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EX-23.3 - ZHENG HUI INDUSTRY CORP. | v200068_ex23-3.htm |
EX-23.1 - ZHENG HUI INDUSTRY CORP. | v200068_ex23-1.htm |
As
filed with the Securities and Exchange Commission on November 1,
2010
Registration
No. 333-168073
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 3 TO FORM S-1
REGISTRATION
STATEMENT UNDER
THE
SECURITIES ACT OF 1933
ZHENG
HUI INDUSTRY CORPORATION
(Exact
name of registrant as specified in its charter)
Nevada
|
2015
|
80-0334470
|
||
(State or Other Jurisdiction of
Incorporation or Organization)
|
(Primary Standard Industrial
Classification Code Number)
|
(I.R.S. Employer
Identification Number)
|
Daokou
Industry Park, Yingli Town
Shouguang,
Shandong
P.R.
China, 262717
Telephone:
86-536-5401658
(Address,
including zip code, and telephone number including area code,
of
registrant’s principal executive offices)
CSC
Services of Nevada, Inc.
502
East John Street
Carson
City, Nevada 89706
Telephone:
(888) 690 2882
(Name,
address, including zip code, and telephone number including area
code, of
agent for service)
Copies
to:
Steven Schuster, Esq.
David W. Sass, Esq.
Qian Hu, Esq.
McLaughlin & Stern LLP
260 Madison Avenue
New York, New York 10016
Telephone (212) 448-1100
Facsimile (800) 203-1556
|
Louis A. Bevilacqua, Esq.
Joseph R. Tiano, Esq.
Jeffrey B. Grill, Esq.
Pillsbury Winthrop Shaw Pittman LLP
2300 N Street, NW
Washington, DC 20037
Telephone (202) 663-8000
Facsimile (202) 663-8007
|
Approximate date of commencement of
proposed sale to the public: As soon as practicable after this
Registration Statement becomes effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
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
¨
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Accelerated Filer
¨
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Non-Accelerated Filer
¨
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Smaller Reporting Company
x
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(Do not check if a smaller reporting company)
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CALCULATION OF REGISTRATION FEE
|
||||||||
Title of Each Class of Securities to Be Registered
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Proposed Maximum
Aggregate Offering Price
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Amount of
Registration Fee
|
||||||
Common
stock, $0.001 par value per share (1)
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$ | 17,250,000 | (3) | $ | 1,230 | |||
Underwriters’
warrants to purchase common stock (2)
|
n/a | n/a | ||||||
Common
stock, $0.001 par value per share issuable upon exercise of the
underwriters’ warrants (2)
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$ | 2,242,500 | (2) | $ | 160 | (2) | ||
Total
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$ | 1,390 | (4) |
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(1)
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In accordance with Rule 416(a),
the registrant is also registering hereunder an indeterminate number of
additional shares of common stock that may be issued and resold pursuant
to stock splits, stock dividends, anti-dilution provisions, including the
anti-dilution provisions under the underwriters’ warrants, and similar
transactions.
|
|
(2)
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The registrant has agreed to
issue to each of the underwriters a warrant to purchase a number of shares
of common stock equal to 10% of the total number of shares of common stock
sold in the offering. The warrants will be exercisable at a price equal to
130% of the public offering price in connection with the offering. The
registration fee was calculated in accordance with Rule 457(g) under the
Securities Act. The proposed maximum aggregate offering price of the
underwriters’ warrants is $2,242,500, which is equal to 130% of $1,725,000
(10% of $17,250,000). In accordance with Rule 457(g)
under the Securities Act, because the shares of the registrant’s common
stock underlying the underwriters’ warrants are registered hereby, no
separate registration fee is required with respect to the warrants
registered hereby.
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(3)
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Includes
shares of common stock issuable upon exercise of the underwriters’
over-allotment. Estimated solely for the purpose of calculating the
registration fee pursuant to Rule
457(o).
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(4)
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Previously paid.
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THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and is not soliciting an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted.
PRELIMINARY
PROSPECTUS
|
SUBJECT
TO COMPLETION
|
NOVEMBER
1, 2010
|
Shares
ZHENG
HUI INDUSTRY CORPORATION
|
Common Stock
This is
an initial public offering of shares of common stock, $.001 par value per share,
of Zheng Hui Industry Corporation, a Nevada corporation. We are
offering shares
of our common stock. Prior to this offering, there has been no public
market for our common stock. The initial public offering price of our common
stock is expected to be between
$ and
$ per share. We have applied to
have our common stock listed on the NASDAQ Capital Market under the symbol
“ZHIC.”
Investing
in our common stock involves a high degree of risk. See the section entitled
“Risk Factors” beginning on page 10.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
Per Share
|
Total
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|||||||
Initial
public offering price
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$ | $ | ||||||
Underwriting
discount
|
$ | $ | ||||||
Proceeds,
before expenses, to us
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$ | $ |
We have
granted to the underwriters an option to purchase up to
additional shares
of our common stock to cover over-allotments, if any, at the initial public
offering price, less underwriting discounts and commissions, within 45 days from
the date of this prospectus. We have also granted to each of the underwriters a
warrant to purchase up to an aggregate
of shares
of our common stock as additional compensation. See “Underwriting” for
more information.
The
underwriters expect to deliver shares of our common stock to purchasers on or
about ,
2010.
Rodman
& Renshaw, LLC
|
Newbridge
Securities Corporation
|
The
date of this prospectus
is ,
2010
TABLE
OF CONTENTS
Page
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1
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10
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25
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26
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27
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28
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29
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30
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31
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32
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35
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48
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50
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65
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68
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75
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78
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79
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80
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82
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83
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87
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92
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92
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92
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F-1
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F-1
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You
should rely only on information contained in this prospectus or in any free
writing prospectus that we may provide to you. We have not, and the underwriters
have not, authorized anyone to provide you with additional information or
information different from what is contained in this prospectus or in any free
writing prospectus that we may provide to you. We are not making an offer of
these securities in any jurisdiction where the offer is not permitted. The
information in this prospectus may only be accurate as of the date on the front
of this prospectus regardless of time of delivery of this prospectus or any sale
of our securities.
Dealer
Prospectus Delivery Obligation
Until ,
2010 (the 25th day after the date of this prospectus), all dealers that effect
transactions in our common stock, whether or not participating in this offering,
may be required to deliver a prospectus. This is in addition to the dealer’s
obligation to deliver a prospectus when acting as an underwriter and with
respect to unsold allotments or subscriptions.
This
summary highlights selected information appearing elsewhere in this prospectus.
This summary is not complete and does not contain all of the information that
you should consider before investing in our common stock. You should carefully
read this prospectus and the registration statement of which this prospectus is
a part in their entirety before investing in our securities, especially the
risks of investing in our securities, which we discuss later in “Risk Factors,”
and our consolidated financial statements and related notes included elsewhere
in this prospectus. Unless the context requires otherwise, the words the
“Company,” “Zheng Hui,” “we,” “us” and “our” refer to Zheng Hui Industry
Corporation, our subsidiaries and Weifang Jinzheng Poultry Co. Ltd. This
prospectus assumes the over-allotment has not been exercised, unless otherwise
indicated. Unless otherwise indicated, all amounts in this prospectus are
reflected in the legal currency of the United States, which may be referred to
as “U.S. dollars,” “USD” or “$.”
Overview
We are
engaged in hatching “Cherry Valley” duck and producing, processing, marketing
and distributing frozen processed duck, duck feed and other duck-related
products in the People’s Republic of China (the “PRC” or “China”). We sell
frozen duck, in whole or cut-up form, to wholesalers, food processing companies
and distributors in fifteen Chinese provinces, including the cities of Beijing,
Shanghai, Tianjin, and Chongqing. Our objective is to establish ourselves as a
leading producer and distributor of “Cherry Valley” ducks in the
PRC.
Through
years of experience and operation, we believe that we have developed a highly
effective vertically-integrated supply chain that we describe as a
“Company-Base-Farmer” business model. Under our model, we raise breeder ducks
and hatch ducklings in our own facilities and then sell ducklings to our
network of approximately 400 contracted farmers. We repurchase the adult
commercial ducks that meet our criteria from our contracted farmers, then
process, freeze, and store the ducks and duck products in our own facilities. To
assist in the ducks’ growth, we also produce and sell duck feed to our
contracted farmers through feed brokers.
Although
the raw material cost of the duck feed can be volatile for a duck
raising company, by leveraging our relationships with our suppliers,
contracted farmers and customers and our vertically-integrated model,
we have generated substantial revenue and simultaneously reduced the
volatility.
Nine Months Ended September 30,
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Year Ended December 31,
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|||||||||||||||
2010
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2009
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2009
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2008
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|||||||||||||
USD
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USD
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USD
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USD
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|||||||||||||
Net
revenue
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30,063,212
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25,171,582
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36,757,703
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33,354,5 35
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||||||||||||
Cost
of sales
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24,917,180
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20,098,775
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29,299,988
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26,501,070
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||||||||||||
Gross
profit
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5,146,032
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5,072,807
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7,457,715
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6,853,465
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||||||||||||
Gross
profit ratio
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17.1
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%
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20.2
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%
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20.3
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%
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20.6
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%
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||||||||
Net
income
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2,906,705
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3,146,931
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4,730,350
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4,083,502
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In
addition, our operating model transfers most of the risk involved in the duck
production process to our farmers and feed brokers, therefore insulating us from
over-production and missed market opportunities. We generally limit the term of
our sales contracts to 30 days. In order to avoid over-production, we
maintain inventory of frozen duck products at a low level and base our
production and sales to farmers of ducklings upon the quantity of contracts or
sales orders we receive. In addition, due to the short 30-day operating
cycle, we can easily adjust our production based on market demand, preferences
and other fluctuations and variables.
Our major
product is frozen, lean-meat “Cherry Valley” duck, which was developed from the
traditional Peking or Beijing ducks by Cherry Valley Farm, a United Kingdom
(“UK”) company. Our product is the third generation of Cherry Valley
species introduced from the UK, which we purchase from their authorized
distributor in China. According to the China Animal Agriculture Association,
Cherry Valley ducks have the following general characteristics relative to other
ducks: (1) higher growth rate; (2) higher conversion rate of feed, that is, with
the same amount of feed, the duck will provide more meat; (3) higher rate of
lean meat; (4) stronger disease immunity; and (5) greater ability to be
cultivated in different geographical regions. Also, Cherry Valley ducks have
less fat content. According to a report from January 2010 in the Meat Trade News Daily in the
UK, a traditional Peking duck will have a fat level in excess of 35%, whereas a
Cherry Valley duck will have a fat level of less than 27%.
1
We have
an abundant supply of breeder ducks and the ability to process approximately
25,000 ducks a day. In addition to revenues generated from the sale of processed
duck products, we also generate revenues from the sales of ducklings and duck
feed to our contracted farmers and duck feathers to a domestic feather
processing manufacturer in China. One of our main growth strategies is to expand
our production capacity of processed duck by either acquiring or constructing an
additional facility. Such additional facility will have additional cold storage,
slaughter facilities, feather-removing workshops, processing plants, a
warehouse, and other buildings and workspaces necessary to grow our business. By
acquiring or constructing an additional facility, we expect to increase our
capacity from approximately 25,000 ducks per day to approximately 80,000 ducks
per day. In addition to the increase of our duck production capacity,
we also expect to increase the production of our ducklings, duck feed and duck
feathers. Specifically, we expect to increase the number of breeder ducks raised
in our breeder duck farm from 50,000 heads to 100,000 heads annually which would
lay on average 80,000 eggs per day, purchase approximately 120 additional sets
of hatchery machines to increase our duckling hatching capacity from 8.5 million
heads to 20 million heads annually, and build an additional feed production
facility to increase our feed production capacity from approximately 50,000 tons
to 80,000 tons annually. As we process more ducks, we expect our feather
production output to also increase. Further, as we expand, we intend to hire
additional personnel for sales, feed production, processing production, feather
production, hatching, breeding and administrative functions.
In order
to maintain quality control and ensure compliance with applicable government
regulations, we supervise and direct the use of veterinary medicine and vaccines
to our contracted farmers. We also have established and maintained
standards so that our production facilities for the process of raising ducks and
duckling hatching, producing duck feed, commercial duck processing, feather
removal, partition processing, refrigeration, and storage technologies meet all
government regulations. We believe that these measures help us produce, what we
believe to be, high quality ducks and duck products.
Industry
Background
The
national output of poultry meats amounted to approximately 7.9 million tons in
the first half of 2008 with ducks accounting for approximately 1.2 million tons
and a growth rate of 8.2%, compared to the same period in the previous year,
according to China’s Ministry of Agriculture and as published by the China
Animal Agriculture Association). In 2009, the number of ducks on hand was 1,096
million and the number of ducks sold from farm was 3,520 million (including
2,060 million Cherry Valley ducks). The number of ducks on hand in China in 2009
accounted for 67.3% of the total amount in the world. The number of ducks
slaughtered in China in 2009 accounted for 74.7% of the total amount in the
world.
China is
the largest duck producer in the world and has the largest stock of domestic
ducks in the world with approximately 70% of the duck population worldwide.
According to statistics from the Food and Agriculture Organization of the United
Nations, or the FAO, duck meat production totaled 2.66 million tons in 2009 up
from 1.95 million tons in 2004. This represented a growth rate of 36.3%, which
was higher than the rate of growth in the production of pork, chicken and beef
meat. Over the same 5-year period, pork meat production grew by 12.1% (from 44.5
million tons to 49.9 million tons), chicken meat production grew by 20.7% (from
9.5 million tons to 11.4 million tons), and beef meat (including buffalo) grew
by 14.2% (from 5.6 million tons to 6.4 million tons), According to statistics
from the FAO, the breeding stock of duck worldwide was 1,046 million in 2005,
among which Asia had 931 million breeding stock, accounting for 89% of the world
total. In Asia, raising ducks for meat is mainly practiced in countries like
China, Vietnam, Thailand, Indonesia and India, with China raising the most ducks
among all Asian countries.
Our
Competitive Strengths
We
believe that the following competitive advantages have contributed to our
competitive position in the duck industry:
|
·
|
Location: Our production facilities are
located on 115,211 square meters in Shouguang City, Shandong Province,
China. We believe Shandong Province is well situated logistically for
distribution to all the main areas of duck consumption in China—Central,
Beijing, Tianjin, Northeast, Northwest and the Yangtze River delta
zone. Shandong Province has historically had a moderate climate and
has ample land for growth. In addition, we have access to abundant
supplies of corn and other feed ingredients locally, which lowers
the cost for our feed production. Furthermore, thousands of
experienced poultry-raising farmers are located in the same region as our
facilities. Moreover, our operation is located in the transportation
hub of Shandong Province, providing our customers across China with easy
access to our facilities, thus, we believe significantly reducing the cost
of transportation and
logistics.
|
|
·
|
Vertically-Integrated
Business Model: Our
industrial chain is a vertically-integrated business model that integrates
feed producing, hatchery, farming, slaughtering, cutting and processing,
and wholesaling high volume duck production. Our company has built a
breeder farm with 50,000 breeder ducks providing eggs for the hatchery of
ducklings, a feed production facility producing feed for breeders and meat
ducks, a hatchery facility providing 25,000 ducklings daily, a processing
factory, and a long-term relationship with approximately 400 farmer
families. The facilities arrangement and the vertically-integrated
operation model have resulted in cost advantages while also mitigating the
price volatility of our raw material supply-feed and
ducklings.
|
|
·
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Cost: Our vertically-integrated
business model has reduced the volatility of the costs of our raw
materials, feed and ducklings. We also implemented a cost control strategy
throughout the process, such as operating our facilities during the time
of the day when electricity cost is the lowest. In addition, abundant
access to our local supplies of corn and other feed ingredients assures
the low cost for our feed production, which is a substantial cost
component for our final frozen duck
products.
|
|
·
|
Farmer
Network: We have a
broad base network of approximately 400 contracted farmers. This network
allows us to scale our production in a very efficient manner. All
contracts for production with farmers are 30 days, which allows our
capacity to remain
flexible.
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2
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·
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Reputation: We have received eight industry
awards or certifications in response to our contributions to the economic
development in the Shandong Province, the development of duck product
processing and the creation of job opportunities in the Shandong Province.
We believe these awards have helped us enhance our reputation in the
poultry and duck production industry among suppliers, customers, farmers,
banks, and relevant government authorities in the geographic areas of
China where we operate. These awards and certifications
include: the Shandong Agricultural Industry Award
for the key and leading enterprise (awarded by the Shandong provincial
government in August 2005); the award for the Agricultural Industrial
High-Integrity Service Enterprise (awarded by the Weifang Agricultural
Bureau in September 2005); and the contribution award for the leading
agricultural enterprise (awarded by the Weifang municipal government in
February 2006). These awards and certifications were given to us based on
our industry performance and for meeting certain criteria set by different
local area governments. While we did not undertake any competitive process
in order to receive these awards or certifications, we believe these
awards and certifications are only given to select companies in the
agricultural and poultry industry that meet certain performance and other
criteria.
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|
·
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Long-Term
Relationships with Key Customers and Diversified Customer Base:
We believe we have
established strong business relationships with several key customers.
Among our long-term customers, those with whom we have been doing business
for at least five to eight years, Yurun Group, which is listed on the Hong
Kong Stock Market, purchased nearly 5% of our duck production in 2009
making them our biggest customer of frozen duck products. Furthermore, our
top ten long-term customers, including Yurun Group, purchased frozen duck
products, in the aggregate, approximately 16% of our frozen duck
production in 2009. Given the lack of high concentration of sales to our
largest customers, we are not overly dependent on any one
customer.
|
|
·
|
Epidemic
Prevention and Quality Control: We supervise the operation of
our base farm and undertake various measures in order to maintain quality
control and prevent the spread of disease. Among other things, we monitor
the sanitation at the hatcheries, the quality and purity of our feed
ingredients and feed, the health of our breeder flocks and ducklings, the
conditions of our facilities and the quality of our finished products. We
conduct on-site quality control activities at each of the processing
plants and the prepared-duck plant. Our technician team visits farmers on
a regular basis, supervising and providing assistance in the use of
veterinary medicine vaccines by our contracted farmers. Contracted farmers
are required to sanitize and clean their duck habitats completely between
rounds of raising ducks. In addition, we have adopted various measures to
assure the quality of the ducks we repurchase from the farmers, including
providing our farmers with our on-site hatched ducklings, self-produced
feed, technical support throughout the duck raising period, and the
supervision and direction regarding the use of veterinary medicine.
|
Our
Growth Strategies
Our
primary objectives are to capitalize on current market opportunities and build
on our competitive strengths to enhance our position as a leader in the duck
industry by:
·
|
Enhance Sales and
Marketing: We expect to focus on channels through food
processors and distributors while seeking opportunities to enter the rural
markets of Shanghai, Nanjing, and Wuhan. We intend to explore new selling
channels such as supermarkets and groceries. We plan to expand our sales
and marketing team and develop a network of distributors and we also
intend to hire additional sales staff in order to strengthen our existing
relationships with food processors and develop new relationships,
including with supermarkets and grocery stores both locally and in
selected national markets in China. Meanwhile, we will also look to enter
into agreements with distributors active in the rural markets of Shanghai,
Nanjing, and Wuhan to distribute our products there.
|
|
|
·
|
Expand
Geographic Presence:
We intend to expand the sales of our frozen duck products geographically.
We continue to focus on our markets including those in the Shanghai,
Nanjing, and Wuhan areas. By establishing and strengthening business
relationships with food processing customers, supermarkets, restaurants,
and the individual distributors in these areas and expanding our market
share in the rural areas of these markets, we believe we will be able
to increase our sales. In addition, we plan to strengthen our sales and
marketing efforts by expanding our sales team.
|
|
·
|
Expand
Production Capacity:
We intend to expand our production capacity of frozen ducks from the
current daily capacity of processing 25,000 heads to 80,000 heads through
the related expansion of our feed production facility, hatchery, and
breeder farm. Specifically, we expect to increase our breeder duck
purchase from 50,000 heads to 100,000 heads and maintain that level,
purchase approximately 120 sets of hatchery machines to increase our
duckling production capacity from 8.5 million heads to 20 million heads
annually, and build an additional feed production facility to increase our
feed production capacity from 50,000 tons to 80,000 tons annually. We also
intend to hire additional personnel for sales, feed production, processing
production, feather production, hatchery, breeder farm, and administrative
functions.
|
|
·
|
Strengthen Our
Farmer Network: To
strengthen our farmer network, we intend to help existing farmers expand
their production and to continue adding additional contracted farmers.
Specifically, we intend to help existing farmers reduce the cost of
raising ducks by providing them additional technical support to assure a
high survival rate, and offering duckling delivery services and commercial
adult duck pick up services. We intend to offer competitive prices for
such services, which we believe will allow our contracted farmers to be
more profitable. In addition, as we expand our production capacity, we
believe we could easily find available farmers within Shandong Province to
work with.
|
3
|
·
|
Increase Our
Customer Base: By
strengthening our relationships with key customers and diversifying our
customer base, we plan to increase our product share in the market in
which we operate. We intend to attract more customers by providing a
diversified product mix and adding new varieties of the Bai Tiao products
and duck part products.
|
|
·
|
Improve Profit
Margins: In 2009, 98.6% of
our frozen duck products were sold through our own sales personnel to food
processors and only 1.4% of our products were sold through individual
distributors to local supermarkets. The profit margins for the sales to
the supermarkets and grocery stores are significantly higher than the
sales to food processors. We plan to expand our sales to supermarkets as
well as grocery stores through our own sales personnel and distributors
and we expect such change in our sales strategy to help increase our
profit margins.
|
Market
Opportunity
|
·
|
Compared to traditional Peking
ducks, Cherry Valley ducks are leaner with less fat content according
to the China Animal Agricultural Society and, based on the 206 million
Cherry Valley ducks sold from farms in China in 2009 and our increased
revenues during the past two years, have become popular. We expect this
popularity to drive market demand for Cherry Valley ducks in
China.
|
|
·
|
According to the CIA World
Factbook, China’s population is estimated to have grown by
approximately 0.7% in 2009 and is expected to grow further in future
years. We expect duck consumption to increase with this population
growth.
|
Our
Risks and Challenges
An
investment in our common stock involves a high degree of risk, including risks
related to us, the industries in which we operate, the PRC, the ownership of our
common stock and this offering, such as:
|
·
|
our dependence on the continued
growth of the duck industry in
China;
|
|
·
|
the loss of any key employee,
including members of our senior management
team;
|
|
·
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increased competition in the duck
industry;
|
|
·
|
events beyond our control, such
as an outbreak of disease in flocks or the adoption by government agencies
of more stringent regulations, could materially and adversely affect our
operations; and
|
|
·
|
currency conversion and exchange
rate volatility could adversely affect our financial
condition.
|
See “Risk
Factors” beginning on page 10 for a more detailed description of these and other
risks related to an investment in our common stock.
Corporate
Information
We
were incorporated in the State of Oregon on January 22, 2009, and we changed our
domicile to the State of Nevada on May 21, 2010. We conduct our operations
principally through our wholly-owned subsidiary, Beijing CHENGMUJINMING
Technology Service Co., LTD. (“Beijing CMJM”), a wholly foreign-owned enterprise
incorporated under the laws of the PRC on March 23, 2010. Through a series of
agreements (the “VIE Agreements”), Beijing CMJM has exclusive control over the
business of Weifang Jinzheng Poultry Co., Ltd. (“Jinzheng”), a company organized
under the laws of the PRC in 2002. In accordance with the VIE Agreements,
Beijing CMJM has the right to control substantially all revenues obtained by
Jinzheng. Pursuant to this contractual arrangement, Jinzheng is considered our
variable interest entity (“VIE”) for accounting purposes. See “Our
Corporate Structure” below in this Prospectus Summary and “Our History and
Corporate Structure—Contractual Arrangements with Jinzheng and Jinzheng
Stockholders” in this prospectus for a description of the contractual
arrangements among Beijing CMJM and Jinzheng and its stockholders (“Jinzheng
Stockholders”).
Our
principal executive offices are located at Daokou Industry Park, Yingli Town,
Shouguang, Shandong Province, China. The telephone number at our
principal executive offices is +86-536-5401658. The registered office of Beijing
CMJM is located at 1704F1 17th floor, Tsing Wun Contemporary Building,
Mantingfangyuan Housing Estate, Qingyunli, Haidian District, Beijing, China. Our
registered office in Nevada is located at CSC Services of Nevada, Inc., 502 East
John Street, Carson City, Nevada 89706. Investors should submit any
inquiries to the address and telephone number of our principal executive offices
in China set forth above. Our website is located at
http://www.jinzhenggroup.com. The information contained on our website is not a
part of this prospectus and is not incorporated herein by
reference.
4
Our
Corporate Structure
We
operate our business in China through Jinzheng, a PRC limited liability company,
wholly owned by our Chief Executive Officer, Junfeng Shan, and three other
shareholders, Yan Wang, Li Qian and Yufen Zhang, all of whom are PRC citizens.
Jinzheng holds the licenses and approvals necessary to breed, produce and
distribute ducks and other poultry meats in China. Pursuant to our VIE
Agreements with Jinzheng and Jinzheng Stockholders, we provide consulting and
management services to Jinzheng. We have exclusive control over Jinzheng’s daily
operations and financial affairs and the authority to appoint and the authority
to its senior executives and approve all matters requiring shareholder approval.
The VIE agreements are in effect for a term of ten years starting from March 25,
2010 and can be renewed for additional ten-year terms upon notice by Beijing
CMJM, our wholly-owned subsidiary. As a result of these contractual
arrangements, we are the primary beneficiary of Jinzheng. Accordingly, we
have consolidated Jinzheng’s financial results, assets and liabilities in our
financial statements since the execution of the VIE Agreements. For a
description of these contractual arrangements, see “Our History and Corporate
Structure—Contractual Arrangements with Jinzheng and Jinzheng Stockholders.”
Please also see the risk factors set forth under “Risk Factors—Risks Related to
Our Corporate Structure” on page 14 for a detailed description of the risks
related to our corporate structure.
The
following diagram illustrates our current corporate structure and the place of
formation, ownership interest and affiliation of each of our subsidiaries and
Jinzheng as of the date of this prospectus.
Junfeng
Shan, the sole shareholder of Zheng Hui Holding Limited (BVI Co1), also directly
owns 89.85% of the capital stock of Jinzheng, while Yufen Zhang, Yan Wang and Li
Qian own in aggregate the balance of the capital stock of Jinzheng
(these three individuals, together with Junfeng Shan, the “principal
shareholders”). The same three individuals also are the sole shareholders for
each of the BVI Co2, BVI Co3 and BVI Co4, respectively, as described in the
diagram above.
5
The
Offering
Common
stock offered by us
|
shares
|
|
shares
if the underwriters exercise their over-allotment option in full
and shares
if the underwriters also exercise their option to purchase additional
shares pursuant to their warrants issued in this
offering.
|
||
Common
stock outstanding before this offering
|
2,030,457 shares
|
|
Common
stock to be outstanding after this offering
|
shares
|
|
Offering
price
|
$ per
share
|
|
Use
of proceeds
|
We
estimate that our net proceeds from this offering will be approximately
$ million (based on an assumed initial public
offering price of $ per share, which is the
mid-point of the range set forth on the cover page of this prospectus)
after deducting underwriting discounts and commissions and the estimated
net proceeds. We intend to use approximately $11 million to $12 million
for the acquisition or construction of a new factory, including processing
and cold storage facilities and related equipment. In addition, we intend
to use approximately $3 million to expand our current
facilities. The remaining amount, if any, will be used for general
corporate purposes.
|
|
The
amounts and timing of our actual expenditures will depend on numerous
factors, including the status of our development efforts, sales and
marketing activities and the amount of cash generated or used by our
operations. We may find it necessary or advisable to use portions of the
proceeds for other purposes, and we will have broad discretion in the
application of the net proceeds. Pending these uses, the proceeds will be
invested in short-term, investment grade, interest-bearing
securities.
|
||
See
“Use of Proceeds” on page 26 for more information.
|
||
Over-allotment
option
|
In
connection with this offering, the underwriters have been granted an
over-allotment option, exercisable in full or in part, to purchase up to
an aggregate
of shares
of our common stock at the initial public offering price, less
underwriting discounts and commissions, within 45 days from the date of
this prospectus.
|
|
Underwriters’
warrants
|
In
connection with this offering, the underwriters have each been issued a
warrant to purchase up to an aggregate
of shares
of our common stock at
$ per share (a
price equal to 130% of the public offering price).
|
|
Dividends
|
We
have never paid a dividend on our common stock and we have no intention to
pay dividends in the near future.
|
|
Lock-up
|
We
and each of our directors, executive officers and certain principal
stockholders have agreed, subject to certain exceptions, not to, including
not announce an intention to, for a period of 12 months from the date of
this prospectus sell, transfer or otherwise dispose of any shares of our
common stock without the prior written consent of the underwriters.
See “Underwriting.”
|
|
Risk
factors
|
Investing
in these securities involves a high degree of risk. As an investor you
should be able to bear a complete loss of your investment. You should
carefully consider the information set forth in the “Risk Factors” section
beginning on page 10.
|
|
Listing
|
We
have applied to have our common stock listed on the NASDAQ Capital
Market (“NASDAQ”) under the symbol “ZHIC.”
|
6
Summary
Financial and Operating Data
The
following summary of our combined statement of income data for the years ended
December 31, 2009 and 2008 and the summary of the combined balance sheet data as
of December 31, 2009 and 2008 are derived from our audited combined financial
statements and related notes thereto included elsewhere in this prospectus. The
audited combined financial statements have been prepared in accordance with
accounting principles generally accepted in the United States (“GAAP”), and have
been audited by EFP Rotenberg, LLP, an independent registered public accounting
firm. The summary of our consolidated and combined statement of income for
the nine months ended September 30, 2010 and 2009 and the summary of our
consolidated and combined balance sheet data as of September 30, 2010 presented
below are derived from our unaudited consolidated interim financial statements
and related notes thereto included elsewhere in this prospectus. We have
prepared our unaudited consolidated interim financial statements on the same
basis as our audited combined financial statements and have included all
adjustments, consisting of normal and recurring adjustments that we consider
necessary to present fairly our financial position and results of operations for
our unaudited period. The summary financial information as of and for the
nine months ended September 30, 2010 is not necessarily indicative of the
results that may be obtained throughout fiscal year 2010.
The
consolidated and combined financial statements are reported in U.S. dollar
amounts. This data should be read in conjunction with our “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
our audited combined and unaudited consolidated financial statements and the
related notes included elsewhere in this prospectus.
The
balance sheet data as of September 30, 2010 is
presented:
·
|
on an actual basis;
and
|
·
|
on an as adjusted basis to
reflect (i) our sale of common stock in this offering at an assumed
initial public offering price of
$ per share (the
mid-point of the range set forth on the cover page of this prospectus),
after deducting estimated underwriting discounts and commissions and
estimated offering expenses.
|
Nine Months Ended
September 30,
|
Year Ended
December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
USD
|
USD
|
USD
|
USD
|
|||||||||||||
Net
revenue
|
30,063,212
|
25,171,582
|
36,757,703
|
33,354,535
|
||||||||||||
Cost
of sales
|
24,917,180
|
20,098,775
|
29,299,988
|
26,501,070
|
||||||||||||
Gross
profit
|
5,146,032
|
5,072,807
|
7,457,715
|
6,853,465
|
||||||||||||
Total
operating expenses
|
(1,257,578
|
(840,686
|
)
|
(1,120,479
|
)
|
(1,376,941
|
)
|
|||||||||
Income
from operations
|
3,888,454
|
4,232,121
|
6,337,236
|
5,476,524
|
||||||||||||
Total
other income
|
-
|
23,180
|
23,190
|
65,090
|
||||||||||||
Net
income before provision for income taxes
|
3,888,454
|
4,255,301
|
6,360,426
|
5,541,614
|
||||||||||||
Provision
for income taxes
|
981,749
|
1,108,370
|
1,630,076
|
1,458,112
|
||||||||||||
Net
income
|
2,906,705
|
3,146,931
|
4,730,350
|
4,083,502
|
||||||||||||
Net
income attributable to stockholders
|
2,906,705
|
2,517,545
|
3,915,595
|
3,266,802
|
||||||||||||
Other
comprehensive income attributable to stockholders
|
347,367
|
19,370
|
16,617
|
341,457
|
||||||||||||
Total
comprehensive income attributable to stockholders
|
3,254,072
|
2,536,915
|
3,932,212
|
3,608,259
|
||||||||||||
Basic
and diluted earnings per common share to stockholders
|
1.44
|
1.26
|
1.96
|
1.63
|
||||||||||||
Basic
and diluted weighted average common shares outstanding
|
2,021,997
|
2,000,000
|
2,000,000
|
2,000,000
|
7
As of September 30,
|
As of December 31,
|
||||||||||||
2010
|
2009
|
2008
|
|||||||||||
Actual
USD
|
As
Adjusted
(1)
USD
|
USD
|
USD
|
||||||||||
Consolidated
Balance Sheet Data
|
|||||||||||||
Cash
and cash equivalents
|
6,247,644
|
2,543,095
|
1,720,357
|
||||||||||
Total
assets
|
22,245,617
|
18,770,229
|
15,616,076
|
||||||||||
Total
liabilities
|
4,854,985
|
5,014,169
|
6,617,739
|
||||||||||
Total
Zheng Hui Industry Corp. stockholders’ equity
|
17,390,632
|
13,756,060
|
7,558,924
|
||||||||||
Non
controlling interest in VIE
|
-
|
-
|
1,439,413
|
||||||||||
Total
equity
|
17,390,632
|
13,756,060
|
8,998,337
|
(1)
|
Does not give effect to the
estimated use of proceeds. See “Use of
Proceeds.”
|
The table
below sets forth additional financial data for each of the periods indicated
that we believe is important to an understanding of our operations.
Nine Months Ended
September 30,
|
Year Ended
December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
USD
|
USD
|
USD
|
USD
|
|||||||||||||
Other
data
|
||||||||||||||||
EBITDA
(1)
|
4,392,170
|
4,725,946
|
6,987,651
|
6,261,206
|
||||||||||||
Adjusted
EBITDA (2)
|
4,392,170
|
4,749,126
|
6,964,461
|
6,196,116
|
||||||||||||
Capital
expenditures
|
302,153
|
2,344,255
|
4,235,306
|
743,995
|
(1)
|
EBITDA is defined as net income
before net interest expense, income tax expense, depreciation and
amortization. EBITDA is a financial measure that is not calculated in
accordance with generally accepted accounting principles, or GAAP. EBITDA
should not be considered as an alternative to net income (loss), operating
income (loss) or any other measure of financial performance calculated and
presented in accordance with GAAP. We prepare EBITDA to eliminate the
impact of items that we do not consider indicative of our core operating
performance. We encourage you to evaluate these adjustments and the
reasons we consider them
appropriate.
|
We
believe EBITDA is useful to investors in evaluating our operating performance
because:
|
·
|
securities analysts use EBITDA as
a supplemental measure to evaluate the overall operating performance of
companies and we anticipate that our investor and analyst presentations
after we are public will include EBITDA;
and
|
|
·
|
we believe that the elimination
of certain non-cash, non-operating or non-recurring items enables a more
consistent measurement of period to period performance of our operations,
as well as a comparison of our operating performance to companies in our
industry.
|
8
Our
management uses EBITDA:
|
·
|
as a measure of operating
performance;
|
|
·
|
for planning purposes, including
the preparation of our annual operating
budget;
|
|
·
|
to allocate resources to enhance
the financial performance of our
business;
|
|
·
|
to evaluate the effectiveness of
our business strategies; and
|
|
·
|
in communications with our Board
of Directors concerning our financial
performance.
|
Although
EBITDA is frequently used by investors and securities analysts in their
evaluations of companies, EBITDA has limitations as an analytical tool, and you
should not consider it in isolation or as a substitute for analysis of our
results of operations as reported under GAAP. Some of these limitations
are:
|
·
|
EBITDA does not reflect our cash
expenditures or future requirements for capital expenditures or other
contractual commitments;
|
|
·
|
EBITDA does not reflect changes
in, or cash requirements for, our working capital
needs;
|
|
·
|
EBITDA does not reflect interest
expense or interest income;
|
|
·
|
EBITDA does not reflect cash
requirements for income
taxes;
|
|
·
|
although depreciation and
amortization are non-cash charges, the assets being depreciated or
amortized will often have to be replaced in the future, and EBITDA does
not reflect any cash requirements for these replacements;
and
|
|
·
|
other companies in our industry
may calculate EBITDA or similarly titled measures differently than we do,
limiting its usefulness as a comparative
measure.
|
(2)
|
Adjusted EBITDA represents EBITDA
adjusted for non-operating income or expense. Adjusted EBITDA is a
financial measure that is not calculated in accordance with GAAP. Adjusted
EBITDA should not be considered as an alternative to net income (loss),
operating income (loss) or any other measure of financial performance
calculated and presented in accordance with GAAP. Our Adjusted EBITDA may
not be comparable to similarly titled measures of other companies because
other companies may not calculate Adjusted EBITDA or similarly titled
measures in the same manner as we do. We use Adjusted EBITDA to evaluate
our operating results without the additional variations caused by
non-operating income or expense, which is
non-recurring.
|
The
following table includes a reconciliation of our Net Income to our EBITDA and
Adjusted EBITDA for each of the periods indicated:
Nine Months Ended
September 30,
|
Year Ended
December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
USD
|
USD
|
USD
|
USD
|
|||||||||||||
Net
income
|
2,906,705
|
3,146,931
|
4,730,350
|
4,083,502
|
||||||||||||
Depreciation
and amortization
|
397,001
|
310,222
|
425,594
|
323,971
|
||||||||||||
Provision
for income taxes
|
981,749
|
1,108,370
|
1,630,076
|
1,458,112
|
||||||||||||
Interest
expenses
|
106,715
|
160,423
|
201,631
|
395,621
|
||||||||||||
EBITDA
|
4,392,170
|
4,725,946
|
6,987,651
|
6,261,206
|
||||||||||||
Other
income
|
-
|
23,180
|
23,190
|
65,090
|
||||||||||||
Adjusted
EBITDA
|
4,392,170
|
4,749,126
|
6,964,461
|
6,196,116
|
9
Investing
in our common stock involves a high degree of risk. Before making an investment
in our common stock, you should carefully consider the following risks, as well
as the other information contained in this prospectus. You should pay particular
attention to the fact that we conduct all of our operations in China and are
governed by a legal and regulatory environment that in some respects differs
significantly from the environment that may prevail in the U.S. and other
countries. The risks described below are those which we believe are currently
the material risks we face. Any of the risk factors described below could
materially adversely affect our business, prospects, financial condition, cash
flows and results of operations. As a result, the trading price of our common
stock could decline and you may lose part or all of your investment.
Risks
Related to Our Business
Industry
cyclicality can affect our earnings, especially due to fluctuations in commodity
prices of feed ingredients and duck meat.
Profitability
in the duck industry is materially affected by the commodity prices of feed
ingredients, duck meat and alternative proteins. These prices are determined by
supply and demand factors and supply and demand factors with respect to feed
ingredients, duck meat and alternative proteins may not correlate. As a result,
the duck industry is subject to wide fluctuations. It is very difficult to
predict when these cycles will occur. All we can safely predict is that they do
and will occur.
Various
factors can affect the supply of corn and soybean meal, which are the primary
ingredients of the feed we use. In particular, global weather patterns, the
global level of supply inventories and demand for feed ingredients, currency
fluctuations and the agricultural and energy policies of the United States and
foreign governments all affect the supply of feed ingredients. Weather patterns
often change agricultural conditions in an unpredictable manner. A sudden and
significant change in weather patterns could affect supplies of feed
ingredients, as well as our ability to obtain feed ingredients, grow duck meat
or deliver products. More recently, demand for corn from ethanol producers has
resulted in sharply higher costs for corn and other grains. Increases in the
prices of feed ingredients will result in increases in raw material costs and
operating costs. Because our duck meat prices are related to the commodity
prices of duck meats, we typically are not able to increase our product prices
to offset these increased grain costs. We periodically enter into contracts in
the fall, when corn is more abundant and prices are relatively lower to purchase
additional supplies, which are stored for future use to manage our feed
ingredient costs. This practice reduces but does not eliminate the risk of
increased operating costs from commodity price increases.
Outbreaks
of avian disease, such as avian influenza, or the perception that outbreaks may
occur, can significantly restrict our ability to conduct our
operations.
We take
reasonable precautions to ensure that our flocks are healthy and that our
processing plants and other facilities operate in a sanitary and environmentally
sound manner. Nevertheless, events beyond our control, such as the outbreak of
avian disease, even if it does not affect our flocks, could significantly
restrict our ability to conduct our operations or our sales. An outbreak of
disease could result in governmental restrictions on the sales of fresh and
frozen duck meat, including our fresh and frozen duck meat products, or other
products to or from our suppliers, facilities or customers, or require us to
destroy one or more of our flocks. This could result in the cancellation of
orders by our customers and create adverse publicity that may have a material
adverse effect on our business, reputation and prospects. In addition, worldwide
fears about avian disease, such as avian influenza, or AI, have, in the past,
depressed demand for fresh duck meat, which adversely impacted our sales.
Since all the commercial ducks that we purchase are raised by our approximately
400 contracted farmers within a radius of 10 kilometers of our processing
facility, the risk of disease or other disruptions to our business operations
from a local outbreak is enhanced.
In recent
years there has been substantial publicity regarding a highly pathogenic Asian
strain of AI, known as H5N1, which has affected Asia since 2002 and which has
been found in Europe, the Middle East and Africa. It is widely believed that
this strain of AI is spread by migratory birds, such as ducks and geese. There
have also been some cases where this strain of AI is believed to have passed
from birds to humans as humans came into contact with live birds that were
infected with the disease.
Competition
in the duck industry with other duck companies, especially companies with
greater resources, may make us unable to compete successfully in this industry,
which could adversely affect our business.
The duck
industry is highly competitive. Some of our competitors have greater financial
and marketing resources than we have.
In
general, the competitive factors in China’s duck industry include:
|
·
|
price;
|
10
|
·
|
product
quality;
|
|
·
|
brand
identification;
|
|
·
|
breadth of product line;
and
|
|
·
|
customer
service.
|
Competitive
factors vary by major markets. In the foodservice market, where we principally
operate, competition is based on consistent quality, product development,
service and price. Our success depends in part on our ability to manage costs
and be efficient in the highly competitive duck industry.
We
conduct substantially all of our operations through Jinzheng, and our
performance will depend upon the performance of Jinzheng.
We have
no operations independent of those of Jinzheng. As a result, we are dependent
upon the performance of Jinzheng and will be subject to the financial, business
and other factors affecting Jinzheng as well as general economic and financial
conditions. As substantially all of our operations are conducted through
Jinzheng, we are dependent on the cash flow of Jinzheng to meet our
obligations.
Since
virtually all of our assets are held by Jinzheng, the claims of our shareholders
will be structurally subordinate to all existing and future liabilities and
obligations, and trade payables of Jinzheng. In the event of a bankruptcy,
liquidation or reorganization our assets and those of our subsidiaries will be
available to satisfy the rights of our shareholders only after all of Jinzheng’s
liabilities and obligations have been paid in full.
Due
to our growth in recent years, our past results may not be indicative of our
future performance so evaluating our business and prospects may be
difficult.
Our
business has grown and evolved rapidly in recent years as demonstrated by our
growth in revenues from approximately $33.3 million in 2008 to approximately
$36.8 million in 2009, representing a 10.5% growth rate. In addition, our
revenues increased approximately $5.0 million, or 19.9%, from approximately
$25.2 million in the nine months ended September 30, 2009 to $30.2 million in
the same period in 2010. We may not be able to achieve similar growth in
future periods. Therefore, our historical operating results may not provide a
meaningful basis for evaluating our business, financial performance and
prospects in the future. Moreover, our ability to achieve satisfactory operating
results at higher production and sales volumes is unproven. You should not rely
on our past results or our historical rate of growth as an indication of our
future performance.
Our revenues are
all generated in China, and our business will be harmed if demand in China
decreases.
Historically,
all of our revenues have been derived from customers in China. If demand for our
processed duck decreases in China or if we are unable to generate international
sales, our revenue and net income would also decline.
Inclement
weather, such as excessive heat or storms, could hurt our flocks, which could in
turn have a material adverse effect on our results of operations.
Extreme
weather in the region where we operate, such as excessive heat, hurricanes or
other storms, could impair the health or growth of our flocks or interfere with
our hatching, production or shipping operations due to power outages, fuel
shortages, damage to infrastructure, or disruption of shipping channels, among
other things. Any of these factors could materially and adversely affect our
results of operations.
We
may not be able to effectively control and manage our growth.
If our
business and markets grow and develop it may be necessary for us to finance and
manage expansion in an orderly fashion. In addition, we may face challenges in
managing expanding product offerings. Such circumstances will increase demands
on our existing management and facilities. Failure to manage this growth and
expansion could interrupt or adversely affect our operations and cause
production backlogs, longer product development time frames and administrative
inefficiencies.
Shortages
or disruptions in the availability of raw materials could have a material
adverse effect on our business.
We expect
that raw materials of corn and soybean meal will continue to account for a
significant portion of our cost of goods sold in the future. The prices of raw
materials fluctuate because of general economic conditions, global supply and
demand and other factors causing monthly variations in the costs of our raw
materials purchases. These macro-economic factors, together with labor and other
business interruptions experienced by certain suppliers, have contributed to
periodic shortages in the supply of raw materials, and such shortages may
increase in the future. If we are unable to procure adequate supplies of raw
material to meet our future production needs and customer demand, shortages
could result in a material loss of customers and revenues and adversely impact
our results of operations. In addition, supply shortages or disruptions or the
loss of suppliers may cause us to procure our raw materials from less cost
effective sources and may have a material adverse effect on our business,
revenues and results of operations.
11
We
depend on the availability of, and good relations with, our contracted farmer
family growers.
We
contract with approximately 400 independent farmer families in China for
the grow-out of our day-old ducklings. Our operations depend on the availability
of labor and contracted farmers and maintaining good relations with these
persons. If we do not attract and maintain contracts with our contracted
farmers, our production operations could be negatively impacted.
We
depend on a few suppliers for a significant portion of our principal raw
materials and we do not have any long-term supply contracts, which makes us
susceptible to increased operating costs, production delays or shortages and
quality control risks. Interruptions of production at our key suppliers may
affect our results of operations and financial performance.
We
rely on a limited number of suppliers for most of the raw materials we use. Our
major raw materials include breeder ducks, soybean meal and corn, of which
the latter two are the major raw materials of our duck feed products. We
purchase breeder ducks from one supplier, Weifang Legang Food Co., Ltd. We later
purchase soybean meal from two suppliers, China Oil & Foodstuff (Weifang)
Co., Ltd and Weifang Haihua Zhenxing Oil & Foodstuff Co., Ltd., with each
supplier accounting for 4.7% and 3.8% of our total purchases of raw materials in
2009, respectively. In addition, we purchase corn from five individuals, in
aggregate, accounting for 10.3% of our total purchases of raw materials in
2009. We do not have long-term or volume purchase agreements in excess of one
year with most of our suppliers. Such dependence on a limited number of
suppliers involves risks, including limited control over the price, timely
delivery and quality of the materials supplied. Interruptions or shortages of
supplies from our key suppliers of raw materials could disrupt production or
impact our ability to increase production and sales. Identifying and accessing
alternative sources may increase our costs. Interruptions at our key suppliers
could negatively impact our results of operations, financial performance and the
price of our common stock.
Increases
in raw materials prices may increase credit and default risk with respect to our
customers.
Increases
in the price of our products, as raw material prices rise, may place additional
demands on the working capital and liquidity needs of our customers.
Accordingly, our customers’ cash flow may be negatively impacted which may have
an adverse affect on the timing and amount of payment on our accounts
receivable, which would in turn, negatively affect our results of
operations.
If
our duck products become contaminated, we may be subject to product liability
claims and product recalls.
Duck
products may be subject to contamination by disease-producing organisms, or
pathogens, such as Listeria monocytogenes, Salmonella and generic E. coli. These
pathogens are generally found in the environment and, as a result, there is a
risk that they, as a result of food processing, could be present in our
processed duck products. These pathogens can also be introduced as a result of
improper handling by our customers, consumers or third parties after we have
shipped the products. We control these risks through careful processing and
testing of our finished product, but we cannot entirely eliminate them. We have
little, if any, control over proper handling in different stages of production
process. Nevertheless, we may be blamed for contamination caused by improper
handling of or tampering with our products by our contracted farmers, customers,
consumers or third parties. Any publicity regarding product contamination or
resulting illness or death could adversely affect us even if we did not cause
the contamination and could have a material adverse effect on our business,
reputation and future prospects. We could be required to recall our products if
they are contaminated or damaged and product liability claims could be asserted
against us. We currently do not have product liability insurance to cover
any damages that may be awarded pursuant to any such liability
claims.
We
are exposed to risks relating to product liability, product recalls, property
damage and injuries to persons, for which insurance coverage is expensive,
limited and potentially inadequate.
Our
business operations entail a number of risks, including risks relating to
product liability claims, product recalls, property damage and injuries to
persons. We currently do not maintain insurance with respect to these risks,
including product liability and recall insurance, property insurance, workers
compensation insurance and general liability insurance. Such insurance may be
expensive and difficult to obtain in the future. We cannot assure you that we
will obtain such insurance or, if obtained, we can maintain on reasonable terms
sufficient coverage to protect us against losses due to any of these
events.
Since there is no
assurance that we will complete the acquisition or construction of a new
facility, we may not be able to expand our production capacity as planned and
our business and prospects would be adversely affected if we fail to do so.
We plan
to expand our current production capacity from processing 25,000 heads to 80,000
heads per day. To realize this goal, we intend to acquire or construct a new
factory that includes processing and storage facilities and related equipment.
We have explored opportunities to acquire additional facilities and we have also
purchased the land use rights necessary to build a facility if necessary.
Although we believe that we would have sufficient funds to complete one of these
two options with the proceeds from this offering and cash generated from our
operations, there is no assurance that we will be able to complete either one of
the options successfully if additional funds are needed. If we fail to complete
one of the options, we will be unable to increase our production capacity as
planned, which would adversely affect our business and prospects. Further our
goal of production capacity expansion would not be realized as we have planned,
and our business growth would be adversely affected as a result.
12
Our
business would be adversely affected if we expand by acquiring other businesses
or by building new processing plants, but fail to successfully integrate the
acquired business or run a new plant efficiently.
We
regularly evaluate expansion opportunities such as acquiring other businesses or
building new processing plants. Significant expansion involves risks such as
additional debt, integrating the acquired business or new plant into our
operations and attracting and retaining growers. In evaluating expansion
opportunities, we carefully consider the effect that financing the opportunity
will have on our financial condition. Successful expansion depends on our
ability to integrate the acquired business or efficiently run the new plant. If
we are unable to do this, expansion could adversely affect our operations,
financial results and prospects.
Current
and future governmental regulations or changes in the enforcement of existing
laws may materially affect our business.
The duck
industry is subject to various governmental regulations relating to the
processing, packaging, storage, distribution, advertising, labeling, quality and
safety of food products. Unknown matters, new laws and regulations, or stricter
interpretations of existing laws or regulations may materially affect our
business or operations in the future. Our failure to comply with applicable laws
and regulations could subject us to administrative penalties and civil remedies,
including fines, injunctions and recalls of our products. Our operations are
also subject to extensive and increasingly stringent environmental regulations,
which pertain to the discharge of materials into the environment and the
handling and disposition of wastes. Failure to comply with these regulations can
have serious consequences, including civil and administrative penalties and
negative publicity.
We
may be affected by global climate change or by legal, regulatory, or market
responses to such change.
