annual production is less than 10,000 metric tons, according to China
Research and Intelligence’s research report on the Chinese feed industry
2009-2010. During the first six months of 2010, we sold a total of
83,657 metric tons as compared to the first six months of 2009 when we sold
43,542 metric tons, representing an increase of 92%. Our plans for
2010 call for us sell 180,000 metric tons without considering the impact of any
acquisitions.
During
2010, we intend to introduce a bulk delivery system for hog feed to the market,
a value solution for large commercial farms.
21
Hog
Production Business
In our
hog production business, we have grown our business through strategic
acquisitions of current producing commercial hog farms and organic growth. We
own two breeder hog farms and 29 meat producing hog farms located in Jiangxi,
Shanghai, Hainan, Guangxi, and Fujian provinces, which are strategically located
in or near the largest pork consumption areas in the PRC.
We
entered the hog farming business on November 9, 2007 as a result of our
acquisition of ninety percent (90%) of the capital stock of Lushan Breeder Pig
Farm Co., Ltd. and acquired the remaining 10% in the first quarter of 2010 for
$230,063. Lushan owns and operates a breeder hog farm in Jiangxi Province.
Lushan is a mid-scale hog farm engaged in the business of raising, breeding and
selling hogs in the PRC for use in the pork production market in the PRC. In
2008, we acquired at least a majority interest in 29 meat hog producing farms in
the Jiangxi, Shanghai, Hainan, Guangxi, and Fujian provinces through our
subsidiaries - Nanchang Best, Shanghai Best, Guangxi Huijie and Best Swine. Our
meat hog producing farms generate revenue primarily from the sale of meat hogs
to processors. Our meat hogs are sold primarily in Jiangxi, Shanghai, Hainan,
Guangxi, Fujian, Guangdong and other neighboring provinces. In November 2009, we
broke ground on our first "Western-model" farm in the city of Da Hua, Guangxi
Province. We also completed the construction of a nucleus farm in the city of
Wuning, Jiangxi Province in November 2009. This farm will be operated by Hypor
AgFeed Breeding Company.
In
February 2010, we entered into negotiations to participate in a hog production
project in conjunction with Xinyu City in Jiangxi Province. The
proposed project is a plan to build 5 western model hog farms with the initial
phase of the project to encompass an investment of $18 million for the
construction of two 5,000 head sow farms, one 200 head boar stud farm
and one 2,600 head multiplier facility. Upon completion the initial
phase, the project is expected to have an annual production capacity of 230,000
hogs. In April of 2010 these negotiations were successfully completed
and construction will begin in May 2010.
Our
breeder farms generate revenue primarily from the sale of breeder hogs to
commercial hog farms and, to a lesser extent, the sale of meat hogs to hog
slaughterhouses. Our customers include large-scale hog farms, mid-scale hog
farms and small-scale farms. Our breeder hogs are sold throughout the PRC,
primarily in southeastern China.
During
the first six months of 2010 our capital spending consisted of $7.6 million for
property, plant and equipment purchases, environmental and other
expenditures.
During
the first six months of 2010 we sold 270,000 head with an average selling price
of $154 per head at an average weight of 88.8kg (196 lbs.) as
compared to the first six months of 2009 when we sold 318,000 head
with an average selling price of $161 per head at an average weight of 90.7kg
(200 lbs.).
As a
result of our strategic direction to introduce modern western hog production
technologies to our existing farm base, we have begun to realize improved
operating efficiencies. We have reduced our operating costs by $8 per
head. During the first six months of 2010, the benefit of these
operating efficiencies helped to offset the high cost of corn and soy and weak
market prices for hogs. These efficiencies were achieved in large
part as a direct result of our alliances with Hypor and M2P2.
Our
strategic alliance with Hypor, announced in April of 2009, has four phases: (1)
upgrading the genetic base of our existing herds; (2) creating a sow
farrow-to-finish nucleus facility (Wuning Farms) to supply superior breeding
stock to be utilized in our production systems and for sale to outside
commercial hog farms; (3) establishing high health, top quality genetics to the
farms being developed by AgFeed International Protein; and (4) developing gene
transfer centers to maximize the use of the top performing boars in China across
AgFeed's production system. On December 17, 2009, we formed Hypor AgFeed
Breeding Company with Hypor to develop, operate and market a genetic nucleus
farm in Wuning, China. Hypor AgFeed Breeding Company is owned 85% by us and 15%
by Hypor.
22
On July
13, 2009, together with M2P2, we formed AgFeed International Protein, a joint
venture focused on enhancing hog production systems for Chinese and other Pan
Asian clients based on modern western standards to increase productivity and
ensure the highest bio-security health standards in the Pan Asian hog industry.
