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EX-21 - Deyu Agriculture Corp.v216965_ex21.htm
EX-31.1 - Deyu Agriculture Corp.v216965_ex31-1.htm
EX-31.2 - Deyu Agriculture Corp.v216965_ex31-2.htm
EX-32.1 - Deyu Agriculture Corp.v216965_ex32-1.htm
EX-32.2 - Deyu Agriculture Corp.v216965_ex32-2.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934: For the Fiscal Year Ended December 31, 2010

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 333-160476

DEYU AGRICULTURE CORP.
(Exact name of registrant as specified in its charter)

Nevada
 
80-0329825
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)

Room 808, Tower A, Century Centre, 8 North Star Road
Beijing, People’s Republic of China
(Address, including zip code, of principal executive offices)

(626) 242-5292
86-13828824414
(Registrants’ telephone number, including area code)

Securities Registered Under Section 12(b) of the Exchange Act:
None
Name of exchange on which registered:
None (OTCQB)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.  Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).  Yes ¨No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
 
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 ¨
Accelerated filer ¨
Non-accelerated filer o
 
Smaller Reporting Company x
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨    No x

As of the end of the issuer’s most recently completed second fiscal quarter, the issuer’s public float was $26,520,648.  As of the end of the issuer’s fiscal year ended December 31, 2010, its net revenue was $89,175,633.

The number of outstanding shares of the registrant’s Common Stock on March 29, 2011 was 10,499,774.
 
Documents Incorporated By Reference
 
NONE
 
 
 

 
 
DEYU AGRICULTURE CORP.
FORM 10-K


INDEX
 
     
Page
PART I
     
Item 1.
Business.
  3
Item 1A.
Risk Factors.
  18
Item 1B.
Unresolved Staff Comments.
  18
Item 2.
Properties.
  18
Item 3.
Legal Proceedings.
  19
Item 4.
(Removed and Reserved)
  19
       
PART II
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
  20
Item 6.
Selected Financial Data.
  22
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
  22
       
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
  32
Item 8.
Financial Statements.
  32
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  33
Item 9A.
Controls and Procedures.
  33
       
PART III
     
Item 10.
Directors, Executive Officers and Corporate Governance.
  35
Item 11.
Executive Compensation.
  41
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
  45
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
  47
Item 14.
Principal Accountant Fees and Services.
  48
       
Part IV
     
Item 15.
Exhibits and Financial Statement Schedules.
  49
       
SIGNATURES
  52
 
 
2

 
 
DEYU AGRICULTURE CORP.

PART I

ITEM 1.  Business

In this Annual Report on Form 10-K, unless otherwise indicated, the words “we”, “us” and “our” refer to Deyu Agriculture Corp. and all entities owned or controlled by Deyu Agriculture Corp.  All references to “Deyu” or the “Company” in this Annual Report mean Deyu Agriculture Corp., a Nevada corporation, and all entities owned or controlled by Deyu Agriculture Corp., except where it is made clear that the term only means the parent or a subsidiary company. References in this Annual Report to the “PRC” or “China” are to the People’s Republic of China.
 
Overview

We are a Beijing, China-based producer and seller of organic and non-organic, ready-to-eat and ready-to-drink “simple processed” and “deep processed” grain consumer products which are sold in approximately 10,000 supermarkets and convenient stores throughout China.  We are also one of the dominant organic and non-organic agricultural product distributors in Shanxi Province engaged in procuring, processing, marketing and distributing various grain and corn products and byproducts.

Our farming operations are conducted through our wholly-owned PRC subsidiaries, Jinzhong Deyu Agriculture Trading Co. Limited (“Jinzhong Deyu”), Jinzhong Yongcheng Agriculture Trading Co. Limited (“Yongcheng”), and Jinzhong Yuliang Agriculture Trading Co. Limited (“Yuliang”).  Jinzhong Deyu focuses on processing and distributing “simple processed” grain products, while Yongcheng and Yuliang focus on the distribution of corn and corn byproducts.  Our “deep processed” grain product operations are conducted through our variable interest entities (a) Beijing Jundaqianyuan Investment Management Co., Ltd. (“Junda”), a PRC company and 14.2857% equity interest holder in Deyufarm Innovation Food (Beijing) Co., Ltd., a PRC company (“Deyufarm”) and (b) Jinzhong Longyue Investment Consultancy Services Co., Ltd. (“Longyue”), a PRC company and the 50% equity interest holder in Deyufarm.  Together, Junda and Longyue owned 100% of Deyufarm on December 31, 2010 prior to the finalization of funding from SBCVC Fund III Co. Ltd., an unrelated third party, and each derive 100% of their income from the profits generated by Deyufarm through its wholly-owned subsidiary, Sichuan Haoliangxin Instant Food Co., Ltd., a PRC company (“Haoliangxin”).
 
A brief description of our products is set forth below, by division:

 
Corn Products Division –Yongcheng and Yuliang process and distribute corn and corn byproducts. Yongcheng and Yuliang acquire unprocessed corn and perform value-added processes such as cleaning, drying and packaging.  Consumers range from corn oil/corn starch manufacturing companies, livestock feed companies and governmental procurement agencies in China.
   
“Simple Processed” Grain Product Division – Jinzhong Deyu procures and distributes with Detian Yu grain products including millet, green beans, soy beans, black rice, whole wheat flour and may other variety of grains traditionally grown and consumed in China. Jinzhong Deyu acquires unprocessed grains and performs simple value-added processes to the grains such as peeling, cleaning, grinding and packaging. The majority of our finished products are then sold directly to supermarkets and grain wholesalers.  One other type of product is packed dried noodles consisting of grains or grains mixed with wheat.
 
“Deep Processed” Grain Products Division –Haoliangxin and Deyufarm have developed deep processed grain products for years and owns various consumer packed products, including non-fry organic instant noodles made of grains.  Haoliangxing has also developed instant drink grain soups and buckwheat teas and continues to develop new products.  Haoliangxin has grown rapidly due to the increased demand of more organic products in the PRC made of grains and instant daily food products, particularly in urban cities with a growing middle class and high-income consumers who tend to have less time to cook and eat.  Our expansion of our sales networks and brand name promotions have resulted in our brand name recognition which we believe have triggered strong sales for this division of our business.
 
Operating revenue for the year ended December 31, 2010 was $89,175,633, representing a 119% increase from $40,732,447 for the year ended December 31, 2009. Our net income for the year ended December 31, 2010 was $11,502,252, representing a 60% increase from $7,181,132 for the year ended December 31, 2009.
 
 
3

 
 
Our principal office is located at Tower A, Century Centre, Room 808, 8 North Star Road, Beijing, PRC. Our telephone number is (626) 242-5292 and (86)-13828824414. Our fax number is (86)-10-62668413, and our corporate website is www.deyuagri.com (information on our website is not made a part of this Annual Report).

Corporate History

2010 Share Exchange and Financings

On April 27, 2010, Deyu (then known as Eco Building International, Inc.) completed the acquisition of City Zone Holdings Limited, an emerging organic and non-organic agricultural products distributor in the Chinese Province of Shanxi, engaged in procuring, processing, marketing and distributing various grain and corn products (“City Zone”), by means of a share exchange (the “Exchange”).  As a result of the Exchange, City Zone became a wholly-owned subsidiary of Deyu.

Simultaneously with the acquisition, we completed a private placement offering in the gross amount of $8,211,166 of the sale of securities to accredited investors at $4.40 per unit, with each “Unit” consisting of one share of our Series A convertible preferred stock and one warrant to purchase 0.4 shares of our common stock with an exercise price of $5.06 per share.
 
On May 10, 2010, we closed on the second and final round of the private placement offering as disclosed in our Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on May 3, 2010 through the sale of 589,689 Units comprised of 589,689 shares of our Series A Convertible Preferred Stock and 235,882 five year warrants with an exercise price of $5.06 per share, to certain accredited investors for total gross proceeds of $2,594,607. We raised an aggregate amount of $10,805,750 in the two rounds of offerings.

In connection with the financing transaction, we entered into (i) a Registration Rights Agreement, (ii) a Lock-Up Agreement and (iii) a Securities Escrow Agreement for a make good arrangement with our management (together with the Securities Purchase Agreement, these agreements shall be referred to as the “Financing Documents”).
 
The private placement closed simultaneously with the signing of the Financing Documents and our issuing of 2,455,863 shares of Series A convertible preferred stock and warrants exercisable into 982,362 shares of common stock to certain investors (collectively, the “Investors”).  Pursuant to its terms, the Series A convertible preferred stock receive cumulative dividends at a rate of 5% per annum and can be converted into common stock on a 1:1 basis, subject to applicable adjustments.  Pursuant to its terms, the warrants can be converted into 982,362 shares of common stock at an exercise price of $5.06 per share (the "Warrants").  The Warrants will expire on April 27, 2015.  

In connection with the private placement and as part of the Financing Documents, we also entered into a Registration Rights Agreement, whereby, we agreed to file a registration statement on Form S-1 (or other applicable Form) within 60 days of the close of such financing.  If the registration statement was not timely filed or was not declared effective within 180 days from the closing, we could have been liable for damages in the amount of 0.5% of the purchase price per month until the default is cured. We filed a Registration Statement on Form S-1 with the SEC on June 15, 2010, and on October 21, 2010, the SEC declared the Form S-1 effective.
 
We also entered into a Lock-Up Agreement with the Investors, pursuant to which the common stock owned by the management of City Zone will be locked-up until six (6) months after the Registration Statement is declared effective.

Lastly, our majority shareholder (Expert Venture Limited) entered into a Securities Escrow Agreement whereby such majority shareholder pledged 2,455,863 shares of  common stock of the Company as security that we reach certain earnings thresholds for fiscal years ended 2010 and 2011 (the “Make Good Shares”).  One half (or 1,227,932 shares) of the Make Good Shares shall be allocated to the 2010 earnings requirement and the other half (1,227,931 shares) of the Make Good Shares shall be allocated to the 2011 earnings requirement.  If we meet these thresholds, the Make Good Shares will be released from escrow and returned to our majority shareholder.  Alternatively, if we fail to meet the earnings requirements, the Make Good Shares will be released to the Investors in accordance with the terms of the Securities Escrow Agreement.  For the fiscal year 2010, pursuant to the Make Good Agreement, we have to report net income of $11,000,000.   For fiscal year 2011, pursuant to the Make Good Agreement, we have to report net income of $15,000,000.  We will not be issuing any additional shares if the earnings threshold is not met.  The Make Good Shares are already issued to our majority shareholder and it will be transferring his shares to the Investors if the earnings threshold is not met.  Therefore, this will not dilute any shareholders.
 
 
4

 

The Make Good Shares shall be released from escrow based on the following terms and conditions:

For Fiscal Year ended 2010, the 1,227,932 shares being held in escrow for fiscal year 2010 shall be disbursed as follows:
 
–  
If we achieve net income of at least 95% of $11,000,000, then 1,227,932 shares shall be returned to the majority shareholder.

–  
If we achieve net income of less than 50% of $11,000,000 (or $5,500,000), then 1,227,932 shares shall be released to the investors on a pro rata basis (based on the amount of each Investors investment).

–  
If we achieve net income of between 50% and less than 95% of $11,000,000, then a portion of the 1,227,932 shares held in escrow shall be disbursed to the Investors (the remaining shares will be returned to the majority shareholder.  The number of shares released to the Investors shall be determined by doubling the percentage missed between the actual net income as compared to the make good target and then multiplying that by the 1,227,932 escrow shares.

We had achieved the 2010 performance threshold.  Additionally, as a result of the Share Exchange, we changed our fiscal year end to December 31.
 
On May 19, 2010, we filed with the Secretary of State for the State of Nevada a Certificate of Amendment to our Articles of Incorporation changing our name from “Eco Building International, Inc.” to “Deyu Agriculture Corp.” FINRA declared the name change effective on June 2, 2010.

2010 VIE Control Agreements (Deyufarm and Haoliangxin)

On November 16, 2010, our wholly-owned PRC subsidiary Detian Yu entered into a series of control agreements (collectively, the “Control Agreements”) with each of Junda and Longyue pursuant to which Detian Yu shall provide management and consulting services and business cooperation opportunities services to each of Junda and Longyue in exchange for service fees from each of Junda and Longyue equal to 100% (in the aggregate) of the net income after tax of each of Junda and Longyue.  Together, Junda and Longyue owned 100% of Deyufarm as of December 31, 2010 prior to the finalization of funding from SBCVC Fund III Co., Ltd., an unrelated third party, and each derive 100% of their income from the profits generated by Deyufarm through its wholly-owned subsidiary, Haoliangxin.

As of November 16, 2010, Detian Yu controls Deyufarm, a PRC joint venture entity by virtue of a Joint Venture Contract executed on September 25, 2010 by and among Junda, Longyue and SBCVC Fund III Company Limited, a company organized under the laws of Hong Kong and the 35.7143% equity interest holder in Deyufarm as of February 25, 2011.  According to the agreement of “investments and related matters” on September 15, 2010 by and among Junda, Longyue, SBCVC and Deyufarm, within two years after SBCVC contributes the capital, SBCVC has rights to request Deyufarm to buy back some or all shares owned by Junda or Longyue but transferred to SBCVC; and within 48 months, all parties will start and complete the eligible IPO.  Deyufarm, through its subsidiary, Haoliangxin, is engaged in the research & development and production of instant grain foods and has production facilities in Chengdu, Sichuan Province, PRC.  Set forth below is a brief summary of each of the Control Agreements.

Pursuant to an Exclusive Management and Consulting Service Agreement, Detian Yu shall provide to each of Junda and Longyue management and consulting services in relation to the business of Junda and Longyue in exchange for 35% of the net income after taxes of Junda and Longyue every fiscal year for a term of 10 years.  Such services include, without limitation, design system solutions, professional consulting, personnel training, market research, planning and development, operation planning and business strategies, market development of products and services, promotional and public relations activities, customer management and development, accounting and financial management, and consulting services to raw material suppliers.  Furthermore, each of Junda and Longyue have irrevocably guaranteed to Detian Yu that it will not apply to any judicial authority, arbitration authority, government or any other authority or individual for the revocation of the agreement for any reason.  
 
 
5

 
 
Pursuant to a Business Cooperation Agreement, Detian Yu shall provide business cooperation opportunities services including clients, cooperation partners and market information in the fields of grain processing, sales and financing to each of Junda and Longyue in exchange for cooperation fees and commissions from each of Junda and Longyue equal to 65% of the net income after tax of each of Junda and Longyue in every fiscal year for a term of 10 years.  Furthermore, each of Junda and Longyue have irrevocably guaranteed to Detian Yu that it will not apply to any judicial authority, arbitration authority, government or any other authority or individual for the revocation of the agreement for any reason.  

Detian Yu has entered into Business Operations Agreements with each of (i) Junda and its shareholders and (ii) Longyue and its shareholders pursuant to which such shareholders warrant that Junda or Longyue (as the case may be) shall not engage in any transactions which may have a material effect on the capital, business, personnel, obligations, rights or operations of Junda or Longyue (as the case may be) without the prior written consent of Detian Yu or a third party designated by Detian Yu.  Furthermore, the shareholders shall elect the directors of Junda or Longyue (as the case may be), cause such directors to elect the person designated by Detian Yu as chairman of the board, and appoint the persons designated by Detian Yu as general manager, chief finance auditor and other senior operating officers in compliance with the procedures stipulated by relevant laws, regulations and each company’s articles of association.  The shareholders have also agreed to unconditionally pay or freely transfer all dividends and any other income or rights (if any) acquired from Junda or Longyue (as the case may be) as the shareholders thereof and provide all the documents or take all the actions needed to satisfy such payment and transfer in compliance with the requirements of Detian Yu.  Detian Yu shall guarantee the performance of the obligations of Junda and Longyue under all contracts executed by Junda and Longyue for the term of these Control Agreements and the shareholders have agreed to pledge all of their respective equity interests in Junda or Longyue (as the case may be) for a counter-guarantee of the performance of Detian Yu’s guarantees and other relevant obligations assumed by Detian Yu.  The term of these Control Agreements is 10 years.  

