Attached files
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EX-4.12 - EMERALD DAIRY INC | v171400_ex4-12.htm |
EX-5.1 - EMERALD DAIRY INC | v171400_ex5-1.htm |
EX-23.1 - EMERALD DAIRY INC | v171400_ex23-1.htm |
EX-10.14 - EMERALD DAIRY INC | v171400_ex10-14.htm |
As
filed with the Securities and Exchange Commission on January 14,
2010
(Registration
No. 333-162432)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
AMENDMENT
NO. 2
TO
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
EMERALD
DAIRY INC.
Nevada
|
2020
|
80-0137632
|
||
(State
or other jurisdiction of
incorporation
or organization)
|
(primary
standard industrial
classification
code number)
|
(I.R.S.
Employer
Indentification
No.)
|
11990
Market Street, Suite 205
Reston,
Virginia 20190
(703)
867-9247
Shu
Kaneko
Chief
Financial Officer
11990
Market Street, Suite 205
Reston,
Virginia 20190
Tel:
(703) 867-9247
Fax:
(678) 868-0633
Copies of
all communications to:
Jeffrey
A. Rinde, Esq.
Blank
Rome LLP
The
Chrysler Building
405
Lexington Ave.
New York,
NY 10174
Tel:
(212) 885-5000
Fax:
(212) 885-5001
Approximate
date of proposed sale to the public: From time to time after the effective date
of this Registration Statement.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act, check the
following box: x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting
company. See the definition of “large accelerated filer,”
“accelerated filer,” and “small reporting company”:
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o (do not check if a
smaller reporting company)
|
Smaller
reporting company x
|
THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
PROSPECTUS
Subject
to completion, dated January 14, 2010
EMERALD
DAIRY INC.
12,589,979
SHARES OF COMMON STOCK
This
prospectus relates to disposition of up to 12,589,979 shares of our common stock
held by the selling stockholders referred to in this prospectus. The
shares covered by this prospectus include:
·
|
6,969,810
outstanding shares held by the selling stockholders;
and
|
·
|
5,620,169
shares issuable upon exercise of warrants held by the selling
stockholders.
|
We will
not receive any of the proceeds from the sale or other disposition of the shares
of common stock covered by this prospectus. However, we will receive gross
proceeds of $12,872,575 if all of the warrants held by the selling stockholders
are exercised for cash.
Our
common stock is traded in the over-the-counter market and prices are quoted on
the over-the-counter electronic bulletin board under the symbol
"EMDY.OB." On January 13, 2010, the last reported sale price for our
common stock was $1.70 per share.
The
selling stockholders may, from time-to-time, sell, transfer or otherwise dispose
of any or all of their shares of common stock on any exchange, market or trading
facility on which shares are traded or in private transactions and in other ways
described in the “Plan of Distribution”. These dispositions may be at
fixed prices, at the prevailing market price at the time of sale, at prices
related to the prevailing market price, at varying prices determined at the time
of sale, or at negotiated prices.
INVESTING
IN OUR STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS"
BEGINNING ON PAGE 5.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES
OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date
of this prospectus is ____________, 2009
You
should rely only on the information contained in this prospectus. We have not,
and the selling stockholders have not, authorized anyone to provide you with
different information. If anyone provides you with different information, you
should not rely on it. We are not, and the selling stockholders are not, making
an offer to sell these securities in any jurisdiction where the offer or sale is
not permitted. You should assume that the information contained in this
prospectus is accurate only as of the date on the front cover of this
prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date.
TABLE
OF CONTENTS
Page
|
|
Prospectus
Summary
|
1
|
Our
Company
|
1
|
Corporate
Information
|
2
|
The
Offering
|
3
|
Summary
Historical Financial Information
|
4
|
Risk
Factors
|
5
|
Forward
Looking Statements
|
17
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Use
of Proceeds
|
18
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Market
for Our Common Stock
|
18
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Capitalization
|
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
21
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Business
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52
|
Legal
Proceedings
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65
|
Management
|
65
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Executive
Compensation
|
67
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Security
Ownership of Certain Beneficial Owners and Management
|
74
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Certain
Relationships and Related Transactions
|
75
|
Description
of Securities
|
79
|
Selling
Stockholders
|
90
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Plan
of Distribution
|
104
|
Legal
Matters
|
106
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Experts
|
106
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
|
106
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Where
You Can Find Additional Information
|
107
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Financial
Statements
|
F-1
|
i
PROSPECTUS
SUMMARY
This
summary highlights selected information contained elsewhere in this prospectus.
To fully understand this offering, you should read the entire prospectus
carefully, including the more detailed information regarding the Company, the
risks of purchasing our common stock discussed under "risk factors," and our
financial statements and the accompanying notes. In this prospectus, the
“Company,” "we", "us" and "our", refer to Emerald Dairy Inc. and its
subsidiaries, unless the context otherwise requires. Unless otherwise indicated,
the term "year," "fiscal year" or "fiscal" refers to our fiscal year ending
December 31st. Except as specifically indicated otherwise, we have
adjusted all references to our common stock in this prospectus to reflect the
effect of a 1-for-40 reverse stock split on June 25, 2007.
Our
Company
We are a
producer of milk powder, rice powder and soybean milk powder, which currently
comprise approximately 95%, 3% and 2% of our sales,
respectively. We have an Infant & Baby Formula Milk Powder Production
Permit, issued by the State General Administration of Quality Supervision and
Inspection and Quarantine of the People’s Republic of China (“PRC”). Only
current license holders are permitted to produce formula milk powder in the
PRC. Through our network of over 800 salespeople, our products are
distributed throughout 20 provinces in the PRC, and sold in over 5,800 retail
outlets.
Our
products are marketed under two brand names:
|
·
|
“Xing
An Ling,” which is designed for high-end customers;
and
|
|
·
|
“Yi
Bai,” which is designed for middle and low-end
customers.
|
The
Chinese government has initiated programs to promote milk consumption and is
providing incentives to increase dairy production. The dairy market today in the
PRC is over $13.0 billion and is expected to grow at a rate of 15% per year for
the foreseeable future. We focus on the infant formula segment of the market,
which is expected to grow even faster, at a rate of approximately 23% through
2011. Currently, it is estimated that demand for infant formula in
the PRC outstrips supply by at least 2-to-1. During the past three
fiscal years our sales have grown at an average rate of more than 50% per year,
with sales of $44.3 million, $29.6 million and $18.8 million for the fiscal
years ended December 31, 2008, 2007 and 2006, respectively.
Because
of our close proximity to our sources of fresh milk, we are able to complete the
production process in approximately 30 – 35 hours, which is faster than
competitors of ours that are not similarly situated. We produced
approximately 7,000 tons of milk powder at our facility in Be’ian City,
Heilongjiang Province, PRC in fiscal 2007, up from approximately 5,000 tons in
fiscal 2006. In 2008, by adding a third shift to the existing two shifts working
schedule, we produced approximately 9,000 tons of milk powder. In
addition, in July 2008, through our wholly-owned subsidiary, Hailun Xinganling
Dairy Co., Ltd. (“HXD”), we commenced construction of a new production facility
in Hailun City, Heilongjiang Province, PRC, which we expect will enable us to
produce an additional 9,000 tons of milk powder in 2010 and a total of 18,000
tons of milk powder annually in 2011. As a result, we believe we will have the
capacity to produce approximately 27,000 tons of milk powder per year by the end
of fiscal 2011. It is expected that our production of rice powder and soymilk
powder will also increase in volume, while continuing to comprise an aggregate
of approximately 5% of our overall sales.
1
All of
our business is conducted through our wholly-owned Chinese
subsidiaries:
|
·
|
Heilongjiang
Xing An Ling Dairy Co. Limited (“XAL”), which handles our promotion, sales
and administrative functions;
|
|
·
|
Heilongjiang
Be’ian Nongken Changxing Lvbao Dairy Limited Liability Company (“Lvbao”),
which handles production of our products in Be’ian City, Heilongjiang
Province, PRC; and
|
|
·
|
HXD,
which, upon completion of our new production facility, will handle
additional production of our products in Hailun City, Heilongjiang
Province, PRC.
|
Corporate
Information
Our
predecessor filer was incorporated under the name Micro-Tech Identification
Systems, Inc. (“Micro-Tech”) pursuant to the laws of the State of Nevada on
September 24, 1986. For several years prior to the Reverse Merger (described
below), Micro-Tech’s primary business operations involved seeking the
acquisition of assets, property, or businesses that may be beneficial to
Micro-Tech and its shareholders.
On
October 9, 2007, American International Dairy Holding Co., Inc., a Nevada
corporation (“AIDH”) became a wholly-owned subsidiary of Micro-Tech, when it
merged with Micro-Tech’s wholly-owned subsidiary, which was organized for that
purpose (the “Reverse Merger”). Immediately following the Reverse Merger,
Micro-Tech succeeded to the business of AIDH as its sole line of business, and
changed its name to Amnutria Dairy Inc. On January 25, 2008, we
changed our name from Amnutria Dairy Inc. to Emerald Dairy Inc.
AIDH was
organized pursuant to the laws of the State of Nevada on April 18, 2005, for the
purpose of acquiring the stock of Heilongjiang Xing An Ling Dairy,
Co. On May 30, 2005, AIDH acquired Heilongjiang Xing An Ling Dairy
Co. Limited, (“XAL”), a corporation formed on September 8, 2003 in Heilongjiang
Providence, PRC. This transaction was treated as a recapitalization of XAL for
financial reporting purposes. The effect of this recapitalization was rolled
back to the inception of XAL for financial reporting purposes.
Prior to
September 23, 2006, XAL owned approximately 57.7% of Heilongjiang Beian Nongken
Changxing LvbaoDairy Limited Liability Company (“LvBao”), with the remaining
balance being held by AIDH’s sole shareholder. On September 23, 2006, the
remaining 42.3% ownership in LvBoa was transferred to XAL and was treated as an
additional capital contribution. The effect of this contribution by the sole
shareholder was rolled back to September 8, 2003 for financial reporting
purposes.
On May
22, 2008, we formed AIDH’s wholly-owned subsidiary, HXD, under the laws of the
PRC. Upon completion of our new production facility, HXD will handle
additional production of our products in Hailun City, Heilongjiang Province,
PRC
All of
the business of AIDH is conducted through AIDH's wholly-owned subsidiaries, XAL
and HXD, and XAL's subsidiary, LvBao.
Our U.S.
offices are located at 11990 Market Street, Suite 205, Reston, Virginia 20190,
telephone number (703) 867-9247. Our corporate headquarters are
located at 10 Huashan-lu, Xiangfang-qu, 9th Floor, Wanda Building, Harbin City,
Heilongjiang Province, PRC 150001.
2
The
Offering
Common
Stock Offered by the Company
|
None
|
Common
Stock Offered by the Selling
Stockholders
|
Up
to 12,589,979 shares of our common stock, including: (i) up to 6,969,810
shares of issued and outstanding common stock held by the selling
stockholders, (ii) up to 373,334 shares issuable upon exercise of warrants
held by the selling stockholders, at an exercise price of $0.94 per share,
(iii) up to 1,333,333 shares issuable upon exercise of warrants held by
the selling stockholders, at an exercise price of $1.50 per share, (iv) up
to 700,583 shares issuable upon exercise of warrants held by the selling
stockholders, at an exercise price of $1.63 per share, (v) up to 857,110
shares issuable upon exercise of warrants held by the selling
stockholders, at an exercise price of $2.04 per share, (vi) up to 75,000
shares issuable upon exercise of warrants held by the selling
stockholders, at an exercise price of $2.61 per share, and (vii) up to
2,280,809 shares issuable upon exercise of warrants held by the selling
stockholders, at an exercise price of $3.26 per share.
|
Common
Stock Outstanding Prior to this Offering
|
32,927,191
shares
|
Use
of Proceeds
|
We
will not receive any proceeds from the shares sold in this
offering.
|
Symbol
for our Common Stock
|
“EMDY.OB”
|
Risk
Factors
We urge
you to read the "Risk Factors" section beginning on page 5 of this prospectus so
that you understand the risks associated with an investment in our common
stock.
3
Summary
Historical Financial Information
The
following tables set forth our summary historical financial information. You
should read this information together with the financial statements and the
notes thereto appearing elsewhere in this prospectus and the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Consolidated
Statements of Operations:
For the Nine Months
Ended September 30,
|
For the Fiscal Year
Ended December 31,
|
|||||||||||||||
2009
|
2008
|
2008
|
2007
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
(Audited)
|
(Audited)
|
|||||||||||||
Sales
|
$ | 31,261,491 | $ | 32,560,256 | $ | 44,325,179 | $ | 29,618,008 | ||||||||
Cost
of Goods Sold
|
17,057,583 | 19,845,232 | 26,546,291 | 19,064,905 | ||||||||||||
Gross
Profit
|
14,203,908 | 12,715,024 | 17,778,888 | 10,553,103 | ||||||||||||
Total
Operating Expenses
|
9,579,027 | 10,355,970 | 14,210,578 | 6,875,197 | ||||||||||||
Total
Other (Expense)
|
(63,466 | ) | (262,862 | ) | (413,605 | ) | (9,443 | ) | ||||||||
Provision
for Income Taxes
|
860,948 | 586,957 | 840,198 | 118,325 | ||||||||||||
Net
Income
|
$ | 3,700,467 | $ | 1,509,235 | $ | 2,314,507 | $ | 3,550,138 | ||||||||
Basic
Earnings Per Share
|
$ | 0.12 | $ | 0.05 | $ | 0.08 | $ | 0.15 | ||||||||
Basic
Weighted Average Shares Outstanding
|
29,979,356 | 29,299,332 | 29,299,332 | 24,211,872 | ||||||||||||
Diluted
Earnings Per Share
|
$ | 0.12 | $ | 0.05 | $ | 0.08 | $ | 0.15 | ||||||||
Diluted
Weighted Average Shares Outstanding
|
30,429,024 | 29,563,708 | 29,518,067 | 24,271,991 | ||||||||||||
Comprehensive
Income
|
$ | 3,690,611 | $ | 2,588,087 | $ | 3,481,375 | $ | 4,185,217 |
Consolidated
Balance Sheets:
As at September 30,
|
As at December 31,
|
|||||||||||
2009
|
2008
|
2007
|
||||||||||
(Unaudited)
|
(Audited)
|
(Audited)
|
||||||||||
Cash
and cash equivalents
|
$ | 9,681,007 | $ | 7,343,588 | $ | 6,560,931 | ||||||
Total
current assets
|
$ | 22,297,720 | $ | 18,710,381 | $ | 16,594,937 | ||||||
Property,
plant and equipment, net
|
$ | 5,743,716 | $ | 6,101,566 | $ | 3,320,081 | ||||||
Total
assets
|
$ | 36,402,432 | $ | 28,674,375 | $ | 20,030,246 | ||||||
Total
current liabilities
|
$ | 7,577,525 | $ | 8,253,183 | $ | 3,480,666 | ||||||
Put/Call
Liability
|
— | — | $ | 3,169,444 | ||||||||
Total
stockholders' equity
|
$ | 28,824,907 | $ | 20,421,192 | $ | 13,380,136 |
4
RISK
FACTORS
An
investment in our common stock is speculative and involves a high degree of
risk. You should carefully consider the following important risks and
uncertainties before buying shares of our common stock in this offering. If any
of the damages threatened by any of the following risk factors actually occur,
our business, results of operations, financial condition and cash flows could be
materially adversely affected, the trading price of our common stock could
decline significantly, and you might lose all or part of your
investment.
Risks
Related to Our Business
Unstable
market conditions may have serious adverse consequences on our
business.
The
recent worldwide economic downturn and market instability have made the business
climate more volatile and more costly. Although all of our business
operations are currently conducted in the PRC, our general business strategy may
be adversely affected by unpredictable and unstable market
conditions. If the current equity and credit markets deteriorate
further, or do not improve, it may make any necessary debt or equity financing
more difficult, more costly, and more dilutive. While we believe we have
adequate capital resources to meet current working capital and capital
expenditure requirements for the next twelve months, a radical economic downturn
or increase in our expenses could require additional financing on less than
attractive rates or on terms that are excessively dilutive to existing
stockholders. Failure to secure any necessary financing in a timely
manner and on favorable terms could have a material adverse effect on our growth
strategy, financial performance and stock price and could require us to delay or
abandon our expansion plans. These factors may have a material
adverse effect on our results of operations, financial condition or cash flows
and could cause the price of our common stock to decline
significantly.
Our
products may not achieve or maintain market acceptance.
We market
our products in the PRC. Dairy product consumption in the PRC has historically
been lower than in many other countries in the world. Growing
interest in milk products in the PRC is a relatively recent phenomenon which
makes the market for our products less predictable. Consumers may
lose interest in the products. As a result, achieving and maintaining
market acceptance for our products will require substantial marketing efforts
and the expenditure of significant funds to encourage dairy consumption in
general, and the purchase of our products in particular. There is
substantial risk that the market may not accept or be receptive to our
products. Market acceptance of our current and proposed products will
depend, in large part, upon our ability to inform potential customers that the
distinctive characteristics of our products make them superior to competitive
products and justify their pricing. Our current and proposed products
may not be accepted by consumers or able to compete effectively against other
premium or non-premium dairy products. Lack of market acceptance
would limit our revenues and profitability.
In
addition, we market our product, in part, as a healthy and good source of
nutrition, however, periodically, medical and other studies are released and
announcements by medical and other groups are made which raise concerns over the
healthfulness of cow’s milk in the human diet. An unfavorable study
or medical finding could erode the popularity of milk in the Chinese diet and
negatively affect the marketing of our product causing sales, and cause our
revenues, to decline.
5
Contamination
of milk powder products produced in the PRC could result in negative publicity
and have a material adverse effect on our business.
In
mid-2008, a number of milk powder products produced within the PRC were found to
contain unsafe levels of tripolycyanamide, also known as melamine, sickening
thousands of infants. This prompted the Chinese government to
conduct a nationwide investigation
into how the milk powder was contaminated, and caused a worldwide recall of
certain milk powder products produced within the PRC. On
September 16, 2008, the PRC’s Administration of Quality Supervision, Inspection
and Quarantine (AQSIQ) revealed that it had tested samples from 175 dairy
manufacturers, and published a list of 22 companies whose products contained
melamine. We passed the emergency inspection and were not included on
AQSIQ’s list. Although we believe that the inevitable contraction in
the Chinese milk powder industry caused by this crisis will lead to increased
demand for our products, we can not be certain that the illnesses caused by
contamination in the milk powder industry, whether or not related to our
products, won’t lead to a sustained decrease in demand for milk powder products
produced within the PRC, thereby having a material adverse effect on our
business.