The
growing political and scientific sentiment is that increased concentrations of
carbon dioxide and other greenhouse gases in the atmosphere are influencing
global weather patterns. Changing weather patterns, along with the increased
frequency or duration of extreme weather conditions, could impact the
availability or increase the cost of key raw materials that we use to produce
our products. Additionally, the sale of our products can be impacted by weather
conditions.
Concern
over climate change, including global warming, has led to legislative and
regulatory initiatives directed at limiting greenhouse gas, or GHG, emissions.
For example, proposals that would impose mandatory requirements on GHG emissions
continue to be considered by policy makers in the territories that we operate.
Laws enacted that directly or indirectly affect our production, distribution,
packaging, cost of raw materials, fuel, ingredients, and water could all impact
our business and financial results.
Potential
environmental liability could have a material adverse effect on our operations
and financial condition.
As a
manufacturer, we are subject to various Chinese environmental laws and
regulations on air emission, waste water discharge, solid wastes and noise
discharge. Although we believe that our operations are in substantial compliance
with current environmental laws and regulations, we may not be able to comply
with these regulations at all times as the Chinese environmental legal regime is
evolving and becoming more stringent. Therefore, if the Chinese government
imposes more stringent regulations in the future, we may have to incur
additional and potentially substantial costs and expenses in order to comply
with new regulations, which may negatively affect our results of operations.
Further, no assurance can be given that all potential environmental liabilities
have been identified or properly quantified or that any prior owner, operator,
or tenant has not created an environmental condition unknown to us. If we fail
to comply with any of the present or future environmental regulations in any
material aspects, we may suffer from negative publicity and be subject to claims
for damages that may require us to pay substantial fines or have our operations
suspended or even be forced to cease operations.
We
rely on key personnel in order to grow our business.
We depend
substantially on the leadership of Mr. Junfeng Shan, our chairman and chief
executive officer, who is integral to our ability to continue to grow our
business and has established relationships within the industries in which we
operate. If Mr. Junfeng Shan or any of our other key personnel was to leave us,
our growth strategy might be hindered, which could limit our ability to increase
revenue. In addition, we face competition for attracting skilled personnel. If
we fail to attract and retain qualified personnel to meet current and future
needs, this could slow our ability to grow our business, decrease our market
share and have a material adverse effect on our business, results of operations
and financial condition.
We
may need additional financing, which may not be available on satisfactory terms
or at all.
Our
capital requirements may be accelerated as a result of many factors, including
timing of development activities, underestimates of budget items, unanticipated
expenses or capital expenditures, future product opportunities with
collaborators, future licensing opportunities and future business combinations.
Consequently, we may need to seek additional debt or equity financing, which may
not be available on favorable terms, if at all, and may be dilutive to our
stockholders.
13
We may
seek to raise additional capital through public or private equity offerings,
debt financings or additional corporate collaboration and licensing
arrangements. To the extent that we raise additional capital by issuing equity
securities, our stockholders may experience dilution. To the extent that we
raise additional capital by issuing debt securities, we may incur substantial
interest obligations, may be required to pledge assets as security for the debt
and may be constrained by restrictive financial and/or operational covenants.
Debt financing would also be superior to our stockholders’ interest in
bankruptcy or liquidation. To the extent we raise additional funds through
collaboration and licensing arrangements, it may be necessary to relinquish some
rights to our technologies or product candidates, or grant licenses on
unfavorable terms.
Risks
Related to Our Corporate Structure
Our
contractual arrangements with Jinzheng and its shareholders may not be as
effective in providing control over these entities as direct
ownership.
We have
no equity ownership interest in Jinzheng and rely on the contractual
arrangements of the VIE Agreements to control and operate Jinzheng. These
contractual arrangements may not be as effective in providing control over
Jinzheng as direct ownership. For example, Jinzheng could fail to take actions
required for our business or fail to pay dividends to Beijing CMJM despite its
contractual obligation to do so. If Jinzheng fails to perform its obligation
under the VIE Agreements, we may have to rely on legal remedies under PRC law,
which may not be effective. In addition, we cannot assure you that Jinzheng’s
shareholders will always act in our best interests.
Our
contractual arrangements with Jinzheng may result in adverse tax consequences to
us.
As a
result of our corporate structure and contractual arrangements between Beijing
CMJM and Jinzheng, Beijing CMJM is effectively subject to the 5% PRC business
tax on revenues derived from Jinzheng pursuant to the VIE Agreements. Beijing
CMJM is subject to the business tax, while Jinzheng, as a manufacturer, instead
of a service provider, is not subject to the business tax. Moreover, we
would be subject to adverse tax consequences if the PRC tax authorities were to
determine that the VIE Agreements between Beijing CMJM and Jinzheng were not on
an arm’s length basis and therefore constitute a favorable transfer pricing. As
a result, the PRC tax authorities could request that we adjust its taxable
income upward for PRC tax purposes. Such a pricing adjustment could adversely
affect us by:
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·
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increasing Jinzheng’s tax
expenses without reducing Beijing CMJM’s tax expenses, which could subject
Jinzheng to late payment fees and other penalties for under-payment of
taxes; and/or
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·
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resulting in Beijing CMJM’s loss
of its preferential tax
treatment.
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The principal
shareholder of Jinzheng has potential conflicts of interest with us, which may
adversely affect our business.
Junfeng
Shan, our chairman and chief executive officer, is also the principal
shareholder of Jinzheng. Conflicts of interests between his duties to our
company and Jinzheng may arise. As Mr. Junfeng Shan is a director and executive
officer of our company, he has a duty of loyalty and care to us under Nevada
State law when there are any potential conflicts of interests between our
company and Jinzheng. Additionally, Mr. Junfeng Shan has executed an irrevocable
power of attorney to appoint the individual designated by us to be his
attorney-in-fact to vote on his behalf on all Jinzheng matters requiring
shareholder approval. We cannot assure, however, that when conflicts of interest
arise, Mr. Junfeng Shan will act completely in our interests or that conflicts
of interests will be resolved in our favor. In addition Mr. Junfeng Shan could
violate his employment agreement with us or his legal duties by diverting
business opportunities from us to others. In addition, Mr. Junfeng Shan may
be able to cause the VIE Agreements to be performed, amended or terminated in a
manner adverse to us by, among other things, failing to remit payments to us on
a timely basis or operating Jinzheng so as to cause harm to our business. If we
cannot resolve any conflicts of interest between us and Mr. Junfeng Shan, we
would have to rely on legal proceedings, which could result in the disruption of
our business.
PRC laws and
regulations governing our businesses and the validity of certain of our
contractual arrangements are uncertain. If we are found to be in violation of
such PRC laws and regulations, our business may be negatively affected.
There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing our business, or the enforcement and performance of Beijing CMJM’s
contractual arrangements with Jinzheng.
Zheng Hui
and Beijing CMJM are considered foreign investors or foreign invested
enterprises under PRC law. As a result, Zheng Hui and Beijing CMJM are subject
to limitations under PRC law on foreign ownership of Chinese companies.
According to the Catalogue of Industries for Guiding Foreign Investment (the
“Catalogue”), there are four kinds of industries which are encouraged,
permitted, restricted and prohibited for foreign investment. Although the
primary business of Jinzheng is not within the category in which foreign
investment is currently restricted or prohibited, the uncertainty of PRC law,
regulations and governmental policies affecting foreign ownership may result in
Zheng Hui being required to hold (or, conversely, being prohibited from
holding), directly or indirectly, a given percentage of Jinzheng’s equity
interests. Our VIE Agreements with Jinzheng and the Jinzheng Stockholders its
shareholders allow us to substantially control Jinzheng through Beijing CMJM
without exercising the exclusive equity interest purchase agreement.
14
However,
there are substantial uncertainties regarding the interpretation, application
and enforcement of current PRC laws and regulations and the PRC government may
determine that the contractual arrangements were designed to circumvent the
applicable PRC laws and regulations. Accordingly, we cannot assure you that our
contractual arrangements with Jinzheng and the Jinzheng Stockholders will be
enforceable, which may make it difficult to exert effective control over
Jinzheng. Further, we may be subject to sanctions, including fines, and
could be required to restructure our business and operations or cease to provide
certain services or products. If any of the foregoing occurs, our ability
to conduct our business may be negatively affected and our financial conditions,
results of operations and prospects could be materially and adversely impacted.
Risks
Associated With Doing Business In China
There are
substantial risks associated with doing business in China, as set forth in the
following risk factors.
Our
operations and assets in China are subject to significant political and economic
uncertainties.
Changes
in PRC laws and regulations, or their interpretations, or the imposition of
confiscatory taxation, restrictions on currency conversion, imports and sources
of supply, devaluations of currency or the nationalization or other
expropriation of private enterprises could have a material adverse effect on our
business, results of operations and financial condition. Under our current
leadership, the Chinese government has been pursuing economic reform policies
that encourage private economic activity and greater economic decentralization.
There is no assurance, however, that the Chinese government will continue to
pursue these policies, or that it will not significantly alter these policies
from time to time without notice.
We
derive a substantial portion of our sales from China and a slowdown or other
adverse developments in the PRC economy may materially and adversely affect our
customers, demand for our services and our business.
Substantially
all of our sales are generated in China. We anticipate that sales of our
products in China will continue to represent a substantial proportion of our
total sales in the near future. Although the PRC economy has grown significantly
in recent years, we cannot assure you that such growth will continue. The
industry in which we are involved is growing in the PRC, but we do not know how
sensitive we are to a slowdown in economic growth or other adverse changes in
the PRC economy which may affect demand for our products. A slowdown in overall
economic growth, an economic downturn or recession or other adverse economic
developments in the PRC may materially reduce the demand for our products and
materially and adversely affect our business.
Currency
fluctuations and restrictions on currency exchange may adversely affect our
business, including limiting our ability to convert Chinese Renminbi, or RMB,
into foreign currencies and, if the RMB were to decline in value, reducing our
revenue in U.S. dollar terms.
The
exchange rate of the RMB is currently managed by the Chinese government. On
July 21, 2005, the People's Bank of China, or the People's Bank, with the
authorization of the State Council of the PRC, announced that the RMB exchange
rate would no longer be pegged to the U.S. Dollar and would float based on
market supply and demand with reference to a basket of currencies. According to
public reports, the governor of the People's Bank has stated that the basket is
composed mainly of the U.S. Dollar, the European Union Euro, the Japanese Yen
and the South Korean Won. Also considered, but playing smaller roles, are the
currencies of Singapore, the United Kingdom, Malaysia, Russia, Australia, Canada
and Thailand. The weight of each currency within the basket has not been
announced.
The
initial adjustment of the RMB exchange rate was an approximate 2% revaluation
from an exchange rate of 8.28 RMB per U.S. Dollar to 8.11 RMB per U.S. Dollar.
The People's Bank also announced that the daily trading price of the U.S. Dollar
against the RMB in the inter-bank foreign exchange market would be allowed to
float within a band of 0.3% around the central parity published by the People's
Bank, while the trading prices of the non-U.S. Dollar currencies against the RMB
would be allowed to move within a certain band announced by the People's Bank.
The People's Bank has stated that it will make adjustments of the RMB exchange
rate band when necessary according to market developments as well as the
economic and financial situation. In a later announcement published on
May 18, 2007, the band was extended to 0.5%. Since July 2008, the RMB has
traded at 6.83 RMB per U.S. Dollar. Recent reports indicate an upward
revaluation in the value of the RMB against the U.S. Dollar may be allowed. The
People's Bank announced on June 19, 2010 its intention to allow the RMB to
move more freely against the basket of currencies, which increases the
possibility of sharp fluctuations in the value of the RMB in the near future and
thus the unpredictability associated with the RMB exchange rate.
Despite
this change in their exchange rate regime, the Chinese government continues to
manage the valuation of the RMB. The value of our common stock will be
indirectly affected by the foreign exchange rate between the U.S. dollar and the
RMB. Appreciation or depreciation in the value of the RMB relative to the U.S.
dollar would affect our financial results reported in U.S. dollar terms without
giving effect to any underlying change in our business or results of operations.
Fluctuations in the exchange rate will also affect the relative value of any
dividend we issue that will be exchanged into U.S. dollars, as well as earnings
from, and the value of, any U.S. dollar-denominated investments we make in the
future.
15
The
income statements of our operations are translated into U.S. dollars at the
average exchange rates in each applicable period. To the extent the U.S. dollar
strengthens against foreign currencies, the translation of these foreign
currencies denominated transactions results in reduced revenue, operating
expenses and net income for our international operations. Similarly, to the
extent the U.S. dollar weakens against foreign currencies, the translation of
these foreign currency denominated transactions results in increased revenue,
operating expenses and net income for our international operations. We are also
exposed to foreign exchange rate fluctuations as we convert the financial
statements of our foreign subsidiaries into U.S. dollars in consolidation. If
there is a change in foreign currency exchange rates, the conversion of the
foreign subsidiaries’ financial statements into U.S. dollars will lead to a
translation gain or loss, which is recorded as a component of other
comprehensive income. In addition, we have certain assets and liabilities that
are denominated in currencies other than the relevant entity’s functional
currency. Changes in the functional currency value of these assets and
liabilities create fluctuations that will lead to a transaction gain or
loss.
Very
limited hedging transactions are available in China to reduce our exposure to
exchange rate fluctuations. To date, we have not entered into any hedging
transactions. While we may enter into hedging transactions in the future, the
availability and effectiveness of these transactions may be limited, and we may
not be able to successfully hedge our exposure at all. In addition, our foreign
currency exchange losses may be magnified by PRC exchange control regulations
that restrict our ability to convert RMB into foreign currencies.
The
application of PRC regulations relating to the overseas listing of PRC domestic
companies is uncertain, and we may be subject to penalties for failing to
request approval of the PRC authorities prior to listing our shares in the
U.S.
On August
8, 2006, six PRC government agencies, namely, the Ministry of Commerce, or
MOFCOM, the State Administration for Industry and Commerce, or SAIC, the China
Securities Regulatory Commission, or CSRC, the State Administration of Foreign
Exchange, or SAFE, the State Assets Supervision and Administration Commission,
or SASAC, and the State Administration for Taxation, or SAT, jointly issued the
Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors (the “New M&A Rules”), which became effective on September 8,
2006. The New M&A Rules purport, among other things, to require offshore
“special purpose vehicles,” that are (1) formed for the purpose of overseas
listing of the equity interests of PRC companies via acquisition and (2) are
controlled directly or indirectly by PRC companies and/or PRC individuals, to
obtain the approval of the CSRC prior to the listing and trading of their
securities on overseas stock exchanges. Based on our understanding of current
PRC Laws and as advised by our PRC counsel, (i) Beijing CMJM was incorporated by
a foreign owned enterprise, and there was no acquisition of the equity or assets
of a “PRC domestic company” as such term is defined under the New M&A Rules
and (ii) no provision in the New M&A Rules clearly classifies the
contractual arrangements between Beijing CMJM and Jinzheng as a type of
transaction falling within the New M&A Rules. Therefore, we were and
are not required to obtain the approval of CSRC under the New M&A Rules in
connection with this offering.
However,
there are substantial uncertainties regarding the interpretation, application
and enforcement of the New M&A Rules and CSRC has yet to promulgate any
written provisions or formally declare or state whether the overseas listing of
a PRC-related company structured similar to ours is subject to the approval of
CSRC. Any violation of these rules could result in fines and other penalties on
our operations in China, restrictions or limitations on remitting dividends
outside of China, and other forms of sanctions that may cause a material and
adverse effect to our business, operations and financial
conditions.
The new
mergers and acquisitions regulations also established additional procedures and
requirements that are expected to make merger and acquisition activities by
foreign investors more time-consuming and complex, including requirements in
some instances that the Ministry of Commerce be notified in advance of any
change-of-control transaction in which a foreign investor takes control of a PRC
domestic enterprise that owns well-known trademarks or China’s traditional
brands. We may grow our business in part by acquiring other businesses.
Complying with the requirements of the new mergers and acquisitions regulations
in completing this type of transactions could be time-consuming, and any
required approval processes, including CSRC approval, may delay or inhibit our
ability to complete such transactions, which could affect our ability to expand
our business or maintain our market share.
Recent
PRC regulations relating to the establishment of offshore special purpose
companies by PRC residents may subject our PRC resident shareholders or our PRC
subsidiaries to penalties, limit our ability to distribute capital to our PRC
subsidiaries, limit our PRC subsidiaries’ ability to distribute funds to us, or
otherwise adversely affect us.
The
SAFE issued a public notice in October 2005, or the SAFE Circular No. 75,
requiring PRC residents to register with the local SAFE branch before
establishing or controlling any company outside of China for the purpose of
capital financing with assets or equities of PRC companies, referred to in the
SAFE Circular No. 75 as SPVs. PRC residents who are shareholders of SPVs
established before November 1, 2005 were required to register with the local
SAFE branch before March 31, 2006. Further, PRC residents are required to file
amendments to their registrations with the local SAFE branch if their SPVs
undergo a material event involving changes in capital, such as changes in share
capital, mergers and acquisitions, share transfers or exchanges, spin-off
transactions or long-term equity or debt investments. Our current PRC resident
shareholders have made the registration successfully. However, any failure by
shareholders of our ordinary shares to amend their registration or the failure
of future shareholders of our company who are PRC residents to comply with the
registration procedures set forth in the SAFE Circular No. 75 could subject such
beneficial owners and our PRC subsidiaries to fines and legal sanctions. See
“Business—Government Regulation—Foreign Exchange
Regulation.”
16
Failure
to comply with PRC regulations regarding the registration requirements for
employee stock ownership plans or share option plans may subject our PRC stock
incentive plan participants or us to fines and other legal or administrative
sanctions.
In
December 2006, the People’s Bank of China promulgated Administrative Measures
for Individual Foreign Exchange, or the Individual Foreign Exchange Rules,
setting forth the requirements for foreign exchange transactions by PRC
individuals under either the current account or the capital account. In January
2007, SAFE issued Implementing Rules for the Individual Foreign Exchange Rules,
which, among other things, specified approval requirements for certain capital
account transactions such as a PRC citizen’s participation in the employee stock
ownership plans or stock option plans of an overseas publicly-listed company. On
March 28, 2007, SAFE promulgated the Application Procedure of Foreign
Exchange Administration for Domestic Individuals Participating in Employee Stock
Holding Plan or Stock Option Plan of Overseas-Listed Company, or “Circular 78.”
Under Circular 78, PRC citizens who are granted stock options by an overseas
publicly-listed company are required, through a PRC agent or PRC subsidiary of
such overseas publicly-listed company, to register with SAFE and complete
certain other procedures. We and our PRC citizen employees, who maybe granted
share options, or PRC optionees, will be subject to these regulations when our
company becomes an overseas publicly-listed company. If we or our PRC optionees
fail to comply with these regulations, we or our PRC optionees may be subject to
fines and legal sanctions. However, as these rules were only recently
promulgated, it is currently unclear as to how they will be interpreted and
implemented.
Because
our principal assets are located outside of the United States and with the
exception of one director, our directors and all our officers reside outside of
the United States, it may be difficult for you to enforce your rights based on
the United States Federal securities laws against us and our officers and
directors in the United States or to enforce judgments of United States courts
against us or them in the PRC.
With the
exception of one director, all of our officers and directors reside outside of
the United States. In addition, our operating subsidiaries are located in the
PRC and all of their assets are located outside of the United States. China does
not have a treaty with United States providing for the reciprocal recognition
and enforcement of judgments of courts. It may therefore be difficult for
investors in the United States to enforce their legal rights based on the civil
liability provisions of the United States federal securities laws against us in
the courts of either the United States or the PRC and, even if civil judgments
are obtained in courts of the United States, to enforce such judgments in PRC
courts. Further, it is unclear if extradition treaties now in effect between the
United States and the PRC would permit effective enforcement against us or our
officers and directors of criminal penalties, under the United States federal
securities laws or otherwise.
We
may have limited legal recourse under PRC law if disputes arise under our
contracts with third parties.
The
Chinese government has enacted some laws and regulations dealing with matters
such as corporate organization and governance, foreign investment, commerce,
taxation and trade. However, their experience in implementing, interpreting and
enforcing these laws and regulations is limited, and our ability to enforce
commercial claims or to resolve commercial disputes is unpredictable. If our new
business ventures are unsuccessful, or other adverse circumstances arise from
these transactions, we will face the risk that the parties to these ventures may
seek ways to terminate the transactions, or, may hinder or prevent us from
accessing important information regarding the financial and business operations
of these acquired companies. The resolution of these matters may be subject to
the exercise of considerable discretion by agencies of the Chinese government,
and forces unrelated to the legal merits of a particular matter or dispute may
influence their determination. Any rights we may have to specific performance,
or to seek an injunction under PRC law, in either of these cases, are severely
limited, and without a means of recourse by virtue of the Chinese legal system,
we may be unable to prevent these situations from occurring. The occurrence of
any such events could have a material adverse effect on our business, financial
condition and results of operations. Although legislation in China over the past
30 years has significantly improved the protection afforded to various forms of
foreign investment and contractual arrangements, these laws, regulations and
legal requirements are relatively new and their interpretation and enforcement
involve uncertainties, which could limit the legal protection available to us,
and foreign investors, including you. The inability to enforce or obtain a
remedy under any of our future agreements could result in a significant loss of
business, business opportunities or capital and could have a material adverse
impact on our operations.
17
We
may be exposed to liabilities under the Foreign Corrupt Practices Act, and any
determination that we violated the Foreign Corrupt Practices Act could have a
material adverse effect on our business.
We are
subject to the Foreign Corrupt Practice Act, or FCPA, and other laws that
prohibit improper payments or offers of payments to foreign governments and
their officials and political parties by U.S. persons and issuers as defined by
the statute for the purpose of obtaining or retaining business. We have
operations, agreements with third parties and make sales in China, which may
experience corruption. Our activities in China create the risk of unauthorized
payments or offers of payments by our employees, consultants, sales agents or
distributors because these parties are not always subject to our control. It is
our policy to implement safeguards to discourage these practices by our
employees. However, our existing safeguards and any future improvements may
prove to be less than effective, and the employees, consultants, sales agents or
distributors of our Company may engage in conduct for which we might be held
responsible. Violations of the FCPA may result in severe criminal or civil
sanctions, and we may be subject to other liabilities, which could negatively
affect our business, operating results and financial condition. In addition, the
government may seek to hold our Company liable for successor liability FCPA
violations committed by companies in which we invest or that we
acquire.
We
face uncertainty from the Circular on Strengthening the Administration of
Enterprise Income Tax on Non-resident Enterprises' Share Transfer ("Circular
698") released in December 2009 by China's State Administration of Taxation, or
the SAT, effective as of January 1, 2008.
Pursuant
to the Circular on Strengthening Administration of Enterprise Income Tax for
Share Transfers by Non-PRC Resident Enterprises (“Circular 698”) issued by the
SAT on December 10, 2009, where a foreign investor transfers the equity
interests of a PRC resident enterprise indirectly via disposing of the equity
interests of an overseas holding company (an “Indirect Transfer”) and such
overseas holding company is located in a tax jurisdiction that: (i) has an
effective tax rate less than 12.5% or (ii) does not tax foreign income of its
residents, the foreign investor shall report such Indirect Transfer to the
competent tax authority of the PRC resident enterprise. The PRC tax authority
will examine the true nature of the Indirect Transfer, and if the tax authority
considers that the foreign investor has adopted an abusive arrangement in order
to avoid PRC tax, they will disregard the existence of the overseas holding
company and re-characterize the Indirect Transfer and as a result, gains derived
from such Indirect Transfer may be subject to PRC withholding tax at the rate of
up to 10%. Circular 698 also provides that, where a non-PRC resident
enterprise transfers its equity interests in a PRC resident enterprise to its
related parties at a price lower than the fair market value, the competent tax
authority has the power to make a reasonable adjustment to the taxable income of
the transaction.
Since
Circular 698 became effective on January 1, 2008, we cannot assure you that our
reorganization will not be subject to examination by PRC tax authorities or that
any direct or indirect transfer of our equity interests in our PRC subsidiaries
via our overseas holding companies will not be subject to a withholding tax of
10%.
Due
to various restrictions under PRC laws on the distribution of dividends by our
PRC operating companies, we may not be able to pay dividends to our
stockholders.
The
Wholly-Foreign Owned Enterprise Law (1986), as amended, the Wholly-Foreign Owned
Enterprise Law Implementing Rules (1990), as amended and the Company Law of the
PRC (2006) contain the principal regulations governing dividend distributions by
wholly foreign-owned enterprises. Under these regulations, wholly foreign-owned
enterprises may pay dividends only out of their accumulated profits, if any,
determined in accordance with PRC accounting standards and regulations.
Additionally, Jinzheng is required to set aside a certain amount of its
accumulated profits each year, if any, to fund certain reserve funds. These
reserves are not distributable as cash dividends except in the event of
liquidation and cannot be used for working capital purposes. The PRC government
also imposes controls on the conversion of RMB into foreign currencies and the
remittance of currencies out of the PRC. We may experience difficulties in
completing the administrative procedures necessary to obtain and remit foreign
currency for the payment of dividends from the profits of Jinzheng. Furthermore,
if our subsidiaries in China incur debt on their own in the future, the
instruments governing the debt may restrict their ability to pay dividends or
make other payments. If we unable to receive all of the revenues from our
operations through these contractual or dividend arrangements, we may be unable
to pay dividends on our common stock.
Changes
in foreign exchange regulations in the PRC may affect our ability to pay
dividends in foreign currency or conduct other foreign exchange
business.
We
receive substantially all of our revenues in RMB, which is currently not a
freely convertible currency. The restrictions on currency exchanges may limit
our ability to use revenues generated in RMB to make dividends or other payments
in United States dollars. The PRC government strictly regulates conversion of
RMB into foreign currencies. Over the years, foreign exchange regulations in the
PRC have significantly reduced the government’s control over routine foreign
exchange transactions under current accounts. In the PRC, SAFE regulates the
conversion of the RMB into foreign currencies. Pursuant to applicable PRC laws
and regulations, foreign invested enterprises incorporated in the PRC are
required to apply for “Foreign Exchange Registration Certificates.” Currently,
conversion within the scope of the “current account” (e.g. remittance of foreign
currencies for payment of dividends, etc.) can be effected without requiring the
approval of SAFE. However, conversion of currency in the “capital account” (e.g.
for capital items such as direct investments, loans, securities, etc.) still
requires the approval of SAFE. In addition, failure to obtain approval from SAFE
for currency conversion on the capital account may adversely impact our capital
expenditure plans and our ability to expand in accordance with our desired
objectives.
18
The PRC
government may also at its discretion restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange control
system prevents us from obtaining foreign currency, we may be unable to pay
dividends or meet obligations that may be incurred in the future that require
payment in foreign currency.
The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities.
We are
dependent on our relationship with the local government of the province in which
we operate our business. The Chinese government has exercised and continues to
exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Our ability to operate in China may be
harmed by changes in its laws and regulations, including those relating to
taxation, environmental regulations, land use rights, property and other
matters. We believe that our operations in China are in material compliance with
all applicable legal and regulatory requirements. However, the central or local
governments of these jurisdictions may impose new, stricter regulations or
interpretations of existing regulations that would require additional
expenditures and efforts on our part to ensure our compliance with such
regulations or interpretations. Accordingly, government actions in the future,
including any decision not to continue to support recent economic reforms and to
return to a more centrally planned economy or regional or local variations in
the implementation of economic policies, could have a significant effect on
economic conditions in China or particular regions thereof, and could require us
to divest ourselves of any interest we then hold in Chinese
properties.
Future
inflation in China may inhibit our ability to conduct business in China. In
recent years, the Chinese economy has experienced periods of rapid expansion and
high rates of inflation. Rapid economic growth can lead to growth in the money
supply and rising inflation. If prices for our products rise at a rate that is
insufficient to compensate for the rise in the costs of supplies, it may have an
adverse effect on profitability. These factors have led to the adoption by the
Chinese government, from time to time, of various corrective measures designed
to restrict the availability of credit or regulate growth and contain inflation.
High inflation may in the future cause the Chinese government to impose controls
on credit and/or prices, or to take other action, which could inhibit economic
activity in China, and thereby harm the market for our products.
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
The PRC
historically has been deficient in Western style management and financial
reporting concepts and practices, as well as in modern banking, and other
control systems. We may have difficulty in hiring and retaining a sufficient
number of qualified employees familiar with these concepts, practices and
systems to work in the PRC. As a result of these factors, and especially given
that we expect to be a publicly listed company in the U.S. and subject to
regulation as such, we may experience difficulty in establishing management,
legal and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet Western standards. We may have difficulty establishing
adequate management, legal and financial controls in the PRC. Therefore, we may,
in turn, experience difficulties in implementing and maintaining adequate
internal controls as required under Section 404 of the Sarbanes-Oxley Act of
2002 (“Sarbanes-Oxley”) and other applicable laws, rules and regulations. This
may result in significant deficiencies or material weaknesses in our internal
controls, which could impact the reliability of our financial statements and
prevent us from complying with rules and regulations of the Securities and
Exchange Commission (the “SEC”) and the requirements of Sarbanes-Oxley. Any such
deficiencies, weaknesses or lack of compliance could have a materially adverse
effect on our business and the public announcement of such deficiencies could
adversely impact our stock price.
It
may be difficult to protect and enforce our intellectual property rights under
PRC law.
Intellectual
property rights in China are still developing, and there are uncertainties
involved in the protection and the enforcement of such rights. While we are not
currently dependent on our intellectual property rights, we still need to pay
special attention to protecting our intellectual property and trade secrets.
Failure to adequately protect our intellectual property rights could lead to
losses, including a potential loss of a competitive advantage that cannot be
compensated through a damages award.
Under
PRC law, we are required to obtain permits and business licenses, and our
failure to do so would adversely impact our ability to conduct business in
China.
We hold
various permits, business licenses, and approvals authorizing our operations and
activities, which are subject to periodic review and reassessment by the Chinese
authorities. Standards of compliance necessary to pass such reviews change from
time to time and differ from jurisdiction to jurisdiction, leading to a degree
of uncertainty. If renewals, or new permits, business licenses or approvals
required in connection with existing or new facilities or activities, are not
granted or are delayed, or if existing permits, business licenses or approvals
are revoked or substantially modified, we will suffer a material adverse effect.
If new standards are applied to renewals or new applications, it could prove
costly to us to meet any new level of compliance.
19
New
labor laws in the PRC may adversely affect our results of
operations.
On June
29, 2007, the PRC government promulgated a new labor law, namely, the Labor
Contract Law of the PRC, or the New Labor Contract Law, which became effective
on January 1, 2008. The New Labor Contract Law imposes stricter obligations on
employers. Under the New Labor Contract Law, an employer is obligated to execute
written labor contracts with all of its employees, otherwise an employee without
a written labor contract will be entitled to claim double monthly salary from
the employer. Certain of our employees hired on a temporary basis were hired
without execution of a written labor contract. Should such an employee file a
valid claim, there can be no assurance that we will not be required to make
additional payments under the New Labor Contract Law, which would adversely
affect our results of operations.
The New Labor Contract Law
also imposes tougher procedural requirements related to a reduction in workforce
and requires certain terminations to be based upon seniority and not merit. In
the event we decide to significantly change or decrease our workforce, the New
Labor Contract Law could adversely affect our ability to enact such changes in a
timely and cost-effective manner that is most advantageous to our business,
which may materially and adversely affect our financial condition and results of
operations.
Our
failure to fully comply with PRC labor laws exposes us to potential
liability.
Companies
operating in China must comply with a variety of labor laws, including certain
social insurance, housing fund and other staff welfare-oriented payment
obligations. There exist uncertainties as to the interpretation, implementation
and enforcement of such obligations. If relevant governmental authorities
determine that we have not complied fully with such obligations, we may be in
violation of applicable PRC labor laws and we cannot assure you that PRC
governmental authorities will not impose penalties on us for any failure to
comply. In addition, in the event that any current or former employee files a
complaint with relevant governmental authorities, we may be subject to making up
such staff-welfare oriented obligations as well as paying administrative fines.
Our failure to comply with PRC labor laws could expose us to potential
liability.
If
our land use rights are revoked, we would have no operational
capabilities.
Under
Chinese law, land is owned by the state or rural collective economic
organizations. The state issues to tenants the rights to use property. Use
rights can be revoked and the tenants forced to vacate at any time when
redevelopment of the land is in the public interest. The public interest
rationale is interpreted quite broadly and the process of land appropriation may
be less than transparent. Jinzheng relies heavily on these land use
rights for its operations, and the loss of such rights would have a
material adverse effect on our company.
Because
we may not be able to obtain business insurance in the PRC, we may not be
protected from risks that are customarily covered by insurance in the United
States.
Business
insurance is not readily available in the PRC. To the extent that we suffer a
loss of a type which would normally be covered by insurance in the United
States, such as product liability and general liability insurance, we would
incur significant expenses in both defending any action and in paying any claims
that result from a settlement or judgment.
We
are subject to the environmental protection law of China.
Our
manufacturing process may produce by-products such as effluent, gases and noise,
which are harmful to the environment. We are subject to multiple laws governing
environmental protection, such as “The Law on Environmental Protection of the
PRC” and “The Law on Prevention of Effluent Pollution of the PRC,” as well as
standards set by the relevant governmental authorities determining the
classification of different wastes and proper disposal. Not obeying the laws and
regulations and not paying the pollution discharge fees on time may result in
fines or penalties on us and adversely affect our business and results of
operations.
China is
experiencing substantial problems with environmental pollution. Accordingly, it
is likely that the national, provincial and local governmental agencies will
adopt stricter pollution controls. There can be no assurance that future changes
in environmental laws and regulations will not impose costly compliance
requirements on us or otherwise subject us to future liabilities. Our
profitability may be adversely affected if additional or modified environmental
control regulations are imposed upon us.
20
Any
recurrence of severe acute respiratory syndrome, or SARS, or another widespread
public health problem, could adversely affect our operations.
A renewed
outbreak of SARS or another widespread public health problem in the PRC, where
all of our revenue is derived, could have an adverse effect on our operations.
Our operations may be impacted by a number of health-related factors, including
quarantines or closures of some of our offices that could leave us without many
employees to conduct our business which would materially and adversely affect
our operations and financial condition.
Risks
Related to Our Securities and this Offering
No
market currently exists for our common stock, and we cannot assure you that an
active trading market will develop for our common stock.
Prior to
this offering, there has been no public market for shares of our common stock.
We cannot predict the extent to which investor interest in our company will lead
to the development of a trading market on the NASDAQ or otherwise, or how liquid
that market might become. If an active market does not develop, you may have
difficulty selling any shares of our common stock that you purchase in this
initial public offering. The initial public offering price for the shares of our
common stock will be determined by negotiations between us and the
representatives of the underwriters, and may not be indicative of prices that
will prevail in the open market following this offering. Therefore, you may be
unable to resell your shares of our common stock at a price that is attractive
to you, if at all.
The
market price for our common stock may be subject to wide fluctuations and our
common stock may trade below the initial public offering price.
The
initial public offering price of our common stock will be determined by
negotiations between us and representatives of the underwriters based on
numerous factors. See “Determination of Offering Price” and
“Underwriting.” This price may not be indicative of the market price of our
common stock after this offering. We cannot assure you that you will be able to
resell your common stock at or above the initial public offering price or our
net asset value. The securities of a number of Chinese companies and companies
with substantial operations in China have also experienced wide fluctuations
subsequent to their initial public offerings, including trading at prices
substantially below the initial public offering prices. Among the factors that
could affect the price of our common stock are risk factors:
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announcements of competitive
developments, by our
competitors;
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regulatory developments of our
industry affecting us, our customers or our
competitors;
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actual or anticipated
fluctuations in our quarterly operating
results;
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failure of our quarterly
financial and operating results to meet market expectations or failure to
meet our previously announced guidance, if
any;
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changes in financial estimates by
securities research
analysts;
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changes in the economic
performance or market valuations of our
competitors;
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additions or departures of our
executive officers and other key
personnel;
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announcements regarding
intellectual property litigation (or potential litigation) involving us or
any of our directors and
officers;
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fluctuations in the exchange
rates between the U.S. dollar and the RMB;
and
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release or expiration of the
underwriters’ post-offering lock-up or other transfer restrictions on our
outstanding common stock.
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In
addition, the securities markets have from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular industries or companies. For example, recently the capital and
credit markets experienced substantial volatility and disruption, developing
into a global financial and economic crisis. As a result, stock prices of a
broad range of companies worldwide, whether or not they are related to the
financial services industry, had declined and fluctuated significantly. These
market fluctuations may also have a material adverse effect on the market price
of our securities.
21
We
have never paid cash dividends and are not likely to do so in the foreseeable
future.
We have
never declared or paid any cash dividends on our common stock. We currently
intend to retain any future earnings for use in the operation and expansion of
our business. We do not expect to pay any cash dividends in the foreseeable
future but will review this policy as circumstances dictate. Although Jinzheng,
our VIE, paid dividends to Jinzheng Stockholders in the amounts of $210,499 in
2009 and $1,755,288 in 2008, we intend to restrict Jinzheng, pursuant to the VIE
Agreements effective on March 25, 2010, from declaring or paying any dividends
to Jinzheng Stockholders in the foreseeable future.
We
have considerable discretion in the use of proceeds from this offering and we
may use these proceeds in ways with which you may not agree.
We intend
to use the net proceeds from this offering for general corporate purposes,
including capital expenditures and funding possible future acquisitions. We have
not allocated the net proceeds of this offering to any particular project or
acquisition, except to expand our processing and cold storage capacity either
through acquisition of an existing facility or through construction of a new
facility. Rather, our Board of Directors and our management will have
considerable discretion in the application of the net proceeds received by us.
You will not have the opportunity, as part of your investment decision, to
assess whether proceeds are being used appropriately. You must rely on the
judgment of our Board of Directors and our management regarding the application
of the net proceeds of this offering. The net proceeds may be used for corporate
purposes that do not improve our efforts to maintain profitability or increase
the price of our securities. The net proceeds from this offering may be placed
in investments that do not produce income or that lose value. See “Use of
Proceeds.”
You
will experience immediate and substantial dilution in the net tangible book
value of your investment and may experience further dilution in the
future.
The
assumed initial public offering price of our common stock of
$ per share in this offering, the mid-point
of the price range set forth on the cover of this prospectus, is substantially
higher than the net tangible book value per share of our outstanding common
stock prior to this offering. Consequently, when you purchase our common stock
in this offering at an offering price of
$ , you will incur immediate
dilution of $ per share.
See “Dilution.”
We
may need additional capital and may sell additional securities or other equity
securities or incur indebtedness, which could result in additional dilution to
our shareholders or increase our debt service obligations.
We may
require additional cash resources due to changed business conditions or other
future developments, including any investments or acquisitions we may decide to
pursue. If our cash resources are insufficient to satisfy our cash requirements,
we may seek to sell additional equity or debt securities or obtain a credit
facility. The sale of additional equity securities or equity-linked debt
securities could result in additional dilution to our shareholders. The
incurrence of indebtedness would result in increased debt service obligations
and could result in operating and financing covenants that would restrict our
operations. We cannot assure you that financing will be available in amounts or
on terms acceptable to us, if at all.
Substantial
future sales of our common stock in the public market, or the perception that
these sales could occur, could cause the price of our securities to
decline.
Additional
sales of our securities in the public market after this offering, or the
perception that these sales could occur, could cause the market price of our
securities to decline. Upon completion of this offering, we will
have
million shares of our common stock outstanding. Of that amount,
approximately shares
of our common stock are freely transferable without restriction upon resale,
and
shares of common stock outstanding after this offering will be available for
sale upon the expiration of varying lock-up periods beginning from the date of
this prospectus, subject to volume and other restrictions as applicable under
Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”).
See “Shares Eligible for Future Sale.” All securities sold in this offering will
be freely transferable without restriction under the Securities Act. Any or all
of these shares may be released prior to expiration of the lock-up period at the
discretion of the lead underwriters for this offering. In addition, we may grant
or sell additional options, restricted shares or other share-based awards in the
future under our share incentive plan to our management, employees and other
persons, the settlement and sale of which may further dilute our shares and
drive down the price of our securities.
NASDAQ
may delist our securities from quotation on its exchange which could limit
investors’ ability to make transactions in our securities and subject us to
additional trading restrictions.
We have
applied for listing of our common stock on NASDAQ to be effective concurrently
with this offering. NASDAQ is a national securities exchange. We cannot assure
you that our securities will meet the continued listing requirements to be
listed on NASDAQ in the future.
22
If NASDAQ
delists our common stock from trading on its exchange, we could face significant
material adverse consequences including:
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a limited availability of market
quotations for our
securities;
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a determination that our common
stock is a “penny stock” which will require brokers trading in our common
stock to adhere to more stringent rules and possibly resulting in a
reduced level of trading activity in the secondary trading market for our
common stock;
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a limited amount of news and
analyst coverage for our company;
and
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a decreased ability to issue
additional securities or obtain additional financing in the
future.
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Our
costs will increase significantly as a result of operating as a public company,
and our management will be required to devote substantial time to complying with
public company regulations.
We have
historically operated our business as a private company. As a public company, we
will incur additional legal, accounting, compliance and other expenses that we
have not incurred historically. After this offering, we will become obligated to
file with the SEC annual and quarterly information and other reports that are
specified in Section 13 and other sections of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). We will also be required to ensure
that we have the ability to prepare financial statements that are fully
compliant with all SEC reporting requirements on a timely basis. In addition, we
will become subject to other reporting and corporate governance requirements,
including certain requirements of NASDAQ, certain provisions of Sarbanes-Oxley
and the regulations promulgated thereunder, which will impose significant
compliance obligations upon us.
Sarbanes-Oxley, as well as
new rules subsequently implemented by the SEC and NASDAQ, have imposed increased
regulation and disclosure and required enhanced corporate governance practices
of public companies. We are committed to maintaining high standards of corporate
governance and public disclosure, and our efforts to comply with evolving laws,
regulations and standards in this regard are likely to result in increased
marketing, selling and administrative expenses and a diversion of management’s
time and attention from revenue-generating activities to compliance activities.
These changes will require a significant commitment of additional resources. We
may not be successful in implementing these requirements and implementing them
could materially adversely affect our business, results of operations and
financial condition. In addition, if we fail to implement the requirements with
respect to our internal accounting and audit functions, our ability to report
our operating results on a timely and accurate basis could be impaired. If we do
not implement such requirements in a timely manner or with adequate compliance,
we might be subject to sanctions or investigation by regulatory authorities,
such as the SEC or NASDAQ. Any such action could harm our reputation and the
confidence of investors and clients in our company and could materially
adversely affect our business and cause our share price to fall.
Failure
to achieve and maintain effective internal controls in accordance with
Section 404 of Sarbanes-Oxley could have a material adverse effect on our
business and stock price.
As a
public company, we will be required to document and test our internal control
procedures in order to satisfy the requirements of Section 404 of
Sarbanes-Oxley, which will require annual management assessments of the
effectiveness of our internal control over financial reporting, to the extent we
are subject to the requirement, and a report by our independent registered
public accounting firm that addresses the effectiveness of internal control over
financial reporting. During the course of our testing, we may identify
deficiencies, which we may not be able to remediate in time to meet our deadline
for compliance with Section 404. Testing and maintaining internal control
can divert our management’s attention from other matters that are important to
the operation of our business. We also expect the new regulations to increase
our legal and financial compliance costs, make it more difficult to attract and
retain qualified officers and members of our Board of Directors, particularly to
serve on our Audit Committee, and make some activities more difficult, time
consuming and costly. We may not be able to conclude on an ongoing basis that we
have effective internal controls over financial reporting in accordance with
Section 404 or, to the extent we are subject to the requirement, our
independent registered public accounting firm may not be able or willing to
issue an unqualified report on the effectiveness of our internal control over
financial reporting. If we conclude that our internal control over financial
reporting is not effective, we cannot be certain as to the timing of completion
of our evaluation, testing and remediation actions or their effect on our
operations because there is presently no precedent available by which to measure
compliance adequacy. If either we are unable to conclude that we have effective
internal control over financial reporting, or to the extent we are subject to
the requirement, our independent auditors are unable to provide us with an
unqualified report as required by Section 404, then investors could lose
confidence in our reported financial information, which could have a negative
effect on the trading price of our stock.
23
If
our shares of common stock become subject to the SEC’s penny stock rules,
broker-dealers may experience difficulty in completing customer transactions and
trading activity in our securities may be adversely affected.
SEC
rules generally defines penny stock to be any equity security that has a market
price (as defined) less than $4.00 per share or an exercise price of less than
$4.00 per share, subject to certain exceptions. The penny stock rules
impose additional sales practice requirements on broker-dealers who sell to
persons other than established customers and accredited investors. The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document in a form prepared by the SEC, which provides information
about penny stocks and the nature and level of risks in the penny stock
market. The broker-dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson in the transaction and monthly account statements showing
the market value of each penny stock held in the customer's account. The
bid and offer quotations, and the broker-dealer and salesperson compensation
information, must be given to the customer orally or in writing prior to
effecting the transaction and must be given to the customer in writing before or
with the customer's confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
these rules, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure
requirements may have the effect of reducing the level of trading activity in
the secondary market for the stock that is subject to these penny stock
rules. Consequently, these penny stock rules may affect the ability of
broker-dealers to trade our securities. We believe that the penny stock
rules may discourage investor interest in, and limit the marketability of, our
common stock should our common stock be considered a penny
stock.
In
addition to the penny stock rules promulgated by the SEC, the Financial Industry
Regulatory Authority (“FINRA”) has adopted rules that require that in
recommending an investment to a customer, a broker-dealer must have reasonable
grounds for believing that the investment is suitable for that customer.
Prior to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to
obtain information about the customer’s financial status, tax status, investment
objectives and other information. Under interpretations of these rules,
FINRA believes that there is a high probability that speculative low-priced
securities will not be suitable for at least some customers. FINRA
requirements make it more difficult for broker-dealers to recommend that their
customers buy our common stock, which may limit your ability to buy and sell our
stock.
Our chairman and
chief executive officer exercises control over most matters submitted to a
shareholder vote and may have interests that differ from other shareholders. He
may, therefore, take actions that are not in the interests of our other
shareholders.
As
of September 30, 2010, approximately 88.5% of our outstanding common stock
was held by Mr. Junfeng Shan, our chairman and chief executive officer. After
this offering, Mr. Junteng Shan is expected to retain his status as our
controlling shareholder and hold
approximately % of our outstanding common
stock. As a result, Mr. Shan is able to control the outcome of shareholder votes
on various matters, including the election of directors and extraordinary
corporate transactions, including business combinations. The interests of Mr.
Junfeng Shan, as the controlling shareholder, could be in conflict with the
interests of other shareholders and he would have the ability to cause us to
take actions in his interest. In addition, Mr. Junfeng Shan may pursue
transactions that, in his judgment, could enhance his equity investment, even
though such transactions may involve risks to our other
shareholders.
This
concentration of ownership could have the effect of delaying or preventing a
change in our control or otherwise discouraging a potential acquirer from
attempting to obtain control of us, which in turn could have a material and
adverse effect on the market price of the common stock or prevent our
stockholders from realizing a premium over the market prices for their shares of
common stock. In addition, the occurrence of sales of a large number of
shares of our common stock, or the perception that these sales could occur, may
affect our stock price and could impair our ability to obtain capital through an
offering of equity securities. Furthermore, the current ratios of ownership of
our common stock reduce the public float and liquidity of our common stock,
which can in turn affect the market price of our common stock.
The
issuance of preferred stock could discourage, delay or prevent a change of
control of our company and may result in an entrenchment of management and
diminish the value of our common stock.
Our
articles of incorporation provide that our Board of Directors may issue, without
further stockholder approval, up to 20,000,000 shares of preferred stock in one
or more series with such rights, preferences and designations as determined by
the Board of Directors. Our bylaws provide that, unless otherwise prescribed by
statute, special meetings of the stockholders can only be called by the Chairman
of our Board of Directors, our Chief Executive Officer, our President, or by a
majority of the Board of Directors. These provisions may discourage, delay or
prevent a merger, acquisition or other change of control that our stockholders
may consider favorable. See “Description of Capital Stock.”
Such
anti-takeover provisions could impede the ability of our common stockholders to
benefit from a change of control and, as a result, could materially adversely
affect the market price of our common stock and your ability to realize any
potential change-in-control premium.
24
This
prospectus includes forward-looking statements that involve risks and
uncertainties. All statements other than statements of historical facts
are forward-looking statements. These forward-looking statements are included
throughout this prospectus, including in, but not limited to, the sections
entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and “Business,” and
relate to matters such as our industry, business strategy, goals and
expectations concerning our market position, future operations, margins,
profitability, capital expenditures, liquidity and capital resources and other
financial and operating information. You can generally identify these
forward-looking statements by words such as “anticipate,” “assume,” “believe,”
“budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,”
“potential,” “predict,” “project,” “future” and similar terms and
phrases.
The
forward-looking statements contained in this prospectus are based on
management’s current expectations and are subject to uncertainty and changes in
circumstances. There can be no assurance that future developments affecting us
will be those that we have anticipated. Actual results may differ materially
from these expectations due to changes in global, regional or local political,
economic, business, competitive, market, regulatory and other factors, many of
which are beyond our control. We believe that these factors include those
described in “Risk Factors.” Should one or more of these risks or uncertainties
materialize, or should any of our assumptions prove incorrect, our actual
results may vary in material respects from those projected in these
forward-looking statements. Any forward-looking statement made by us in this
prospectus speaks only as of the date on which we make it. Factors or events
that could cause our actual results to differ may emerge from time to time, and
it is not possible for us to predict all of them. We undertake no obligation to
publicly update any forward-looking statement, whether as a result of new
information, future developments or otherwise, except as may be required by any
applicable securities laws.
25
We
estimate that the net proceeds from the sale of the shares of common stock in
the offering will be approximately
$ . If
the underwriters exercise their over-allotment option in full, we estimate that
our net proceeds will be approximately
$ . These estimates are based
upon an assumed initial public offering price of
$ per share, the mid-point of the range shown
on the front cover of this prospectus, and deduct the underwriting discounts and
commissions and estimated offering expenses.
We intend
to use the net proceeds we receive from this offering for the following
purposes:
|
·
|
approximately $11 million to $12
million for the acquisition or construction of a new factory, including
processing and cold storage facilities, and related
equipment;
|
|
·
|
approximately $3 million to
expand our current facilities;
and
|
|
·
|
the remaining net proceeds for
other general corporate
purposes.
|
We expect
that approximately $11 million to $12 million will be sufficient for the
acquisition or construction, respectively, of a new factory, including
processing and cold storage facilities and related equipment. However, if
additional funds not raised in this offering are necessary, we expect that we
will be able to use cash generated from our operations to fund such
needs.
Currently
we are only exploring the possible opportunity to acquire or construct a new
factory. We do not have any specific plans to commence the acquisition or
construction process and we have not entered into any agreement or understanding
in connection with any possible acquisition or construction
opportunity.
The
foregoing purposes represent our best estimate of the allocation of the net
proceeds from this offering based upon the current state of our business
operations, current plans, and the current economic and industry conditions.
However, such allocation is subject to reapportionment among the categories
listed above or to new categories altogether. The amounts and timing of
our actual expenditures will depend on numerous factors, including the status of
our development efforts, sales and marketing activities, the amount of cash
generated or used by our operations and our competition. We may find it
necessary or advisable to use portions of the proceeds for other purposes, and
we will have broad discretion in the application of the net proceeds. Pending
these uses, the proceeds will be invested in short-term, investment grade,
interest-bearing securities.
26
We have
been advised that the underwriters propose to offer the common stock directly to
the public at the public offering price that appears on the cover page of this
prospectus. In addition, the representative may offer some of the common stock
to other securities dealers at such price less a concession of
$ per share. The
underwriters may also allow, and such dealers may re-allow, a concession not in
excess of $ per share to
other dealers. After the common stock is released for sale to the public, the
representatives may change the offering price and other selling terms at various
times.