The joint venture was formed to take advantage of the commercialization and
consolidation of the hog industry being fostered by the Chinese central and
local governments. We are AgFeed International Protein's first client. We own
65% of AgFeed International Protein, certain affiliates own an additional 15.1%
and M2P2 owns the remaining 19.9%. On November 9, 2009, construction began on of
our first large western model farm in Da Hua, China (Jiangxi Province). This is
the first of seven farms that will be constructed in South China that will house
an additional 35,000 genetically superior sows and 400 boars. When fully
operational, we anticipate that these farms will produce 750,000 – 850,000 pigs
per year. It is anticipated that the cost to build the seven farms will be
approximately $50 million over the next two years. AgFeed International Protein
has completed all phases of design and blueprints for these farms and has been
working with international and local construction firms to ensure
success.
Our
current strategic plan calls for us to develop, during 2009 -2012, a production
platform capable of producing 2 million hogs per year by 2015. The key element
to this future growth is modern hog production technologies and science based
genetics, which is underscored by our joint ventures with Hypor and
M2P2. Our Lushan and Ganda Breeding Farm are now fully stocked with
the Hypor Large White Pureline Sows, the Hypor Landrace Pureline Boars and the
Duroc Terminal Sire.
The
demand for safe food is the key driver in our strategy “AgFeed, Government and
Farmer”. The local governments have partnered with AgFeed in the cities of Dahua
and Xinyu to build agricultural industrial parks that will produce top health
and safe pork meat for the Chinese consumer.
Chinese
Vice Premier Li Keqiang said, "Food is essential, and safety should be a top
priority. Food safety is closely related to people's lives and health and
economic development and social harmony," at a State Council meeting in Beijing.
In June 2009, food safety laws were passed in China and passed down to the local
governments for implementation.
According
to the China Feed Industry Association, China has the world's largest and most
profitable market for hog production, which processed 625 million hogs in 2009,
compared to approximately 100 million in the U.S. More than 1.2 billion Chinese
consume pork as their primary source of meat. 62% of all meat consumed in China
is pork. Chinese consumers consume more pork each year than the rest of the
world combined. China’s pork consumption is forecast to increase to 47.0 million
metric tons in 2010 up from 44.9 million metric tons in 2008, an increase of
about 5%. Projected pork demand by 2015 is estimated to approach 68.0 million
metric tons, an increase of 51%
The
Chinese government supports hog producers with favorable tax status and
subsidies, insurance, vaccines, caps on feed costs and land use grants. Hog
production is exempt from all taxes and sow owners receive government grants and
subsidies.
Critical
Accounting Policies
In
presenting our financial statements in conformity with accounting principles
generally accepted in the United States (“US GAAP”), we are required to make
certain estimates and assumptions that affect the amounts reported
therein. Several of the estimates and assumptions we are required to
make relate to matters that are inherently uncertain as they pertain to future
events. However, events that are outside of our control cannot be
predicted and, as such, they cannot be contemplated in evaluating such estimates
and assumptions. If there is a significant unfavorable change to
current conditions, it will likely result in a material adverse impact to our
consolidated results of operations, financial position and liquidity. We believe
that the estimates and assumptions we used when preparing our financial
statements were the most appropriate at that time. Presented below
are those accounting policies that we believe require subjective and complex
judgments that could potentially affect reported results.
23
Use of
Estimates. Our discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial
statements, which were prepared in accordance with US GAAP. The
preparation of these consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates,
including those related to impairment of long-lived assets and allowance for
doubtful accounts. We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under
different assumptions or conditions; however, we believe that our estimates,
including those for the above-described items, are reasonable.
Areas
that require estimates and assumptions include valuation of accounts receivable
and inventory, determination of useful lives of property and equipment,
estimation of certain liabilities and sales returns.
Allowance
For Doubtful Accounts. We continually monitor customer
payments and maintain a reserve for estimated losses resulting from our
customers’ inability to make required payments. In determining the reserve, we
evaluate the collectability of our accounts receivable based upon a variety of
factors. In cases where we become aware of circumstances that may impair a
specific customer’s ability to meet its financial obligations, we record a
specific allowance against amounts due. For all other customers, we recognize
allowances for doubtful accounts based on our historical write-off experience in
conjunction with the length of time the receivables are past due, customer
credit worthiness, geographic risk and the current business environment. Actual
future losses from uncollectible accounts may differ from our
estimates.
Inventories. Inventories
are stated at the lower of cost or market. Cost is determined using the weighted
average method. We evaluate our ending inventories for estimated excess
quantities and obsolescence. Our evaluation includes the analysis of future
sales demand by product, within specific time horizons. Inventories in excess of
projected future demand are written down to net realizable value. In addition,
we assess the impact of changing technology on inventory balances and
writes-down inventories that are considered obsolete. Inventory obsolescence and
excess quantities have historically been minimal.
Long-Lived
Assets. We periodically assess potential impairments to our long-lived
assets We perform an impairment review whenever events or changes in
circumstances indicate that the carrying value may not be fully recoverable.