As security for the performance of all of the obligations or debts under the Exclusive Management and Consulting Service Agreements and Business Cooperation Agreements assumed by Junda and Longyue, and under a counter-guarantee to all the payments made by Detian Yu for the performance of the guarantees assumed by Detian Yu under the Business Operation Agreements, the shareholders of Junda and the shareholders of Longyue entered into Share Pledge Agreements with Detian Yu pursuant to which they agreed to pledge all of their respective interests to Detian Yu.  The term for each pledge shall continue until the date that all of the Control Agreements summarized above have been terminated.  Each of the shareholders of Junda has also executed a Power of Attorney which grant to a designee of Detian Yu all the voting rights as a shareholder of Junda and each of the shareholders of Longyue has also executed a Power of Attorney which grant to a designatee of Detian Yu all the voting rights as a shareholder of Junda and Longyue.  

Detian Yu has also entered into Equity Acquisition Option Agreements with the shareholders of Junda and the shareholders of Longyue pursuant to which the shareholders have granted to Detian Yu an irrevocable and unconditional right to purchase, or cause a designated party of Detian Yu to purchase, part or all of the equity interests in Junda and Longyue from such shareholders, when and to the extent that, applicable PRC laws permit.  The consideration for the equity acquisition option for Junda is RMB 80,000,000 and the consideration for the equity option for Longyue is RMB 120,000,000. 

           The Control Agreements executed by the following shareholders of Junda may be considered related person transactions by virtue of each shareholder’s stated relationship with the Registrant (a) Jianming Hao, the Chairman and CEO of the Registrant, owns 33% of Junda, (b) Wenjun Tian, the Presdient and a Director of the Registrant, owns 34% of Junda, (c) Jianbin Zhou, the Chief Operating Officer of the Registrant, owns 10% of Junda, (d) Li Ren, Vice President of Branding and Marketing of the Registrant, owns 5% of Junda, (e) Yongqing Ren, Vice President of the Corn Division of the Registrant, owns 3% of Junda and (f) Junde Zhang, Vice President of the Grains Division of the Registrant, owns 3% of Junda.  All of the Control Agreements have been reviewed, analyzed, and approved by the Company’s independent board members.
 
 
6

 
 
Corporate Structure

The Company’s current corporate structure is set forth below: 
 
 
 
7

 
 
With the exception of our four registered trademarks: “Deyu”, “Deyufarm”, “Haoliangxin” and “Shitie”, we do not own any patents, trademarks, licenses or franchises on our products or processes. We produce processed foods and therefore patents, trademarks and licenses are not necessary for our business operations.  We also own the rights to the domain name www.deyuagri.com, which is currently in good standing.
 
Competitive Landscape

There are several smaller companies in our simple processed grain landscape, which are local in focus, have little brand recognition and limited distribution networks.  The competitors are:

–  
Shanxi Qinzhou Huang Millet Group Limited Company -  This company’s main products are high quality millets grown in the city of Qinzhou, in Shanxi Province.

–  
Shanxi Jin Wei Yuan Grains Company Limited - This Company mainly produces and sells high quality grains as well as deep processed grain products, including millets, corn powder, and soy beans.

–  
Heshun Province Xin Ma Millets Development Company Limited - This company produces and sells grains as well as deep processed products, including beans and flour.

Our main competitors in the deep processed grain market are:

–  
Ting Tsin International Group – They are a market leader in instant noodles, ready-to-drink teas and bottled water; best known for their "Master Kong" brand in China.

–  
White Elephant Group – Henan-based food company with “White Elephant” branded instant noodles.

–  
Hualong Group – Hebei-based food company with “White Elephant” branded instant noodles.

–  
Wu Gu Dao Chang Company – COFCO subsidiary with “Wu Gu Dao Chang” branded instant noodles.

Seasonality of Raw Materials

The growing season for our corn and grain in the Shanxi Province is 135+ days, which requires only one planting per year of the farmland.  With our storage facilities being built, it has increased our storage capacity by 70,000+ tons to more than 120,000+ tons, with turnover capacity of 600,000+ tons.  We believe that an increase in storage capacity, combined with its ability to increase its farmer’s cooperative network and farmer’s agents, as well as the ability to expand its purchasing into other geographical areas in Shanxi Province, reduces the risk which may be attributable to raw material seasonality.

Our Current Products
 
Our products include (a) corn products, (b) simple processed grain products and (c) deep processed grain products. Our corn products are principally sold to large food and oil processing companies and feed material production companies. Our simple processed grain products have been packaged under our registered trademarks “Deyu” and “Shitie” for retail distribution in supermarkets. We plan to increase the number of grain food product offerings by developing processed grain foods and higher value-added products. Our current grain products include the following:
 
Item
Weight
Unit
Fine millet
400g
bag
Fine millet
2,400g
bag
Fine millet
5kg
bag
Gift box millet
400g
bag
Green bean
400g
bag
Green bean noodle
800g
bag
Green bean
800g
bag
Corn grits
400g
bag
Corn flour
800g
bag
Soybean
400g
bag
Whole wheat flour
5kg
bag
Whole wheat flour
25kg
bag
Black rice
400kg
bag
Buckwheat noodle
800g
bag
Sorghum flour
800g
bag
Gift box grains
2,400g
bag
Combo bean flour
2,400g
bag
Combo red flour
2,400g
bag
Health congee
936g
bag
 
 
8

 
 
 
Our current deep processed products are sold in famous chained supermarkets and convenient stores across Beijing and are expanding throughout China via our strong local sales forces.  Products under the name of “Deyufarm” include the following:

 
Product Characteristics
 
Our farmland is located in the center of Shanxi Province, which has a relatively dry climate and which is ideal for grain cultivation. Grain crop growth relies principally on the climate and rainfall, and is not dependent on the application of chemical fertilizers or pesticides. Our simple and deep value-added processing of grains maintain the grain’s original nutritional components.  A portion of Jinzhong Deyu’s grain products are certified as “Organic” by the Beijing Zhonglu Huaxia Organic Food Certification Centre, the chief organic food certification organization accredited and approved by the Certification and Accreditation Administration of the PRC (CNCA).

We provide technological guidance and support to our farmers regarding seed dissemination, cultivation methods, ecological fertilizer, irrigation, cultivation, weeding and harvesting. Working closely with our farmers helps ensure that we receive high quality raw materials for production. We also utilize an advanced product control system to help ensure high-quality finished products.
 
 
9

 
 
Key Customers

The Company did not have any customers who accounted for 10% or more of total sales of our products or 10% or more of total trade receivables during the fiscal years ended December 31, 2010 and 2009.  However, the following tables set forth our three major customers for each division for fiscal years ended December 31, 2010 and 2009, respectively:
 
Corn Division:

   
% of Gross Sales for the Years Ended December 31,
 
   
2010
   
2009
 
Corn Division:
               
Shanghai Yihai Trading Co., Ltd., Shanxi Office
   
23.8
%
   
48.6
%
Sichuan Guangyuanhexi Provincial Grain Reserve
   
4.3
%
   
3.3
%
Chengdu Zhengda Co., Ltd.
   
3.7
%
   
2.2
%
Top Three Customers as % of Total Gross Sales:
   
31.8
%
   
54.1
%

For corn division, due to the efforts of diversifying our customer base, the top three and top one customer percentages of gross sales in 2010 have decreased substantially.  At the same time, the portion of revenues derived from new or small customers has increased and the overall number of customers also increased.

Simple Processed Grain Division:

   
% of Gross Sales for the Years Ended December 31,
 
   
2010
   
2009
 
Simple-Processed Grain Division:
               
Tianjin Yimingda Grain Division
   
5.2
%
   
-
%
Beijing Guanfu Food Products Co., Ltd.
   
5.1
%
   
-
%
Beijing Qiheyuan Food Technology Co., Ltd.
   
3.1
%
   
-
%
Top Three Customers as % of Total Gross Sales
   
13.4
%
   
-
%

We changed our strategy from selling both corn and grain to one key customer to focusing on selling simple processed grains through retail stores for direct consumers for their day to day use, at the same time to match with deep processed grain products sold in the same stores.

Deep Processed Grain Division:

   
% of Gross Sales for the Years Ended December 31,
 
   
2010
   
2009
 
Deep-Processed Grain Division:
               
Xinkeyuan
   
2.1
%
   
-
%
Beijing Huanqiu Jindan E-Commerce Co., Ltd.
   
2.1
%
   
-
%
Tiajin Hongfuyongsheng Business Trading Co., Ltd.
   
1.1
%
   
-
%
Top Three Customers as % of Total Gross Sales:
   
5.3
%
   
-
%
 
 
10

 
 
As it is a newly created division in 2010, there is no data available for 2009.  Two of the top three customers are all wholesalers distributing through their channels of numerous retail stores regionally or nationally, while the other one is an e-commerce retailer.  We also directly sell through retail chain stores.

For the corn division, top three customers’ accounts receivable represents 10% within the division and 9% overall in 2010.  For the simple-processed grain division, top three customers’ accounts receivable represents 17% within the division and 1% overall in 2010.  For the deep-processed grain division, top three customers’ accounts receivable represents 7% within the division and less than 1% overall in 2010.

Key Suppliers of Raw Materials

The Company does not have any suppliers who accounted for 10% or more of total purchases of raw materials or 10% or more of total trade payables during the fiscal years ended December 31, 2010 and 2009.

Market Opportunity
 
Grain Products (Simple and Deep Processed)

Grain products contain high levels of vitamin B1, dietary fiber and trace elements. Coarse grains are believed to be beneficial to people with diabetes or high blood pressure. The Chinese Nutrition Society, commissioned by the Ministry of Health in 2007 to formulate Dietary Guidelines, recommends consumption of 250-400 grams per day of processed grain foods for adults. They also recommended that adults consume 50-100 grams per day of coarse grains and whole grain foods. 72% of adults in China, amounting to 607 million people, are urban residents. Based on these guidelines, the demand for grain products by people in urban cities could reach 7.66 million tons.
 
As a result of the economic growth and improved living standards in China, the dietary components of the Chinese population have changed dramatically. In general, the population pays more attention to diet and nutrition. Management believes that the increased awareness of the value and benefits of grain products has resulted in an increased demand for our organic grain products.
 
Corn and Corn Byproducts
 
The demand for corn has increased significantly, with annual growth of 3.26% for 2006 through 2009 and growth of 2.88% expected for 2010 through 2015. According to estimates by United States Department of Agriculture (“USDA”), the global demand for corn has substantially exceeded supply from 2007 through 2010.
 
Year
Beginning Balance
Supply
Demand
Supply Demand Gap
Closing Balance
2006/2007
125,110
713,130
728,080
-14,950
110,160
2007/2008
110,160
789,810
778,880
10,930
121,090
2008/2009
130,350
787,830
778,600
9,230
1,395.8
2009/2010
139,580
785,140
796,520
-11,380
1,281.9

(Units: ‘000 tons)
(Source: USDA)
 
Corn as Feed Material
 
Since 1997, feed production has maintained steady growth. China is now the second largest feed producer, second only to the United States. Corn is the main raw feed material for pigs, cattle, chickens and other livestock. Corn byproducts, including corn stalks, are also used as an important source of feed.

 
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Source:   Nongbo Interactive Commerce (www.aweb.com.cn)

Corn Food Products
 
The development of corn processing has led to a revolution in corn consumption habits. In many developed countries, corn is generally regarded as a “health food”.  In the United States, it is believed that over one tenth of health foods are made with corn or corn byproducts. In recent years, demand for corn in international markets has grown. Corn oil squeezed from corn germ contains over 10 types of fatty acids, more than 50% of which are acids rich in vitamins A and E. Corn oil is low in cholesterol and is believed to have positive effects on high blood pressure and heart disease. Corn oil is also widely used in the pharmaceutical and chemical industries.
 
Sales Network
 
Grain Products (Preliminary, Simple and Deep Processed)
 
We established a marketing center in Beijing focused on promoting our products throughout China. In addition, we plan to expand our sales network to include offices in the cities of Shenzhen, Hangzhou, Chengdu, Tianjin and Congqing. Our main sales channels are as follows:
 
Supermarkets: At present, our sales network covers approximately 10,000 supermarkets and convenience stores with distribution to over 29 Provinces in China, including the cities of Shanxi, Beijing, Tianjin, Jinan, Fuzhou, Chengdu and Shijiazhuang.  Supermarkets include Hualian, RT-Mart Supermarket, Wal-Mart, Tiankelong, Yung-hui, China Resources Vanguard, Aoshi Kai, Sinopec Convenience Stores, Supermarkets, Tian Jia, the Tianhe supermarket chains and Sen Tian supermarket.
   
Sales channels of unpackaged products:  We also sell unpackaged products of various kinds of grains in some supermarkets in Beijing open and loosely in baskets where customers can scoop the grains into plastic bags to determine the volume they want, and such sales strategy targets large use consumers.
 
Corn Products
 
Corn is used extensively in feeds, edible food and highly processed products. Global energy shortages make corn an attractive alternative energy source.  We have strategic partnerships with large customers such as Yihai Group, New Hope Group, Zhenda Feeds and provincial Grain Reserves. We have entered into a two year purchase agreement with Yihai Group for the sale of corn products. According to the master agreement, Yihai will purchase from us 250,000 tons of corn in 2010 and 500,000 tons in 2011.
 
 
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Product Development
 
At present, our grain products are mostly simple processed products. “Simple process” refers to products which are processed from raw materials to become ready-to-cook grains, whereas “deep process” refers to simple processed products which are further processed to become instant, ready-to-eat or drink beverages or foods.  Over the next two to three years, we plan on focusing on the development of “simple processed” grain food products, with the goal of becoming the top producer of these products in China. Our existing grain products are natural foods that maintain their original nutritious properties and we believe such products will meet the demand of consumers seeking healthy diets.  We also plan to continue to develop deep processed foods, such as instant foods and other high value-added grain foods, based on consumer demand.  These types of food products are easy to store, convenient to prepare, and maintain their nutritional characteristics. This is especially suitable for consumer groups who have little time to prepare meals, but are concerned with maintaining a healthy diet. 
 
 
Processing and Warehousing Capacities

General
 
Our facilities have site coverage of 11,667 square meters and constructed area of 6,752 square meters. The plant also includes a 3,000 square meter drying area surrounded by villages and farmland in Shanzhuang Tou Village of Shitie County.

Production Capacity

We are equipped with three fully automatic production lines for millet, grain and flour. These lines include various kinds of rice milling machines, filtering machines, elevators, color selection machines, exhaust fans, automatic packing machines and other equipment.
  
Grains production flow chart:
 
 
 
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Flour (corn flour, millet flour) production flow chart:
 
 
To ensure high quality we installed fully automated production equipment in our facilities.  Characteristics of our production equipment are as follows:
 
 
Production equipment is fully automated. Raw materials are moved through the production process via the elevator. The production process is fully enclosed for protection against any pollution or contamination.
     
 
We installed equipment with advanced color selection technology for grains. The device is stable and reliable, and features automatic temperature control, automatic removal of dust and impurities, automatic air pressure detection, self injection and light testing.
     
 
We have a cooling system that helps millet maintain its nutritious components, color and appearance.
     
 
Selective application of the polishing process helps maintain nutritional components.
 
Our modern equipment and technology, combined with advanced processing techniques, helps ensure that grain production is high-quality, natural, green and ecological.  Additionally, a portion of our grains can be categorized as organic. The careful management of breeding, cultivation, production, packaging and storage also leads to high quality products. 
 
We implemented strict quality control on each process in purchasing, storage, processing, packaging, and distribution. We keep any items that are examined in the course of quality control inspections for one year in accordance with National Technology Quality Supervision Bureau requirements. We cooperate fully with the Bureau during their random testing and examination of our products.

Packaging Capacity
 
Our 400 square-meter packaging facility is dust proof, moisture proof, anti-static, anti-rodent and air ventilated and is isolated from the rest of the plant. Products are transported by a hoisting machine to the packaging facility, which has four production lines: automated vacuum packaging, automated granular packaging, automated Hatta hybrid packaging and automated powder packaging. All processes in the packaging facility are enclosed to avoid contamination.
 
The vacuum packaging line automates measuring, bag making, filling, cutting, bag shaping, vacuum sealing, coding, counting and transmission. It accommodates 70 to 500 grams of product and packages at the speed 100 to 120 bags per minute. The granular packaging line also automates measuring, bag making, filling, cutting, bag shaping, coding, counting and transmission. It accommodates 75 to 1,000 grams of product at the speed of 90 to 120 bags per minute. The Hatta hybrid packaging line is used for packing the healthy congee and colored grains. It automates measuring, bag making, filling, cutting, bag shaping, coding, counting and transmission, and accommodates 50 to 500 grams of product at the speed of 120 to 150 bags per minute. The powder packing line is used for packaging grain flour products and automates measuring, bag making, filling, cutting, bag shaping, coding, counting and transmission, and accommodates 5 to 5,000 grams of product at the speed of 80 to 90 bags per minute.
 