As
we increase the scale of our operations, we may be unable to maintain the level
of quality we currently attain by producing our products in small
batches. If quality of our product declines, sales may
decline.
Our
products are manufactured in small batches. If we are able to
increase our sales, we will be required to increase our
production. Increased production levels may force us to modify our
current manufacturing methods in order to meet demand. We may be unable to
maintain the quality of our dairy products at increased levels of
production. If quality declines, consumers may not wish to purchase
our products and a decline in the quality of our products could damage our
reputation, business, operations and finances.
We
depend on supplies of raw milk and other raw materials, a shortage of which
could result in reduced production and sales revenues and/or increased
production costs.
Raw milk
is the primary raw material we use to produce our products. As we pursue our
growth strategy, we expect raw milk demands to continue to grow. Because we own
only a small number of dairy cows, we depend on dairy farms and dairy farmers
for our supply of fresh milk. We expect that we will need to continue to
increase the number of dairy farmers from which we source raw milk. If we are
not able to renew our contracts with suppliers or find new suppliers to provide
raw milk we will not be able to meet our production goals and our sales revenues
will fall. If we are forced to expand our sources for raw milk, it
may be more and more difficult for us to maintain our quality control over the
handling of the product in our supply and manufacturing chain. A
decrease in the quality of our raw materials would cause a decrease in the
quality of our product and could damage our reputation and cause sales to
decrease.
Raw milk
production is, in turn, influenced by a number of factors that are beyond our
control including, but not limited to, the following:
|
·
|
seasonal factors: dairy
cows generally produce more milk in temperate weather than in cold or hot
weather and extended unseasonably cold or hot weather could lead to lower
than expected production;
|
|
·
|
environmental factors:
the volume and quality of milk produced by dairy cows is closely linked to
the quality of the nourishment provided by the environment around them,
and, therefore, if environmental factors cause the quality of nourishment
to decline, milk production could decline and we may have difficulty
finding sufficient raw milk; and
|
6
|
·
|
governmental agricultural and
environmental policy: declines in government grants, subsidies,
provision of land, technical assistance and other changes in agricultural
and environmental policies may have a negative effect on the viability of
individual dairy farms, and the numbers of dairy cows and quantities of
milk they are able to produce.
|
We also
source large volumes of soy beans, rice, and other raw materials from suppliers.
Interruption of or a shortage in the supply of raw milk or any of our other raw
materials could result in our being unable to operate our production facilities
at full capacity or, if the shortage is severe, at any production level at all,
thereby leading to reduced production output and sales and reduced
revenues.
Even if
we are able to source sufficient quantities of raw milk or our other raw
materials to meet our needs, downturns in the supply of such raw materials
caused by one or more of these factors could lead to increased raw material
costs which we may not be able to pass on to the consumers of our products,
causing our profit margins to decrease.
Volatility
of raw milk costs make our operating results difficult to predict, and a steep
cost increase could cause our profits to diminish significantly.
The
policy of the PRC since the mid-1990s has focused on moving the industry in a
more market-oriented direction. These reforms have resulted in the potential for
greater price volatility relative to past periods, as prices are more responsive
to the fundamental supply and demand aspects of the market. These changes in the
PRC’s dairy policy could increase the risk of price volatility in the dairy
industry, making our net income difficult to predict. Also, if prices are
allowed to escalate sharply, our costs will rise and we may not be able to pass
them on to consumers of our products, which will lead to a decrease in our
profits.
The
milk business is highly competitive and, therefore, we face substantial
competition in connection with the marketing and sale of our
products.
We face
competition from non-premium milk producers distributing milk in our marketing
area and other milk producers packaging their milk in glass bottles, and other
special packaging, which serve portions of our marketing area. Most of our
competitors are well established, have greater financial, marketing, personnel
and other resources, have been in business for longer periods of time than we
have, and have products that have gained wide customer acceptance in the
marketplace. Our largest competitors are state-owned dairies owned by the
government of the PRC. Large foreign milk companies have also entered the milk
industry in the PRC. The greater financial resources of such competitors will
permit them to procure retail store shelf space and to implement extensive
marketing and promotional programs, both generally and in direct response to our
advertising claims. The milk industry is also characterized by the frequent
introduction of new products, accompanied by substantial promotional campaigns.
We may be unable to compete successfully or our competitors may develop products
which have superior qualities or gain wider market acceptance than
ours.
7
We
face the potential risk of product liability associated with food products; Lack
of general liability insurance exposes us to liability risks in the event of
litigation against us.
We sell
products for human consumption, which involves risks such as product
contamination or spoilage, product tampering and other adulteration of our
products. We may be subject to liability if the consumption of any of our
products causes injury, illness or death. In addition, we may recall products in
the event of contamination or damage. A significant product liability judgment
or a widespread product recall may negatively impact our profitability for a
period of time depending on product availability, competitive reaction and
consumer attitudes. Even if a product liability claim is unsuccessful or is not
fully pursued, the negative publicity surrounding any assertion that our
products caused illness or injury could adversely affect our reputation with
existing and potential customers and our corporate and brand image. We would
also have to incur defense costs, including attorneys’ fees, even if a claim is
unsuccessful. We do not have liability insurance with respect to product
liability claims. Any product liabilities claims could have a material adverse
effect on its business, operating results and financial condition.
The
loss of any of our key executives could cause an interruption of our business
and an increase in our expenses if we are forced to recruit a replacement; We
have no key-man life insurance covering these executives.
We are
highly dependent on the services of Yang Yong Shan, our Chairman, Chief
Executive Officer and President. He has been primarily responsible
for the development and marketing of our products and the loss of his services
would have a material adverse impact on our operations. We have not applied for
key-man life insurance on his life and have no current plans to do
so.
We
do not have any independent directors serving on our board of directors, which
could present the potential for conflicts of interest and prevent our common
stock from being listed on a national securities exchange.
We
currently do not have any independent directors serving on our board of
directors and we cannot guarantee that our board of directors will have any
independent directors in the future. In the absence of a majority of independent
directors, our executive officers could establish policies and enter into
transactions without independent review and approval thereof. This could present
the potential for a conflict of interest between us and our stockholders,
generally, and the controlling officers, stockholders or directors.
In
addition, since none of the directors currently on our board of would qualify as
an independent director under the rules of the New York Stock Exchange, NYSE
Amex Equities or The Nasdaq Stock Market, we would fail to satisfy at least one
of the necessary initial listing requirements for any of these national
securities exchanges. Therefore, until we appoint a majority of
independent directors to our board we expect that our common stock will continue
to be listed on Over-the-Counter Bulletin Board (“OTCBB”) maintained by the
Financial Industry Regulatory Authority (“FINRA”), which might make our common
stock less attractive to potential investors.
Our
management has identified a material weakness in our internal control over
financial reporting, which if not properly remediated could result in material
misstatements in our future interim and annual financial statements and have a
material adverse effect on our business, financial condition and results of
operations and the price of our common stock.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
in accordance with U.S. generally accepted accounting principles.
8
As
further described in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Material Weakness in Internal Control Over
Financial Reporting,” our management has identified a material weakness in our
internal control over financial reporting. A material weakness, as
defined in the standards established by the Public Company Accounting Oversight
Board (“PCAOB”), is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will
not be prevented or detected on a timely basis.
Although
we are in the process of implementing initiatives aimed at addressing this
material weakness, these initiatives may not remediate the identified material
weakness. Failure to achieve and maintain an effective internal
control environment could result in us not being able to accurately report our
financial results, prevent or detect fraud or provide timely and reliable
financial information pursuant to the reporting obligations we will have as a
public company, which could have a material adverse effect on our business,
financial condition and results of operations. Further, it could cause our
investors to lose confidence in the financial information we report, which could
adversely affect the price of our common stock.
Ensuring
that we have adequate internal financial and accounting controls and procedures
in place might entail substantial costs, may take a significant period of time,
and may distract our officers and employees from the operation of our business,
which could adversely affect our operating results and our ability to operate
our business.
Ensuring
that we have adequate internal financial and accounting controls and procedures
in place to help ensure that we can produce accurate financial statements on a
timely basis is a costly and time-consuming effort that needs to be re-evaluated
frequently. We became a public company on October 2007, by virtue of the Reverse
Merger described in “Management’s Discussion and Analysis of Financial Condition
and Results of Operations – Recent Developments – Reverse Merger, Private
Placements and Related Transactions.” As a public company, we need to
document, review, test and, if appropriate, improve our internal controls and
procedures in connection with Section 404 of the Sarbanes-Oxley Act, which
requires annual management assessments of the effectiveness of our internal
control over financial reporting and a report by our independent auditors. Both
the Company and its independent auditors will be testing our internal controls
in connection with the Section 404 requirements and, as part of that
documentation and testing, will identify areas for further attention and
improvement.
Implementing
any appropriate changes to our internal controls might entail substantial costs
in order to add personnel and modify our existing accounting systems, take a
significant period of time to complete, and distract our officers and employees
from the operation of our business. These changes might not, however,
be effective in maintaining the adequacy of our internal controls, and could
adversely affect our operating results and our ability to operate our
business.
Risks
Related to Doing Business in the PRC
Changes
in the PRC’s political or economic situation could harm us and our operational
results.
Economic
reforms which have been adopted by the Chinese government could change at any
time. Because many reforms are unprecedented or experimental, they
are expected to be refined and adjusted. Other political, economic and social
factors, such as political changes, changes in the rates of economic growth,
unemployment or inflation, or in the disparities in per capita wealth between
regions within the PRC, could lead to further readjustment of the reform
measures. This refining and readjustment process may negatively affect our
operations This could damage our operations and profitability. Some
of the things that could have this effect are:
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level
of government involvement in the
economy;
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control
of foreign exchange;
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methods
of allocating resources;
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balance
of payments position;
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international
trade restrictions; or
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international
conflict.
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The
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD, in many ways. As
a result of these differences, we may not develop in the same way or at the same
rate as might be expected if the Chinese economy were similar to those of the
OECD member countries. It is possible that the Chinese government may
abandon its reforms all together and return to a more nationalized economy.
Negative impact upon economic reform policies or nationalization could result in
a total investment loss in our common stock.
Changes
in the interpretations of existing laws and the enactment of new laws may
negatively impact our business and results of operation.
There are
substantial uncertainties regarding the application of Chinese laws, especially
with respect to existing and future foreign investments in the PRC. The Chinese
legal system is a civil law system based on written statutes. Unlike common law
systems, it is a system in which precedents set in earlier legal cases are not
generally used. Laws and regulations effecting foreign invested enterprises in
the PRC have only recently been enacted and are evolving rapidly, and their
interpretation and enforcement involve uncertainties. Changes in existing laws
or new interpretations of such laws may have a significant impact on our methods
and costs of doing business. For example, new legislative proposals for product
pricing, approval criteria and manufacturing requirements may be proposed and
adopted. Such new legislation or regulatory requirements may have a material
adverse effect on our financial condition, results of operations or cash flows.
In addition, we will be subject to varying degrees of regulation and licensing
by governmental agencies in the PRC. Future regulatory, judicial and legislative
changes could have a material adverse effect on our Chinese operating
subsidiaries. Regulators or third parties may raise material issues
with regard to our Chinese subsidiaries or our compliance or non-compliance with
applicable laws or regulations or changes in applicable laws or regulations may
have a material adverse effect on our operations. Because of the evolving nature
in the law, it will be difficult for us to manage and plan for changes that may
arise.
It
will be difficult for any shareholder of ours to commence a legal action against
our executives. Enforcing judgments won against them or the Company
will be difficult.
Most of
our officers and directors reside outside of the United States. As a result, it
will be difficult, if not impossible, to acquire jurisdiction over those persons
in a lawsuit against any of them, including with respect to matters arising
under U.S. federal securities laws or applicable state securities
laws. Because the majority of our assets are located in the PRC, it
would also be extremely difficult to access those assets to satisfy an award
entered against us in United States court. Moreover, we have been advised that
the PRC does not have treaties with the United States providing for the
reciprocal recognition and enforcement of judgments of courts.
10
Recent
PRC regulations relating to mergers and acquisitions of domestic enterprises by
foreign investors may increase the administrative burden we face and create
regulatory uncertainties.
On August
8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce
(“MOFCOM”), the State Assets Supervision and Administration Commission
(“SASAC”), the State Administration for Taxation, the State Administration for
Industry and Commerce, the China Securities Regulatory Commission (“CSRC”), and
the State Administration of Foreign Exchange (“SAFE”), jointly adopted the
Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors (the “New M&A Rule”), which became effective on September 8, 2006.
The New M&A Rule purports, among other things, to require offshore special
purpose vehicles (“SPVs”), formed for overseas listing purposes through
acquisitions of PRC domestic companies and controlled by PRC companies or
individuals, to obtain the approval of the CSRC prior to publicly listing their
securities on an overseas stock exchange.
On
September 21, 2006, pursuant to the New M&A Rule and other laws and
regulations of the PRC (“PRC Laws”), the CSRC, on its official website,
promulgated relevant guidance with respect to the issues of listing and trading
of domestic enterprises’ securities on overseas stock exchanges (the
“Administrative Permits”), including a list of application materials with
respect to the listing on overseas stock exchanges by SPVs.
On
October 9, 2007, AIDH, parent company of the Chinese corporations through which
we do all of our business, became a subsidiary through a Reverse Merger, as
further described in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Recent Developments — Reverse Merger,
Private Placements and Related Transactions.”
Based on
our understanding of current PRC Laws, we believe that the New M&A Rule does
not require us or our Chinese shareholders or our entities in China to obtain
the CSRC approval in connection with the Reverse Merger because AIDH completed
the approval procedures of the acquisition of a majority equity interest in its
PRC subsidiary before September 8, 2006 when the New M&A Rule became
effective.
There
are, however, substantial uncertainties regarding the interpretation and
application of current or future PRC Laws, including the New M&A Rule. PRC
government authorities may take a view contrary to our understanding that we do
not need the CSRC approval, and Chinese government authorities may impose
additional approvals and requirements.
Further,
if the PRC government finds that we or our Chinese shareholders did not obtain
the CSRC approval, which should have been obtained before consummating the
Reverse Merger, we could be subject to severe penalties. The New M&A Rule
does not specify penalty terms, so we are not able to predict what penalties we
may face, but they could be materially adverse to our business and
operations.
Future
inflation in the PRC may inhibit our ability to conduct business in the
PRC.
In recent
years, the Chinese economy has experienced periods of rapid expansion and high
rates of inflation. During the past ten years, the rate of inflation in the PRC
has been as high as 20.7% and as low as 2.2%. These factors have led to the
adoption by the Chinese government, from time to time, of various corrective
measures designed to restrict the availability of credit or regulate growth and
contain inflation. High inflation may in the future cause the Chinese government
to impose controls on credit and/or prices, or to take other action, which could
inhibit economic activity in the PRC, which could harm the market for our
products and adversely effect our operations and business.
11
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
The PRC
historically has been deficient in western-style management and financial
reporting concepts and practices, as well as in modern banking, computer and
other control systems. We may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC. As a result of
these factors, we may experience difficulty in establishing management, legal
and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet western standards. If we are not able to maintain
adequate controls our financial statements may not properly represent our
financial condition, results of operation or cash flows. Weakness in
our controls could also delay disclosure of information to the public which is
material to an investment decision with respect to our stock.
Fluctuations
in the exchange rate between the Chinese currency and the United States dollar
could adversely affect our operating results.
The
functional currency of our operations in China is “Renminbi,” or “RMB.” However,
results of our operations are translated at average exchange rates into United
States dollars for purposes of reporting results. As a result, fluctuations in
exchange rates may adversely affect our expenses and results of operations as
well as the value of our assets and liabilities. Fluctuations may adversely
affect the comparability of period-to-period results. We currently do
not use hedging techniques, and even if in the future we do, we may not be able
to eliminate the effects of currency fluctuations. Thus, exchange rate
fluctuations could cause our profits to decline, which, in turn, may cause our
stock prices, to decline.
Changes
in foreign exchange regulations in the PRC may affect our ability to pay
dividends in foreign currency or conduct other foreign exchange
business.
The
Renminbi is currently not a freely convertible currency, and the restrictions on
currency exchange may limit our ability to use revenues generated in RMB to fund
our business activities outside the PRC, or to make dividends or other payments
in United States dollars. The PRC government strictly regulates conversion of
RMB into foreign currencies. Over the years, foreign exchange regulations in the
PRC have significantly reduced the government’s control over routine foreign
exchange transactions under current accounts. In the PRC, SAFE regulates the
conversion of the RMB into foreign currencies. Pursuant to applicable PRC laws
and regulations, foreign invested enterprises incorporated in the PRC are
required to apply for “Foreign Exchange Registration Certificates.” Currently,
conversion within the scope of the “current account” (e.g. remittance of foreign
currencies for payment of dividends, etc.) can be effected without requiring the
approval of SAFE. However, conversion of currency in the “capital account”
(e.g. for capital items
such as direct investments, loans, securities, etc.) still requires the approval
of SAFE.
In
addition, on October 21, 2005, SAFE issued the Notice on Issues Relating to the
Administration of Foreign Exchange in Fundraising and Reverse Investment
Activities of Domestic Residents Conducted via Offshore Special Purpose
Companies (“Notice 75”), which became effective as of November 1, 2005. Notice
75 replaced the two rules issued by SAFE in January and April 2005.
According
to Notice 75:
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prior
to establishing or assuming control of an offshore company for the purpose
of obtaining overseas equity financing with assets or equity interests in
an onshore enterprise in the PRC, each PRC resident, whether a natural or
legal person, must complete the overseas investment foreign exchange
registration procedures with the relevant local SAFE
branch;
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an
amendment to the registration with the local SAFE branch is required to be
filed by any PRC resident that directly or indirectly holds interests in
that offshore company upon either (1) the injection of equity interests or
assets of an onshore enterprise to the offshore company, or (2) the
completion of any overseas fund raising by such offshore company;
and
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an
amendment to the registration with the local SAFE branch is also required
to be filed by such PRC resident when there is any material change in the
capital of the offshore company that does not involve any return
investment, such as (1) an increase or decrease in its capital, (2) a
transfer or swap of shares, (3) a merger or division, (4) a long term
equity or debt investment, or (5) the creation of any security
interests.