Factors we considered include, but are not limited to: significant
underperformance relative to expected historical or projected future operating
results; significant changes in the manner of use of the acquired assets or the
strategy for our overall business; and significant negative industry or economic
trends. When we determine that the carrying value of a long-lived asset may not
be recoverable based upon the existence of one or more of the above indicators
of impairment, we estimate the future undiscounted cash flows expected to result
from the use of the asset and its eventual disposition. If the sum of the
expected future undiscounted cash flows and eventual disposition is less than
the carrying amount of the asset, we recognize an impairment loss. An impairment
loss is reflected as the amount by which the carrying amount of the asset
exceeds the fair market value of the asset, based on the fair market value if
available, or discounted cash flows. To date, there has been no impairment of
long-lived assets.
Property
and Equipment. Useful lives of property and equipment is based on
historical experience and industry norms. Changes in useful lives due to changes
in technology or other factors can affect future depreciation
estimates.
Revenue
Recognition. Our revenue recognition policies are in compliance with SEC
Staff Accounting Bulletin (SAB) 104. Revenue is recognized when services are
rendered to customers when a formal arrangement exists, the price is fixed or
determinable, the delivery is completed, no other significant obligations of
AgFeed exist and collectability is reasonably assured. Payments received before
all of the relevant criteria for revenue recognition are satisfied are recorded
as unearned revenue. We are not subject to VAT withholdings. We give volume
rebates to certain customers based on volume achieved.
24
We make
estimates and judgments when determining whether the collectability of revenue
from customers is reasonably assured. Management estimates regarding
collectability impact the actual revenues recognized each period and the timing
of the recognition of revenues. Our assumptions and judgments regarding future
collectability could differ from actual events, thus materially impacting our
financial position and results of operations.
Sales
returns and allowances have historically been
insignificant. Accordingly, estimating returns is not
critical. However, if circumstances change, returns and allowance may
impact the company’s earnings. There are no differences in our arrangements with
our different types of customers. Accordingly, we do not have
different revenue recognition policies for different types of
customers. We offer credit terms ranging from 30 to 90 days for
most customers. From some large customers, we may extend these terms
beyond 90 days.
Recent
Accounting Pronouncements
On July
1, 2009, we adopted Accounting Standards Update (“ASU”) No. 2009-01, “Topic
105 - Generally Accepted Accounting Principles - amendments based on Statement
of Financial Accounting Standards No. 168, “The FASB Accounting Standards
Codification™ and the Hierarchy of Generally Accepted Accounting Principles”
(“ASU No. 2009-01”). ASU No. 2009-01 re-defines authoritative GAAP
for nongovernmental entities to be only comprised of the FASB Accounting
Standards Codification™ (“Codification”) and, for SEC registrants, guidance
issued by the SEC. The Codification is a reorganization and
compilation of all then-existing authoritative GAAP for nongovernmental
entities, except for guidance issued by the SEC. The Codification is
amended to effect non-SEC changes to authoritative GAAP. Adoption of
ASU No. 2009-01 only changed the referencing convention of GAAP in Notes to
the Consolidated Financial Statements.
On
February 25, 2010, the FASB issued ASU 2010-09 Subsequent Events Topic 855
“Amendments to Certain Recognition and Disclosure Requirements,” effective
immediately. The amendments in the ASU remove the requirement for an SEC filer
to disclose a date through which subsequent events have been evaluated in both
issued and revised financial statements. Revised financial statements include
financial statements revised as a result of either correction of an error or
retrospective application of US GAAP. The FASB believes these amendments remove
potential conflicts with the SEC’s literature. The adoption of this ASU did not
have a material impact on our consolidated financial statements.
On March
5, 2010, the FASB issued ASU No. 2010-11 Derivatives and Hedging Topic 815
“Scope Exception Related to Embedded Credit Derivatives.” This ASU clarifies the
guidance within the derivative literature that exempts certain credit related
features from analysis as potential embedded derivatives requiring separate
accounting. The ASU specifies that an embedded credit derivative feature related
to the transfer of credit risk that is only in the form of subordination of one
financial instrument to another is not subject to bifurcation from a host
contract under ASC 815-15-25, Derivatives and Hedging — Embedded Derivatives —
Recognition. All other embedded credit derivative features should be analyzed to
determine whether their economic characteristics and risks are “clearly and
closely related” to the economic characteristics and risks of the host contract
and whether bifurcation is required. The ASU is effective for the Company on
July 1, 2010. Early adoption is permitted. The adoption of this ASU will not
have a material impact on our consolidated financial statements.
In April
2010, the FASB codified the consensus reached in Emerging Issues Task Force
Issue No. 08-09, “Milestone Method of Revenue Recognition.” FASB ASU
No. 2010-17 provides guidance on defining a milestone and determining when
it may be appropriate to apply the milestone method of revenue recognition for
research and development transactions. FASB ASU No. 2010-17 is
effective for fiscal years beginning on or after June 15, 2010, and is
effective on a prospective basis for milestones achieved after the adoption
date. We do not expect this ASU will have a material impact on our
financial position or results of operations when we adopt this update on
January 1, 2011.