Prior to
this offering, there was no public market for any of our securities. The public
offering price of our common stock was determined by negotiation between us and
the representatives of the underwriters. The principal factors considered in
determining the public offering price of the common stock included:
|
·
|
the information in this
prospectus and otherwise available to the
underwriters;
|
|
·
|
the history and the prospects for
the industry in which we
compete;
|
|
·
|
the ability of our
management;
|
|
·
|
the prospects for our future
earnings;
|
|
·
|
the present state of our
development and our current financial
condition;
|
|
·
|
the general condition of the
economy and the securities markets in the United States at the time of
this offering;
|
|
·
|
the recent market prices of, and
the demand for, publicly-traded securities of generally comparable
companies; and
|
|
·
|
other factors as were deemed
relevant.
|
We cannot
be sure that the public offering price will correspond to the price at which our
common stock will trade in the public market following this offering or that an
active trading market for our common stock will develop or continue after this
offering.
27
We have
never declared or paid dividends on our capital stock and do not expect to
declare or pay any cash dividends on our common stock in the foreseeable future.
We currently intend to retain future earnings, if any, to finance the expansion
of our business. The decision whether to pay cash dividends on our common
stock will be made by our Board of Directors, in their discretion, and will
depend on our financial condition, operating results, capital requirements and
other factors that the Board of Directors considers significant. Jinzheng,
our operating entity, declared and paid dividends to its shareholders in the
amounts of $210,499 in 2009 and $1,755,288 in 2008. Pursuant to the VIE
Agreements entered into on March 25, 2010, Beijing CMJM, our subsidiary, is
entitled to retain all proceeds earned by Jinzheng during the term of the VIE
Agreements and, without Beijing CMJM’s prior written consent, Jinzheng cannot
pay any dividends. Beijing CMJM intends to restrict Jinzheng from declaring or
paying any dividends to its shareholders in the foreseeable future.
Under
applicable PRC regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with PRC accounting standards and regulations. In addition, a
foreign-invested enterprise in China is required to set aside at least 10.0% of
its after-tax profit based on PRC accounting standards each year to its general
reserves until the accumulative amount of such reserves reach 50.0% of its
registered capital. These reserves are not distributable as cash dividends. The
board of directors of a foreign-invested enterprise has the discretion to
allocate a portion of its after-tax profits to staff welfare and bonus funds,
which may not be distributed to equity owners except in the event of
liquidation.
Furthermore,
the ability of our Chinese operating subsidiaries to pay dividends may be
restricted due to the foreign exchange control policies and availability of cash
balance of the Chinese operating subsidiaries. Because substantially all of our
operations are conducted in China and a substantial majority of our revenues are
generated in China, a majority of our revenue being earned and currency received
are denominated in RMB. RMB is subject to the exchange control regulation in
China, and, as a result, we may be unable to distribute any dividends outside of
China due to PRC exchange control regulations that restrict our ability to
convert RMB into U.S. Dollars.
Our
inability to receive dividends or other payments from our Chinese operating
entity could adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends, or
otherwise fund and conduct our business. Jinzheng’s funds may not be readily
available to us to satisfy obligations, which have been incurred outside the
PRC, which could adversely affect our business and prospects or our ability to
meet our cash obligations. Accordingly, if we do not receive dividends from our
Chinese operating entity, our liquidity, financial condition and ability to make
dividend distributions to our stockholders will be materially and adversely
affected.
28
The
following table summarizes our capitalization as of September 30, 2010, on an
actual and as adjusted basis to reflect our receipt of estimated net proceeds
from the sale
of
shares of common stock (excluding
the shares
of common stock which the underwriters have the option to purchase to cover
over-allotments, if any) in this offering at a public offering price of
$ per share, and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses of approximately
$
.
You
should read this table in conjunction with “Use of Proceeds,” “Selected
Financial and Operating Data,” “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our audited combined and
unaudited consolidated financial statements and related notes included elsewhere
in this prospectus.
As of September 30, 2010
|
||||||||
Actual
|
As Adjusted
|
|||||||
USD
|
||||||||
Short-term
loans
|
1,940,849 | |||||||
Long-term
loans
|
235,141 | |||||||
Preferred
stock, $0.001 par value, 20,000,000 shares authorized, and 0 shares issued
and outstanding actual and as adjusted
|
- | |||||||
Common
stock, $0.001 par value, 180,000,000 shares authorized, and 2,030,457
shares
and shares issued
and outstanding actual and as adjusted, respectively
|
2,030 | |||||||
Additional
paid-in capital
|
4,574,695 | |||||||
Statutory
reserves
|
1,615,946 | |||||||
Retained
earnings
|
9,827,664 | |||||||
Accumulated
other comprehensive income
|
1,370,297 | |||||||
Total
shareholders’ equity
|
17,390,632 | |||||||
Total
capitalization
|
$ | 19,566,622 |
29
If you
invest in our securities, your investment will be diluted immediately to the
extent of the difference between the public offering price per share of common
stock you pay in this offering, and the pro forma net tangible book value per
share of common stock immediately after this offering.
After
giving effect to the sale
of shares
of common stock in the offering at a public offering price of
$ per share, and after deducting the
underwriting discount and commission and estimated offering expenses, our
adjusted pro forma net tangible book value as of September 30, 2010 would have
been $ million, or
$ per share. This represents an immediate
increase in pro forma net tangible book value of
$ per share to existing stockholders and immediate
dilution of $ per share to new investors
purchasing shares in the offering.
The
following table illustrates this per share dilution:
Public
offering price per share
|
||||||||
Pro
forma net tangible book value per share as of September 30,
2010
|
||||||||
Increase
in pro forma net tangible book value per share attributable to new
investors
|
||||||||
Adjusted
pro forma net tangible book value per share after the
offering
|
||||||||
Dilution
in net tangible book value per share to new investors
|
Our
adjusted pro forma net tangible book value after the offering, and the dilution
to new investors in the offering, will change from the amounts shown above if
the underwriters’ over-allotment option is exercised.
A $1.00
increase or decrease in the assumed public offering price per share would
increase or decrease our adjusted pro forma net tangible book value per share
after this offering by approximately $ , and
dilution per share new investors by approximately
$ , after deducting the underwriting discount
and estimated offering expenses payable by us.
30
Our
business is conducted in China, and all of our revenue and the majority of our
expenses are denominated in RMB, their functional currency. However, we use the
U.S. dollar as our reporting currency. The assets and liabilities of our PRC
subsidiaries are translated from RMB into U.S. dollars at the exchange rates on
the balance sheet date, shareholders’ equity is translated at the historical
rates and the revenues and expenses are translated at the weighted average
exchange rate for the period. We make no representation that any RMB or U.S.
dollar amounts could have been, or could be, converted into U.S. dollars or RMB,
as the case may be, at any particular rate, or at all. The PRC government
imposes control over its foreign currency reserves in part through direct
regulation of the conversion of RMB into foreign exchange and through
restrictions on foreign trade.
The
following table sets forth information concerning exchange rates between the RMB
and the U.S. dollar for the periods indicated.
|
Noon Buying Rate(1)
|
|||||||
Period
|
Period End(2)
|
Weighted Average(3)
|
||||||
(RMB
per U.S. Dollar)
|
||||||||
2007
|
7.2946 | 7.8806 | ||||||
2008
|
6.8224 | 6.9193 | ||||||
2009
|
6.8259 | 6.8295 | ||||||
2010
|
||||||||
January
|
6.8268 | 6.8269 | ||||||
February
|
6.8258 | 6.8285 | ||||||
March
|
6.8258 | 6.8262 | ||||||
April
|
6.8247 | 6.8256 | ||||||
May
|
6.8305 | 6.8275 | ||||||
June
|
6.7815 | 6.8184 | ||||||
July
|
6.7735 | 6.7762 | ||||||
August
|
6.6907 | 6.7396 | ||||||
September
|
6.7035 | 6.7514 | ||||||
October (through October 22) | 6.6585 | 6.6665 |
(1)
|
The
exchange rates are based on the noon buying rate in the city of New York
for cable transfers of RMB as certified for customs purposes by the
Federal Reserve Bank of New York through December 31, 2008. For January 1,
2009 and all later dates and periods, the exchange rate refers to the
exchange rate as set forth in the H.10 statistical release of the Federal
Reserve Board.
|
(2)
|
All
yearly periods end on December 31 of the stated year. All monthly periods
end on the last day of the stated month, except for October 2010, which
ends on October 22.
|
(3)
|
Weighted
averages for a period are calculated by using the average of the exchange
rates on the end of each month during the period; monthly averages are
calculated using the average of the daily rates during the relevant
period.
|
31
The
following selected combined statement of income data during the two years ended
December 31, 2009 and 2008 and the summary of the combined balance sheet data as
of December 31, 2009 and 2008 are derived from our audited combined financial
statements included elsewhere in this prospectus. The audited combined financial
statements have been prepared in accordance with GAAP, and have been audited by
EFP Rotenberg, LLP, an independent registered public accounting
firm.
The
summary historical financial information for the nine months ended September 30,
2010 and 2009 and consolidated balance sheet data as of September 30,
2010 presented below are derived from our unaudited consolidated
interim financial statements and related notes thereto included elsewhere in
this prospectus. We have prepared our unaudited condensed
consolidated interim financial statements on the same basis as our audited
combined financial statements and have included all adjustments, consisting of
normal and recurring adjustments, which we consider necessary to present fairly
our financial position and results of operations for our unaudited
period. The summary financial information as of and for the nine
months ended September 30, 2010 is not necessarily indicative of the results
that may be obtained throughout fiscal year 2010.
The
consolidated and combined financial statements are reported in U.S. dollar
amounts. This data should be read in conjunction with our “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
our audited combined and unaudited consolidated financial statements and the
related notes included elsewhere in this prospectus.
The
adjusted balance sheet data reflects the balance sheet data as of December 31,
2009 and September 30, 2010, as adjusted to reflect our receipt of the estimated
net proceeds from our sale
of shares
of common stock in this offering at an assumed initial public offering price of
$ per share (the mid-point of the range set
forth on the cover page of this prospectus), after deducting the estimated
underwriting discounts and commissions and estimated offering expenses payable
by us.
Our
historical results for any period are not necessarily indicative of results to
be expected for any future period. You should read the following selected
financial information in conjunction with the consolidated and combined
financial statements and related notes and the information under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere in this prospectus.
Nine Months Ended
September 30,
|
Year Ended
December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
USD
|
USD
|
USD
|
USD
|
|||||||||||||
Net
revenue
|
30,063,212 | 25,171,582 | 36,757,703 | 33,354,535 | ||||||||||||
Cost
of sales
|
24,917,180 | 20,098,775 | 29,299,988 | 26,501,070 | ||||||||||||
Gross
profit
|
5,146,032 | 5,072,807 | 7,457,715 | 6,853,465 | ||||||||||||
Total
operating expenses
|
(1,257,578 | (840,686 | ) | (1,120,479 | ) | (1,376,941 | ) | |||||||||
Income
from operations
|
3,888,454 | 4,232,121 | 6,337,236 | 5,476,524 | ||||||||||||
Total
other income
|
- | 23,180 | 23,190 | 65,090 | ||||||||||||
Net
income before provision for income taxes
|
3,888,454 | 4,255,301 | 6,360,426 | 5,541,614 | ||||||||||||
Provision
for income taxes
|
981,749 | 1,108,370 | 1,630,076 | 1,458,112 | ||||||||||||
Net
income
|
2,906,705 | 3,146,931 | 4,730,350 | 4,083,502 | ||||||||||||
Net
income attributable to stockholders
|
2,906,705 | 2,517,545 | 3,915,595 | 3,266,802 | ||||||||||||
Other
comprehensive income attributable to stockholders
|
347,367 | 19,370 | 16,617 | 341,457 | ||||||||||||
Total
comprehensive income attributable to stockholders
|
3,254,072 | 2,536,915 | 3,932,212 | 3,608,259 | ||||||||||||
Basic
and diluted earnings per common share to stockholders
|
1.44 | 1.26 | 1.96 | 1.63 | ||||||||||||
Basic
and diluted weighted average common shares outstanding
|
2,021,997 | 2,000,000 | 2,000,000 | 2,000,000 |
32
As of September 30,
|
As of December 31,
|
||||||||||||
2010
|
2009
|
2008
|
|||||||||||
Actual
USD
|
As
Adjusted
(1)
USD
|
USD
|
USD
|
||||||||||
Consolidated
Balance Sheet Data
|
|||||||||||||
Cash
and cash equivalents
|
6,247,644
|
2,543,095
|
1,720,357
|
||||||||||
Total
assets
|
22,245,617
|
18,770,229
|
15,616,076
|
||||||||||
Total
liabilities
|
4,854,985
|
5,014,169
|
6,617,739
|
||||||||||
Total
Zheng Hui Industry Corp. stockholders’ equity
|
17,390,632
|
13,756,060
|
7,558,924
|
||||||||||
Non
controlling interest in VIE
|
-
|
-
|
1,439,413
|
||||||||||
Total
equity
|
17,390,632
|
13,756,060
|
8,998,337
|
________________________
(1)
|
Does not give effect to the
estimated use of proceeds. See “Use of
Proceeds.”
|
The table
below sets forth additional financial data for each of the periods indicated
that we believe is important to an understanding of our operations:
Nine Months Ended
September 30,
|
Year Ended December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
USD
|
USD
|
USD
|
USD
|
|||||||||||||
Other
data
|
||||||||||||||||
EBITDA
(1)
|
4,392,170
|
4,725,946
|
6,987,651
|
6,261,206
|
||||||||||||
Adjusted
EBITDA (2)
|
4,392,170
|
4,749,126
|
6,964,461
|
6,196,116
|
||||||||||||
Capital
expenditures
|
302,153
|
2,344,255
|
4,235,306
|
743,995
|
(1)
|
EBITDA is defined as net income
before net interest expense, income tax expense, depreciation and
amortization. EBITDA is a financial measure that is not calculated in
accordance with generally accepted accounting principles, or GAAP. EBITDA
should not be considered as an alternative to net income (loss), operating
income (loss) or any other measure of financial performance calculated and
presented in accordance with GAAP. We prepare EBITDA to eliminate the
impact of items that we do not consider indicative of our core operating
performance. We encourage you to evaluate these adjustments and the
reasons we consider them appropriate. We believe EBITDA is useful to
investors in evaluating our operating performance
because:
|
·
|
securities analysts use EBITDA as
a supplemental measure to evaluate the overall operating performance of
companies and we anticipate that our investor and analyst presentations
after we are public will include EBITDA;
and
|
·
|
we believe that the elimination
of certain non-cash, non-operating or non-recurring items enables a more
consistent measurement of period to period performance of our operations,
as well as a comparison of our operating performance to companies in our
industry.
|
33
Our
management uses EBITDA:
|
·
|
as a measure of operating
performance;
|
|
·
|
for planning purposes, including
the preparation of our annual operating
budget;
|
|
·
|
to allocate resources to enhance
the financial performance of our
business;
|
|
·
|
to evaluate the effectiveness of
our business strategies; and
|
|
·
|
in communications with our Board
of Directors concerning our financial
performance.
|
Although
EBITDA is frequently used by investors and securities analysts in their
evaluations of companies, EBITDA has limitations as an analytical tool, and you
should not consider it in isolation or as a substitute for analysis of our
results of operations as reported under GAAP. Some of these limitations
are:
|
·
|
EBITDA does not reflect our cash
expenditures or future requirements for capital expenditures or other
contractual commitments;
|
|
·
|
EBITDA does not reflect changes
in, or cash requirements for, our working capital
needs;
|
|
·
|
EBITDA does not reflect interest
expense or interest income;
|
|
·
|
EBITDA does not reflect cash
requirements for income
taxes;
|
|
·
|
although depreciation and
amortization are non-cash charges, the assets being depreciated or
amortized will often have to be replaced in the future, and EBITDA does
not reflect any cash requirements for these replacements;
and
|
|
·
|
other companies in our industry
may calculate EBITDA or similarly titled measures differently than we do,
limiting its usefulness as a comparative
measure.
|
(2)
|
Adjusted EBITDA represents EBITDA
adjusted for non-operating income or expense. Adjusted EBITDA is a
financial measure that is not calculated in accordance with GAAP. Adjusted
EBITDA should not be considered as an alternative to net income (loss),
operating income (loss) or any other measure of financial performance
calculated and presented in accordance with GAAP. Our Adjusted EBITDA may
not be comparable to similarly titled measures of other companies because
other companies may not calculate Adjusted EBITDA or similarly titled
measures in the same manner as we do. We use Adjusted EBITDA to evaluate
our operating results without the additional variations caused by
non-operating income or expense, which is
non-recurring.
|
The
following table includes a reconciliation of our Net Income to our EBITDA and
Adjusted EBITDA for each of the periods indicated:
Nine Months Ended
September 30,
|
Year Ended
December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
USD
|
USD
|
USD
|
USD
|
|||||||||||||
Net
income
|
2,906,705
|
3,146,931
|
4,730,350
|
4,083,502
|
||||||||||||
Depreciation
and amortization
|
397,001
|
310,222
|
425,594
|
323,971
|
||||||||||||
Provision
for income taxes
|
981,749
|
1,108,370
|
1,630,076
|
1,458,112
|
||||||||||||
Interest
expenses
|
106,715
|
160,423
|
201,631
|
395,621
|
||||||||||||
EBITDA
|
4,392,170
|
4,725,946
|
6,987,651
|
6,261,206
|
||||||||||||
Other
income
|
-
|
23,180
|
23,190
|
65,090
|
||||||||||||
Adjusted
EBITDA
|
4,392,170
|
4,749,126
|
6,964,461
|
6,196,116
|
34
AND
RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of
operations are based upon and should be read in conjunction with our financial
statements and the related notes included in this prospectus. This discussion
contains forward-looking statements that involve risks, uncertainties and
assumptions. We caution you that our business and financial performance are
subject to substantial risks and uncertainties. Our actual results could differ
materially from those projected in the forward-looking statements as a result of
various factors, including those set forth under “Risk Factors” and elsewhere in
this prospectus.
Overview
We are
engaged in hatching “Cherry Valley” duck and producing, processing, marketing
and distributing frozen processed duck, duck feed, and other duck-related
products in the People’s Republic of China (the “PRC” or “China”). We sell
frozen ducks, in whole or cut-up form, to wholesalers, food processing companies
and distributors in fifteen Chinese provinces, including the cities of Beijing,
Shanghai, Tianjin, and Chongqing. Our objective is to establish ourselves as a
leading producer and distributor of “Cherry Valley” ducks in the
PRC.
Through
years of experience and operation, we believe we have developed a highly
effective vertically-integrated supply chain that we describe as a
“Company-Base-Farmer” business model. Under our model, we raise breeder
ducks and hatch ducklings in our own facilities and then sell the ducklings to
our network of approximately 400 contracted farmers. We repurchase the adult
commercial ducks that meet our criteria from our contracted farmers
then process, freeze, and store the ducks and duck products in our
facilities. To assist the ducks’ growth, we also produce and sell duck feed to
our contracted farmers through feed brokers.
Our major
product is frozen, lean-meat “Cherry Valley” duck, which was developed from
traditional Peking or Beijing duck by Cherry Valley Farm, a United Kingdom
(“UK”) company. Our product is the third generation of the Cherry Valley species
introduced from the UK, which we purchase from their authorized distributor in
China. According to the China Animal Agriculture Association, Cherry Valley
ducks have the following general characteristics relative to other ducks: (1)
higher growth rate; (2) higher conversion rate of feed, that is, with the same
amount of feed, the duck will provide more meat; (3) higher lean meat content;
(4) stronger disease immunity; and (5) greater ability to be cultivated in
different geographic region. Also, Cherry Valley ducks have less fat content.
According to a report from January 2010 in the Meat Trade News Daily in the
UK, a traditional Peking duck will have a fat level in excess of 35%, whereas a
Cherry Valley duck will have a fat level of less than 27%.
Significant
Factors Affecting Our Results of Operations
The most
significant factors that affect our financial condition and results of
operations are the following:
Economic
Conditions in China
We
operate our manufacturing facilities in China and derive the majority of our
revenues from sales to customers in China. As such, economic conditions in China
will affect virtually all aspects of our operations, including the demand for
our products, the availability and prices of our raw materials and our other
expenses. China’s economy has grown significantly in recent years. According to
research from the International Monetary Fund and the United States Department
of Agriculture (the “USDA”), China’s economy grew at an average growth rate of
9.1% between 1999 and 2008. In 2009, the economy grew by 8.7%, and long-term
growth rates are expected to show continued expansion at a rate of approximately
10% in coming years. As a result of rapid economic growth, domestic
demand for and consumption of duck products has increased substantially and is
expected to continue to grow in future years. We believe that economic
conditions in China will continue to affect our business and results of
operations.
Industry
Demand
According
to the data provided by the China Meat Association, China produces the largest
amount of ducks in the world. In 2009, the number of ducks on hand in China was
1,096 million and the number of ducks sold from farm was 352 million (including
206 million Cherry Valley ducks). The number of ducks on hand in China in 2009
accounts for 67.3% of the total amount in the world. The number of ducks
slaughtered in China in 2009 accounts for 74.7% of the total amount in the
world.
Market
Pricing
Generally,
we price our duck products based upon our knowledge of current market prices and
a calculation of our production costs and desired profit margins. Consistent
with the duck industry practice in China, our profitability is affected by
market prices, which may fluctuate substantially and exhibit cyclical and
seasonal characteristics. To adjust to such fluctuation, we establish our base
prices on the basis of market prices for each category of product. We also
adjust such base prices weekly, or daily depending on different categories of
product, according to the added value of each category of products, volume of
orders for each product, product varieties and other factors. The final sale
prices to each of our customers are generally negotiated from time to time. Our
orders and sales are generally made on a basis of thirty days.
35
Production
Capacity
The
following table sets forth the daily production capacity for each product
segment, including the processed duck, hatching of ducklings and duck feed
production. The processed duck and ducklings are based on the numbers of heads
processed or hatched, and the duck feed is based on the tons of feed our feed
production equipment can produce daily.
Product Segment
|
Capacity Per Day
|
|||
Processed
duck (heads)
|
25,000
|
|||
Duckling
(heads)
|
25,000
|
|||
Duck
Feed (tons)
|
137
|
Supply
and Costs of Raw Materials
We
purchase breeder ducks from one of the major Cherry Valley breeder duck
suppliers in Shandong Province, Weifang Legang Food Co., Ltd. We purchase the
breeder ducks from this supplier once or twice a year and therefore we do not
have long-term contracts with our supplier. One breeder duck costs approximately
$204 (1,430 RMB) for each combination (110 females and 30 males) and in 2009 we
spent approximately $60,000 (400,000 RMB) on the purchase of breeder ducks. The
price for the breeder ducks has historically been stable and we believe that our
supplier of breeder ducks is replaceable in the event we need to change
suppliers. The raw materials for our duck feed production are primarily corn
(50-70%) and soybean meal (15-33%). We also purchase soybean meal from two
suppliers, China Oil & Foodstuff (Weifang) Co., Ltd and Weifang Haihua
Zhenxing Oil & Foodstuff Co., Ltd., with each supplier accounting for 4.7%
and 3.8% of our total purchases of raw materials in 2009, respectively. In
addition, we purchase corn from five individuals, in the aggregate, accounting
for 10.3% of our total purchases of raw materials in 2009. Historically, we
have not had difficulty obtaining these materials from our suppliers and we do
not anticipate any difficulty obtaining these materials in the future. We
believe that our sources of supplies are adequate for our present needs and
anticipated growth. We use approximately 1,500 tons of corn per month, which
costs over $4.39 million (30 million RMB) per year. We usually purchase the
grains in the amounts we expect to need, but during each fall season when corn
supply is abundant and prices are low, we purchase corn for future needs and
store the excess supply. We have storage capacity for 5,000 tons of
feed.
Seasonality
of Our Industry
The
demand for our duck products is greatest prior to the Chinese New Year, which is
usually during early February resulting in a general peak in demand in the
fourth quarter. Otherwise, the demand for duck is not seasonal. The table below
shows our total revenues by quarter for the years ended December 31, 2009 and
2008.
Quarter
Ended
March
31,
|
Quarter
Ended
June 30,
|
Quarter
Ended
September
30,
|
Quarter
Ended
December
31,
|
Total
|
||||||||||||||||
Year
|
USD
|
USD
|
USD
|
USD
|
USD
|
|||||||||||||||
2009
|
7,641,152 | 8,534,839 | 8,945,719 | 11,671,785 | 36,793,495 | |||||||||||||||
2008
|
7,025,245 | 7,805,364 | 9,101,197 | 9,450,146 | 33,381,952 |
36
Government
Programs and Regulations
Our
facilities and operations are subject to regulation by various government
agencies, including, but not limited to, local agencies of the State Federal
Food and Drug Administration (“SFDA”), the Ministry of Agriculture (“MOA”), and
the Department of Health. Our duck processing plant is subject to
continuous on-site inspection by the government. The Quality Control
Agency visits our facilities every month to ensure our products meet the
applicable standards. The local Health Agency visits every three months to
inspect the sanitation of our facilities and the local Husbandry Agency visits
our contracted farmers and our slaughter facilities periodically. Each time we
repurchase ducks from our contracted farmers, we need a permit from the local
Husbandry Agency, which is present when we repurchase the ducks to check whether
the ducks satisfy the food safety standards.
The duck
industry is subjected to policies, which are promulgated to ensure the
development of the industry and the improvement of farmers’ living standards and
disposable income. Given our engagement in duck raising and food processing, we
are subject to various policies and regulations regarding tax, finance and
product and production safety applicable only to the agricultural industry that
have been issued and are enforced by government agencies.
Exchange
Rate Fluctuations
Our
reporting currency is the U.S. dollar and our operations in China use their
local currency as their functional currencies. All of our revenue and expenses
are in Chinese Renminbi. Since 1994, the official exchange rate for the
conversion of Renminbi to the U.S. dollar had generally been stable and the
Renminbi had appreciated slightly against the U.S. dollar. However, on July 21,
2005, the Chinese government changed its policy of pegging the value of Chinese
Renminbi to the U.S. dollar.
The
income statements of our operations are translated into U.S. dollars at the
average exchange rates in each applicable period.
Our
Expansion Plan
We expect
to increase our current production capacityfrom processing 25,000 heads to
80,000 heads per day. To realize this goal, we intend to acquire or construct a
new factory including processing and storage facilities and related
equipment. We also intend to expand our current facilities, including
our breeder farm, feed production facility and hatchery.
If we
choose to acquire a new factory, we expect that it would take approximately
eighteen months to reach full production capacity of the newly acquired factory.
To breakdown the timeline, we expect that it would take six months to complete
the acquisition transaction and to start the operation and the expansion of feed
production facility and breed farm. We expect it would take an additional
six months to complete the test running of machineries (including machinery
installation, training of workers and alignment) and complete the improvement
and expansion of the hatchery to realize 50% of the production capacity of the
newly acquired factory and another six months to realize 100% of the production
capacity of the newly acquired factory.
If we
choose to construct a new factory, we expect that it would take approximately
twenty seven months to reach full production capacity of the newly constructed
factory. To breakdown the timeline, we expect that it would take approximately
fifteen months to complete the construction of the factory, installation of the
facilities to start the operation, expand the feed production facility and
breeder farm and hatchery. We expect it would take an additional six
months to complete the test running of machineries (including machinery
installation, training of workers and alignment) to realize 50% of the
production capacity of the newly constructed factory and another six months
to realize 100% of the production capacity of the newly constructed factory.
37
Our sales
and marketing strategy is expected to focus on channels through food processors
and distributors while seeking opportunities to enter the rural markets of
Shanghai, Nanjing, and Wuhan. We intend to explore new selling channels such as
supermarkets and groceries. We plan to expand our sales and marketing team and
develop a network of distributors and we also intend to hire additional sales
staff in order to strengthen our existing relationships with food processors and
develop new relationships, including with supermarkets and grocery stores both
locally and in selected national markets in China. Meanwhile, we will also look
to enter into agreements with distributors active in the rural markets of
Shanghai, Nanjing, and Wuhan to distribute our products there.
We intend
to implement our expansion-related sales and marketing strategy in the weeks and
months prior to the testing of our new facilities. We will continue to carry out
the following activities during our expansion period:
|
·
|
Expanding
our sales and marketing team by recruiting sales employees in our targeted
rural markets and with supermarket procurement experience;
|
|
·
|
Strengthening
our relationships with current customers;
|
|
·
|
Exploring
new customer relationships, including with supermarkets, grocery stores,
food processors and distributors;
|
|
·
|
Seeking
opportunities to enter rural markets; and
|
|
·
|
Implementing
a series of branding activities to establish and advertise our brand.
|
We have
set forth the expected costs associated with either an acquisition or
construction of a new factory along with the costs associated with the expansion
of our current facilities.
Facility/Project
|
Acquisition
|
Construction
|
||||||
Estimated Cost (USD)
|
||||||||
Processing
and cold storage facilities
|
11,000,000
|
9,500,000
|
||||||
Feed
facility expansion
|
900,000
|
900,000
|
||||||
Hatchery
expansion
|
700,000
|
700,000
|
||||||
Breeder
farm expansion
|
700,000
|
700,000
|
||||||
Personnel
arrangements
|
600,000
|
600,000
|
||||||
Lab
for epidemic prevention use
|
400,000
|
400,000
|
||||||
Farmer
base expansion
|
550,000
|
550,000
|
||||||
Other
costs
|
150,000
|
150,000
|
||||||
Total
|
15,000,000
|
13,500,000
|
We expect
that approximately $11 million to $12 million will be sufficient for the
acquisition or construction, respectively, of a new factory, including
processing and cold storage facilities and related equipment. However, if
additional funds not raised in this offering are necessary, we expect that we
will be able to use cash generated from our operations to fund such needs. We
generated $6.6 million cash in 2009 and expect to maintain the level in 2010 and
2011 by operating under current operation scale.
Currently
we are only exploring the possible opportunity to acquire or construct a new
factory. We do not have any specific plans to commence the acquisition or
construction process and we have not entered into any agreement or understanding
in connection with any possible acquisition or construction
opportunity.
The
potential acquisition candidates we plan to review would only have some existing
processing and cold storage facilities, and thus we expect the cost to expand
our feed facility, hatchery, breeder farm, personnel staff, lab and farmer base
under both acquisition and construction scenarios would be the
same.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations are
based on our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America
(“GAAP”). The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities
and expenses. On an ongoing basis, we evaluate our estimates and judgments,
including those related to accrued expenses, fair valuation of stock related to
stock-based compensation and other items. 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 from the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
38
Revenue
Recognition
Revenue
from sales of our products is recognized when the significant risks and rewards
of ownership have been transferred to the third-parties at the time when the
products are delivered to and accepted by them, the sales price is fixed or
determinable as stated in the sales contract, and collection is reasonably
assured. Revenues consist of the invoice value of the sale of goods
and services net of value added tax. There are no general rights of return on
delivered products and no price protection is granted to customers.
Allowance
for Doubtful Accounts
Our
accounts receivable balance on our balance sheet is affected by our allowance
for doubtful accounts, which reflects our estimate of the expected amount of the
receivables that we will not be able to collect. We maintain an allowance for
doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments. Our allowance for doubtful accounts is
based on our assessment of the collectability of specific customer accounts, the
aging of accounts receivable, our history of bad debts, and the general
condition of the industry. If a major customer’s credit worthiness deteriorates,
or our customers’ actual defaults exceed our historical experience, our
estimates could change and impact our reported results.
Allowance
for doubtful accounts amounted to $113,383, $131,474, and $116,025 as of
December 31, 2008, 2009, and September 30, 2010, respectively, representing
3.0%, 4.0%, and 2.0% of our accounts receivable as of those dates. This
allowance reflected a reduction in accounts receivable that was charged to the
bad debt provision under operating expenses.
Inventories
and Allowance for Obsolescence
We state
inventories at the lower of cost or market value, determined using the weighted
average cost method. We provide inventory allowances when conditions indicate
that the selling price is less than cost due to physical deterioration, usage,
obsolescence and reductions in estimated future demand. Unfavorable changes in
market conditions may result in a need for additional inventory reserves that
could adversely impact our gross margins. Conversely, favorable changes in
demand could result in higher gross margins when we sell products.
We do
not provide allowance for our breeders. There was no allowance for other types
of inventories at September 30, 2010, December 31, 2009 and
2008.
Income
Taxes
We
account for income tax using an assets and liability approach, which allows for
recognition of deferred tax benefits in future years. Under the
assets and liability approach, deferred taxes are provided for the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purpose. A valuation allowance is provided for deferred tax assets if
it is more likely than not these items will either expire before we are able to
realize their benefits, or that future realization is uncertain.
Impairment
of Long-Lived Assets
We
evaluate our long-lived assets or asset group for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset or a
group of long-lived assets may not be recoverable. When these events occur, we
evaluate the impairment by comparing the carrying amount of the assets to future
undiscounted net cash flows expected to result from the use of the assets and
their eventual disposition. If the sum of the expected undiscounted cash flow is
less than the carrying amount of the assets, we would recognize an impairment
loss based on the excess of the carrying amount of the asset group over its fair
value. We generally determine fair value by discounting the cash flows expected
to be generated by the assets, when the market prices are not readily available
for the long-lived assets. We did not recognize any impairment of long-lived
assets for any of the periods presented.
Variable
Interest Entities
Pursuant
to the VIE Agreements effective on March 25, 2010 between Beijing CMJM and
Jinzheng, Jinzheng is considered our Variable Interest Entity (“VIE”). For
accounting purposes, this resulted in the combination of the balance sheet data
and financial results of Jinzheng with that of Beijing CMJM for the years ended
December 31, 2009 and 2008. As a wholly-owned subsidiary of Zheng Hui, the
combined financial statements of Beijing CMJM are further consolidated with the
financial statements of Zheng Hui. Accordingly, the financial statements of
Beijing CMJM and Jinzheng are contained in this prospectus and the discussion
below includes the financial condition and results of operation of Beijing CMJM
and Jinzheng.
39
Results
of Operations
Nine
Months Ended September 30, 2010 Compared to Nine Months Ended September 30,
2009
Revenues
We
derive our revenues from the sales of processed frozen duck products, ducklings,
duck feed and other duck related products. Our revenues during the nine months
ended September 30, 2010 were approximately $30.2 million, an increase of
approximately $5 million, or approximately 19.9%, as compared to total revenues
of approximately $25.2 million during the nine months ended September 30, 2009.
The breakdown of our revenues by product is as follows:
Nine Months Ended
September
30, 2010
|
Nine Months Ended
September
30, 2009
|
|||||||
Frozen
duck products
|
$ | 16,195,201 | $ | 13,131,819 | ||||
Ducklings
|
3,602,815 | 3,640,218 | ||||||
Duck
feed
|
8,351,522 | 6,572,511 | ||||||
Other
revenues
|
2,042,364 | 1,833,512 | ||||||
Total
gross revenues
|
$ | 30,191,902 | $ | 25,178,060 |
Frozen duck products. During
the nine months ended September 30, 2010, our revenues from the sales of frozen
duck products increased by approximately $3.1 million, or approximately 23.7%,
compared to the nine months ended September 30, 2009. Our main frozen duck
products consist of Bai Tiao, which is duck sold in whole, and duck parts and
organs, such as wings, chests, legs, flippers, gizzard and other duck parts. Bai
Tiao is the main product, accounting for 38.5% of total revenue in the nine
months ended September 30, 2010, compared to 30.5% of total revenues in the nine
months ended September 30, 2009. Duck parts are new products we developed in
2009, and they accounted for 6.2% of our total revenues in the nine months ended
September 30, 2010 compared to 11.7% of our total revenue in the nine months
ended September 30, 2009. The increased revenues from the sales of frozen duck
products were primarily attributed to the recovery of the global economy and
increasing market demand. In the nine months ended September 30, 2010, we
increased our sales of frozen duck products by 2,000 tons and the average
selling price has increased by $70 per ton as compared to same period in 2009.
Our existing customers consumed approximately $3.0 million more of our
products in the nine months ended September 30, 2010 as compared to the nine
months ended September 30, 2009. We also developed five new customers who, in
the aggregate, purchased approximately $0.2 million of our frozen duck
products.
Ducklings. Compared to the
nine months ended September 30, 2009, our revenues from the sales of ducklings
during the nine months ended September 30, 2010 decreased by approximately $0.04
million, or approximately 1%. In order to perform our one-time maintenance for
the production machinery after the Chinese New Year in 2010, we closed our
hatchery facility for 15 days, therefore leading to the decreased sales of
ducklings.
Duck feed. Compared to the
nine months ended September 30, 2009, our revenues from the sales of duck feed
during the nine months ended September 30, 2010 increased from approximately
$6.6 million to approximately $8.4 million, or approximately 27.1%. We sold
approximately 5,200 more tons of duck in nine months ended September 30, 2010 as
compared to same period in 2009.
Other revenues. For the
nine months ended September 30, 2010, other revenues, which consisted of the
sales of feather, ageing breeders and eggs, increased by approximately $0.2
million, or approximately 11.4%. The increase in other revenues is attributable
to the increase in sales of feathers and the disposal of aging breeders and
eggs.
Cost
of Sales
The
cost of sales for frozen duck products includes the expenses incurred from our
repurchase of live ducks from contracted farmers, direct labor fees,
manufacturing overhead (including indirect materials, indirect labor fees,
utilities and depreciation), and related taxes. Cost of sales for ducklings
includes the expenses incurred from our purchase of breeding ducks, feed, labor
costs and manufacturing overhead such as utilities and depreciation. Cost of
sales for feed includes the purchase of corn and soybean meal, and manufacturing
overhead such as labor cost, utilities, and depreciation.
For
the nine months ended September 30, 2010, our total cost of sales amounted to
approximately $24.9 million, or approximately 82.7% of total revenues, as
compared to cost of sales of approximately $20.1 million, or approximately 79.8%
of total revenues, for the nine months ended September 30, 2009. The increase in
cost of sales as a percentage of total revenue was primarily due to increased
prices for the major components of feed. The average purchase prices for corn
and soybean meal have increased by $32 and $64 per ton, respectively, or a
percentage increase of 14.1% and 16.1%, respectively.
Gross
Profit
Gross
profit for the nine months ended September 30, 2010 was approximately $5.1
million, or 17.1% of total revenues, as compared to approximately $5.1 million,
or 20.2% of revenues for the nine months ended September 30, 2009. The decrease
in the gross profit margin was attributable to increased cost of sales as a
percentage of revenue and the business tax accrued. The increase in cost of
sales as a percentage of revenue was primarily attributed to increased unit
prices for corn and soybean meal. We also recorded approximately $0.1 million
business tax in nine months ended September 30, 2010, whereas the business tax
in the nine months ended September 30, 2009 was nil. Pursuant to the VIE
Agreements between Jinzheng and Beijing CMJM effective on March 25, 2010,
Jinzheng is required to pay 85% of its net profit to Beijing CMJM as a
consulting fee. Beijing CMJM is required to pay 5% of that service fee as
business tax according to PRC tax laws.
40
Operating
Expenses
Total
operating expenses for the nine months ended September 30, 2010 were
approximately $1.3 million, an increase of approximately $0.4 million, or
approximately 50%, compared to the total operating expenses in the nine months
ended September 30, 2009 of $0.8 million. This increase resulted from the
following items:
·
|
Increased general and
administrative expenses: For the nine months ended September 30, 2010,
general and administrative expenses were approximately $0.9 million as
compared to $0.5 million for the nine months ended September 30, 2009, an
increase of approximately $0.4 million or approximately 68%. The general
and administrative expenses primarily consisted of salaries and related
benefits, amortization and depreciation, travel and entertainment,
professional fees, taxes and other expenses. The increase was mainly
attributable to the professional services relating to this offering, such
as auditing and legal fees. We expect general and administrative expenses
to increase as we recruit additional professionals and incur additional
costs related to the growth of our business, including compliance-related
costs to support our future operations as a U.S. personnel listed public
company.
|
·
|
Increased bad debt expenses:
We provided allowance for doubtful other receivables amounting to $0.06
million in nine months ended September 30, 2010 due to their remote
collectivity, while in the same period of 2009, no such expenses
occurred.
|
·
|
Decreased interest expense:
For the nine months ended September 30, 2010, interest expense was $0.1
million as compared to $0.16 million for the nine months ended September
30, 2009, a decrease of $0.05 million, or approximately 34.5%. The
decrease in interest expense was primarily attributable to the decrease in
the outstanding balance under our bank loans in 2009 by approximately $0.7
million, or approximately
28%.
|
Income
from Operations
We
reported income from operations of approximately $3.9 and $4.2 million during
the nine months ended September 30, 2010 and 2009,
respectively.
Income
Taxes
Our
income tax expense was approximately $1 and $1.1 million for the nine months
ended September 30, 2010 and 2009.
Non-controlling
Interest .
Our
non-controlling interest was nil for the nine months ended September 30, 2010
and $0.6 million for the nine months ended September 30, 2009. This change was
primarily because our current shareholders acquired the remaining 20% equity
interest in Jinzheng on December 31, 2009.
Net
Income
As a
result of the foregoing factors, our net income was approximately $2.9 million
and $2.5 million for the nine months ended September 30, 2010 and 2009,
respectively. This translated to basic and diluted net income per common share
of $1.44 and $1.44 respectively, for the nine months ended September 30, 2010
and $1.26 and $1.26, respectively for the nine months ended September 30,
2009.
Other
Comprehensive Income
The
functional currency of our subsidiary and affiliated operating company in the
PRC is the RMB. The financial statements of our subsidiary and affiliate are
translated into U.S. dollars using year-end rates of exchange for assets and
liabilities, and average rates of exchange (for the year) for revenues, costs,
and expenses. Net gains and losses resulting from foreign exchange transactions
are included in the combined statements of operations. As a result of these
translations, which are a non-cash adjustment, we reported a foreign currency
translation gain of $0.3 million for the nine months ended September 30, 2010 as
compared to $0.02 million for the nine months ended September 30, 2009. This
non-cash gain increased our reported comprehensive income.
Comprehensive
Income
We had
comprehensive income of approximately $3.3 million during the nine months ended
September 30, 2010, as compared to approximately $2.5 million during the nine
months ended September 30, 2009. This increase was primarily attributable
to our foreign currency translation gains.
41
Results
of Operations
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenues
In
2009 and 2008, we derived our revenues from the sales of processed frozen duck
products, ducklings, duck feed and other duck related products. Our revenues
during the year ended December 31, 2009 were approximately $36.8 million, an
increase of approximately $3.4 million or approximately 10.2%, as compared to
total revenues of approximately $33.4 million during the year ended December 31,
2008. During the years ended December 31, 2009 and 2008, the breakdown of our
revenues by our products was as follows:
Year Ended
December 31, 2009
|
Year Ended
December 31, 2008
|
|||||||
Frozen
duck products
|
$
|
20,241,941
|
$
|
16,735,538
|
||||
Ducklings
|
4,993,530
|
4,807,239
|
||||||
Duck
feed
|
8,894,336
|
9,586,643
|
||||||
Other
revenues
|
$
|
2,663,688
|
$
|
2,252,532
|
||||
Total
gross revenues
|
$
|
36,793,495
|
$
|
33,381,952
|
Frozen duck products. During
the year ended December 31, 2009, revenues from the sales of frozen duck
products increased by approximately $3.5 million or approximately 21%, compared
to approximately $16.7 million during the year ended December 31, 2008. The
increased revenues were primarily attributed to development of 18 new customers
who, in the aggregate, purchased approximately $4.3 million of products in 2009.
Our main frozen duck products consisted of Bai Tiao, which is duck sold whole,
and duck parts and organs, such as wings, chests, legs, flippers, gizzard, and
other duck parts. Bai Tiao was the main product, accounting for 30% of total
revenues in 2009 compared to 38% of total revenue in 2008. Duck parts were new
products developed in 2009, and they accounted for 11.7% of total revenues in
2009 compared to 0% in 2008.
Ducklings. Compared to the
year ended December 31, 2008, our revenues from the sales of ducklings during
2009 increased by approximately $0.2 million, or approximately 3.88%. The
increase was primarily attributable to the increased demands for ducklings by
our contracted farmers as a result of our increased sale of frozen duck products
to our customers.
Duck feed. Compared to the
year ended December 31, 2008, our revenues from the sales of duck feed during
2009 decreased by approximately $0.7 million from approximately $9.6 million to
approximately $8.9 million, or approximately 7.2%. The decrease was in line with
the decrease of our feed production as the result of a shorter operating period
in 2009 as compared to 2008. In 2009, we spent approximately 15 days maintaining
and repairing our feed production equipment when we suspended our feed
operation.
Other revenues. During the
year ended December 31, 2009, other revenues, which consisted of revenues mainly
from the sale of feathers, breeders and eggs, increased by approximately $0.4
million or approximately 18.3%, from approximately $2.3 million during the year
ended December 31, 2008. The increase in other revenues was attributable to the
increased sale of feather by approximately $0.4 million. The price of feather
was based on unit price per duck, and the revenues from the sales of feather in
2009 increased as the number of total ducks processed increased during the
period. Approximately 8 million ducks were processed in 2009 and approximately
7.5 million in 2008.
Cost
of Sales
Cost of
sales for frozen duck products includes the expenses incurred from our
repurchase of live adult ducks from contracted farmers, direct labor fees,
manufacturing overhead such as indirect materials, indirect labor fees,
utilities and depreciation, and related taxes. Cost of sales for ducklings
includes the expenses incurred from our purchase of parent breeding ducks, feed,
labor cost, and manufacturing overhead such as utilities and depreciation. Cost
of sales for feed includes the purchase of corn and soybean meal, and
manufacturing overhead such as labor cost, utilities, and
depreciation.
For
the year ended December 31, 2009, our total cost of sales amounted to
approximately $29.3 million or approximately 79.7% of total revenues, as
compared to approximately $26.5 million or approximately 79.5% of total revenues
for the year ended December 31, 2008. The slight increase in cost of sales as a
percentage of total revenue was primarily due to the slight decline in the
average selling unit price for frozen duck products in
2009.
42
Gross
Profit
Gross
profit for the year ended December 31, 2009 was approximately $7.5 million or
20.3% of total revenues, as compared to approximately $6.9 million or 20.6% of
revenues for the year ended December 31, 2008. The decrease in gross profit
margin was attributable to the increase in cost of sales as a percentage of
revenue. The increase in cost of sales as a percentage of revenue was primarily
contributed to slight increase of unit price for corn and live duck purchase. We
expect our gross profit margin to remain at approximately
20%.
Operating
Expenses
Total
operating expenses for the year ended December 31, 2009 were approximately $1.1
million, a decrease of $87,315 or approximately 7.4%, compared to approximately
$1.2 million during the year ended December 31, 2008. This decrease was the
result of the combined effects of the following items:
·
|
Increased selling expenses:
During the year ended December 31, 2009, our selling expenses amounted to
approximately $0.2 million, an increase of $57,161 or approximately 41.3%,
as compared to approximately $0.1 million during the fiscal year of 2008.
During the year ended December 31, 2009, more product promotion efforts
were made to acquire new customers and thus we incurred more business
expenses compared to 2008. As a result, we obtained 18 new customers in
2009. We expect the amount of our selling and marketing expenses to
increase in the near future as we plan to expand our sales and marketing
personnel in connection with the expansion of business; however, we do not
anticipate a significant increase in our selling and marketing expenses as
a percentage of our total revenues in the near
future.
|
·
|
Increased general and
administrative expenses: During the year ended December 31, 2009, general
and administrative expenses were approximately $0.7 million, an increase
of approximately $0.1 million or approximately 25.5%, as compared to
approximately $0.6 million for the fiscal year of 2008. The general and
administrative expenses consisted mainly of salaries and related benefits
to our employees, amortization and depreciation, travel and entertainment,
professional fees, taxes and others. The increase was mainly the result of
increased salaries and related benefits, amortization, and taxes. We
expect that our general and administrative expenses will continue to
increase as we plan to recruit additional professionals to accommodate our
business growth. Such increased expenses will also resulted from the
increased legal and auditing expenses related to compliance-related costs
to support our future operations as a U.S. listed public
company.
|
·
|
Decreased bad debt expenses:
During the year ended December 31, 2009, bad debt expenses were $17,799, a
decrease of $93,824 or approximately 84.1%, as compared to approximately
$0.1 million for the fiscal year of 2008. In 2008, the bad debt expenses
incurred from our failure to collect from two customers who suffered from
the earthquake which occurred in Sichuan
Province.
|
·
|
Decreased interest expense:
During the year ended December 31, 2009, our interest expense was
approximately $0.2 million, a decrease of approximately $0.2 million or
approximately 49%, as compared to approximately $0.4 million for the year
ended December 31, 2008. The decrease in interest expense was primarily
attributable to the decrease in the outstanding balance under our bank
loans in 2009 by approximately $1.5 million or approximately
43.3%.
|
Income
from Operations
We
reported income from operations of approximately $6.3 million during the year
ended December 31, 2009, as compared to income from operations of approximately
$5.6 million during the year ended December 31, 2008, an increase of
approximately $0.7 million or approximately 12.3%.
Other
income/expenses
During
the year ended December 31, 2009, our total other income amounted to $23,190, an
increase of $127,247, or approximately 122.3%, as compared to other expense of
$104,057 during the year ended December 31, 2008. This change was primarily
attributable to $169,147 of loss on disposal of fixed assets during
2008.
Income
Taxes
During
the year ended December 31, 2009, our income tax expense was approximately $1.6
million as compared to approximately $1.5 million during the year ended December
31, 2008.
43
Non-controlling
Interest .
Our
non-controlling interest was $0.6 million for the years ended December 31, 2008
and 2009. This change was primarily because our current shareholders, acquired
the remaining 20% equity interest in Jinzheng in December 31 2009.
Net
Income
As a
result of the foregoing factors, our net income for the year ended December 31,
2009 was approximately $4 million, an increase of approximately $0.7 million or
19.9% as compared to net income of approximately $3.3 million during the year
ended December 31, 2008. This translated to basic and diluted net income per
common share of $1.96 and $1.96, respectively, for the year ended December 31,
2009 and $1.63 and $1.63, respectively, for the year ended December 31,
2008.
Other
Comprehensive Income
The
functional currency of our subsidiary and affiliate operating in the PRC is the
RMB. The financial statements of our subsidiary and affiliate are translated
into U.S. dollars using year-end rates of exchange for assets and liabilities,
and average rates of exchange (for the year) for revenues, costs, and expenses.
Net gains and losses resulting from foreign exchange transactions are included
in the combined statements of operations. As a result of these translations,
which are a non-cash adjustment, we reported a foreign currency translation gain
of $24,921 for the year ended December 31, 2009, as compared to $426,821 for the
fiscal year of 2008. This non-cash gain increased our reported comprehensive
income.
Comprehensive
Income
As a
result of our foreign currency translation gains, our comprehensive income
during the year ended December 31, 2009 was approximately $4.8 million, compared
to approximately $4.5 million for the year ended December 31, 2008.
Liquidity
and Capital Resources
To
date, we have financed our operations primarily through cash flows from our
operations and short-term bank borrowings. As of September 30, 2010, we had
approximately $6.2 million in cash and cash equivalents. Although we combined
the results of Jinzheng, our VIE, in our consolidated financial statements for
the nine months ended September 30, 2010, we can only receive cash payments
from Jinzheng pursuant to our contractual arrangements with Jinzheng and
Jinzheng Stockholders. Pursuant to the Exclusive Technical Consulting Service
Agreement between Beijing CMJM and Jinzheng, Beijing CMJM has the exclusive
right to provide business consulting and related services in connection with the
new management platform, business development and operation, and training of
technical and managerial personnel for Jinzheng (the “Services”). Under this
agreement, Beijing CMJM owns the intellectual property rights arising from the
performance of the Services, including, but not limited to, copyrights, patents,
know-how and commercial secrets, whether developed by Beijing CMJM or Jinzheng.