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Moreover,
Notice 75 applies retroactively. As a result, PRC residents who have established
or acquired control of offshore companies that have made onshore investments in
the PRC in the past are required to complete the relevant overseas investment
foreign exchange registration procedures by March 31, 2006. Under the relevant
rules, failure to comply with the registration procedures set forth in Notice 75
may result in restrictions being imposed on the foreign exchange activities of
the relevant onshore company, including the payment of dividends and other
distributions to its offshore parent or affiliate and the capital inflow from
the offshore entity, and may also subject relevant PRC residents to penalties
under PRC foreign exchange administration regulations.
In
addition, SAFE issued updated internal implementing rules (“Implementing Rules”)
in relation to Notice 75. The Implementing Rules were promulgated and became
effective on May 29, 2007. Such Implementing Rules provide more detailed
provisions and requirements regarding the overseas investment foreign exchange
registration procedures. However, even after the promulgation of Implementing
Rules there still exist uncertainties regarding the SAFE registration for PRC
residents’ interests in overseas companies. It remains uncertain whether PRC
residents shall go through the overseas investment foreign exchange registration
procedures under Notice 75 or Implementing Rules.
Penalties
for non-compliance which may be issued by SAFE can impact the PRC resident
investors as well as the onshore subsidiary. However, certain matters related to
implementation of Circular No. 75 remain unclear or untested. As a result, we
may be impacted by potential penalties which may be issued by SAFE. For
instance, remedial action for violation of the SAFE requirements may be to
restrict the ability of our Chinese subsidiaries to repatriate and distribute
its profits to us in the United States. The results of non-compliance are
uncertain, and penalties and other remedial measures may have a material adverse
impact upon our financial condition and results of operations.
Extensive
regulation of the food processing and distribution industry in the PRC could
increase our expenses resulting in reduced profits.
We are
subject to extensive regulation by the PRC's Agricultural Ministry, and by other
county and local authorities in jurisdictions in which our products are
processed or sold, regarding the processing, packaging, storage, distribution
and labeling of our products. Applicable laws and regulations governing our
products may include nutritional labeling and serving size requirements. Our
processing facilities and products are subject to periodic inspection by
national, county and local authorities. To the extent that new regulations are
adopted, we will be required to conform our activities in order to comply with
such regulations. Our failure to comply with applicable laws and regulations
could subject us to civil remedies, including fines, injunctions, recalls or
seizures, as well as potential criminal sanctions, which could have a material
adverse effect on our business, operations and finances.
13
Limited
and uncertain trademark protection in the PRC makes the ownership and use of our
trademarks uncertain.
We have
obtained trademark registrations for the use of our tradenames “Xing An Ling”
and “Yi Bai”, which have been registered with the PRC’s Trademark Bureau of the
State Administration for Industry and Commerce with respect to our milk
products. We believe our trademarks are important to the establishment of
consumer recognition of our products. However, due to uncertainties in Chinese
trademark law, the protection afforded by our trademarks may be less than we
currently expect and may, in fact, be insufficient. Moreover even if it is
sufficient, in the event it is challenged or infringed, we may not have the
financial resources to defend it against any challenge or infringement and such
defense could in any event be unsuccessful. Moreover, any events or conditions
that negatively impact our trademarks could have a material adverse effect on
our business, operations and finances.
Risks
Relating to the Market for Our Common Stock
Because
we became public by means of a reverse merger, we may not be able to attract the
attention of major brokerage firms.
There may
be risks associated with our becoming public through a the Reverse Merger, as
described in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Recent Developments — Reverse Merger, Private Placements
and Related Transactions.” Because of our Reverse Merger, we could be exposed to
undisclosed liabilities resulting from our operations prior to the merger and we
could incur losses, damages or other costs as a result. In addition,
securities analysts of major brokerage firms may not provide coverage of us
since there is no incentive to brokerage firms to recommend the purchase of our
common stock. Further, brokerage firms may not want to conduct any secondary
offerings on our behalf in the future. These factors may negatively
effect the market price and liquidity of our common stock.
There
is currently a limited trading market for our common stock and a more liquid
trading market may never develop or be sustained and stockholders may not be
able to liquidate their investment at all, or may only be able to liquidate the
investment at a price less than the Company’s value.
There is
currently a limited trading market for our common stock and a more liquid
trading market may never develop. As a result, the price if traded
may not reflect the value of the Company. Consequently, investors may not be
able to liquidate their investment at all, or if they are able to liquidate it
may only be at a price that does not reflect the value of our
business. Because the price for our stock is low, many brokerage
firms may not be willing to effect transactions in the securities. Even if an
investor finds a broker willing to effect a transaction in our stock, the
combination of brokerage commissions, transfer fees, taxes, if any, and any
other selling costs may exceed the selling price. Further, many lending
institutions will not permit the use of common stock like ours as collateral for
any loans. Even if a more active market should develop, the price may
be highly volatile.
Our
common stock is currently approved for quotation on the OTCBB. We do
not satisfy the initial listing standards of the New York Stock Exchange, NYSE
Amex Equities or The Nasdaq Stock Market. If we never are able to
satisfy any of those listing standards our common stock will never be listed on
an exchange. As a result, the trading price of our stock may be lower
than if we were listed on an exchange. Our stock may be subject to increased
volatility. When a stock is thinly traded, a trade of a large block
of shares can lead to a dramatic fluctuation in the share
price. These factor may make it more difficult for our shareholders
to sell their shares.
14
Our
stock price may be volatile in response to market and other
factors.
The
market price for our stock may be volatile and subject to price and volume
fluctuations in response to market and other factors, including the following,
some of which are beyond our control:
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the
increased concentration of the ownership of our shares by a limited number
of affiliated stockholders following the Reverse Merger may limit interest
in our securities;
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variations
in quarterly operating results from the expectations of securities
analysts or investors;
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revisions
in securities analysts’ estimates or reductions in security analysts’
coverage;
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announcements
of technological innovations or new products or services by us or our
competitors;
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reductions
in the market share of our
products;
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announcements
by us or our competitors of significant acquisitions, strategic
partnerships, joint ventures or capital
commitments;
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general
technological, market or economic
trends;
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volatility
in our results of operations;
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investor
perception of our industry or
prospects;
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insider
selling or buying;
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investors
entering into short sale contracts;
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regulatory
developments affecting our industry;
and
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additions
or departures of key personnel.
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These
factors may negatively effect the market price and liquidity of our common
stock.
“Penny
Stock” rules may make buying or selling our common stock difficult.
Trading
in our common stock is subject to the “penny stock” rules. The Securities and
Exchange Commission (“SEC”) has adopted regulations that generally define a
penny stock to be any equity security that has a market price of less than $5.00
per share, subject to certain exceptions. These rules require that any
broker-dealer that recommends our common stock to persons other than prior
customers and accredited investors, must, prior to the sale, make a special
written suitability determination for the purchaser and receive the purchaser’s
written agreement to execute the transaction. Unless an exception is available,
the regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the risks
associated with trading in the penny stock market. In addition, broker-dealers
must disclose commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities they offer. The
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from effecting transactions in our common stock, which
could severely limit the market price and liquidity of our common
stock.
15
We
have a concentration of stock ownership and control, which may have the effect
of delaying, preventing, or deterring certain corporate actions and may lead to
a sudden change in our stock price.
Our
common stock ownership is highly concentrated. As of the date hereof, one
shareholder, Yang Yong Shan, beneficially owns 14,063,329 shares, or
approximately 42.5% of our total outstanding common stock. He is also our
Chairman, Chief Executive Officer and President. His interests may
differ significantly from your interests. As a result of the
concentrated ownership of our stock, a relatively small number of stockholders,
acting together, will be able to control all matters requiring stockholder
approval, including the election of directors and approval of mergers and other
significant corporate transactions. In addition, because our stock is
so thinly traded, the sale by any of our large stockholders of a significant
portion of that stockholder’s holdings could cause a sharp decline in the market
price of our common stock.
We
have the right to issue up to 10,000,000 shares of "blank check" preferred
stock, which may adversely affect the voting power of the holders of other of
our securities and may deter hostile takeovers or delay changes in management
control.
Our
certificate of incorporation provides that we may issue up to 10,000,000 shares
of preferred stock from time to time in one or more series, and with such
rights, preferences and designations as our board of directors may determinate
from time to time. While none of our preferred stock has yet been issued, our
board of directors, without further approval of our common stockholders, is
authorized to fix the dividend rights and terms, conversion rights, voting
rights, redemption rights, liquidation preferences and other rights and
restrictions relating to any series of our preferred stock. Issuances of shares
of preferred stock could, among other things, adversely affect the voting power
of the holders of other of our securities and may, under certain circumstances,
have the effect of deterring hostile takeovers or delaying changes in management
control. Such an issuance would dilute existing stockholders, and the
securities issued could have rights, preferences and designations superior to
our common stock.
A
substantial number of shares of our common stock are issuable upon exercise of
outstanding warrants, the exercise of which will substantially reduce the
percentage ownership of holders of our currently outstanding shares of common
stock, and the sale of which may cause a decline in the price at which shares of
our common stock can be sold.
As of
the date of this prospectus, we have outstanding exercisable warrants to
purchase an aggregate of 7,460,813 shares of our common stock, of
which:
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373,334
are exercisable at a price of $0.94 per
share;
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1,333,333
are exercisable at a price of $1.50 per
share;
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2,246,748
are exercisable at a price of $1.63 per
share;
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906,190
are exercisable at a price of $2.04 per
share;
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75,000
are exercisable at a price of $2.61 per share;
and
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2,526,208
are exercisable at a price of $3.26 per
share.
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5,620,169
of the shares underlying these exercisable warrants are being registered hereby
for possible resale by those selling stockholders who own the warrants. We also
have outstanding warrants to purchase 714,286 shares of our common stock at an
exercise price of $1.68 per share, which may become exercisable on March 2, 2010
if certain conditions are met. The issuance of all or substantially
all additional shares of common stock that are issuable upon exercise of our
outstanding warrants will substantially reduce the percentage equity ownership
of holders of shares of our common stock. In addition, the exercise
of a significant number of warrants, and subsequent sale of shares of common
stock received upon such exercise, could cause a sharp decline in the market
price of our common stock. The rights and obligations under the
warrants are further described in “Description of Securities –
Warrants.”
We
have not paid, and do not intend to pay, cash dividends in the foreseeable
future.
We
have not paid any cash dividends on our common stock and do not intend to pay
cash dividends in the foreseeable future. We intend to retain future earnings,
if any, for reinvestment in the development and expansion of our business.
Dividend payments in the future may also be limited by other loan agreements or
covenants contained in other securities which we may issue. Any future
determination to pay cash dividends will be at the discretion of our board of
directors and depend on our financial condition, results of operations, capital
and legal requirements and such other factors as our board of directors deems
relevant. In addition, the promissory notes we issued in the June
2008 Note Offering, as amended, and November 2008 Note Offering, further
described in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Recent Developments — Sale of Notes and Warrants,”
contain restrictive covenants on our payment of dividends, as further described
in “—Description of Securities — Promissory Notes.”
FORWARD-LOOKING
STATEMENTS
Some of
the statements contained in this prospectus are not statements of historical or
current fact. As such, they are "forward-looking statements" based on our
current expectations, which are subject to known and unknown risks,
uncertainties and assumptions. They include statements relating to:
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·
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future
sales and financings;
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·
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the
future development of our business;
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·
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our
ability to execute our business
strategy;
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·
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projected
expenditures; and
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·
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the
market for our products.
|
You can
identify forward-looking statements by terminology such as "may," "will,"
"should," "could," "expects," "intends," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of these
terms or other comparable terminology. These statements are not predictions.
Actual events or results may differ materially from those suggested by these
forward-looking statements. In evaluating these statements and our prospects
generally, you should carefully consider the factors set forth below. All
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by these cautionary factors and to
others contained throughout this prospectus. We are under no duty to update any
of the forward-looking statements after the date of this prospectus or to
conform these statements to actual results.
17
Although
it is not possible to create a comprehensive list of all factors that may cause
actual results to differ from the results expressed or implied by our
forward-looking statements or that may affect our future results, some of these
factors are set forth under "Risk Factors" in this prospectus and in our
periodic filings made with the SEC.
USE
OF PROCEEDS
The
shares of common stock covered by this prospectus are, either issued and
outstanding, or issuable upon exercise of common stock purchase warrants owned
by the selling stockholders. Each of the selling stockholders will receive all
of the net proceeds from the sale of shares by that stockholder. We will not
receive any of the proceeds from the sale or other disposition of the shares
common stock covered by this prospectus. However, upon the exercise of warrants
by payments of cash, we will receive $12,872,575, in the aggregate, assuming all
of the warrants are exercised. To the extent that we receive cash upon the
exercise of the warrants, we expect to use that cash for the construction of a
new production facility and for general corporate purposes.
MARKET
INFORMATION
Market
Information
Our
common stock was approved for quotation on the OTCBB in the first quarter of
2007. Through October 9, 2007, our trading symbol was “MCTC.OB.” As
of October 9, 2007, we changed our name to Amnutria Dairy Inc. and were assigned
a new trading symbol of “AUDY.OB.” On January 25, 2008, we changed
our name to Emerald Dairy Inc. and received a new trading symbol of
“EMDY.OB”
On
October 20, 2008, shares of common stock purchased in two private offerings we
conducted in fiscal 2007 became eligible for sale pursuant to Rule 144 under the
Securities Act of 1933, as amended. Prior to that date, there had
been no established public trading market for shares of our common stock for
over five years. There is currently only a limited trading market for our common
stock and no assurance can be given that a more liquid trading market for our
common stock will develop or be maintained.
The
high and low sales prices for our common stock for the fourth quarter of fiscal
2008, first, second, third and fourth quarters of fiscal 2009, and the
subsequent interim period, were as follows:
Quarter Ended
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High
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Low
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||||||
2008
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||||||||
December
31, 2008
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$ | 2.50 | $ | 0.70 | ||||
2009
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||||||||
March
31, 2009
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$ | 1.00 | $ | 0.26 | ||||
June
30, 2009
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$ | 2.11 | $ | 0.60 | ||||
September
30, 2009
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$ | 1.90 | $ | 1.30 | ||||
December
31, 2009
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$ | 2.00 | $ | 1.50 | ||||
2010
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||||||||
March
31, 2010 (through January
13, 2010)
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$ | 1.80 | $ | 1.65 |
18
Trading
in our common stock has been sporadic and the quotations set forth above are not
necessarily indicative of actual market conditions. All prices reflect
inter-dealer prices without retail mark-up, mark-down, or commission and may not
necessarily reflect actual transactions.
As of
the date hereof, we have outstanding exercisable warrants to purchase an
aggregate of 7,460,813 shares of our common stock, of which:
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·
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373,334
are exercisable at a price of $0.94 per
share;
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·
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1,333,333
are exercisable at a price of $1.50 per
share;
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·
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2,246,748
are exercisable at a price of $1.63 per
share;
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·
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906,190
are exercisable at a price of $2.04 per
share;
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·
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75,000
are exercisable at a price of $2.61 per share;
and
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·
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2,526,208
are exercisable at a price of $3.26 per
share.
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We also
have outstanding warrants to purchase 714,286 shares of our common stock at an
exercise price of $1.68 per share, which may become exercisable on March 2, 2010
if certain conditions are met.
In
addition, we have issued and outstanding under our 2009 Equity Incentive Plan
(“2009 Plan”):
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·
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703,200
stock options, exercisable at a price of $0.42 per share, of which: (i)
175,800 vested on September 2, 2009, and (ii) an additional 175,800 will
vest on each of March 2, 2010, September 2, 2010 and March 2,
2011;
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·
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380,000
stock options, exercisable at a price of $1.80 per share, of which 95,000
will vest on each of May 10, 2010, November 10, 2010, May 10, 2011 and
November 10, 2011; and
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·
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380,000
share appreciation rights, exercisable at a price of $1.80 per share,
which will vest with respect to 25% of the underlying shares on each of
May 10, 2010, November 10, 2010, May 10, 2011 and November 10,
2011.
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Of the
32,927,191 shares of common stock we currently have issued and outstanding
(which amount does not include an additional 1,944,444 shares which are
currently held in treasury), 29,658,726 may be eligible for sale pursuant to
Rule 144 under the Securities Act of 1933, as amended.
Holders
As of the
date hereof, there were approximately 208 holders of record of our common
stock.
19
Dividends
We
have not paid any dividends since inception and do not anticipate paying any
dividends in the foreseeable future. We currently intend to retain
all available funds and any future earnings of our business for use in the
operation of our business. The declaration, payment and amount of
future dividends, if any, will depend upon our future earnings, results of
operations, financial position and capital requirements, among other factors,
and will be at the sole discretion of our Board of Directors. In
addition, the promissory notes we issued in the June 2008 Note Offering, as
amended, and November 2008 Note Offering, further described in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations —
Recent Developments — Sale of Notes and Warrants,” contain restrictive covenants
on our payment of dividends, as further described in “Description of Securities
– Promissory Notes.”
Securities
Authorized For Issuance Under Equity Compensation Plan
As of
December 31, 2008, we did not have any stock option, bonus, profit sharing,
pension or similar plan.
In March
2009, our board of directors adopted and our stockholders approved the 2009 Plan
to attract and retain the best available personnel, provide additional
incentives to employees, directors and consultants and promote the success of
our business. A total of 1,500,000 shares of our common stock have
been reserved for issuance under the 2009 Plan. The 2009 Plan is further
described in “Description of Securities – Stock Options and Share Appreciation
Rights.”
20
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with our audited consolidated
financial statements for the years ended December 31, 2008 and 2007 and the
related notes thereto and our unaudited consolidated financial statements for
the three and nine months ended September 30, 2009 and the related notes
thereto. Our fiscal year ends on December 31, and each of our fiscal
quarters ends on the final day of each of March, June and September. The
following discussion contains forward-looking statements. Please see
"Forward-Looking Statements" for a discussion of uncertainties, risks and
assumptions associated with these statements.
Overview
We are a
producer of milk powder, rice powder and soybean milk powder, which currently
comprise approximately 95%, 3% and 2% of our sales,
respectively. Through our network of over 800 salespeople, our products are
distributed throughout 20 provinces in the PRC, and sold in over 5,800 retail
outlets.
Our
products are marketed under two brand names:
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·
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“Xing
An Ling,” which is designed for high-end customers;
and
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·
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“Yi
Bai,” which is designed for middle and low-end
customers.