25
Results
of Operations
Comparison
of three months ended June 30, 2010 and June 30, 2009
Three Months Ended
June 30,
|
|||||||||||||||||
2010
|
2009
|
$
Change
|
%
Change
|
||||||||||||||
(in
thousands)
|
|||||||||||||||||
Revenues
|
$ | 37,662 | $ | 38,528 | $ | (866 | ) | -2.2 | % | ||||||||
Cost
of goods sold
|
$ | 35,103 | $ | 33,306 | $ | 1,797 | 5.4 | % | |||||||||
Gross
profit
|
$ | 2,559 | $ | 5,222 | $ | (2,662 | ) | -51.0 | % | ||||||||
Operating
expenses
|
$ | 4,492 | $ | 2,960 | $ | 1,532 | 51.8 | % | |||||||||
Interest
and financing costs
|
$ | 140 | $ | 625 | $ | (485 | ) | -77.6 | % | ||||||||
Net
income
|
$ | (2,955 | ) | $ | 1,226 | $ | (4,181 | ) | -341.0 | % |
2010
|
2009
|
Change
|
Price
|
Volume
|
||||||||||||||||
Business
segment:
|
||||||||||||||||||||
Animal
feed nutrition
|
||||||||||||||||||||
Volume
(metric tons)
|
41,315 | 23,300 | 18,015 | |||||||||||||||||
Revenue
(in 000s)
|
$ | 28,090 | $ | 14,912 | $ | 13,178 | $ | 890 | $ | 12,288 | ||||||||||
Cost
of goods sold (in 000s)
|
$ | 23,321 | $ | 11,810 | $ | 11,511 | $ | 1,305 | $ | 10,206 | ||||||||||
Gross
profit (in 000s)
|
$ | 4,769 | $ | 3,102 | $ | 1,667 | $ | (415 | ) | $ | 2,082 | |||||||||
Gross
profit margin
|
18.1 | % | 27.9 | % | ||||||||||||||||
Revenue/MT
|
$ | 680 | $ | 640 | $ | 40 | ||||||||||||||
Cost
of goods sold/MT
|
$ | 560 | $ | 510 | $ | 50 | ||||||||||||||
Gross
profit/MT
|
$ | 120 | $ | 130 | $ | (10 | ) | |||||||||||||
Hog
production
|
||||||||||||||||||||
Volume
(hogs)
|
95,000 | 184,000 | (89,000 | ) | ||||||||||||||||
Revenue
(in 000s)
|
$ | 12,560 | $ | 27,622 | $ | (15,062 | ) | $ | (3,420 | ) | $ | (11,642 | ) | |||||||
Cost
of goods sold (in 000s)
|
$ | 14,769 | $ | 25,503 | $ | (10,734 | ) | $ | 2,890 | $ | (13,624 | ) | ||||||||
Gross
profit (in 000s)
|
$ | (2,209 | ) | $ | 2,119 | $ | (4,328 | ) | $ | (6,310 | ) | $ | 1,982 | |||||||
Gross
profit margin
|
-19.6 | % | 7.7 | % | ||||||||||||||||
Revenue/hog
|
$ | 131 | $ | 150 | $ | (19 | ) | |||||||||||||
Cost
of goods sold/hog
|
$ | 154 | $ | 138 | $ | 16 | ||||||||||||||
Gross
profit/hog
|
$ | (23 | ) | $ | 12 | $ | (35 | ) |
Revenues. The decrease was
due to a 58.8% decrease in hog production revenue offset by a 136.8% increase in
animal feed. Hog sales of 95,000 for three months ended June 30, 2010 which was
a decrease from total hog sales of 184,000 hogs for the three months ended June
30, 2009. Animal feed sales volume for three months ended June 30,
2010 exceeded 41,315 metric tons representing a 77% increase in volume over the
comparative period of 2009. However, the increase in revenue described above was
offset by lower hog sales prices and increases in ingredient costs.
26
Driving
the increase in animal nutrition revenues is the continuing market shift of our
customers to complete feeds. This feed category contributed 14,000
metric tons of the 18,000 combined metric tons of growth. Condensed
feeds contributed additional tonnage of 4,000 with declines of 300 metric tons
in our fine feeds category offset by an increase of 300 metric tons in our
premix feed type.