Pursuant to this agreement, Jinzheng is obligated to pay 85% of its annual net
profit to Beijing CMJM on a semi-annual basis as a consulting service fee. These
payments are made through a dividend from Jinzheng to Beijing
CMJM.
As of
September 30, 2010, we had $1.9 million outstanding in borrowings under our
short-term bank loans, which amount bore a weighted-average interest rate of
6.195% per annum.
These
short-term bank loans have terms of twelve months, and expire at various times
throughout the year. These facilities contain no specific renewal terms but we
have historically been able to obtain extensions of some of the facilities
shortly before they mature. These loans were guaranteed by Shouguang Desheng
Steel Construction Equipment Installation Co., Ltd. and Shandong Haihui Group
Co., Ltd. We also guaranteed bank loans for each of our guarantors as
reciprocation for their guarantee of our loans. Mutual guarantee for bank loans
is a common business practice in China.
We
believe that our current levels of cash, cash flows from operations and bank
borrowings, combined with the net proceeds from this offering, will be
sufficient to meet our anticipated cash needs for our operations and expansion
plans for at least the next 12 months. However, we may need additional cash
resources in the future if we experience changed business conditions or other
developments. We may also need additional cash resources in the future if we
find and wish to pursue opportunities for investment, acquisition, strategic
cooperation or other similar actions. If we ever determine that our cash
requirements exceed our amounts of cash and cash equivalents on hand, we may
seek to issue debt or equity securities or obtain a credit facility. Any future
issuance of equity securities could cause dilution for our shareholders. Any
incurrence of indebtedness could increase our debt service obligations and cause
us to be subject to restrictive operating and financial covenants. It is
possible that, when we need additional cash resources, financing will only be
available to us in amounts or on terms that would not be acceptable to us, if at
all.
44
The
following table shows our cash flow with respect to operating activities,
investing activities and financial activities for each of the periods
indicated:
Nine Months Ended
September 30,
|
Year ended
December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
USD
|
USD
|
USD
|
USD
|
|||||||||||||
Net
cash provided by operating activities
|
3,211,816
|
3,267,410
|
6,576,992
|
2,892,783
|
||||||||||||
Net
cash used in investing activities
|
(302,153
|
)
|
(2,344,255
|
)
|
(4,235,306
|
)
|
(743,995
|
)
|
||||||||
Net
cash provided by (used in) financing
activities
|
675,472
|
(1,598,580
|
)
|
(1,523,668
|
)
|
(2,019,461
|
)
|
|||||||||
Net
changes in cash and cash equivalents
|
3,585,135
|
(675,425
|
)
|
818,018
|
129,327
|
|||||||||||
Effect
on change of exchange rate
|
119,414
|
3,362
|
4,720
|
101,952
|
||||||||||||
Cash
and cash equivalents, beginning
|
2,543,095
|
1,720,357
|
1,720,357
|
1,489,078
|
||||||||||||
Cash
and cash equivalents, ending
|
6,247,644
|
1,048,294
|
2,543,095
|
1,720,357
|
Operating
Activities
Net cash
provided by operating activities amounted to $6.6 million during the year ended
December 31, 2009, compared to $2.9 million during the year ended December 31,
2008. The change was primarily attributable to our growing business as we
increased our net revenue by $3.4 million from $33.4 million in 2008 to $36.8
million in 2009. In addition, our collection of accounts
receivable increased by approximately $2.6 million from $18.4 million in
2008 to $21 million in 2009.
Net
cash provided by operating activities amounted to $3,2 million during the nine
months ended September 30, 2010, compared to $3.3 million during the nine months
ended September 30, 2009. The change was primarily attributable to expenditures
related to this offering, including but not limited to payment for auditing,
legal and other professional services and collection of accounts receivable and
other receivable.
Investing
Activities
Net cash
used in investing activities amounted to $4.2 million in 2009, mainly as a
result of our purchases of a land use right for $3.3 million and construction of
the new bio-gas and feed facility for $0.9 million. The land use right we
purchased enables us have a fifty-year use right over two pieces of land with
total area of approximately 126,000 square meters. To fulfill our expansion
plan, we plan to expand supporting facilities, such as our breeder farm,
hatchery, and feed production facilities. In addition, if we choose to construct
a new factory, we might use our current land resources.
Net cash
used in investing activities in 2008 amounted to $0.7 million, mainly as a
result of the purchase of an employee dormitory and office
building.
Net
cash used in investing activities amounted to $2.3 million in nine months ended
September 30, 2009, mainly as a result of our purchases of a land use right for
$1.4 million and construction of the new bio-gas and feed facility for $0.9
million.
Financing
Activities
Net cash
used in financing activities amounted to $1.5 million in 2009, mainly as a
result of (1) the repayment of $3.4 million of our short-term bank loans,
partially offset by proceeds of $1.9 million from additional short-term bank
loans, and (2) the payment of a dividend of $0.2 million by Jinzheng in 2009.
Net cash
used in financing activities amounted to $2 million in 2008, mainly as a
result of (1) the repayment of $3.4 million of our short-term bank loans,
partially offset by proceeds of $3.3 million from additional short-term bank
loans, and (2) the payment of a dividend of $1.8 million by Jinzheng in 2008.
Net
cash provided by financing activities amounted to $0.7 million in the
nine months ended September 30, 2010, mianly as a result of (1) $0.4 million
proceeds received for the issuance of our common stock of 30,457 shares to Blue
Net Group Limited, and (2) $0.3 million repayment received from
Jintai.
Net
cash used in financing activities amounted to $1.6 million in the nine
months ended September 30, 2009, mainly as a result of (1) the repayment of $1.4
million of our short-term bank loans, partially offset by proceeds of $0.07
million from loans to related parties and (2) the payment of a dividend
during nine months ended September 30,
2010.
45
Capital
Expenditures
We had
capital expenditures of $4.2 million, $0.7 million and $0.3 million for the
years ended December 31, 2009 and 2008, and the nine months ended September
30, 2010, respectively. Our capital expenditures were made primarily for the
construction of our production facilities, obtaining land use rights and the
purchases of property, plant and equipment. Our capital expenditures have been
primarily funded by net cash generated from our operating activities and cash
provided by financing activities. We expect our capital expenditures in 2010 to
primarily consist of the purchases of property, plant and equipment and
construction of a production facility. We expect to fund these capital
expenditures by cash generated from operating and financing activities as well
as net proceeds from this offering.
Contractual
Obligations
We have
no material contractual obligations.
Off-Balance
Sheet Commitments and Arrangements
We have
not entered into any derivative contracts that are indexed to our shares and
classified as shareholder’s equity, or that are not reflected in our combined
financial statements. Furthermore, we do not have any retained or contingent
interest in assets transferred to an unconsolidated entity that serves as
credit, liquidity or market risk support to such entity. We do not have any
variable interest in any unconsolidated entity that provides financing,
liquidity, market risk or credit support to us or engages in leasing, hedging or
research and development services with us.
We
entered into certain financial guarantees to guarantee the payment obligations
of a third party as described in the following table. As of September 30, 2010,
we guaranteed the following outstanding bank loans:
Guaranteed Third Party Loans
|
Maturity Date
|
Loan Amount
|
||||
Shouguang
Desheng Steel Construction Equipment Installation Co.,
Ltd
|
March
26, 2011
|
$
|
597,184
|
|||
Shouguang
Desheng Steel Construction Equipment Installation Co.,
Ltd
|
June
17, 2011
|
447,888
|
||||
Shandong
Yilong Textile Co., Ltd
|
April
22, 2011
|
298,592
|
||||
Shandong
Haihui Group Co., Ltd
|
April
2, 2011
|
746,480
|
||||
Shandong
Haihui Group Co., Ltd
|
June
20, 2011
|
522,536
|
||||
Total
loans outstanding on September 30, 2010
|
$
|
2,612,680
|
All
the bank loans we guaranteed as of September 30, 2009 have been repaid in full
upon their respective due dates.
Pursuant
to the guarantees entered into among with the borrower, the banks and Jinzheng,
Jinzheng is obligated to repay the respective loan to the banks if the borrower
fails to repay the indebtedness including accrued interest to the banks within
two years after the due date of the loans.
The
borrowers are unrelated parties that have reciprocally guaranteed our bank
loans. Mutual guarantee for bank loans is a common business practice in China.
Since the each borrower has not defaulted in its payment obligations and each
appears to have solid financial position, we do not anticipate recognizing any
liabilities pursuant to these guarantees.
Recent
Accounting Pronouncements
In
September 2006, FASB issued Accounting Standards Codification (“ASC”) 820 (prior
authoritative literature: SFAS No. 157, “Fair Value Measurements”)
which defines fair value, establishes a market-based framework or hierarchy for
measuring fair value and expands disclosures about fair value measurements. This
guidance is applicable whenever another accounting pronouncement requires or
permits assets and liabilities to be measured at fair value. It does not expand
or require any new fair value measures; however the application of this
statement may change current practice. The Company adopted this guidance for
financial assets and liabilities effective on January 1, 2008 and for
non-financial assets and liabilities effective on January 1, 2009. The adoption
did not have a material effect on the Company’s financial condition, results of
operations, or cash flows.
46
In
December 2007, FASB issued FASB ASC 805 (prior authoritative literature: SFAS
No. 141(R), “Business
Combinations”) and FASB ASC 810-10-65 (prior authoritative literature:
SFAS No. 160, “Accounting and
Reporting of Noncontrolling Interest in Consolidated Financial Statements, an
amendment of ARB No. 51”). These new standards will significantly change
the accounting for and reporting of business combinations and non-controlling
(minority) interests in consolidated financial statements. FASB ASC 805 and FASB
ASC 810-10-65 are required to be adopted simultaneously and are effective for
the first annual reporting period beginning on or after December 15, 2008. The
adoption of FASB ASC 805 and FASB ASC 810-10-65 did not have a material impact
on the Company’s financial position, results of operations, or cash flows.
In
December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB
110”). SAB 110 permits companies to continue to use the simplified
method, under certain circumstances, in estimating the expected term of “plain
vanilla” options beyond December 31, 2007. SAB 110 updates guidance
provided in SAB 107 that previously stated that the Staff would not expect a
company to use the simplified method for share option grants after December 31,
2007. Adoption of SAB 110 did not have a material impact on the
Company’s financial statements.
In March
2008, FASB issued FASB ASC 815-10 (prior authoritative
literature: SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133”). FASB ASC 815-10 requires enhanced disclosures about an entity’s
derivative and hedging activities. FASB ASC 815-10 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008 with early application encouraged. As such, the Company was required to
adopt these provisions at the beginning of the fiscal year ended December 31,
2009. The adoption of ASC 815-10 did not have a material impact on
the Company’s financial position, results of operations, or cash flows.
In May
2008, FASB issued FASB ASC 944 (prior authoritative literature: SFAS
No. 163, “Accounting for
Financial Guarantee Insurance Contracts—an interpretation of FASB Statement No.
60”). FASB ASC 944 interprets Statement 60 and amends existing accounting
pronouncements to clarify their application to the financial guarantee insurance
contracts included within the scope of that Statement. FASB ASC 944 is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and all interim periods within those fiscal years. The Company
adopted these provisions for the fiscal year ended December 31, 2009. The
adoption of issued FASB ASC 944 did not have a material impact on the Company’s
financial position, results of operations, or cash flows.
In May
2009, FASB issued FASB ASC 855-10 (prior authoritative
literature: SFAS No. 165, “Subsequent Events”). FASB
ASC 855-10 establishes principles and requirements for the reporting of events
or transactions that occur after the balance sheet date, but before financial
statements are issued or are available to be issued. ASC 855-10 is effective for
financial statements issued for fiscal years and interim periods ending after
June 15, 2009. The Company adopted these provisions for the fiscal year ended
December 31, 2009. Adoption of ASC 855-10 did not have a material effect on the
Company’s financial statements.
In June
2009, FASB issued FASB ASC 105-10 (prior authoritative
literature: SFAS No. 168, “The FASB Accounting Standards
Codification TM and the Hierarchy of Generally Accepted Accounting Principles—a
replacement of FASB Statement No. 162”). FASB ASC 105-10
establishes the FASB Accounting Standards Codification TM (Codification) as the
source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity with GAAP. FASB ASC 105-10 is effective for financial statements
issued for fiscal years and interim periods ending after September 15,
2009. The Company adopted these provisions for the fiscal year ended
December 31, 2009. Adoption of FASB ASC 105-10 did not have a material effect on
the Company’s financial statements.
In
February 2010, FASB issued Accounting Standard Update (“ASU”) 2010-09 Subsequent
Event (Topic 855) Amendments to Certain Recognition and Disclosure Requirements.
ASU 2010-09 removes the requirement for an SEC filer to disclose a date 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 GAAP. All of the amendments in ASU 2010-09
are effective upon issuance of the final ASU, except for the use of the issued
date for conduit debt obligors. That amendment is effective for interim or
annual periods ending after June 15, 2010. Adoption of ASU 2010-09 did not have
a material effect on the Company’s financial statements.
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
47
China Meat-Duck Industry
According
to the statistics from Food and Agriculture Organization of the United Nations
or the FAO, the breeding stock of duck worldwide was 1,046 million in 2005,
among which Asia had 931 million breeding stock, accounting for 89% of the world
total. In Asia, raising ducks for meat is mainly practiced in countries like
China, Vietnam, Thailand, Indonesia, and India.
China is
the largest duck producer in the world. In 2009, the number of ducks
on hand was 1,096 million and the number of ducks sold from farm was 352 million
(including 206 million Cherry Valley ducks). The number of ducks on hand in
China in 2009 accounted for 67.3% of the total amount in the world. The number
of ducks slaughtered in China in 2009 accounted for 74.7% of the total amount in
the world. China’s output of poultry meats amounted to approximately 7.9 million
tons in the first half of 2008 with ducks accounting for approximately 1.2
million tons and a growth rate of 8.2%, compared to the same period in the
previous year, according to China’s Ministry of Agriculture and as published by
the China Animal Agriculture Association.
Poultry
consumption, (including chicken and duck), has been increasing globally in
recent years. According to the FAO, in the United States, poultry
production (in tons) increased from 37.6% of all meat in 1990 to 45.5% in 2009.
At the same time, beef production’s share declined from 36.5% to 28.6%, while
pork production showed little difference with a 24.3% share in 1990 compared to
a 25.1% share in 2009. In comparison, China’s poultry production in 2009 stood
at 21.0% of all meat, less than half of the US average and indicating
substantial potential for further growth.
Global
production figures show a similar trend to the United States with poultry
production increasing at a higher rate than other meat. Acording to FAO, poultry
production grew by 123.0% between 1990 and 2009, compared with 51.7% for pork
and 17.8% for beef. Over the last five years, the growth in poultry production
also outpaced other meat, growing by 17.8% compared with 9.7% for pork and 6.7%
for beef.
According
to the FAO, in China, poultry’s share of meat production has risen significantly
over the last 2 decades, growing from 12.3% in 1990 to 21.0% in 2009. At the
same time, Duck’s share of all meat production increased from 2.0% to
3.4%.
According
to the FAO, duck meat production in China has also been growing at a faster pace
than other major meat groups over the last 10 years. Duck meat production
increased from 1.87 million tons in 1999 to 2.66 million tons in 2009, a
compound annual growth rate, or CAGR of 3.6% which compares to a CAGR of 3.4%
for chicken, 2.3% for pork and 2.4% for beef over the same period. Duck meat
production’s growth rate has been even higher over the last five years, going
from 1.95 million tons in 2004 to 2.66 million tons in 2009, a CAGR of 6.4%
compared to CAGR of 3.8% for chicken, 2.3% for pork and 2.7% for beef over the
same period.
The
following table shows meat production statistics in China for 1990 and 1999-
2009:
Meat
Production in China (in million tons)
|
||||||||||||||||||||||||||||||||||||||||||||||||
1990
|
1999
|
2000
|
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
|||||||||||||||||||||||||||||||||||||
Pig
Meat
|
24.02 | 39.90 | 40.75 | 41.65 | 42.32 | 43.43 | 44.48 | 46.62 | 47.59 | 43.93 | 47.19 | 49.88 | ||||||||||||||||||||||||||||||||||||
Beef
and Buffalo Meat
|
1.30 | 5.08 | 5.16 | 5.11 | 5.24 | 5.45 | 5.62 | 5.70 | 5.79 | 6.15 | 6.15 | 6.43 | ||||||||||||||||||||||||||||||||||||
Chicken
Meat
|
2.66 | 8.17 | 9.06 | 8.85 | 9.17 | 9.45 | 9.48 | 9.97 | 10.16 | 10.62 | 11.05 | 11.44 | ||||||||||||||||||||||||||||||||||||
Duck
Meat
|
0.60 | 1.87 | 1.87 | 1.91 | 1.85 | 1.92 | 1.95 | 2.15 | 2.18 | 2.33 | 2.52 | 2.66 | ||||||||||||||||||||||||||||||||||||
Total
Poultry Meat
|
3.74 | 11.76 | 12.69 | 12.52 | 12.73 | 13.14 | 13.24 | 14.06 | 14.29 | 15.04 | 15.81 | 16.44 | ||||||||||||||||||||||||||||||||||||
Total
Meat
|
30.42 | 60.10 | 62.11 | 62.99 | 64.23 | 66.26 | 67.91 | 71.19 | 72.69 | 70.42 | 74.51 | 78.21 |
Source:
Food and Agriculture Organization of the United Nations.
According
to Zero Power Intelligence Co. Ltd., a consulting firm engaged by the Company,
with approximately 67% of world duck population, China has the largest stock of
domestic ducks in the world. The total poultry meat output in China
will reach 16 million tons in 2010, and duck meat output will reach 3.2 million
tons, an equivalent of 20% of the total output. Duck meat output is expected to
rise to approximately 3.53 million tons in 2012 and 5.16 million tons in 2015.
In addition to the traditional duck meat products, the product portfolio is
expected to expand to include duck neck, duck liver, duck feet, and duck down,
which is expected to help provide higher profit margins.
Zheng Hui
is expected to benefit from the following trends: 1) Chinese consumers have been
eating more meat, including more duck; 2) duck meat consumption in China has
been increasing faster than other major meat groups (pork, beef, and chicken);
and 3) duck’s share of total meat consumption has been growing. We expect these
trends to continue as China becomes more prosperous, living standards continue
to improve, the middle class continues to grow and consumers turn to healthier
diets which generally favors poultry over beef and pork.
48
Cherry
Valley Duck
China
enjoys a very long history of breeding and farming ducks. From early 1980s to
mid 1980s, meat duck farming has penetrated many major cities in China, doubling
the total meat output within merely five years. Cherry Valley Duck is physically
larger and heavier, but also matures fast relative to most other duck breeds. It
can grow up to 2.5 kilos within 5 weeks after birth, and up to 3.3 kilos in
another 2 weeks. It generally becomes ready for market at 40 days old, and
reaches sexual maturity at 26 weeks old. A mature duck can lay 210-220 eggs per
year, each of which weighs 90 grams. It also has a higher proportion of lean
meat and breast meat. Its eviscerated percentage is 72.55%, which is eviscerated
weight divided by its pre-slaughter live weight multiplied by100%, and its feed
conversion is 2.45:1 to 2.5:1, meaning that every 2.45-to-2.5 kilos of feed can
result in one kilo of weight gain. When compared with Muscovy Duck and Gouyu
Duck, two other popular duck breeds in China, Cherry Valley Duck has
significantly higher body weight, breast meat weight, breast meat proportion,
and eviscerated percentage. Moreover, it is more resistant to diseases and
better at adapting to local environment, making it suitable for farming in both
Northern and Southern China.
Because
of its physical characteristics, Cherry Valley Ducks has become the most widely
spread type of meat-duck in China, winning over 50% of the entire market share.
In Guangdong Province, Cherry Valley Duck accounts for over 70% of its total
meat duck stock.
49
Overview
We are
engaged in hatching “Cherry Valley” duck and producing, processing, marketing
and distributing frozen processed duck, duck feed, and other duck-related
products in the PRC. We sell frozen duck, in whole or cut-up form, to
wholesalers, food processing companies and distributors in fifteen Chinese
provinces including the cities of Beijing, Shanghai, Tianjin, and Chongqing. Our
objective is to establish ourselves as a leading producer and distributor of
ducks and duck products in the PRC.
Through
years of experience and operation we believe that we have developed a highly
effective vertically-integrated supply chain that we describe as a
“Company-Base-Farmer” business model. Under our model, we raise breeder ducks
and hatch ducklings in our own facilities and then the sell ducklings to our
network of approximately 400 contracted farmers. We repurchase the adult
commercial ducks that meet our criteria from our contracted farmers, then
process, freeze, and store the ducks and duck products in our own facilities. To
assist in the ducks’ growth, we also produce and sell duck feed to our
contracted farmers through feed brokers.
Although
the raw material cost of the duck feed can be volatile for a duck
raising company, by leveraging our relationships with our suppliers,
contracted farmers and customers and our vertically-integrated model,
we have generated substantial revenue and simultaneously reduced the
volatility.
Nine Months Ended September 30,
|
Year Ended December 31,
|
|||||||||||||||
2010
|
2009
|
2009
|
2008
|
|||||||||||||
USD
|
USD
|
USD
|
USD
|
|||||||||||||
Net
revenue
|
30,063,212
|
25,171,582
|
36,757,703
|
33,354,5 35
|
||||||||||||
Cost
of sales
|
24,917,180
|
20,098,775
|
29,299,988
|
26,501,070
|
||||||||||||
Gross
profit
|
5,146,032
|
5,072,807
|
7,457,715
|
6,853,465
|
||||||||||||
Gross
profit ratio
|
17.1
|
%
|
20.2
|
%
|
20.3
|
%
|
20.6
|
%
|
||||||||
Net
income
|
2,906,705
|
3,146,931
|
4,730,350
|
4,083,502
|
In
addition, our operating model transfers most of the risk involved in the duck
production process to our farmers and feed brokers, therefore insulating us from
over-production and missed market opportunities. We generally limit the term of
our sales contracts to 30 days. In order to avoid over-production, we
maintain inventory of frozen duck products at a low level and base our
production and sales to farmers of ducklings upon the quantity of contracts or
sales orders we receive. In addition, due to the short 30-day
operating cycle, we can easily adjust our production based on market demand,
preferences and other fluctuations and variables.
Our major
product is frozen, lean-meat “Cherry Valley” duck, which was developed from the
traditional Peking or Beijing ducks by Cherry Valley Farm, a United Kingdom
(“UK”) company. Our product is the third generation of Cherry Valley
species introduced from the UK, which we purchase from their authorized
distributor in China. According to the China Animal Agriculture Association,
Cherry Valley ducks have the following general characteristics relative to other
ducks: (1) higher growth rate; (2) higher conversion rate of feed, that is, with
the same amount of feed, the duck will provide more meat; (3) higher rate of
lean meat; (4) stronger disease immunity; and (5) greater ability to be
cultivated in different geographical regions. Also, Cherry Valley ducks have
less fat content. According to a report from January 2011 in the Meat Trade News Daily in the
UK, a traditional Peking duck will have a fat level in excess of 35%, whereas a
Cherry Valley duck will have a fat level of less than 27%.
We have
an abundant supply of breeder ducks and the ability to process approximately
25,000 ducks a day. In addition to revenues generated from the sale of processed
duck products, we also generate revenues from the sales of ducklings and duck
feed to our contracted farmers and duck feathers to a domestic feather
processing manufacturer in China. One of our main growth strategies is to expand
our production capacity of processed duck by either acquiring or constructing an
additional facility. Such additional facility will have additional cold storage,
slaughter facilities, feather-removing workshops, processing plants, a
warehouse, and other buildings and workspaces necessary to grow our business. By
acquiring or constructing an additional facility, we expect to increase our
capacity from approximately 25,000 ducks per day to approximately 80,000 ducks
per day. In addition to the increase of our duck production capacity,
we also expect to increase the production of our ducklings, duck feed and duck
feathers. Specifically, we expect to increase the number of breeder ducks raised
in our breeder duck farm from 50,000 heads to 100,000 heads annually which would
lay on average 80,000 eggs per day, purchase approximately 120 additional sets
of hatchery machines to increase our duckling hatching capacity from 8.5 million
heads to 20 million heads annually, and build an additional feed production
facility to increase our feed production capacity from approximately 50,000 tons
to 80,000 tons annually. As we process more ducks, we expect our feather
production output to also increase. Further, as we expand, we intend to hire
additional personnel for sales, feed production, processing production feather
production, hatching, breeding and administrative functions.
50
To expand
our production capacity to approximately 80,000 ducks per day, we will need
more contracted farmers to fulfill the capacity. We believe we have abundant
access to local poultry farmers in Shandong Province to accommodate our growth,
because according to the municipal government statistics by Shouguang City there
are approximately 970,000 farmers in the city. We also expect we will need
approximately 42,000 tons of corn and 12,000 tons of soybean meal in addition to
our current supplies. According to Chinese official statistics, the corn
production of China in 2010 will be approximately 165 million tons, and
therefore we believe we will have no difficulty in purchasing additional corn.
Although we don’t have official information about domestic soybean meal
production in 2010, we believe we will have no difficulty in purchasing
additional 12,000 tons soybean meal. We believe such amounts under prevailing
market prices will be available in the future as well. If the prevailing market
prices for corn and soybean meal increase, we intend to pass on the price
increases to our customers by raising our product prices to maintain our profit
margins. There can be no assurance, however, that we will be able to pass any
such price increases to our customers. We also need to expand our marketing and
sales team and strengthen our marketing efforts to develop additional customers
including the expansion to the rural duck consumers in three major areas such as
Shanghai, Nanjing and Wuhan areas. We also intend to expand our sales to the
supermarkets and grocery stores, which yield higher profit margins than sales to
food processors. To help our existing contracted farmers to increase their
production capacity, we would also need to expand our technical and
administrative personnel to provide them sufficient technical and delivery
services.
In order
to maintain quality control and ensure compliance with applicable government
regulations, we supervise and direct the use of veterinary medicine and vaccines
to our contracted farmers. We also have established and maintained
standards so that our production facilities for the process of raising ducks and
duckling hatching, producing duck feed, commercial duck processing, feather
removal, partition processing, refrigeration and storage technologies meet all
government regulations. We believe that these measures help us produce, what we
believe to be, high quality ducks and duck products.
Market
Opportunity
|
·
|
Compared to traditional Peking
ducks, Cherry Valley ducks are leaner with less fat content
according to the China Animal Agricultural Society and, based on the 206
million Cherry Valley ducks sold from farms in China in 2009 and our
increased revenues during the past two years, have become popular. We
expect this popularity to drive market demand for Cherry Valley ducks in
China.
|
|
·
|
According to the CIA World
Factbook, China’s population is estimated to have grown by approximately
0.7% in 2009 and is expected to grow further in future years. We expect
duck consumption to increase with this population
growth.
|
Our
Competitive Strengths
We
believe that we have the following competitive advantages:
|
·
|
Location: Our production facilities are
located on 115,211 square meters in Shouguang City, Shandong Province,
China. We believe Shandong Province is well situated logistically for
distribution to all the main areas of duck consumption in China—Central,
Beijing, Tianjin, Northeast, Northwest and the Yangtze River delta
zone. Shandong Province has historically had a moderate
climate, has ample land for growth, an abundant supply of corn and
other ingredients for our feed production, and thousands of local poultry
farmers, which are all characteristics that will facilitate our duck
production and growth. In addition, we have access to abundant supplies of
corn and other feed ingredients locally, which lowers the cost of our feed
production. Furthermore, thousands of local, experienced poultry-raising
farmers are located in the same region as our facilities. Moreover, our
operation is located in the transportation hub of Shandong Province,
providing our customers across China with easy access to our facilities
thus we believe significantly reducing the cost of transportation and
logistics.
|
|
·
|
Vertically-Integrated
Business Model: Our
industrial chain is a vertically-integrated business model that integrates
feed producing, hatchery, farming, slaughtering, cutting and processing,
and wholesaling high volume duck production. Our company has built a
breeder farm with 50,000 breeder ducks providing eggs for the hatchery of
ducklings, a feed production facility producing feed for breeders and meat
ducks, a hatchery facility providing 25,000 ducklings daily, a processing
factory, and a long-term relationship with approximately 400 farmer
families. The facilities arrangement and the vertically-integrated
operation model have resulted in cost advantage while mitigating the price
volatility of our raw material supply-feed and
ducklings.
|
|
·
|
Cost: Our vertically-integrated
business model, has reduced volatility of the costs of our raw
materials, feed and ducklings. We also implemented a cost control strategy
throughout the process, such as operating our facilities during the time
of the day when electricity cost is the lowest. In addition, abundant
access to our local supplies of corn and other feed ingredients assures
the low cost for our feed production, which is a substantial
cost component for our final frozen duck
products.
|
51
|
·
|
Farmer
Network: We have a
broad base network of approximately 400 contracted farmers. This network
allows us to scale our production in a very efficient manner. All
contracts for production with farmers are 30 days, which allows our
capacity to remain flexible.
|
|
·
|
Reputation: We have received eight industry
awards or certifications in response to our contributions to the economic
development in the Shandong Province, the development of duck product
processing and the creation of job opportunities in the Shandong
Province. We believe these awards have helped us enhance our
reputation in the poultry and duck production industry among suppliers,
customers, farmers, banks, and relevant government authorities in the
geographic areas of China where we operate. These awards and
certifications include: the Shandong Agricultural Industry
Award for the key and leading enterprise (awarded by the Shandong
provincial government in August 2005); the award for the Agricultural
Industrial High-Integrity Service Enterprise (awarded by the Weifang
Agricultural Bureau in September 2005); and the contribution
award for the leading agricultural enterprise (awarded by the Weifang
municipal government in February 2006). These awards and certifications
were given to us based on our industry performance and for meeting certain
criteria set by different local area governments. While we did not
undertake any competitive process in order to receive these awards or
certifications, we believe these awards and certifications are only given
to select companies in the agricultural and poultry industry that meet
certain performance and other criteria.
|
|
·
|
Long-Term
Relationships with Key Customers and Diversified Customer
Base: We believe we
have established strong business relationships with several key
customers. Among our long-term customers, those with whom we have
been doing business for at least five to eight years, Yurun Group, listed
on the Hong Kong Stock Market, purchased nearly 5% of our duck production
in 2009 making them our biggest customer of frozen duck products.
Furthermore, our top ten long-term customers, including Yurun Group,
purchased frozen duck products, in the aggregate, approximately 16% of our
frozen duck production in 2009. Given the lack of high concentration of
sales to our largest customers, we are not overly dependent on any one
customer.
|
|
·
|
Epidemic
Prevention and Quality Control: We supervise the operation of
our base farm and undertake various measures in order to maintain quality
control and prevent the spread of disease. Among other things, we monitor
the sanitation at the hatcheries, the quality and purity of our feed
ingredients and feed, the health of our breeder flocks and ducklings, the
conditions of our facilities and the quality of our finished products. We
conduct on-site quality control activities at each of the processing
plants and the prepared-duck plant. Our technician team visits farmers on
a regular basis, supervising and providing assistance in the use of
veterinary medicine vaccines by our contracted farmers. Contracted farmers
are required to sanitize and clean their duck habitats completely between
rounds of raising ducks. In addition, we have adopted various measures to
assure the quality of the ducks we repurchase from the farmers, including
providing our farmers with our on-site hatched ducklings, self-produced
feed, technical support throughout the duck raising period, and the
supervision and direction regarding the use of veterinary
medicine.
|
Our Growth Strategies. Our
primary objectives are to capitalize on current market opportunities and build
on our competitive strengths to enhance our position as a leader in the duck
industry.
|
·
|
Enhance Sales and
Marketing: We expect to focus on channels through food
processors and distributors while seeking opportunities to enter the rural
markets of Shanghai, Nanjing and Wuhan. We intend to explore new selling
channels such as supermarkets and groceries. We plan to expand our sales
and marketing team and develop a network of distributors and we also
intend to hire additional sales staff in order to strengthen our existing
relationships with food processors and develop new relationships,
including with supermarkets and grocery stores both locally and in
selected national markets in China. Meanwhile, we will also look to enter
into agreements with distributors active in the rural markets of Shanghai,
Nanjing, and Wuhan to distribute our products there.
|
|
·
|
Expand
Geographic Presence:
We intend to expand the sales of our frozen duck products geographically.
We continue to focus on our markets including those in the Shanghai,
Nanjing and Wuhan areas. By establishing and strengthening business
relationships with food processing customers, supermarkets, restaurants,
and the individual distributors in the areas and expanding our market
share in the rural areas of these markets, we believe we will be able to
increase our sales. In addition, we plan to strengthen our sales and
marketing efforts by expanding our sales team.
|
|
·
|
Expand
Production Capacity:
We intend to expand the production capacity from the current daily
capacity of processing 25,000 heads to 80,000 heads through the related
expansion of the feed production facility, hatchery, and breeder farm.
Specifically, we expect to increase our breeder from duck purchase from
50,000 heads to 100,000 heads and maintain that level, purchase
approximately 120 additional sets of hatchery machines to increase our
duckling production capacity from 8.5 million heads to 20 million heads
annually, and build an additional feed production facility to increase our
feed production capacity from 50,000 tons to 80,000 tons annually. We also
intend to hire additional personnel for sales, feed production, processing
production, feather production, hatchery, breeder farm, and administrative
functions.
|
52
|
·
|
Strengthen Our
Farmer Network: To
strengthen our farmer network, we intend to help our existing farmers
expand their production and to continue adding additional contracted
farmers to the system. Specifically, we intend to help existing farmers
reduce the cost of raising ducks by providing them additional technical
support to assure a high survival rate, and offering duckling delivery
services and commercial adult duck pick up services. We intend to offer
competitive prices for such services, which we believe will allow our
contracted farmers to be more profitable. In addition, as we expand our
production capacity, we believe we could easily find available farmers
within Shandong Province to work with.
|
|
·
|
Increase Our
Customer Base: By
strengthening our relationships with key customers and diversifying our
customer base, we plan to increase our product share in the market in
which we operate. We intend to attract more customers by providing an
diversified product mix and adding new varieties of the Bai Tiao products
and duck part products.
|
|
·
|
Improve Profit
Margins: In 2009,
98.55% of our frozen duck products were sold through our own sales
personnel to food processors and only 1.45% of our products were sold
through individual distributors to local supermarkets. The profit margins
for the sales to the supermarkets and grocery stores are significantly
higher than the sales to food processors. We plan to expand our sales to
supermarkets as well as grocery stores through our own salespersons
and distributors and we expect such change in our sales strategy will
help increase our profit margins.
|
Products
We have
produced a wide range of processed frozen duck products that allows us to take
advantage of certain marketing opportunities. Specifically, we market a full
range of duck and duck industry products, including the following:
|
·
|
Duck Meat
Products: Our main
frozen duck related products consist of Bai Tiao, which is duck sold in
whole, and duck parts and organs, such as wings, chests, legs, flippers,
gizzard, and other duck parts. Bai Tiao is our main product, accounting
for 30% of total revenue in 2009 compared to 38% in 2008. Duck parts are
new products which accounted for 11.7% of total revenue in 2009 compared
to 0% in 2008.
|
|
·
|
Duckling
Products: We have 60
automatic hatchery machines and we are capable of producing approximately
25,000 ducklings per day and we expect to be able to produce approximately
80,000 ducklings per day after our production expansion plan is
implemented. We sell the ducklings to our contracted farmers to raise the
ducklings for approximately 30 days. We then repurchase the adult ducks
back from the contracted
farmers.
|
|
·
|
Duck Feed
Products: We produce
two different categories of duck feed for breeding ducks and commercial
ducks. Each category has three types of feed corresponding to the three
development stages of the ducks. We have the capacity to produce
approximately 50,000 tons of finished feed annually under current
configurations, and we expect to expand our capacity to 80,000 tons per
year after our production expansion plan is
implemented.
|
|
·
|
Duck Feather
Products: We shave
and collect the duck feathers, dry them, and sell them to a domestic
feather processing manufacturer in China. We only sell duck feathers to
one customer under a one-year contract renewable each year for four years.
The revenue from duck feathers accounted for approximately 6% of our total
revenue in 2009. If this customer becomes unavailable, we believe we can
find alternate garment
manufacturers.
|
53
The
following table sets forth, for the periods indicated, the contribution, as a
percentage of net sales dollars, of each of our major product
lines.
Nine Months Ended
|
Nine Months Ended
|
Year Ended
|
Year Ended
|
|||||||||||||||||||||||||||||
September 30, 2010
|
September 30, 2009
|
December 31, 2009
|
December 31, 2008
|
|||||||||||||||||||||||||||||
USD
|
USD
|
USD
|
USD
|
|||||||||||||||||||||||||||||
Frozen
duck products
|
16,195,201 | 54 | % | 13,131,819 | 52 | % | 20,241,941 | 55 | % | 16,735,538 | 50 | % | ||||||||||||||||||||
Ducklings
|
3,602,815 | 12 | % | 3,640,218 | 14 | % | 4,993,530 | 14 | % | 4,807,239 | 14 | % | ||||||||||||||||||||
Duck
feed
|
8,351,522 | 28 | % | 6,572,511 | 26 | % | 8,894,336 | 24 | % | 9,586,643 | 29 | % | ||||||||||||||||||||
Other
revenues (Feather)
|
2,042,364 | 7 | % | 1,833,512 | 7 | % | 2,663,688 | 7 | % | 2,252,532 | 7 | % | ||||||||||||||||||||
Total
net revenues
|
30,191,902 | 100 | % | 25,178,060 | 100 | % | 36,793,495 | 100 | % | 33,381,952 | 100 | % |
Market
Segments and Pricing
The
following table sets forth our general market segments and the daily capacity at
full capacity expressed in number of heads processed.
Market Segment
|
Capacity
Per Day
|
|||
Processed
Duck
|
25,000
|
|||
Duckling
|
25,000
|
|||
Duck
Feed (tons)
|
137
|
Generally,
we price many of our duck products based upon knowledge of current market prices
and calculation of our production cost and desired margins. Consistent with the
industry, our profitability is impacted by such market prices which may
fluctuate substantially and exhibit cyclical and seasonal characteristics. We
will adjust base prices depending upon value added, volume, product mix and
other factors. While base prices may change weekly and daily, our adjustment is
generally negotiated from time to time with our customers.
Sales
and Marketing
We sell
our frozen duck products primarily through the efforts of our sales team
consisting of six persons. We sell to food processors principally located
in fifteen Chinese provinces including the major cities of Beijing, Shanghai,
Tianjin, and Chongqing. We also have three brokers who are responsible for
selling one to two percent of our frozen duck products. For the frozen duck
products, the customers usually arrange for picking up their purchases at our
processing facilities and assume the transportation risk. Altogether, we have
approximately 70 customers. This wide range of customers, together with our
product mix, provides us with flexibility in responding to changing market
conditions in our effort to maximize profits. This flexibility also assists us
in our efforts to reduce our exposure to market volatility order in advance,
although our ability to do so is limited.
Our
employees sell and distribute our ducklings directly to the contracted farmers.
Contracted farmers are required to raise only our ducklings and use our feed. By
contract we are required to repurchase from the contracted farmers the adult
ducks which satisfy our selection standards.
Sales and
distribution of our duck feed are sold through approximately thirteen
independent feed brokers. Pursuant to the arrangements between us and the
independent feed brokers, we recognize revenues upon the delivery of the feed to
the independent feed brokers. The independent feed brokers then resell the feed
to the contracted farmers with the payments being made at the time of our
repurchase of ducks from the contracted farmers. We have no further obligations
to the independent feed brokers. The independent feed brokers
undertake the risk should the contracted farmers fail to pay them.
The
independent feed brokers have to assume the risk should the farmers fail to pay,
not us. As for the ducklings and feed, we use our employees and leased trucks to
provide transport to the contracted farmer’s farm of each contracted
farmer.
Yurun
Group, which is listed on the Hong Kong Stock Market, purchased nearly 5% of our
frozen duck production in 2009 making them our biggest customer of frozen duck
products. Our top ten long-term customers, including Yurun Group, purchased
frozen duck products, in the aggregate, approximately 16% of our frozen duck
production in 2009. We do not believe the loss of any single customer would have
a material adverse effect on us because we could sell duck or duck products
earmarked for any single customer at market prices to others.
We expect
to focus on channels through food processors and distributors while seeking
opportunities to enter the rural markets of Shanghai, Nanjing, and Wuhan. We
intend to explore new selling channels such as supermarkets and groceries. We
plan to expand our sales and marketing team and develop a network of
distributors and we also intend to hire additional sales staff in order to
strengthen our existing relationships with food processors and develop new
relationships, including with supermarkets and grocery stores both locally and
in selected national markets in China. Meanwhile, we will also look to enter
into agreements with distributors active in the rural markets of Shanghai,
Nanjing, and Wuhan to distribute our products there.
54
Production
and Facilities
General
We are a
vertically-integrated producer of frozen duck products, which includes breeding,
duck raising, egg laying, hatching, duck meat processing and packaging of the
products.
The
“Company-Base-Farmers” model of producing duck products can be reflected in the
following chart:
Grandparent Breeder
Farm (our
supplier)
ê
|
Parent Breeder Farm (our base farm)
ê
|
Commercial Line (contracted farmers)
Production volume
Raised for approximately 28 days – 35
days
ê
|
Selection by Jinzheng and
repurchase
ê
|
Our processing facilities
ê
|
Duck meat distributors
ê
|
Market
ê
|
Consumers
|
Purchase
of Breeding Ducks
We
purchase all the breeder flocks from Weifang Legang Food Co., Ltd. and we raise
them in our own farms for the production of hatching eggs. Our breeder flocks
are acquired as one-day old ducks (known as ducklings) from this primary
breeding company that has a division specializing in the production of Cherry
Valley breeder stock. We purchase on a yearly basis the ducklings in proportion
of approximately one male to four female ducks with a cost of approximately $204
(1,430 RMB) for each combination (30 males and 110 females). To date, we had
approximately 50,000 breeding ducks being raised in our facility. Prior to the
year of 2010, we did not have a sales agreement with this breeder duck supplier.
In March 2010, we entered into a one time sales contract with this supplier by
which this supplier shall provide us with 320 units of breeder
ducks.
Raising
and Hatching
The
breeding ducks start to lay eggs in 6 months. They attain a maximum ability to
lay eggs in 10 months and can be maintained at that level for one year.
Therefore, after the total of 22 months, the breeding ducks will be either sold
to farmers or disposed. 1,000 female ducks can produce approximately 950 eggs
per day and the selection rate is approximately 90%. We sell the unused eggs to
other farmers.
We own
and operate one hatchery facility where eggs are incubated. We have 60 automatic
hatchery machines and we are capable of hatching an aggregate of approximately
25,000 ducklings per day. The hatchery rate of eggs is 99%. After our expansion
plan is implemented, we will be able to increase that capacity to 80,000
ducklings per day.
On the
day after the eggs are hatched, employees transport the ducklings to the
contractual farmers using our leased trucks.
55
Process
Flow of Merchandise Duckling Incubation
Brooding
and Rearing period:
|
Brooding
period (1-4 weeks old), rearing period (5-22 weeks old)
|
|
Egg
Producing:
|
The
breeding ducks in the egg producing period are bred as required by the
management of breeding ducks during the egg producing
period
|
|
Egg
Inspection and Disinfection:
|
The
fetching eggs collected are transported to the incubation workshop
promptly and strictly selected; the selected hatching eggs are disinfected
prior to incubation or storage
|
|
Incubation:
|
Incubation
is carried out in accordance with the requirements for the incubation of
hatching eggs
|
|
Hatching:
|
Transported
to the hatchery on and after 26 days and hatched on and after the 28 th
day
|
|
Sale
of Ducklings:
|
|
The
ducklings are distinguished and selected after
hatching.
|
Grow-out
in Contracted Farmers
We have
approximately 400 contracted farmers to raise ducks in surrounding areas with a
radius of 10 kilometers to our base farm and processing facilities. We have
approximately 10 technician employees designated to help the farmers and direct
the vaccination and feeding of the ducks periodically, to ensure quality
control. We repurchase from the farm owners after 28 to 35 days the adult ducks
which meet our quality criteria. Our contracted farmers have the ability to
raise 9 million ducks per year. To ensure the quality of duck meat, our base
farmers are required to use only our feed and raise only the ducks we
provide.
We
provide ducklings in six to eight rounds per year and undergo sanitation and
cleaning between rounds. All the contracts with the farmers are short term, but
we have worked with many of these farmers for years. We also believe that the
Shandong Province provides abundant access to farmers to help raise the
ducks.
Feed
Production
An
important factor in the grow-out of ducks is the rate at which ducks convert
feed into body weight. We produce our own duck feed and purchase on the open
market the primary feed ingredients, including corn and soybean meal, which
historically have been the largest cost components of our total feed
costs.
To
diversify our products, we sell the feed through our feed brokers to our
contracted farmers for profit. The feed brokers sell to the farmers on credit
and the brokers are paid upon our repurchase of adult ducks from the
farmers. We have approximately 13 feed brokers and none of them
account for greater than 10% of our revenue.
Feed
grains are commodities subject to volatile price changes caused by weather, size
of harvest, transportation and storage costs, demand and the agricultural and
energy policies of the Chinese government. Generally, we purchase our corn and
other feed supplies at current prices from suppliers and, to a limited extent,
directly from farmers. Feed grains are available from an adequate number of
sources. The process for such production is reflected in the chart
below.
Although
the raw material cost of the duck feed an be volatile for a duck raising
company, by leveraging our well established relationships and the
vertically-integrated model, we have generated substantial revenue and
simultaneously reduced the volatility and lowered our cost compared to our
competitors. In addition, our operation model distributes most of the risk
involved in the duck production process among our farmers and feed brokers. We
generally limit the term of our sales contracts to 30 days. In order to avoid
over-production, we maintain inventory of frozen duck products at a low level
and base our production and sales to farmers of ducklings upon the quantity of
contracts and sales orders we receive. In addition, due to the short 30-day
operation cycle we can easily adjust our production based on market demand,
preferences and other fluctuations and variables.
Process
Flow of Feed Processing
Inspection
and acceptance:
|
Collect
raw materials from qualified suppliers, and inspect pursuant to quality
standards.
|
|
Cleanup
and storage:
|
Remove
impurity substances from the raw materials, and transport the raw
materials after treatment to different feed bins for
production.
|
|
Addition
and mix:
|
Add
ingredients as required by the composition of the feed, and mix them up
fully.
|
|
Granulation:
|
Harden
and temper the mixed raw materials, and make into granulated
feed.
|
|
Packaging
and stocking:
|
|
The
finished products will be packaged and stocked for sale after
inspection and
acceptance.
|
56
Processing of
Frozen Ducks
Once the
adult ducks reach a processing weight in 28 to 33 days, we repurchase from the
farmers the ducks which meet our quality criteria. The repurchase rate is
approximately 99%. We pick up the ducks from each farmer and transport them to
our processing plants, which is usually within 10 kilometers.
Our
processing plant uses modern, highly automated equipment to process and package
the ducks. Our processing plant operates one processing line on a double shift
basis and processes approximately 160,000 ducks per week.
Process
Flow of Duck Product Processing
Living
Stocks:
|
Repurchase
living ducks from our signed raising households and quarantine such living
ducks in order to ensure the conformity with our quality standards.
|
|
Slaughter:
|
Slaughtering
process.
|
|
Processing,
Weighting and Classification:
|
In
accordance with the production and processing plan, select, split and
classify the segmented ducks, whole ducks and by-products on basis of
their respective operation instruction. Weigh and classify the duck after
processing and treatment, and then finish package as required by the
products.
|
|
The
well-packaged products will be quickly frozen in one room and the finished
products after inspection and acceptance will be transported to separate
iceboxes for storage.
|
||
Distribution
and Sale:
|
|
The
sale and transportation of products shall be in insulated vans, such vans
shall be in compliance with the requirements for the sanitary insulation
of frozen products. If customers pick up the frozen products at our plant
,they bear the risk of transportation; if we deliver to customers’
location, we bear the risk of
transportation.
|
Business
Changes Upon Expansion
We plan
to expand our daily processing capacity from 25,000 heads to 80,000 heads daily.
To fulfill this goal, we will either acquire an existing factory or build one by
ourselves on the land we already purchased. We also intend to expand our other
facilities to maintain our vertically-integrated supply chain. Specifically, we
expect to increase the number of breeder ducks raised in our breeder duck farm
from 50,000 heads to 100,000 heads annually, purchase approximately 120
additional sets of hatchery machines to increase our duckling production
capacity from 8.5 million heads to 20 million heads annually, and build an
additional feed production facility to increase our feed production capacity
from approximately 50,000 tons to 80,000 tons annually. As we process more
ducks, we expect our feather production output to also increase. Further, as we
expand, we intend to hire additional personnel for sales, feed production,
processing production, feather production, hatching, breeding and administrative
functions.
To expand
our production capacity to approximately 80,000 ducks per day, we will need
more contracted farmers to fulfill the capacity. We believe we have abundant
access to local poultry farmers in Shandong Province to accommodate our growth,
because according to the municipal government statistics by Shouguang City there
are approximately 970,000 farmers in the city. We also expect we will need
approximately 42,000 tons of corn and 12,000 tons soybean meal in addition
to our current supplies. According to Chinese official statistics, the corn
production of China in 2010 will be approximately 165 million tons, and
therefore we believe we will have no difficulty in purchasing additional corn.
Although we don’t have official information about domestic soybean meal
production in 2010, we believe we will have no difficulty in purchasing
additional 12,000 tons of soybean meal. We believe such amounts under prevailing
market prices will be available in the future as well. If the prevailing market
prices for corn and soybean meal increase, we intend to pass on the price
increase to our customers by raising our product prices to maintain our profit
margins. There can be no assurance, however, that we will be able to pass on any
such price increases to our customers. We also need to expand our marketing
and sales team and strengthen our marketing efforts to develop additional
customers including the expansion to the rural duck consumers in three major
areas such as Shanghai, Nanjing and Wuhan areas. We also intend to expand our
sales to the supermarkets and grocery stores, which yield higher profit
margins than sales to food processors. To help our existing contracted farmers
to increase their production capacity, we would also need to expand our
technical and administrative personnel to provide them sufficient technical and
delivery services.
Quality
Control and Awards
We
believe that quality control is important to our business and conduct quality
control activities throughout all aspects of our operations. We believe these
activities are beneficial to efficient production and in assuring our customers
wholesome, high quality products.
We
supervise the operation of a modern, well-equipped base farm which, among other
things, monitors sanitation at the hatcheries, quality and purity of our feed
ingredients and feed, the health of our breeder flocks and ducklings, and
conducts microbiological tests of live ducks, facilities and finished products.
We conduct on-site quality control activities at each of the processing plants
and the prepared duck plant. Our team of technicians visits farms on a regular
basis, supervising and directing the farmers’ use of veterinary medicine and
vaccines.