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The
Chinese government has initiated programs to promote milk consumption and is
providing incentives to increase dairy production. The dairy market today in the
PRC is over $13.0 billion and is expected to grow at a rate of 15% per year for
the foreseeable future. We focus on the infant formula segment of the market,
which is expected to grow even faster, at an annual rate of approximately 23%
through 2011. Currently, it is estimated that demand for infant formula in the
PRC outstrips supply by at least 2-to-1.
We have
received an Infant & Baby Formula Milk Powder Production Permit from the
State General Administration of Quality Supervision and Inspection and
Quarantine of the PRC. Only current license holders are permitted to produce
formula milk powder in the PRC.
Because
of our close proximity to our sources of fresh milk, we are able to complete the
production process in approximately 30 – 35 hours, which is faster than
competitors of ours that are not similarly situated. We produced approximately
7,000 tons of milk powder at our facility in Be’ian City, Heilongjiang Province,
PRC in fiscal 2007, up from approximately 5,000 tons in fiscal 2006. In 2008, by
adding a third shift to the existing two shifts working schedule, we produced
approximately 9,000 tons of milk powder.
In
addition, in July 2008, through our wholly-owned subsidiary, Hailun Xinganling
Dairy Co., Ltd. (“HXD”), we commenced construction of a new production facility
in Hailun City, Heilongjiang Province, PRC, which we expect will enable us to
produce an additional 9,000 tons of milk powder in 2010 and a total of 18,000
tons of milk powder annually in 2011. As a result, between our existing
production facility in Be’ian City and our new production facility in Hailun
City, we believe we will have the capacity to produce approximately 27,000 tons
of milk powder per year by the end of fiscal 2011. It is expected that our
production of rice powder and soymilk powder will also increase in volume over
the same period, while continuing to comprise an aggregate of approximately 5%
of our overall sales.
21
All of
our business is conducted through our wholly-owned Chinese
subsidiaries:
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·
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Heilongjiang
Xing An Ling Dairy Co. Limited (“XAL”), which handles our promotion, sales
and administrative functions;
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·
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Heilongjiang
Be’ian Nongken Changxing Lvbao Dairy Limited Liability Company (“Lvbao”),
which handles production of our products in Be’ian City, Heilongjiang
Province, PRC; and
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·
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HXD,
which will handle additional production of our products in Hailun City,
Heilongjiang Province, PRC.
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Recent
Developments
Reverse
Merger, Private Placements and Related Transactions
Prior to
October 9, 2007, we were a public shell company, as defined by Rule 405 of the
Securities Act of 1933 and Rule 12b-2 of the Securities Exchange Act of 1934,
without material assets or activities. On October 9, 2007, we completed a
reverse merger (the “Reverse Merger”), pursuant to which our wholly-owned
subsidiary merged with and into a private company, American International Dairy
Holding Co., Inc. (“AIDH”), with such private company being the surviving
company. In connection with this Reverse Merger, we discontinued our former
business and succeeded to the business of AIDH as our sole line of business. For
financial reporting purposes, AIDH is considered to be the accounting acquirer.
Accordingly, the historical financial statements presented and the discussion of
financial condition and results of operations herein are those of AIDH and do
not include our historical financial results.
Simultaneously
with the Reverse Merger, we sold 1,333,333 units of our securities to John V.
Winfield, consisting of: (i) 1,333,333 shares of our common stock, (ii) warrants
to purchase 266,667 shares of our common stock, at an exercise price of $0.94
per share (“Warrant W-1”), and (iii) warrants to purchase 1,333,333 shares of
our common stock, at an exercise price of $1.50 per share (“Warrant W-2”), for
an aggregate purchase price of $1,000,000 (the “First Offering”). In addition,
we sold 2,061,227 units of our securities to certain additional “accredited
investors” (the “Initial Purchasers”), consisting of (i) 2,061,227 shares
of our common stock, (ii) warrants to purchase 412,245 of our common stock,
at an exercise price of $2.04 per share (the “Class A Warrants”), and
(iii) warrants to purchase 2,061,227 shares of our common stock, at an
exercise price of $3.26 per share (the “Class B Warrants”), for an aggregate
purchase price of $3,359,800 (the “Initial Placement of the Second Offering”).
The rights and obligations under Warrant W-1, Warrant W-2, the Class A Warrants,
and the Class B Warrants are further described in “— Description of Securities —
Warrants” below.
Upon the
consummation of the Reverse Merger, and the closing of the First Offering and
Initial Placement of the Second Offering, we entered into a Share Repurchase
Agreement with Grand Orient Fortune Investment, Ltd. (“Grand Orient”), a PRC
company controlled by Mingwen Song, pursuant to which we repurchased 1,944,444
shares (the “Repurchased Shares”) of our issued and outstanding common stock
from Grand Orient for an aggregate purchase price of $3,169,444 (the “Repurchase
Transaction”). We determined to repurchase these shares, to reduce the overall
dilution created by the First Offering and Second Offering. The Repurchased
Shares are currently being held in treasury.
Immediately
following the closing of the Repurchase Transaction, we entered into Put/Call
Agreements with each of Grand Orient and Fortune Land Holding, Ltd., a PRC
company controlled by Dexuan Yu (jointly, the “Put/Call Shareholders). Prior to
the termination of the Put/Call Agreements on March 3, 2009, we had the right to
repurchase an aggregate of 1,944,444 shares of our common stock from the
Put/Call Shareholders under certain circumstances, and the Put/Call Shareholders
had the right to cause us to repurchase such shares at $1.63 per share if
certain events occur. The Put/Call Agreements are further described in “—
Liquidity and Capital Resources — Put/Call Agreements” below.
22
On
October 19, 2007, we sold 2,846,746 units of our securities to additional
“accredited investors” (the “Additional Purchasers”), consisting of
(i) 2,846,746 shares of our common stock, (ii) 569,346 Class A Warrants,
and (iii) 2,846,746 Class B Warrants, for an aggregate purchase price of
$4,640,200 (the “Additional Placement of the Second Offering,” and together with
the Initial Placement of the Second Offering, the “Second
Offering”).
As of
March 2, 2009, an aggregate of 183,457 of the Class A Warrants and 175,937 of
the Class B Warrants were tendered at reduced exercise prices, as further
described in “— Recent Developments — First Warrant Tender Offer” below. On
August 13, 2009, an aggregate of 49,000 Class A Warrants and 2,205,828 Class B
Warrants were exchanged for warrants with reduced exercise prices and, as of
August 14, 2009, all of the warrants were exercised, as further described in “—
Recent Developments — Second Warrant Tender Offer” below.
In
connection with the First Offering and Second Offering (collectively, the
“October Offerings”), we engaged finders and placement agents to whom we paid
fees in the aggregate of $700,452, and granted (i) warrants to purchase an
aggregate of 106,667 shares of our common stock, at an exercise price of $0.94
per share, the terms and conditions of which are identical to those of Warrant
W-1, and (ii) warrants to purchase 392,639 shares of our common stock, at an
exercise price of $2.04, the terms and conditions of which are identical to
those of the Class A Warrants. On March 2, 2009, the exercise prices of 235,583
of these warrants were reduced from $2.04 to $1.63, as partial consideration for
services rendered in connection with a consulting agreement we entered into with
one of these parties.
Construction
of New Production Facility
On May
22, 2008, we organized our wholly-owned subsidiary, HXD, under the laws of the
PRC. In July 2008, HXD commenced construction of a production facility to be
located in Hailun City, Heilongjiang Province, PRC. Initially, the new facility
will have one production line, which will have the capacity to produce 9,000
tons of milk power annually. The new facility will have the capacity to
accommodate a second production line, which, if and when completed, would enable
us to produce an additional 9,000 tons of milk powder per year, giving us a
total annual production capacity at all of our production facilities of 27,000
tons of milk powder. We anticipate that production at this new facility will
commence in the first quarter of fiscal 2010. We believe that the cost to add
the second production line would be approximately an additional $15.0 million.
We plan to raise the funds needed for the new facility from the capital market
through private or public equity and/or debt offerings. There can be no
assurance that that any additional financing will become available to us, and if
available, on terms acceptable to us.
23
Sale
of Notes and Warrants
June
2008 Note Offering
In
June 2008, we conducted a private offering of up to a maximum of (i) $3,000,000
of our 8% promissory notes (the “June 2008 Notes”) and (ii) warrants to purchase
300,000 shares of our common stock, at an exercise price of $2.61 per share (the
“June 2008 Warrants”) (the “June 2008 Note Offering”). On June 12, 2008,
one “accredited investor” (the “Initial June 2008 Noteholder”) purchased, for a
purchase price of $1,500,000, a June 2008 Note in the principal amount of
$1,500,000, and June 2008 Warrants to purchase 150,000 shares of our common
stock. On June 20, 2008, an additional “accredited investor” (the “Additional
June 2008 Noteholder” and, together with the Initial June 2008 Investor, the
“June 2008 Noteholders”) purchased, for a purchase price of $750,000, a June
2008 Note in the principal amount of $750,000, and June 2008 Warrants to
purchase 75,000 shares of our common stock. As of December 31, 2008,
the terms of the June 2008 Notes and June 2008 Warrants were
amended. As of December 31, 2009, the terms of the June 2008 Notes
were further amended. The rights and obligations under the June 2008
Notes, as amended, are further described in “— Description of Securities —
Promissory Notes” below. The rights and obligations under the June
2008 Warrants, as amended, are further described in “— Description of
Securities — Warrants” below. In addition, as of December 31, 2009,
we granted the June 2008 Noteholders additional warrants to purchase an
aggregate of 789,356 shares of our common stock in consideration for further
extending the maturity date of the indebtedness represented by the June 2008
Notes. The rights and obligations under these additional warrants are further
described in “— Description of Securities — Warrants” below.
In
connection with the June 2008 Note Offering, we engaged a placement agent to
whom we paid a placement fee in the amount of $97,500, and granted warrants to
purchase 45,000 shares of our common stock, the terms and conditions of which
are identical to the those of the June 2008 Warrants, as amended as of December
31, 2008. In addition, as of July 4, 2009, we granted the same placement
agent warrants to purchase an additional 97,500 shares of our common stock in
consideration for its services in connection with the amendment of the June 2008
Notes and June 2008 Warrants as of December 31, 2008. The rights and obligations
under these additional warrants are further described in “— Description of
Securities — Warrants” below. Further, as of December 31, 2009, we
issued the same placement agent 200,000 share of our common stock in
consideration for its services in connection with the further amendment of the
June 2008 Notes as of December 31, 2009.
November
2008 Note Offering
On
November 10, 2008, we sold to one “accredited investor” (the “November 2008
Noteholder”) for a purchase price of $500,000, a 10% promissory note (the
“November 2008 Note”) in the principal amount of $500,000, and warrants to
purchase 50,000 shares of our common stock, at an exercise price of $2.61 per
share (the “November 2008 Warrants”) (the “November 2008 Note Offering”). As of
November 10, 2009, certain of the terms of the November 2008 Note were amended.
The rights and obligations under the November 2008 Note, as amended, are further
described in “— Description of Securities — Promissory Notes”
below. The rights and obligations under the November 2008 Warrants
are further described in “— Description of Securities — Warrants”
below. In addition, as of November 10, 2009, we granted the November
2008 Noteholder additional warrants to purchase 100,000 shares of our common
stock in consideration for amending the November 2008 Note. The rights and
obligations under these additional warrants are further described in “—
Description of Securities — Warrants” below.
In
connection with the November 2008 Note Offering, we engaged a placement agent to
whom we paid a placement fee in the amount of $40,000, and granted warrants to
purchase 25,000 shares of our common stock, the terms and conditions of which
are identical to those of the November 2008 Warrants. In addition, as
of November 10, 2009, we paid the same placement agent a fee in the amount of
$97,500, and issued to it warrants to purchase 120,000 shares of our common
stock in consideration for its services in connection with, among other things,
the amendment of the November 2008 Notes.
First
Warrant Tender Offer
As of
April 24, 2008, we commenced an offer (the “First Warrant Tender Offer”) to the
holders of our then outstanding warrants, pursuant to which the holders had the
opportunity to exchange their existing warrants for amended warrants to be
exercised at reduced exercise prices as follows:
24
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·
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with
respect to eligible warrants having an exercise price of $0.94 per share,
a holder accepting the First Warrant Tender Offer could exercise some or
all of the amended warrants at $0.75 per share of common
stock;
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·
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with
respect to eligible warrants having an exercise price of $1.50 per share,
a holder accepting the First Warrant Tender Offer could exercise some or
all of the amended warrants at $1.20 per share of common
stock;
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·
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with
respect to eligible warrants having an exercise price of $2.04 per share,
a holder accepting the First Warrant Tender Offer could exercise some or
all of the amended warrants at $1.63 per share of common stock;
and
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·
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with
respect to eligible warrants having an exercise price of $3.26 per share,
a holder accepting the First Warrant Tender Offer could exercise some or
all of the amended warrants at $2.61 per share of common
stock.
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On March
2, 2009, we closed the First Warrant Tender Offer. In connection with the First
Warrant Tender Offer:
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·
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a
total of 183,457 warrants were tendered at the reduced exercise price of
$1.63 per share, for an aggregate exercise price of $299,035;
and
|
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·
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a
total of 175,937 warrants were tendered at the reduced exercise price of
$2.61 per share, for an aggregate exercise price of
$459,196.
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As a
result, we received gross proceeds of $758,231 and issued an aggregate of
359,394 shares of our common stock.
Second
Warrant Tender Offer
As of
June 19, 2009, we commenced an offer (the “Second Warrant Tender Offer”) to all
holders of warrants to purchase shares of our common stock, having exercise
prices of either $0.94, $1.50, $1.63, $2.04 or $3.26 per share, originally
issued in connection with the October Offerings (the “Original Warrants”), the
opportunity to voluntarily exchange any or all of the Original Warrants for
amended warrants exercisable at reduced exercise prices (“Amended Warrants”),
for a limited period of time.
The terms
of the Amended Warrants, included the following:
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·
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with
respect to the 373,344 warrants having an exercise price of $0.94 per
share, a holder accepting the Second Warrant Tender Offer was entitled to
exchange some or all of the warrants for amended warrants exercisable at
$0.75 per share;
|
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·
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with
respect to the 1,333,333 warrants having an exercise price of $1.50 per
share, a holder accepting the Second Warrant Tender Offer was entitled to
exchange some or all of the warrants for amended warrants exercisable at
$1.20 per share;
|
|
·
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with
respect to the 235,583 warrants having an exercise price of $1.63 per
share, a holder accepting the Second Warrant Tender Offer was entitled to
exchange some or all of the warrants for amended warrants exercisable at
$1.30 per share;
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25
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·
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with
respect to the 955,190 warrants having an exercise price of $2.04 per
share, a holder accepting the Second Warrant Tender Offer was entitled to
exchange some or all of the warrants for amended warrants exercisable at
$1.63 per share; and
|
|
·
|
with
respect to the 4,732,036 warrants having an exercise price of $3.26 per
share, a holder accepting the Second Warrants Tender Offer was entitled to
exchange some or all of the warrants for amended warrants exercisable at
$1.63 per share.
|
On August
13, 2009, we closed the Second Warrant Tender Offer. In connection with the
Second Warrant Tender Offer:
|
·
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a
total of 49,000 Original Warrants with an exercise price of $2.04 per
share were exchanged for Amended Warrants with a reduced exercise price of
$1.63 per share; and
|
|
·
|
a
total of 2,205,828 Original Warrants with an exercise price of $3.26 per
share were exchanged for Amended Warrants with a reduced exercise price of
$1.63 per share.
|
On August
14, 2009, the warrant holders that participated in the Second Warrant Tender
Offer exercised all of the 2,254,828 Amended Warrants they received in
connection therewith, at an exercise price of $1.63 per share. As a result, we
received gross proceeds of $3,675,370.
Adoption
of 2009 Equity Incentive Plan
On March
2, 2009, our board of directors adopted and our stockholders approved the 2009
Plan to attract and retain the best available personnel, provide additional
incentives to employees, directors and consultants and promote the success of
our business. A total of 1,500,000 shares of our common stock have been reserved
for issuance under the 2009 Plan. The 2009 Plan is further described
in “— Description of Securities — Stock Options and Share Appreciation
Rights.”
Payment
of Liquidated Damages
In
connection with the October Offerings, as further described in “— Recent
Developments — Reverse Merger, Private Placements and Related Transactions”
above, we entered into Registration Rights Agreements with the investors in the
October Offerings (the “Investors”). Pursuant to the Registration Rights
Agreements, we were required to pay liquidated damages to the Investors, if we
failed to satisfy certain registration requirements, as further described in “—
Liquidity and Capital Resources — Registration Rights and Liquidated Damages”
below. As a result of our failure to satisfy the registration requirements, we
accrued a total of $1,201,998 in liquidated damages through October 19, 2008,
the date the shares purchased in the October Offerings became eligible for sale
pursuant to Rule 144 under the Securities Act. Pursuant to the Registration
Rights Agreement, the liquidated damages were payable in cash or shares of our
common stock, at our discretion. As of October 5, 2009, in full payment of the
liquidated damages, we issued an aggregate of 667,777 shares of our common
stock to the Investors, valued at $1.80 per share, the closing price on the
OTCBB on October 20, 2008. In addition, pursuant to the Registration Rights
Agreements, if we failed to pay any liquidated damages in full within seven days
after the date payable, we were required to pay interest thereon at a rate of
15% per annum until such amounts, plus all such interest thereon, are paid in
full. Therefore, as of October 5, 2009, we paid interest in the aggregate amount
of approximately $172,900, by issuing an aggregate of 108,056 additional shares
of our common stock, valued at $1.60 per share, the closing price of our common
stock on the OTCBB on October 2, 2009.
26
Term
Loan
On November 30, 2009, we entered
into a Loan Agreement with a lender (the “Term Loan Lender”), pursuant to which
we borrowed $1,750,000 from the Term Loan Lender (the “Term Loan”), in
consideration for which we issued to the Term Loan Lender a promissory note (the
“Term Loan Note”). The terms of the Term Loan Note are further described in “—
Description of Securities — Promissory Notes” below.
December 2009 Note
Offering
On December 24, 2009, we sold to
three “accredited investors” (the “December 2009 Noteholders”) for a purchase
price of $1,750,000, 10% promissory notes in the aggregate principal amount of
$1,750,000 (the “December 2009 Notes”) and warrants to purchase an aggregate of
536,809 shares of our common stock, at an exercise price of $1.63 per share (the
“December 2009 Warrants”) (the “December 2009 Note Offering”). The rights and
obligations under the December 2009 Note are further described in “— Description
of Securities — Promissory Notes” below. The rights and obligations
under the December 2009 Warrants are further described in “— Description of
Securities — Warrants” below. At the closing of the December 2009
Note Offering, we paid the December 2009 Noteholders a closing fee in the
aggregate amount of $35,000, and prepaid interest on the December 2009 Notes in
the aggregate amount of $175,000. As a result, we received net proceeds of
$1,540,000.