The
challenges of the market are evident in the results produced by our hog
segment. Hog production shows a revenue decline of $15 million
reflecting a decline of $3.4 million due to the rapid decline of market prices
for hogs and $11.6 million due to our marketing 89,000 less hogs in 2010 versus
2009. The price component is indicative of the bringing to market an
excessive number of hogs as a carryover from the Chinese New Year’s festival,
response to increased costs and the impact of flooding in the regions we conduct
business, including Jiangxi province and Guangxi province. The result
is the revenue per hog declined to $131 versus $150 in 2009. In terms
of volume, during the three months ended June 30, 2009, we followed a program of
purchasing hogs from outside our system for finishing to market weights to take
advantage of profitable market prices. In 2010, we did not purchase
hogs under this program and in combination with vastly reduced revenue per hog
and the reduction of our herd of over 19,000 animals due to flooding and its
effects (over 16,000) and planned culling of 3,000 sows. Our hog volumes were
89,000 lower in the three months ended June 30, 2010 compared to the same period
in 2009.
Cost of Goods Sold. We
experienced increases in cost of goods sold for our two business lines during
the three months ended June 30, 2010 driven primarily by a 20.0% increase in
corn prices over the same period in 2009. For our feed
nutrition segment, the increased tonnage produced an increase in our costs of
$10.2 million while ingredient costs reflecting increased costs of corn in the
comparative periods, produced cost increases of $1.3 million. As a
result, gross profit reflects a net increase of $1.7 million driven by the
aforesaid volumes but reflecting a challenging market in which to pass along all
of our cost increases.
Gross Profit. Gross margins
decreased to 6.8% from 13.6% during the three months ended June 30, 2010 as
compared to the same period in 2009. Our gross profit (loss) margin for the feed
and hog segments were 18.1% and (19.6%), respectively for the three months ended
June 30, 2010 as compared to 27.9% and 7.7% for three months ended June 30
2009. The decrease in gross margin is attributed to the 20.0%
increase in corn cost and a reduction in the selling price for our hogs over the
same period in 2009. The increase in the cost of corn was offset somewhat by
actions taken in the first quarter of 2010 including our entry into long-term
contracts for key product ingredients which locked in favorable
pricing.
Selling, General and Administrative
Expenses. Selling, general and administrative expense includes overhead
expenses such as rent, management and staff salaries, general insurance,
marketing, accounting, legal and offices expenses. Our selling expenses for the
three months ended June 30, 2010 decreased by approximately $16,000 compared to
the corresponding period in 2009. General and administrative expenses for our
feed segment increased by approximately $443,000 or 113% from the corresponding
period in 2009 principally due to the overall expansion of the feed segment that
included increased salary and utility costs. Our corporate expenses also
increased by approximately $471,000 or 94% due to higher professional fees,
stock incentive compensation, and officer and director
compensation. General and administrative expenses for our hog farms
for the three months ended June 30, 2010 increased by approximately $635,000 or
59% over the corresponding period in 2009 to due to an overall increase in
expenses associated with expansion of our hog segment and consulting fees paid
in connection with establishing our first large western model hog
farm.
27
Interest and Financing Costs.
We incurred interest and financing costs of approximately $140,000 and $624,000
during the three months ended June 30, 2010 and 2009, respectively. The
decrease is due to the amortization of debt discounts during the three months
ended June 30, 2009 as a result of debt conversion during that
period.
Income Taxes. Hog production
is an income tax exempt sector in China and sow owners receive government grants
and subsidies. Some of our feed manufacturing companies benefit from exemption
from value-added tax.
Net Loss. The decrease in our
net income was due to the increase in cost of goods sold and higher operating
expenses. We continued to benefit from the tax-exempt status for our hog
production business. The higher sales and the benefits from economies of scale
in our business resulting in a modest increase in operating efficiency was
offset by higher cost of sales. We continued to benefit from the tax-exempt
status for our hog production business.