57
The
following chart lists the awards we have received from government
agencies:
Award/Certification
|
Awarding/Certifying Body
|
Award/Certification
Date
|
||
The
Key and Leading Enterprise of Shandong Agricultural Industrialization
|
|
Shandong
Agriculture Department, Shandong Development and Reform Commission,
Shandong Economic Trade Committee, Shandong Finance Department, Shandong
Foreign Trade and Economic Cooperation Department, Shandong Internal
Revenue Bureau, Shandong Local Taxation Bureau, Shandong Federation of
Supply and Marketing Cooperatives, Shandong Fishery & Ocean
Department, Shandong Forestry Bureau, Jinan Branch of People’s Bank of
China
|
|
August
2005
|
Award/Certification
|
Awarding/Certifying
Body
|
Award/Certification
Date
|
||
Contribution
Award for the Agriculture Leading Enterprise Construction of the City
|
Weifang
Municipal Party
Committee
Weifang
People’s Government
|
February
2006
|
||
Agricultural
Industrialization High Integrity Service Enterprise
|
Weifang
Administration Bureau for Industry and Commerce
Agricultural
Work Office of Weifang Municipal Committee
Weifang
Agriculture Bureau
Weifang
Enterprise Credit Management Association
|
September
2005
|
||
Outstanding
Privately Owned Enterprise of 2007
|
Yingli
Town Party Committee
Yingli
People’s Government
|
February
2008
|
||
Abiding
by Contracts and Keeping Promise Enterprises
|
|
Shouguang
Administration of Industry and Commerce Shouguang Enterprise Reputation
Administration Association
|
|
June
2007
|
Regulatory
and Governmental Licenses and Permits
Our
facilities and operations are subject to regulation by various Chinese
governmental agencies, including, but not limited to, local agencies of the
State Federal Food and Drug Administration (“SFDA”), the Ministry of Agriculture
(“MOA”), and the Department of Health. Our duck processing plants are
subject to continuous on-site inspection by the government. The
Quality Control Agency visits our facilities every month to ensure our products
meet the applicable standards. The local Health Agency visits every three months
to monitor the sanitary conditions of our facilities. The local Husbandry Agency
visits the contracted farmers and our slaughter facilities periodically. Each
time when we repurchase the ducks from the farmers, we need a permit from the
local Husbandry Agency, which is there at the time of purchase to check whether
the ducks to be repurchased satisfy the food safety standard. We have
approximately 10 employees to handle the repurchase and
transportation.
The
following is a description of the material licenses and permits issued to us in
order for us to carry out our operations, other than those pertaining to general
business registration requirements:
Hygiene
License
We view
hygiene control as a critical aspect of food production operations and place
great emphasis on the hygienic preparation of our processed frozen duck products
to ensure they are safe for consumption. We have received the following hygiene
license in relation to our operations:
58
Name of Certificate
|
Description of License/Permit
|
Issuing Authority
|
Expiration Date
|
|||
Hygiene
License
|
|
Permit
to process frozen duck products
|
|
Shouguang
City
Hygiene
Bureau
|
|
April
24,
2012
|
Other Licenses
and Permits
Our other
licenses and permits are as follows:
Name of Certificate
|
Description of License/Permit
|
Issuing Authority
|
Expiration
Date
|
|||
Grain
Procurement License
|
Permit
to procure grain from producers
|
Shouguang
City Grain Bureau
|
December
24, 2011
|
|||
Breeder
Poultry License
|
Permit
to raise breeder poultry
|
Shandong
Province Husbandry Bureau
|
August
4, 2011
|
|||
Animal
Epidemic Prevention Qualification Certificate
|
Venue
for qualified animal epidemic prevention condition
|
Shouguang
Husbandry Bureau
|
April
12, 2011
|
|||
Feed
Production License
|
Permit
to produce and sell feed products
|
Shandong
Province Husbandry Bureau
|
August
31, 2011
|
|||
Sewage
and Waste Disposal Permit
|
Permit
to discharge the sewage and waste
|
Shouguang
Environmental Protection Agency
|
September
20, 2011
|
Compliance
with existing regulations has not had a material adverse effect on our earnings
or competitive position in the past and is not anticipated to have a materially
adverse effect in the future. Management believes that we are in material
compliance with existing laws and regulations relating to the operation of its
facilities and does not know of any major capital expenditures necessary to
comply with such statutes and regulations.
We take
extensive precautions to ensure that our flocks are healthy and that our
processing plants and other facilities operate in a healthy and environmentally
sound manner. Events beyond our control, however, such as an outbreak of disease
in its flocks or the adoption by governmental agencies of more stringent
regulations, could materially and adversely affect our operations.
Customers
We sell
frozen duck, in whole or cut-up form, to food processing companies and
distributors in fifteen Chinese provinces, including the cities of Beijing,
Shanghai, Tianjin, and Chongqing. We have established
business relationships with our key customers since Jinzheng was established and
have been doing business with our key customers for five to eight years.
Yurun Group, which is listed on the Hong Kong Stock market, purchased nearly 5%
of our frozen duck production in 2009 making them our biggest customer of frozen
duck products. Our top ten long-term customers, including Yurun Group, purchased
frozen duck products, in the aggregate, approximately 16% of our frozen duck
production in 2009.
The below
chart illustrates the geographic location of our customers based on the
provinces and major cities. The percentage reflects the proportion of revenues
generated by each province or city in 2009.
59
Competition
In 2007,
China had 737 million ducks on hand with a slaughter capacity of 2,089
billion. Many large scale poultry enterprises started to engage in
producing and processing this type of duck meat in recent years. Some of them
have slaughter capacity of more than 10 million ducks, with an integrated
production process that includes breeding duck raising and hatching, commercial
duck raising, slaughtering and production of duck products. Besides such
large enterprises, China also has many small enterprises engaged in raising,
slaughtering and processing bird species. However, in recent years, the Chinese
government has strengthened the supervision of the safety of the food processing
industry, and put strict requirements on hygiene and animal epidemic prevention,
so the amount of individual slaughterhouse operators has gradually
decreased.
We have
become one of the leading vertically-integrated duck producers in Shandong
Province, with the value chain of parental breeder duck raising, hatching, feed
processing, commercial duck raising, processing and sale of duck products. We
have the capacity of hatching 10 million ducklings and processing 8.5 million
meat ducks annually. This provides us with a competitive advantage in cost
control and ability to manage risk compared to smaller producers. Our complete
industry chain can ensure the continuity and stability of the production,
improve the product quality and reduce the costs, and therefore strengthen our
competition position. However, we are still subject to significant competition
from regional and national firms in the duck markets in which we compete and
some of our competitors have greater financial and marketing resources than
us.
Shandong
Province is one of the poultry production centers in China. Some of our
competitors in the province have greater capacity for production of ducks and
duck products than us. Some of these competitors have entered into the
pre-cooked duck product market and some of them sell both ducks and chickens.
Although some of these competitors may have greater access to capital and higher
market shares than us, the market for ducks in China has shown significant
growth and provides us with significant opportunities.
Sources of
Supply
We
purchase breeder ducks from Weifang Legang Food Co., Ltd., one of the major
Cherry Valley breeder duck suppliers in Shandong Province. We purchase the
breeder ducks from this supplier once or twice a year and therefore we do not
have long term contracts with them. Our breeder ducks costs approximately $204
(1,430 RMB) for each combination of 30 males and 110 females. We
believe that the prices for the breeder ducks are stable and the breeder duck
supplier is replaceable in the event we need a new source of
supply.
The raw
materials for our duck feed production are primarily corns (50-70%) and soybean
meal (15-33%) We do not anticipate any difficulty in obtaining these
materials in the future. We purchase these materials from a number of vendors
and believe that our sources of supply are adequate for our present needs and
anticipated growth. We use approximately 1,500 tons of corn per month which cost
over $4.4 million (30 million RMB) per year. We usually purchase the grains in
the amount we need, but during fall seasons when corn supply is abundant and the
price is low we generally purchase more corn supply than we need and store it,
lowering our average cost of raw materials and reducing the impact from market
volatility. We have storage capacity for 5,000 tons of feed.
Seasonality
The
demand for our duck products is the highest prior to the Chinese New Year, which
is usually during early February. Demand is otherwise not
seasonal.
60
Intellectual
Property
|
·
|
We are currently using the name
of “Zheng Hui” for all our products. Our application for the trademark
“Zheng Hui” in China is pending. We also own three domain names:
jinzhenggroup.com”, “jinzhenggroup.cn”, and “
jinzhenggroup.com.cn”.
|
|
·
|
We are not aware of any material
infringement of our intellectual property
rights.
|
Insurance
We
maintain various insurance policies to safeguard against risks and unexpected
events. In protecting against work-related casualties and injuries, we purchase
accidental injury insurance policies for our employees. In addition, we provide
social security insurance including pension insurance, unemployment insurance,
work related injury insurance and medical insurance for our employees. We have
not maintained insurance for our plants, machinery, equipment, inventories and
motor vehicles. We do not have product liability insurance for our products. All
of our products have met the relevant regulatory requirements under PRC laws and
we have not been subject to any material fines or legal action involving product
non-compliance.
Employees
We had
397 full-time employees as of September 30, 2010. The following table shows the
breakdown of employees by department:
Function
|
Number of
employees
|
% of total
|
||||||
Administration
(6 sales personnel)
|
30
|
8
|
%
|
|||||
Base
farm (16 technicians), hatchery (2 technicians), process and cold storage
(5 technicians)
|
322
|
81
|
%
|
|||||
Feed
Production (2 technicians)
|
45
|
11
|
%
|
|||||
Total
|
397
|
100
|
%
|
Legal
Proceedings
We may be
subject to legal proceedings, investigations and claims incidental to the
conduct of our business from time to time. We are not currently a party to any
litigation or other legal proceedings brought against us. We are also not aware
of any legal proceeding, investigation or claim, or other legal exposure that
has a more than remote possibility of having a material adverse effect on our
business, financial condition or results of operations.
Property
Under the
current PRC law, land is owned by the state, and parcels of land in rural areas,
which is known as collective land, is owned by the rural collective economic
organization. “Land use rights” are granted to an individual or entity after
payment of a land use right fee made to the applicable state or rural collective
economic organization. Land use rights grant the holder the right to use the
land for a specified long-term period.
Our
properties are located in Shandong Province under land use rights for
purposes of production and employee living quarters.
We have
land use rights, expiring at different times from years 2053 to 2059, for a
total of approximately 82,294 square meters of land for all of our existing
facilities, including an office building of 3,815 square meters, a processing
facility of 21,121 square meters, a breeder farm of 44,130 square meters, a feed
production facility of 13,228 square meters, and 158,694 square meters of
undeveloped land on which we may build a new processing facility and cold
storage.
Government
Regulation
This
section sets forth a summary of the most significant regulations or requirements
that affect our business activities in China. Certain of these regulations and
requirements, such as those relating to tax, foreign currency exchange, dividend
distribution, regulation of foreign exchange in certain onshore and offshore
transactions and regulations of overseas listings, may affect our shareholders’
right to receive dividends and other distributions from us.
61
Environmental
Regulations
On
December 26, 1989, the Standing Committee of the National People’s Congress
issued the Environment Protection Law, setting forth the legal framework for
environment protection in China. The Environmental Protection Law requires the
State Administration of Environmental Protection to implement uniform
supervision and administration of environmental protection standards nationwide
and to establish national waste discharge standards. Local environmental
protection bureaus are responsible for environmental protection in their
jurisdictions and may set stricter local standards which are required to be
registered at the State Administration of Environmental Protection. Companies
are required to comply with the stricter one of the two standards. Enterprises
producing environmental contamination and other public hazards must incorporate
the relevant environmental protection standards into their planning and
establish environmental protection systems. These companies must also adopt
effective measures to prevent environmental contamination and hazardous
emissions, such as waste gas, waste water, deposits, dusts, pungent gases and
radioactive matters as well as noise, vibration and magnetic radiation.
Companies discharging contaminated wastes in excess of the discharge standards
prescribed by the State Administration of Environmental Protection must pay
non-standard discharge fees in accordance with national regulations and be
responsible for the applicable remediation. Government authorities may impose
different penalties against persons or companies in violation of the
environmental protection laws and regulations depending on individual
circumstances. Such penalties may include warnings, fines, imposition of
deadlines for remediation, orders to cease certain operations, orders to
reinstall contamination prevention and remediation facilities that have been
removed or left unused, imposition of administrative actions against the
responsible persons or orders to close down the company. Where the violation is
deemed serious, responsible persons may be required to pay damages, and may be
subject to criminal liability.
New
M&A Regulations and Overseas Listings
On August
8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, the
State Assets Supervision and Administration Commission, the State Administration
for Taxation, the State Administration for Industry and Commerce, the CSRC and
the SAFE, jointly issued the Regulations on Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors, or the New M&A Rule, which became
effective on September 8, 2006. This New M&A Rule, among other things,
includes provisions that purport to require that an offshore special purpose
vehicle formed for purposes of overseas listing of equity interests in PRC
companies and controlled directly or indirectly by PRC companies or individuals
obtain the approval of the CSRC prior to the listing and trading of such special
purpose vehicle’s securities on an overseas stock exchange.
On
September 21, 2006, the CSRC published on its official website its approval
procedures for overseas listings by special purpose vehicles. The CSRC approval
procedures require the filing of certain documents with the CSRC and may take
several months to complete. However, other than documents required to be
submitted, no other details with respect to the timing, criteria and process for
obtaining any required approval from the CSRC have been specified. Therefore, it
remains unclear how the New M&A Rule or the CSRC procedures will be
interpreted, amended and implemented by the relevant authorities. See “Risk
Factors—Risks Associated with Doing Business in China—The application of PRC
regulations relating to the overseas listing of PRC domestic companies is
uncertain, and we may be subject to penalties for failing to request approval of
the PRC authorities prior to listing our shares in the U.S.”
Foreign
Exchange Regulation
Pursuant
to the Foreign Exchange Administration Rules promulgated on January 29, 1996 and
amended on January 14, 1997 and August 5, 2008, and various regulations issued
by the SAFE and other relevant PRC government authorities, RMB is freely
convertible only with respect to current account items, such as trade-related
receipts and payments, interest and dividends. Capital account items, such as
direct equity investments, loans and repatriations of investments, require the
prior approval of the SAFE or its local branches for conversion of RMB into
foreign currency, such as U.S. dollars, and remittance of the foreign currency
outside the PRC.
Payments
for transactions that take place within the PRC must be made in RMB. Unless
otherwise approved, PRC companies must repatriate foreign exchange payments
received from abroad. Foreign-invested enterprises may retain foreign exchange
in accounts with designated foreign exchange banks subject to a cap set by the
SAFE or its local counterpart. Unless otherwise approved, domestic enterprises
must convert all of their foreign exchange receipts into RMB.
Pursuant
to the SAFE’s Notice on Relevant Issues Concerning Foreign Exchange
Administration for PRC Residents to Engage in Financing and Inbound Investment
via Overseas Special Purpose Vehicles, or the SAFE Circular No. 75, issued on
October 21, 2005, (i) a PRC resident must register with the local SAFE branch
before establishing or controlling an overseas special purpose vehicle, or SPV,
for the purpose of obtaining overseas equity financing using the assets of or
equity interests in a domestic enterprise; (ii) when a PRC resident contributes
the assets of or its equity interests in a domestic enterprise into an SPV, or
engages in overseas financing after contributing assets or equity interests into
an SPV, such PRC resident must register his or her interest in the SPV and any
subsequent change thereto with the local SAFE branch; and (iii) when the SPV
undergoes a material event, such as a change in share capital, merger and
acquisition, share transfer or exchange, spin-off or long-term equity and debt
investment, the PRC resident must, within 30 days from the occurrence of such
event, register such change with the local SAFE branch. On May 29, 2007, the
SAFE issued relevant guidance to its local branches for the implementation of
the SAFE Circular No. 75. This guidance standardizes more specific and stringent
supervision on the registration requirement relating to the SAFE Circular No. 75
and further requests PRC residents holding any equity interests or options in
SPVs, directly or indirectly, controlling or nominal, to register with the
SAFE.
62
Our
beneficial owners who are PRC residents have registered with the local SAFE
branch as required under the SAFE Circular No. 75. See “Risk Factors—Risks
Associated with Doing Business in China—Recent PRC regulations relating to the
establishment of offshore special purpose companies by PRC residents may subject
our PRC resident shareholders to personal liability, limit our ability to inject
capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to
distribute profits to us, or otherwise adversely affect us.”
Regulations
Relating to Employee Share Options
Pursuant
to the Implementation Rules of the Administration Measure for Individual Foreign
Exchange, or the Individual Foreign Exchange Rule, and an implementation notice
on the rule, issued in January and March 2007, respectively, by the SAFE, PRC
citizens who are granted share options by an overseas publicly-listed company
are required, through a PRC agent designated by such overseas publicly-listed
company, to register with the SAFE and complete certain other procedures related
to the share options. PRC agents may be the subsidiary of such overseas
publicly-listed company, trade union of any such PRC subsidiary having legal
person status, a trust and investment company or other financial institution
qualified to engage in assets custodian business. Such individuals’ foreign
exchange income received from the sale of shares or dividends distributed by the
overseas publicly-listed company must first be remitted into a collective
foreign exchange account opened and managed by the PRC agent before distribution
to such individuals in a foreign currency or in RMB. We and our PRC citizen
employees who may be granted share options, or PRC optionees, will be subject to
these rules when our company becomes an overseas publicly-listed company. If we
or our PRC optionees fail to comply with these regulations, we or our PRC
optionees may be subject to fines and legal sanctions. However, as these rules
have only been recently promulgated, it is currently unclear as to how these
rules will be interpreted and implemented.
Regulation
of Dividend Distribution
The
principal regulations governing distribution of dividends of foreign holding
companies include the Foreign Investment Enterprise Law (1986), as amended, and
the Administrative Rules under the Foreign Investment Enterprise Law (1990), as
amended. Under these regulations, foreign-invested enterprises in China may pay
dividends only out of their accumulated profits, if any, determined in
accordance with Chinese accounting standards and regulations. In addition,
foreign-invested enterprises in China are required to allocate at least 10% of
their respective accumulated profits each year, if any, to fund certain reserve
funds unless these reserves have reached 50% of the registered capital of the
enterprises. These reserves are not distributable as cash dividends. Our Chinese
subsidiaries, which are all foreign-invested enterprises, are restricted from
distributing any dividends to us until they have met these requirements set out
in the regulations.
According
to the new EIT law and the implementation rules on the new EIT law, if a foreign
legal person is not deemed to be a resident enterprise for Chinese tax purposes,
dividends generated after January 1, 2008 and paid to this foreign legal person
from business operations in China will be subject to a 10% withholding tax,
unless such foreign legal person’s jurisdiction of incorporation has a tax
treaty with the PRC that provides for a different withholding
arrangement.
Under the
new EIT law and its implementation rules, if an enterprise incorporated outside
China has its “de facto management organization” located within China, such
enterprise would be classified as a resident enterprise and thus would be
subject to an enterprise income tax rate of 25% on all of its income on a
worldwide basis, with the possible exclusion of dividends received directly from
another Chinese tax resident.
Regulations
on Trademarks
Both the
PRC Trademark Law, adopted in 1982 and revised in 1993 and 2001, and the
Implementation Regulation of the PRC Trademark Law adopted by the State Council
in 2002, give protection to the holders of registered trademarks. The Trademark
Office, under the authority of the State Administration for Industry and
Commerce, handles trademark registrations and grants rights for a term of ten
years for registered trademarks, which may be renewed by the Trademark Office.
The PRC Trademark Law has adopted a “first-to-file” principle with respect to
trademark registration. Where a trademark for which a registration has been made
is identical or similar to another trademark which has already been registered
or been subject to a preliminary examination and approval for use on the same
kind of or similar commodities or services, the application for registration of
such trademark may be rejected. Any person applying for the registration of a
trademark may not prejudice the existing right first obtained by others, nor may
any person register in advance a trademark that has already been used by another
party and has already gained a “sufficient degree of reputation” through such
party’s use. Trademark license agreements must be filed with the Trademark
Office or its regional offices.
63
On June
29, 2007, the National People’s Congress promulgated the Labor Contract Law of PRC ,
or the Labor Contract Law, which became effective as of January 1, 2008. On
September 18, 2008, the PRC State Council issued the PRC Labor Contract Law
Implementation Rules , which became effective as of the date of issuance.
The Labor Contract Law and its implementation rules are intended to give
employees long-term job security by, among other things, requiring employers to
enter into written contracts with their employees and restricting the use of
temporary workers. The Labor Contract Law and its implementation rules impose
greater liabilities on employers, require certain terminations to be based upon
seniority rather than merit and significantly affect the cost of an employer’s
decision to reduce its workforce. Employment contracts lawfully entered into
prior to the implementation of the Labor Contract Law and continuing after the
date of its implementation remain legally binding and the parties to such
contracts are required to continue to perform their respective obligations
thereunder. However, employment relationships established prior to the
implementation of the Labor Contract Law without a written employment agreement
were required to be memorialized by a written employment agreement that
satisfies the requirements of the Labor Contract Law within one month after it
became effective on January 1, 2008.
Tort
Liability Law
The Tort
Liability Law of the People’s Republic of China, which was passed during the
12th Session of the Standing Committee of the 11th National People’s Congress on
December 26, 2009, states that manufacturers are liable for damages caused by
defects in their products and sellers are liable for damages attributable to
their fault. If the defects are caused by the fault of third parties such as the
transporter or storekeeper, manufacturers and sellers are entitled to claim for
compensation from these third parties after paying the compensation
amount.
64
The
following diagram illustrates our corporate and shareholder structure as of the
date of this prospectus.
Mr.
Junfeng Shan, the sole shareholder of Zheng Hui Holding Limited (BVI Co1), also
owns directly 89.85% of the capital stock of Jinzheng, while Yufen Zhang, Yan
Wang and Li Qian own in aggregate the balance of the capital stock of Jinzheng.
The same three individuals also are sole shareholder for the each of the BVI
Co2, BVI Co3 and BVI Co4, respectively, as described in the chart
above.
Corporate
History
On
January 22, 2009, we were incorporated in the State of Oregon, and we changed
our domicile to the State of Nevada on May 21, 2010. On March 23, 2010, we
established our wholly-owned subsidiary, Beijing CMJM, in Beijing
China. On March 25, 2010, Beijing CMJM entered into a series of
contracts with Jinzheng and/or Jinzheng Stockholders and obtained the exclusive
control over its duck production and distribution business in China.
Accordingly, we have consolidated Jinzheng’s historical financial results in our
financial statements as a VIE pursuant to GAAP.
We
believe that, (1) the ownership structure of Beijing CMJM and Jinzheng complies
with, and immediately after this offering, will comply with, current PRC laws
and regulations; (2) our contractual arrangements with Jinzheng and Jinzheng
Stockholders are valid and binding on all parties to these arrangements, and do
not violate current PRC laws or regulations; and (3) the business operations of
our company, Beijing CMJM and Jinzheng comply with current PRC laws and
regulations.
Material
Operating Entities
Beijing
CMJM. Since our inception, we have conducted our operations
in China primarily through Beijing CMJM, a wholly foreign-owned enterprise in
China. Beijing CMJM manages the businesses and also provides consulting and
other related services to Jinzheng. See “— Contractual Arrangements with
Jinzheng and Jinzheng Stockholders.”
Jinzheng.
We conduct our duck production and distribution business through Jinzheng, a
limited liability company established in China. Junfeng Shan beneficially owns
89.85% of the equity and three other individuals beneficially own 3.05%, 3.55%,
and 3.55% of the equity respectively. Jinzheng operates our duck production and
distribution business and holds the licenses and approvals necessary to the
operation of business in China.
Contractual
Arrangements with Jinzheng and Jinzheng Stockholders
Our
relationships with Jinzheng and Jinzheng Stockholders are governed by a series
of contractual arrangements. Under PRC laws, each of the shareholders is an
independent legal person and neither of them is exposed to liabilities incurred
by the other party. The contractual arrangements are comprised of a series of
agreements, including Exclusive Technical Consulting Service Agreements and
Operating Agreements, through which we have the right to advise, consult, manage
and operate Jinzheng, and collect and own 85% of their respective net profits.
In order to further reinforce our rights to control and operate Jinzheng, these
companies and their stockholders have granted us, under the Exclusive Equity
Interest Purchase Agreement, the exclusive right and option to acquire all of
their equity interests in Jinzheng, or alternatively, all of the assets of
Jinzheng. Further the Jinzheng Stockholders have pledged all of their rights,
titles and interests in Jinzheng to us under the Exclusive Equity Interest
Pledge Agreement.
65
On March
25, 2010, we entered into the following contractual arrangements:
Exclusive Technical Consulting
Service Agreement. Pursuant to the Exclusive Technical Consulting Service
Agreement between Beijing CMJM and Jinzheng, Beijing CMJM has the exclusive
right to provide business consulting and related services, including the
provision of advanced management skills to offer a framework for the
construction of a new management platform, the provision of technology
information and materials related to Jinzheng’s business development and
operation, training of technical and managerial personnel for Jinzheng and
provision of required training documents (the “Services”). Under this agreement,
Beijing CMJM owns the intellectual property rights arising from the performance
of the Services, including, but not limited to, copyrights, patent, know-how and
commercial secrets, whether developed by Beijing CMJM or Jinzheng. Jinzheng pays
85% of its annual net profit to Beijing CMJM on a semi-annual basis as
consulting service fee. The remaining 15% of annual net profits is restricted by
the Equity Interest Pledge Agreement, which entitles Beijing CMJM to collect
dividends from Jinzheng during the term of the pledge. Because the pledge
remains in effect to guarantee payment under the Exclusive Technical Consulting
Service Agreement, the principal shareholders will not have any right to receive
any dividends from Jinzheng if they are declared. The consulting service
agreement is in effect for a term of ten years starting from March 25, 2010
unless previously terminated. This agreement may be renewed for additional
ten-year terms upon notice by Beijing CMJM.
Operating Agreement. Pursuant
to the Operating Agreement among Beijing CMJM, Jinzheng and the principal
shareholders, Beijing CMJM fully guarantees the performance of the contracts,
agreements or transactions executed by Jinzheng related to Jinzheng’s business.
Jinzheng, in return, agrees to pledge all of its receivables and assets to
Beijing CMJM. In addition, Jinzheng agrees that without the prior consent of
Beijing CMJM, Jinzheng will not engage in any transactions that could materially
affect the assets, obligations, rights or the business of Jinzheng, including,
without limitation, (a) borrowing money from a third party or assuming any debt,
(b) selling to or acquiring from any third party any assets or rights, including
without limitation, any intellectual property rights, (c) providing any real
guaranty for any third party with its assets or intellectual property rights, or
(d) assigning to any third party its business agreements. Moreover, Jinzheng
agrees to accept the corporate policy advice and guidance provided by Beijing
CMJM on Jinzheng’s daily operations, financial management and employment issues.
The principal shareholders appoint the candidates recommended by Beijing CMJM to
Jinzheng’s board of directors. Beijing CMJM has the right to appoint personnel
to high level managerial positions of Jinzheng, including General Manager, Chief
Financial Officer and other senior officers. The term of this agreement is ten
years from March 25, 2010 unless earlier terminated. The agreement can be
renewed for additional ten-year periods at Beijing CMJM’s written request.
Beijing CMJM may terminate the agreement at any time upon thirty (30) days’
written notice to Jinzheng.
Equity Interest Pledge
Agreement. Under the Equity Interest Pledge Agreement between the
principal shareholders of Jinzheng and Beijing CMJM, the principal shareholders
pledged all of their equity interests in Jinzheng to Beijing CMJM to guarantee
Jinzheng’s consulting fees paid to Beijing CMJM. According to the Equity
Interest Pledge Agreement, the shareholders of Jinzheng can not transfer their
shares to any third party other than Beijing CMJM and upon an event of default,
Beijing CMJM, as pledgee, will be entitled to certain rights, including but not
limited to the right to sell the pledged equity interests. The principal
shareholders agree that without Beijing CMJM’s prior written consent, they will
not transfer any equity interest, create or permit to exist any pledge that may
damage Beijing CMJM’s rights or interests in the pledged equity interests, or
cause Jinzheng’s meeting of stockholders or board of directors to pass any
resolutions about the sale, transfer, pledge or other disposal of the lawful
right to derive income from any equity interest in Jinzheng or about the
permission of the creation of any other security interests thereon. The term of
this agreement is the same as the longest of the Service Agreements. If the term
of any Service Agreement is renewed, the term of this agreement will extend
accordingly.
Exclusive Equity Interest Purchase
Agreement. Pursuant to the Exclusive Equity Interest Purchase Agreement
between Jinzheng, the principal shareholders and Beijing CMJM, the principal
shareholders irrevocably, unconditionally and exclusively granted Beijing CMJM a
purchase option (the “Purchase Option”) whereby, to the extent permitted under
Chinese law, Beijing CMJM has the right to request the principal shareholders
transfer, to it or its designated entity or person, the total equity interests
held by them in the registered capital of Jinzheng, which as a group equals 100%
of the outstanding equity of Jinzheng. The Purchase Option, which was granted to
Beijing CMJM, and the consulting fees are in exchange for the services provided
to Jinzheng by Beijing CMJM. Beijing CMJM did not pay any cash
consideration for the Purchase Option. Beijing CMJM has sole
discretion to decide the specific time, method and number of the exercise of the
Purchase Option. At the time of each exercise of the Purchase Option by Beijing
CMJM, the total consideration to be paid to principal shareholders shall be
determined through negotiation according to the evaluation of the equity
interest by the relevant qualified institute and it shall be the lowest price
permitted under PRC laws. The term of this agreement is ten years from March 25,
2010 unless earlier terminated. The agreement can be renewed for additional
ten-year periods at Beijing CMJM’s written request.
66
Power of Attorney. Pursuant
to a power of attorney, each of the principal shareholders agree to irrevocably
entrust Beijing CMJM with his stockholder voting rights and other stockholder
rights for representing him to exercise such rights at the stockholders’ meeting
of Jinzheng in accordance with applicable laws and its Article of Association,
including, but not limited to, the right to sell or transfer all or any of his
equity interest in Jinzheng, and appoint and vote for the directors and Chairman
as the authorized representative of the Principal shareholders. The term of each
proxy and voting agreement is as long as each of the principal shareholders is a
shareholder of Jinzheng from March 25, 2010.
Zheng Hui
and Beijing CMJM are considered foreign investors or foreign invested
enterprises under PRC law. As a result, Zheng Hui and Beijing CMJM are subject
to limitations under PRC law on foreign ownership of domestic companies.
According to the Catalogue of Industries for Guiding Foreign Investment (the
“Catalogue”), there are four kinds of industries which are encouraged,
permitted, restricted and prohibited for foreign investment. Although the
primary business of Jinzheng is not within the category in which foreign
investment is currently restricted or prohibited, the uncertainty of PRC law,
regulations and governmental policies affecting foreign ownership may result in
Zheng Hui being required to hold (or, conversely, being prohibited from
holding), directly or indirectly, a given percentage of Jinzheng’s equity
interests. Our VIE Agreements with Jinzheng and its shareholders allow us to
substantially control Jinzheng through Beijing CMJM without exercising the
exclusive equity interest purchase agreement. Therefore we set up our corporate
structure this way rather than exercising the exclusive equity interest purchase
agreement. While we are not aware of many United States public companies in the
duck industry that have all or substantially all of their operations in China,
this corporate structure is typical among other United States public companies
that have all or substantially all of their operations in China and we are aware
of other companies whose corporate structure is the same as the corporate
structure of Zheng Hui in similar industries, such as the swine industry.
67
Directors
and Executive Officers
Set forth
below is information regarding our current directors and executive
officers:
Name
|
Age
|
Position
|
||
Junfeng
Shan
|
53
|
Chief
Executive Officer, President and Chairman
|
||
Xiaofang
Xue
|
32
|
Chief
Financial Officer, Secretary
|
||
Lilian
Jiang*
|
42
|
Independent
Director
|
||
Yuan
Gong*
|
37
|
Independent
Director
|
||
Jing
Cao*
|
31
|
Independent
Director
|
||
Kunshan
Wang*
|
65
|
Independent
Director
|
||
Shidian
Shan
|
36
|
Vice
President
|
||
Yunqing
Wu
|
32
|
Vice
President
|
||
Yongping
Shan
|
56
|
Vice
President
|
*
Indicates member of Audit, Nominating and Corporate Governance Committee and
Compensation Committee
Below is
the ten year employment history of each director, executive officer and
significant employees listed above. None of them are directors or officers for
any other public companies or investment companies in the United
States.
Junfeng Shan: President and
CEO. Mr. Shan was the founder of our company in 2002 and has since served as
President and Chief Executive Officer. From November 1980 to February 1990, he
acted as deputy manager and then as manager of Shouguang Daokou Construction
Co., Ltd. From March 1990 to March 2002, he acted as manager of No.4 Shouguang
Construction Co., Ltd. and as deputy manager of Daokou Shangsheng Duck meat
factory. Mr. Shan has a Bachelor degree in Science from Shandong
Construction College. As a founder of our company and leaders in each of the
companies he served previously, the Board believes that Mr. Shan has the
experience, qualifications, attributes and skills necessary to serve on the
Board because of his extensive years of experience in the industry, his having
provided leadership and strategic direction to the Company as its founder and
his unparalleled knowledge of the Company and its business.
Xiaofang Xue: Chief Financial
Officer and Secretary. Ms. Xue became our Chief Financial Officer in December
2009. From 2005 to 2009, Ms. Xue acted as Senior Auditor in Ernst & Young’s
Beijing office where she led the pre-public offering auditing. From
2004 to 2005, she was an accountant for Kunming XinKe Electronic Co. Ltd; from
2002 through 2004, she acted as an auditor in Ernst & Young Shenzhen
office. From 2001 through 2002, she was an English teacher at Lingnan
Technology College. She has a Bachelor of Art in English from Zhongshan
University, Guangzhou, China. Her six years of experience with Ernst & Young
demonstrates her ability to serve as Chief Financial Officer for the
Company.
Lilian Jiang: Director,
Chairman of Audit Committee. Ms. Jiang became a member of our Board of Directors
in April 2010. From February 2008 through the present, Ms. Jiang has
worked as manager for Wen Jiang & Company, PC, formerly known as Wen Y Jiang
CPA, PC in Portland, Oregon where she provides consulting and accounting
services to Chinese public and private companies. She is responsible
for accounting control systems and the preparation of financial statements. From
April 1994 to January 2008, she acted as Senior Financial Analyst & Internal
Auditor, at Port of Portland located at Portland, Oregon. From January 1992 to
April 1994, she was an accountant at Larson, Dowsett & Fogg, CPA’s, P.C.,
located in Portland, Oregon. Ms. Jiang has a Bachelor of Science in Accounting
from Jinan University in Guangzhou, China and a Post-Baccalaureate Certificate
in Accounting from Portland State University, Portland, Oregon. She’s also a
licensed Certified Public Accountant in the State of Oregon since July 1997. By
working for U.S. accounting firms in the finance industry for more than 18 years
and as a certified public accountant, the Board of Directors believes that Ms.
Jiang has the credentials to serve as the Chairman of our Audit
Committee.
Yuan Gong: Director. Mr. Gong
has served as a Director of the Company since April 2010. Mr. Gong has served as
a partner of Jessie International a financial advisory firm Beijing, China since
March 2008. His responsibilities include advising and assisting private and
public companies in accessing capital markets and introducing private equity and
hedge fund investors. Since December 2009, he has been the Chief Financial
Officer of China Energy Corp. (CHGY.OB). From September 2008 until November
2009, he served as the Vice President of Capital Markets of China Integrated
Energy (NASDAQ: CBEH). From September 2007 to April 2008, he was Director of
Investor Relations for Xinyuan Real Estate Company Ltd. (NYSE: XIN) From March
2007 to August 2007, he was Assistant General Manager for SPG Land, located in
Shanghai, China. From March 2005 to March 2007, he was Research Associate at
Morgan Stanley Asia Limited, and from June 2003 to November 2004, he was a
Project Specialist for JP Morgan Investment Management Security Operation. From
August 1997 to July 2001, he was Chief Representative for ConAgra Refrigerated
Foods International. He has Master of Business Administration from the
University of Delaware, and Bachelor of Arts in English from Peking University.
The Board of Directors believes that Mr. Gong’s extensive experiences with
public companies and his knowledge of finance industry make him qualified to
serve as a Director.
68
Jing Cao: Director. Ms. Cao
has been a Director of the Company since April 2010. Since July 2009,
Ms. Cao has worked in Cell Tech Electronic Limited as finance director. Her
responsibilities include assisting in fundraising and pre-IPO preparation. From
July 2001 to July 2009, Ms. Cao worked as manager at Assurance and Advisory
Business Services Group in Ernst &Young, where she served numerous public
companies listed in the U.S., Hong Kong and China. She has acted as a leader on
public company audit engagements, U.S. integrated audits, PRC statutory
reporting and Group reporting for multinational corporations. Ms. Cao has a
bachelor of international enterprises management from the Central University of
Finance and Economics, Beijing China. She has a certificate from the Chinese
Institute of Certified Public Accountants and the Association of Chartered
Certified Accountants. The Board of Directors believes that her experience as an
auditor serving public companies provides Ms. Cao has the knowledge and
credentials to serve as a Director.
Kunshan Wang: Director. Mr. Wang has been Director of the
Company since May 2010. From March 1998 to 2008, Mr. Wang was Deputy
Director of Municipal People’s Congress of Shouguang city. From March 1987 to
1998, he was vice commissioner of Shouguang County in charge of local
agriculture and rural construction. From September 1984 to February 1987, he was
Secretary of the Party Committee of Chengguan Commune, Shouguang County. From
October 1983 to August 1984, he was Secretary of the Party Committee of Daotian
Commune. From September 1982 to September 1983, he was Director of Prefectures
Agriculture Committee. From June 1980 to August 1982, he was Secretary of the
Party Committee of Jitai Commune. From November 1979 to May 1980, he was Deputy
Secretary of the Party Committee of Jitai Commune, the director of Management
Committee. From 1971 to October 1979, he was Deputy Secretary of the Party
Committee of Madian Commune, the director of Management Committee. The Board of
Directors believes that Mr. Wang’s extensive experience in the local government
of Shouguang city and agricultural industry provides him with the knowledge and
expertise to serve the Company as a Director.
Shidian Shan: Vice President.
Mr. Shan joined the Company in 1997, becoming a Vice President in 2002. Mr. Shan
has responsibility for financial and accounting matters. From April 1994 to July
1997, he acted as chief accountant for No.4 Shouguang Construction Co., Ltd.
From August 1997 to December 2001, he acted as Chief Financial Officer for
Shouguang Antisepticise and Heat Preservation Installation Co., Ltd. Mr. Shan
has a degree in accounting from Weifang Technology college.
Yunqing Wu: Vice President.
Mr. Wu joined the Company in 2008. Mr. Wu is responsible for the Company's
administration and human resources functions. From January 2001 to October 2004,
he acted as network centre director of Shandong Shouguang Vegetable Industry
Group. From October 2004 to March 2007, he acted as assistant to the president
and network centre director of Qicai Farm Industry Marketing of Shandong
Shouguang Vegetable Industry Group respectively. From March 2007 to October
2008, he acted as chief of office and director of human resources of Shandong
Haoyuan Industry Co., Ltd. He has a bachelor degree in economic management from
Weifang college.
Yongping Shan: Vice President.
Since April 2002, Mr. Shan has served as Vice President of Jinzheng Poultry Co.
Ltd. Mr. Shan is responsible for production and sales. From April
1980 to June 1991, he acted as deputy manager of Shouguang Daokou Prawn Feed
Welfare Factory. From July 1991 to October 1997, he acted as deputy factory
director in Shouguang Daokou Changsheng Chicken Farm. From November 1997 to
March 2002, he acted as manager of Shouguang Prawn Feed Welfare Factory, a
company engaged in the prawn industry.
Family
Relationships
There are
no family relationships among our executive officers, directors or significant
employees.
Involvement
in Certain Legal Proceedings
To the
best of our knowledge, none of our directors or executive officers has been
convicted in a
criminal proceeding, excluding traffic violations or similar misdemeanors, or
has been a party to any judicial or administrative proceeding during the past
ten years that resulted in a judgment, decree or final order enjoining the
person from future violations of, or prohibiting activities subject to, federal
or state securities laws, or a finding of any violation of federal or state
securities laws, except for matters that were dismissed without sanction or
settlement. Except as set forth in our discussion below in “Certain
Relationships and Related Transactions,” none of our directors, director
nominees or executive officers has been involved in any transactions with us or
any of our directors, executive officers, affiliates or associates which are
required to be disclosed pursuant to the rules and regulations of the
SEC.
69
Corporate
Governance
Board
of Directors
Director
Independence
Our Board
of Directors consists of five members: Junfeng Shan, Lilian Jiang, Yuan Gong,
Jing Cao, and Kunshan Wang. Ms. Jiang, Ms, Cao and Mr., Gong were elected in
April 2010, and Mr. Wang was elected in May 2010, and our Board of Directors has
determined that each qualify as an “independent director” as defined by Rule
5605(a)(2) of NASDAQ’s Marketplace Rules. Our Board of Directors made its
determination based on information furnished by all of the directors regarding
their relationships with us and our affiliates and research conducted by
management. All actions of the Board of Directors require the approval of a
majority of the directors in attendance at a meeting at which a quorum is
present.
Leadership
Structure
Our Board
of Directors has chosen Mr. Junfeng Shan to serve as both Chairman and Chief
Executive Officer because we believe he will best serve the Company and our
stockholders in that dual role given his unique knowledge of the Company as its
founder and vast experience in our industry.
Communications
with the Board
Any of
our stockholders or any other interested party may communicate with our Board of
Directors directly through one or more directors in writing addressed to the
director or directors, c/o Zheng Hui Industry Corporation, Daokou Industry Park,
Yingli Town, Shouguang, Shandong Province, China, attention: Secretary. Please
identity the party or parties to whom the correspondence is being sent. Any
communication that is addressed to our Board of Directors or fails to identify a
particular director will be sent to our Chairman. The Company’s Secretary will
review each communication and will promptly forward to the appropriate party or
parties all communications that relate to our business, operations, financial
condition, management, employees or similar business matters. The Company’s
Secretary will not forward any advertising, solicitation or similar
materials.
Director
Attendance at Annual Meeting of Stockholders
We will
hold annual meetings of stockholders and we will invite all of our directors to
attend such meetings, and we will strongly encourage attendance.
Board
Diversity
We do not
have a specific policy on diversity relating to the selection of nominees for
our Board of Directors. While we believe that diversity and a variety of
experiences and viewpoints represented on the Board should always be considered,
we also believe that a director nominee should not be chosen nor excluded solely
or largely because of race, color, gender, national origin, sexual orientation,
or identity. In selecting a director nominee, the Nominating and Corporate
Governance Committee focuses on diversity in the broadest sense, considering,
among other things, skills, expertise, or background that would complement our
existing Board taking into account the Company’s business and
industry.
Board
Committees
The Board
of Directors has an Audit Committee, a Nominating and Corporate Governance
Committee and a Compensation Committee, each of which was formed on May 30,
2010.
Audit Committee. The Audit
Committee members consist of Lilian Jiang, Yuan Gong, Jing Cao, and Kunshan
Wang. Each of these members would be considered “independent” as defined by Rule
5605(a)(2) of NASDAQ’s Marketplace Rules, as determined by our Board of
Directors.
The Audit
Committee oversees our financial reporting process on behalf of the Board of
Directors. The Audit Committee’s responsibilities include the following
functions:
|
·
|
approve and retain the
independent auditors to conduct the annual audit of our books and
records;
|
|
·
|
review the proposed scope and
results of the audit;
|
70
|
·
|
review and pre-approve the
independent auditors’ audit and non-audited services
rendered;
|
|
·
|
approve the audit fees to be
paid;
|
|
·
|
review accounting and financial
controls with the independent auditors and our internal auditors and
financial and accounting
staff;
|
|
·
|
review and approve transactions
between us and our directors, officers and
affiliates;
|
|
·
|
recognize and prevent prohibited
non-audit services; and
|
|
·
|
meeting separately and
periodically with management and our internal auditor and independent
auditors.
|
The Audit
Committee operates under a written charter. Ms. Lilian Jiang serves as the
Chairman of our Audit Committee. The Company’s Board of Directors has determined
that the company has one audit committee financial expert as defined by the
rules and regulations of the SEC and NASDAQ, Lilian Jiang, serving on its Audit
Committee. Lilian Jiang has been a certified public accountant since 1997 and
understands U.S. GAAP and financial statements.
Nominating and Corporate Governance
Committee. The Nominating and Corporate Governance Committee is
responsible for identifying potential candidates to serve on our board and its
committees. The Nominating and Corporate Governance Committee’s responsibilities
include the following functions:
|
·
|
making recommendations to the
board regarding the size and composition of the
board;
|
|
·
|
identifying and recommending to
the board nominees for election or re-election to the board, or for
appointment to fill any
vacancy;
|
|
·
|
establishing procedures for the
nomination process;
|
|
·
|
advising the board periodically
with respect to corporate governance matters and practices, including
periodically reviewing corporate governance guidelines to be adapted by
the board; and
|
|
·
|
establishing and administering a
periodic assessment procedure relating to the performance of the board as
a whole and its individual
members.
|
Lilian
Jiang, Yuan Gong, Jing Cao, and Kunshan Wang are the members of the Nominating
and Corporate Governance Committee. The Nominating and Corporate Governance
Committee operates under a written charter. The Nominating and Corporate
Governance Committee will also consider director nominees recommended by
stockholders. The Nominating and Corporate Governance Committee will evaluate
such director candidates in the same manner as it evaluates director candidates
recommended by our directors, management or employees.
Compensation Committee. The
Compensation Committee is responsible for making recommendations to the board
concerning salaries and incentive compensation for our officers and employees
and administers our stock option plans. Its responsibilities include the
following functions:
|
·
|
reviewing and recommending policy
relating to the compensation and benefits of our officers and employees,
including reviewing and approving corporate goals and objectives relevant
to the compensation of our chief executive officer and other senior
officers; evaluating the performance of these officers in light of those
goals and objectives; and setting compensation of these officers based on
such evaluations;
|
|
·
|
administering our benefit plans
and the issuance of stock options and other awards under our stock plans;
and reviewing and establishing appropriate insurance coverage for our
directors and executive
officers;
|
|
·
|
recommending the type and amount
of compensation to be paid or awarded to members of our Board of
Directors, including consulting, retainer, meeting, committee and
committee chair fees and stock option grants or awards;
and
|
71
|
·
|
reviewing and approving the terms
of any employment agreements, severance arrangements, change-of-control
protections and any other compensatory arrangements for our executive
officers.
|
Lilian
Jiang, Yuan Gong, Jing Cao, and Kunshan Wang are the members of the Compensation
Committee. The Compensation Committee operates under a written
charter.
Management’s Role in Compensatory
Process. Management also plays a role in the compensation-setting
process. The most significant aspects of management’s role are:
|
·
|
evaluating employee
performance;
|
|
·
|
establishing business performance
targets and objectives; and
|
|
·
|
recommending salary levels and
any equity awards.
|
The Chief
Executive Officer works with the Compensation Committee to provide:
|
·
|
background information regarding
the Company’s strategic
objectives;
|
|
·
|
his evaluation of the performance
of the senior executive officers;
and
|
|
·
|
compensation recommendations as
to senior executive officers (other than
himself).
|
Although
our Chief Executive Officer may recommend to the Compensation Committee the
compensation package and awards to our executive officers, the Compensation
Committee approves the compensation packages.
Role of Compensation
Consultants. The Compensation Committee may retain a compensation
consultant from time to time to assist the Compensation Committee in researching
and evaluating executive officer and director compensation and compensation
programs. The Company did not engage any independent compensation consultants in
2009.
Delegation of Authority. The
Compensation Committee may form and delegate authority to subcommittees and may
delegate authority to one or more designated members of the Compensation
Committee in order to determine or administer the compensation to the Company’s
executive officers and/or directors.
Board
of Directors’ Role in Risk Oversight
The Board
is charged with oversight of and safeguarding the assets of the Company and with
maintaining appropriate financial and other controls, and conducting the
Company’s business wisely and in compliance with applicable laws and regulations
and proper governance. Included in these responsibilities is the Board of
Directors’ oversight of the various risks facing the Company. In this regard,
the Board seeks to understand and oversee critical business risks. The Board
does not view risk in isolation. Risks are considered in virtually every
business decision and as part of the Company’s business strategy. The Board
recognizes that it is neither possible nor prudent to eliminate all risk.
Indeed, purposeful and appropriate risk-taking is essential for the Company to
be competitive on a global basis and to achieve its objectives.
While the
Board oversees risk management, the Company’s management is charged with
managing risk. The Company has robust internal processes and a strong internal
control environment to identify and manage risks and to communicate with the
Board. The Board monitors and evaluates the effectiveness of the internal
controls and the risk management program at least annually. Management
communicates routinely with the Board and individual Directors on the
significant risks identified and how they are being managed. Directors are free
to, and indeed often do, communicate directly with senior management. The Board
implements its risk oversight function as a whole but intends to establish and
delegate this risk oversight function to various committees in the
future.
Director
Qualifications
Directors
are responsible for overseeing the Company’s business consistent with their
fiduciary duty to shareholders. This significant responsibility requires
highly-skilled individuals with various qualities, attributes and professional
experience. The Board believes that there are general requirements for service
on the Company’s Board of Directors that are applicable to all Directors and
that there are other skills and experience that should be represented on the
Board as a whole but not necessarily by each Director. The Board considers the
qualifications of Directors and Director candidates individually and in the
broader context of the Board’s overall composition and the Company’s current and
future needs.
72
Qualifications
for All Directors
In its
assessment of each potential candidate, the Board considers the nominee’s
judgment, integrity, experience, independence, understanding of the Company’s
business or other related industries and such other factors the Board determines
are pertinent in light of the current needs of the Board. The Board also takes
into account the ability of a Director to devote the time and effort necessary
to fulfill his or her responsibilities to the Company.
The Board
requires that each Director be a recognized person of high integrity with a
proven record of success in his or her field. Each Director must demonstrate
respect for and an ability and willingness to learn corporate governance
requirements and practices, an appreciation of multiple cultures and a
commitment to ethical business practices. In addition to the qualifications
required of all Directors, the Board assesses intangible qualities including the
individual’s ability to ask difficult questions and, simultaneously, to work
collegially.
The Board
does not have a specific diversity policy, but considers diversity of
professional and academic experiences in evaluating candidates for Board
membership. Diversity is important because a variety of points of view
contribute to a more effective decision-making process.
Code
of Ethics
We
adopted a Code of Ethics pursuant to Section 406 of Sarbanes-Oxley in April
2010. Our Code of Ethics includes our Standards of Business Conduct and Finance
Code of Professional Conduct which apply to our officers, directors and
employees. The Finance Code of Professional Conduct applies to all employees and
not only employees in the finance department. The Standard of Business Conduct
provides guidelines to employees to report any suspected or known violations of
the Finance Code of Professional Conduct, the Standards of Business Conduct, or
our other policies.
All
employees will:
|
·
|
Act with honesty and integrity,
avoiding actual or apparent conflicts of interest in their personal and
professional relationships.
|
|
·
|
Provide shareholders with
information that is accurate, complete, objective, fair, relevant, timely,
and understandable, including information in our filings with and other
submissions to the SEC and other public
bodies.
|
|
·
|
Comply with rules and regulations
of federal, state, provincial and local governments, and of other
appropriate private and public regulatory
agencies.
|
|
·
|
Act in good faith, responsibly,
with due care, competence, and diligence, without misrepresenting material
facts or allowing one’s independent judgment to be
subordinated.
|
|
·
|
Respect the confidentiality of
information acquired in the course of one’s work except when authorized or
otherwise legally obligated to
disclose.
|
|
·
|
Not use confidential information
acquired in the course of one’s work for personal
advantage.
|
|
·
|
Share knowledge and maintain
professional skills importance and relevancy to shareholders’
needs.
|
|
·
|
Proactively promote and be an
example of ethical behavior as a responsible individual among peers, in
the working environment and the
community.
|
|
·
|
Exercise responsible use,
control, and stewardship over all Zheng Hui’s assets and resources that
are employed by or entrusted to
us.
|
|
·
|
Not coerce, manipulate, mislead,
or unduly influence any authorized audit or interfere with any auditor
engaged in the performance of an internal or independent audit of Zheng
Hui’s system of internal controls, financial statements, or accounting
books and records.
|
73
This
Finance Code of Professional Conduct embodies principles which we are expected
to adhere to and advocate. These principles of ethical business conduct
encompass rules regarding both individual and peer responsibilities, as well as
responsibilities to our shareholders and the public. The CEO, CFO, and all
employees are expected to abide by this Code. Any violations of our Finance Code
of Professional Conduct may result in disciplinary action, up to and including
termination of employment.