Trends
and Uncertainties
Economic
Downturn
The
recent worldwide economic downturn and market instability have made the business
climate more volatile and more costly. Although all of our business operations
are currently conducted in the PRC, our general business strategy may be
adversely affected by unpredictable and unstable market conditions. If the
current equity and credit markets deteriorate further, or do not improve, it may
make any necessary debt or equity financing more difficult, more costly, and
more dilutive. Failure to secure any necessary financing in a timely manner and
on favorable terms could have a material adverse effect on our growth strategy,
financial performance and stock price and could require us to delay or abandon
our expansion plans.
Narrowing
of Gap in Milk Consumption
The
Chinese government has initiated programs to promote milk consumption and is
providing incentives to increase dairy production. In addition to improving the
overall health of its populous, the government views increased dairy production
as a means of improving employment in rural areas thus improving social
stability. The programs are designed to narrow the significant gap between the
PRC’s per capita milk consumption of 15 kg per person and the global average of
100 kg per person.
Industry
Growth
The dairy
market today in the PRC is over $13.0 billion. According to the website of China
National Bureau of Statistics, between 2000 and 2007 the dairy industry in the
PRC experienced an average growth of 16% per year. English-language copies of
the reports of the China National Bureau of Statistics are available on its
website, free of charge, at www.stats.gov.cn/english. The dairy industry in the
PRC is projected to grow at rate of 15% per year from 2008 to 2012, to reach
$32.0 billion by 2012.
27
On its
website, the Dairy Association of China estimates that the infant formula market
segment, which is the market segment we target, has grown even faster in recent
years, at a rate of 20%-30% per year. We believe the following three factors are
the main drivers of the infant formula market:
|
·
|
Increased
household income made infant formula more affordable in the
PRC;
|
|
·
|
Increased
number of working mothers or busy mothers created more demands for infant
formula products; and
|
|
·
|
Increased
popularity and acceptance of infant formula
products.
|
Supply
of Infant Formula
It is
estimated that the demand for infant formula in the PRC outstrips supply by at
least 2-to-1. In recent years, our production capabilities have not been able to
keep up with demand for our products. We have commenced construction of a new
production facility in Hailun City with an initial annual production capacity of
9,000 tons of milk powder, which is expected to start production in the first
quarter of 2010. We expect that this increase in production capacity of
approximately 100% will result in the doubling of our sales revenues, with a
corresponding increase in cost of goods sold and sales and administrative
expenses.
This
project has cost an aggregate of approximately $20.0 million, including land use
rights, construction expenses and equipment costs. We have applied the net
proceeds we received from the June 2008 Note Offering and November 2008 Note
Offering, further described in “— Recent Developments — Sale of Notes and
Warrants” above, the First Warrant Tender Offer, further described in “— Recent
Developments — First Warrant Tender Offer” above, the Second Warrant Tender
Offer, further described in “— Recent Developments — Second Warrant Tender
Offer” above, the Term Loan, further described in “— Recent Developments — Term
Loan” above, and the December 2009 Note Offering, further described in “— Recent
Developments — December 2009 Note Offering” above, toward the construction and
equipping of this new production facility.
Product
Pricing and Raw Material Supply
Historically
we have been able to obtain sufficient raw milk and other raw materials to meet
our production needs. The price of raw milk is affected by regional market in
Heilongjiang Province, PRC, while other raw materials are affected by global
markets. We expect that the raw materials we require to produce our products
will continue to be available to us for the foreseeable future. However, we
believe the recent worldwide increases in the cost and availability of
commodities, such as rice and oil, will lead to increases in prices for such
commodities. To some extent, we believe we will be able to increase the prices
for our products to pass on higher raw material costs to consumers. However,
there is no guarantee that we will be able to raise prices to the full extent
necessary to cover rises in costs for raw materials, which could have a negative
material impact on our financial condition and results of
operations.
Brand
Name and Product Quality
There are
more than 30 brand names of infant formula products sold in the PRC. Most of our
international and larger competitors have been concentrating in the first tier
cities, or well-known urban centers such as Beijing and Shanghai. The rest of
the Chinese domestic companies in the industry, including us, have been focusing
on less developed second and third tier cities where competition is less severe
than the top tier cities. As consumers have many options for infant formula
products, infant formula producers with better quality and safety images have
the advantages to sell their product at higher price. Brand image and
recognition are increasingly important in gaining customer
loyalty.
28
Organic
Label Milk Products
Currently,
there are no organic label milk powder products in the mainland China market. In
February 2008, we obtained organic label certification from Guangdong Zhongjian
Certification Co., Ltd. We plan to create an organic label product line
beginning in fiscal 2010. We will need to test the market to determine demand
for organic milk products. Initially, we expect sales of organic milk powder to
be minor. However, over the long term, we believe that, similar to the growth of
the organic milk market in the U.S., organic milk products will be very popular
in the PRC. Over time, this will help increase our revenues.
Factors
Affecting Raw Milk Production
Raw milk
production is influenced by a number of factors that are beyond our control
including, but not limited to, the following:
|
·
|
Seasonal factors: dairy
cows generally produce more milk in temperate weather than in cold or hot
weather and extended unseasonably cold or hot weather could lead to lower
than expected production;
|
|
·
|
Environmental factors:
the volume and quality of milk produced by dairy cows is closely linked to
the quality of the nourishment provided by the environment around them, if
environmental factors cause the quality of nourishment to decline, milk
production could decline and we may have difficulty finding sufficient raw
milk; and
|
|
·
|
Governmental agricultural and
environmental policy: declines in government grants, subsidies,
provision of land, technical assistance and other changes in agricultural
and environmental policies may have a negative effect on the viability of
individual dairy farms, and the numbers of dairy cows and quantities of
milk they are able to produce.
|
Contamination
of Milk Powder Products Produced in the PRC
In
mid-2008, a number of milk powder products produced within the PRC were found to
contain unsafe levels of tripolycyanamide, also known as melamine, sickening
thousands of infants. This prompted the Chinese government to conduct a
nationwide investigation into how the milk powder was contaminated, and caused a
worldwide recall of certain milk powder products produced within the PRC. On
September 16, 2008, China’s Administration of Quality Supervision, Inspection
and Quarantine (AQSIQ) revealed that it had tested samples from 175 dairy
manufacturers, and published a list of 22 companies whose products contained
melamine. We passed the emergency inspection and were not included on AQSIQ’s
list. Although we believe that the inevitable contraction in the Chinese milk
powder industry caused by this crisis will lead to increased demand for our
products, we can not be certain that the illnesses caused by contamination in
the milk powder industry, whether or not related to our products, will not lead
to decreased demand for milk powder products produced within the PRC, thereby
having a material adverse effect on our business.
29
Results
of Operations
Nine-Month
Period Ended September 30, 2009 Compared to Nine-Month Period Ended September
30, 2008
The
following summarizes changes in our operations for the nine months ended
September 30, 2009 and 2008. Net income increased by $2,191,232, from
$1,509,235 in the nine months ended September 30, 2008, to $3,700,467 for the
nine months ended September 30, 2009. The increase in net income during the nine
months ended September 30, 2009, as compared to the same time period in the
prior year, was due an increase in gross profit as further described
below.
Sales
and Cost of Goods Sold
For the Nine
months
Ended September
30,
|
||||||||
2009
|
2008
|
|||||||
Sales
|
$
|
31,261,491
|
$
|
32,560,256
|
||||
Cost
of Goods Sold
|
17,057,583
|
19,845,232
|
||||||
Gross
Profit
|
$
|
14,203,908
|
$
|
12,715,024
|
Sales. Sales volume decreased
by 774 metric tons, or 11.4%, period on period, to 5,987 metric tons for the
nine months ended September 30, 2009, from 6,761 metric tons for the nine months
ended September 30, 2008. Sales revenues decreased by $1,298,765, or 4.0%,
from $32,560,256 in the nine months ended September 30, 2008, to $31,261,491 for
the nine months ended September 30, 2009. This decrease was primarily due to a
decrease in subcontracting revenue, as compared to the nine months ended
September 30, 2008, as we shifted our sales mix to produce more of our higher
margin product line in fiscal 2009.
Sales by product
line. A break-down of our sales by product line for the nine
months ended September 30, 2009 and 2008 is as follows:
Nine
months Ended September 30,
|
||||||||||||||||||||||||||||
2009
|
2008
|
Period-on-period
|
||||||||||||||||||||||||||
Product category
|
Quantity
(tons)
|
$ Amount
|
% of sales
|
Quantity
(tons)
|
$ Amount
|
% of
sales
|
Qty.
Variance
|
|||||||||||||||||||||
Milk
powder
|
4,454
|
27,318,421
|
87.4
|
4,543
|
26,144,060
|
80.3
|
(89
|
)
|
||||||||||||||||||||
Rice
powder
|
168
|
954,482
|
3.1
|
147
|
813,645
|
2.5
|
21
|
|||||||||||||||||||||
Soybean
powder
|
472
|
822,026
|
2.6
|
350
|
644,233
|
2.0
|
122
|
|||||||||||||||||||||
Subcontracting
|
893
|
2,166,562
|
6.9
|
1,721
|
4,958,318
|
15.2
|
(828
|
)
|
||||||||||||||||||||
Total
|
5,987
|
31,261,491
|
100.0
|
6,761
|
32,560,256
|
100.0
|
(774
|
)
|
There
were various changes to the break-down of sales among our product lines over the
nine months ended September 30, 2009, as we increased production in most lines,
but attempted to adjust our sales mix to higher margin products, and away from
subcontracting. Rice powder accounted for 3.1% of our sales mix for the
nine months ended September 30, 2009, at an average selling price of $5,681 per
metric ton, as compared to 2.5% of our sales mix in the nine months ended
September 30, 2008, at an average selling price of $5,535 per metric
ton. Soybean powder accounted for 2.6% of our sales mix for the nine months
ended September 30, 2009, at an average selling price of $1,742 per metric ton,
as compared to 2.0% of our sales mix in the nine months ended September 30,
2008, at an average selling price of $1,841 per metric ton. Milk powder
accounted for 87.4% of nine months ended September 30, 2009 sales mix, at an
average selling price of $6,133 per metric ton, as compared to 80.3% of first
quarter 2008, at an average selling price of $5,755 per metric ton. We decreased
our subcontract production during the nine months ended September 30, 2009 to
6.9% of the sales mix, at an average selling price of $2,426 per metric ton, as
compared to 15.2% of the sales mix in the nine months ended September 30, 2008,
at an average sales price of $2,881 per metric ton.
30
A
breakdown of our average selling price by product line for the nine months ended
September 30, 2009 and 2008 is as follows:
|
Nine
months Ended
September
30,
|
|
||||||||||||||
Average selling prices
|
|
2009
|
|
|
2008
|
|
|
Variance
|
|
|||||||
|
$
|
$
|
$
|
%
|
||||||||||||
Milk
powder
|
6,133
|
5,755
|
378
|
6.6
|
||||||||||||
Rice
powder
|
5,681
|
5,535
|
146
|
2.6
|
||||||||||||
Soybean
powder
|
1,742
|
1,841
|
(99
|
)
|
(5.4
|
)
|
||||||||||
Subcontracting
|
2,426
|
2,881
|
(455
|
)
|
(15.8
|
)
|
||||||||||
Total
|
5,222
|
4,816
|
406
|
8.4
|
Cost of Goods
Sold. Cost of goods sold decreased by $2,787,649, or 14.0%,
from $19,845,232 in the nine months ended September 30, 2008, to $17,057,583 for
the nine months ended September 30, 2009. This decrease was directly related to
our reduction in subcontracting work during the nine months ended September 30,
2009. Overall our cost per metric ton decreased by $86, or 2.9%, to $2,849 per
metric ton in the nine months ended September 30, 2009, as compared to $2,935
per metric ton in nine months ended September 30, 2008, due to increases in our
sales prices and the reductions in the price of raw materials we use to produce
our products.
A
breakdown of cost of sales by product line for the nine months ended September
30, 2009 and 2008 is as follows:
|
Nine
months Ended September 30,
|
|
||||||||||||||
|
2009
|
|
|
2008
|
|
|
Variance
|
|
||||||||
|
$
|
|
|
$
|
|
|
$
|
|
|
|
%
|
|
||||
Cost of sales
|
||||||||||||||||
Milk
powder
|
13,887,172
|
14,893,859
|
(1,006,687
|
)
|
(6.8
|
)
|
||||||||||
Rice
powder
|
374,307
|
262,169
|
112,138
|
42.8
|
||||||||||||
Soybean
powder
|
616,126
|
423,707
|
192,419
|
45.4
|
||||||||||||
Subcontracting
|
2,179,978
|
4,265,497
|
(2,085,519
|
)
|
(48.9
|
)
|
||||||||||
Total
|
17,057,583
|
19,845,232
|
(2,787,649
|
)
|
(14.0
|
)
|
||||||||||
|
||||||||||||||||
Cost per units sold (per
ton)
|
||||||||||||||||
Milk
powder
|
3,118
|
3,278
|
(160
|
)
|
(4.9
|
)
|
||||||||||
Rice
powder
|
2,228
|
1,783
|
445
|
25.0
|
||||||||||||
Soybean
powder
|
1,305
|
1,211
|
94
|
7.8
|
||||||||||||
Subcontracting
|
2,441
|
2,478
|
(37
|
)
|
(1.5
|
)
|
||||||||||
Average
cost per unit sold
|
2,849
|
2,935
|
(86
|
)
|
(2.9
|
)
|
31
Gross Profit. Gross profit was
$14,203,908, or 45.4% of our sales for the nine months ended September 30, 2009,
as compared to gross profit of $12,715,024, or 39.1%, for the nine months ended
September 30, 2008. During the nine months ended September 30, 2009, our gross
margin on milk powder increased to 49.2%, from 43.0% in the same period of the
prior year, due to an increase in the average sales price of 6.6%, while there
was a 4.9% decrease in the cost per metric ton from the nine months ended
September 30, 2008. The gross margin for soybean powder declined 9.2% to
25.0% in the nine months ended September 30, 2009, as compared to 34.2% in the
nine months ended September 30, 2008, due to an increase in the average cost per
ton of 7.8% in the nine months ended September 30, 2009 as compared to the same
period in 2008.
A
breakdown of gross margin by product line for the nine months ended September
30, 2009 and 2008 is as follows:
Nine
months Ended September 30,
|
||||||||||||||||||||
2009
|
2008
|
Period-on-period
|
||||||||||||||||||
Product category
|
|
$ Amount
|
|
|
Gross
Margin %
|
|
|
$ Amount
|
|
|
Gross
Margin %
|
|
|
Margin
Variance
|
|
|||||
Milk
powder
|
13,431,249
|
49.2
|
11,250,201
|
43.0
|
6.2
|
|||||||||||||||
Rice
powder
|
580,175
|
60.8
|
551,476
|
67.8
|
(7.0
|
)
|
||||||||||||||
Soybean
powder
|
205,900
|
25.0
|
220,526
|
34.2
|
(9.2
|
)
|
||||||||||||||
Subcontracting
|
(13,416
|
)
|
(0.6
|
)
|
692,821
|
14.0
|
(14.6
|
)
|
||||||||||||
Total
|
14,203,908
|
45.4
|
12,715,024
|
39.1
|
6.3
|
Operating
Expenses
|
For the Nine
months
Ended September
30,
|
|||||||
|
2009
|
2008
|
||||||
Operating Expenses
|
||||||||
Selling
and administrative expenses
|
$
|
9,448,920
|
$
|
10,283,634
|
||||
Depreciation
and amortization
|
130,107
|
72,336
|
||||||
Total
operating expenses
|
$
|
9,579,027
|
$
|
10,355,970
|
Selling Expenses. Selling
expenses overall decreased by $543,003, or 6.9%, from $7,834,865 in the nine
months ended September 30, 2008, to $7,291,862 for the nine months ended
September 30, 2009. The major factors in the decrease in selling expenses are as
follows:
|
·
|
Advertising
and promotion expenses decreased by $693,282, or 19.1%, to $2,940,297 in
2009, from $3,633,579 in 2008, due to a less aggressive marketing campaign
in 2009.
|
|
·
|
Entertainment
expenses decreased by $117,155, or 25.1%, to $350,155 in 2009, from
$467,311 in 2008, as we reduced our marketing as compared to
2008.
|
|
·
|
Transportation
expenses decreased by $69,367, or 8.7%, to $730,313 in 2009, from $799,680
in 2008, as a result of our shipping costs decreasing in 2009 as compared
to 2008.
|
These
decreases were partially offset by increases in:
|
·
|
Traveling
expenses, by $93,733, or 11.7%, to $897,992 in 2009, from $804,259 in 2008
as cost for travel increased during
2009.
|
32
|
·
|
Product
promoter salaries, by $116,255, or 119.2%, to $213,816 in 2009, from
$97,561 in 2008, as we increased the amount paid to
promoters.
|
|
·
|
Salaries
of our salespersons, by $179,962, or 12.5%, to $1,615,054 in 2009, from
$1,435,092 in 2008, as we increased our sales during
2009.
|
Rather
than using a wholesaler, our sales people deal directly with the retail
outlets. This business model has higher sales expenses compared to
the traditional business model, but creates better profit margins for
us.
Administrative Expenses.
Administrative expenses decreased by $291,711, or 11.9%, from $2,448,769 in nine
months ended September 30, 2008, to $2,157,058 for the nine months ended
September 30, 2009. The primary factor in this decrease was that we incurred
liquidated damages of $901,199 in the nine months ended September 30, 2008, as a
result of our failure to satisfy requirements to register shares of our common
stock, but did not incur liquidated damages in the comparable period in
2009.