Comparison
of six months ended June 30, 2010 and June 30, 2009
Six
Months Ended June 30,
|
|||||||||||||||||
2010
|
2009
|
$
Change
|
%
Change
|
||||||||||||||
(in
thousands)
|
|||||||||||||||||
Revenues
|
$ | 90,521 | $ | 71,957 | $ | 18,564 | 25.8 | % | |||||||||
Cost
of goods sold
|
$ | 81,642 | $ | 60,932 | $ | 20,710 | 34.0 | % | |||||||||
Gross
profit
|
$ | 8,879 | $ | 11,025 | $ | (2,147 | ) | -19.5 | % | ||||||||
Operating
expenses
|
$ | 9,187 | $ | 5,581 | $ | 3,606 | 64.6 | % | |||||||||
Interest
and financing costs
|
$ | 265 | $ | 777 | $ | (513 | ) | -65.9 | % | ||||||||
Net
income
|
$ | (1,887 | ) | $ | 4,245 | $ | (6,132 | ) | -144.5 | % |
2010
|
2009
|
Change
|
Price
|
Volume
|
||||||||||||||||
Business
segment:
|
||||||||||||||||||||
Animal
feed nutrition
|
||||||||||||||||||||
Volume
(metric tons)
|
83,657 | 43,542 | 40,115 | |||||||||||||||||
Revenue
(in 000s)
|
$ | 56,150 | $ | 27,696 | $ | 28,454 | $ | 1,504 | $ | 26,950 | ||||||||||
Cost
of goods sold (in 000s)
|
$ | 46,917 | $ | 22,009 | $ | 24,908 | $ | 2,402 | $ | 22,506 | ||||||||||
Gross
profit (in 000s)
|
$ | 9,233 | $ | 5,687 | $ | 3,546 | $ | (898 | ) | $ | 4,444 | |||||||||
Gross
profit margin
|
18.2 | % | 26.8 | % | ||||||||||||||||
Revenue/MT
|
$ | 670 | $ | 640 | $ | 30 | ||||||||||||||
Cost
of goods sold/MT
|
$ | 560 | $ | 510 | $ | 50 | ||||||||||||||
Gross
profit/MT
|
$ | 110 | $ | 130 | $ | (20 | ) | |||||||||||||
Hog
production
|
||||||||||||||||||||
Volume
(hogs)
|
270,000 | 318,000 | (48,000 | ) | ||||||||||||||||
Revenue
(in 000s)
|
$ | 41,616 | $ | 51,026 | $ | (9,410 | ) | $ | (2,103 | ) | $ | (7,307 | ) | |||||||
Cost
of goods sold (in 000s)
|
$ | 41,970 | $ | 45,688 | $ | (3,718 | ) | $ | 3,709 | $ | (7,427 | ) | ||||||||
Gross
profit (in 000s)
|
$ | (354 | ) | $ | 5,338 | $ | (5,692 | ) | $ | (5,812 | ) | $ | 120 | |||||||
Gross
profit margin
|
-0.9 | % | 10.5 | % | ||||||||||||||||
Revenue/hog
|
$ | 154 | $ | 161 | $ | (7 | ) | |||||||||||||
Cost
of goods sold/hog
|
$ | 156 | $ | 144 | $ | 12 | ||||||||||||||
Gross
profit/hog
|
$ | (2 | ) | $ | 17 | $ | (19 | ) |
28
Revenues. The decrease was
due to a 21.4% decrease in hog production revenue offset by a 166.2% increase in
animal feed. Hog sales of 270,000 for six months ended June 30, 2010 as compared
to total hog sales of 318,000 hogs for the six months ended June 30,
2009. Animal feed sales volume for six months ended June 30, 2010
exceeded 83,657 metric tons representing a 92% increase in volume over the
comparative period of 2009. However, the increase in revenue described above was
offset by lower hog sales prices and increases in ingredient costs.
Our
animal nutrition segment contributed increased revenues of $28.5 million from
increased volumes of complete feed (31, 400 metric tons), condensed feed (7,600
metric tons) and premix feed (1,400 metric tons) slightly offset by a decline in
fine feed of 300 metric tons. The referenced volume increases are
primarily indicative of the ongoing shift of our customers to complete feeds and
to a lesser degree, but of note, to our condensed feed. The
pricing component yielded $1.5 million of the revenue increase more than offset
by increases to our ingredient costs aggregating at $2.4 million. Our
volumes increased our cost of sales by $22.5 million. Overall, animal
feed contributed $3.5 million to the Company’s gross profit.
The
decline in our hog segment brought the revenue for the six months ended June 30,
2010 down by $9.4 million to $41.6 million from $51.0 million reflecting the
fact that we did not purchase hogs outside of our internal production
capabilities for the purpose of finishing them (48,000 of hogs with causing a
$7.3 million impact to revenue) and declining market prices ($154 per hog in
2010 versus $161 per hog in 2009) driving an unfavorable impact to revenue of
$2.1 million.
Cost of Goods Sold. We
experienced increases in cost of goods sold for our two business lines during
the six months ended June 30, 2010 driven primarily by a 20.0% increase in corn
prices over the same period in 2009. Our cost of goods sold for the
hog segment for the six months ended June 30, 2010 showed a decline of $3.7
million of which $10.7 million occurred in the second quarter reflecting reduced
sales of hogs (48,000 with a $7.4 million impact) in line with the decline of
revenue and offset by increased costs of production ($3.7 million) influenced by
increased costs of feed and the reduction of our herd of over 19,000 animals due
to flooding and its effects (over 16,000) and planned culling of 3,000
sows.
Gross Profit. Gross margins
decreased to 9.8% from 15.3% during the six months ended June 30, 2010 as
compared to the same period in 2009. Our gross profit (loss) margin for the feed
and hog segments were 18.2% and (0.9%), respectively for the six months ended
June 30, 2010 as compared to 26.8% and 10.5% for six months ended June 30
2009. The decrease in gross margin is attributed to the 20.0%
increase in corn cost and a reduction in the selling price for our hogs over the
same period in 2009. The increase in the cost of corn was offset somewhat by
actions taken in the first quarter of 2010 including our entry into long-term
contracts for key product ingredients which locked in favorable
pricing.