We are
required to disclose any amendment to, or waiver from, a provision of our Code
of Ethics applicable to our principal executive officer, principal financial
officer, principal accounting officer, controller, or persons performing similar
functions. We intend to use our website as a method of disseminating this
disclosure, as permitted by applicable SEC rules. Any such disclosure will be
posted to our website within four business days following the date of any such
amendment to, or waiver from, a provision of our Code of Ethics.
Compensation
Committee Interlocks and Insider Participation
None of
the Company’s executive officers have served as a member of the compensation
committee (or other board committee performing similar functions) of any entity
of which a member of the Company’s Compensation Committee was an executive
officer, nor did any of the Company’s executive officers serve as a member of
the compensation committee (or other board committee performing similar
functions or, in the absence of such a committee, the entire Board of
Directors) of any entity for which any of the Company’s Directors served as an
executive officer.
74
Compensation
Discussion and Analysis
Background
and Compensation Philosophy
Our
Compensation Committee consists of Lilian Jiang, Yuan Gong, Jing Cao and Kunshan
Wang, all independent directors. The Compensation Committee and,
prior to its establishment in May 2010, our Board of Directors determined the
compensation to be paid to our executive officers based on our financial and
operating performance and prospects and contributions made by the officers’ to
our success. Each of the named officers will be measured by a series of
performance criteria by the Board of Directors, or the compensation committee,
on a yearly basis. Such criteria will be set forth based on certain objective
parameters such as job characteristics, required professionalism, management
skills, interpersonal skills, related experience, personal performance and
overall corporate performance.
Our
compensation program for our executive officers and all other employees is
designed such that it will not incentivize unnecessary risk-taking. We provide
our executive officers with a base salary and, at the discretion of the
Compensation Committee, may provide bonuses. Our policy of compensating our
executives with a cash salary has served us well. Because of our history of
attracting and retaining executive talent, we do not believe it is necessary at
this time to provide our executives equity incentives, or other benefits in
order for us to continue to be successful.
Compensation
Policies and Practices as They Related to Risk Management
Our Board
of Directors and Compensation Committee have not adopted or established a formal
policy or procedure for determining the amount of compensation paid to our
executive officers. The Compensation Committee makes an independent evaluation
of appropriate compensation to key employees, with input from management. The
Compensation Committee has oversight of executive compensation plans, policies
and programs.
Our
compensation program for our executive officers and all other employees is
designed such that it will not incentivize unnecessary risk-taking. The base
salary component of our compensation program is a fixed amount and does not
depend on performance. Our cash incentive program takes into account multiple
metrics, thus diversifying the risk associated with any single performance
metric, and we believe it does not incentivize our executive officers to focus
exclusively on short-term outcomes. If we provide equity awards, we intend that
they will be subject to vesting to align the long-term interests of our
executive officers with those of our stockholders.
Compensation
Committee Process
Our Board
of Directors and Compensation Committee have not adopted or established a formal
policy or procedure for determining the amount of compensation paid to our
executive officers. The Compensation Committee makes an independent evaluation
of appropriate compensation to key employees, with input from management. The
Compensation Committee has oversight of executive compensation plans, policies
and programs.
Tax
Implications of Executive Compensation
Under
Section 162(m) of the Code, annual compensation in excess of $1,000,000 paid to
certain executive officers of a publicly held corporation will not be
deductible, unless such compensation is based upon performance objectives
meeting certain regulatory criteria or is otherwise excluded from the
limitation.
75
Summary
Compensation Table
The
following table sets forth the compensation paid or accrued by us to our Chief
Executive Officer, President and Chief Financial Officer and each of our other
officers. None of their compensation exceeded $100,000 for each of the Company’s
last three completed fiscal years.
Name and
Principal
Position
|
Fiscal
Year
|
Salary
($) (1)
|
Bonus
($)
|
Stock
Awards ($)
|
Option
Awards
($)
|
Non-equity
Incentive Plan
Compensation
($)
|
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings ($)
|
All Other
Compensation
($)
|
Total
($) (2)
|
|||||||||||||||||||||||||
Junfeng Shan, President
|
2009
|
5,933
|
-
|
-
|
-
|
-
|
-
|
-
|
5,933
|
|||||||||||||||||||||||||
and
CEO
|
||||||||||||||||||||||||||||||||||
2008
|
4,097
|
-
|
-
|
-
|
-
|
-
|
-
|
4,097
|
||||||||||||||||||||||||||
2007
|
4,022
|
-
|
-
|
-
|
-
|
-
|
-
|
4,022
|
||||||||||||||||||||||||||
Xiaofang
Xue, CFO
|
2009
|
1,751
|
-
|
-
|
-
|
-
|
-
|
-
|
1,751
|
|||||||||||||||||||||||||
2008
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||||
2007
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||||
Shidian
Shan, VP
|
2009
|
4,187
|
-
|
-
|
-
|
-
|
-
|
-
|
4,187
|
|||||||||||||||||||||||||
2008
|
3,618
|
-
|
-
|
-
|
-
|
-
|
-
|
3,618
|
||||||||||||||||||||||||||
2007
|
3,477
|
-
|
-
|
-
|
-
|
-
|
-
|
3,477
|
||||||||||||||||||||||||||
Yongping
Shan, VP
|
2009
|
5,589
|
-
|
-
|
-
|
-
|
-
|
-
|
5,589
|
|||||||||||||||||||||||||
2008
|
3,722
|
-
|
-
|
-
|
-
|
-
|
-
|
3,722
|
||||||||||||||||||||||||||
2007
|
3,548
|
-
|
-
|
-
|
-
|
-
|
-
|
3,548
|
||||||||||||||||||||||||||
Yunqing
Wu, VP
|
2009
|
1,391
|
-
|
-
|
-
|
-
|
-
|
-
|
1,391
|
|||||||||||||||||||||||||
2008
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||||
2007
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1)
|
The salary presented was
converted into U.S. dollars from RMB at a conversion rate of RMB 6.83 for
the year ended December 31, 2009. Our named executive officers reside in
China and therefore may receive their annual compensation in
RMB.
|
(2)
|
Reflects total compensation
converted into U.S. Dollars, provided by the PRC operating companies for
the years ended December 31, 2009 and 2008,
respectively.
|
Grants
of Plan-Based Awards
None.
Outstanding
Equity Awards at Fiscal Year-End
None.
Option
Exercise and Stock Vested
None.
Pension
Benefits
We do not
sponsor any qualified or non-qualified defined benefit plans.
Nonqualified
Deferred Compensation
We do not
maintain any non-qualified defined contribution or deferred compensation
plans.
Director
Compensation
None of
the directors received compensation for their respective services rendered to
the Company for the year ended December 31, 2009.
76
Equity
Compensation Plan Information
We have
not established equity based incentive program and have not granted stock based
awards as a component of compensation. In the future, we may adopt and establish
an equity incentive plan pursuant to which awards may be granted if our
Compensation Committee determines that it is in the best interests of our
stockholders and the Company to do so.
Outstanding
Equity Awards at Fiscal Year End
For the
year ended December 31, 2009, no director or executive officer has received
compensation from us pursuant to any compensatory or benefit plan. There is no
plan or understanding, express or implied, to pay any compensation to any
director or executive officer pursuant to any compensatory or benefit plan,
although we anticipate that we will compensate our officers and directors for
services to us with stock or options to purchase stock, in lieu of
cash.
Executive
Employment Agreements and Potential Payments upon Termination or a Change of
Control
Employment
Agreements
The
following employment terms were entered into by the Company and Junfeng Shan,
Xiaofang Xue, Shidian Shan, Yunqing Wu and Yongping Shan pursuant to employment
agreements dated of May 24, 2010. The terms for the employment agreements are
three years until April 30, 2013.
Prior to
this offering, Jinzheng was a private limited company organized under the laws
of the PRC, and in accordance with PRC regulations, the salary of our executives
was determined by our shareholders. Mr. Junfeng Shan, our Chairman and Chief
Executive Officer, Ms. Xiaofang Xue, our Chief Financial Officer, and our VPs,
Mr. Shidian Shan, Mr. Yunqing Wu, and Mr. Yongping Shan, have executed
employment agreements which provide for the following annual
salaries:
Name
|
Annual
Salary
|
|
Junfeng
Shan
|
RMB
180,000 (approximately $26,354)
|
|
|
||
Xiaofang
Xue
|
RMB
120,000 (approximately $17,569)
|
|
Shidian
Shan
|
RMB
120,000 (approximately $17,569)
|
|
Yunqing
Wu
|
RMB
120,000 (approximately $17,569)
|
|
Yongping
Shan
|
RMB
120,000 (approximately
$17,569)
|
Other
than the salary and necessary social benefits required by the government, which
are defined in the employment agreements, we currently do not provide other
benefits to the officers at this time. Our executive officers may receive
performance bonuses at the discretion of the Compensation Committee. We do not
provide retirement benefits (other than a state pension scheme in which all of
our employees in China participate).
According
to the employment agreements, each of our executive officers has agreed that he
or she will not, during the term of his employment, and for a period of one (1)
year thereafter the termination of employment, either directly or indirectly,
engage in any business, with or for any company, enterprise, institution,
organization or other legal entity, which is in competition with the Duck
Business. The term “Duck Business” includes duck feeding, duck breeding, duck
feed production, duck slaughtering, cold storage, and sale of duck food.
Severance
and Change of Control Payments
In the
event of termination of employment without cause, employees are entitled to a
maximum of one year’s salary pursuant to their employment
agreements. The agreements do not provide for any payments in the
event of a change of control.
77
The
following table sets forth as of October 29, 2010 the number of shares of our
common stock beneficially owned by (i) each person who is known by us to be the
beneficial owner of more than five percent of the Company’s common stock; (ii)
each director; (iii) each of the named executive officers in the Summary
Compensation Table; and (iv) all directors and executive officers as a group. As
of October 29, 2010, we had 2,030,457 shares of common stock issued and
outstanding.
Beneficial
ownership is determined in accordance with SEC rules and generally includes
voting or investment power with respect to securities. Unless otherwise
indicated, the stockholders listed in the table have sole voting and investment
power with respect to the shares indicated. Unless otherwise noted, the
principal address of each of the stockholders, directors and officers listed
below is c/o Daokou Industry Park, Yingli Town, Shouguang, Shandong, China,
262717.
All
share ownership figures include shares of our common stock issuable upon
securities convertible or exchangeable into shares of our common stock within
sixty (60) days of October 29, 2010, which are deemed outstanding and
beneficially owned by such person for purposes of computing his or her
percentage ownership, but not for purposes of computing the percentage ownership
of any other person .
Number of
Shares
|
Percentage of
|
|||||||
Name of Beneficial Owner
|
Beneficially
Owned
|
Class
Owned (%)
|
||||||
Officers
and Directors
|
||||||||
Junfeng
Shan
|
1,797,000
|
88.5
|
%
|
|||||
Xiaofang
Xue
|
0
|
*
|
||||||
Shidian
Shan
|
0
|
*
|
||||||
Yunqing
Wu
|
0
|
*
|
||||||
Yongping
Shan
|
0
|
*
|
||||||
Lilian
Jiang
|
0
|
*
|
||||||
Yuan
Gong
|
0
|
*
|
||||||
Jing
Cao
|
0
|
*
|
||||||
Kunshan
Wang
|
0
|
*
|
||||||
All
executive officers and directors as a group (9 persons)
|
1,797,000
|
88.5
|
%
|
*
Indicates less than 1%.
Changes
of Control
There are
currently no arrangements which could result in a change in
control.
78
Transactions
With Related Persons
During
the nine months ended September 30, 2010, Mr. Junfeng Shan, our Chairman and
Chief Executive Officer, paid $290,997 on behalf of the Company for professional
services and expenses relating to this offering, including auditing and legal
services. This loan from Mr. Junfeng Shan is interest free and has no fixed term
of repayment. As of September 30, 2010, $290,997 was
outstanding.
Shouguang
Jintai Construction Co., Ltd. (“Jintai”) is a related party to the Company. Mr.
Junfeng Shan owns a majority of the capital stock of Jintai. We had an
outstanding loan of $462,313 and $452,908 to Jintai as of September 30, 2010 and
December 31, 2009, respectively. The loan is interest free and has no fixed term
of repayment.
During
2008, the Company signed two construction contracts totaling $291,792 (RMB
2,000,000) with Jintai for an animal feed storage facility improvement and
construction of a marsh gas facility. As of December 31, 2008, the
Company prepaid $237,810 (RMB 1,630,000) on these contracts. These
improvements and construction of facilities were completed and in use in
December 2009 and the amount of $29,179 (RMB 200,000) was paid to
Jintai in 2009.
The
Company transferred the lease for a salt field to Jintai in 2007 for a
consideration of $640,435 which was the prepayment made to the lessee by us in
prior periods. As of September 30, 2010, Jintai has paid approximately $290,000
(RMB2,000,000). It is expected to pay the amount by the end of
2010.
On
March 25, 2010, Beijing CMJM, our wholly-owned subsidiary, entered into a series
of agreements (the “VIE Agreements”) with Jinzheng and Jinzheng Stockholders,
which agreements include the Exclusive Technical Consulting Service Agreement,
the Operating Agreement, the Equity Interest Pledge Agreement, the Exclusive
Equity Interest Purchase Agreement and the Power of Attorney. Pursuant to the
VIE Agreements, Beijing CMJM obtained the ability to direct the operations of
Jinzheng and to receive a majority of the residual returns. Jinzheng is
affiliated with us. Mr. Junfeng Shan, our chairman and chief executive officer
and controlling shareholder, directly owns 89.85% of the capital stock of
Jinzheng. With the effectiveness of the VIE contract, for the period from March
25 to September 30, 2010, the approximate dollar value of the total amount
involved in the transaction was $2.1 million, and, based solely on his ownership
interest in Jinzheng, Mr. Shan’s interest in the transaction was approximate
$1.9 million.
Review,
Approval or Ratification of Transactions with Related Parties
All
ongoing and future transactions between us and any of our officers and directors
and their respective affiliates, including loans by our officers and directors,
will be on terms believed by us to be no less favorable than are available from
unaffiliated third parties. Such transactions or loans, including any
forgiveness of loans, will require prior approval by the Nominating and
Corporate Governance Committee (whose members are “independent” directors) and
by a majority of our disinterested “independent” directors (to the extent we
have any) or the members of our board who do not have an interest in the
transaction, in either case who had access, at our expense, to our attorneys or
independent legal counsel. We will not enter into any such transaction unless
our disinterested (“independent”) directors determine that the terms of such
transaction are no less favorable to us than those that would be available to us
with respect to such a transaction from unaffiliated third parties. We will not
enter into a business combination or invest alongside any of our directors,
officers, any affiliate of ours or of any of our directors or officers or a
portfolio company of any affiliate of our directors or
officers.
79
General
Our
authorized capital stock consists of 200,000,000 shares, par value $0.001 per
share, consisting of 180,000,000 shares of common stock and 20,000,000 shares of
preferred stock.
Common
Stock
As
of October 29, 2010, we had 2,030,457 shares of common stock issued and
outstanding.
Dividend
Rights
The
holders of outstanding common stock are entitled to receive dividends out of
funds legally available at the times and in the amounts that the Board of
Directors may determine.
Voting
Rights
Each
holder of common stock is entitled to one vote for each share of common stock
held on all matters submitted to a vote of stockholders. Cumulative voting for
the election of directors is not provided for in our certificate of
incorporation, as amended and restated. Any action other than the election of
directors shall be authorized by a majority of the votes cast, except where the
Nevada Corporation Law prescribes a different percentage of votes and/or
exercise of voting power.
No
Preemptive or Similar Rights
Holders
of our common stock do not have preemptive rights, and shares of our common
stock are not convertible or redeemable.
Right
to Receive Liquidation Distributions
Upon our
dissolution, liquidation or winding-up, our assets legally available for
distribution to our stockholders are distributable ratably among the holders of
common stock.
Preferred
Stock
No shares
of preferred stock are outstanding. The Board of Directors has discretion to
issue one or more series of preferred stock with such designations, rights and
preferences as they may determine, in their sole discretion.
Anti-Takeover
Provisions
Our
articles of incorporation and bylaws contain certain provisions that may have
the effect of entrenching our existing board members, delaying, deferring or
preventing a future takeover or change in control of the company unless such
takeover or change in control is approved by the Board of Directors. These
provisions include:
|
·
|
Blank Check
Preferred Stock. Our
articles of incorporation provide that our Board of Directors may issue,
without further stockholder approval, up to 20,000,000 shares of preferred
stock in one or more series with such rights, preferences and designations
as determined by the Board of Directors.
|
|
·
|
Special
Meetings of Shareholders. Our bylaws provide that, unless
otherwise prescribed by the statute, special meetings of the stockholders
can only be called by our Chief Financial Officer or President or by a
majority of the directors.
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Contracts and
Transactions with Interested Directors and Officers. We may enter into a contract or a
transaction with our directors or officers or any other corporation, firm,
association, or entity in which one or more of our directors or officers
are financially interested if: (a) the fact of such relationship or
interest is disclosed or known to our Board of Directors or committee
which authorizes, approves, or ratifies the contract or transaction in
good faith by vote or consent sufficient for the purpose without counting
the votes or consents of such interested director; (b) the fact of such
relationship or interest is disclosed or known to the stockholders
entitled to vote and they authorize, approve, or ratify such contract or
transaction by vote or written consent; (c) the fact of the common
directorship, office or financial interest is not disclosed or known to
the director or officer at the time the transaction is brought before our
Board of Directors for action; or (d) the contract or transaction is fair
and reasonable to the Company at the time it is approved. Common or
interested directors may be counted in determining the presence of a
quorum at a meeting of the Board of Directors or committee thereof which
authorizes, approves, or ratifies such contract or transaction.
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80
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Amendment of
Bylaws . Our bylaws
may be amended by our Board of Directors without shareholder
approval.
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Authorized
but Unissued Shares.
Our Board of Directors may cause us to issue our authorized but unissued
shares of common stock in the future without stockholders’' approval.
These additional shares may be utilized for a variety of corporate
purposes, including future public offerings to raise additional capital,
corporate acquisitions and employee benefit plans. The existence of
authorized but unissued shares of common stock could render more difficult
or discourage an attempt to obtain control of a majority of our common
stock by means of a proxy contest, tender offer, merger or
otherwise.
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We have
opted out of the Combinations with Interested Stockholders provisions contained
in Sections 78.411 through 78.444, inclusive of the Nevada Revised Statute and
the Acquisition of Controlling Interest provisions contained in Sections 78.378
through 78.3793, inclusive of the Nevada Revised Statute.
Transfer
Agent and Registrar
The
Transfer Agent and Registrar for shares of our common stock is Continental Stock
Transfer & Trust Company. Our Transfer Agent and Registrar’s telephone
number is (212) 509- 4000, and its address is 17 Battery Place, 8th Floor, New
York, NY 10004.
81
Prior to
this offering, there has been no public market for our common stock. When a
public market develops, future sales of substantial amounts of our common stock
in the public market could adversely affect market prices. After the date of
this prospectus, we will
have shares
of common stock issued and outstanding.
Approximate Number of
Shares Eligible for Future Sale
(1)
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Date
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After
the date of this prospectus, freely tradable shares sold in this
offering.
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(1) Assumes
the underwriters’ over-allotment to purchase additional shares is not
exercised.
Rule
144
Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rule 144 promulgated under the
Securities Act. In general, under Rule 144 as currently in effect, a person, or
persons whose shares are aggregated, who has beneficially owned shares of our
common stock for at least six months, including the holding period of any prior
owner, except if the prior owner was one of our affiliates, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of:
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1% of the number of shares of our
common stock then outstanding (which will equal approximately shares
immediately after this offering);
or
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the average weekly trading volume
of our common stock during the four calendar weeks preceding the filing of
a notice on Form 144 with respect to the sale, assuming that our common
stock is trading at such
time.
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Sales by
a person deemed to be our affiliate under Rule 144 are also subject to manner of
sale provisions and notice requirements and to the availability of current
public information about us.
Rule
701
In
general, Rule 701 of the Securities Act, as currently in effect, provides that
any of our directors, executive officers, employees, consultants or advisors who
purchased shares of our common stock in connection with a compensatory stock or
option plan or other written agreement relating to compensation is eligible to
resell those shares 90 days after we became a reporting company under the
Exchange Act in reliance on Rule 144, but without compliance with some of the
restrictions provided in Rule 144, including the holding period requirements.
However, all Rule 701 shares are subject to lock-up agreements as described
below and under “Underwriting” included elsewhere in this prospectus and will
become eligible for sale upon the expiration of the restrictions set forth in
those agreements.
Lock-Up
Agreements
All of
our directors and officers have signed lock-up agreements under which they have
agreed not to sell, transfer or dispose of, directly or indirectly, any shares
of our common stock or any securities into or exercisable or exchangeable for
shares of our common stock without the prior written consent of the underwriter
for a period of 12 months, subject to a possible extension under certain
circumstances, after the date of this prospectus. These agreements are described
below under “Underwriting.”
82
The
following sets forth the material PRC and U.S. federal income tax consequences
of an investment in our common shares. It is based upon laws and relevant
interpretations thereof in effect as of the date of this prospectus, all of
which are subject to change. This discussion does not deal with all possible tax
consequences relating to an investment in our common share, such as the tax
consequences under state, local and other tax laws.
People’s
Republic of China Taxation
In 2007,
the PRC National People’s Congress enacted the new Enterprise Income Tax Law,
which became effective on January 1, 2008. The new Enterprise Income Tax Law
imposes a single uniform income tax rate of 25% on all Chinese enterprises,
including foreign-invested enterprises, and levies a withholding tax rate of 10%
on dividends payable by Chinese subsidiaries to their foreign shareholders
unless any such foreign shareholders’ jurisdiction of incorporation has a tax
treaty with China that provides for a different withholding agreement. Under the
new Enterprise Income Tax Law, enterprises established outside China but deemed
to have a “de facto management body” within the country may be considered
“resident enterprises” for Chinese tax purposes and, therefore, may be subject
to an enterprise income tax rate of 25% on their worldwide income. Pursuant to
the implementation rules of the new Enterprise Income Tax Law, a “de facto
management body” is defined as a body that has material and overall management
control over the business, personnel, accounts and properties of the enterprise.
Although substantially all members of our management are located in China, it is
unclear whether Chinese tax authorities would require (or permit) us to be
treated as PRC resident enterprises. If we are deemed a Chinese tax resident
enterprise, we may be subject to an enterprise income tax rate of 25% on our
worldwide income, excluding dividends received directly from another Chinese tax
resident. As a result of such changes, our historical tax rates will not be
indicative of our tax rates for future periods and the value of our common
shares may be adversely affected. See “Risk Factors — Risks Associated With
Doing Business in China— The newly enacted PRC tax law affects tax exemptions on
dividends received by us and increases the enterprise income tax rate applicable
to us.
United States Federal Income Tax
Consequences
The
following is a discussion of certain material U.S. federal income tax
consequences of purchasing, owning and disposing of our common shares. This
discussion does not purport to be a comprehensive description of all of the U.S.
tax considerations that may be relevant to a particular person’s decision to
acquire our common shares (including any state, local, other U.S. or non-U.S.
tax consequences of the ownership of our common shares).
This
discussion applies only to those holders that hold our common shares as capital
assets for U.S. tax purposes (generally, for investment). This section does not
apply to holders that may be subject to special tax rules, including but not
limited to:
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dealers in securities or
currencies;
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banks, insurance companies or
certain financial
institutions;
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tax-exempt
organizations;
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regulated investment companies or
real estate investment
trusts;
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controlled foreign
corporations;
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passive foreign investment
companies;
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persons who hold or receive our
common shares as compensation;
or
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holders that hold our common
shares as part of a straddle, hedging or conversion
transaction.
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This
section is based on the U.S. Internal Revenue Code of 1986, as amended (the
“Code”, its legislative history, existing and proposed U.S. Treasury Department
regulations, published rulings and other administrative guidance of the U.S.
Internal Revenue Service (the “IRS”) and court decisions, all as in effect on
the date hereof. These laws and other authorities are subject to change or
different interpretation by the IRS or a court, possibly on a retroactive
basis.
You are a
“U.S. holder” if you are a beneficial owner of our common shares and you
are:
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a citizen or resident of the
United States for federal income tax
purposes;
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a corporation, or other entity
treated as a domestic corporation for U.S. federal income tax purposes,
created or organized under the laws of the United States, any state
thereof, or the District of
Columbia;
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83
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an estate whose income is subject
to U.S. federal income tax regardless of its source;
or
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a trust, if a U.S. court can
exercise primary supervision over the trust’s administration and one or
more U.S. persons are authorized to control all substantial decisions of
the trust, or if the trust has a valid election in effect under applicable
U.S. Treasury Department regulations to be treated as a United States
person.
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You are a
“non-U.S. holder” if you are a beneficial owner of our common shares and you are
not a U.S. holder or a partnership, or other entity treated as a partnership for
U.S. federal income tax purposes.
If a
partnership (including for this purpose any entity treated as a partnership for
U.S. tax purposes) is a beneficial owner of our common shares, the U.S. tax
treatment of a partner in the partnership generally will depend on the status of
the partner and the activities of the partnership. A holder of our common shares
that is a partnership and partners in such a partnership should consult their
own tax advisors about the U.S. federal income tax consequences of holding and
disposing of our common shares.
YOU
SHOULD CONSULT YOUR OWN TAX ADVISORS CONCERNING THE U.S. FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF OUR COMMON
SHARES IN YOUR PARTICULAR SITUATION.
U.S.
Holders
Taxation
of Distributions on Our Common Shares
Distributions
(if any) made to U.S. holders on our common shares generally will constitute
dividends for U.S. federal income tax purposes to the extent paid from our
current or accumulated earnings and profits, as determined under U.S. federal
income tax principles. To the extent these distributions exceed our current and
accumulated earnings and profits, the excess will constitute a return of capital
that is applied against and reduces (but not below zero) the U.S. holder’s
adjusted tax basis in our common shares, and then will be treated as gain from
the sale of our common shares.
Any
dividends we pay to a U.S. holder that is treated as a taxable corporation for
U.S. federal income tax purposes generally will qualify for the
dividends-received deduction if the applicable holding period and other
requirements are satisfied. For taxable years beginning on or before December
31, 2010, certain “qualified dividend income” will be taxable to a non-corporate
U.S. holder at the special reduced rates normally applicable to capital gains
(subject to certain limitations), provided that the U.S. holder receiving the
dividend satisfies applicable holding period and other
requirements.
Taxation
of Sale, Exchange or Other Taxable Disposition of Our Common Shares
In
general, a U.S. holder must treat any gain or loss recognized upon a sale,
taxable exchange, or other taxable disposition of our common shares as capital
gain or loss. Any such capital gain or loss will be long-term capital gain or
loss if the U.S. holder’s holding period for the common shares so disposed of
exceeds one year. In general, a U.S. holder will recognize gain or loss in an
amount equal to the difference between (1) the sum of the amount of cash and the
fair market value of any property received in such disposition and (2) the U.S.
holder’s adjusted tax basis in the common shares so disposed of. Long-term
capital gain recognized by a non-corporate U.S. holder generally will be subject
to a maximum tax rate of 15 percent for tax years beginning on or before
December 31, 2010, after which the maximum long-term capital gains tax rate is
scheduled to increase to 20 percent. The deduction of capital losses is subject
to various limitations.
Non-U.S. Holders
Taxation
of Distributions on Our Common Shares
Distributions
(if any) made to non-U.S. holders on our common shares will constitute dividends
for U.S. federal income tax purposes to the extent paid from our current or
accumulated earnings and profits, as determined under U.S. federal income tax
principles. To the extent these distributions exceed our current or accumulated
earnings and profits, the excess will constitute a return of capital that is
applied against, and will reduce, a non-U.S. holder’s basis in our common
shares, but not below zero, and then will be treated as gain from the sale of
our common shares.
Dividends
paid to a non-U.S. holder on our common shares generally will be subject to
withholding of U.S. federal income tax at a 30% rate, or any lower rate that may
be specified by an applicable income tax treaty. To receive a reduced treaty
rate, you must complete IRS Form W-8BEN (or substitute form), certify under
penalty of perjury that you are eligible for benefits under the applicable
treaty, and provide other additional information as required. You must
periodically update the information on such forms. Special certification and
other requirements apply to certain non-U.S. holders that are pass-through
entities rather than corporations or individuals. In addition, U.S. Treasury
Department regulations provide special procedures for payments of dividends
through certain intermediaries.
84
Dividends
that (1) are effectively connected with the conduct of a trade or business by a
non-U.S. holder within the United States; and (2) if an income tax treaty
applies, are attributable to a permanent establishment, or, if the non-U.S.
holder is an individual, a fixed base in the United States, as provided in the
applicable treaty, are not subject to U.S. federal withholding tax, provided
that the non-U.S. holder satisfies certain certification and disclosure
requirements, including providing us with a properly executed IRS Form W-8ECI,
for effectively connected income, or W-8BEN, for treaty benefits, or such
successor form as the IRS designates. In such cases, dividends are subject to
U.S. federal income tax on a net income basis at applicable graduated individual
or corporate rates. In addition, a “branch profits tax” may be imposed at a 30%
rate (or any lower rate that may be specified by an applicable income tax
treaty) on dividends received by a foreign corporation that are effectively
connected with the conduct of a trade or business in the United
States.
If you
are eligible for a reduced rate of U.S. federal withholding tax under an income
tax treaty, you may obtain a refund of any excess amounts withheld by filing an
appropriate claim for refund together with the required information with the
IRS.
Taxation
of Sale, Exchange or Other Taxable Disposition of Our Common Shares
A
non-U.S. holder generally will not be subject to U.S. federal income or
withholding tax with respect to gain recognized on a sale or other disposition
of our common shares unless one of the following applies:
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the gain is effectively connected
with your conduct of a trade or business in the United States and, if
required by an applicable tax treaty, attributable to a permanent
establishment or fixed base you maintain in the United States; in these
cases, you will be taxed on the net gain derived from the sale under the
regular graduated U.S. federal income tax rates, unless an applicable
treaty provides otherwise; if you are a foreign corporation, you will be
taxed on your net gain under regular graduated U.S. federal income tax
rates and, in addition, you may be subject to a branch profits tax equal
to 30% of your effectively connected earnings and profits within the
meaning of the Code for the taxable year, as adjusted for specified items,
unless you qualify for a lower rate under an applicable income tax treaty
and demonstrate that you so qualify;
or
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if you hold our common shares as
a capital asset and you are a non-resident alien individual who is present
in the United States for 183 or more days in the taxable year of the sale
or other disposition, and you meet certain other conditions; in this case,
you will be subject to a flat 30% tax on the gain derived from the sale,
which may be offset by U.S. capital losses, notwithstanding the fact that
you are not considered a resident of the United
States.
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Information
Reporting and Backup Withholding
Under
U.S. Treasury Department regulations, we must report annually to the IRS and to
you the gross amount of dividends we paid to you and the tax withheld with
respect to such dividends. These reporting requirements apply regardless of
whether withholding was reduced or eliminated by an applicable income tax
treaty. Copies of the information returns reporting such dividends and
withholding also may be required to be made available to the tax authorities in
the country in which a non-U.S. holder resides under the provisions of an
applicable income tax treaty.
Backup
withholding, currently imposed at a rate of 28%, may apply to payments of
dividends by us. If you are a U.S. holder, backup withholding will apply to you
if you fail to provide an accurate taxpayer identification number or
certification of exempt status or fail to report all interest and dividends
required to be shown on your federal income tax returns. Certain U.S. holders
(including, among others, corporations) are not subject to backup
withholding.
If you
are a non-U.S. holder, and you fail to certify under penalties of perjury and in
accordance with applicable U.S. Treasury Department regulations that you are a
non-U.S. holder (and we do not have actual knowledge or reason to know that you
are a U.S. person as defined under the Code) you may be subject to backup
withholding.
The
payment of proceeds to you on your sale or other disposition of our common
shares by or through a U.S. office of any broker, U.S. or non-U.S., is subject
to both backup withholding and information reporting, unless you certify under
penalties of perjury that you are a non-U.S. holder (and we do not have actual
knowledge or reason to know that you are a U.S. person as defined under the
Code), or you otherwise establish an exemption. In general, backup withholding
and information reporting will not apply to a payment to you of proceeds on your
sale or other disposition of our common shares by or through a non-U.S. office
of a non-U.S. broker. If, however, the broker is, for U.S. federal income tax
purposes, a U.S. person, a controlled foreign corporation, as defined in the
Code, a foreign person that derives 50% or more of its gross income for
specified periods from the conduct of a trade or business in the U.S., or a
foreign partnership with particular U.S. connections, such payments will be
subject to information reporting, but generally not backup withholding,
unless:
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the broker has documentary
evidence in its records that you are a non-U.S. holder and other specified
conditions are met; or
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you otherwise establish an
exemption.
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Any
amounts withheld under the backup withholding rules do not constitute a separate
U.S. federal income tax. Rather, any amounts withheld under the backup
withholding rules may be allowed as a refund or a credit against your U.S.
federal income tax liability, if any, if the required information is timely
furnished to the IRS.
The
foregoing discussion of United States Federal Income Tax Consequences does not
address all aspects of U.S. federal income taxes and does not deal with all tax
considerations that may be relevant to holders in light of their personal
circumstances or particular situations and is not based on an opinion of
counsel. Accordingly, you should consult your own tax advisor with respect to
the federal, state, local and non-U.S. tax consequences of your ownership and
disposition of our common shares in light of your particular tax
situation.
86
Subject
to the terms and conditions in the underwriting agreement,
dated ,
2010, by and among us and Rodman & Renshaw, LLC and Newbridge Securities
Corporation, who are acting as the representatives of the underwriters of this
offering, each underwriter named below has severally agreed to purchase from us,
on a firm commitment basis, the number of shares of common stock set forth
opposite its name below, at the public offering price, less the underwriting
discount set forth on the cover page of this prospectus.
Underwriter
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Number of
Shares
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Rodman
& Renshaw, LLC
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Newbridge
Securities Corporation
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Total
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The
underwriters have agreed to purchase all of the shares offered by this
prospectus (other than those covered by the over-allotment option described
below) if any are purchased. Under the underwriting agreement, if an underwriter
defaults in its commitment to purchase shares, the commitments of non-defaulting
underwriters may be increased or the underwriting agreement may be terminated,
depending on the circumstances. The underwriting agreement provides that the
obligations of the underwriters to pay for and accept delivery of the shares are
subject to the passing upon certain legal matters by counsel and certain
conditions such as confirmation of the accuracy of representations and
warranties by us about our financial condition and operations and other
matters.
The
shares should be ready for delivery on or
about ,
2010 against payment in immediately available funds. The underwriters may reject
all or part of any order.
Commissions
and Discounts
The
following table provides information regarding the amount of the discount to be
paid to the underwriters by us:
Per Share
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Total
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Public
offering price
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$ | $ | ||||||
Underwriting
discount
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$ | $ | ||||||
Corporate finance
fee (1)
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$ | $ | ||||||
Proceeds, before
expenses, to us (2)
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$ | $ |
(1)
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The corporate finance fee of 2.0%
of the gross proceeds of the offering is not payable with respect to the
shares of common stock sold upon exercise of the underwriters’
over-allotment option.
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(2)
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We estimate that the total
expense of this offering excluding the underwriters’ discount and the
non-accountable expense allowance, will be approximately
$ .
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Pricing
of Securities
The
representatives have advised us that the underwriters propose to offer the
shares directly to the public at the public offering price that appears on the
cover page of this prospectus. In addition, the representatives may offer some
of the shares to other securities dealers at such price less a concession of
$ per share. The underwriters may also allow,
and such dealers may re-allow, a concession not in excess of
$ per share to other dealers. After the
shares are released for sale to the public, the representatives may change the
offering price and other selling terms at various times.
Prior to
this offering, there was no public market for our common stock. The public
offering price of our common stock was determined by negotiation between us and
the underwriters. The principal factors considered in determining the public
offering price of the common stock included:
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the information in this
prospectus and otherwise available to the
underwriters;
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the history and the prospects for
the industry in which we
compete;
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the ability of our
management;
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the prospects for our future
earnings;
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the present state of our
development and our current financial
condition;
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the general condition of the
economy and the securities markets in the United States at the time of
this offering;
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the recent market prices of, and
the demand for, publicly-traded securities of generally comparable
companies; and
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other factors as were deemed
relevant.
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We have applied to have
our common stock listed on NASDAQ under the symbol “ZHIC.” We cannot be sure
that the public offering price will correspond to the price at which our common
stock will trade in the public market following this offering or that an active
trading market for our common stock will develop and continue after this
offering.
Over-allotment
Option
We have
granted the underwriters an over-allotment option. This option, which is
exercisable for up to 45 days after the date of this prospectus, permits the
underwriters to purchase a maximum
of additional
shares of common stock for the purpose of covering over-allotments which may
occur during the distribution and sale of the shares of common stock, If this
option is exercised in full, the total price to the public will be
$ . The
underwriters have severally agreed that, to the extent the over-allotment option
is exercised, they will each purchase a number of additional shares
proportionate to the underwriters’ initial amount reflected in the table
above.
Underwriters’
Warrants
We have
issued to the underwriters share purchase warrants (the
“Underwriters’ Warrants”) covering a number of shares of common stock of common
stock equal to ten percent (10.0%) of the total number of shares of common stock
being sold in the offering, including shares of common stock subject to the
over-allotment option. The Underwriters’ Warrants are non-exercisable
for six (6) months after the date of the closing of the offering and expire five
(5) years after such date. The Underwriters’ Warrants are exercisable
at a price equal to
$
per share (130% of the public offering price) in connection with the
offering. The Underwriters’ Warrants shall not be redeemable. The
shares of common stock underlying the Underwriters’ Warrants are being
registered by us under the Securities Act concurrently with the
offering. The Underwriters’ Warrants may not be transferred, assigned
or hypothecated for a period of six (6) months following the closing of the
offering, except that they may be assigned, in whole or in part, to any
successor, officer, manager or member of the underwriters (or to officers,
managers or members of any such successor or member), and to members of the
underwriting syndicate or selling group. The Underwriters’ Warrants
may be exercised as to all or a lesser number of underlying shares of common
stock, provide for cashless exercise and demand registration rights for a period
of five (5) years after the closing of this offering at the warrant holders’
expense, and unlimited piggyback registration rights for a period of five (5)
years after the closing of this offering at our expense.
Other
Terms
The
underwriting agreement provides for indemnification between us and the
underwriters against specified liabilities, including liabilities under the
Securities Act, and for contribution by us and the underwriters to payments that
may be required to be made with respect to those liabilities. We have been
advised that, in the opinion of the SEC, indemnification liabilities under the
Securities Act is against public policy as expressed in the Securities Act, and
is therefore, unenforceable.
Stabilization
Until the
distribution of the shares of common stock offered by this prospectus is
completed, rules of the SEC may limit the ability of the underwriters to bid for
and to purchase our shares of common stock. As an exception to these rules, the
underwriters may engage in transactions effected in accordance with Regulation M
under the Exchange Act that are intended to stabilize, maintain or otherwise
affect the price of our common stock. The underwriters may engage in
over-allotment sales, syndicate covering transactions, stabilizing transactions
and penalty bids in accordance with Regulation M.
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Stabilizing transactions permit
bids or purchases for the purpose of pegging, fixing or maintaining the
price of the common stock, so long as stabilizing bids do not exceed a
specified maximum.
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Over-allotment involves sales by
the underwriters of shares of common stock in excess of the number of
shares of common stock the underwriters are obligated to purchase, which
creates a short position. The short position may be either a covered short
position or a naked short position. In a covered short position, the
number of shares of common stock over-allotted by the underwriters is not
greater than the number of shares of common stock that they may purchase
in the over-allotment option. In a naked short position, the number of
shares of common stock involved is greater than the number of shares in
the over-allotment option. The underwriters may close out any covered
short position by either exercising their over-allotment option or
purchasing shares of our common stock in the open
market.
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Covering transactions involve the
purchase of securities in the open market after the distribution has been
completed in order to cover short positions. In determining the source of
securities to close out the short position, the underwriters will
consider, among other things, the price of securities available for
purchase in the open market as compared to the price at which they may
purchase securities through the over-allotment option. If the underwriters
sell more shares of common stock than could be covered by the
over-allotment option, creating a naked short position, the position can
only be closed out by buying securities in the open market. A naked short
position is more likely to be created if the underwriters are concerned
that there could be downward pressure on the price of the securities in
the open market after pricing that could adversely affect investors who
purchase in this offering.
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Penalty bids permit the
underwriters to reclaim a selling concession from a selected dealer when
the shares of common stock originally sold by the selected dealer are
purchased in a stabilizing or syndicate covering
transaction.
|
These
stabilizing transactions, covering transactions and penalty bids may have the
effect of raising or maintaining the market price of our common stock or
preventing or retarding a decline in the market price of our common stock. As a
result, the price of our common stock may be higher than the price that might
otherwise exist in the open market.
Neither
we nor the underwriters make any representation or prediction as to the effect
that the transactions described above may have on the prices of our common
stock. These transactions may occur on NASDAQ or on any other trading market. If
any of these transactions are commenced, they may be discontinued without notice
at any time.
A
prospectus in electronic format may be made available on a website maintained by
the representatives of the underwriters and may also be made available on a
website maintained by other underwriters. The underwriters may agree to allocate
a number of shares to underwriters for sale to their online brokerage account
holders. Internet distributions will be allocated by the representatives of the
underwriters to underwriters that may make Internet distributions on the same
basis as other allocations. In connection with the offering, the underwriters or
syndicate members may distribute prospectuses electronically. No forms of
electronic prospectus other than prospectuses that are printable as Adobe® PDF
will be used in connection with this offering.
The
underwriters have informed us that they do not expect to confirm sales of shares
of common stock offered by this prospectus to accounts over which they exercise
discretionary authority.
89
Sales
Outside the United States
No action
has been taken in any jurisdiction (except in the United States) that would
permit a public offering of the common stock, or the possession, circulation or
distribution of this prospectus or any other material relating to us or the
common stock in any jurisdiction where action for that purpose is required.
Accordingly, the common stock may not be offered or sold, directly or
indirectly, and none of this prospectus or any other offering material or
advertisements in connection with the common stock may be distributed or
published, in or from any country or jurisdiction, except in compliance with any
applicable rules and regulations of any such country or
jurisdiction.
Each of
the underwriters may arrange to sell common stock offered hereby in certain
jurisdictions outside the United States, either directly or indirectly or
through affiliates, where they are permitted to do so.
Australia
If this
document is issued or distributed in Australia, it is issued or distributed to
“wholesale clients” only, not to “retail clients.” For the purposes
of this paragraph, the terms “wholesale client” and “retail client” have the
meanings given in section 761 of the Australian Corporations Act 2001
(Cth). This document is not a disclosure document under the
Australian Corporations Act, has not been lodged with the Australian Securities
& Investments Commission and does not purport to include the information
required of a disclosure document under the Australian Corporations
Act. Accordingly, (i) the offer of securities under this document is
only made to persons to whom it is lawful to offer such securities under one or
more exemptions set out in the Australian Corporations Act, (ii) this document
is only made available in Australia to those persons referred to in clause (i)
above, and (iii) the offeree must be sent a notice stating in substance that, by
accepting this offer, the offeree represents that the offeree is such a person
as referred to in clause (i) above, and, unless permitted under the Australian
Corporations Act, agrees not to sell or offer for sale within Australia any of
the securities sold to the offeree within 12 months after its transfer to the
offeree under this document.
China
This
prospectus has not been and will not be circulated or distributed in the prc,
and common stock may not be offered or sold, and will not be offered or sold to
any person for re-offering or resale, directly or indirectly, to any resident of
the prc except pursuant to applicable laws and regulations of the
PRC.
United
Arab Emirates
The
offering has not been approved or licensed by the Central Bank of the United
Arab Emirates (the “UAE”), Securities and Commodities Authority of the UAE
and/or any other relevant licensing authority in the UAE including any licensing
authority incorporated under the laws and regulations of any of the free zones
established and operating in the territory of the UAE, in particular the Dubai
Financial Services Authority (the “DFSA”), a regulatory authority of the Dubai
International Financial Centre (the “DIFC”).
The
offering does not constitute a public offer of securities in the UAE, DIFC
and/or any other free zone in accordance with the Commercial Companies Law,
Federal Law No.8 of 1984 (as amended), DFSA Offered Securities Rules and NASDAQ
Dubai Listing Rules, accordingly, or otherwise. The securities
offered hereby may not be offered to the public in the UAE and/or any of the
free zones, including, in particular, the DIFC.
The
securities offered hereby may be offered and issued only to a limited number of
investors in the UAE or any of its free zones (including, in particular, the
DIFC) who qualify as sophisticated investors under the relevant laws and
regulations of the UAE or the free zone concerned, including, in particular, the
DIFC.
The
company represents and warrants that the securities offered hereby will not be
offered, sold, transferred or delivered to the public in the UAE or any of its
free zones, including, in particular, the DIFC.”
90
Dubai
The
issuer is not licensed by the Dubai Financial Services Authority (“DFSA”) to
provide financial services in the Dubai International Financial Centre
(“DIFC”). The offering has not been approved or licensed by the
Central Bank of the United Arab Emirates (the “UAE”), Securities and Commodities
Authority of the UAE and/or any other relevant licensing authority in the UAE
including any licensing authority incorporated under the laws and regulations of
any of the free zones established and operating in the territory of the UAE, in
particular the DFSA, a regulatory of the DIFC.
The
offering does not constitute a public offer of securities in the UAE, DIFC
and/or any other free zone in accordance with the Commercial Companies Law,
Federal Law No.8 of 1984 (as amended), DFSA Offered Securities Rules and NASDAQ
Dubai Listing Rules, accordingly, or otherwise. The securities
offered hereby may not be offered to the public in the UAE and/or any of the
free zones, including, in particular, the DIFC.
The
securities offered hereby may be offered and issued only to a limited number of
investors in the UAE or any of its free zones (including, in particular, the
DIFC) who qualify as sophisticated investors under the relevant laws and
regulations of the UAE or the free zone concerned, including, in particular, the
DIFC.
The
company represents and warrants that the securities offered hereby will not be
offered, sold, transferred or delivered to the public in the UAE or any of its
free zones, including, in particular, the DIFC.
Israel
The
common stock offered by this prospectus has not been approved or disapproved by
the Israeli Securities Authority (the ISA), or ISA, nor has such common stock
been registered for sale in Israel. The shares may not be offered or
sold, directly or indirectly, to the public in Israel, absent the publication of
a prospectus. The ISA has not issued permits, approvals or licenses
in connection with the offering or publishing the prospectus; nor has it
authenticated the details included herein, confirmed their reliability or
completeness, or rendered an opinion as to the quality of the common stock being
offered. Any resale, directly or indirectly, to the public of the
common stock offered by this prospectus is subject to restrictions on
transferability and must be effected only in compliance with the Israeli
securities laws and regulations.
Pakistan
The
investors / subscribers in Pakistan will be responsible for ensuring their
eligibility to invest under the applicable laws of Pakistan and to obtain any
regulatory consents if required for such purpose.
Saudi
Arabia
No
offering of shares is being made in the kingdom of saudi arabia, and no
agreement relating to the sale of the shares will be concluded in Saudi
Arabia. This document is provided at the request of the recipient and
is being forwarded to the address specified by the recipient. Neither
the agent nor the offering have been licensed by the Saudi's Securities and
Exchange Commission or are otherwise regulated by the laws of the kingdom of
Saudi Arabia.
Therefore,
no services relating to the offering, including the receipt of applications
and/or the allotment of the shares, may be rendered within the kingdom by the
agent or persons representing the offering.
United
Kingdom
The
content of this Memorandum has not been issued or approved by an authorised
person within the meaning of the United Kingdom Financial Services and Markets
Act 2000 (“FSMA”). Reliance on this Memorandum for the purpose of
engaging in any investment activity may expose an Investor to a significant risk
of losing all of the property or other assets invested. This
Memorandum does not constitute a Prospectus within the meaning of the FSMA and
is issued in reliance upon one or more of the exemptions from the need to issue
such a prospectus contained in section 86 of the FSMA.
91
The
validity of the common stock offered hereby will be passed upon for us by
McLaughlin & Stern LLP, New York, New York. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Pillsbury Winthrop Shaw Pittman LLP, Washington, DC. In addition, certain legal
matters relating to PRC law in connection with this offering will be passed upon
for us by B&D Law Firm, Beijing and by the underwriters by Team-Run Law
Firm. Pillsbury Winthrop Shaw Pittman LLP may rely upon Team-Run Law Firm with
respect to matters governed by PRC Law.
Our
financial statements as of and for the years ended December 31, 2009 and 2008
included in this prospectus and in the registration statement have been audited
by EFP Rotenberg, LLP, an independent registered public accounting firm, as
stated in its reports appearing herein. Certain information included
in this prospectus and the registration statement under “Industry Overview” has
been provided by by Zero Power Intelligence Co. Ltd. a consulting firm engaged
by the Company.
We have
filed with the SEC a registration statement on Form S-1 under the Securities Act
with respect to the common stock offered hereby. This prospectus, which
constitutes a part of the registration statement, does not contain all of the
information in the registration statement and the exhibits of the registration
statement. For further information with respect to us and the securities being
offered under this prospectus, we refer you to the registration statement,
including the exhibits and schedules thereto.
You may
read and copy the registration statement of which this prospectus is a part at
the SEC’s Public Reference Room, which is located at 100 F Street, N.E.,
Washington, D.C. 20549. You can request copies of the registration statement by
writing to the SEC and paying a fee for the copying cost. Please call the SEC at
1-800-SEC-0330 for more information about the operation of the SEC’s Public
Reference Room. In addition, the SEC maintains an Internet website, which is
located at www.sec.gov, which contains reports, proxy and information statements
and other information regarding issuers that file electronically with the SEC.
You may access the registration statement of which this prospectus is a part at
the SEC’s Internet website. We are subject to the information reporting
requirements of the Securities Exchange Act of 1934, and we will file reports,
proxy statements and other information with the SEC.
92
Page
|
||
Financial
Statements as of December 31, 2009 and 2008 for Zheng Hui Industry
Corporation and Subsidiaries
|
||
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Combined
Balance Sheets for Zheng Hui Industry Corporation and
Subsidiaries as of December 31, 2009 and 2008 (Audited)
|
F-3
|
|
Combined
Statements of Income and Comprehensive Income for Zheng Hui Industry Corporation and
Subsidiaries for the years ended December 31, 2009 and 2008 (Audited)
|
F-4
|
|
Combined
Statements of Cash Flows for Zheng Hui Industry Corporation and
Subsidiaries for the years ended December 31, 2009 and 2008 (Audited)
|
F-5
|
|
Combined
Statements of Stockholders’ Equity for Zheng Hui Industry Corporation and
Subsidiaries for the years ended December 31, 2009 and 2008 (Audited)
|
F-6
|
|
Notes
to Combined Financial Statements
|
F-7
– F-27
|
Page
|
||
Financial
Statements as of September 30, 2010 and 2009 for Zheng Hui Industry
Corporation and Subsidiaries
|
||
Consolidated
Balance Sheets for Zheng Hui Industry Corporation
and Subsidiaries as of September 30, 2010 and 2009 (Unaudited)
|
F-28
|
|
Consolidated
and Combined Statements of Operation and Comprehensive Income for Zheng
Hui Industry Corporation
and Subsidiaries for the six months ended September 30, 2010 and 2009
(Unaudited)
|
F-29
|
|
Consolidated
and Combined Statements of Cash Flows for Zheng Hui Industry Corporation
and Subsidiaries for the six months ended September 30, 2010 and 2009
(Unaudited)
|
F-30
|
|
Notes
to Consolidated Financial Statements
|
F-31
– F-43
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Zheng Hui Industry Corporation and Subsidiaries
We have
audited the accompanying combined balance sheets of Zheng Hui Industry
Corporation and Subsidiaries as of December 31, 2009 and 2008, and the related
combined statements of operations and comprehensive income, changes in
stockholders' equity, and cash flows for each of the years in the two-year
period ended December 31, 2009. Zheng Hui Industry Corporation and Subsidiaries’
management is responsible for these financial statements. Our responsibility is
to express an opinion on these combined financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the combined financial statements referred to above present fairly, in
all material respects, the financial position of Zheng Hui Industry Corporation
and Subsidiaries as of December 31, 2009 and 2008, and the results of its
operations and its cash flows for each of the years in the two-year period ended
December 31, 2009 in conformity with accounting principles generally accepted in
the United States of America.