These
decreases were partially offset by:
|
·
|
An
increase in stock option expenses of $125,452 in 2009 from stock options
granted in 2009 partially offset the decrease in liquidated
damages.
|
|
·
|
An
increase in consulting expenses of $226,893 in 2009 from $83,430 in 2008
to $310,323 in 2009 as we paid for assistance in locating potential
financing options.
|
|
·
|
An
increase in legal and accounting expenses of $157,066 in 2009 from
$451,419 in 2008 to $608,485 in 2009 due to increased costs related to
public company reporting requirements as compared to
2008.
|
Provision
for Income Taxes
For the Nine
months
Ended September
30,
|
||||||||
2009
|
2008
|
|||||||
Provision
for Income Taxes
|
||||||||
Current
|
$
|
860,948
|
$
|
586,957
|
||||
Deferred
|
—
|
—
|
||||||
$
|
860,948
|
$
|
586,957
|
Provision for Income Taxes.
Income taxes increased by $273,991, or 46.8%, from $586,957 for the nine months
ended September 30, 2008, to $860,948 for the nine months ended September 30,
2009. This increase was due to the increase in our taxable income in our
operating subsidiaries.
Fiscal
Year Ended December 31, 2008 Compared to Fiscal Year Ended December 31,
2007
The
following summarizes changes in our operations for the fiscal years ended
December 31, 2008 and 2007. Net income decreased by $1,235,631, or
34.8%, from approximately $3,550,138 in the fiscal year ended December 31, 2007
to approximately $2,314,507 for the fiscal year ended December 31, 2008. The
decrease in net income during the year ended December 31, 2008, as compared to
the same time period in the prior year, was due to a one-time charge of $986,699
in liquidated damages resulting from our failure to satisfy certain registration
requirements, combined with an increase in our operating expenses, which offset
an increase in our gross profit as further described below.
33
Sales
and Cost of Goods Sold
|
For
the Fiscal Years
Ended
December 31,
|
|||||||
|
2008
|
2007
|
||||||
|
||||||||
Sales
|
$ | 44,325,179 | $ | 29,618,008 | ||||
Cost of Goods
Sold
|
26,546,291 | 19,064,905 | ||||||
Gross
Profit
|
$ | 17,778,888 | $ | 10,553,103 |
Sales. Sales volume increased
by 1,046 metric tons, or 13.2%, period on period to 8,976 metric tons for the
fiscal year ended December 31, 2008, from 7,930 metric tons for the fiscal year
ended December 31, 2007. As a result, sales revenues increased by
$14,707,171, or 49.7%, from $29,618,008 in the fiscal year ended December 31,
2007 to $44,325,179 for the fiscal year ended December 31, 2008. This increase
was due to the following factors:
|
·
|
We
expanded the market areas in the 20 provinces in which we sell our
products and our products are now sold in over 5,800 retail outlets, up
from approximately 5,600 in fiscal
2007;
|
|
·
|
Our
products became increasing popular in mainland China due to our continued
sales and marketing efforts; and
|
|
·
|
The
average selling price for all products has increased by $1,203 per metric
ton, as compared to the fiscal year ended December 31, 2007, because we
produced more of our high end product line in fiscal
2008.
|
Sales by product
line. A break-down of our sales by product line for the years
ended December 31, 2008 and 2007 is as follows:
Fiscal Year Ended December 31,
|
||||||||||||||||||||||||||||
2008
|
2007
|
Period-on-period
|
||||||||||||||||||||||||||
Product category
|
Quantity
(tons)
|
$ Amount
|
% of sales
|
Quantity
(tons)
|
$ Amount
|
% of
sales
|
Qty.
Variance
|
|||||||||||||||||||||
|
||||||||||||||||||||||||||||
Milk
powder
|
6,175
|
36,245,495
|
81.8
|
5,245
|
22,821,548
|
77.0
|
930
|
|||||||||||||||||||||
Rice
powder
|
198
|
1,105,837
|
2.5
|
200
|
985,746
|
3.3
|
(2
|
)
|
||||||||||||||||||||
Soybean
powder
|
477
|
882,185
|
2.0
|
404
|
641,053
|
2.2
|
73
|
|||||||||||||||||||||
Subcontracting
|
2,126
|
6,091,662
|
13.7
|
2,081
|
5,169,661
|
17.5
|
45
|
|||||||||||||||||||||
Total
|
8,976
|
44,325,179
|
100.0
|
7,930
|
29,618,008
|
100.0
|
1,046
|
34
There
were various changes to the break-down of sales among our product lines over the
fiscal year ended December 31, 2008, as we increased production in most all
lines, but attempted to adjust our sales mix to higher margin
products. Soybean powder only accounted for 2.0% of our sales mix for
the fiscal year 2008, at an average selling price of $1,849 per metric ton, as
compared to 2.2% of our sales mix in fiscal year 2007, at an average selling
price of $1,587 per metric ton. Milk powder accounted for 81.8% of
fiscal year 2008 sales mix, at an average selling price of $5,869 per metric
ton, as compared to 77.0% of fiscal year 2007, at an average selling price of
$4,351 per metric ton. We decreased our subcontract production during fiscal
year 2008 to 13.7% of the sales mix, at an average selling price of $2,865 per
metric ton, as compared to 17.5% of the sales mix in fiscal year 2007, at an
average sales price of $2,484 per metric ton.
A
breakdown of our average selling price by product line for the years ended
December 31, 2008 and 2007 is as follows:
Fiscal Year Ended
December 31,
|
||||||||||||||||
Average selling prices
|
2008
|
2007
|
Variance
|
|||||||||||||
|
$
|
$
|
$
|
%
|
||||||||||||
Milk
powder
|
5,869
|
4,351
|
1,518
|
34.9
|
||||||||||||
Rice
powder
|
5,575
|
4,929
|
646
|
13.1
|
||||||||||||
Soybean
powder
|
1,849
|
1,587
|
262
|
16.5
|
||||||||||||
Subcontracting
|
2,865
|
2,484
|
381
|
15.3
|
||||||||||||
Total
|
4,938
|
3,735
|
1,203
|
32.2
|
Cost of Goods
Sold. Cost of goods sold increased by $7,481,386, or 39.2%,
from $19,064,905 in the fiscal year ended December 31, 2007, to $26,546,291 for
the fiscal year ended December 31, 2008. This increase was directly related to
an increase in sales during fiscal year of 49.7%. Overall our cost per metric
ton increased by $553, or 23.0%, to $2,957 per metric ton in the fiscal year
ended December 31, 2008, as compared to $2,404 per metric ton in fiscal year
ended December 31, 2007, due to increases in our sales and the price of raw
materials we use to produce our products.
A
breakdown of cost of sales by product line for the years ended December 31, 2008
and 2007 is as follows:
|
Fiscal Year Ended December 31,
|
|||||||||||||||
|
2008
|
2007
|
Variance
|
|||||||||||||
|
$
|
$
|
$
|
%
|
||||||||||||
Cost of sales
|
||||||||||||||||
Milk
powder
|
20,185,806
|
13,909,783
|
6,276,023
|
45.1
|
||||||||||||
Rice
powder
|
433,662
|
399,497
|
34,165
|
8.6
|
||||||||||||
Soybean
powder
|
580,684
|
419,621
|
161,063
|
38.4
|
||||||||||||
Subcontracting
|
5,346,139
|
4,336,004
|
1,010,135
|
23.3
|
||||||||||||
|
26,546,291
|
19,064,905
|
7,481,386
|
39.2
|
||||||||||||
|
||||||||||||||||
Cost per units sold(per
ton)
|
||||||||||||||||
Milk
powder
|
3,269
|
2,652
|
617
|
23.3
|
||||||||||||
Rice
powder
|
2,186
|
1,997
|
189
|
9.5
|
||||||||||||
Soybean
powder
|
1,217
|
1,039
|
178
|
17.1
|
||||||||||||
Subcontracting
|
2,515
|
2,084
|
431
|
20.7
|
||||||||||||
Average
cost per unit sold
|
2,957
|
2,404
|
553
|
23.0
|
35
Gross Profit. Gross profit was
$17,778,888, or 40.1% of our sales for the fiscal year ended December 31, 2008,
as compared to gross profit of $10,553,103, or 35.6% for the fiscal year ended
December 31, 2007. During the fiscal year ended December 31, 2008 our gross
margin on milk powder increased to 44.3% from 39.1% in the prior year, due to an
increase in the average sales price of 34.9% while there was a 23.3 % increase
in the cost per metric ton from the fiscal year ended December 31,
2007. The gross margin for soybean powder declined 0.3% to 34.2% in
fiscal year 2008 as compared to 34.5% in fiscal year 2007 due to increase in the
average cost per ton of 17.1% in fiscal year 2008 as compared to fiscal year
2007.
A
breakdown of gross margin by product line for the years December 31, 2008 and
2007 is as follows:
Fiscal
Year Ended December 31,
|
||||||||||||||||||||
2008
|
2007
|
Period-on-
period
|
||||||||||||||||||
Product category
|
$ Amount
|
Gross
Margin
%
|
$
Amount
|
Gross
Margin
%
|
Margin
Variance
|
|||||||||||||||
Milk
powder
|
16,059,689
|
44.3
|
8,911,766
|
39.0
|
5.3
|
|||||||||||||||
Rice
powder
|
672,175
|
60.8
|
586,248
|
59.5
|
1.3
|
|||||||||||||||
Soybean
powder
|
301,501
|
34.2
|
221,432
|
34.5
|
(0.3
|
)
|
||||||||||||||
Subcontracting
|
745,523
|
12.2
|
833,657
|
16.1
|
(3.9
|
)
|
||||||||||||||
Total
|
17,778,888
|
40.1
|
10,553,103
|
35.6
|
4.5
|
Operating
Expenses
|
For
the Fiscal Years
Ended
December 31,
|
|||||||
|
2008
|
2007
|
||||||
Operating
Expenses
|
||||||||
Selling
expenses
|
$ | 10,602,185 | $ | 5,331,489 | ||||
Administrative
expenses
|
3,494,733 | 1,492,642 | ||||||
Depreciation
and amortization
|
113,660 | 51,066 | ||||||
Total
operating expenses
|
$ | 14,210,578 | $ | 6,875,197 |
Selling Expenses. Selling
expenses overall increased by $5,270,696, or 98.9%, from $5,331,489 in fiscal
year ended December 31, 2007, to $10,602,185 for the fiscal year ended December
31, 2008. The major factors in the increase in selling expenses are as
follows:
|
·
|
Advertising
increased by $3,360,124, or 4,304.4%, to $3,438,187 in 2008, from $78,063
in 2007, due to our marketing campaign to increase brand awareness and
sales.
|
|
·
|
Selling
salaries increased by $637,682, or 47.2%, to $1,988,116 in 2008, from
1,350,434 in 2007, as amounts we paid to our sales staff rose due to
increased sales.
|
|
·
|
Traveling
expenses incurred by the sales staff increased by $405,714, or 58.7%, to
$1,097,255 in 2008, from $691,541 in 2007, due to the expansion of our
sales network.
|
|
·
|
Transportation
expenses increased by $247,765, or 41.3%, to $847,055 in 2008, from
$599,290 in 2007, as a result of our shipping of more products in 2008 as
compared to 2007.
|
36
|
·
|
Outdoor
promotion expenses increased by $280,885, or 305.2%, to $372,906 in 2008,
from $92,021 in 2007, as part of our marketing campaign to increase brand
awareness and sales.
|
|
·
|
Sales
entertainment expenses increased by $180,813, or 41.7%, to $614,953 in
2008, from $434,140 in 2007, as we increased our sales
network.
|
Rather
than using a wholesaler, our sales people deal directly with the retail
outlets. This business model has higher sales expenses compared to
the traditional business model, but creates better profit margins for
us. For a more complete discussion regarding the costs and profits of
our retail sales model, see “Description of Business - Company Strategy - Market
Strategy - Sales Channel.”
Administrative Expenses.
Administrative expenses increased by $2,002,091, or approximately 134.1%, from
$1,492,642 in fiscal year ended December 31, 2007, to $3,494,733 for the fiscal
year ended December 31, 2008. The major factors in the increase in
administrative expenses are as follows:
|
·
|
Additional
liquidated damages incurred in 2008 of $986,699, due to our failure to
satisfy registration requirements under registration rights
agreements.
|
|
·
|
Increase
of administrative salaries of $175,116, or 97.4%, to $354,992 in 2008,
from $179,876 in 2007, as a result of our hiring of four additional
administrative personnel during
2008.
|
|
·
|
Increase
in legal and accounting expenses of $943,704, or 3,057.2%, to $797,899 in
2008, from $25,273 in 2007, due to increased costs related to our first
full fiscal year of public company reporting
requirements.
|
|
·
|
Increase
of travel expenses of $89,778, or 78.6%, to $204,009 in 2008, from
$114,231 in 2007, due to the increased travel by our administrative
personnel in connection with efforts to raise financing to fund our
growth.
|
|
·
|
Increase
of investor relations expenses of $152,552, or 11,389.9%, to $153,891 in
2008, from $1,339 in 2007, due to our first full fiscal year as a public
company.
|
Provision
for Income Taxes
For the Fiscal Years
Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Provision
for Income Taxes
|
||||||||
Current
|
$ | 840,198 | $ | 118,325 | ||||
Deferred
|
— | — | ||||||
$ | 840,198 | $ | 118,325 |
Provision for Income Taxes.
Income taxes increased by $721,873, or 610.0%, from $118,325 in fiscal year
ended December 31, 2007, to $840,198 for the fiscal year ended December 31,
2008. This increase was due to the increase in our taxable income in our
operating subsidiaries.
37
Liquidity
and Capital Resources
Uses
of Capital
|
|
For the Nine
Months Ended
September 30,
|
|
|||||
2009
|
2008
|
|||||||
Net
cash provided by operating activities
|
$
|
2,101,308
|
$
|
4,955,796
|
||||
Net
cash used in investing activities
|
(4,194,717
|
)
|
(10,188,918
|
)
|
||||
Net
cash provided by financing activities
|
$
|
4,433,590
|
$
|
1,959,082
|
Net Cash Provided By Operating
Activities. For the nine months ended September 30, 2009,
$2,101,308 was provided by operating activities, compared with $4,955,796
provided by operating activities for the nine months ended September 30, 2008.
Our decrease in net cash provided from operating activities during 2009 was due
to an increase in net income to $3,700,467 for the nine months ended September
30, 2009, from $1,509,235 for the same period in the prior year, which was
partially offset by the following:
|
·
|
Trade
accounts receivable increased by $559,266, due to the increased level of
sales during 2009.
|
|
·
|
Inventory
increased by $837,027, due to seasonal summer build up in products as
compared to December 2008.
|
|
·
|
Accounts
payable and accrued expenses increased by $424,925 at September 30, 2009,
as compared to the same period in 2008, due to increases in production of
products and expenses.
|
Net Cash Used In Investing
Activities. For the nine months ended September 30,
2009, we used $4,194,717 in investing activities, compared with $10,188,918 used
in investing activities for the nine months ended September 30, 2008. The
$4,194,717 was for the construction of our new production facility.
Net Cash Provided By Financing
Activities. For the nine months ended September 30, 2009, $4,433,590 was
provided by financing activities, compared with $1,959,082 provided by financing
activities for the nine months ended September 30, 2008. We raised $4,433,590
through the exercise of warrants during the nine months ended September 30,
2009, in connection with the consummation of the First Warrant Tender Offer and
Second Warrant Tender Offer as further described in “- Recent Developments –
First Warrant Tender Offer” and “- Recent Developments – Second Warrant Tender
Offer,” respectively, above.
38
General
In recent
years, the Chinese government has initiated programs to promote milk consumption
and is providing incentives to increase dairy production. Over the same period,
our products have become increasing popular in mainland China due to our
continued sales and marketing efforts. As a result, we have experienced
tremendous growth well above the industry average during recent years. Sales
increased from approximately $7.9 million in 2005 to approximately $44.3 million
in 2008, a 461% increase over three years. Net income increased from
approximately $0.7 million in 2005 to approximately $2.3 million in 2008, a 220%
increase over three years.
Cash and
cash equivalents at September 30, 2009 increased by 31.8% to $9,681,007, from
$7,343,588 at December 31, 2008. Working capital increased from approximately
$3.5 million in 2005 to approximately $14.7 million at September 30, 2009,
including cash generated from operations, as well as funds raised from private
offerings of promissory notes and warrants we consummated in fiscal 2008. Based
upon our short term liabilities, we believe our cash and cash equivalents are
adequate to satisfy our working capital needs and sustain our ongoing operations
for the next twelve months.
Production
capacity has been the bottle neck for our growth in recent years, because
production has not been able to keep up with demand. Our growth strategy for the
next three years will be primarily focused on expanding production capacity and
strengthening sales efforts. Management plans to achieve this strategy by
increasing our production capacity with introduction of our new production
facility, sales staff, and advertising expenditures.
In
July 2008, we commenced construction of a new production facility in Hailun
City, Heilongjiang Province, PRC. The first phase of this project has cost an
aggregate of approximately $20.0 million, including land use rights,
construction expenses and equipment costs. Upon completion of the first phase,
the new facility will have one production line, which will have the capacity to
produce 9,000 tons of milk power annually. We anticipate that production at this
new facility will commence in the first quarter of fiscal 2010. In the second
phase, a second production line may be added at this new facility, which, when
completed, would enable us to produce an additional 9,000 tons of milk powder
per year, giving us a total annual production capacity of 27,000 tons of milk
powder. We believe the cost to add the second production line would be an
additional $15.0 million.
Historically
we relied on investments by our Chief Executive Officer and shareholders, and
bank loans, to meet our cash and capital expenditures. However, as the amount of
our capital expenditures increases, we will depend more on the capital markets
to raise funds through private and public offerings of equity and/or debt. There
can be no assurance that any future financing will be available to us when
needed, and on commercially reasonable terms.
In
connection with the October Offerings, we received aggregate gross proceeds of
$9,000,000. The gross proceeds from the October Offerings were used in
connection with the Repurchase Transaction, to pay expenses related to our
Reverse Merger and October Offerings, and for general working capital purposes.
The Repurchase Transaction, Reverse Merger and October Offerings are further
described in “— Recent Developments — Reverse Merger, Private Placements and
Related Transactions” above.
In
June 2008, we closed the June 2008 Note Offering, pursuant to which we received
aggregate gross proceeds of $2,250,000. In addition, on November 10, 2008, we
closed the November 2008 Note Offering, pursuant to which we received aggregate
gross proceeds of $500,000. We used the gross proceeds from the June 2008 Note
Offering and the November 2008 Note Offering primarily for the construction and
equipping of our new production facility, and to pay expenses related to these
offerings. The June 2008 Note Offering and November 2008 Note Offering are
further described in “- Recent Developments - Sale of Notes and Warrants”
above.