Selling, General and Administrative
Expenses. Our selling expenses for the six months ended June 30, 2010
increased by approximately $151,000 compared to the corresponding period in
2009. General and administrative expenses for our feed segment increased by
approximately $869,000 or 116% from the corresponding period in 2009 principally
due to the overall expansion of the feed segment that included increased salary
and utility costs. Our corporate expenses also increased by approximately
$1,375,000 or 158% due to higher professional fees, stock incentive
compensation, and officer and director compensation. General and
administrative expenses for our hog farms for the six months ended June 30, 2010
increased by approximately $1,212,000 or 58% over the corresponding period in
2009 to due to an overall increase in expenses associated with expansion of our
hog segment and consulting fees paid in connection with establishing our first
large western model hog farm.
Interest and Financing Costs.
We incurred interest and financing costs of approximately $265,000 and $777,000
during the six months ended June 30, 2010 and 2009, respectively. The
decrease is due to the amortization of debt discounts during the three months
ended June 30, 2009 as a result of debt conversion during that
period.
29
Income Taxes. Hog production
is an income tax exempt sector in China and sow owners receive government grants
and subsidies. Some of our feed manufacturing companies benefit from exemption
from value-added tax.
Net Loss. The decrease in our
net income was due to the increase in cost of goods sold and higher operating
expenses. We continued to benefit from the tax-exempt status for our hog
production business. The higher sales and the benefits from economies of scale
in our business resulting in a modest increase in operating efficiency was
offset by higher cost of sales. We continued to benefit from the tax-exempt
status for our hog production business.
Off-Balance
Sheet Arrangements
There
were no off-balance sheet arrangements during the six months ended June 30, 2010
that have, or are reasonably likely to have, a current or future effect on our
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to our
interests.
Liquidity
and Capital Resources
At June
30, 2010, we had $24.0 million in cash and cash equivalents on
hand.
During
first quarter of 2008, we completed two financings. We received
aggregate gross proceeds of $22 million through the sale of 2,444,448 shares of
common stock at $9 per share. We received aggregate proceeds of $19
million through the issuance of three-year convertible notes bearing interest at
7% and convertible into common stock at $10 per share. In connection
with the convertible notes, we issued 380,000 warrants that are exercisable
immediately and have a $10 strike price. The exercise price on the
warrants was subsequently reduced to $5 per share. We paid offering
costs of $3,432,670 related to the sale of shares and $1,716,666 related to the
issuance of the convertible notes.
On April
16, 2008, we entered into a Securities Purchase Agreement with institutional
investors in connection with a registered direct offering of securities
providing for the issuance of 625,000 shares of our common stock at price
of $16.00 per share for aggregate gross proceeds of $10,000,000. We
paid $703,472 in costs related to this offering.
On April
22, 2008, we entered into Securities Purchase Agreements with institutional
investors in connection with a registered direct offering of securities
providing for the issuance of 1,322,836 shares of the Company’s Common
Stock at $19.05 per share for aggregate gross proceeds of $25.2
million. We paid $1,772,752 in costs related to this
offering.
On
December 29, 2008, we completed a financing and raised gross proceeds of $8.75
million through the sale to institutional investors of 5 million newly issued
common stock units at $1.75 per unit under an effective Form S-3 Registration
Statement. Each unit consists of one share of newly issued common stock and a
warrant to purchase 0.7 of a share of common stock for $2.50 a share, which is
exercisable over a five-year period. We paid costs related to this
offering of $1,227,616.
From
October 6, 2008 through October 31, 2008, the Company repurchased 367,295 shares
of our common stock for $1,811,746. No additional shares have been
repurchased.
On May 8,
2009, we closed a private placement by issuing 2,329,645 shares of common stock
for gross proceeds of $10 million to certain institutional
investors. We also issued 1,164,822 common stock purchase warrants to
the investors and 244,613 common stock purchase warrants to the placement agent
for the transaction. The warrants are exercisable immediately have an
exercise price of $4.50 per share and expire on May 8, 2014. We paid costs
related to this offering of $1.1 million.
30
On
September 9, 2009, we entered into an Equity Credit Agreement with an
institutional investor, which was amended and restated as of November 9, 2009,
providing for, among other things, the issuance of shares of its common stock at
any time and from time to time during the next two years for gross proceeds of
up to $50,000,000. In connection with the closing of the transaction, we also
issued warrants to purchase an additional 400,000 shares of its common stock
during a five year period at an exercise price of $5.75 per
share. This transaction closed on September 9, 2009. On
August 4, 2010 we issued 1,152,516 shares of our common stock in connection with
this Equity Credit Agreement for gross proceeds of $3,000,000.
During
2009, certain warrant holders exercised 3,225,004 warrants that resulted in
gross proceeds of $8,062,510.