Our product labeling complies with the Interim Measures for Labeling of Food Products of Enterprises in the Shanxi Province and the GB7718-1994 Standards for Food Products Labeling. We obtained the registration certificate (Record number SB/1407000-009-01).
 
 
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Warehousing and Logistics Capacity

We rent two large warehouses for storage of raw materials (mainly corn): the Yuci Warehouse and the Shanxi 661 Warehouse.  The total capacity of our warehouse space is greater than 50,000 tons and annual turnover is approximately 250,000 tons.  In 2010, the construction of a new storage center was still in progress, which is situated on 70 mu (approximately 46,690 square meters) of land for storage of more than 70,000 tons of food products and annual turnover of greater than 350,000 tons.  This warehouse will allow us to have storage capacity of more than 120,000 tons of food products and annual turnover of greater than 600,000 tons.  

The cave type warehouses that we use are fully enclosed and have thermostatic and moisture proof characteristics. Each of the cave type warehouses is built with 1.5 meter thick walls and moisture proof layers. They maintain a temperature of 10 degrees Celsius throughout the year, perfectly suited for food storage. Since no air conditioning is required, the operating costs of the warehouses are low. The warehouses are equipped with infrared sensors that can accurately detect temperature changes and the presence of rodents, insects, and other pests.
 
Before corn can be stored in warehouses, it must undergo drying and water removal treatments. We have three sets of drying equipment allowing us to process up to 350,000 tons annually. The new storage center will be equipped with the most advanced equipment for corn drying allowing it to process 500,000 tons annually. After the drying process, the corn is packaged in bags and moved to warehouses. There, the products undergo insecticide and anti-bacterial treatments. After being sealed for 15 days and air ventilated for another 7 days, the products are then stored in enclosed warehouses.

We have an exclusive lease agreement with three railway lines for freight transportation: (a) Shanxi Cereal & Oil Group, Mingli Reservation Depot; (b) Shanxi Yuci Cereal Reservation Depot; and (c) Yuci Dongzhao Railway Freight Station.  These exclusive agreements help us ensure speedy delivery of our products at a low cost (compared to truck transportation). 

Research and Development
 
We hire a number of agricultural experts as the consultants in sectors including food processing, breeding, cultivation, nutrition and disease prevention. We, together with the Shanxi Agricultural Sciences Institute, Shanxi Agricultural University and their Institute of Seeds and Planting, established a joint laboratory for research breeding and cultivation. This laboratory also provides quality testing of our products and provides suggestions for the improvement of our products. We have also established an agricultural product research center in Beijing. Specifically, we have entered into two Agricultural Technology Cooperative Agreements.  One agreement is with Sorghum Institute, Shanxi Academy of Agricultural Science for the cooperative use of technology in the cultivation and planting of grains.  The other agreement is with Millet Research Institute, Shanxi Academy of Agricultural Science for the cooperation of species improvement and green planting technologies.
 
Our R&D team and laboratory uses a hybridization technique for breeding rather than a genetically modified approach. They have special characteristics such as strong drought resistance and resistance to pests. None of the seeds are cultivated using pesticides or chemical fertilizers. This not only reduces costs, but also increases the output and, most importantly, allows us to ensure that a portion of our crops are organic.

Research and development expenses were $73,860 and $98,087 for the years ended December 31, 2010 and 2009, respectively.  We reduced our R&D expenditures in 2010 due to the fact that we discontinued a research project focused on one particular type of grain which we decided not to pursue.  None of these expenditures were directly borne or reimbursed by our customers.  For 2011, we expect to spend $300,000 on R&D for further product researches and improvements and new product developments.

Target Market
 
We focus on promoting the concept of “healthy and green”.  Target customers include urban city residents who pursue healthy diets. Management believes health-oriented food products are also important to families in tier 1 and tier 2 cities in China.  Beijing, Shanghai and Guangzhou are considered tier 1 cities in China because they were the first to be opened up to competitive economic development and are the most populous, affluent and competitive.  Tier 2 cities, such as Tianjin, Suzhou, Dalian, Qingdao and Hangzhou, have a smaller population and are not as developed as tier 1 cities.
 
 
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Operating Mode
 
We have established a large scale plantation adopting the mode of “Company + Farmers + Base”. Shanxi Province offers high quality land that supports organic growing of grains and corn. Our operating model is illustrated by the chart below: 
 
 
 
Government Regulation

Grain Production and Sales Business
 
Our production, purchases and sales of grain food products are subject to the following rules and regulations in the People’s Republic of China:
 
1.  
“The Food Safety Law of the People’s Republic of China” (the “Food Safety Law”)
2.  
“Regulations on the Implementation of the Food Safety Law of the People’s Republic of China” (the “Regulations”)
3.  
“Law of the People’s Republic of China on Quality and Safety of Agricultural Products” and the Food Distribution Management Ordinance.
 
 
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We are engaged in the sale of packaged grain products. The supervising authority for such products is the Beijing Bureau of the Industry and Commerce. Pursuant to Regulation 29 of the Food Safety Laws, entities engaging in food production, food distribution and food service, must obtain a Food Production Permit, Food Distribution Permit and Food Service Permit. Those who have obtained the Food Production Permit are authorized to operate a food production business and are not required to apply for a Food Distribution Permit. However we have also obtained the Food Distribution Permit from the Beijing Bureau of Industry and Commerce.
 
We are also engaged in the production and sale of grain foods. The supervising authority for such production is the Technology Quality Supervision Bureau of Shanxi Province. Pursuant to Food Safety Laws and ancillary regulations, the nation’s Head Office of the Technology Quality Supervision Bureau supervises technology quality of enterprises which are engaged in food production. The Bureau issues Food Production Permits, undertakes mandatory examinations of technology quality for entry into the industry and is responsible for investigation of incidents regarding food safety. Pursuant to Regulation 29 of the Food Safety Laws, entities engaging in food production, food distribution and food service, must obtain the Food Production Permit, Food Distribution Permit and Food Service Permit. Those who have obtained the Food Production Permit are authorized to operate food production businesses and are not required to apply for a Food Distribution Permit. Deyu has also obtained the nation’s Industrial Production Permit from the Technology Quality Supervision Bureau (Cereals: QS140701040051 and Flour: QS140701016210). Our food labeling complies with the Interim Measures for Labeling of Food Products of Enterprises in Shanxi Province and GB7718-1994 Standards for Food Products Labeling and has obtained the relevant registration certificate (Record number SB/1407000-009-01).

Corn Purchase and Sale Business

Yuliang is engaged in the purchase and sale of raw corn products. The supervising authority for the purchase and sale of raw corn products is the State Administration of Grain. Pursuant to Regulation 6 of the Food Distribution Management Regulations announced by the State Council of PRC, the State Council Development and Reform Department and the National Food Administration Departments (the commissions National Food Authority) are responsible for the mid and long-term planning of the nation’s overall balance of foods, regulation, restructuring of important food species and food distribution. The National Food Administration Department is responsible for food distribution, guidance to the industry, oversight of the food distribution laws, regulations, policies and implementation of rules and regulations. Pursuant to Regulation 9, food operators must obtain permits and register pursuant to relevant registration regulations. We obtained the necessary Food Products Purchase Permit and operate in compliance with the relevant standards of food quality, storage, logistics and facilities.
 
Competitive Advantages

Unique Cultivation Environment

            Shanxi Province is located on the Loess Plateau in the western part of China. The city of Jinzhong is located in the center of Shanxi Province. The topography of the regions creates optimal conditions for growing grains. Favorable weather conditions, combined with our unique and advantageous geographical conditions lead to high-quality products. There has been no serious flood or drought in the region in the past 100 years. The recent drought occurred in Northern China does not affect Company due to once a year planting season starting from April.  The temperature difference between day and night is greater than 10 degrees Celsius. The weather is dry and cold. There are about 158 days without frost during the year and the growing period is longer than 135 days. The weather conditions are especially favorable for growing corn and grains. Grains are highly drought resistant. Growing grains is reliant on natural rainfall, no irrigation is required throughout the year, and no application of chemical fertilizer or pesticides is needed. Irrigation by underground water is only required in exceptional circumstances.
 
The northern and southern parts of Shanxi Provicne are rich in coal mines, however, there are no large coal mines or other large polluting industries in the central part of Shanxi Province, where Jinzhong is located. Jinzhong’s economy relies heavily on agriculture. Jinzhong’s cultivation lands are located in Jinzhong City.
 
 
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Scale Production Advantage

Agricultural land for large scale farming of grains is becoming rare in China. With the support of our local government, we have adopted the operation mode of Company + Farmers + Base on a large scale. In the past three years, we signed agricultural co-operative agreements with governments of the counties and villages of Jinzhong for exclusive farming rights to approximately 90,000 acres of farmland for 20 years. Local governments arrange for farmers to grow crops on the farming land and we place orders with the farmers each year. The farmers plant according to the size of the orders and we acquire the crops after they are harvested. We do not own title to this land nor do we own the right to use this land.
 
Technical Support

To improve the technology in farming, breeding and cultivation, and processing, we hired 6 professors as consultants. With Shanxi Agricultural Sciences Institute and Shanxi Agriculture University and their breeding and cultivation center, we established joint laboratories for the research and development of corn and grain breeding and cultivation.

Employees
 
We currently have approximately 781 full time employees and various numbers of part-time employees working on a seasonal basis.
 
ITEM 1A. Risk Factors

This information not required for smaller reporting companies such as Deyu.
 
ITEM 1B. Unresolved Staff Comments
 
None.
 
ITEM 2. Properties
 
We rent two large warehouses for storage of raw materials (mainly corn): the Yuci Warehouse and the Shanxi 661 Warehouse.  The total capacity of our warehouse space was greater than 50,000 tons and annual turnover is about 250,000 tons. In 2010, the construction of a new storage center was still in progress, which is situated on 70 mu (approximately 46,690 square meters) of land for storage of more than 70,000 tons of food products and annual turnover of greater than 350,000 tons. This warehouse allows us to have storage capacity of more than 120,000 tons of food products and annual turnover of greater than 600,000 tons.  

The cave type warehouses are natural warehouses with enclosed, thermostatic and moisture proof characteristics.  Each of the cave type warehouses is built with a 1.5 meter thick covering and moisture proof layers and maintains a temperature of 10 degrees Celsius throughout the year, ideal for food storage.  Because no air conditioning is required, the operating costs of the warehouses are low.  The warehouses are equipped with infrared detection and temperatures sensing devices which are able to accurately detect rodents, insects and temperature changes.

The standardized warehouses, new storage facilities, and cave type warehouses are located at the Yongcheng Logistics Center, Liyan County, Yuci District, Jinzhong City, PRC.

Land

We owned close to 2,000 acres of land in the Shanxi Province.  The land is used for research and development; specifically, experimental breeding of seeds for potential use by the farmers we ultimately purchase corn and grain from.

On September 30, 2010 and December 20, 2010, we entered into Farmland Transfer Agreements with Shanxi Jinbei Plant Technology Co., Ltd. for the transfer of certain land use rights consisting of 53,000 mu (equivalent to 8,731 acres) and 52,337 mu (equivalent to 8,615 acres), respectively.  We paid RMB19,415,000 (approximately $2,900,000) and RMB27,221,000 (approximately $4,066.000) in September 30, 2010 and December 20, 2010, respectively.  Pursuant to the agreement and the terms of the land use certificates, the land use rights continue for 43 years (on average).  The land will be used for agricultural planting of corn and grains.
 
 
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ITEM 3.  Legal Proceedings
 
We are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations.  To our knowledge, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of our executive officers or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or any of our companies or our companies’ subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

ITEM 4.   (Removed and Reserved)
 
 
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PART II

ITEM 5. 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Our common stock is quoted on the OTCQB under the symbol “DEYU”.  There can be no assurance that a liquid market for our securities will ever develop.  Transfer of our common stock may also be restricted under the securities or blue sky laws of various states and foreign jurisdictions.  Consequently, investors may not be able to liquidate their investments and should be prepared to hold the common stock for an indefinite period of time.
 
The following table summarizes the high and low closing sales prices per share of the common stock for the periods indicated as reported on the OTCQB:
 
Closing Bid Prices
 
Fiscal Year Ended December 31, 2010
 
    High ($)     Low ($)  
             
1st Quarter (January 4 – March 31):
 
NONE
   
NONE
 
                 
2rd Quarter (April 1 – June 30):
 
7.10
   
5.00
 
                 
3nd Quarter (July 1 – September 30):
 
7.75
   
6.00
 
                 
4th Quarter (October 1 – December 31):
 
7.00
   
3.00
 

The following table presents certain information with respect to our equity compensation plan as of December 31, 2010:
 
               
Number of
 
               
securities remaining
 
   
Number of securities
         
available for future
 
   
to be issued
   
Weighted-average
   
issuance under equity
 
   
upon exercise of
   
exercise price of
   
compensation plans
 
   
outstanding options,
   
outstanding options,
   
(excluding securities
 
   
warrants and rights
   
warrants and rights
   
reflected in column (a))
 
Plan Category
 
(a)
   
(b)
   
(c)
 
Equity compensation plans
                 
approved by security holders
   
--
   
$
--
     
--
 
                         
Equity compensation plans
                       
not approved by security holders(1)
   
971,000
     
4.40
     
29,000
 
                         
    Total
   
971,000
   
$
4.40
     
29,000
 

(1) On November 4, 2010, the Company’s Board of Directors approved the Company’s 2010 Share Incentive Plan.  Under the Plan, 1,000,000 shares of the Company’s common stock shall be allocated to and authorized for use pursuant to the terms of the Plan.  On November 8, 2010, a total of 931,000 non-qualified incentive stock options were approved by our Board of Directors and granted under the Plan to executives, key employees, independent directors, and consultants at an exercise price of $4.40 per share and on December 15, 2010, 40,000 non-qualified incentive stock shares were approved by our Board of Directors and granted under the Plan to a consultant at an exercise price of $4.40 per share, of which shall vest as follows:
 
33 1/3% of the option grants vested one (1) month after the date of grant;
33 1/3% of the option grants will vest twelve (12) months after the date of grant; and
33 1/3% of the option grants will vest twenty-four (24) months after the date of grant.
 
 
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On November 5, 2011, we filed a Registration Statement with the SEC on Form S-8 covering the shares underlying the options set forth above.  As of March 25, 2011, none of the options issued pursuant to the Plan have been exercised.

Performance Graph

We are a “smaller reporting company” and, as such, are not required to provide this information.

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

In connection with the Share Exchange, on April 27, 2010, we issued an aggregate of 8,736,932 shares of our common stock to the shareholders of City Zone.  We received in exchange from the City Zone shareholders 100% of the shares of City Zone, which exchange resulted in City Zone becoming our wholly owned subsidiary. The issuance of such securities was exempt from registration pursuant to Section 4(2) of, and Regulation D and/or Regulation S promulgated under the Securities Act of 1933, as amended.
 
Simultaneous with the closing the Share Exchange, we entered into the Purchase Agreement with certain accredited Investors for the issuance and sale in a private placement of Units, consisting of, 2,455,863 shares of our Series A convertible preferred stock, par value $0.001 per share and Series A warrants to purchase up to 982,362 shares of our Common Stock, for aggregate gross proceeds of approximately $10,805,750. The issuances of the aforementioned securities were exempt from registration pursuant to Section 4(2) of, and Regulation D and/or Regulation S promulgated under the Securities Act of 1933, as amended.

On November 4, 2010, the Company’s Board of Directors approved the Company’s 2010 Share Incentive Plan (the “Plan”).  Under the Plan, 1,000,000 shares of the Company’s common stock shall be allocated to and authorized for use pursuant to the terms of the Plan.  On November 8, 2010, a total of 931,000 non-qualified incentive stock options were approved by our Board of Directors and granted under the Plan to executives, key employees, independent directors, and consultants at an exercise price of $4.40 per share and on December 15, 2010, 40,000 non-qualified incentive stock shares were approved by our Board of Directors and granted under the Plan to a consultant at an exercise price of $4.40 per share, of which shall vest as follows:
 
33 1/3% of the option grants vested one (1) month after the date of grant;
33 1/3% of the option grants will vest twelve (12) months after the date of grant; and
33 1/3% of the option grants will vest twenty-four (24) months after the date of grant.