39
As of
April 24, 2008, we commenced the First Warrant Tender Offer, pursuant to which
the holders of warrants received in connection with the October Offerings had
the opportunity to tender their warrants for shares of our common stock at a
reduced exercise prices. On March 2, 2009, we closed the First Warrant Tender
Offer. In connection with the First Warrant Tender Offer we received gross
proceeds of $758,231. We used the gross proceeds we received from the First
Warrant Tender Offer for the construction and equipping of our new production
facility, and to pay expenses related to the First Warrant Tender Offer. The
First Warrant Tender Offer is further described in “- Recent Developments –
First Warrant Tender Offer” above.
On August
13, 2009, we closed our Second Warrant Tender Offer, pursuant to
which:
|
·
|
a
total of 49,000 Original Warrants with an exercise price of $2.04 per
share were exchanged for Amended Warrants with a reduced exercise price of
$1.63 per share; and
|
|
·
|
a
total of 2,205,828 Original Warrants with an exercise price of $3.26 per
share were exchanged for Amended Warrants with a reduced exercise price of
$1.63 per share.
|
On August
14, 2009, the warrant holders that participated in the Second Warrant Tender
Offer exercised all of the 2,254,828 Amended Warrants they received in
connection therewith, at an exercise price of $1.63 per share. As a result, we
received gross proceeds of $3,675,370. We used the gross proceeds we received
from the Second Warrant Tender Offer for the construction and equipping of our
new production facility, and to pay expenses related to the Second Warrant
Tender Offer. The Second Warrant Tender Offer is further described in “- Recent
Developments – Second Warrant Tender Offer” above.
On
November 30, 2009, we borrowed $1,750,000 through the Term Loan from the Term
Loan Lender. We applied the proceeds of this Term Loan primarily to the
equipping of the first production line of our new production facility. The Term
Loan is further described in “— Recent Developments — Term Loan”
above.
On
December 24, 2009, we consummated the December 2009 Note Offering pursuant to
which we received net proceeds of $1,540,000. We intend to apply the net
proceeds primarily toward (i) the cost of equipping the first production line of
our newly-constructed milk powder processing facility, (ii) the payment of
expenses incurred in connection with the December 2009 Note Offering, and (iii)
general working capital purposes.
Following
the completion of the first production line of our new facility, we plan to add
a second production line, which, when completed, would enable us to produce an
additional 9,000 tons of milk powder per year, giving us a total annual
production capacity of 27,000 tons of milk powder. We believe the cost to add
the second production line would be an additional $15.0 million. We
currently have no sources for the additional financing we may need to add a
second production line at our new processing facility. There can be no assurance
that that any additional financing will become available to us, and if
available, on terms acceptable to us.
In
addition to constructing our new production facility, we have purchased an
office building located in Heilongjiang Province, PRC, for approximately $1.8
million, which will serve as our corporate headquarters. The purchase price of
this building was paid out of our retained earnings.
Currently,
we spend approximately 8% - 12% of total revenues on advertising and promotional
efforts through out the year. We spent approximately $3.0 million, $1.9 million
and $0.8 million on advertising and promotion in fiscal 2008, 2007 and 2006,
respectively. We currently expect to spend an aggregate of between $4.0 million
and $5.0 million on advertising and promotion in fiscal 2009, of which
$2,940,297 has already been spent as of September 30, 2009. This will still fall
within our standard budget for advertising and promotion of 8% - 12% of total
revenues, but in 2009 we plan to spread the expense over the entire year rather
than in the first half of the year as we did in 2008. The funds for advertising
and promotion will generally come out of our earnings.
40
Management
will also consider making strategic acquisitions if there are good opportunities
in the marketplace. However, revenue from acquisitions has not been included in
our planned growth.
Registration
Rights and Liquidated Damages
In
connection with the October Offerings, as further described in “- Recent
Developments - Reverse Merger, Private Placements and Related Transactions”
above, we entered into Registration Rights Agreements (each, a “Registration
Rights Agreement,” and collectively the “Registration Rights Agreements”) with
Mr. Winfield, the Initial Purchasers and the Additional Purchasers
(collectively, the “Investors”), pursuant to which we agreed that within thirty
(30) business days of the respective closing date (the “Filing Date”), we would
file a registration statement with the SEC (the “Registration Statement”)
covering the resale of (i) the shares of common stock purchased in the October
Offerings (the “Purchased Shares”), and (ii) the common stock issuable upon
exercise of Warrant W-1, Warrant W-2, the Class A Warrants, and the Class B
Warrants (collectively (i), (ii), (iii) and (iv), the “Registrable Securities”).
Further, we agreed to use our best efforts to (i) cause the Registration
Statement to be declared effective within ninety (90) calendar days from the
Filing Date, or, if reviewed by the SEC, within one hundred eighty (180)
calendar days after the Filing Date, and (ii) keep the Registration Statement
continuously effective until all of the Registrable Securities have been sold,
or may be sold without volume restrictions pursuant to Rule 144.
Pursuant
to the Registration Rights Agreements, we are required to pay liquidated damages
to the holders of the Purchased Shares if (i) we fail to file the Registration
Statement within thirty (30) business days from the Closing Date, (ii) the SEC
does not declare the Registration Statement effective within ninety (90) days of
the Filing Date (or one hundred eighty (180) days in the event of a review by
the SEC) (the “Effectiveness Date”), (iii) we fail to request acceleration of
effectiveness within five (5) business days of a notice of no further review
from the SEC, (iv) we fail to respond to the SEC within ten (10) business days
of receipt by us of any comments on the Registration Statement, or (v) after it
has been declared effective, the Registration Statement ceases to be effective
or available or if we suspend the use of the prospectus forming a part of the
Registration Statement (A) for more than thirty (30) days in any period of 365
consecutive days if we suspend in reliance on its ability to do so due to the
existence of a development that, in the good faith discretion of its board of
directors, makes it appropriate to so suspend or which renders us unable to
comply with SEC requirements, or (B) for more than ninety (60) days in any
period of 365 consecutive days for any reason. The liquidated damages will
accumulate at the rate of one and one-half percent (1.5%) of the purchase price
paid by the Investors for units of our securities purchase in the October
Offerings for each thirty (30) day period during which a registration default is
continuing; provided, however, that (i) we shall not be liable for liquidated
damages with respect to any warrants or shares of common stock underlying the
warrants, and (ii) in no event will we be liable for liquidated damages in
excess of 1.5% of the aggregate purchase price of the securities purchased in
the October Offerings in any 30 day period, and (iii) the maximum aggregate
liquidated damages payable to any purchaser in the October Offerings shall be
20% of the aggregate purchase price paid by such purchaser. The
Registration Rights Agreement further requires that if we fail to pay any
partial liquidated damages in full within seven days after the date payable, we
will pay interest thereon at a rate of 15% per annum, until such amounts, plus
all such interest thereon, are paid in full.
Notwithstanding
anything to the contrary stated in the Registration Rights Agreements, we are
entitled to limit the Registrable Securities to the extent necessary to avoid
any issues arising from the recent interpretations by the SEC of Rule 415 of the
Securities Act of 1933, as amended.
41
We did
not satisfy these registration requirements and, as a result, accrued a total of
$1,201,998 in liquidated damages and $172,900 in interest. As of
October 5, 2009, we issued an aggregate of 775,833 shares in full payment of the
liquidated damages and interest, as further described in “— Recent Developments
— Reverse Merger, Private Placements and Related Transactions”
above.
Share
Repurchase and Put/Call Agreements
On
October 9, 2007, we consummated the Repurchase Transaction with a shareholder,
as further described in “- Recent Developments - Reverse Merger, Private
Placements and Related Transactions” above. We repurchased the Repurchased
Shares, to reduce the overall dilution created by the October Offerings. The
Repurchased Shares are currently being held in treasury.
Immediately
following the closing of the Repurchase Transaction, we entered into Put/Call
Agreements with the Put/Call Shareholders. Pursuant to the Put/Call Agreements,
we had an option to repurchase an aggregate of 1,944,444 shares of our common
stock (the “Put/Call Shares”) from the Put/Call Shareholders (the “Call
Option”), for an exercise price of $1.63 per share (the “Call Option Price”), if
the following conditions were met (the “Call Option Conditions”):
|
·
|
either
(a) a registration statement (“Registration Statement”) covering the
resale of the Put/Call Shares had been declared effective by the SEC, and
had been kept continuously effective by us, or (b) all of the Put/Call
Shares were available for sale without registration pursuant to Rule 144;
and
|
|
·
|
the
closing price of a share of our common stock as traded on the OTCBB (or
such other exchange or stock market on which the common stock may be
listed or quoted) equaled or exceeded $4.08 (appropriately adjusted for
any stock split, reverse stock split, stock dividend or other
reclassification or combination of the common stock occurring after the
date hereof) for at least ten (10) consecutive trading days immediately
preceding the date notice of exercise of a Call Option was given by
us.
|
In
addition, pursuant to the Put/Call Agreements, the Put/Call Shareholders had the
right to cause us to repurchase the Put/Call Shares (the “Put Right”), for a
price of $1.63 per share (the “Put Purchase Price”), if:
|
·
|
we
failed to exercise our Call Option within ten (10) days of a date on which
all of the Call Option Conditions had been met;
or
|
|
·
|
we
consummated a private offering of our securities of $5,000,000 or greater
(a “Qualified Offering”);
|
|
·
|
we
failed to consummate a Qualified Offering on or prior to October 9, 2009
(each of the aforementioned conditions, a “Put Right
Trigger”).
|
Initially,
our failure to (i) file the Registration Statement within thirty (30) business
days of October 9, 2007 (the “Filing Date”), (ii) have the Registration
Statement declared effective within ninety (90) calendar days from the Filing
Date, or, if reviewed by the SEC, within one hundred eighty (180) calendar days
after the Filing Date, or (iii) keep the Registration Statement continuously
effective until all of the “Registrable Securities” were available for sale
without registration pursuant to Rule 144, would also have served as a Put Right
Trigger. However, as of April 9, 2008, the Put/Call Shareholders agreed to amend
the Put/Call Agreements to delete this provision. We did not pay any
consideration to the Put/Call Shareholders in connection with their waiver of
this provision.
42
We had
recorded the value of the Put/Call Agreements as a liability in the aggregate
amount of $3,169,444 as of October 9, 2007, based on the fair market value of
the underlying common stock of $1.63 as of such date. The parties mutually
agreed that it was in the best interests of the Company and its stockholders for
the Put/Call Agreements to be terminated. Therefore, as of March 3, 2009, the
Put/Call Agreements were terminated.
Changes
in foreign exchange regulations in the PRC and ability to pay dividends in
foreign currency or conduct other foreign exchange business
The
Renminbi is currently not a freely convertible currency, and the restrictions on
currency exchange may limit our ability to use revenues generated in RMB to fund
our business activities outside the PRC, or to make dividends or other payments
in United States dollars. The PRC government strictly regulates conversion of
RMB into foreign currencies. Over the years, foreign exchange regulations in the
PRC have significantly reduced the government’s control over routine foreign
exchange transactions under current accounts. In the PRC, SAFE, regulates the
conversion of the RMB into foreign currencies. Pursuant to applicable PRC laws
and regulations, foreign invested enterprises incorporated in the PRC are
required to apply for “Foreign Exchange Registration Certificates.” Currently,
conversion within the scope of the “current account” (e.g. remittance of foreign
currencies for payment of dividends, etc.) can be effected without requiring the
approval of SAFE. However, conversion of currency in the “capital account” (e.g.
for capital items such as direct investments, loans, securities, etc.) still
requires the approval of SAFE. See the discussion in Risk Factors on
page 5 for more information.
Material
Weakness in Internal Control Over Financial Reporting
On
October 9, 2007, we became a public company by virtue of the Reverse Merger, as
more fully described in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Recent Developments — Reverse Merger,
Private Placements and Related Transactions” above.
Consequently,
we are now subject to the laws related to reporting companies, including the
Sarbanes-Oxley Act of 2002, as amended. Section 404 of the
Sarbanes-Oxley Act requires annual management assessments of the effectiveness
of our internal control over financial reporting. We were first required to
comply with Section 404 commencing with our Annual Report on Form 10-K for the
year ending December 31, 2007. However, our management has not yet
been able to complete its assessment. Our management is currently
carrying out an evaluation, under the supervision and with the participation of
our president (also our principal executive officer) and chief financial officer
(also our principal financial and accounting officer), of the effectiveness of
the design and operation of our disclosure controls and procedures. We are
currently in the process of further documenting our system of internal control
over financial reporting and we will add additional controls and procedures as
needed in order to satisfy the requirements of Section 404. During the course of
our testing, we may in the future identify deficiencies which we may not be able
to remediate in time to comply with Section 404.
Section
404 also requires a report by our independent registered public accounting firm
regarding the effectiveness of our internal control over financial reporting.
Under current requirements, our independent registered public accounting firm is
not required to evaluate and assess our internal control over financial
reporting until its audit of our consolidated financial statements for the year
ending December 31, 2009. Consequently, we will not be evaluated independently
in respect of our controls for a substantial period of time after this offering
is completed. As a result, we may not become aware of other material weaknesses
in our internal control that may be later identified by our independent
registered public accounting firm.
43
As
mentioned above, our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Our internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements in accordance with generally accepted accounting
principles.
In
connection with the audits of the fiscal years ended December 31, 2008 and 2007,
Windes & McClaughry Accountancy Corporation (“Windes”), our independent
registered public accounting firm, noted matters involving our internal controls
that it considered to be significant deficiencies, and taken together constitute
a material weakness, under the standards of the Public Company Accounting
Oversight Board (“PCAOB”). Under the PCAOB standards, a material weakness is a
significant deficiency, or combination of significant deficiencies, that, in
Windes’s judgment, results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
The
material weaknesses identified by Windes were as follows:
|
·
|
Improper
treatment of the effects of exchange rate changes on cash balances held in
foreign currencies in the 2006 statement of cash flows;
and
|
|
·
|
Inadequate
or incomplete review and analysis of certain contractual and other
liabilities.
|
Our
management has discussed these material weaknesses with our board of directors
and has engaged in the following remediation efforts to ensure that the
significant deficiencies do not reoccur:
|
·
|
We
hired an outside consultant to assist with the preparation of our
financial statements; and
|
|
·
|
We
implemented new review and analysis processes for all significant
contractual and other liabilities, including without
limitation:
|
|
(a)
|
the
requirement that white papers be prepared to document all material
transactions;
|
|
(b)
|
the
establishment of checklists and timelines to insure timely reporting of
financial information; and
|
|
(c)
|
the
utilization of comparison review of Chinese accounting standards versus
GAAP standards; and
|
|
·
|
we
purchased and are implementing a new revenue accounting system, that we
believe will enable us to record and report revenue as required to support
our preparation of timely and accurate financial
statements.
|
In
addition, in the fourth quarter of 2008, we retained an outside consultant to
assist us with the self-assessment required by Section 404 of the Sarbanes-Oxley
Act of 2002. This consultant completed the documentation of our internal
controls and procedures. However, upon review of the work product, our
management determined that the prepared documentation did not contain sufficient
detail. Therefore, in the first quarter of 2009, we retained an additional
consultant to help management refine the documentation. That
consultant has not yet completed the documentation of our internal controls and
procedures.
44
These
remediation efforts are designed to address the material weakness identified by
Windes and to improve and strengthen our overall control environment. We believe
these actions will prevent the significant deficiencies from reoccurring. Our
management, including our principal executive officer and principal financial
officer, does not expect that disclosure controls or internal controls over
financial reporting will prevent all errors, even as the aforementioned
remediation measures are implemented and further improved to address all
deficiencies. The design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions.
The
implementation of our remediation plan will require substantial expenditures,
could take a significant period of time to complete, and could distract our
officers and employees from the operation of our business. In particular, we
will incur significant expenses in implementing a new revenue accounting system,
including software license fees as well as fees of third-party consultants and
employment-related expenses attributable to additional internal staffing. We are
currently unable to estimate with reasonable certainty the anticipated costs
associated with our remediation efforts. See “Risk Factors — Ensuring
that we have adequate internal financial and accounting controls and procedures
in place might entail substantial costs, may take a significant period of time,
and may distract our officers and employees from the operation of our business,
which could adversely affect our operating results and our ability to operate
our business.”
Our
failure to remediate the material weakness Windes identified, or the
identification in the future of other material weaknesses in our internal
control over financial reporting may adversely affect our ability to report
financial information, including the filing of our quarterly or annual reports
with the SEC, on a timely and accurate basis and, in particular, may impair our
ability to comply with Section 404 of the Sarbanes-Oxley Act. If we are unable
to comply with Section 404 or otherwise to produce accurate and timely financial
statements, our stock price may be adversely affected and we may be unable to
maintain compliance with SEC requirements. See “Risk Factors — Our
management has identified a material weakness in our internal control over
financial reporting, which if not properly remediated could result in material
misstatements in our future interim and annual financial statements and have a
material adverse effect on our business, financial condition and results of
operations and the price of our common stock.”
Dividends
We have
not paid any dividends. In all likelihood, we will use our earnings to develop
our business and do not intend to declare dividends for the foreseeable future.
Any decision to pay dividends on our common stock in the future will be made by
our board of directors on the basis of earnings, financial requirements and
other such conditions that may exist at that time. In addition, the
Notes we issued in the Note Offering, further described in “— Recent
Developments — Sale of Notes and Warrants” above, contain restrictive covenants
on our payment of dividends, as further described in “Description of Securities
— Promissory Notes” above.
45
Contractual
Obligations and Commercial Commitments
Our
contractual obligations, as of September 30, 2009, were as
follows:
Payments Due By Period
|
||||||||||||||||||||
Contractual obligations
|
Total
|
Less than
1 year
|
1-3 years
|
After
3-5 years
|
More than
5 years
|
|||||||||||||||
Equipment
purchase
|
$
|
1,590,466
|
$
|
1,590,466
|
—
|
—
|
—
|
|||||||||||||
Construction
contract
|
1,868,145
|
1,868,145
|
—
|
—
|
—
|
|||||||||||||||
Debt
Obligations
|
3,199,038
|
3,199,038
|
—
|
—
|
—
|
|||||||||||||||
Advertising
contract
|
82,036
|
82,036
|
—
|
—
|
—
|
|||||||||||||||
Operating
leases
|
39,335
|
39,335
|
—
|
—
|
—
|
|||||||||||||||
Total:
|
$
|
6,799,020
|
$
|
6,779,020
|
—
|
—
|
—
|
Critical
Accounting Policies and Estimates
Our
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) which
require use to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of our financial statements and the
reported amounts of revenues and expenses during the reporting periods. The
consolidated financial statements include the our accounts and those of our
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. In our opinion, the
condensed consolidated financial statements contain all the adjustments
necessary (consisting only of normal recurring accruals) to make our financial
position and the results of operations and cash flows not misleading. Critical
accounting policies are those that require the application of management’s most
difficult, subjective, or complex judgments, often because of the need to make
estimates about the effect of matters that are inherently uncertain and that may
change in subsequent periods. In preparing the financial statements, we utilized
available information, including our past history, industry standards and the
current economic environment, among other factors, in forming our estimates and
judgments, giving due consideration to materiality. Actual results may differ
from these estimates. In addition, other companies may utilize different
estimates, which may impact the comparability of our results of operations to
those of companies in similar businesses. We believe that of our significant
accounting policies, the following may involve a higher degree of judgment and
estimation.