As of
June 30, 2010, we had short-term loans outstanding of $4,419,000. The loan was
entered into during the second quarter of 2009. The note was renewed
in May 2010 and is due on May 4, 2011.
During
the six months ended June 30, 2010, we used $2.9 million of cash from our
operating activities. The cash used was primarily a result of the net loss
including noncontrolling interest, an increase in accounts receivable and
inventory offset by an increase in accounts payable and other
payables.
We used
approximately $10.8 million in investing activities during the six months ended
June 30, 2010 all of which was for the acquisition of property and
equipment.
We used
$4,821 in cash from financing activities as a result of the purchase of the
noncontrolling interest in two subsidiaries and the contribution from a
noncontrolling interest.
At June
30, 2010, our accounts receivable balance was approximately $17.4 million, an
increase of $3.0 million from December 31, 2009.
Our
principal demands for liquidity are to increase capacity, purchase raw
materials, distribute our products, consolidate our existing farm operations and
make strategic acquisitions or investments in our industry as opportunities
present themselves, as well as general corporate purposes. We may
seek additional funds from the capital markets to further support our genetics
program to increase hog production and profitability. We expect our
genetics program to be accretive to earnings in the near future.
We intend
to meet our liquidity requirements, including capital expenditures related to
the purchase of equipment, purchase of raw materials, and the expansion of our
business, through cash flow provided by operations and funds raised through cash
investments.
The
majority of our revenues and expenses were denominated in RMB, the currency of
the PRC. There is no assurance that exchange rates between the RMB
and the USD will remain stable.
Contractual
Obligations
No
contractual obligation occurred during the six months ended June 30, 2010 and
therefore it is not expected to have any effect on our liquidity and cash flow
in future periods.
Inflation
and Seasonality
Demand
for our products remains fairly consistent throughout the year and we do not
believe our operations have been materially affected by inflation or
seasonality.
31
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
Disclosures
About Market Risk
We may be
exposed to changes in financial market conditions in the normal course of
business. Market risk generally represents the risk that losses may
occur as a result of movements in interest rates and equity
prices. We currently do not use financial instruments in the normal
course of business that are subject to changes in financial market
conditions.
Currency
Fluctuations and Foreign Currency Risk
Substantially
all of our operations are conducted in the PRC, with the exception of our
limited export business and overseas purchases of raw materials. Most
of our sales and purchases are conducted within the PRC in RMB, which is the
official currency of the PRC. The effect of the fluctuations of
exchange rates is considered minimal to our business operations.
Substantially
all of our revenues and expenses are denominated in RMB. However, we
use US dollars for financial reporting purposes. Conversion of RMB
into foreign currencies is regulated by the People’s Bank of China through a
unified floating exchange rate system. Exchange rate fluctuations may
adversely affect the value, in U.S. dollar terms, of our net assets and income
derived from its operations in the PRC.
Interest
Rate Risk
We have
interest rate risk related to the short-term notes entered; however, we do not
believe this interest rate risk is significant.
Credit
Risk
We have
not experienced significant credit risk, as most of our customers are long-term
customers with superior payment records. Our receivables are
monitored regularly by our credit managers.
The
Company carried out an evaluation, under the supervision and with the
participation of its management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company’s “disclosure controls and procedures” (as defined in the Exchange Act
Rule 13a-15(e)) as of the end of the period covered by this quarterly
report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company’s disclosure controls and
procedures are effective.
There was
no change in the Company’s internal control over financial reporting that
occurred during the Company’s most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
Item
1. Legal Proceedings
We know
of no pending legal proceedings to which we are a party which are material or
potentially material, either individually or in the aggregate. We are from time
to time, during the normal course of our business operations, subject to various
litigation claims and legal disputes. We do not believe that the ultimate
disposition of any of these matters will have a material adverse effect on our
consolidated financial position, results of operations or
liquidity.
32
Item
1A. Risk Factors
There
have been no material changes from the disclosure provided in Part 1, Item 1A of
our Annual Report on Form 10-K for the year ended December 31, 2009, as
amended.
None
Item
3. Defaults Upon Senior Securities
None.
Item
4. (Removed and Reserved)
Item
5. Other Information
None.
Item
6. Exhibits
(a) Exhibits
Exhibit
Number
|
Description
of Exhibit
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
promulgated under the Securities and Exchange Act of 1934, as
amended.
|
|
31.2
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a),
promulgated under the Securities and Exchange Act of 1934, as
amended.
|
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer).
|
|
32.2
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Chief Financial
Officer).
|
33
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AgFeed
Industries, Inc.
|
|||
August
9, 2010
|
By:
|
/s/ Xiong
Junhong
|
|
Xiong
Junhong
|
|||
Chief
Executive Officer (Principal Executive Officer)
|
|||
August
9, 2010
|
By: |
/s/ Selina
Jin
|
|
Selina
Jin
|
|||
Chief
Financial Officer
|
|||
(Principal
Financial and Accounting Officer)
|
|||
34