On November 5, 2011, we filed a Registration Statement with the SEC on Form S-8 covering the shares underlying the options set forth above.  As of March 25, 2011, none of the options issued pursuant to the Plan have been exercised.

Holders of Common Equity

            On March 29, 2011, we had 10,499,774 shares of common stock issued and outstanding to 14 holders of record, and the closing price of our common stock as quoted on the OTCQB was $2.90 per share.  The number of record holders does not include beneficial owners of common stock whose shares are held in the names of banks, brokers, nominees or other fiduciaries.

Dividends
 
We have not paid cash dividends on any class of common equity since formation.

In connection with our private placement in May 2010, we issued 2,455,863 shares of our Series A convertible preferred shares and warrants exercisable into 982,362 shares of common stock to certain Investors.  Pursuant to the terms of our Series A convertible preferred share designations, the holders of our Series A convertible preferred shares are entitled to receive cumulative dividends at a rate of 5% per annum, and such shares of Series A convertible preferred stock are convertible into shares of our common stock on a 1:1 basis, subject to applicable adjustments.  On July 22, 2010, we distributed a cumulative Series A convertible preferred share dividend of $96,051 in aggregate, to such holders of Series A convertible preferred stock on a pro rata basis and on January 27, 2011, we issued a second Series A convertible preferred share dividend equal to $231,670, in the aggregate, to such holders of Series A convertible preferred stock on a pro rata basis.
 
 
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ITEM 6.   Selected Financial Data

We are a “smaller reporting company” and, as such, are not required to provide this information.

ITEM 7.   Management‘s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements
 
The following is management’s discussion and analysis of certain significant factors which have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This Annual Report includes forward-looking statements. Generally, the words “believes ”, “anticipates”, “ may ”, “ will ”, “ should ”, “ expect ”, “ intend ”, “estimate”, “continue” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Annual Report or other reports or documents we file with the SEC from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be place on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Annual Report.

Summary of our Business

We are a Beijing, China-based producer and seller of organic and non-organic, ready-to-eat and ready-to-drink “simple processed” and “deep processed” grain consumer products which are sold in approximately 10,000 supermarkets and convenient stores throughout China.  We are also one of the dominant organic and non-organic agricultural product distributors in Shanxi Province engaged in procuring, processing, marketing and distributing various grain and corn products and byproducts.

 We have experienced high growth in both revenue and net income.  Operating revenue for the year ended December 31, 2010 was $89,175,633, representing a 119% increase from $40,732,447 for the year ended December 31, 2009. Our net income for the year ended December 31, 2010 was $11,502,252, representing a 60% increase from $7,181,132 for the year ended December 31, 2009.

Our continuous growth relies on our ability to meet the increasing demand for our current products and our expanded product lines.  Management has developed strategies and taken actions to keep up with demands and foreseeable ones.  Such actions include working with farmers to increase current yields, focusing on our ability to enter into new cooperative agreements, signing contracts with new farmer agents, and expanding geographically in Shanxi Province, land acquisitions, building production sites and warehouses, or even consider mergers and acquisitions of suppliers of some of our products (although we are currently not a party to any such negotiations or agreements), vendors, or competitors if considered necessary or bargain purchase.

As a result of our recent Control Agreements whereby we now control Deyufarm, our deep processed grain products are higher margin products than our rough processed corn.  As such, we have increased our efforts to enter into supermarkets in tier 1 and tier 2 cities in China.   Additionally, based upon our perceived and historical growing demand for our deep processed grain products, the changing dietary demands, and the increase in health and nutrition consciousness of the Chinese people, we believe we have a unique opportunity to substantially increase our revenues, net income and gross margins.  Management has also begun an initial evaluation of the viability of exporting our deep processed grain products to other countries, such as Japan and the United States.  
 
 
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We believe significant factors that could affect our operating results are the (a) cost of raw materials, (b) prices and margins of our products to our retailers and their markup to the end users, (c) consumer acceptance of our deep processed grain products, (d) general economic conditions in China, and (e) the changing dietary habits of the people of China towards our quality organic food.

Our goal for 2011 is to develop the business model comprised of three major pieces: corn division, simple and deep processed grain divisions, and non-processed and unpacked grains sold in retail stores.  Together that would result in significant growth.  We will shift some capital from corn division to unpacked grain business.  At the same time, we rely on our strengths, competitive edges and support to our corn customers to keep up the revenues.  On the other hand, all of increased distribution channels and brand name recognition out of sales and marketing initiatives and momentum we gain from simple and deep processed grain products would help tremendously on this unpacked grain business.  In addition, the ERP system we implemented to strength and better our procurement capability and accuracy, particularly for retail side of business, would boost up our flexibility and accuracy to eventually increase our business and quality of accounting and internal control.  Meanwhile, the B2B and B2C E-Commerce we built will further enhance our selling capability which should attract especially our current or new wholesale customers who can register as members by paying membership fees to attain lower pricing.  This initiative would help encourage them to order high volume and help our cash flows at the same time.

Plan of Operation

With the corn business being matured and stable and yet increasing demand yearly, we have acquired two pieces of farmland of approximately 17,300 acres of ownership rights between 40 to 47 years at the end of 2010 for a total of approximately $7 million to secure the supply and quality of crops for both grains and corn. The growing season for these parcels commences in April 2011.  As a result, we believe we have achieved economies of scale through exclusive rights of use to over 109,000 acres of some of China’s most fertile agricultural land, including ownership rights to approximately 19,000 acres.  Since demand of both simple processed and deep processed grain products is increasing through our expanding sales network and brand name recognition, we are increasing the land coverage of our growing base and also our production base for deep processed products.  To achieve that, we are constructing warehouses in Shanxi Province and a new plant in the outskirts of Beijing.

In the coming year 2011, for sales and marketing strategy, instead of rapidly increasing the number of stores selling our products across Beijing and China as a whole, we have shifted our focus on promoting our name brand and products regionally, and increasing customer purchases on a per store basis.

Since we have been successful of promoting and selling our products through all of our distribution channels and networks, including B2B and B2C E-Commerce, and our brand names are becoming widely known, to support this growth, the Company has carefully planned to build more warehouses and plants and to acquire companies in the future that either fit in or expand Deyu product lines.  It also helps ease requests by many of our wholesalers and retail stores for providing other non-existing Deyu product lines.  Thus, we plan to make a few strategic acquisitions per year vertically or horizontally to sell either under our own brands name or theirs through our distribution networks.

Critical Accounting Policies and Estimates

This discussion and analysis of financial condition and results of operations has been prepared by management based on our consolidated financial statements, which have been prepared in accordance with US GAAP.  The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates our critical accounting policies and estimates, including those related to revenue recognition, valuation of accounts receivable, property and equipment, long-lived assets, intangible assets, derivative liabilities and contingencies.  Estimates are based on historical experience and on various assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These judgments and estimates affect the reported amounts of assets and liabilities and the reported amounts of revenue and expenses during the reporting periods.
 
 
23

 
 
We consider the following accounting policies important in understanding our operating results and financial condition:

Use of Estimates

The preparation of the consolidated financial statements in conformity with generally accepted  accounting  principles 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.  Management makes its estimates based on historical experience and various other assumptions and information that are available and believed to be reasonable at the time the estimates are made.  Therefore, actual results could differ from those estimates under different assumptions and conditions.

Long-Lived Assets

We apply the provisions of FASB ASC Topic 360 (ASC 360), "Property, Plant, and Equipment" which addresses financial accounting and reporting for the impairment or disposal of long-lived assets.  We periodically evaluate the carrying value of long-lived assets to be held and used in accordance with ASC 360, at least on an annual basis.  ASC 360 requires the impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts.  In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets.  Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal.

Goodwill and Intangible Assets

Good will calculated as the purchase premium after adjust for the fair value of net assets acquired.  Goodwill is not amortized but is reviewed for potential impairment on an annual basis, or when events or circumstances indicate a potential impairment, at the reporting unit level.  A reporting unit, as defined under applicable accounting guidance, is a business segment or one level below a business segment.  Under applicable accounting guidance, the goodwill impairment analysis is a two-step test.  The first step of the goodwill impairment test involves comparing the fair value of each reporting unit with its carrying amount including goodwill.  If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair value, the second step must be performed to measure potential impairment.

The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated possible impairment.  The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination.  Measurement of the fair values of the assets and liabilities of a reporting unit is consistent with the requirements of the fair value measurements accounting guidance, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The adjustments to measure the assets, liabilities, and intangibles at fair value are for the purpose of measuring the implied fair value of goodwill and such adjustments are not reflected in the consolidation balance sheet.  If the implied fair value of goodwill exceeds the goodwill assigned to the reporting unit, there is no impairment.  If the goodwill assigned to a reporting unit exceeds the implied fair value of goodwill, an impairment charge is recorded for the excess.  An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit.  An impairment loss establishes a new basis in the goodwill and subsequent reversals of goodwill impairment losses are not permitted under applicable accounting guidance.  In 2010, goodwill was tested for impairment and it was determined that goodwill was not impaired as of December 31, 2010.
 
 
24

 
 
For intangible assets subject to amortization, an impairment loss is recognized if the carrying amount of the intangible asset is not recoverable and exceeds fair value.  The carrying amount of the intangible asset is considered not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use of the asset.

Fair Value Measurements

FASB ASC 820, “Fair Value Measurements” (formerly SFAS No. 157) defines fair value for certain financial and nonfinancial assets and liabilities that are recorded at fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  It requires that an entity measure its financial instruments to base fair value on exit price and maximize the use of observable units and minimize the use of unobservable inputs to determine the exit price.  It establishes a hierarchy which prioritizes the inputs to valuation techniques used to measure fair value.  This hierarchy increases the consistency and comparability of fair value measurements and related disclosures by maximizing the use of observable inputs and minimizing the use of unobservable inputs by requiring that observable inputs be used when available.  Observable inputs are inputs that reflect the assumptions market participants would use in pricing the assets or liabilities based on market data obtained from sources independent of the Company.  Unobservable inputs are inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  The hierarchy prioritizes the inputs into three broad levels based on the reliability of the inputs as follows:

·  
Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.  Valuation of these instruments does not require a high degree of judgment as the valuations are based on quoted prices in active markets that are readily and regularly available.

·  
Level 2 – Inputs other than quoted prices in active markets that are either directly or indirectly observable as of the measurement date, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

·  
Level 3 – Valuations based on inputs that are unobservable and not corroborated by market data.  The fair value for such assets and liabilities is generally determined using pricing models, discounted cash flow methodologies, or similar techniques that incorporate the assumptions a market participant would use in pricing the asset or liability.

This guidance applies to other accounting pronouncements that require or permit fair value measurements.  On February 12, 2008, the FASB finalized FASB Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157 (ASC 820).  This Staff Position delays the effective date of SFAS No. 157 (ASC 820) for nonfinancial assets and liabilities to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  The adoption of SFAS No. 157 (ASC 820) had no effect on the Company's financial position or results of operations.

We also analyze all financial instruments with features of both liabilities and equity under ASC 480-10 (formerly SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”) and ASC 815-40 (formerly EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”).  We have determined ASC 480-10 (formerly SFAS 150) and ASC 815-40 (formerly EITF 00-19) has no material effect on our financial position or results of operations.

Revenue Recognition

Our revenue recognition policies are in compliance with the SEC Staff Accounting Bulletin No. 104 (“SAB 104”).  We recognize product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) our price to the customer is fixed or determinable and (iv) collection of the resulting accounts receivable is reasonably assured.  We recognize revenue for product sales upon transfer of title to the customer.  Customer purchase orders and/or contracts are generally used to determine the existence of an arrangement.  Shipping documents and the completion of any customer acceptance requirements, when applicable, are used to verify product delivery or that services have been rendered.  The Company assesses whether a price is fixed or determinable based upon the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.
 
 
25

 
 
Our revenue is recognized net of value-added tax (VAT), reductions to revenue for estimated product returns, and sales discounts based on volume achieved in the same period that the related revenue is recorded.  The estimates are based on historical sales returns, analysis of credit memo data, and other factors known at the time.  For the years ended December 31, 2010 and 2009, sales discounts were $0 and $847,849, respectively.  Commencing from year 2010, the Company had terminated the offering of sales discounts to customers.

We offer a right of exchange on our grain products sold through our relationship with grocery store networks.  The consumer who purchases the product may exchange it for the same kind and quantity of product originally purchased.  In accordance with FASB ASC 605-15-25-1 and 605-15-15-2, these are not considered returns for revenue recognition purposes.  For the year ended December 31, 2010, the returns of our product were not material.

Stock-Based Compensation

In December 2004, the Financial Accounting Standard Board, or the FASB, issued the Statement of Financial Accounting Standards, or SFAS, No. 123(R), “Share-Based Payment”, which replaces SFAS No. 123 and supersedes APB Opinion No. 25.  SFAS No. 123(R) is now included in the FASB’s ASC Topic 718, “Compensation – Stock Compensation.”  Under SFAS No. 123(R), companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees or independent contractors are required to provide services.  Share-based compensation arrangements include stock options and warrants, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans.  In March 2005, the SEC issued Staff Accounting Bulletin No. 107, or SAB 107, which expresses views of the staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies.  SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods.  On April 14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS No. 123(R).  Companies may elect to apply this statement either prospectively, or on a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods under SFAS No. 123.

We have fully adopted the provisions of FASB ASC 718 and related interpretations as provided by SAB 107.  As such, compensation cost is measured on the date of grant as the fair value of the share-based payments.  Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant.

Income Taxes

We account for income taxes in accordance with FASB ASC Topic 740, “Income Taxes.”  ASC 740 requires a company to use the asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences.  Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not be realized.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
 
Under ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.  For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.  The adoption had no effect on the Company’s consolidated financial statements.
 
 
26

 
 
Foreign Currency Translation and Comprehensive Income

U.S. GAAP requires that recognized revenue, expenses, gains and losses be included in net income.  Certain statements, however, require entities to report specific changes in assets and liabilities, such as gain or loss on foreign currency translation, as a separate component of the equity section of the balance sheet.  Such items, along with net income, are components of comprehensive income.  The functional currency of the Company is Renminbi (RMB).  The unit of RMB is in Yuan.  Translation gains are classified as an item of other comprehensive income in the stockholders’ equity section of the consolidated balance sheet.

Recent Pronouncements

In December 2009, FASB issued new guidance regarding improvements to financial reporting by enterprises involved with variable interest entities.  The new guidance provides an amendment to its consolidation guidance for variable interest entities and the definition of a variable interest entity and requires enhanced disclosures to provide more information about an enterprise’s involvement in a variable interest entity.  This amendment also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity and is effective January 1, 2010.  The adoption of this guidance had no impact on our consolidated financial position or results of operations.

In January 2010, FASB issued an amendment regarding improving disclosures about fair value measurements.  This new guidance requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement.  The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years.  There was no impact from the adoption of this guidance to our consolidated financial position or results of operations as the amendment only addresses disclosures.

In April 2010, FASB issued an amendment to Stock Compensation.  The amendment clarifies that an employee stock-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or service condition.  Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity.  The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010.  The adoption of this guidance had no impact on our consolidated financial position or results of operations since our stock-based payment awards have an exercise price denominated in the same currency of the market in which our Company shares are traded.