The previously issued financial
statements have been restated to reflect the non-controlling interest in a
subsidiary in the year ended December 31, 2008 and 11 months ended November 30,
2009 as more fully discussed in Note 17.
EFP
Rotenberg, LLP
Rochester,
New York
June 7,
2010
(October 28, 2010 as to the effects
of the restatement discussed in Note 17)
F-2
Zheng
Hui Industry Corporation
Combined
Balance Sheets
December 31,
2009 |
December 31,
2008 |
|||||||
|
(Restated)
|
|||||||
ASSETS | ||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 2,543,095 | $ | 1,720,357 | ||||
Accounts
receivable, net
|
4,394,548 | 2,869,970 | ||||||
Inventory
|
1,438,294 | 2,721,003 | ||||||
Prepayments
|
5,043 | 830,756 | ||||||
Other
receivables
|
825,842 | 1,595,155 | ||||||
Due
from related parties
|
1,094,934 | 597,768 | ||||||
Total
Current Assets
|
10,301,756 | 10,335,009 | ||||||
Property,
Plant and Equipment, net
|
4,535,026 | 3,979,752 | ||||||
Land
Use Right, net
|
3,900,579 | 632,622 | ||||||
Due
from related parties
|
- | 640,347 | ||||||
Deferred
tax assets
|
32,868 | 28,346 | ||||||
Total
Assets
|
$ | 18,770,229 | $ | 15,616,076 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Short-term
loan
|
$ | 1,901,363 | $ | 3,355,607 | ||||
Accounts
payable
|
1,033,491 | 1,066,010 | ||||||
Advances
from customers
|
345,196 | 482,678 | ||||||
Tax
payable
|
985,008 | 802,349 | ||||||
Accrued
expenses
|
17,537 | 10,528 | ||||||
Salary
payable
|
122,576 | 129,490 | ||||||
Dividend
payable
|
- | 210,090 | ||||||
Other
current liabilities
|
378,641 | 331,201 | ||||||
Total
Current Liabilities
|
4,783,812 | 6,387,953 | ||||||
Long-term
loan
|
230,357 | 229,786 | ||||||
Total
Liabilities
|
5,014,169 | 6,617,739 | ||||||
Stockholders’
Equity:
|
||||||||
Preferred
stock: $0.001 par value, 20,000,000 shares authorized , zero shares issued
and outstanding
|
- | - | ||||||
Common
stock: $0.001 par value, 180,000,000 shares authorized, 2,000,000 shares
issued and outstanding
|
2,000 | 2,000 | ||||||
Additional
paid in capital
|
4,194,225 | 3,353,418 | ||||||
Retained
earnings
|
6,920,959 | 2,106,610 | ||||||
Statutory
reserve
|
1,615,946 | 938,634 | ||||||
Accumulated
other comprehensive income
|
1,022,930 | 798,407 | ||||||
Total
Zheng Hui Industry Corp. stockholders’ equity
|
13,756,060 | 7,199,069 | ||||||
Non
controlling interest in VIE
|
(nil | ) | 1,799,268 | |||||
Total
Equity
|
13,756,060 | 8,998,337 | ||||||
Total
Liabilities and Stockholders’ Equity
|
$ | 18,770,229 | $ | 15,616,076 |
F-3
Zheng
Hui Industry Corporation
Combined
Statements of Operations and Comprehensive Income
For the years ended December 31,
|
2009
(Restated)
|
2008
(Restated)
|
||||||
Sales
|
$
|
36,793,495
|
$
|
33,381,952
|
||||
Sales
tax and surtax
|
35,792
|
27,417
|
||||||
Net
sales
|
36,757,703
|
33,354,535
|
||||||
Cost
of sales
|
29,299,988
|
26,501,070
|
||||||
Gross
profit
|
7,457,715
|
6,853,465
|
||||||
Operating
expenses:
|
||||||||
Selling
expenses
|
195,572
|
138,411
|
||||||
General
and administrative expenses
|
705,477
|
562,139
|
||||||
Bad
debt expense
|
17,799
|
111,623
|
||||||
Interest
expense
|
201,631
|
395,621
|
||||||
Loss
on disposal of fixed assets
|
-
|
169,147
|
||||||
Total
operating expenses
|
1,120,479
|
1,376,941
|
||||||
Income
from operations
|
6,337,236
|
5,476,524
|
||||||
Other
income
|
||||||||
Other
income
|
23,190
|
36,364
|
||||||
Subsidy
income
|
-
|
28,726
|
||||||
Total
other income
|
23,190
|
65,090
|
||||||
Net
income before provision for income taxes
|
6,360,426
|
5,541,614
|
||||||
Provision
for income taxes
|
1,630,076
|
1,458,112
|
||||||
Net
income
|
$
|
4,730,350
|
$
|
4,083,502
|
||||
Other
comprehensive income:
|
||||||||
Foreign
currency translation adjustment
|
24,921
|
426,821
|
||||||
Comprehensive
income
|
$
|
4,755,271
|
$
|
4,510,323
|
||||
Less:
|
||||||||
Net
income attributable to non controlling interest in VIE
|
814,755
|
816,700
|
||||||
Other
comprehensive income attributable to non controlling interest’s share –
foreign currency translation adjustment
|
8,304
|
85,364
|
||||||
Total
comprehensive income attributable to non controlling interest’s share
|
823,059
|
902,064
|
||||||
Net
income attributable to stockholders
|
3,915,595
|
3,266,802
|
||||||
Other
comprehensive income attributable to stockholders – foreign currency
translation adjustment
|
16,617
|
341,457
|
||||||
Total
comprehensive income attributable to stockholders
|
3,932,212
|
3,608,259
|
||||||
Basic
and diluted earning per common share to stockholders
|
$
|
1.96
|
$
|
1.63
|
||||
Basic
and diluted weighted average common shares outstanding
|
2,000,000
|
2,000,000
|
F-4
Zheng
Hui Industry Corporation
Combined
Statements of Cash Flows
For
the years ended December 31,
|
2009
|
2008
|
||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$
|
4,730,350
|
$
|
4,083,502
|
||||
Adjustments
to reconcile net income to net cash provided by
operations:
|
||||||||
Depreciation
and amortization expenses
|
425,594
|
323,971
|
||||||
Bad
debt expense
|
17,799
|
111,623
|
||||||
Loss
on disposal of fixed assets
|
-
|
169,147
|
||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(1,534,426
|
)
|
(343,622
|
)
|
||||
Other
receivables
|
772,862
|
(90,284
|
)
|
|||||
Prepayments
|
827,333
|
(808,195
|
)
|
|||||
Inventory
|
1,288,781
|
186,619
|
||||||
Deferred
tax assets
|
(4,450
|
)
|
(27,906
|
)
|
||||
Accounts
payable
|
(35,151
|
)
|
(363,006
|
)
|
||||
Advance
from customers
|
(138,607
|
)
|
(162,766
|
)
|
||||
Tax
payable
|
180,567
|
(215,059
|
)
|
|||||
Accrued
expenses
|
6,979
|
(20,144
|
)
|
|||||
Salary
payable
|
(7,234
|
)
|
20,775
|
|||||
Other
current liabilities
|
46,595
|
28,128
|
||||||
Net
cash provided by operating activities
|
6,576,992
|
2,892,783
|
||||||
Cash
flows from investing activities:
|
||||||||
Acquisition
of property, plant and equipments
|
(936,249
|
)
|
(743,995
|
)
|
||||
Payment
for land use right
|
(3,299,057
|
)
|
-
|
|||||
Net
cash used in investing activities
|
(4,235,306
|
)
|
(743,995
|
)
|
||||
Cash
flows from financing activities:
|
||||||||
Borrowing
from (Lending to) related company-net
|
146,180
|
(186,721
|
)
|
|||||
Capital
contribution
|
2,452
|
-
|
||||||
Inception
of bank loans
|
1,900,340
|
3,303,530
|
||||||
Repayment
of bank loans
|
(3,362,141
|
)
|
(3,360,982
|
)
|
||||
Dividends
distribution
|
(210,499
|
)
|
(1,775,288
|
)
|
||||
Net
cash flows from financing activities
|
(1,523,668
|
)
|
(2,019,461
|
)
|
||||
Net
changes in cash and cash equivalents
|
818,018
|
129,327
|
||||||
Effect
on change of exchange rate
|
4,720
|
101,952
|
||||||
Cash
and cash equivalents, beginning
|
1,720,357
|
1,489,078
|
||||||
Cash
and cash equivalents, ending supplementary cash flow
information:
|
$
|
2,543,095
|
$
|
1,720,357
|
||||
interest
paid
|
$
|
204,430
|
$
|
397,200
|
||||
Income
tax paid
|
$
|
1,644,631
|
$
|
1,488,750
|
||||
Non-cash
financing activities:
|
||||||||
$983,927
receivable from shareholders were waived as dividends distribution in
2008
|
F-5
Zheng
Hui Industry Corporation
Combined
Statements of Changes in Stockholders’ Equity (Restated)
Accumulated
|
|||||||||||||||||||||||||||||
Additional
|
other
|
Non
|
|||||||||||||||||||||||||||
Common
stock
|
Paid-In
|
Retained
|
comprehensive
|
Shareholders'
|
controlling
|
Total
|
|||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Reserve
|
Earnings
|
income
|
equity
|
interest
|
equity
|
|||||||||||||||||||||
USD
|
USD
|
USD
|
USD
|
USD
|
USD
|
USD
|
USD
|
||||||||||||||||||||||
Balance
-December 31, 2007
|
2,000,000 | 2,000 | 3,353,418 | 424,112 | 309,871 | 456,950 | 4,546,351 | 1,136,089 | 5,682,440 | ||||||||||||||||||||
Net
income
|
- | - | 3,266,802 | - | 3,266,802 | 816,700 | 4,083,502 | ||||||||||||||||||||||
Dividends
declared
|
- | - | (955,541 | ) | - | (955,541 | ) | (238,885 | ) | (1,194,426 | ) | ||||||||||||||||||
Appropriation
to statutory reserve
|
- | 514,522 | (514,522 | ) | - | - | - | - | |||||||||||||||||||||
Other
comprehensive income:
|
- | - | - | - | - | - | - | ||||||||||||||||||||||
Foreign
Currency Translation Adjustment
|
- | - | - | 341,457 | 341,457 | 85,364 | 426,821 | ||||||||||||||||||||||
Balance
-December 31, 2008
|
2,000,000 | 2,000 | 3,353,418 | 938,634 | 2,106,610 | 798,407 | 7,199,069 | 1,799,268 | 8,998,337 | ||||||||||||||||||||
Capital
Contribution
|
2,452 | - | - | - | 2,452 | - | 2,452 | ||||||||||||||||||||||
Net
income
|
- | - | 3,915,595 | - | 3,915,595 | 814,755 | 4,730,350 | ||||||||||||||||||||||
Appropriation
to statutory reserve
|
- | 473,280 | (473,280 | ) | - | - | - | - | |||||||||||||||||||||
Other
comprehensive income:
|
- | - | - | - | - | - | - | ||||||||||||||||||||||
Foreign
Currency Translation Adjustments
|
- | - | - | 16,617 | 16,617 | 8,304 | 24,921 | ||||||||||||||||||||||
Acquisition
of non controlling interest
|
838,355 | 204,032 | 1,372,034 | 207,906 | 2,622,327 | (2,622,327 | ) | - | |||||||||||||||||||||
Balance
-December 31, 2009
|
2,000,000 | 2,000 | 4,194,225 | 1,615,946 | 6,920,959 | 1,022,930 | 13,756,060 | - | 13,756,060 |
F-6
Zheng
Hui Industry Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
Note
1 – Organization and Basis of Presentation
Zheng
Hui Industry Corporation (“Zheng Hui” or the “Company”) was incorporated under
the laws of the State of Oregon, United States on January 22, 2009 as a
corporation. On March 23, 2010, Zheng Hui established a wholly owned subsidiary
in Beijing, the Peoples Republic of China (“China”), named Beijing
CHENGMUJINMING Technology Service Co., Ltd (“Beijing CMJM”). Other than the
equity interest in Beijing CMJM, Zheng Hui does not own any assets or conduct
any operations. Beijing CMJM conducts its business through a legal entity
located in Shouguang City, Shandong Province, China, named Weifang Jinzheng
Poultry Co., Ltd (“Jinzheng”).
Jinzheng
was incorporated on April 22, 2002 by Mr. Junfeng Shan, who held 84% of the
equity interest, and four other individuals (“minority shareholders”), Baoying
Shan, Yimin Sun, Anjun Zheng, and Yongping Shan, who held the remaining 16% of
the equity interest. On May 28, 2006, Mr. Junfeng Shan and the minority
shareholders made disproportionate additional investments in Jinzheng, As a
result of such additional investments, Mr. Junfeng Shan held 80% of the equity
interest and each of the minority shareholders held 5% of the equity interest,
respectively. On December 1, 2009, the non-controlling interests were
sold by the minority shareholders directly to the new Zheng Hui shareholder
group as follows: Baoying Shan sold 5% of the Jinzheng equity
interest to Mr. Junfeng Shan; Yimin Sun sold 4.85% of the Jinzheng equity
interest to Mr. Junfeng Shan and sold 0.15% of the Jinzheng equity interest to
the current shareholder Yufen Zhang; Anjun Zheng sold 2.9% of the Jinzheng
equity interest to Yufen Zhang and sold 2.1% of the Jinzheng equity interest to
Yan Wang; and Yongping Shan sold 1.45% of the Jinzheng equity interest to Yan
Wang and sold 3.55% of Jinzheng equity interest to Qian Li. After the execution
of share transfer agreements, Mr. Junfeng Shan held 89.85% of the total equity,
and Yufen Zhang, Yan Wang and Qian Li, the three other individuals have obtained
3.05%, 3.55%, and 3.55% of the equity, respectively (these four individuals
consists of “principal shareholders”).
The
income attributed to the non-controlling interest was determined as follows: In
2008 a non-controlling interest of 20% existed for the entire year.
Therefore, both the net income and other comprehensive income have
been calculated as 20% of those components. In 2009 a non-controlling
interest existed for 11 months (January 1, 2009 to November 30, 2009). The
Company calculated net income and other comprehensive income at November
30, 2009 and 20% of each was attributed to the non-controlling interest and
reflected on the December 31, 2009 income statement as
such.
Chinese
laws and regulations currently do not prohibit or restrict foreign ownership in
breeding and food processing businesses. However, Chinese laws and regulations
do prevent direct foreign investment in certain industries. On March 25, 2010,
to protect Zheng Hui’s shareholders from possible future foreign ownership
restrictions, Beijing CMJM, Jinzheng and principal shareholders entered into a
series of agreements, as described below (the Exclusive Technical Consulting
Service Agreement, the Operating Agreement, the Equity Interest Pledge
Agreement, the Exclusive Equity Interest Purchase Agreement and the Power of
Attorney).
Under
these agreements Beijing CMJM obtained the ability to direct the operations of
Jinzheng and to receive a majority of the residual returns (receive 85% of the
expected gains of Jinzheng).Therefore, management determined that Jinzheng
became a variable interest entity (“VIE”) under the provisions of Financial
Accounting Standards Board (“FASB”) ASC 810-10 (Prior authoritative literature:
FIN 46R Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51) and Zheng
Hui was determined to be the primary beneficiary of Jinzheng. Accordingly,
beginning March 25, 2010, Zheng Hui is able to consolidate the assets,
liabilities, results of operations and cash flows of Jinzheng in the financial
statements. Because the major shareholder group of Zheng Hui and Jinzheng were
the same, Zheng Hui and Jinzheng were deemed, until March 25, 2010, to be under
the common control.
As the
result of the above, the accompanying combined financial statements
contain:
·
|
Through January 22, 2009, the
assets, liabilities, results of operations and cash flows of Jinzheng;
and
|
·
|
For the period from January 22,
2009 through December 31, 2009, the assets, liabilities, results of
operations and cash flows of Zheng Hui combined with
Jinzheng.
|
The
combined financial statements are prepared as if the reorganization structure
was completed on January 1, 2008.
Zheng
Hui, its subsidiary, Beijing CMJM, and its VIE-Jinzheng (collectively the
“Group”) are principally engaged in the poultry breeding and processing, frozen
poultry product distribution, and feed production. The Group distributes
products nationally in China.
F-7
Zheng
Hui Industry Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
Exclusive Technical Consulting
Service Agreement. Pursuant to the Exclusive Technical Consulting Service
Agreement between Beijing CMJM and Jinzheng, Beijing CMJM has the exclusive
right to provide business consulting and related services provision of advanced
management skills to offer a framework for the construction of a new management
platform; provision of technology information and materials related to
Jinzheng’s business development and operation; training of technical and
managerial personnel for Jinzheng and provision of required training documents
(the “Services”). Under this agreement, BI CMJM owns the intellectual property
rights arising from the performance of the Services, including, but not limited
to, copyrights, patent, know-how and commercial secrets, whether developed by
Beijing CMJM or Jinzheng. Jinzheng pays 85% of its annual net profit to Beijing
CMJM on a semi-annual basis as consulting service fee. The remaining 15% of
annual net profits is restricted by the Equity Interest Pledge Agreement, which
entitles Beijing CMJM to collect dividends from Jinzheng during the term of the
pledge. Because the pledge remains in effect to guarantee payment under the
Exclusive Technical Consulting Service Agreement, the principal
shareholders will not have any right to receive any dividends from Jinzheng if
they are declared. The consulting
service agreement is in effect for a term of 10 years starting from March 25,
2010 unless previously terminated. This agreement may be renewed for one or more
10-year terms upon notice by Beijing CMJM.
Operating Agreement. Pursuant
to the Operating Agreement among Beijing CMJM, Jinzheng and the principal
shareholders, Beijing CMJM provides full guarantee for the performance of
contracts, agreements or transactions executed by Jinzheng related to Jinzheng’s
business. Jinzheng, in return, agrees to pledge the whole receivables and assets
to Beijing CMJM. In addition, Jinzheng agrees that without the prior consent of
Beijing CMJM, Jinzheng will not engage in any transactions that could materially
affect the assets, obligations, rights or the business of Jinzheng, including,
without limitation, (a) borrowing money from a third party or assuming any debt,
(b) selling to or acquiring from any third party any assets or rights, including
without limitation, any intellectual property rights, (c) providing any real
guaranty for any third party with its assets or intellectual property rights,
(d) assigning to any third party its business agreements. Moreover, Jinzheng
agrees to accept the corporate policy advice and guidance provided by Beijing
CMJM on Jinzheng’s daily operations, financial management and employment issues.
The principal shareholders shall appoint the candidates recommended by Beijing
CMJM to Jinzheng’s board of directors. Beijing CMJM has the right to appoint
personnel to high level managerial positions of Jinzheng, including General
Manager, Chief Financial Officer and other senior officers. The term of this
agreement is 10 years from March 25, 2010 unless previously terminated. The
agreement can be renewed for additional 10-year periods at Beijing CMJM’s
written request. Beijing CMJM may terminate the agreement at any time upon
thirty (30) days written notice to Jinzheng.
Equity Interest Pledge
Agreement. Under the Equity Interest Pledge Agreement between the
principal shareholders and Beijing CMJM, the principal shareholders pledged all
of their equity interests in Jinzheng to Beijing CMJM to guarantee Jinzheng’s
consulting fees payment to Beijing CMJM. During the Event of Default, Beijing
CMJM, as pledgee, will be entitled to certain rights, including but not limited
to the right to sell the pledged equity interests. The principal shareholders
agree that without Beijing CMJM’s prior written consent, they will not transfer
any equity interest, create or permit to exist any pledge that may damage
Beijing CMJM’s rights or interests in the pledged equity interests, or cause
Jinzheng’s meeting of stockholders or board of directors to pass any resolutions
about the sale, transfer, pledge or other disposal of the lawful right to derive
income from any equity interest in Jinzheng or about the permission of the
creation of any other security interests thereon. The term of this agreement is
the same as the longest of the Service Agreements. If the term of any Service
Agreement is renewed, the term of this agreement will extend
accordingly.
F-8
Zheng
Hui Industry Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
Exclusive Equity Interest Purchase
Agreement. Under the Exclusive Equity Interest Purchase Agreement between
Jinzheng, the principal shareholders and Beijing CMJM, the principal
shareholders irrevocably, unconditionally and exclusively granted Beijing CMJM a
purchase option (the “Purchase Option”) whereby, to the extent permitted under
Chinese law, Beijing CMJM has the right to request the principal shareholders
transfer, to it or its designated entity or person, the total equity interests
held by them in the registered capital of Jinzheng, which as a group equals 100%
of the outstanding equity of Jinzheng. Beijing CMJM has sole discretion to
decide the specific time, method and number of the exercise of the Purchase
Option. At the time of each exercise of the Purchase Option by Beijing CMJM, the
total consideration to be paid to principal shareholders shall be determined
through negotiation according to the evaluation of the Equity Interest by the
relevant qualified institute and it shall be the lowest price permitted under
China law. The term of this agreement is 10 years from March 25, 2010 unless
previously terminated. The agreement can be renewed for additional 10-year
periods at Beijing CMJM’s written request.
Power of Attorney. Pursuant
to the Power of Attorney, each of the principal shareholders agree to
irrevocably entrust Beijing CMJM with his stockholder voting rights and other
stockholder rights for representing him to exercise such rights at the
stockholders’ meeting of Jinzheng in accordance with applicable laws and its
Article of Association, including, but not limited to, the right to sell or
transfer all or any of his equity interest in Jinzheng, and appoint and vote for
the directors and Chairman as the authorized representative of the principal
shareholders. The term of each Proxy and Voting Agreement is as long as each of
the principal shareholders is a shareholder of Jinzheng from March 25, 2010.
As of May
21, 2010, Zheng Hui Industry Corporation was reincorporated from Oregon to
Nevada.
Note
2 – Summary of Significant Accounting Policies
(a)
|
Basis of
Presentation
|
The
combined financial statements are prepared in accordance with generally accepted
accounting principles in the United States of America (“US GAAP”). The
accompanying combined financial statements include the combined assets,
liabilities, revenues, expenses and cash flows of Jinzheng and Zheng Hui as of
and for the years ended December 31, 2009 and 2008 (See Note 1). All
inter-company transactions and balances are eliminated upon
consolidation.
F-9
Zheng
Hui Industry Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
(b)
|
Cash and Cash
Equivalent
|
Cash and
cash equivalents include cash on hand and demand deposits with banks with an
original maturity of three months or less. The Group maintains cash with high
credit quality financial institutions in the United States and in
China.
(c)
|
Account
Receivable
|
Account
Receivables are recognized and carried at the original invoice amount less
allowance for any uncollectible amounts. An estimate for doubtful
accounts is made when collection of the full amount is no longer
probable. Bad Debts are written off as incurred. The Group
monitors exposure to credit losses and maintains allowances for anticipated
losses considered necessary under the circumstances.
(d)
|
Inventory
|
Inventory
consists of breeder ducks, feed, processed poultry, and packaging supplies.
Breeders are stated at the lower of cost or market, less accumulated
amortization. The costs associated with breeders are mainly feed cost and labor
costs, which are accumulated up to the production stage and amortized over their
productive lives which is twelve months using the straight line
method.
Other
inventory is valued at the lower of cost (using the weighted average method) or
net realizable value. Cost includes all costs to acquire and other
costs incurred in bringing the inventories to their present location and
condition. The Group evaluates the net realizable value of its
inventories on a regular basis and records a provision for loss to reduce the
computed weighted-average cost. Net realizable value is the estimated
selling price in the ordinary course of business less the estimated costs of
completing, selling expenses and related taxes.
(e)
|
Land Use
Right
|
According
to the laws of China, the government owns all the land in
China. Companies or individuals are authorized to possess and use the
land only through land use rights granted by the Chinese
government. Land use rights would be amortized using the
straight-line method over the lease term of 50 years.
(f)
|
Property, Plant and
Equipment
|
Fixed
assets are stated at cost. The cost of repairs and maintenance is
expensed as incurred; major replacements and improvements are
capitalized.
When
assets are retired or otherwise disposed of, the costs and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
recognized in income for the period of disposition.
Impairment
losses are recorded on fixed 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 amount. There were no
impairment losses in 2009 or 2008.
F-10
Zheng
Hui Industry Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
Depreciation
is computed using the straight-line method over the estimated useful lives of
assets, net of the estimated residual values. The useful lives for
property, plant and equipment are as follows:
Buildings
and leasehold improvements
|
20
years
|
Plant
and machinery
|
10
years
|
Office
equipment and furnishing
|
5
years
|
Motor
vehicles
|
5
years
|
(g)
|
Construction in
Progress
|
Construction
in Progress represents direct costs of construction or acquisition and design
fees incurred. Capitalization of these costs ceases and the
construction in progress is transferred to plant and equipment assets when
substantially all the activities necessary to prepare the assets for their
intended use are completed. No depreciation is provided until it is
completed and ready for intended use.
(h)
|
Accounting for the impairment of
long-lived assets
|
The
long-lived assets held and used by the Group are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable. It is reasonably possible that these assets could
become impaired as a result of technology or other industry changes.
Determination of recoverability of assets to be held and used is done by
comparing the carrying amount of an asset to future net undiscounted cash flows
to be generated by the assets.
If such
assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. During the reporting
periods, there was no impairment loss.
(i)
|
Statutory
Reserves
|
According
to the Articles of Incorporation, the Beijing CMJM and Jinzheng are required to
transfer a certain portion of its net profit, as determined under China
accounting regulations, from current net income to the statutory reserve fund,
which is restricted for dividend distribution.
(j)
|
Income
Taxes
|
The Group
accounts for income tax using an assets and liability approach and allows for
recognition of deferred tax benefits in future years. Under the
assets and liability approach, deferred taxes are provided for the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purpose. A valuation allowance is provided for deferred tax assets if
it is more likely than not these items will either expire before the Group is
able to realize their benefits, or that future realization is
uncertain.
F-11
Zheng
Hui Industry Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
(k)
|
Related
Parties
|
Parties
are considered to be related if one party has the ability, directly or
indirectly, to control the other party or exercise significant influence over
the other party in making financial and operational
decisions. Parties are also considered to be related if they are
subject to common control or common significant influence. Related
parties may be individuals or corporate entities.
(l)
|
Foreign Currency
Translation
|
The
accompanying financial statements are presented in United States Dollars (USD).
While the financial reporting currency of the Company is USD, and the functional
currency of Jinzheng and Beijing CMJM is the Renminbi (RMB). The financial
statements are translated into United States dollars from RMB at year-end
exchange rates as to assets and liabilities and average exchange rates as to
revenues and expenses. Capital accounts are translated at their historical
exchange rates when the capital transactions occurred.
December 31, 2009
|
|||||||
Balance
sheet
|
RMB
|
6.83720
|
to
US
|
$
|
1
|
||
Statement
of income and comprehensive income
|
RMB
|
6.84088
|
to
US
|
$
|
1
|
||
December 31, 2008
|
|||||||
Balance
sheet
|
RMB
|
6.85420
|
to
US
|
$
|
1
|
||
Statement
of income and comprehensive income
|
RMB
|
6.96225
|
to
US
|
$
|
1
|
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US$ at
the rates used in translation. RMB has been under pressure to appreciate against
the US dollar. This results in foreign currency translation adjustment as
depicted in combined financial statements.
(m)
|
Guarantee
Expense
|
The Group
accounts for its liability for product guaranteed in accordance with FASB
Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others.” Under FIN 45, the aggregate changes in the liability for accruals
related to product warranties issued during the reporting period must be charged
to expense as incurred.
The Group
guarantees a 98% survival rate of the ducklings by delivering additional 2% of
the product. The guarantee expires seven days after delivery. If the survival
rate falls below 96%, the Group provides additional guarantee compensation to
customers. Based on historical experience, the likelihood that survival rate
falls below 96% is remote and therefore no accrued guarantee liability was
recorded at year-end. Guarantee expense for the 2009 and 2008 were $0 and $0,
respectively.
F-12
Zheng
Hui Industry Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
(n)
|
Use of
Estimates
|
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, the Group
evaluates its estimates, including, but not limited to, those related to
depreciation, bad debts, income taxes and contingencies. The Group
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, actual results could
differ from those estimates.
(o)
|
Economic and Political
Risks
|
The
Group’s operations are conducted in China. Accordingly, the Group’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in China, and by the general state of
the Chinese economy.
The
Group’s operations in China are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others,
the political, economic and legal environment and foreign currency
exchange. The Group’s results may be adversely affected by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversion, remittances abroad, and rates and methods of
taxation, among other things.
(p)
|
Fair Value of Financial
Instruments
|
The
carrying value of financial instruments including cash, receivables, accounts
payable, accrued expenses and debt, approximates their fair value at December
31, 2009 and 2008 due to the relatively short-term nature of these
instruments.
(q)
|
Revenue
Recognition
|
Revenue
from sales of the Group’s products is recognized when the significant risks and
rewards of ownership have been transferred to the third-parties at the time when
the products are delivered to and accepted by them, the sales price is fixed or
determinable as stated in the sales contract, and collection is reasonably
assured. Revenues consist of the invoice value of the sale of goods
net of value added tax, and product returns.
Sale
of ducklings
The Group
recognizes the sale of ducklings upon the delivery of the ducklings to farmers.
Upon the delivery of the ducklings, the risk and award on the ducklings have
been transferred to farmers. Therefore, revenue is recognized
accordingly.
F-13
Zheng
Hui Industry Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
Pursuant
to the contracts between the Jinzheng and the farmers, the Group is obligated to
buy back the ducks within the contract period provided the mature ducks meet
conditions specified in the contract.
Sale
of feed
The Group
recognizes the sale of feed upon the delivery of the feed to distributors. The
risk and award on the feed have been transferred to distributors. Therefore,
revenue is recognized accordingly.
Pursuant
to the contracts between the Jinzheng and the distributors, the feed sold to
distributors should only be sold to the Group’s contracted farmers.
Sale
of frozen duck products and other products
The Group
recognizes the sale of frozen duck products and other products upon the delivery
to the customers.
Top ten
unrelated customers of the Group command approximately 29% and 39% of the 2009
and 2008 total sales, respectively.
(r)
|
Advertising and promotion
expenses
|
Advertising
and promotion expenses are expensed as incurred and are included in selling
expenses.
(s)
|
Cost of
revenues
|
Cost of
revenues consists primarily of material costs, employee compensation,
depreciation and related expenses, which are directly attributable to the
production of products. Write-down of inventory to lower of cost or market is
also recorded in cost of revenues. Top four unrelated suppliers command
approximately 11% and 14% of the 2009 and 2008 total purchases,
respectively.
(t)
|
Value-added tax
(“VAT”)
|
In
accordance with the relevant tax laws in the PRC, VAT is levied on the invoiced
value of sales and is payable by the purchaser. The Group is required to remit
the VAT it collects to the tax authority, but may deduct the VAT it has paid on
eligible purchases. The difference between the amounts collected and paid is
presented as VAT recoverable or payable balance on the balance
sheet.
(u)
|
Business tax (“BT”) and
surcharges
|
According
to China’s tax laws, Beijing CMJM is subject to a 5% business tax on revenue
obtained from Jinzheng, Business tax and the related surcharges are
recognized when the revenue is earned.
Jinzheng
is subject to 11% related surcharges for city construction and education on
total VAT payable for the reporting periods. Business tax and the related
surcharges are recognized when the VAT payable is occurred.
(v)
|
Employee
benefit
|
The
full-time employees of the Company’s PRC subsidiary are entitled to staff
welfare benefits including medical care, housing fund, unemployment insurance
and pension benefits. These entities are required to accrue for these benefits
based on certain percentages of the employees’ salaries, subject to certain
ceilings, in accordance with the relevant PRC regulations, and make
contributions to the state-sponsored plans out of the amounts accrued. The total
amounts for such employee benefits, which were expensed as incurred, were
$41,399 and $44,854 for the years ended December 31, 2009,and 2008,
respectively.
F-14
Zheng
Hui Industry Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
(w)
|
Comprehensive
Income
|
Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, all
items that are required to be recognized under current accounting standards as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other financial
statements. The component of comprehensive income includes foreign currency
translation adjustment.
(x)
|
Concentration of Credit
Risk
|
Financial
instruments that potentially subject the Group to significant concentration of
credit risk consist primarily of trade account receivable. The Group
performs ongoing credit evaluations with respect to the financial condition of
its creditors, but does not require collateral.
The
Group’s insurance may not provide sufficient coverage in the event of damage or
loss of its properties due to the limited business insurance products offered in
China. If a natural disaster, fire, wide spread disease or other significant
event beyond the Group’s control occurred, the value of the Group’s properties
may be subject to write-off and the Group would incur a significant loss
thereon.
(y)
|
Government
Subsidies
|
Government
grants for revenue and /or expenses should be recognized in income when the
related revenue and/or expense are recorded. Government grants related to
property, plant, and equipment should be netted against the depreciation expense
of the related assets over the useful lives of these assets. Government
subsidies relating to specific borrowings are recorded as an offset to the
interest expense over the term of these borrowings. Unrestricted government
subsidies from local governmental agencies allowing the Group fully discretion
in the fund utilization were $0 and $28,726 for the years ended December 31,
2009 and 2008, respectively.
(z)
|
Segment
Reporting
|
The Group
operates and manages its business as a single segment. As the Group primarily
generates its revenues from customers in China, no geographical segments are
presented.
(aa)
|
Recent Accounting
Pronouncements
|
In
September 2006, FASB issued ASC 820 (Prior authoritative literature: SFAS No.
157, “Fair Value Measurements” which defines fair value, establishes a
market-based framework or hierarchy for measuring fair value and expands
disclosures about fair value measurements. This guidance is applicable whenever
another accounting pronouncement requires or permits assets and liabilities to
be measured at fair value. It does not expand or require any new fair value
measures; however the application of this statement may change current practice.
The Group adopted this guidance for financial assets and liabilities effective
January 1, 2008 and for non financial assets and liabilities effective January
1, 2009. The adoption did not have a material effect on the Group’s financial
condition, results of operations, or cash flows.
F-15
Zheng
Hui Industry Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
In
December 2007, FASB issued FASB ASC 805 (Prior authoritative
literature: SFAS No. 141(R), “Business
Combinations” and FASB ASC 810-10-65 (prior
authoritative literature: SFAS No. 160, “Accounting and Reporting of
Noncontrolling Interest in Consolidated Financial Statements, an amendment of
ARB No. 51”). These new standards will significantly change the
accounting for and reporting of business combinations and non-controlling
(minority) interests in consolidated financial statements. FASB ASC 805 and FASB
ASC 810-10-65 are required to be adopted simultaneously and are effective for
the first annual reporting period beginning on or after December 15, 2008.
Earlier adoption is prohibited. The adoption of FASB ASC 805 and FASB
ASC 810-10-65 did not have a material impact on the Group’ financial position,
results of operations, or cash flows.
In
December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB
110”). SAB 110 permits companies to continue to use the
simplified method, under certain circumstances, in estimating the expected term
of “plain vanilla” options beyond December 31, 2007. SAB 110 updates
guidance provided in SAB 107 that previously stated that the Staff would not
expect a Group to use the simplified method for share option grants after
December 31, 2007. Adoption of SAB 110 did not have a
material impact on the Group’s financial statements.
In March
2008, FASB issued FASB ASC 815-10 (prior authoritative
literature: SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement No.
133”). FASB ASC 815-10 requires enhanced disclosures about an entity’s
derivative and hedging activities. FASB ASC 815-10 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008 with early application encouraged. As such, the Group is required to
adopt these provisions at the beginning of the fiscal year ended December 31,
2009. The adoption of FASB ASC 815-10 did not have a material impact
on the Group’s financial position, results of operations, or cash flows.
In May
2008, FASB issued FASB ASC 944 (prior authoritative literature: SFAS
No. 163, "Accounting for
Financial Guarantee Insurance Contracts — an interpretation of FASB Statement
No. 60"). FASB ASC 944 interprets Statement 60 and amends existing
accounting pronouncements to clarify their application to the financial
guarantee insurance contracts included within the scope of that Statement. FASB
ASC 944 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and all interim periods within those fiscal
years. The Group adopted these provisions for the fiscal year ended
December 31, 2009. The adoption of issued FASB ASC 944 did not have a material
impact on the Group’s financial position, results of operations, or cash flows.
In May
2009, FASB issued FASB ASC 855-10 (prior authoritative
literature: SFAS No. 165, "Subsequent Events"). FASB ASC 855-10
establishes principles and requirements for the reporting of events or
transactions that occur after the balance sheet date, but before financial
statements are issued or are available to be issued. FASB ASC 855-10 is
effective for financial statements issued for fiscal years and interim periods
ending after June 15, 2009. The Group adopted these provisions for the fiscal
year ended December 31, 2009. Adoption of FASB ASC 855-10 did not have a
material effect on the Group’s financial statements.
F-16
Zheng
Hui Industry Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
In June
2009, FASB issued ASC 105-10 (Prior authoritative literature: SFAS
No. 168, "The FASB Accounting
Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles a replacement of FASB Statement No.
162"). FASB ASC 105-10 establishes the FASB Accounting
Standards Codification TM (Codification) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with GAAP.
FASB ASC 105-10 is effective for financial statements issued for fiscal years
and interim periods ending after September 15, 2009. The Group
adopted these provisions for the fiscal year ended December 31, 2009. Adoption
of FASB ASC 105-10 did not have a material effect on the Group’s financial
statements.
In
February 2010, FASB issued ASU 2010-09 Subsequent Event (Topic 855) Amendments
to Certain Recognition and Disclosure Requirements. ASU 2010-09 removes the
requirement for an SEC filer to disclose a date 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 GAAP. All of the amendments in ASU 2010-09 are effective upon
issuance of the final ASU, except for the use of the issued date for conduit
debt obligors. That amendment is effective for interim or annual periods ending
after June 15, 2010. Adoption of ASU 2010-09 did not have a material effect on
the Group’s financial statements.
Note
3 – Accounts Receivable
The
Group’s accounts receivable from unrelated parties as of December 31, 2009 and
2008 were summarized as follows:
December
31,
|
2009
|
2008
|
||||||
Trade
Receivables
|
$
|
4,526,022
|
$
|
2,983,353
|
||||
Less:
Allowance for doubtful accounts
|
(131,474
|
)
|
(113,383
|
)
|
||||
Net
accounts receivable
|
$
|
4,394,548
|
$
|
2,869,970
|
||||
Movement
of allowance for doubtful accounts
|
||||||||
Balance
– December 31, 2007
|
$
|
-
|
||||||
Allowance
provided
|
111,623
|
|||||||
Foreign
currency translation
|
1,760
|
|||||||
Balance
– December 31, 2008
|
113,383
|
|||||||
Allowance
provided
|
17,799
|
|||||||
Foreign
currency translation
|
292
|
|||||||
Balance
– December 31, 2008
|
$
|
131,474
|
F-17
Zheng
Hui Industry Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
Note
4 - Inventory
On
December 31, 2009 and 2008, inventories consisted of the following:
December
31,
|
2009
|
2008
|
||||||
Raw
materials
|
$
|
262,916
|
$
|
594,212
|
||||
Breeders
|
805,537
|
902,462
|
||||||
Finished
goods
|
||||||||
Processed
poultry
|
286,695
|
1,106,328
|
||||||
Feed
|
83,146
|
118,001
|
||||||
Total
Inventories
|
$
|
1,438,294
|
$
|
2,721,003
|
Note
5 – Prepayments
As of
December 31, 2008, the Group has prepayments of $830,756. These
prepayments are equipment and civil construction contract deposits for the marsh
gas facility, the animal feed storage facility, and the dormitory.
Note
6 – Other receivables
December
31,
|
2009
|
2008
|
||||||
Other
receivables
|
$
|
825,842
|
$
|
1,595,155
|
||||
Less:
Allowance for doubtful accounts
|
-
|
-
|
||||||
Net
other receivable
|
$
|
825,842
|
$
|
1,595,155
|
Other
receivables are unsecured, interest free and have no fixed repayment
date.
Note
7 – Related Party Transactions
The table
below sets forth the major related parties and their relationships with the
Group:
Name
of related party
|
Relationships
with the Company
|
|
Shouguang
Jintai Construction Co., Ltd. ("Jintai")
|
Under
common control by Mr. Shan Junfeng
|
|
Mr.
Shan Junfeng
|
Chairman,
CEO, and major shareholder of the
Company
|
(1) Due
from/to related parties
Due
from Jintai
|
December
31,
2009
|
December
31,
2008
|
||||||
USD
|
USD
|
|||||||
Loan
(RMB 3,096,619.44)
|
452,907
|
597,768
|
||||||
Receivable
arising from transfer of a lease of salt lake field at 2007 year end
(proceed: RMB 4,389,666.67)
|
642,027
|
640,347
|
||||||
1,094,934
|
1,238,115
|
F-18
The loan
is interest free and with no fix payment term.
The Group
transferred the lease of a salt field to the related party at the end of 2007.
The total consideration is $640,435 (RMB 4,389,667) which was the prepayment
made to leaser (the local government of China) by the Group in prior
periods. The consideration has not been paid by the related party. According to
the lease transfer agreement, Jintai is required to settle the amount on
installment basis, $292,517(RMB 2,000,000) due on March 31, 2010, $146,259(RMB
1,000,000) due on June 30, 2010, and rest $203,251(RMB 1,389,667) due on
December 31 2010. Though the receivable from Jintai is past due, the Company has
not provided allowance as there has not been a significant change in credit
quality and the amounts are still considered recoverable.
(2) Transactions
with Jintai:
During
2008, the Group signed two civil work contracts totaling $291,792 (RMB
2,000,000) with the related party for an animal feed storage facility
improvement and constructing a marsh gas facility. As of December 31,
2008, the Group prepaid $237,810 (RMB 1,630,000) on these
contracts. These improvement and facility were completed and in use
in December 2009.
(3) Mr.
Junfeng Shan will continue to hold a controlling interest of the outstanding
equity in the company after the offering.
F-19
Zheng
Hui Industry Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
Note
8 - Property, Plant and Equipment
Property,
plant and equipment consisted of the following, as of December 31, 2009 and
2008.
December 31,
|
2009
|
2008
|
||||||
Buildings
and Leasehold
|
$
|
5,550,561
|
$
|
4,811,887
|
||||
Machinery
|
1,653,468
|
1,400,739
|
||||||
Office
Equipments
|
17,637
|
16,922
|
||||||
Motor
Vehicles
|
6,362
|
6,346
|
||||||
Total
|
7,228,028
|
6,235,894
|
||||||
Accumulated
Depreciation
|
(2,693,002
|
)
|
(2,295,918
|
)
|
||||
Construction
in Progress
|
-
|
39,776
|
||||||
Property,
Plant and Equipment, net
|
$
|
4,535,026
|
$
|
3,979,752
|
The Group
recorded depreciation expense of $391,165 and $310,145 for the years ended
December 31, 2009 and 2008, respectively.
Note
9 - Land Use Rights
December 31,
|
2009
|
2008
|
||||||
Land
Use Right
|
$
|
4,003,277
|
$
|
700,702
|
||||
Accumulated
Amortization
|
(102,698
|
)
|
(68,080
|
)
|
||||
Land
Use Right, net
|
$
|
3,900,579
|
$
|
632,622
|
The Group
recorded amortization expense of $34,429 and $13,826 for the years ended
December 31, 2009 and 2008, respectively.
F-20
Zheng
Hui Industry Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
Note
10 - Short-term Bank Loan
Short-term
loan represented the following as of December 31, 2009 and 2008:
December 31,
|
2009
|
2008
|
||||||
Secured
|
$
|
1,901,363
|
$
|
3,355,607
|
||||
Less:
Current portion
|
(1,901,363
|
)
|
(3,355,607
|
)
|
||||
Non-current
portion
|
$
|
-
|
$
|
-
|
To
finance the operation of the business, the Group obtained the following
short-term loans from the local Rural Cooperative Bank of
China. These loans were guaranteed by three unrelated companies.
Interest is payable monthly on the 20th day. The loans as at December
31,2008 were paid in full on their maturity date. The Group recorded
$20 1,895 and $ 39 1,666 interest expenses related to these bank loans for the
years ended December 31, 2009 and 2008, respectively.
Inception Date
|
Maturity Date
|
Loan
Amount
|
Annual
Interest
Rate
|
|||||||
April
18, 2008
|
April1
7, 2009
|
$
|
729,480
|
11.952
|
%
|
|||||
October
14, 2008
|
October
13, 2009
|
729,480
|
11.952
|
%
|
||||||
November
14, 2008
|
November
13, 2009
|
729,480
|
11.632
|
%
|
||||||
December
12, 2008
|
December
11, 2009
|
1,167,167
|
8.496
|
%
|
||||||
Total
loans outstanding at December 31, 2008
|
$
|
3,355,607
|
||||||||
November
22, 2009
|
November
21, 2010
|
$
|
731,293
|
6.195
|
%
|
|||||
December
16, 2009
|
December
15, 2010
|
1,170,070
|
6.195
|
%
|
||||||
Total
loans outstanding at December 31, 2009
|
$
|
1,901,363
|
F-21
Zheng
Hui Industry Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
Note
11 – Income Taxes
The
Company pays no tax and conducts substantially all of its business through its
subsidiary and VIE located in China.
The
Company’s subsidiary and VIE registered in China are subject to enterprise
income tax (“EIT”) on the taxable income as reported in their statutory accounts
adjusted in accordance with relevant Chinese income tax laws. The general
applicable EIT rate is 25% (2009: 25%).
The
provision for income taxes includes the following:
For the years ended December 31,
|
2009
|
2008
|
||||||
Current
income tax expense
|
$
|
1,634,521
|
$
|
1,486,018
|
||||
Deferred
income tax (benefit)
|
(4,445
|
)
|
(27,906
|
)
|
||||
Provision
for income taxes, net
|
$
|
1,630,076
|
$
|
1,458,112
|
All of
the Group’s income (loss) before income taxes is from Chinese sources. Actual
income tax expenses reported in the combined statements of income and
comprehensive income differ from the amounts computed by applying the Chinese
statutory income tax rate of 25% to income before income taxes for 2009 and 2008
for the following reasons:
For the years ended December 31,
|
2009
|
2008
|
||||||
Income
before income taxes
|
$
|
6,360,426
|
$
|
5,541,614
|
||||
Computed
“expected” income tax expense at 25%
|
1,590,107
|
1,385,404
|
||||||
Tax
effect on net permanent differences (nondeductible
expenses)
|
39,969
|
72,708
|
||||||
Provision
for income taxes
|
$
|
1,630,076
|
$
|
1,458,112
|
Deferred
tax assets and deferred tax liabilities reflect the tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purpose. A summary of the
composition of the deferred income tax assets follows:
As of December 31,
|
2009
|
2008
|
||||||
Bad
debt reserve
|
$
|
32,868
|
$
|
28,346
|
||||
Total
|
32,868
|
28,346
|
||||||
Valuation
allowance
|
-
|
-
|
||||||
Net
deferred assets
|
$
|
32,868
|
$
|
28,346
|
The Group
has no loss carry forwards available. As the result of the assessment of the
FASB ASC 740-10 (prior authoritative literature: FASB Interpretation No. 48
(“FIN 48”), Accounting for Uncertainty in Income Taxes — An Interpretation of
FASB Statement No. 109), the Group has no unrecognized tax benefits.
In
addition, the Group had a corporate income tax liability of $656,569 and
$682,732 for the years ended December 31, 2009 and 2008,
respectively.
F-22
Zheng
Hui Industry Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
Note
12 – Long Term Liabilities
The
Group’s long term liability includes a loan from the local finance bureau
originated on January 1, 2007 with the first repayment of RMB 790,000
(approximately $116,000) on October 30, 2011 and the remaining due on December
31, 2012. The annual interest rate is approximate 2% and the annual interest was
RMB 33,000 (approximately $5,000). The low interest is to support the Group’s
operation in poultry industry. The loan was guaranteed by an unrelated
company.
Note
13 - Restricted Net Assets
The
Company’s ability to pay dividends is primarily dependent on the Company
receiving distributions of funds from its subsidiary and VIE. Relevant Chinese
statutory laws and regulations permit payments of dividends by the Company’s
Chinese subsidiary only out of their retained earnings, if any, as determined in
accordance with Chinese accounting standards and regulations. The results of
operations reflected in the financial statements prepared in accordance with
U.S. GAAP differ from those reflected in the statutory financial statements of
the Company’s subsidiary and VIE.
In
accordance with the Regulations on Enterprises with Foreign Investment of China
and their articles of association, a foreign invested enterprise established in
China is required to provide certain statutory reserves, namely general reserve
fund, the enterprise expansion fund and staff welfare and bonus fund which are
appropriated from net profit as reported in the enterprise’s PRC statutory
accounts. A wholly-owned foreign invested enterprise is required to allocate at
least 10% of its annual after-tax profit to the general reserve until such
reserve has reached 50% of its respective registered capital based on the
enterprise’s Chinese statutory accounts. Appropriations to the enterprise
expansion fund and staff welfare and bonus fund are at the discretion of the
board of directors for all foreign invested enterprises. The aforementioned
reserves can only be used for specific purposes and are not distributable as
cash dividends. Beijing CMJM was established as a wholly-owned foreign invested
enterprise and therefore is subject to the above mandated restrictions on
distributable profits.
Additionally,
in accordance with the Company Law of China, a domestic enterprise is required
to provide statutory common reserve at least 10% of its annual after-tax profit
until such reserve has reached 50% of its respective registered capital based on
the enterprise’s Chinese statutory accounts. A domestic enterprise is also
required to provide for discretionary surplus reserve, at the discretion of the
board of directors, from the profits determined in accordance with the
enterprise’s Chinese statutory accounts. The aforementioned reserves can only be
used for specific purposes and are not distributable as cash dividends. Jinzheng
was established as domestic invested enterprises and therefore is subject to the
above mandated restrictions on distributable profits.
As a
result of these Chinese laws and regulations that require annual appropriations
of 10% of after-tax income to be set aside prior to payment of dividends as
general reserve fund, the Company’s Chinese subsidiary and VIE are restricted in
their ability to transfer a portion of their net assets to the
Company.
F-23
Zheng Hui Industry
Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
Amounts
restricted include paid-in capital and statutory reserve funds of the Company’s
Chinese subsidiary and VIE as determined pursuant to Chinese generally accepted
accounting principles, totaling approximately $5,812,000 and $5,336,000 as of
December 31, 2009 and 2008, respectively Therefore in accordance with
Rules 5-04 and 4-08 (e) (3) of Regulation S-X, the condensed parent company only
financial statements as of December 31, 2009, and for the year then ended are
disclosed in Note 15.
Note
14 – Commitments and Contingencies
(a)
|
Capital
Commitments
|
As of
December 31, 2009 and 2008, the Group had no significant capital commitments
required for disclosure.
(b)
|
Lease
Commitments
|
As of
December 31, 2009 and 2008, the Group had no significant lease commitments
required for disclosure.