Results of Operations for the Year Ended December 31, 2010 as compared to the Year Ended December 31, 2009
 
   
For The Years Ended
December 31,
           
   
2010
   
2009
   
Change
 
%
 
                       
Net revenue
 
$
89,175,633
   
$
40,732,447
     
48,443,186
     
119
%
                                 
Cost of goods sold
   
(66,921,540
)
   
(30,136,581
)
   
(36,784,959)
     
122
%
                                 
Gross Profit
   
22,254,093
     
10,595,866
     
11,658,227
     
110
%
                                 
Selling expenses
   
(7,047,808
)
   
(1,947,613
)
   
(5,100,195)
     
262
%
General and administrative expenses
   
(4,129,458
)
   
(719,910
)
   
(3,409,548)
     
474
%
Other expenses
   
-
     
(556,312
   
556,312
     
(100)
%
Research and development expenses
   
(73,860
)
   
(98,087
)
   
24,227
     
(25)
%
Total Operating Expense
   
(11,251,126
)
   
(3,321,922
)
   
(7,929,204)
     
239
                                 
Operating income
   
11,002,967
     
7,273,944
     
3,729,023
     
51
%
                                 
Interest income
   
17,505
     
10,081
     
7,424
     
74
%
Interest expense
   
(341,555
)
   
(102,893
)
   
(238,662)
     
232
%
Non-operating income
   
12,404
     
-
     
(12,404)
     
-
 
Total Other Expense
   
(336,454
)
   
(92,812
)
   
(243,642)
     
263
%
                                 
Income before income taxes
   
10,666,513
     
7,181,132
     
3,485,381
     
49
%
 Income tax benefit
   
1,163,461
     
-
     
1,163,461
     
-
 
Net income
   
11,829,974
     
7,181,132
     
4,648,842
     
65
%
                                 
Preferred stock dividends
   
(327,721)
     
-
     
(327,721)
     
-
 
                                 
Net income available to common stockholders
 
$
11,502,253
   
$
7,181,132
     
4,321,121
     
60
%
                                 
Net income per common share – basic
 
$
1.36
   
$
1.46
     
(0.10)
     
(7)
%
                                 
Net income per common share – diluted
 
$
1.15
   
$
1.46
     
(0.31)
     
(21)
%
                                 
Weighted average number of common shares outstanding- basic
   
8,445,880
     
4,930,000
     
3,515,880
     
71
%
                                 
Weighted average number of common shares outstanding-dilute
   
10,249,041
     
4,930,000
     
5,319,041
     
108
%
 
 
27

 
 
Net Revenue

Our revenue for the year ended December 31, 2010 was $89.2 million compared with $40.7 million for the year ended December 31, 2009, an increase of $48.4 million, or 119%, of which $69.5 million was attributable to corn sales, $19.1 million to simple processed grain sales and the remaining $0.6 million from deep processed grain sales.

The following table breaks down the distribution of our sales volume and amount by divisions and as a percentage of gross sales:
 
    
For the Year Ended December 31, 2010
   
For the Year Ended December 31, 2009
 
   
Sales Volume (ton)
   
Gross Sales
   
Less Sales Discount
   
Net Sales
   
% of total sales
   
Sales Volume (ton)
    Gross Sales     Less Sales Discount     Net Sales     % of total sales  
Corn Division
   
240,375
     
69,516,954
     
-
     
69,516,954
     
78
%
   
133,260
     
32,212,159
     
-
     
32,212,159
     
79
%
Simple Processed Grain
   
10,035
     
19,063,353
     
-
     
19,063,353
     
21
%
   
7,096
     
9,368,136
     
847,849
     
8,520,288
     
21
%
Deep Processed Grain
   
-
     
595,327
     
-
     
595,327
     
1
%
   
-
     
-
     
-
     
-
     
-
 
                                                                                 
Total
   
250,410
     
89,175,633
     
-
     
89,175,633
     
100
%
   
140,356
     
41,580,295
     
847,849
     
40,732,447
     
100
%
 
 
28

 
 
The “grain division” described in previous filings is now referred to as the simple processed grain division in light of our expansion into deep processed grains, which is now a separate division.

The corn division increased its revenue by $69.5 million in the year ended December 31, 2010, or 116%, compared to the year ended December 31, 2009.  The increase in revenues was attributable to strong demand.  We believe strong and sufficient demand for corn is derived from a loyal customer base which we believe is attributable to our capability of fulfilling supply orders, our number of warehouses, our high production capacity, our accessibility to railway and transportation, our quality of customer service and products and our competitive pricing.  Our sales growth of corn depends upon our cash flow and capital utilization since we have to pay our farmers or agents first before we can collect from our customers.  The completion of our private placement in May 2010 also contributed to our growth in our corn division in terms of working capital injections.

The simple processed grain division increased its revenues by $10.5 million in the year ended December 31, 2010, or 124%, compared to the year ended December 31, 2009.  The increase in revenues was attributable to our new sales and marketing initiatives, our increase from 300 to approximately 10,000 stores and our increased brand name recognition efforts.  Additionally, during the fourth quarter of 2010, the Company conducted bulk purchase and wholesale trading of rice and flour, resulting in $5.1 million and $0.8 million of sales revenue, respectively.  Management expects to continue to increase the trading volume and to expand its customer base in this sector during 2011.
 
Cost of Goods Sold
 
Cost of goods sold mainly consists of cost of raw materials, labor, utilities, manufacturing costs, manufacturing related depreciation and packaging costs.  Cost of goods sold as a percentage of net revenue increased slightly by 1% from 74% in 2009 to 75% in 2010.  We experienced a purchase cost increase on both corn and grains in 2010 due to a growing demand for corn and grains both globally and domestically, price increases in general and temporary grain shortages in other regions of China which were caused by drought and floods.  The increase in the price of corn resulted in higher margins in our corn division since we were able to pass such increased costs onto our customers.  However, for our simple and deep processed grain products, our selling price remained stable and therefore, increased costs of grains in 2010 negatively affected our profit margins in those divisions.
 
Gross Profit
 
As a percentage of net revenue, gross margin was 25.0% for the year ended December 31, 2010 as compared to 26.0% for the year ended December 31, 2009.  The slight decrease was mainly due to a slightly lower gross margin in our grains division in 2010 as compared to 2009, partially offset by increase in gross margin in the corn division.

Gross margin for the corn division was 22.13% for the year ended December 31, 2010, up by 255 basis points from 19.58% for the year ended December 31, 2009.  The increase was mainly due to higher sales price resulting from higher value of our product brand pursuant to the strengthened relationship with our major customers, the development and growing number of new customers, the affluent funding to purchase more raw materials, and the continuous enhancements in warehousing, as well as our existing advantages in logistics, transportation, product quality, and timely delivery prevailing in the market.

Gross margin for the simple-processed grains division was $35.21% for the year ended December 31, 2010, down by 196 basis points from 54.84% for the year ended December 31, 2009.  The decrease was mainly attributable to the continuous increase in the purchase cost of millet in 2010.  Additionally, we offered promotional price reductions for entering into new supermarkets and holiday sales events during the Chinese New Year season in January and February of 2010, which contributed to the compression of our margin of grain products.

 
29

 
 
Selling Expenses
 
Selling expenses increased by approximately $5.1 million, or 262%, from $1.9 million n the year ended December 31, 2009 to $7 million in the year ended December 31, 2010.  Such increase is attributable to increased freight charges of $1.7 million related to sales increases, new slotting fees of $2.0 million for entering more retail stores and supermarkets for simple and deep processed grain products, newly increased sales and marketing personnel expenses of $0.5 million and newly incurred advertising and endorsement costs of $0.5 million, as well as other costs increased associated with our expanding sales force.

General and Administrative Expenses

The following table breaks down our General and Administrative Expenses:
 
   
For The Years Ended
December 31,
             
   
2010
   
2009
   
Change
   
%
 
                         
Payroll, welfare, and bonuses
 
$
1,798,696
   
$
380,239
   
$
1,418,457
     
373
%
Professional service expense
   
570,168
     
65,879
     
504,289
     
765
%
Rent and utilities
   
355,769
     
16,065
     
339,704
     
2115
%
Travel and lodging expense
   
331,095
     
-
     
331,095
     
100
%
Depreciation & amortization Expense
   
213,210
     
104,116
     
109,094
     
105
%
Others
   
860,520
     
153,611
     
706,909
     
460
%
Total
 
$
4,129,458
   
$
719,910
   
$
3,409,548
     
474
%

General and administrative expenses increased by approximately $3.4 million, or 474%, from $0.7 million in the year ended December 31, 2009 to $4.1 million in the year ended December 31, 2010.  As a percentage of net revenue, our general and administrative expense increased to 4.6% for the year ended December 31, 2010 from 1.8% for the year ended December 31, 2009.  This increase is mainly due to our business growth and expansion that increased our payroll and related expenses, travel, auto, office and all other related expenses.  Additionally, expenses related to regulatory compliance as a U.S. reporting company and for U.S. capital market operations mainly triggered an increase of $0.5 million in our professional service expenses, including investor relations, legal, accounting, and consulting services.
 
Interest Expense
 
Interest expense increased by $238,662, or 232%, from $102,893 in the year ended December 31, 2009 to $341,555 in the year ended December 31, 2010.  This increase is attributable to a 100% increase in the average short-term loan balance of $2.2 million in 2010 as compared with approximately $1.1 million in 2009.  We increased our borrowing to fulfill capital demand resulting from the following:

 
(a)
The increase of our inventory on hand in anticipation of future price increases,
 
(b)
The increase of terms of accounts receivable from customers in our simple- and deep- processed divisions,
 
(c)
The increase in cash purchases of corn and grains resulting from growing demand.
 
Provision for Income Taxes
 
Under the Enterprise Income Tax (“EIT”) Law of the PRC, the standard EIT rate is 25%.  Our PRC subsidiaries are subject to PRC income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which they operate.  According to the Tax Pronouncement [2008] No. 149 issued by the State Administration of Tax of the PRC, the preliminary processing industry of agricultural products is entitled to EIT exemption starting January 1, 2008.  Three of the Company’s wholly-owned subsidiaries located in Shanxi Province, including Jinzhong Deyu, Jinzhong Yongcheng, and Jinzhong Yuliang, are subject to the EIT exemption.  All of our other subsidiaries and consolidated VIEs are subject to the 25% EIT rate.  The operations of Detian Yu, Deyufarm, HaoLiangXin and Xinggu Deyufarm commenced late in the second half of 2010 and as a result, those entities had not been in a profitable position during the remainder of 2010 and therefore, were entitled to income tax benefits.
 
 
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Net Income
 
Net income, before income taxes and preferred stock dividends, increased by approximately $3.5 million, or 49%, from $7.2 million in the year ended December 31, 2009 to $10.7 million in the year ended December 31, 2010.  This increase is mainly attributable to the growth of our simple-processed grain division with an increase of $10.5 million in net revenue and an increase of $8.6 million in gross profit, as well as the growth of our corn division with an increase of $37.3 million in net revenue and an increase of $11.4 million in gross profit.
 
Liquidity and Capital Resources
 
The following summarizes the key component of our cash flows for the years ended December 31, 2009 and 2010:
 
   
2010
   
2009
 
Net cash provided by operating activities
 
$
206,602
   
$
1,622,346
 
Net cash (used in) provided by investing activities
   
(12,961,541)
     
1,370,092
 
Net cash provided by (used in) financing activities
   
16,143,588
     
(763,746)
 
Effect of exchange rate change on cash and cash equivalents
   
204,594
     
1,400
 
Net increase in cash and cash equivalents
 
$
3,593,243
   
$
2,230,092
 
 
For the year ended December 31, 2010, net cash provided by operating activities totaled approximately $0.2 million, a decrease of approximately $1.4 million, or 87%, from approximately $1.6 million in the year ended December 31, 2009.  This decrease is primarily attributable to increase in cash used in inventory purchasing as a result of the continuous growth of our business and higher purchase cost of raw materials during 2010.  Additionally, the purchase of our raw materials requires payments to be made to the suppliers at the time of delivery without credit term.  As our business continued to grow in 2010, more cash was used in inventory purchase accordingly.  The increase in accounts receivable was $1.9 million in 2009 as compared to $6.6 million in 2010 as a result of growth of our net revenue and credit terms offered to new retailers and wholesalers also contributed to the reduction in net cash provided by our operating activities.

For the year ended December 31, 2010, net cash used in investing activities was approximately $13.2 million, as compared to $1.4 million of net cash provided by investing activities for the year ended December 31, 2009.  Such increase is primarily attributable to a prepaid amount of $6.9 million used for the acquisition of farmland use rights, $3.6 million used to construct and remodel our factory and warehouses, $2.1 million use to purchase machinery and equipment and $1 million to purchase an Enterprise Resource and Planning system.
 
Net cash provided by financing activities was approximately $16.1 million during the year ended December 31, 2010 as compared to $0.8 million during the year ended December 31, 2009.  Such increase was mainly attributable to net proceeds of approximately $9.1 million received in connection with our private placement in May 2010, including restricted cash held in escrow and net of direct financing costs, $7.4 million in short-term loans from related parties and approximately $1.8 million in net proceeds from short-term bank loans.

We believe that our current levels of cash, cash flows from operations, and bank/related party borrowings will be sufficient to meet our anticipated cash needs 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 to 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.
 
 
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Summary of Certain Liquidity Events

In connection with an exchange agreement, on April 27, 2010, we issued an aggregate of 8,736,932 shares of our common stock to the shareholders of City Zone.  We received in exchange from the City Zone shareholders 100% of the shares of City Zone, which exchange resulted in City Zone becoming our wholly owned subsidiary.  Immediately after the Share Exchange, we entered into a Purchase Agreement with certain accredited Investors for the issuance and sale in a private placement of units, consisting of, 2,455,863 shares of our Series A convertible preferred stock, par value $0.001 per share and Series A warrants to purchase up to 982,362 shares of our common stock, for aggregate gross proceeds of approximately $10,805,750.

On November 4, 2010, the Company’s Board of Directors approved the Company’s 2010 Share Incentive Plan.  Under the Plan, 1,000,000 shares of the Company’s common stock shall be allocated to and authorized for use pursuant to the terms of the Plan.  On November 8, 2010, a total of 931,000 non-qualified incentive stock options were approved by our Board of Directors and granted under the Plan to executives, key employees, independent directors, and consultants at an exercise price of $4.40 per share and on December 15, 2010, 40,000 non-qualified incentive stock shares were approved by our Board of Directors and granted under the Plan to a consultant at an exercise price of $4.40 per share, of which shall vest as follows:
 
33 1/3% of the option grants vested one (1) month after the date of grant;
33 1/3% of the option grants will vest twelve (12) months after the date of grant; and
33 1/3% of the option grants will vest twenty-four (24) months after the date of grant.

On November 5, 2011, we filed a Registration Statement with the SEC on Form S-8 covering the shares underlying the options set forth above.  As of March 31, 2011, none of the options issued pursuant to the Plan have been exercised.

Contractual Obligations

The following table presents the Company’s material contractual obligations as of December 31, 2010:

Constractual Obligations
 
Total
   
Less than
1 year
   
1-3 years
   
3-5 years
   
More than
5 years
 
                               
Bank Loans
  $ 2,631,364     $ 2,631,364     $ -     $ -     $ -  
Operation Lease Obligations
    9,825,542       946,908       1,614,595       889,198       6,374,841  
    $ 12,456,906     $ 3,578,272     $ 1,614,595     $ 889,198     $ 6,374,841  
Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

We are a “smaller reporting company” and, as such, are not required to provide this information.

ITEM 8.Financial Statements

Reference is made to the “F” pages herein comprising a portion of this Annual Report on Form 10-K.
 
 
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ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

On April 27, 2010, our board of directors (the “Board of Directors”) dismissed George Stewart, CPA (“Stewart”) as our independent registered public accounting firm, and engaged a new independent registered public accounting firm, KCCW Accountancy Corp. (“KCCW”), to serve as our independent auditor.  Steward was dismissed as our independent registered public accounting firm effective on April 27, 2010.  For the two most recent fiscal years ended May 31, 2009, Stewart’s report on the financial statements did not contain any adverse opinions or disclaimers of opinion, and were not qualified or modified as to uncertainty, audit scope, or accounting principles, other than for a going concern.  The dismissal of Stewart and engagement of KCCW were approved by our Board of Directors.  We did not have any disagreements with Stewart relating to any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure for the audited financials for the fiscal years ended May 31, 2009 and 2008, and subsequent interim periods ended August 30, 2009, November 30, 2009 and February 28, 2010 and through the date of dismissal, which disagreements, if not resolved to the satisfaction of Stewart, would have caused us to make reference to the subject matter of the disagreements in connection with our reports.  During our fiscal years ended May 31, 2009 and 2008, and subsequent interim periods ended August 30, 2009, November 30, 2009 and February 28, 2010 and through the date of dismissal, we did not experience any reportable events.  The Company obtained a letter from Stewart addressed to the United States Securities and Exchange Commission stating it agrees with the statements presented in the Form 8-K filed by the Company on May 3, 2010 and the letter was attached to the Form 8-K as Exhibit 16.1.

On April 27, 2010, we engaged KCCW to serve as our independent registered public accounting firm.  Prior to engaging KCCW, we had not consulted KCCW regarding the application of accounting principles to a specified transaction, completed or proposed, the type of audit opinion that might be rendered on our financial statements or a reportable event, nor did we consult with KCCW regarding any disagreements with our prior auditor on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of the prior auditor, would have caused us to make a reference to the subject matter of the disagreements in connection with our reports.  We did not have any disagreements with KCCW, and therefore did not discuss any past disagreements with KCCW.

Item 9A.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act. Based on this evaluation, our management, including our principal executive officer and our principal financial officer, concluded that our disclosure controls and procedures were effective as of the fiscal quarter covered by this Annual Report, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act (i) is recorded, processed, summarized and reported within the time period specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate to allow appropriate decisions on a timely basis regarding required disclosure.
 
Management’s Annual Report on Internal Control over Financial Reporting
 
Management is responsible for establishing and maintaining adequate internal control structure and procedures over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) under the Exchange Act. Our management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2010 based on the framework similarly set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
 
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Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting as of December 31, 2010 was effective.    

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the permanent exemption rules for smaller reporting companies, which require the company to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting
 
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
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PART III
 
ITEM 10.  Directors, Executive Officers and Corporate Governance
 
Directors and Executive Officers

Provided below is a list of the names, ages and positions of all our directors and executive officers. 
 
Name
Age
Position
Jianming Hao
36
Chairman of the Board of Directors, Chief Executive Officer
Wenjun Tian
37
President, Director
Charlie Lin
40
Chief Financial Officer
Jianbin Zhou
42
Chief Operating Officer
Michael Han
40
Corporate Secretary
Al Carmona
52
Independent Director and member of Audit Committee
Longjiang Yuan
47
Independent Director and member of Audit Committee
Timothy Stevens
59
Independent Director and Chairman of Audit Committee

Provided below is a list of the names, ages and positions of certain of our significant employees:
 
Name
Age
Position
Junde Zhang
39
Vice President for the Grains Division
Yongqing Ren
29
Vice President for the Corn Division
Li Ren
47
Vice President for Branding and Marketing
Weizhong Cai
48
Chief Scientist

Family Relationships

There is no family relationship between any of the officers, directors and significant employees of the Company. 
 
Election of Directors and Officers

All directors hold office until the next annual meeting of shareholders and until their successors have been duly elected and qualified. Officers are elected by and serve at the discretion of the Board.
 
Our directors are reimbursed for expenses incurred by them in connection with attending Board meetings, but they do not receive any other compensation for serving on the Board.

Biographies of Officers and Directors

Mr. Jianming Hao, 36, Chief Executive Officer and Chairman of the Board of Directors
 
Mr. Hao is our CEO and Chairman. Between December 2001 to May 2004, Mr. Hao served as the Finance Manager of China Merchants Dichain (Asia) Ltd., a Hong Kong listed company. Between May 2004 and November 2007, Mr. Hao served as a director and Vice President of Shenzhen Litong Investments Ltd.  Since November 2007, he has been a director of Jinzhong Deyu Agriculture Trading Co. Limited, which is now a subsidiary of Deyu Agriculture Corp.  Mr. Hao received a Master’s degree in Finance from Nankai University. He is also a certified public accountant in China.

Mr. Wenjun Tian, 37, Director and President
 
Mr. Tian is a Director and our President. Between September 2003 and December 2007, Mr. Tian served as the Chairman of Shanxi Dongsheng Auction Co., Ltd. Between January 2008 and November 2009, Mr. Tian served as the Chairman of Dongsheng International Investment Inc. He has been a director of Detian Yu since December 2009.  Mr. Tian is the holder of an undergraduate degree and has over 10 years experience in corporate management. Mr. Tian is particularly experienced in investment in agricultural enterprises.
  
 
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Mr. Charlie Lin, 40, Chief Financial Officer

Effective January 10, 2011, the Company appointed Mr. Charlie Lin to serve as the Company’s new Chief Financial Officer.  Mr. Lin is a Certified Public Accountant, a Certified Financial Manager and a Certified Management Accountant.  From March 2008 through January 2011, Mr. Lin previously served as Corporate Controller of Microfabrica, Inc., a start-up VC backed medical device company based in Van Nuys, California where he was in charge of, among other things, accounting, tax, purchasing, financial and operation analyses.  Mr. Lin also has experience securing venture capital funding and has extensive experience working with Microfabrica’s big four accounting firm in connection with the company’s annual audits.  From April 2006 through March 2008, Mr. Lin served as Controller of Ricon Corporation, a  subsidiary of Westinghouse Air Brake Technology Corp. (NYSE: WAB) based in Panorama City, California.  From March 2004 through April 2006, Mr. Lin served as Controller of ProAction Products, Inc., a private injection molding company based in Van Nuys, California.  Mr. Lin was trained as an auditor for Arthur Anderson LLP from 1992 to 1995 and he earned his Bachelors of Science of Accounting and his Masters of Science of Acounting degrees from the University of Wisconsin.  Mr. Lin is a Member of the American Institute of Certified Public Accountants, the Illinois CPA Society and the Institute of Management Accountants. 

Mr. Jianbin Zhou, 42, Chief Operating Officer

Mr. Zhou is our Chief Operating Officer. Between January 2005 and December 2006, Mr. Zhou served as the General Manager of Beijing Kangqiaoshidai Education Development Co., Ltd. Between January 2007 and October 2008, he was the General Manager of Antai Global (Beijing) Risk Management Co., Ltd. Mr. Zhou also served as the Vice President of Dongsheng International (Beijing) Investment Co., Ltd. between October 2008 and August 2009. Mr. Zhou has been a director of Detian Yu since August 2009.  Mr. Zhou is the holder of an undergraduate degree.

Mr. Michael Han, 40, Corporate Secretary

Effective January 10, 2011, the Company appointed Mr. Michael Han to serve as the Company’s Corporate Secretary. From April 2009 through January 2011, Mr. Han served as Vice President for Beijing Jinhuanya Management Consulting Co., Ltd., a PRC company. From April 2006 through March 2009, Mr. Han previously served as Vice President and Manager of the Administration Department of General Circuits (Beijing) Ltd., a PRC company, where he was in charge of Administration, Finance, Marketing and International Sales and Business Development. From April 2001 through March 2006, Mr. Han served as Senior Key Account Manager of Shougang NEC Electronics Co., Ltd., a PRC electronics company. Mr. Han earned his Bachelors of Science degree in Metal Forming & Metal Materials from the College of Beijing Iron & Steel Technology and his Masters in Business Administration degree from Tsinghua University. There is no family relationship between Mr. Han and any of the other officers and directors of the Company.

Mr. Al Carmona, 52, Independent Director and Member of Audit Committee

Mr. Carmona is an independent director of the Company.  During the last 25 years, Mr. Carmona has been with Mars & Co, a high end international strategy consulting firm, during which he served as Executive Vice President and Senior Advisor and has coordinated their Global Business Development Council. With the assistance of Mr. Carmona, Mars & Co. grew to over 250 professionals worldwide. Mr. Carmona has deep experience in a wide variety of areas including cost and supply chain optimization, brand strategy, pricing and demand building optimization, competitive analysis, portfolio optimization, business unit turnarounds, as well as acquisition and divestiture analysis.  Mr. Carmona has a Bachelor of Science degree in Chemical Engineering from Princeton University and a MBA degree from the Wharton Business School, University of Pennsylvania.
 
 
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Mr. Longjiangg Yuan, 47, Independent Director and Member of Audit Committee

Mr. Yuan is an independent director of the Company. He is an acknowledged expert in agricultural technology and has been serving as the vice director of the Science and Technology Bureau of the Chinese Academy of Agricultural Sciences, the largest and highest agriculture institute in China (“CAAS”). Prior to joining the Company, Mr. Yuan spent 17 years in the Institute of Crop Science of the CAAS, where he was also the senior director of the R&D team for paddy rice genetic breeding technologies as well as a scientist in the science commission. He is the director of the Crop Science Society of China and an expert for the National Crop Variety Approval Committee. From 2002 to 2004, Mr. Yuan was an independent director of the board of Shanxi Tunyu Seed Industry Co., Ltd.  Over the years, Mr. Yuan has participated in and led 13 national R&D programs and has developed 17 new crop breeds. He has published more than 20 academic thesis and 5 books on agricultural sciences. Mr. Yuan was also granted 2 scientific and technological progress awards by the Ministry of Agriculture of China.  Mr. Longjiangg Yuan holds a master’s degree in Plant Genetic Breeding from the Graduate School of the Chinese Academy of Agricultural Sciences and a bachelor’s degree in Agriculture from Wan Nan Agriculture University.

Mr. Timothy C. Stevens, 59, Independent Director and Chairman of Audit Committee

Mr. Stevens is an independent director of the Company. Mr. Stevens has over 30 years of executive leadership, management, and client service experience with the world’s leading law, public accounting, and management consulting firms. Since 2004, Mr. Stevens served as the Executive Director of Saul Ewing LLP, a Philadelphia law firm where he oversaw all aspects of its day to day business operations with a focus on improving the bottom line and supporting the Firm’s growth strategy and other key objectives. From 1999 to 2003, he served as the Chief Operating Officer and a member of the Management Committee in the Hong Kong and China offices of the international law firm Baker & McKenzie where he was responsible for all operations (other than client service) for Baker & McKenzie’s large Hong Kong and China practice. From 1995 to 1998, Mr. Stevens served in the Chairman’s office as the Finance and Administrative Partner of PricewaterhouseCoopers China, the world’s largest auditing firm, where he supervised the business plans, office openings and expansions as well as the financial management of the firm.  Mr. Stevens graduated from Clifton College and Bristol University in the United Kingdom. He received the ACA qualification from the UK Chartered Accountants’ Qualification Program in 1974. Mr. Stevens is a licensed CPA in Massachusetts as well as being a Hong Kong FCPA.
 
Mr. Junde Zhang, 39, Vice President for the Grains Division

Mr. Zhang is our Vice President responsible for the operation of the Grains Division. Since April 2004, he has been the Production Director and the General Manager of our Cereal Crops Division. Mr. Zhang is a successful entrepreneur and was appointed as a member of the Yuci People’s Congress. He was awarded the honorable title of Industrial Restructuring Leader by the Yuci Municipal Government.

Mr. Zhang is the holder of an undergraduate degree and has over 10 years of experience in grain breeding, cultivation, processing, marketing and management.

Mr. Yongqing Ren, 29, Vice President for the Corn Division
 
Mr. Ren has been the Vice President and General Manager of our Corn Division since April 2004. He was conferred the honorable title of Industrial Restructuring Leader for two consecutive years and the prize of Top Ten Youth Career Development Contributor by the Yuci Municipal Government.

Mr. Ren is the holder of an undergraduate degree. He is well experienced in corn breeding, cultivation, processing, marketing and management.
 
Mr. Li Ren, 47, Vice President for Branding and Marketing
 
Mr. Ren is our Vice President in charge of Branding and Marketing. He is one of the most well known senior brand managers in the consumer goods industry of China. Between May 1998 and June 2001, Mr. Ren served as the director of Marketing, Administration and Human Resources with Hebei Hualong Group. Between 2003 and 2006, Mr. Ren was the Vice President of Hebei Zhongwang Group and successfully established Beijing Wu Gu Dao Chang Company. Thereafter, he became a free lance brand planner. During the period of June 2007 to March 2008, Mr. Ren helped integrate the brands of White Elephant Group and in 2009, he completed the assignment of the brands of Chengde Wu Gu Agricultural Farm and the strategic planning for the city brands of Urban Zhejiang Jiaxing Nanhu Company. Mr. Ren also established a partnership consulting company in November 2009.
 
 
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Mr. Ren is very experienced in the areas of brand core concept refining, brand structure systemization, brand strategic planning and brand integration and marketing communication. He is one of the few experts in local brand development area in China. Mr. Ren is the holder of an undergraduate degree.

Dr. Weizhong Cai, Age 48, Chief Scientist

Dr. Cai is the Chief Scientist of the Company. Dr. Cai is currently the professor and tutor of food nutrition and health in the School of Public Health, Peking University.  He is mainly engaged in research and teaching of dietary nutrition and hygiene subjects.

In 1979, Dr. Cai was admitted to the Jiangsu Agricultural University where he obtained his bachelor degree, and he began his research works in 1983. He was later admitted to the Graduate School of Chinese Academy of Agricultural Science and Chinese Agricultural University, where he obtained his master and doctorate degrees respectively. During the years from 1995 to 2001, Dr. Cai participated in the nutrition research in the University of California, Wageningen University, and the Swedish Agricultural University.  His research examined specifically in nutritional metabolism, nutrition analysis and nutrition evaluation, covering the human, food and agriculture.

Dr. Cai focused in the research and management for the Chinese Academy of Agricultural Sciences, China Food Group, China Animal Husbandry Industry Group, the National Development and Reform Commission, and the Public Nutrition and Development Centre.  His current research covers public nutrition, children nutrition, food and beverage nutrition, cereals nutrition, nutrition education, nutrition policy, development of nutritional and functional food.

In addition to his commitment to teaching and promoting learning, Dr. Cai has been extensively involved in the advisory works to the government with regard to promotion works in public nutrition improvement and food nutrition development.  He was invited by the “Outline of the Food Industry Development” in the nutrition science guidance section of the National “Eleventh Five-year” program as a script writer. As the National Children Food Safety Action Expert Team leader and the appointed expert to the Public Nutrition Improvement Projects, Dr. Cai also involved in the management and social promotion works in national nutrition improvement, education, policy, development and children food safety.

Dr. Cai is currently engaged in the research and development of Chinese dietary micronutrient intake system, and scientific catering system projects for infants. As a nutrition and health professional, he published dozens of professional articles in international professional conferences, journals and many media.  As the author, he wrote over 100 articles in public health education and scientific articles for media of newspaper, internet, radio and television. His published works include “Public Nutrition and Social Economic development”, “Advanced Nutrition”, “European Food Safety System”, “China Nutrition Industry Development Report”, and “Colorful Healthy Diet Decoding”, etc.

Director Qualifications and Experience
 
The Board considers various characteristics, such as experience, qualifications, attributes and skills, in making its decision to appoint and nominate directors to the Board.

Mr. Hao has the experience, qualifications, attributes and skills to qualify him to serve as a director.  His experience running the Company and its subsidiaries have contributed to his knowledge of the business and his understanding of the grain and corn products industry.  Because of this experience, we expect that he will act in the best interest of the Company.
 
 
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Mr. Tian has the experience, qualifications, attributes and skills to qualify him to serve as a director.  His experience with our subsidiaries and the knowledge he has acquired managing businesses and running our subsidiaries has given him the experience necessary to be ability to sit on our Board of Directors.  Because of this experience, we expect that he will act in the best interest of the Company.

Mr. Carmona has the experience, qualifications, attributes and skills to qualify him to serve as a director.  His past work experience working with companies to optimize their operations and maximize profits gives us the confidence that he will be an asset to our Board of Directors.  Because of this experience, we expect that he will act in the best interest of the Company.

Mr. Yuan has the experience, qualifications, attributes and skills to qualify him to serve as a director.  His past work experience and research experience in the genetic breeding field will be an asset to us as we strive to maximize our grain and corn production and manufacturing. Because of this experience, we expect that he will act in the best interest of the Company.

Mr. Stevens has the experience, qualifications, attributes and skills to qualify him to serve as a director.  His past work experience overseeing the world’s leading law, public accounting and management consulting firms will be an asset to us and he will be in a strong position to oversee our operations and corporate governance.  Because of this experience, we expect that he will act in the best interest of the Company.
  
 Legal Proceedings
 
Unless otherwise indicated, to the knowledge of the Company after reasonable inquiry, no current director or executive officer of the Company during the past ten years, has (i) been convicted in a criminal proceeding (excluding traffic violations or other minor offenses), (ii) been a party to any judicial or administrative proceeding (except for any matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, U.S. federal or state securities laws, or a finding of any violation of U.S. federal or state securities laws, (iii) filed a petition under federal bankruptcy laws or any state insolvency laws or has had a receiver appointed for the person’s property or (iv) been subject to any judgment, decree or final order enjoining, suspending or otherwise limiting for more than 60 days, the person from engaging in any type of business practice , acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity or engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws, (v) been found by a court of competent jurisdiction in a civil action or by the Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated, (vi) been found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated, (vii) been the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (a) any Federal or State securities or commodities law or regulation, (b) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order, or (c) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity, or (viii) been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
 
 
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There are no material pending legal proceedings to which any of the individuals listed above is party adverse to the Company or any of its subsidiaries or has a material interest adverse to the Company or any of its subsidiaries.
 