(c)
|
Repurchase
commitment
|
As part
of our operation mode, we sign meat duck raising contracts with farmers to have
them raise ducks for us. Pursuant to the contract, the farmers are required to
pay for the ducklings. We agree on a fixed repurchase price based on the actual
duck weight to buy back the mature ducks meeting certain criteria in 30 days.
The criteria include weight, no defect on the feather, no use of other source of
feed other than Jinzheng’s feed, and no stomach content found during
slaughtering, and etc. In December 2009 and 2008, we have sold 764,400 and
789,940 ducklings to the contracted farmers, respectively. Accordingly, as of
December 31, 2009 and 2008, we have the obligation of approximately $1,753,000
and $988,000, respectively, to buy back the mature ducks from
farmers.
(d)
|
Legal
Proceedings
|
As of
December 31, 2009 and 2008, the Group had no legal proceedings required for
disclosure.
(e)
|
Guarantees
|
The Group
provided the following loan guarantees at the respective reporting
dates:
Borrower
|
Maturity Date
|
Loan Amount
|
||||
Shouguang
Desheng Steel Construction Equipment Installation Co.,
Ltd.
|
March
20, 2010
|
$
|
585,035
|
|||
Shouguang
Desheng Steel Construction Equipment Installation Co.,
Ltd.
|
June
15, 2010
|
438,776
|
||||
Shandong
Haihui Group Co., Ltd.
|
March
25, 2010
|
731,294
|
||||
Shandong
Haihui Group Co., Ltd.
|
June
28, 2010
|
511,905
|
||||
Total
loans outstanding at December 31, 2009
|
$
|
2,267,010
|
||||
Shandong
Haihui Group Co., Ltd.
|
January
10, 2009
|
$
|
510,636
|
|||
Shandong
Haihui Group Co., Ltd.
|
May
13, 2009
|
875,376
|
||||
Shandong
Yilong Textile Co., Ltd.
|
June
5, 2009
|
583,584
|
||||
Total
loans outstanding at December 31, 2008
|
$
|
1,969,596
|
Pursuant
to the guarantee contracts entered among with the guarantee, banks, and
Jinzheng, the Group is obligated to repay the loan to banks if the borrowers
fail to repay the proceeds to banks within two years after the due date of the
loans. All outstanding loans as at December 31, 2008 were repaid by
borrowers on a timely manner.
It is a
common business practice in China for companies to guarantee these types of
short-term loans . In addition, we believe the unrelated parties
whose loans are guaranteed by us have sound financial position and the
possibility of the Company experiencing a loss from these guarantees is
remote. Therefore the Group does not record any contingent liabilities. The
unrelated parties also provided loan guarantees to the Group for bank loans.
F-24
Zheng
Hui Industry Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
Note
15 – Parent Company only condensed Financial Information
Zheng
Hui Industry Corporation
Condensed
Balance Sheet
December 31, 2009
|
||||
ASSETS
|
||||
Current
Assets:
|
||||
Cash
and cash equivalents
|
$
|
60
|
||
Beneficiary
interest in variable interest entity
|
-
|
|||
Total
Current Assets
|
60
|
|||
Total
Assets
|
$
|
60
|
||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||
Current
Liabilities:
|
||||
Other
current liabilities
|
60
|
|||
Total
Current Liabilities
|
60
|
|||
Total
Liabilities
|
60
|
|||
Stockholders’
Equity:
|
||||
Preferred
stock: $0.001 par value, 20,000,000 shares authorized , zero shares issued
and outstanding
|
-
|
|||
Common
stock: $0.001 par value, 180,000,000 shares authorized, 2,000,000 shares
issued and outstanding
|
2,000
|
|||
Additional
paid in capital
|
452
|
|||
Retained
earnings
|
(2,452
|
)
|
||
Total
Stockholders’ Equity
|
-
|
|||
Total
Liabilities and Stockholders’ Equity
|
$
|
60
|
F-25
Zheng
Hui Industry Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
Zheng
Hui Industry Corporation
Condensed
Income Statement
For the years ended December 31,
|
2009
|
|||
General
and administrative expenses
|
$
|
2,452
|
||
Net
income
|
$
|
(2,452
|
)
|
|
Basic
and diluted earning per common share
|
$
|
-
|
||
Basic
and diluted weighted average common shares outstanding
|
2,000,000
|
Zheng
Hui Industry Corporation
Condensed
Cash Flow
For the years ended December 31,
|
2009
|
|||
Cash
flows from operating activities:
|
||||
Net
income
|
$
|
(2,452
|
)
|
|
Adjustments
to reconcile net income to net cash provided by
operations:
|
||||
Other
current liabilities
|
60
|
|||
Net
cash provided by operating activities
|
(2,392
|
)
|
||
Cash
flows from financing activities:
|
||||
Capital
contribution
|
2,452
|
|||
Net
cash flows from financing activities
|
2,452
|
|||
Net
changes in cash and cash equivalents
|
60
|
|||
Cash
and cash equivalents, beginning
|
-
|
|||
Cash
and cash equivalents, ending
|
$
|
60
|
Note
16 – Subsequent events
On March
17, 2010, Zheng Hui issued 30,457 common shares to Blue Net Group Limited for
$380,000. The fund was received by Beijing CMJM on May 28, 2010.
On March
23, 2010, Zheng Hui established Beijing CHENGMUJINMING Technology Service Co.,
Ltd (Beijing CMJM), a wholly owned subsidiary in Beijing, the Peoples Republic
of China.
F-26
Zheng
Hui Industry Corporation
Notes
To Combined Financial Statements
December
31, 2009 and 2008
On March
25, 2010, Beijing CMJM, Jinzheng and principal shareholders entered into a
series of agreements, under which Beijing CMJM obtained the ability to direct
the operations of Jinzheng and to receive a majority of the residual returns
(absorb 100% of the expected losses and receive 85% of the expected gains of
Jinzheng).
As of May
21, 2010, Zheng Hui Industry Corporation was reincorporated from Oregon to
Nevada.
The Group
has evaluated subsequent events through June 7, 2010, the date which the
financial statements were available to be issued, and no such events have
occurred except which has already been disclosed.
Note
17 – Restatement of financial statements
The
Company has restated the balance sheet for the year ended December 31, 2008 to
reflect the 20% non-controlling interest; the statements of operations
and
comprehensive
income for the year ended December 31, 2008 and 2009 to reflect
the 20% non-controlling interest of twelve months ended December 31,
2008 and the eleven
months ended November 30, 2009, respectively; and restated the equity
statement for the opening of 2008 and years ended December 2008 and
2009.
F-27
Zheng
Hui Industry Corporation
Consolidated
and Combined Balance Sheets
September
30, 2010
|
December
31, 2009
|
|||||||
(unaudited)
|
||||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 6,247,644 | $ | 2,543,095 | ||||
Accounts
receivable, net
|
4,792,223 | 4,394,548 | ||||||
Inventory
|
1,183,698 | 1,438,294 | ||||||
Prepayments
|
- | 5,043 | ||||||
Other
receivables
|
642,673 | 825,842 | ||||||
Due
from related parties
|
819,081 | 1,094,934 | ||||||
Total
current assets
|
13,685,319 | 10,301,756 | ||||||
Property,
plant and equipment, net
|
4,592,032 | 4,535,026 | ||||||
Land
use right, net
|
3,920,598 | 3,900,579 | ||||||
Deferred
tax assets
|
47,668 | 32,868 | ||||||
|
||||||||
Total
assets
|
$ | 22,245,617 | $ | 18,770,229 | ||||
Current
liabilities:
|
||||||||
Short-term
loan
|
$ | 1,940,849 | $ | 1,901,363 | ||||
Accounts
payable
|
967,412 | 1,008,627 | ||||||
Advances
from customers
|
516,384 | 345,196 | ||||||
Tax
payable
|
292,918 | 985,008 | ||||||
Accrued
expenses
|
20,086 | 17,537 | ||||||
Salary
payable
|
109,018 | 122,576 | ||||||
Due
to related parties
|
318,994 | 24,864 | ||||||
Other
current liabilities
|
454,183 | 378,641 | ||||||
Total
current liabilities
|
4,619,844 | 4,783,812 | ||||||
|
||||||||
Long-term
loan
|
235,141 | 230,357 | ||||||
Total
liabilities
|
4,854,985 | 5,014,169 | ||||||
Stockholders’
equity:
|
||||||||
Preferred
stock: $0.001 par value, 20,000,000 shares authorized , zero shares issued
and outstanding
|
- | |||||||
Common
stock: $0.001 par value, 180,000,000 shares authorized, 2,030,457 and
2,000,000 shares issued and outstanding as of September 30, 2010 and
December 31, 2009, respectively
|
2,030 | 2,000 | ||||||
Additional
paid in capital
|
4,574,695 | 4,194,225 | ||||||
Statutory
reserve
|
1,615,946 | 1,615,946 | ||||||
Retained
earnings
|
9,827,664 | 6,920,959 | ||||||
Accumulated
other comprehensive income
|
1,370,297 | 1,022,930 | ||||||
Total
stockholders’ equity
|
17,390,632 | 13,756,060 | ||||||
|
||||||||
Total
liabilities and stockholders’ equity
|
$ | 22,245,617 | $ | 18,770,229 |
F-28
Zheng Hui Industry
Corporation
Consolidated
and Combined Statements of Operations and Comprehensive Income
(Unaudited)
Nine
Months Ended
|
||||||||
September
30, 2010
|
September
30, 2009
|
|||||||
Sales
|
$ | 30,191,902 | $ | 25,178,060 | ||||
Sales
tax and surtax
|
128,690 | 6,478 | ||||||
Net
sales
|
30,063,212 | 25,171,582 | ||||||
Cost
of sales
|
24,917,180 | 20,098,775 | ||||||
Gross
profit
|
5,146,032 | 5,072,807 | ||||||
Operating
expenses
|
||||||||
Selling
expenses
|
195,766 | 144,432 | ||||||
General
and administrative expenses
|
899,886 | 535,831 | ||||||
Bad
debt reserve
|
55,211 | - | ||||||
Interest
expense
|
106,715 | 160,423 | ||||||
Total
operating expenses
|
1,257,578 | 840,686 | ||||||
|
|
|||||||
Income
from operations
|
3,888,454 | 4,232,121 | ||||||
Other
income
|
||||||||
Other
income
|
- | 23,180 | ||||||
Total
other income
|
- | 23,180 | ||||||
Net
income before provision for income taxes
|
3,888,454 | 4,255,301 | ||||||
Provision
for income taxes
|
981,749 | 1,108,370 | ||||||
Net
income
|
$ | 2,906,705 | $ | 3,146,931 | ||||
Foreign
currency translation
|
347,367 | 24,213 | ||||||
Comprehensive
income
|
$ | 3,254,072 | $ | 3,171,144 | ||||
Less:
|
||||||||
Net
income attributable to non-controlling interest in VIE
|
- | 629,386 | ||||||
Other
comprehensive income attributable to non-controlling interest’s share –
foreign currency translation adjustment
|
- | 4,843 | ||||||
Total
comprehensive income attributable to non-controlling interest’s
share
|
- | 634,229 | ||||||
|
||||||||
Net
income attributable to stockholders
|
2,906,705 | 2,517,545 | ||||||
Other
comprehensive income attributable to stockholders – foreign
currency translation adjustment
|
347,367 | 19,370 | ||||||
Total
comprehensive income attributable to stockholders
|
$ | 3,254,072 | $ | 2,536,915 | ||||
Basic
and diluted earning per common share – to stockholders
|
$ | 1.44 | $ | 1.26 | ||||
Basic
and diluted weighted average common shares outstanding
|
2,021,997 | 2,000,000 |
F-29
Zheng
Hui Industry Corporation
Consolidated
and Combined Statements of Cash Flows
For
the nine month ended September 30,
|
2010
|
2009
|
||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 2,906,705 | $ | 3,146,931 | ||||
Adjustments
to reconcile net income to net cash provided by
operations:
|
||||||||
Depreciation
and amortization expenses
|
397,001 | 310,222 | ||||||
Bad
debt expenses
|
55,211 | - | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(285,390 | ) | (217,025 | ) | ||||
Other
receivables
|
123,970 | 509,067 | ||||||
Inventory
|
280,761 | (18,447 | ) | |||||
Prepayments
|
5,046 | (619,540 | ) | |||||
Deferred
tax assets
|
(13,802 | ) | - | |||||
Accounts
payable
|
(59,947 | ) | 591,885 | |||||
Due
to related parties
|
290,997 | - | ||||||
Advance
from customers
|
160,671 | (117,207 | ) | |||||
Tax
payable
|
(700,999 | ) | (322,220 | ) | ||||
Accrued
expenses
|
2,154 | 101 | ||||||
Salary
payable
|
(15,756 | ) | (20,595 | ) | ||||
Other
current liabilities
|
65,194 | 24,238 | ||||||
Net
cash provided by operating activities
|
3,211,816 | 3,267,410 | ||||||
Cash
flows from investing activities:
|
||||||||
Acquisition
of property, plant and equipments
|
(302,153 | ) | (936,294 | ) | ||||
Acquisition
of Land Use Right
|
- | (1,407,961 | ) | |||||
Net
cash used in investing activities
|
(302,153 | ) | (2,344,255 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Borrowing
from (lending to) related companies-net
|
294,972 | 73,028 | ||||||
Proceeds
from issuance of common stock
|
380,500 | - | ||||||
Repayment
of bank loans
|
- | (1,461,286 | ) | |||||
Dividends
distribution
|
- | (210,322 | ) | |||||
Net
cash flows from financing activities
|
675,472 | (1,598,580 | ) | |||||
Net
changes in cash and cash equivalents
|
3,585,135 | (675,425 | ) | |||||
Effect
on change of exchange rate
|
119,414 | 3,362 | ||||||
Cash
and cash equivalents, beginning
|
2,543,095 | 1,720,357 | ||||||
Cash
and cash equivalents, ending
|
$ | 6,247,644 | $ | 1,048,294 | ||||
Supplementary
cash flow information:
|
||||||||
Interest
paid
|
$ | 107,910 | $ | 171,091 | ||||
Income
tax paid
|
$ | 1,545,075 | $ | 1,457,164 | ||||
non-cash
financing activity resulted from chairman paid IPO related expenses on
behalf of the company
|
$ | 290,997 |
nil
|
|||||
F-30
Zheng
Hui Industry Corporation
Notes
to Consolidated and Combined Financial Statements (Unaudited)
Note
1 – Organization and Basis of Presentation
Zheng
Hui Industry Corporation (“the Company”) was incorporated under the laws of the
State of Oregon, United States on January 22, 2009 as a
Corporation. On May 21, 2010, the Company was reincorporated from
Oregon to Neveda. On March 23, 2010, the Company established a wholly owned
subsidiary in Beijing, the Peoples Republic of China (“China”), named Beijing
CHENGMUJINMING Technology Service Co., Ltd (“Beijing CMJM”). Other than the
equity interest in Beijing CMJM, The Company does not own any assets or conduct
any operations. Beijing CMJM conducts its business through a legal entity
located in Shouguang City, Shandong Province, China, named WeiFang Jinzheng
Poultry Co., Ltd (“Jinzheng”).
Jinzheng
was incorporated on April 22, 2002 by Mr. Junfeng Shan who held 84% of the
equity interest and four other individuals (“minority shareholders”) who held
the rest 16% of the equity interest. On May 28, 2006, after Mr. Junfeng Shan and
the minority shareholders increasing the investment to Jinzheng, Mr. Junfeng
Shan held 80% of the equity interest and the minority shareholders held the rest
20% of the equity interest. On December 1, 2009, after the execution of share
transfer agreements, Mr. Junfeng Shan held 89.85% of the total equity, and three
other individuals (other than the minority shareholders) have obtained 3.05%,
3.55%, and 3.55% of the equity, respectively (these four individuals consists of
“principal shareholders”).
The
income attributed to the non-controlling interest was determined as
follows:
A
non-controlling interest of 20% existed for the entire nine month period in
2009. Therefore, both the net income and other comprehensive income have
been calculated as 20% of those components for the 2009 periods
reflected.
On
March 17, 2010, the Company issued 30,457 common shares to Blue Net Group
Limited for $380,500. The fund was received by Beijing CMJM on May 28,
2010.
On
March 25, 2010, to protect The Company’s shareholders from possible future
foreign ownership restrictions, Beijing CMJM, Jinzheng and its current
shareholders entered into a series of agreements. Under these agreements Beijing
CMJM obtained the ability to direct the operations of Jinzheng and to receive a
majority of the residual returns (receive 85% of the expected gains of
Jinzheng).Therefore, management determined that Jinzheng became a variable
interest entity (“VIE”) under the provisions of Financial Accounting Standards
Board (“FASB”) ASC 810-10 (Prior authoritative literature: FIN 46R Consolidation of Variable Interest
Entities, an Interpretation of ARB No. 51) and the Company was
determined to be the primary beneficiary of Jinzheng. Accordingly, beginning
March 25, 2010, The Company is able to consolidate the assets, liabilities,
results of operations and cash flows of Jinzheng in the financial statements.
Because the shareholder group of the Company and Jinzheng were the same, the
Company and Jinzheng were deemed, until March 25, 2010, to be under the common
control.
The
consolidated and combined financial statements are prepared as if the
reorganization structure was completed on January 1, 2008.
The
Company, its subsidiary-Beijing CMJM, and its VIE-Jinzheng (collectively the
“Group”) are principally engaged in the poultry breeding and processing, frozen
poultry product distribution, and feed production. The Group distributes
products nationally in China.
Top
ten unrelated customers of the Group command approximately 26% and 31% of the
third three months of 2010 and 2009 total sales.
F-31
Zheng
Hui Industry Corporation
Notes
to Consolidated and Combined Financial Statements
(Unaudited)
Top
ten unrelated customers of the Group command approximately 25% and 32% of
nine months ended September 30, 2010 and 2009 total sales.
Note
2 – Summary of Significant Accounting Policies
The
condensed consolidated financial statements as of and for September 30, 2010
include the accounts of the Company, its subsidiary Beijing CMJM and the
VIE-Jinzheng. The condensed combined financial statements as of and for
September 30, 2009 include the accounts of Zheng Hui and the VIE-Jinzheng. All
significant intercompany balances and transactions have been eliminated in the
consolidation. Certain information and footnote disclosures normally included in
financial statements prepared in conjunction with generally accepted accounting
principles have been condensed or omitted as permitted by the rules and
regulations of the United States Securities and Exchange Commission, although
the Group believes that the disclosures contained in this report are adequate to
make the information presented not misleading. These condensed consolidated and
combined financial statements should be read in conjunction with the annual
audited combined financial statements and the notes there to included in the
Company’s registration statement on Form S-1 filed with the
SEC.
The
accompanying condensed unaudited interim consolidated and combined financial
statements reflect all adjustments of a normal and recurring nature which are,
in the opinion of management, necessary to present fairly the financial
position, results of operations and cash flows of the Group for the interim
periods presented. The results of operations for these periods are not
necessarily comparable to, or indicative of, results of any other interim period
or for the fiscal year taken as a whole.
Note
3 – Recent Accounting Pronouncements
In
June 2009, the FASB issued FASB ASC 860-10-05 (Prior authoritative literature:
FASB Statement No. 166, “Accounting for Transfers of Financial Assets—an
amendment of FASB Statement No. 140”). FASB ASC 860-10-05 improves the
relevance, representational faithfulness, and comparability of the information
that a reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. FASB ASC 860-10-05 is effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period and for interim and annual reporting periods thereafter. As such, the
Company was required to adopt this standard in January 2010. The adoption of
FASB ASC 860-10-05 has not had a material effect on the Company’s consolidated
and combined financial statements.
In
June 2009, the FASB issued FASB ASC 810-10-05 (Prior authoritative literature:
FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)”). FASB ASC
810-10-05 improves financial reporting by enterprises involved with variable
interest entities and to address (1) the effects on certain provisions of prior
authoritative literature FASB Interpretation No. 46 (revised December 2003),
“Consolidation of Variable Interest Entities”, as a result of the elimination of
the qualifying special-purpose entity concept in prior authoritative literature
SFAS 166 and (2) constituent concerns about the application of certain key
provisions of prior authoritative literature Interpretation 46(R), including
those in which the accounting and disclosures under the Interpretation do not
always provide timely and useful information about an enterprise’s involvement
in a variable interest entity. FASB ASC 810-10-05 is effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. As such, the
Company was required to adopt this standard in January 2010. The adoption of
FASB ASC 810-10-05 has not had a material effect on the Company’s consolidated
and combined financial statements.
F-32
Zheng
Hui Industry Corporation
Notes
to Consolidated and Combined Financial Statements
(Unaudited)
In
June 2009, the FASB issued revised authoritative guidance related to variable
interest entities, which requires entities to perform a qualitative analysis to
determine whether a variable interest gives the entity a controlling financial
interest in a variable interest entity. The guidance also requires an ongoing
reassessment of variable interests and eliminates the quantitative approach
previously required for determining whether an entity is the primary
beneficiary. This guidance, which was reissued by the FASB in December 2009 as
ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities,” amends ASC Topic 810,
“Consolidation”, and became effective as of the beginning of an entity’s first
annual reporting period that begins after November 15, 2009 (January 1, 2010 for
the Company). The adoption of this guidance has not had a significant impact on
the Company’s consolidated and combined financial statements.
In
January 2010, the FASB issued Accounting Standards Updated (ASU) No. 2010-06,
“Improving Disclosures about Fair Value Measurements,” which amends ASC 820,
“Fair Value Measures and Disclosures.” ASU No. 2010-06 amends the ASC to
require disclosure of transfers into and out of Level 1 and Level 2 fair value
measurements, and also require more detailed disclosure about the activity
within Level 3 fair value measurements. The changes to the ASC as a result of
this update are effective for annual and interim reporting periods beginning
after December 15, 2009 (January 1, 2010 for the Company), except for the
requirements related to Level 3 disclosures, which are effective for annual and
interim reporting periods beginning after December 15, 2010 (January 1, 2011 for
the Company). This guidance requires new disclosures only, and has not had a
significant impact on the Company’s consolidated and combined financial
statements.
In
February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to
Certain Recognition and Disclosure Requirements, which amends FASB ASC Topic
855, Subsequent Events. The update provides that SEC filers, as defined in ASU
2010-09, are no longer required to disclose the date through which subsequent
events have been evaluated in originally issued and revised financial
statements. The update also requires SEC filers to evaluate subsequent events
through the date the financial statements are issued rather than the date the
financial statements are available to be issued. The Company adopted ASU 2010-09
upon issuance. The adoption of this ASU update has no material impact on the
Company’s financial statements.
F-33
Zheng
Hui Industry Corporation
Notes
to Consolidated and Combined Financial Statements
(Unaudited)
Note
4 - Foreign Currency Translation
For
the reported periods, the exchange rate used is as follows:
September 30, 2010
|
|||||
Balance
sheet
|
RMB
|
6.69810
|
to
US
|
$1
|
|
Statement
of income and comprehensive income
|
RMB
|
6.78032
|
to
US
|
$1
|
|
September 30, 2009
|
|||||
Balance
sheet
|
RMB
|
6.83760
|
to
US
|
$1
|
|
Statement
of income and comprehensive income
|
RMB
|
6.84110
|
to
US
|
$1
|
|
December 31, 2009
|
|||||
Balance
sheet
|
RMB
|
6.83720
|
to
US
|
$1
|
|
Statement
of income and comprehensive income
|
RMB
|
6.84088
|
to
US
|
$1
|
Note
5 – Trade Receivables
The
Group’s trade receivables from unrelated parties as of September 30, 2010 and
2009 were summarized as follows:
September
30,
2010
(Unaudited)
|
December
31,
2009
|
|||||||
Trade
Receivables
|
$ | 4,908,248 | $ | 4,526,022 | ||||
Less:
Allowance for doubtful accounts
|
(116,025 | ) | (131,474 | ) | ||||
Net
accounts receivable
|
$ | 4,792,223 | $ | 4,394,548 |
F-34
Zheng
Hui Industry Corporation
Notes
to Consolidated and Combined Financial Statements
(Unaudited)
Movement
of allowance for doubtful accounts on accounts
receivable
|
2010
|
|||
Opening
balance as of January 1
|
$ | 131,474 | ||
Allowance
reverse
|
(15,449 | ) | ||
Closing
balance as of September 30
|
$ | 116,025 |
The
allowance reverse was made since the Group collected the trade receivables in
this period
Note
6 – Other Receivables
The
Group’s other receivables from unrelated parties as of September 30, 2010 and
2009 were summarized as follows:
September
30,
2010
(Unaudited)
|
December
31,
2009
|
|||||||
Other
Receivables
|
$ | 717,321 | $ | 825,842 | ||||
Less:
Allowance for doubtful accounts
|
(74,648 | ) | - | |||||
Net
other receivable
|
$ | 642,673 | $ | 825,842 |
F-35
Zheng
Hui Industry Corporation
Notes
to Consolidated and Combined Financial Statements
(Unaudited)
Movement
of allowance for doubtful accounts on other receivable
|
2010
|
|||
Opening
balance as of January 1
|
$ | - | ||
Allowance
provided
|
74,648 | |||
Closing
balance as of September 30
|
$ | 74,648 |
Note
7 – Inventory
Inventories
consisted of the following:
September
30,
2010 (Unaudited)
|
December
31,
2009
|
|||||||
Raw
materials
|
$ | 377,152 | $ | 262,916 | ||||
Breeders
|
625,478 | 805,537 | ||||||
Finished
goods
|
||||||||
-
Processed poultry
|
139,947 | 286,695 | ||||||
-
Feed
|
41,121 | 83,146 | ||||||
Total
Inventories
|
$ | 1,183,698 | $ | 1,438,294 |
Note
8 –Related Party Transactions
The
table below sets forth the major related parties and their relationships with
the Group:
Name
of related party
|
Relationships
with the Company
|
|
Shouguang
Jintai Construction Co., Ltd. ("Jintai")
|
Under
common control by Mr. Shan Junfeng
|
|
Mr.
Junfeng Shan
|
Chairman,
CEO, and major shareholder of the
Company
|
F-36
Zheng
Hui Industry Corporation
Notes
to Consolidated and Combined Financial Statements
(Unaudited)
(1) Due
from/to related parties
Due
from Jintai
|
September
30,
2010
|
December
31,
2009
|
||||||
(unaudited)
|
|
|||||||
Loan
(RMB3,096,619.44)
|
$ | 462,313 | $ | 452,908 | ||||
Receivable
arising from transfer of a lease of salt lake field at 2007 year end
(proceed: RMB4,389,666.67)
|
356,768 | 642,026 | ||||||
$ | 819,081 | $ | 1,094,934 |
The
loan is interest free and with no fix payment term.
The
Group transferred the lease of a salt field to the related party at the end of
2007. The total consideration is $640,435 (RMB4,389,667) which was the
prepayment made to lessor (the local government of China) by the
Group in prior periods. The consideration has not been paid by the
related party. According to the lease transfer agreement, Jintai is required to
settle the amount on installment basis, $298,592(RMB2,000,000) due on March 31,
2010, $149,296(RMB1,000,000) due on September 30, 2010, and rest
$207,472(RMB1,389,667) due on December 31, 2010. The Group received payment of
$298,592(RMB2,000,000) during this quarter. Though the receivable from Jintai is
past due, the Company has not provided allowance as there has not been a
significant change in credit quality and the amounts are still considered
recoverable.
Due
to related party
|
September
30,
2010
|
December
31,
2009
|
||||||
(unaudited)
|
|
|||||||
Jintai
|
$ | 25,380 | $ | 24,864 | ||||
Mr.
Shan Junfeng
|
293,614 | - | ||||||
$ | 318,994 | $ | 24,864 |
(2) Transactions
with Mr. Shan Junfeng:
September
30,
2010
|
September
30,
2009
|
|||||||
(unaudited)
|
(unaudited)
|
|||||||
Short-term
loan (arising from payment by Mr. Shan Junfeng on behalf of the Group for
professional service, such as auditing and legal service relating to the
IPO).
|
$ | 290,997 | $ | - |
The
loan is interest free and with no fix payment term.
(3) Mr.
Junfeng Shan will continue to hold a controlling interest of the outstanding
equity in the company after the offering.
F-37
Zheng
Hui Industry Corporation
Notes
to Consolidated and Combined Financial Statements
(Unaudited)
Note
9 - Property, Plant and Equipment
Property,
plant and equipment consisted of the following,
September
30,
2010
(Unaudited)
|
December
31,
2009
|
|||||||
Buildings
and Lease hold
|
$ | 5,665,830 | $ | 5,550,561 | ||||
Machinery
|
1,687,806 | 1,653,468 | ||||||
Office
Equipments
|
21,018 | 17,637 | ||||||
Motor
Vehicles
|
224,168 | 6,362 | ||||||
Total
|
7,598,822 | 7,228,028 | ||||||
Accumulated
Depreciation
|
(3,091,968 | ) | (2,693,002 | ) | ||||
Construction
in progress
|
85,178 | - | ||||||
Property,
Plant and Equipment, net
|
$ | 4,592,032 | $ | 4,535,026 |
The
Group recorded depreciation expense of $337,077 and $292,651 for the nine months
ended September 30, 2010 and 2009.
Note
10 - Land Use Rights
September
30,
2010
(Unaudited)
|
December
31,
2009
|
|||||||
Land
Use Right
|
$ | 4,086,413 | $ | 4,003,277 | ||||
Accumulated
Amortization
|
(165,815 | ) | (102,698 | ) | ||||
Land
Use Right, net
|
$ | 3,920,598 | $ | 3,900,579 |
The
Group recorded amortization expense of $59,924 and $17,571 for the nine months
ended September 30, 2010 and 2009.
F-38
Zheng
Hui Industry Corporation
Notes
to Consolidated and Combined Financial Statements
(Unaudited)
Note
11 - Short-term Bank Loan
Short-term
loan represented the following:
September
30,
2010
(Unaudited)
|
December
31,
2009
|
|||||||
Secured
|
$ | 1,940,849 | $ | 1,901,363 | ||||
Less:
Current portion
|
(1,940,849 | ) | (1,901,363 | ) | ||||
Non-current
portion
|
$ | - | $ | - |
To
finance the operation of the business, the Group obtained the following
short-term loans from the local Rural Cooperative Bank of
China. These loans were guaranteed by two unrelated companies:
Shandong Haihui Group Co., Ltd and Shouguang Desheng Steel Construction
Equipment Installation Co., Ltd. Interest is payable monthly on the 20th day.
The Group recorded $105,045 and $158,890 for the nine months ended September 30,
2010 and 2009.
Inception
Date
|
Maturity
Date
|
Loan
Amount
|
Annual
Interest
Rate
|
|||
November
22, 2009
|
November
21,2010
|
$ 746,480
|
6.195%
|
|||
December
16, 2009
|
December
15,2010
|
1,194,369
|
6.195%
|
|||
Total
loans outstanding at September 30, 2010
|
$1,940,849
|
F-39
Zheng
Hui Industry Corporation
Notes
to Consolidated and Combined Financial Statements
(Unaudited)
Note
12 – Income Taxes
The
Company pays no tax and conducts substantially all of its business through its
subsidiary and VIE located in China.
The
Company’s subsidiary and VIE registered in China are subject to enterprise
income tax (“EIT”) on the taxable income as reported in their statutory accounts
adjusted in accordance with relevant Chinese income tax laws. The general
applicable EIT rate is 25% (2009: 25%).
The
provision for income taxes includes the following:
Nine
Months Ended
|
||||||||
September
30,
2010
|
September
30,
2009
|
|||||||
Current
income tax expense
|
$ | 995,551 | $ | 1,108,370 | ||||
Deferred
income tax (benefit)
|
(13,802 | ) | - | |||||
Provision
for income taxes, net
|
$ | 981,749 | $ | 1,108,370 |
All of
the Group’s income (loss) before income taxes is from Chinese sources. Actual
income tax expenses reported in the consolidated and combined statements of
income and comprehensive income differ from the amounts computed by applying the
Chinese statutory income tax rate of 25% to income before income taxes for the
three months ended September 30, 2010 for the following
reasons:
Nine
Months Ended
|
||||||||
September
30,
2010
|
September
30,
2009
|
|||||||
Income
before income taxes
|
$ | 3,888,454 | $ | 4,255,301 | ||||
Computed
“expected” income tax expense at 25%
|
972,114 | 1,063,825 | ||||||
Tax
effect on net permanent differences (nondeductible
expenses)
|
9,635 | 44,545 | ||||||
Provision
for income taxes
|
$ | 981,749 | $ | 1,108,370 |
F-40
Zheng
Hui Industry Corporation
Notes
to Consolidated and Combined Financial Statements
(Unaudited)
Deferred
tax assets and deferred tax liabilities reflect the tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purpose. A summary of the
composition of the deferred income tax assets follows:
September
30,
2010
(Unaudited)
|
December
31,
2009
|
|||||||
Bad
debt reserve
|
$ | 47,668 | $ | 32,868 | ||||
Total
|
47,668 | 32,868 | ||||||
Valuation
allowance
|
- | |||||||
Net
deferred assets
|
$ | 47,668 | $ | 32,868 |
The
Group has no loss carryforwards available. As the result of the assessment of
the FASB ASC 740-10 (Prior Authoritative Literature: FASB Interpretation No. 48
(“FIN 48”), Accounting for Uncertainty in Income Taxes — An Interpretation of
FASB Statement No. 109), the Group has no
unrecognized tax benefits.
In
addition, the Group had a corporate income tax liability of $118,093 for
September 30, 2010.
Note
13 - Restricted Net Assets
The
Company’s ability to pay dividends is primarily dependent on the Company
receiving distributions of funds from its subsidiary and VIE. Relevant Chinese
statutory laws and regulations permit payments of dividends by the Company’s
Chinese subsidiary only out of their retained earnings, if any, as determined in
accordance with Chinese accounting standards and regulations. The results of
operations reflected in the financial statements prepared in accordance with
U.S. GAAP differ from those reflected in the statutory financial statements of
the Company’s subsidiary and VIE.
In
accordance with the Regulations on Enterprises with Foreign Investment of China
and their articles of association, a foreign invested enterprise established in
China is required to provide certain statutory reserves, namely general reserve
fund, the enterprise expansion fund and staff welfare and bonus fund which are
appropriated from net profit as reported in the enterprise’s PRC statutory
accounts. A wholly-owned foreign invested enterprise is required to allocate at
least 10% of its annual after-tax profit to the general reserve until such
reserve has reached 50% of its respective registered capital based on the
enterprise’s Chinese statutory accounts. Appropriations to the enterprise
expansion fund and staff welfare and bonus fund are at the discretion of the
board of directors for all foreign invested enterprises. The aforementioned
reserves can only be used for specific purposes and are not distributable as
cash dividends. Beijing CMJM was established as a wholly-owned foreign invested
enterprise and therefore is subject to the above mandated restrictions on
distributable profits.
Additionally,
in accordance with the Company Law of China, a domestic enterprise is required
to provide statutory common reserve at least 10% of its annual after-tax profit
until such reserve has reached 50% of its respective registered capital based on
the enterprise’s Chinese statutory accounts. A domestic enterprise is also
required to provide for discretionary surplus reserve, at the discretion of the
board of directors, from the profits determined in accordance with the
enterprise’s Chinese statutory accounts. The aforementioned reserves can only be
used for specific purposes and are not distributable as cash dividends. Jinzheng
was established as domestic invested enterprises and therefore is subject to the
above mandated restrictions on distributable profits.
F-41
Zheng
Hui Industry Corporation
Notes
to Consolidated and Combined Financial Statements
(Unaudited)
As a
result of these Chinese laws and regulations that require annual appropriations
of 10% of after-tax income to be set aside prior to payment of dividends as
general reserve fund, the Company’s Chinese subsidiary and VIE are restricted in
their ability to transfer a portion of their net assets to the
Group.
Amounts
restricted include paid-in capital and statutory reserve funds of the Company’s
Chinese subsidiary and VIE as determined pursuant to Chinese generally accepted
accounting principles, totaling approximately $6,190,000 as of September 30,
2010.
Note
14 – Commitments and Contingencies
(a)
Capital Commitments
As of
September 30, 2010, the Group had no significant capital commitments required
for disclosure.
(b)
Lease Commitments
As of
September 30, 2010, the Group had no significant lease commitments required for
disclosure.
(c)
Repurchase commitment
As part of our operation mode, we sign Meat duck raising contracts with farmers to have them raise ducks for us. Pursuant to the contract, the farmers are required to pay for the ducklings. We agree on a fixed repurchase price based on the actual duck weight to buy back the mature ducks meeting certain criteria in 30 days. The criteria include weight, no defect on the feather, no use of other source of feed other than Jinzheng’s feed, and no stomach content found during slaughtering, and etc. In September 2010, we have sold 776,903 ducklings to the contracted farmers. Accordingly, as of September 30, 2010, we have the obligation of approximately $ 1,600,000 to buy back the mature ducks from farmers.
(d)
Legal Proceedings
As of
September 30, 2010, the Group had no legal proceedings required for
disclosure.
F-42
Zheng
Hui Industry Corporation
Notes
to Consolidated and Combined Financial Statements
(Unaudited)
(e)
Guarantees
The
Group provided the following loan guarantees at the respective reporting
dates:
Guarantees
given to banks in connection with loans
granted
to the unrelated third parties
|
Maturity
Date
|
Loan
Amount
|
|||
Shouguang
Desheng Steel Construction Equipment Installation Co.,
Ltd
|
March
26, 2011
|
$ | 597,184 | ||
Shouguang
Desheng Steel Construction Equipment Installation Co.,
Ltd
|
June
17, 2011
|
447,888 | |||
Shandong
Yilong Textile Co., Ltd
|
April
22, 2011
|
298,592 | |||
Shandong
Haihui Group Co., Ltd
|
April
2, 2011
|
746,480 | |||
Shandong
Haihui Group Co., Ltd
|
June
20, 2011
|
522,536 | |||
Total
loans outstanding at September 30, 2010
|
$ | 2,612,680 | |||
Shouguang
Desheng Steel Construction Equipment Installation Co.,
Ltd.
|
March
20, 2010
|
$ | 585,035 | ||
Shouguang
Desheng Steel Construction Equipment Installation Co.,
Ltd.
|
June
15, 2010
|
438,776 | |||
Shandong
Haihui Group Co., Ltd.
|
March
25, 2010
|
731,294 | |||
Shandong
Haihui Group Co., Ltd.
|
June
28, 2010
|
511,905 | |||
Total
loans outstanding at December 31, 2009
|
$ | 2,267,010 |
Pursuant
to the guarantee contracts entered among with the guarantee, banks, and
Jinzheng, the Group is obligated to repay the loan to banks if the borrowers
fail to repay the proceeds to banks within two years after the due date of the
loans.
This
is common business practice in China. In addition, those unrelated parties have
sound financial position and possibility of the Company experiencing a loss from
these guarantees is remote. Therefore, the Group does not record any
contingent liabilities. The unrelated parties also provided loan guarantee to
the Group for bank loans.
Note
15 – Subsequent Events
The
Company did not have significant subsequent events through the financial
statements issue date.
F-43
Common Shares
ZHENG
HUI INDUSTRY CORPORATION
PROSPECTUS
Rodman
& Renshaw, LLC
|
Newbridge
Securities Corporation
|
,
2010
Until ,
2010 all dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers’ obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The
following table sets forth the costs and expenses, other than underwriting
discounts and commissions, to be paid by the Registrant in connection with the
issuance and distribution of the common stock being registered. All amounts
other than the Securities and Exchange Commission (“SEC”) registration fee are
estimates.
SEC
Registration Fees
|
$
|
1,612
|
||
FINRA
Fees
|
$
|
2,500
|
||
Printing
and Engraving Expenses
|
$
|
|
*
|
|
NASDAQ
Application Fee
|
$
|
50,000
|
||
Legal
Fees and Expenses
|
$
|
|
*
|
|
Accounting
Fees and Expenses
|
$
|
|
*
|
|
Miscellaneous
|
$
|
|
*
|
|
Total
|
$
|
|
*
|
*
|
To
be included in an amendment
|
Item
14. Indemnification of Directors and Officers
Our
bylaws provide for the indemnification of our present and prior directors and
officers or any person who may have served at our request as a director or
officer of another corporation in which we own shares of capital stock or of
which we are a creditor, against expenses actually and necessarily incurred by
them in connection with the defense of any actions, suits or proceedings in
which they, or any of them, are made parties, or a party, by reason of being or
having been director(s) or officer(s) of us or of such other corporation, in the
absence of negligence or misconduct in the performance of their duties. This
indemnification policy could result in substantial expenditure by us, which we
may be unable to recoup.
Insofar
as indemnification by us for liabilities arising under the Securities Exchange
Act of 1934 may be provided to our directors, officers and controlling persons
pursuant to provisions of our articles of incorporation and bylaws, or
otherwise, we have been advised that in the opinion of the SEC, such
indemnification is against public policy and is, therefore, unenforceable. In
the event that a claim for indemnification by such director, officer or
controlling person of us is in the successful defense of any action, suit or
proceeding is asserted by such director, officer or controlling person in
connection with the securities being offered, we will, unless in the opinion of
our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
us is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
At the
present time, there is no pending litigation or proceeding involving a director,
officer, employee or other agent of ours in which indemnification would be
required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for such indemnification.
Item
15. Recent Sales of Unregistered Securities
The
following private placements of the Company’s securities were made in reliance
upon the exemption from registration under Section 4(2) of the Securities Act of
1933, as amended, as they were transactions by an issuer not involving a public
offering .
On
January 22, 2009, we issued to Mr. Junfeng Shan 2,000,000 shares of our common
stock in consideration for $2,000. This issuance was made in reliance upon the
exemption from registration under Section 4(2) of the Securities Act of 1933, as
amended.
i
On March
17, 2010, we issued 30,457 shares of our common stock to Blue Net Group Limited,
a BVI company, in consideration for the investment of $380,000. This issuance
was also made in reliance upon the exemption from registration under Section
4(2) of the Securities Act of 1933, as amended.
Item
16. Exhibits and Financial Statement Schedules
(a) The
following exhibits are filed as part of the registration statement:
NUMBER
|
DESCRIPTION
|
|
1.1
|
Form
of Underwriting Agreement (1)
|
|
2.1
|
Articles
of Merger*
|
|
2.2
|
Agreement
of Merger*
|
|
3.1
|
Amended
and Restated Certificate of Incorporation*
|
|
3.2
|
Bylaws*
|
|
4.1
|
Specimen
Common Stock Certificate*
|
|
4.2
|
Form
of Underwriter Warrant (1)
|
|
5.1
|
Opinion
of McLaughlin & Stern LLP regarding the legality of
securities (1)
|
|
10.1
|
Exclusive
Technical Consulting Service Agreement dated March 25, 2010 between
Beijing CMJM and Jinzheng*
|
|
10.2
|
Operating
Agreement dated March 25, 2010 between Beijing CMJM and
Jinzheng*
|
|
10.3
|
Form
of Exclusive Equity Interest Pledge Agreement dated March 25, 2010 between
Beijing CMJM and Shareholder of Jinzheng*
|
|
10.4
|
Form
of Exclusive Equity Interest Purchase Agreement dated March 25, 2010
between Beijing CMJM, Jinzheng and Shareholder of
Jinzheng*
|
|
10.5
|
Form
of Power of Attorney dated March 25, 2010 between Beijing CMJM and
Shareholder of Jinzheng*
|
|
10.6
|
Form
of Meat Duck Raising Contract*
|
|
10.7
|
Form
of Duck Feed Sales Contract*
|
|
10.8
|
Form
of Frozen Duck Meat Sales Contract*
|
|
10.9
|
Employment
Contract with Mr. Junfeng Shan dated May 24,
2010*
|
ii
NUMBER
|
DESCRIPTION
|
|
10.10
|
Employment
Contract with Ms. Xiaofang Xue dated May 24, 2010*
|
|
10.11
|
Employment
Contract with Mr. Shidian Shan dated May 24, 2010*
|
|
10.12
|
Employment
Contract with Mr. Yunqing Wu dated May 24, 2010*
|
|
10.13
|
Employment
Contract with Mr. Yongping Shan dated May 24, 2010*
|
|
10.14
|
Loan
contract between Shouguang Rural Cooperative Bank and us dated November
20, 2009*
|
|
10.15
|
Loan
contract between Shouguang Rural Cooperative Bank and us dated December
15, 2009*
|
|
10.16
|
Loan
Guarantee contract between Shouguang Rural Cooperative Bank and us dated
of March 20, 2009*
|
|
10.17
|
Loan
Guarantee contract between Shouguang Rural Cooperative Bank and us dated
of March 25, 2009*
|
|
10.18
|
Loan
Guarantee contract between Shouguang Rural Cooperative Bank and us dated
of June 15, 2009*
|
|
10.19
|
Loan
Guarantee contract between Shouguang Rural Cooperative Bank and us dated
of June 28, 2009*
|
|
10.20
|
Purchase
and Sales Agreement of Breeder Ducks between Weifang Legang Food Co., Ltd.
and us dated of March 3, 2010*
|
|
14.1
|
Business
Code of Conduct*
|
|
14.2
|
Financial
Code of Conduct*
|
|
14.3
|
Charter
for the Audit Committee*
|
|
14.4
|
Charter
for the Nominating and Corporate Governance Committee*
|
|
14.5
|
Charter
for the Compensation Committee*
|
|
21.1
|
Subsidiary
List*
|
|
23.1
|
Consent
of EFP Rotenberg, LLP (2)
|
|
23.2
|
Consent
of McLaughlin & Stern LLP (included in Exhibit 5.1) (1)
|
|
23.3
|
Consent
of Zero Power Intelligence Co. Ltd. (2)
|
|
24.1
|
|
Power
of Attorney
|
*
Previously filed.
|
(1) To be
filed by amendment.
(2)
Filed with this Amendment No. 3.
Item
17. Undertakings
The undersigned registrant hereby
undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To
include any prospectus required by section 10(a)(3) of the Securities Act of
1933;
iii
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) (§230.424(b) of this chapter) if, in the
aggregate, the changes in volume and price represent no more than 20% change in
the maximum aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective registration statement.
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement;
(2) That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4)
That, for the purpose of determining liability under the Securities Act of
1933:
(i)
The information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective; and
(ii)
Each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(5) That,
for the purpose of determining liability of the registrant under the Securities
Act of 1933 to any purchaser in the initial distribution of the securities:The
undersigned registrant undertakes that in a primary offering of securities of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(i) Any
preliminary prospectus or prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424 (§230.424 of this
chapter);
(ii) Any
free writing prospectus relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned
registrant;
(iii) The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
(iv) Any
other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions described in Item 15 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
iv
The
undersigned registrant hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
v
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing this Form S-1 Amendment and has authorized this Form S-1
Amendment to be signed on its behalf by the undersigned in the City of
Shouguang, People’s Republic of China, on November
1, 2010.
ZHENG
HUI INDUSTRY CORPORATION
|
|
By:
|
/s/
Junfeng Shan
|
Junfeng
Shan
|
|
Chairman
and Chief Executive
Officer
|
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
Signature
|
Title
|
Date
|
|||
/s/
Junfeng Shan
|
Chairman
and
|
||||
Junfeng
Shan
|
Chief
Executive Officer
|
November
1, 2010
|
|||
(Principal
Executive Officer)
|
|||||
/s/
Xiaofang Xue
|
Chief
Financial Officer
|
||||
Xiaofang
Xue
|
(Principal
Financial and Accounting
|
November
1, 2010
|
|||
Officer)
|
|||||
/s/
Lilian Jiang*
|
Director
|
||||
Lilian
Jiang
|
November
1, 2010
|
||||
/s/
Yuan Gong*
|
Director
|
||||
Yuan
Gong
|
November
1, 2010
|
||||
/s/
Jing Cao*
|
Director
|
||||
Jing
Cao
|
November
1, 2010
|
||||
/s/
Kunshan Wang*
|
Director
|
||||
Kunshan
Wang
|
|
|
November
1, 2010
|
||
*By:
|
/
s/ Junfeng Shan
|
||||
Junfeng
Shan, Attorney-in-Fact
|
EXHIBIT
NUMBER
|
DESCRIPTION
|
|
1.1
|
Form
of Underwriting Agreement (1)
|
|
2.1
|
Articles
of Merger*
|
vi
2.2
|
Agreement
of Merger*
|
|
3.1
|
Amended
and Restated Certificate of Incorporation*
|
|
3.2
|
Bylaws*
|
|
4.1
|
Specimen
Common Stock Certificate *
|
|
4.2
|
Form
of Underwriter Warrant (1)
|
|
5.1
|
Opinion
of McLaughlin & Stern LLP regarding the legality of
securities (1)
|
|
10.1
|
Exclusive
Technical Consulting Service Agreement dated March 25, 2010 between
Beijing CMJM and Jinzheng*
|
|
10.2
|
Operating
Agreement dated March 25, 2010 between Beijing CMJM and
Jinzheng*
|
|
10.3
|
Form
of Exclusive Equity Interest Pledge Agreement dated March 25, 2010 between
Beijing CMJM and Shareholder of Jinzheng*
|
|
10.4
|
Form
of Exclusive Equity Interest Purchase Agreement dated March 25, 2010
between Beijing CMJM, Jinzheng and Shareholder of
Jinzheng*
|
|
10.5
|
Form
of Power of Attorney dated March 25, 2010 between Beijing CMJM and
Shareholder of Jinzheng*
|
|
10.6
|
Form
of Meat Duck Raising Contract*
|
|
10.7
|
Form
of Duck Feed Sales Contract*
|
|
10.8
|
Form
of Frozen Duck Meat Sales Contract*
|
|
10.9
|
Employment
Contract with Mr. Junfeng Shan dated May 24,
2010*
|
10.10
|
Employment
Contract with Ms. Xiaofang Xue dated May 24, 2010*
|
|
10.11
|
Employment
Contract with Mr. Shidian Shan dated May 24, 2010*
|
|
10.12
|
Employment
Contract with Mr. Yunqing Wu dated May 24, 2010*
|
|
10.13
|
Employment
Contract with Mr. Yongping Shan dated May 24, 2010*
|
|
10.14
|
Loan
contract between Shouguang Rural Cooperative Bank and us dated November
20, 2009*
|
|
10.15
|
Loan
contract between Shouguang Rural Cooperative Bank and us dated December
15, 2009*
|
|
10.16
|
Loan
Guarantee contract between Shouguang Rural Cooperative Bank and us dated
of March 20, 2009*
|
|
10.17
|
Loan
Guarantee contract between Shouguang Rural Cooperative Bank and us dated
of March 25, 2009*
|
|
10.18
|
Loan
Guarantee contract between Shouguang Rural Cooperative Bank and us dated
of June 15, 2009*
|
|
10.19
|
Loan
Guarantee contract between Shouguang Rural Cooperative Bank and us dated
of June 28, 2009*
|
|
10.20
|
Purchase
and Sales Agreement of Breeder Ducks between Weifang Legang Food Co., Ltd.
and us dated of March 3, 2010
|
Business
Code of Conduct*
|
||
14.2
|
Financial
Code of Conduct*
|
|
14.3
|
Charter
for the Audit Committee*
|
vii
14.4
|
Charter
for the Nominating and Corporate Governance Committee*
|
|
14.5
|
Charter
for the Compensation Committee*
|
|
21.1
|
Subsidiary
List*
|
|
23.1
|
Consent
of EFP Rotenberg, LLP (2)
|
|
23.2
|
Consent
of McLaughlin & Stern LLP (included in Exhibit 5.1)(1)
|
|
23.3
|
Consent
of Zero Power Intelligence Co. Ltd. (2)
|
|
24.1
|
|
Power
of Attorney*
|
*
Previously filed.
|
(1) To be
filed by amendment.
(2)
Filed with this Amendment No. 3.
viii