CORPORATE GOVERNANCE
 
Director Independence and Board Committees
 
Director Independence

Our stock is currently quoted on the OTCQB. The OTCQB does not have rules regarding director independence. Accordingly, although our audit committee charter states that each member shall meet the independence requirements set out by the applicable listing standards of the securities exchange, securities association, SRO, or stock market on which the Company’s securities are quoted or listed for trading, we determined that the NASDAQ Marketplace independence requirements were an appropriate standard to determine independence because these requirements are stricter than the current OTC Bulletin Board’s requirements. Additionally, we adopted these stricter standards to strengthen our corporate governance and improve internal controls.
 
Subject to certain exceptions, under the listing standards of the NASDAQ Marketplace, a listed company’s board of directors must consist of a majority of independent directors. Currently, our board of directors has determined that each of the non-management directors, Al Carmona, Longjiang Yuan and Timothy Stevens, are “independent” directors as defined by the listing standards of NASDAQ currently in effect and approved by the U.S. Securities and Exchange Commission and all applicable rules and regulations. All members of the Audit Committee satisfy the “independence” standards applicable to members of such committee. The board of directors made this affirmative determination regarding these directors’ independence based on discussions with the directors and on its review of the directors’ responses to a standard questionnaire regarding employment and compensation history; affiliations, family and other relationships; and transactions with the Company. The board of directors considered relationships and transactions between each director or any member of his immediate family and the Company and its subsidiaries and affiliates. The purpose of the board of director’s review with respect to each director was to determine whether any such relationships or transactions were inconsistent with a determination that the director is independent under the NASDAQ rules.

Audit Committee

On August 19, 2010, we established our Audit Committee. The Audit Committee consists of Timothy Stevens, Al Carmona and Longjiang Yuan, each of whom is an independent director. Timothy Stevens, Chairman of the Audit Committee, is an “audit committee financial expert” as defined under Item 407(d) of Regulation S-K. The purpose of the Audit Committee is to represent and assist our board of directors in its general oversight of our accounting and financial reporting processes, audits of the financial statements and internal control and audit functions. The Audit Committee’s responsibilities include:

 
The appointment, replacement, compensation, and oversight of work of the independent auditor, including resolution of disagreements between management and the independent auditor regarding financial reporting, for the purpose of preparing or issuing an audit report or performing other audit, review or attest services; and
     
 
Reviewing and discussing with management and the independent auditor various topics and events that may have significant financial impact on our company or that are the subject of discussions between management and the independent auditors.

The board of directors has adopted a written charter for the Audit Committee.  During the fiscal year ended December 31, 2010, the Audit Committee met three times.
 
 
40

 
 
Procedures for Determining Executive Compensation

On August 19, 2010, our Board of Directors approved the adoption of the independent director oversight of Executive Officer compensation.  Pursuant to NASDAQ Rule 5605(d), all matters regarding executive officer compensation shall be submitted for approval or recommendation by a majority of the independent directors.

Procedures for Selection of Director Nominees

On August 19, 2010, the Board of Directors of the Company approved the adoption of the procedures for the selection of director nominees.  Pursuant to NASDAQ Rule 5605(e)(1), a majority of the independent directors shall recommend and select the director nominees.
  
Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than ten percent of a registered class of our equity securities, to file reports of ownership and changes in ownership with the SEC.  Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.
 
To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company, all reports under Section 16(a) required to be filed by its officers and directors and greater than ten percent (10%) beneficial owners were filed as of the date of this filing, except that Charlie Lin is still in the process of obtaining SEC filing codes in order to file a Form 3 in connection with his appointment as Chief Financial Officer of the Company on January 10, 2011.

Code of Ethics

On August 19, 2010, our Board of Directors adopted a Code of Conduct applicable to all directors, officers and employees. Pursuant to NASDAQ Rule 5610, the Code of Conduct complies with the definition of a “code of ethics” set out in Section 406(c) of the Sarbanes-Oxley Act of 2002.  A copy of such Code of Conduct is referenced as Exhibit 14.1 herein.

ITEM 11.  Executive Compensation

The following table sets forth all cash compensation paid by us, as well as certain other compensation paid or accrued, in 2010 and 2009, to each of the following named executive officers:
  
Name and Principal Position
 
Fiscal
Year
 
Salary
($)
   
Bonus
($)
   
Stock and Option
Awards
number
   
All Other
Compensation 
($)
   
Total
($)
 
                                   
Jianming Hao
 
2010
   
26,435
     
--
     
150,000
     
63,444
     
89,879
 
(Chief Executive Officer)
 
2009
   
2,266
     
--
     
--
     
--
     
2,266
 
                                             
Wenjun Tian
 
2010
   
26,435
     
--
     
150,000
     
63,444
     
89,879
 
(President)
 
2009
   
2,266
     
--
     
--
     
--
     
2,266
 
                                             
David Lethem
 
2010
   
64,334
     
--
     
25,000
     
--
     
64,334
 
(Former Chief Financial Officer)
 
2009
   
--
     
--
     
--
     
--
     
--
 
                                             
Charlie Lin
 
2010
   
--
     
--
     
--
     
--
     
--
 
(Chief Financial Officer)
 
2009
   
--
             
--
     
--
     
--
 
                                             
Jianbin Zhou
 
2010
   
43,807
     
--
     
40,000
     
15,106
     
58,913
 
(Chief Operating Officer}
 
2009
   
4,532
     
--
     
--
     
--
     
4,532
 
                                             
Michael Han
 
2010
   
13,595
     
--
     
--
     
--
     
13,595
 
Corporate Secretary
 
2009
   
--
     
--
     
--
     
--
     
--
 
                                             
Junde Zhang (1)
 
2010
   
5,287
     
--
     
40,000
     
37,009
     
42,296
 
(Vice President of the Grains Division)
 
2009
   
--
     
--
     
--
     
--
     
--
 
                                             
Yongqing Ren (1)
 
2010
   
5,287
             
40,000
     
37,009
     
42,296
 
(Vice President of the Corn Division)
 
2009
   
--
     
--
     
--
     
--
     
--
 
                                             
Li Ren (1)
 
2010
   
30,967
             
30,000
     
15,106
     
46,073
 
(Vice President of Branding and Marketing)
 
2009
   
--
     
--
     
--
     
--
     
--
 
                                             
Weizhong Cai
 
2010
   
1,133
     
--
     
--
     
--
     
1,133
 
(Chief Scientist)
 
2009
   
 -
     
 -
     
 -
     
 -
     
--
 
 
(1)   
Although they are not executive officers, based upon the compensation received, Mr. Junde Zhang, Mr. Yongqing Ren and Mr. Li Ren qualify as named executive officers for purposes of this table.
 
 
41

 
 
Outstanding Equity Awards at the End of the Fiscal Year

The following table summarizes the number of securities underlying outstanding plan awards for each named executive officer as of December 31, 2010:
 
   
Option Awards
 
Stock Awards
   
Number of
Securities
Underlying
Unexercised
Options (#)
 
Number of
Securities
Underlying
Unexercised
Options (#)
 
Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
 
Option
Exercise
Price ($)
 
Option
Expiration
Date
 
Number
of Shares
or Units
of Stock
That
Have Not
Vested (#)
 
Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested ($)
(4)
 
Equity
Incentive Plan
Awards:
Number of
Unearned
Shares, Units
or Other
Rights That
Have Not
Vested (#)
 
Equity
Incentive Plan
Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested ($)
Name
 
Exercisable
 
Unexercisable
 
 
 
 
 
 
 
Jianming Hao
 
50,000
 
100,000
 
-
 
4.40
 
November 5, 2020
 
-
 
--
 
-
 
-
Wenjun Tian
 
50,000
 
100,000
 
-
 
4.40
 
November 5, 2020
 
-
 
-
 
-
 
-
David Lethem
 
8,333 (1)
 
16,667 (1)
 
-
 
4.40
 
November 5, 2020
 
-
 
-
 
-
-
-
Charlie Lin
 
-
 
-
 
-
 
-
 
-
 
-
 
-
 
-
 
-
Jianbin Zhou
 
13,334
 
26,666
 
-
 
4.40
 
November 5, 2020
 
-
 
-
 
-
 
-
Michael Han
 
-
 
-
 
-
 
-
 
November 5, 2020
 
-
 
-
 
-
 
-
Junde Zhang
 
13,334
 
26,666
 
-
 
4.40
 
November 5, 2020
 
-
 
-
 
-
 
-
Yongqing Ren
 
13,334
 
26,666
 
-
 
4.40
 
November 5, 2020
 
-
 
-
 
-
 
-
Li Ren
 
10,000
 
20,000
 
-
 
4.40
 
November 5, 2020
 
-
 
-
 
-
 
-
Weizhong Cai
 
-
 
-
 
-
 
-
 
-
 
-
 
-
 
-
 
-
 
(1) As a result of the termination of employment of Mr. David Lethem effective January 10, 2011, such options shall expire three months after termination such Employee in accordance with the terms of the Plan unless exercised by Mr. Lethem prior to such date.
 
 
42

 
 
Option Exercises and Stock Vested
 
None.

Director Compensation

            Our directors are reimbursed for expenses incurred by them in connection with attending Board of Directors’ meetings.  The following table presents compensation distributed to our independent directors during the year ended December 31, 2010 for serving on the Board of Directors:

Name
 
Fees Earned or Paid in Cash
($)
   
Option Awards (1)
($)
   
All Other Compensation ($)
   
Total
($)
 
Timothy Stevens
  $ 12,375     $ 35,997     $ -     $ 48,372  
Al Carmona
    6,000       26,998       -       32,998  
Longjiang Yuan
    -       8,999       -       8,999  
    $ 18,375     $ 71,994     $ -     $ 90,369  
 
(1) Reflects the aggregate grant date fair value to option awards granted to the directors, determined in accordance with ASC Topic 718. For information regarding the grant date fair value of stock options, see Note 15 – Share-Based Compensation, to our accompanying consolidated financial statements.
 
Bonuses and Deferred Compensation
 
We do not have any bonus, deferred compensation or retirement plan.  All decisions regarding compensation are determined by our Board of Directors.
 
Options and Stock Appreciation Rights
 
On November 4, 2010, the Company’s Board of Directors approved the Company’s 2010 Share Incentive Plan.  Under the Plan, 1,000,000 shares of the Company’s common stock shall be allocated to and authorized for use pursuant to the terms of the Plan.  On November 8, 2010, a total of 931,000 non-qualified incentive stock options were approved by our Board of Directors and granted under the Plan to executives, key employees, independent directors, and consultants at an exercise price of $4.40 per share and on December 15, 2010, 40,000 non-qualified incentive stock shares were approved by our Board of Directors and granted under the Plan to a consultant at an exercise price of $4.40 per share, of which shall vest as follows:
 
33 1/3% of the option grants vested one (1) month after the date of grant;
33 1/3% of the option grants will vest twelve (12) months after the date of grant; and
33 1/3% of the option grants will vest twenty-four (24) months after the date of grant.

On November 5, 2011, we filed a Registration Statement with the SEC on Form S-8 covering the shares underlying the options set forth above.  As of March 25, 2011, none of the options issued pursuant to the Plan have been exercised.
 
 
43

 
 
Employment Agreements
 
On June 6, 2010, we entered into an employment agreement with Mr. David Lethem pursuant to which Mr. Lethem was hired as our Chief Financial Officer for a term of three (3) years and compensation of $10,000 per month. On January 10, 2011, we accepted the amicable resignation of Mr. Lethem and as a result, we and Mr. Lethem terminated Mr. Lethem’s employment agreement effective as of January 10, 2011.  No early termination penalties were incurred by either us or Mr. Lethem.

On January 10, 2011, we entered into an employment agreement with Charlie Lin pursuant to which Mr. Lin was hired as our Chief Financial Officer.  As compensation for the services rendered by Mr. Lin under the Employment Agreement, as a gross salary and prior to any deductions or withholdings, Mr. Lin will shall be paid a monthly salary of $10,000 during the first three months of employment and, after the confirmation of the employment of Mr. Lin upon the satisfactory performance of the duties of Mr. Lin, Mr. Lin shall be paid the monthly salary of $11,000.  Mr. Lin shall also be paid a year-end bonus at the discretion of our Chief Executive Officer and such bonus, if any, will be normally paid prior to the Chinese New Year.  Mr. Lin shall also be entitled to a fixed monthly allowance of $2,000 per month for health and medical insurance and life insurance and reimbursement of expenses, including certain travel and office expenses.  Mr. Lin shall also be entitled to 13 working days’ vacation for completion of each fiscal year and pro-rata to the length of service of the year rendered.  In addition to any other benefits or compensation set forth above, Mr. Lin shall be entitled to participate in our employee stock option plan at a level commensurate with Mr. Lin’s position as Chief Financial Officer.

Payment of Post-Termination Compensation
 
We do not have change-in-control agreements with any of our directors or executive officers, and we are not obligated to pay severance or other enhanced benefits to executive officers upon termination of their employment.
 
 
44

 
 
ITEM 12.  Security Ownership of Certain Beneficial Owners and Management

The following table sets forth certain information regarding beneficial ownership of our common stock as of, March 25, 2011: (i) by each of our directors, (ii) by each of the named executive officers, (iii) by all of our executive officers and directors as a group, and (iv) by each person or entity known by us to beneficially own more than 5% of any class of our outstanding shares. As of March 31, 2011, there were 10,499,774 shares of our common stock outstanding:

Title of Class
Name and Address of
Beneficial Owner (1)(2)
Amount and Nature of
Beneficial Ownership
(number of shares)
Fully Diluted
Percentage of Outstanding
Shares of Common Stock (3)
Certain Beneficial Owners - Over 5% Ownership
   
Common Stock
Expert Venture Limited (4)(5)
6,213,205
45.65%
Common Stock
Sure Glory Holdings Limited(6)
748,636
5.50%
Common Stock
Charming Action Management Limited(7)
736,364
5.41%
Common Stock
Hong Wang(8)(9)
0
0%
     
Directors and Executive Officers and Significant Employees
   
Common Stock
Jianming Hao(10)
50,000
*
Common Stock
Wenjun Tian(11)
50,000
*
Common Stock
Charlie Lin
0
0%
Common Stock
Yongqing Ren(12)
13,334
*
Common Stock
Jianbin Zhou(13)
13,334
*
Common Stock
Li Ren(14)
10,000
*
Common Stock
Junde Zhang(15)
13,334
*
Common Stock
Al Carmona(16)
67,000
*
Common Stock
Longjiang Yuan(17)
1,667
*
Common Stock
Timothy Stevens(18)
6,667
*
Common Stock
Weizhong Cai
0
0%
Common Stock
Michael Han
0
0%
Officers and Directors as a Group (a total of 12 persons)
225,335
1.66%
 
* less than 1%

(1)  
Pursuant to Rule 13d-3 under the Exchange Act, a person has beneficial ownership of any securities as to which such person, directly or indirectly, through any contract, arrangement, undertaking, relationship or otherwise has or shares voting power and/or investment power or as to which such person has the right to acquire such voting and/or investment power within 60 days.
   
(2)  
Unless otherwise stated, each beneficial owner has sole power to vote and dispose of the shares.
   
(3)  
Applicable percentage of ownership is based on 13,610,135 shares of common stock outstanding as of the date hereof together with securities exercisable or convertible into common stock within sixty (60) days as of the date hereof for each stockholder.
   
(4)  
The registered address of Expert Venture Limited is P.O. Box 957, Offshore Incorporation Centre, Road Town, Tortola, British Virgin Islands.
   
(5)  
Mr. Yam Sheung Kwok is the sole and controlling person of Expert Venture Limited, owning all 1,000 shares of Expert Venture Limited (subject to the share transfer agreements discussed below).
   
(6)  
The registered address of Sure Glory Holdings Limited is P.O. Box 957, Offshore incorporation Centre, Road Town, Tortola, British Virgin Islands.  Mr. Dai Ai Wei is the sole and controlling person of Sure Glory Holdings Limited, owning the sole share of Sure Glory Holdings Limited.
 
 
45

 
 
(7)  
The registered address of Charming Action Management Limited is Portcullis TrustNet Chambers, P.O. Box 3444, Road Town, Tortola, British Virgin Islands.  Miss Jin Juan Dai is the sole and controlling person of Charming Action Management Limited, owning the sole share of Charming Action Management Limited.
   
(8)  
The registered address of Hong Wang is 7/F, B Tower, Jinshangguoji Building, Jinzhong, China.
   
(9)  
Pursuant to a share transfer agreement, Mr. Hong Wang has the option, subject to certain performance targets (discussed in more detail below), to purchase from Mr. Yam Sheung Kwok, the current sole shareholder of Expert Venture Limited, up to 120 shares of Expert Venture Limited. Accordingly, upon exercise of such option, Mr. Wang will indirectly (through his ownership of Expert Venture Limited) own and control 748,585 shares, which equals 5.50% of the fully-diluted percentage of outstanding shares.
   
(10)  
Pursuant to a share transfer agreement, Mr. Jianming Hao, our Chairman and Chief Executive Officer, has the option, subject to certain performance targets, to purchase from Mr. Yam Sheung Kwok, the current sole shareholder of Expert Venture Limited, up to 101 shares of Expert Venture Limited. Accordingly, upon exercise of such option, Mr. Hao will indirectly (through his ownership of Expert Venture Limited own and control 630,059 shares which equals 4.63% of the fully-diluted percentage of outstanding shares. In addition, the Company has granted to Mr. Hao options to purchase 150,000 shares of our common stock under the Plan, 50,000 of which have vested.
   
(11)  
Pursuant to a share transfer agreement, Mr. Wenjun Tian, our Executive Director, will have an option, subject to certain performance targets (discussed in more detail below), to purchase from Mr. Yam Sheung Kwok, the current sole shareholder of Expert, up to 300 shares of Expert, which constitutes 30% of Expert. Accordingly, upon exercise of such option, Mr. Tian will indirectly (through his ownership of Expert) own and control 1,871,461 shares which equals 13.75% of the fully-diluted percentage of outstanding shares. In addition, the Company has granted to Mr. Tian options to purchase 150,000 shares of our common stock under the Plan, 50,000 of which have vested.
 
(12)  
Pursuant to a share transfer agreement, Mr. Yongqing Ren will have an option, subject to certain performance targets (discussed in more detail below), to purchase from Mr. Yam Sheung Kwok, the current sole shareholder of Expert, up to 200 shares of Expert. Accordingly, upon exercise of such option, Mr. Ren will indirectly (through his ownership of Expert) own and control 1,247,641 shares which equals 9.17% of the fully-diluted percentage of outstanding shares. In addition, the Company has granted to Mr. Ren options to purchase 40,000 shares of our common stock under the Plan, 13,334 of which have vested.
   
 (13)
The Company has granted to Mr. Zhou options to purchase 40,000 shares of common stock under the Company’s share option plan, 13,334 of which have vested.
   
 (14)
The Company has granted to Mr. Ren options to purchase 30,000 shares of common stock under the Company’s share option plan, 10,000 of which have vested.
   
 (15)  
Pursuant to a share transfer agreement, Mr. Junde Zhang will have an option, subject to certain performance targets (discussed in more detail below), to purchase from Mr. Yam Sheung Kwok, the current sole shareholder of Expert, up to 200 shares of Expert. Accordingly, upon exercise of such option, Mr. Zhang will indirectly (through his ownership of Expert) own and control 1,247,641 shares which equals 9.17% of the fully-diluted percentage of outstanding shares. In addition, the Company has granted to Mr. Zhang options to purchase 40,000 shares of our common stock under the Plan, 13,334 of which have vested.
   
(16)  
Al Carmona was an investor in the financing that closed immediately following the Share Exchange.  In the offering, Mr. Carmona purchased 45,000 units in the offering which consisted of 45,000 shares of Series A Convertible Preferred Shares and a warrant exercisable into 18,000 shares of common stock at an exercise price of $5.06. In addition, the Company has granted to Mr. Carmona options to purchase 15,000 shares of our common stock under the Plan, 5,000 of which have vested.
   
(17)
The Company has granted to Mr. Yuan options to purchase 5,000 shares of our common stock under the Plan, 1,667 of which have vested.
   
(18)
The Company has granted to Mr. Stevens options to purchase 20,000 shares of our common stock under the Plan, 6,667 of which have vested.
 
 
46

 
 
ITEM 13.  Certain Relationships and Related Transactions, and Director Independence

Due from Related Parties

Total due from related parties amounted to $0 and $5,716,380 as of December 31, 2010 and 2009, respectively.  The balance of $5,716,380 mainly consisted of loans to the original shareholders of Detian Yu.  Those loans were unsecured, bearing no interest, and repaid during 2010.

Due to Related Parties

   
As of December 31,
 
   
2010
   
2009
 
Advances from -
           
Dongsheng International Investment Co., Ltd.
  $ 3,484,848     $ -  
Jinzhong Xinhuasheng Business Trading Co., Ltd.
    3,030,303       -  
Mr. Wenjun Tian
    1,515,152       -  
Mr. Jianming Hao
    -       84,120  
Mr. Junde Zhang
    -       61,530  
Total
  $ 8,030,303     $ 145,650  

Mr. Jianming Hao is the Chief Executive Officer and Chairman of the Board of the Company.  Mr. Wenjun Tian, the President and Executive Director of the Company is also the President and Executive Director of Dongsheng International Investment Co., Ltd.  Mr. Hong Wang, a shareholder with over 5% beneficial ownership and a manager of the Company is the President and Executive Director of Jinzhong Xinhuasheng Business Trading Co., Ltd.  Mr. Junde Zhang is a Vice President and Director of the Company.  Those advances as of December 31, 2010 and 2009 were unsecured, bearing no interest, and no due date was specified.

Guarantees
 
As of December 31, 2010, Jinzhong Deyu provided full guarantees on short-term loans obtained by Jinzhong Yuliang and Jinzhong Yongcheng.  Jinzhong Yuliang also provided full guarantees on a short-term loan obtained by Jinzhong Yongcheng.

As of December 31, 2009, Jinzhong Yuliang provided full guarantees on short-term loans obtained by Jinzhong Yongcheng.
 
Lock Up Agreements
 
All of the shares of our common stock to be owned by the management of City Zone Holdings Limited and other certain shareholders, including Expert Venture Limited, Sure Glory Holdings Limited, Brighton Investments Limited, Mapleland International Investments Limited, Charming Action Management Limited and Shallow Glory Limited, will be restricted from public or private sale until April 21, 2011.
 
Promoters and Certain Control Persons
 
None.

Conflicts of Interest
 
We have certain potential conflicts of interest that are inherent in the relationships between our officers and directors.
 
 
47

 
 
From time to time, one or more of our affiliates may form or hold an ownership interest in and/or manage other businesses both related and unrelated to the type of business that we own and operate. These persons expect to continue to form, hold an ownership interest in and/or manage additional other businesses which may compete with ours with respect to operations, including financing and marketing, management time and services and potential customers. These activities may give rise to conflicts between or among the interests of us and other businesses with which our affiliates are associated. Our affiliates are in no way prohibited from undertaking such activities, and neither we nor our shareholders will have any right to require participation in such other activities.
 
Further, because we intend to transact business with some of our officers, directors and affiliates, as well as with firms in which some of our officers, directors or affiliates have a material interest, potential conflicts may arise between the respective interests of us and these related persons or entities. We believe that such transactions will be effected on terms at least as favorable to us as those available from unrelated third parties.
 
With respect to transactions involving real or apparent conflicts of interest, we have adopted policies and procedures which require that: (a) the fact of the relationship or interest giving rise to the potential conflict be disclosed or known to the directors who authorize or approve the transaction prior to such authorization or approval, (b) the transaction be approved by a majority of our disinterested outside directors and (c) the transaction be fair and reasonable to us at the time it is authorized or approved by our directors.

ITEM 14.  Principal Accountant Fees and Services
 
Public Accounting Fees

The following chart sets forth public accounting fees paid and payable to KCCW Accountancy Corp. (“KCCW”) during the years ended December 31, 2010 and 2009:

   
2010
   
2009
 
Audit Fees
 
$
170,000
   
$
100,000
 
Audit Related Fees
 
$
100,000
   
$
 
Tax Fees
 
$
   
$
 
All Other Fees
 
$
   
$
 
 
Audit fees were for professional services rendered by KCCW for the audit of our annual financial statements and the review of the financial statements included in our quarterly reports on Forms 10-Q, and services that are normally provided by KCCW in connection with statutory and regulatory filings or engagements for that fiscal year.
 
Audit related fees consist of services by KCCW that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under Audit Fees.  This category includes accounting consultations on transaction and proposed transaction related matters.  We incurred these fees in connection with registration statements, financing, and acquisition transaction.
 
KCCW did not bill any other fees for services rendered to us during the years ended December 31, 2010 and 2009 for assurance and related services in connection with the audit or review of our financial statements.

Pre-Approval of Services
 
The Audit Committee appoints the independent accountant each year and pre-approves the audit services.  The Audit Committee chair is authorized to pre-approve specified non-audit services for fees not exceeding specified amounts, if he promptly advises the other Audit Committee members of such approval.
 
Audit of Financial Statements

During the years ended December 31, 2010 and 2009, KCCW was our principal auditor and no work was performed by persons outside of KCCW.
 
 
48

 
 
PART IV

ITEM 15.  Exhibits and Financial Statement Schedules

(a) Financial Statements and Schedules
 
The financial statements are set forth under the “F” pages of this Annual Report on Form 10-K. Financial statement schedules have been omitted because they are either not required, not applicable, or the information is otherwise included.
 
(b)
Exhibits
 
2.1
Share Exchange Agreement Dated April 27, 2010 (1)
   
3.1
Articles of Incorporation of Deyu Agriculture Corp. (2)
   
3.2
Certificate of Amendment of Articles of Incorporation of Deyu Agriculture Corp. (3)
   
3.3
Bylaws of Deyu Agriculture Corp. (2)
   
4.1
Certificate of Designation of Rights and Preferences of Series A Convertible Preferred Stock (1)
   
4.2
Form of Series A Warrant (1)
   
10.1
Securities Purchase Agreement Dated April 27, 2010 (1)
   
10.2
Registration Rights Agreement Dated April 27, 2010 (1)
   
 10.3
Form of Lock-Up Agreement Dated April 27, 2010 (1)
   
10.4
Securities Escrow Agreement Dated April 27, 2010 (1)
   
10.5
Placement Agent Agreement between the Company and Maxim Group, LLC dated January 27, 2010(6)
   
10.6
Share Transfer Agreement between Hong Wang and Yam Sheung Kwok dated April 26, 2010 (6)
   
10.7
Share Transfer Agreement between Jianming Hao and Yam Sheung Kwok dated April 26, 2010 (6)
   
10.8
Share Transfer Agreement between Wenjun Tian and Yam Sheung Kwok dated April 26, 2010 (6)
   
10.9
Share Transfer Agreement between Yongqing Ren and Yam Sheung Kwok dated April 26, 2010 (6)
   
10.10
Share Transfer Agreement between Junde Zhang and Yam Sheung Kwok dated April 26, 2010 (6)
   
10.11
Employment Agreement between David Lethem, as Chief Financial Officer, and the Company dated June 18, 2010 (4)
   
10.12
Certificate from China Organic Food Certification Center dated December 21, 2009 (6)
   
10.13
Corn Purchase Letter of Intent between Shanghai Yihai Trading Co., Ltd., Shanxi Office and Jinzhong Yuliang Agricultural Trading Co., Limited dated December 20, 2009 (6)
   
10.14
Warehouse Lease Agreement between Shanxi 661 Warehouse and Jinzhong Yongcheng Agricultural Trading Co., Limited dated December 21, 2006 (6)
   
10.15
Warehouse Lease Agreement between Shanxi Means of Production Company, Yuci Warehouse (formerly, the 671 Warehouse) and Jinzhong Yongcheng Agricultural Trading Co., Limited dated December 28, 2008 (6)
 
 
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10.16
Railway Lease Agreement between Shanxi Cereal & Oil Group, Mingli Reservation Depot and Jinzhong Yongcheng Agriculture Trading Co., Limited dated December 21, 2006 (6)
   
10.17
Railway Lease Agreement between Shanxi Yuci Cereal Reservation Depot and Jinzhong Yongcheng Agriculture Trading Co., Limited dated November 15, 2007 (6)
   
10.18
Railway Lease Agreement between Yuci Dongzhao Railway Freight Station and Jinzhong Yongcheng Agriculture Trading Co., Limited dated December 21, 2006 (6)
   
10.19
Agricultural Technology Cooperation Agreement between Jinzhong Deyu Agriculture Trading Co., Ltd. and Millet Research Institute, Shanxi Academy of Agricultural Science dated October 2007 (6)
   
10.20
Agricultural Technology Cooperation Agreement between Sorghum Institute, Shanxi Academy of Agricultural Sciences and Jinzhong Deyu Agriculture Trading Co., Ltd. dated August 24, 2008 (6)
   
10.21
Certificate of Forest Rights for the Yuci Forest Right Certificate (2005) No. 01518 dated August 11, 2006 (6)
   
10.22
Farmland Transfer Agreement between Detian Yu Biotechnology (Beijing) Co. Ltd. and Shanxi Jinbei Plant Technology Co, Ltd. dated September 30, 2010 (6)
   
10.23
Land Use Rights Acquisition Contract Dated September 30, 2010 (5)
   
10.24
Deyu Agriculture Corp. 2010 Share Incentive Plan (7)
   
10.25
Exclusive Management and Consulting Service Agreement, dated November 16, 2010, by and between Detian Yu Biotechnology (Beijing) Co. Limited and Beijing Jundaqianyuan Investment Management Co., Ltd. (English translated version) (8)
   
10.26
Exclusive Management and Consulting Service Agreement, dated November 16, 2010, by and between Detian Yu Biotechnology (Beijing) Co. Limited and Jinzhong Longyue Investment Consulting Co., Ltd. (English translated version) (8)
   
10.27
Business Cooperation Agreement, dated November 16, 2010, by and between Detian Yu Biotechnology (Beijing) Co. Limited and Beijing Jundaqianyuan Investment Management Co., Ltd. (English Translated Version) (8)
   
10.28
Business Operation Agreement, dated November 16, 2010, by and among Detian Yu Biotechnology (Beijing) Co. Limited, Beijing Jundaqianyuan Investment Management Co., Ltd. and each of the shareholders of Beijing Jundaqianyuan Investment Management Co., Ltd. (English translated version) (8)
   
10.29
Business Operation Agreement, dated November 16, 2010, by and among Detian Yu Biotechnology (Beijing) Co. Limited, Jinzhong Longyue Investment Consulting Co., Ltd. and both of the shareholders of Jinzhong Longyue Investment Consulting Co., Ltd. (English translated version) (8)
   
10.30
Share Pledge Agreement, dated November 16, 2010, by and among Detian Yu Biotechnology (Beijing) Co. Limited and the following shareholders of Beijing Jundaqianyuan Investment Management Co., Ltd.: Tian Wenjun, Hao Jianming, Yang Jianhui, Zhou Jianbin, Ren Li, Ren Yongqing, Zhang Junde and Wang Tao (English translated version) (8)
 
 
10.31
Share Pledge Agreement, dated November 16, 2010, by and among Detian Yu Biotechnology (Beijing) Co. Limited and the following shareholders of Jinzhong Longyue Investment Consulting Co., Ltd.: Zhao Jing and Zhao Peilin (English translated version) (8)
 
 
 
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10.32
Form of Power of Attorney (English translated version) (8)
 
   
10.33
Equity Acquisition Option Agreement, dated November 16, 2010,  by and among Detian Yu Biotechnology (Beijing) Co. Limited and the following shareholders of Beijing Jundaqianyuan Investment Management Co., Ltd.: Tian Wenjun, Hao Jianming, Yang Jianhui, Zhou Jianbin, Ren Li, Ren Yongqing, Zhang Junde and Wang Tao (English translated version) (8)
   
10.34
Equity Acquisition Option Agreement, dated November 16, 2010,  by and among Detian Yu Biotechnology (Beijing) Co. Limited and the following shareholders of Jinzhong Longyue Investment Consulting Co., Ltd.: Zhao Jing and Zhao Peilin (English translated version) (8)
   
10.35
Business Cooperation Agreement, dated November 16, 2010, by and between Detian Yu Biotechnology (Beijing) Co. Limited and Jinzhong Longyue Investment Consulting Co., Ltd. (English Translated Version) (8)
   
10.36
Village Collective Farmland Transfer Agreement, dated December 20, 2010, by and between Detian Yu Biotechnology (Beijing) Co., Ltd. and Shanxi Jinbei Plant Technology Development Co., Ltd. (English Translated and Mandarin Versions) (9)
   
10.37
Contract of Agreement, effective as of January 10, 2011,  by and between Deyu Agriculture Corp. and Charlie Lin (10)
   
14.1
Code of Conduct (6)
   
16.1
Letter from Auditor (11)
   
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