Inventory
Inventory
is stated at the lower of cost or market. Cost is determined using the weighted
average method. Market value represents the estimated selling price in the
ordinary course of business less the estimated costs necessary to complete the
sale.
Raw
materials consist of raw milk, soybeans, and rice and rice powder. Work in
process consists of materials and products in process of conversion to powder
but not yet packaged.
The cost
of inventories comprises all costs of purchases, costs of conversion and other
costs incurred in bringing the inventories to their present location and
condition. The costs of conversion of inventories include fixed and variable
production overheads, taking into account the stage of
completion.
46
Property
and equipment
Property
and equipment is stated at the historical cost, less accumulated depreciation.
Depreciation on property, plant, and equipment is provided using the
straight-line method over the estimated useful lives of the assets after taking
into account any salvage value as follows:
Buildings
|
30
years
|
Communication
equipment, plant and machinery
|
10
- 30 years
|
Motor
vehicles
|
10
years
|
Dairy
cows
|
5
years
|
Furniture,
Fixtures, and Equipment
|
5 -
10 years
|
Expenditures
for renewals and betterments were capitalized, while repairs and maintenance
costs are normally charged to the statement of operations in the year in which
they are incurred. In situations where it can be clearly demonstrated that the
expenditure has resulted in an increase in the future economic benefits expected
to be obtained from the use of the asset, the expenditure is capitalized as an
additional cost of the asset.
Upon sale
or disposal of an asset, the historical cost and related accumulated
depreciation or amortization of such asset were removed from their respective
accounts and any gain or loss is recorded in the statements of
operations.
Intangible
Assets
Intangible
assets consist of land use rights we acquired and are amortized on a straight
line basis over the lives of the rights agreements, which is fifty years and
patents which are amortized on a straight line basis over the remaining life of
the patents which is five years.
Revenue
recognition
Revenue
is recognized in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition,” which
states that revenue should be recognized when the following criteria are met:
(1) persuasive evidence of an arrangement exists; (2) the service has been
rendered; (3) the selling price is fixed or determinable; and (4) collection of
the resulting receivable is reasonably assured.
Interest
income is recognized when earned, taking into account the average principal
amounts outstanding and the interest rates applicable.
Earnings
per share
Basic net
earnings per common share is computed by dividing net earnings applicable to
common shareholders by the weighted-average number of common shares outstanding
during the period. Diluted net earnings per common share is determined using the
weighted-average number of common share shares outstanding during the period,
adjusted for the dilutive effect of common stock equivalents, consisting of
shares that might be issued upon exercise of common stock warrants. In periods
where losses are reported, the weighted-average number of common shares
outstanding excludes common stock equivalents, because their inclusion would be
anti-dilutive.
47
Taxation
Taxation
on profits earned in the PRC has been calculated on the estimated assessable
profits for the year at the rates of taxation prevailing in the PRC in which we
operate after taking into effect the benefits from any special tax credits or
“tax holidays” allowed in the country of operations.
We
account for income tax under FASB ASC Topic 740, “Income Taxes,” which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of the events that have been included in the financials statements
or tax returns. Deferred income taxes are recognized for all significant
temporary differences between tax and financial statements bases of assets and
liabilities. Valuation allowances are established against net deferred tax
assets when it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
We do not
have any long-term deferred tax assets or liabilities in the PRC that will exist
once the tax holiday expires (See Note 10 to the footnotes to
financial statements included in Item 8 of this report). We do not have any
significant deferred tax asset or liabilities that relate to tax jurisdictions
not covered by the tax holiday.
We do not
accrue United States income tax on unremitted earnings from foreign operations,
as it is our intention to invest these earnings in the foreign operations
indefinitely.
Enterprise
income tax
Under the
“Provisional Regulations of The People’s Republic of China Concerning Income Tax
on Enterprises promulgated by the State Council,” which came into effect on
January 1, 1994, income tax is payable by a Wholly Foreign Owned Enterprises at
a rate of 15% of their taxable income. Preferential tax treatment may, however,
be granted pursuant to any law or regulations from time to time promulgated by
the State Council. XAL enjoyed a 100% exemption from enterprise
income taxes starting on January 10, 2006 due to its classification as a “Wholly
Foreign Owned Enterprise.” On March 16, 2007, the PRC enacted a new Enterprise
Income Tax Law for the purpose of unifying the tax treatment of domestic and
foreign enterprises. This new law eliminates the preferential tax treatment for
new Wholly Foreign Owned Enterprises but allows previously granted exemptions to
stay in place through 2012, with the exception that the statutory tax rate will
increase by 2% per year from 15% in 2006 to 25% by 2012. This exemption ended on
January 10, 2008, at which time XAL will qualify under the current tax structure
for a 50% reduction in the statutory enterprise income tax rates for an
additional three years.
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets, including tax loss and credit carryforwards, and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect of deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Deferred income tax expense represents the change during the period in the
deferred tax assets and deferred tax liabilities. The components of the deferred
tax assets and liabilities are individually classified as current and noncurrent
based on their characteristics. 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.
A
provision has not been made at September 30, 2009 for U.S. or additional foreign
withholding taxes on approximately $17,484,741 of undistributed
earnings of foreign subsidiaries because it is the present intention of
management to reinvest the undistributed earnings indefinitely in foreign
operations. Generally, such earnings become subject to U.S. tax upon the
remittance of dividends and under certain other circumstances. It is not
practicable to estimate the amount of deferred tax liability on such
undistributed earnings.
48
The
Financial Accounting Standards Board (FASB) issued ASU 2009-06, which clarifies
the application of FASB ASC Topic 740 by defining a criterion that an individual
income tax position must meet for any part of the benefit of that position to be
recognized in an enterprise’s financial statements and provides guidance on
measurement, derecognition, classification, accounting for interest and
penalties, accounting in interim periods, disclosure and transition. In
accordance with the transition provisions.
We
recognize that virtually all tax positions in the PRC are not free of some
degree of uncertainty due to tax law and policy changes by the State. However,
we cannot reasonably quantify political risk factors and thus must depend on
guidance issued by current State officials.
Based on
all known facts and circumstances and current tax law, we believe that the total
amount of unrecognized tax benefits as of September 30, 2009, is not material to
its results of operations, financial condition or cash flows. We also believe
that the total amount of unrecognized tax benefits as of September 30, 2009, if
recognized, would not have a material effect on its effective tax rate. We
further believe that there are no tax positions for which it is reasonably
possible, based on current Chinese tax law and policy, that the unrecognized tax
benefits will significantly increase or decrease over the next 12 months
producing, individually or in the aggregate, a material effect on our results of
operations, financial condition or cash flows.
Value
added tax
The
“Provisional Regulations of
The People’s Republic of China Concerning Value Added Tax” promulgated by
the State Council came into effect on January 1, 1994. Under these regulations
and the Implementing Rules of the Provisional Regulations of the PRC Concerning
Value Added Tax, value added tax is imposed on goods sold in or imported into
the PRC and on processing, repair and replacement services provided within the
PRC.
Value
added tax payable in the PRC is charged on an aggregated basis at a rate of 13%
or 17% (depending on the type of goods involved) on the full price collected for
the goods sold or, in the case of taxable services provided, at a rate of 17% on
the charges for the taxable services provided, but excluding, in respect of both
goods and services, any amount paid in respect of value added tax included in
the price or charges, and less any deductible value added tax already paid by
the taxpayer on purchases of goods and services in the same financial
year.
Warrants
We
evaluate our warrants on an ongoing basis considering the provisions of FASB ASC
Topic 480, “Distinguishing
Liabilities From Equity,,” which establishes standards for issuers of
financial instruments with characteristics of both liabilities and equity
related to the classification and measurement of those instruments. The warrants
are evaluated considering FASB ASC Topic 815-10, “Derivatives and Hedging,”
which establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities, considering ASC subtopic 815-40, “Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock” and ASC subtopic 815-40-15-5, “Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity's Own
Stock.”
49
Freestanding
Financial Instruments with Characteristics of Both Liabilities and
Equity
In
accordance with FASB ASC Topic 480, “Distinguishing Liabilities From
Equity,” we account for financial instruments as a liability if it
embodies an obligation to repurchase the issuer’s equity shares, or is indexed
to such an obligation, and that requires or may require the issuer to settle the
obligation by transferring assets. Freestanding financial instruments are
financial instruments that are entered into separately and apart from any of the
entity’s other financial instruments or equity transactions, or that is entered
into in conjunction with some other transaction and is legally detachable and
separately exercisable. The liability recorded is the per share price to be paid
and is offset to equity.
Retirement
benefit costs
According
to the PRC’s regulations on pensions, we contribute to a defined contribution
retirement program organized by the municipal government in the province in
which we were registered and all qualified employees are eligible to participate
in the program. Contributions to the program are calculated at 23.5% of the
employees’ salaries above a fixed threshold amount and the employees contribute
2% to 8% while we contribute the balance contribution of 21.5% to 15.5%. We have
no other material obligation for the payment of retirement benefits beyond the
annual contributions under this program.
Stock
Based Compensation
The FASB
issued ASC 718, “Share-Based Payment,” which requires all share-based payments
to employees, including grants of employee stock options, to be recognized in
the financial statements based on the grant date fair value of the award. Under
ASC 718, we must determine the appropriate fair value model to be used for
valuing share-based payments, the amortization method for compensation cost and
the transition method to be used at date of adoption. The transition methods
include prospective and retroactive adoption options. Under the retroactive
option, prior periods may be restated either as of the beginning of the year of
adoption or for all periods presented. The prospective method requires that
compensation expense be recorded for all unvested stock options and restricted
stock at the beginning of the first quarter of adoption of ASC 718, while the
retroactive methods would record compensation expense for all unvested stock
options and restricted stock beginning with the first period restated. We have
adopted the requirements of ASC 718 for the fiscal year beginning on January 1,
2006.
Fair
value of financial instruments
We apply
the FASB ASC Topic 820, “Fair
Value Measurements and Disclosures.” ASC Topic 820 requires
all entities to disclose the fair value of financial instruments, both assets
and liabilities recognized and not recognized on the balance sheet, for which it
is practicable to estimate fair value. ASC Topic 820 defines fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. As of
September 30, 2009 and 2008 the fair value of cash, accounts receivable, other
receivables, accounts payable, commercial notes payable, and accrued expenses
approximated carrying value due to the short maturity of the instruments, quoted
market prices, or interest rates, which fluctuate with market
rates.
Fair
Value Measurements
The FASB
issued ASC Topic 820, “Fair
Value Measurements.” ASC Topic 820 establishes a framework for
measuring fair value in generally accepted accounting principles, clarifies the
definition of fair value within that framework, and expands disclosures about
the use of fair value measurements. ASC Topic 820 applies to fair
value measurements required by existing accounting pronouncements and does not
require any new fair value measurements.
50
We have
not adopted ASC Topic 820 for non-financial assets and non-financial liabilities
that are recognized or disclosed at fair value in the consolidated financial
statements on a nonrecurring basis as permitted by FASB ASC Topic 820-10-5,
which provided a deferral of such provisions until 2009. We are in
the process of evaluating the impact, if any, of applying these provisions on
its consolidated financial position and results of operations.
The
carrying value of financial assets and liabilities recorded at fair value is
measured on a recurring or nonrecurring basis. Financial assets and
liabilities measured on a non-recurring basis are those that are adjusted to
fair value when a significant event occurs. We had no financial assets or
liabilities carried and measured on a nonrecurring basis during the reporting
periods. Financial assets and liabilities measured on a recurring
basis are those that are adjusted to fair value each time a financial statement
is prepared. We had no financial assets and/or liabilities carried at
fair value on a recurring basis at September 30, 2009.
The
availability of inputs observable in the market varies from instrument to
instrument and depends on a variety of factors including the type of instrument,
whether the instrument is actively traded, and other characteristics particular
to the transaction. For many financial instruments, pricing inputs
are readily observable in the market, the valuation methodology used is widely
accepted by market participants, and the valuation does not require significant
management discretion. For other financial instruments, pricing
inputs are less observable in the market and may require management
judgment.
Recently
Enacted Accounting Standards
Accounting
Standards Update (“ASU”) ASU No. 2009-05 (ASC Topic 820), which amends “Fair
Value Measurements and Disclosures - Overall,” ASU No. 2009-08, “Earnings per
Share,” ASU No. 2009-12 (ASC Topic 820), “Investments in Certain Entities That
Calculate Net Asset Value per Share,” and various other ASU’s No. 2009-2 through
ASU No. 2009-15, which contain technical corrections to existing guidance or
affect guidance to specialized industries or entities, were recently issued.
These updates have either no current applicability to us, or their effect on our
financial statements would not have been significant.
Off-Balance
Sheet Arrangements
We are
not a party to any off-balance sheet arrangements.
51
BUSINESS
Company
Background
Our
predecessor filer, Micro-Tech, was incorporated pursuant to the laws of the
State of Nevada on September 24, 1986. For several years prior to the Reverse
Merger (described below), Micro-Tech was a “shell company,” as defined by
Securities Act Rule 405, and its primary business operations involved seeking
the acquisition of assets, property, or businesses that would be beneficial to
it and its shareholders.
On
October 9, 2007, AIDH, a Nevada corporation, became a wholly-owned subsidiary of
Micro-Tech, when it merged with Micro-Tech’s wholly-owned subsidiary, which was
organized for that purpose. Immediately following the Reverse Merger, Micro-Tech
succeeded to the business of AIDH as its sole line of business, and changed its
name to Amnutria Dairy Inc. On January 25, 2008, we changed our name
from Amnutria Dairy Inc. to Emerald Dairy Inc.
AIDH was
organized pursuant to the laws of the State of Nevada on April 18, 2005, for the
purpose of acquiring the stock of Heilongjiang Xing An Ling Dairy, Co. Limited
(“XAL”), a corporation formed on September 8, 2003 in Heilongjiang Providence,
PRC. On May 30, 2005, AIDH acquired XAL. This transaction was treated
as a recapitalization of XAL for financial reporting purposes. The effect of
this recapitalization was rolled back to the inception of XAL for financial
reporting purposes.
Prior to
September 23, 2006 XAL owned approximately 57.7% of Heilongjiang Beian Nongken
Changxing Lvbao Dairy Limited Liability Company, a PRC company (“LvBao”), with
the remaining balance being held by AIDH’s sole shareholder. On September 23,
2006, the remaining 42.3% ownership in LvBao was transferred to XAL and was
treated as an additional capital contribution. The effect of this contribution
by the sole shareholder was rolled back to September 8, 2003 for financial
reporting purposes.
On May
22, 2008, we formed a new wholly-owned subsidiary, Hailun Xinganling Dairy Co.,
Ltd. (“HXD”), under the laws of the PRC. In July 2008, HXD commenced
construction of a production facility in Hailun City, Heilongjiang Province,
PRC.
All of
our business is conducted through our wholly-owned Chinese
subsidiaries:
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XAL
which handles our promotion, sales and administrative
functions;
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LvBao,
which handles production of our products in Be’ian City, Heilongjiang
Province, PRC; and
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HXD,
which will handle additional production of our products in Hailun City,
Heilongjiang Province, PRC.
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Our U.S.
offices are located at 11990 Market Street, Suite 205, Reston, Virginia 20190,
telephone number (703) 867-9247. Our corporate headquarters are
located at 10 Huashan-lu, Xiangfang-qu, 9th Floor, Wanda Building, Harbin City,
Heilongjiang Province, PRC 150001.
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Below is
a chart depicting our corporate organization:
Industry
The
Chinese government has recognized that the dairy industry is not only crucial to
reform the structure of agriculture in the country and increase the income of
farmers, but also that it is important to improve the diet, health, and overall
welfare of the Chinese people. In recent years, milk and dairy
products have gradually become an accepted daily necessity in the life of
Chinese people. As a result, the dairy market is one of the fasted
growing markets in the PRC. The dairy market today in the PRC is over
$13 billion and is expected to grow at a rate of 15% per year for the
foreseeable future.
Products
We are a
producer of milk powder, soybean powder and rice power in the
PRC. Through our network of over 800 salespeople, our products are
distributed throughout 20 provinces in Mainland China, and sold in over 5,800
retail outlets.
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Our
products are marketed under two brands:
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“Xing
An Ling,” which is designed for high-end customers;
and
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“Yi
Bai,” which is designed for middle and low-end
customers.
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Our total
sales were approximately $44.3 million, $29.6 million and $18.8 million in the
fiscal years ended December 31, 2008, 2007 and 2006,
respectively. Milk powder sales, including subcontracting, accounted
for 95.5%, 94.5% and 94.9% of our total sales in the fiscal years ended December
31, 2008, 2007 and 2006, respectively. Soybean powder sales accounted
for 2.0%, 2.2% and 3.4% of total sales in the fiscal years ended December 31,
2008, 2007 and 2006, respectively. Rice powder sales accounted for
2.5%, 3.3% and 1.7% of total sales in the fiscal years ended December 31, 2008,
2007 and 2006, respectively. No single customer accounted for more
than 5% of our total sales in the above mentioned periods.
Milk
Powder Products
We target
one of the most attractive segments in the dairy market - milk
powder. We have milk powder products specifically geared towards
different age groups and demographics, as follows:
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Formula
milk powder for infants aged 0 - 6 months old - Specifically designed to
provide babies with necessary nutrients such as calcium, selenium,
bioactive substance, and more than 20 vitamins and minerals essential for
an infant’s growth.
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Formula
milk powder for babies 6 - 12 months old - Specifically designed to help
with the development of the brain, intestines, and body’s
immunity.
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Formula
milk powder for young kids from 1 - 3 years old - Provides children with
comprehensive nutritional support at the critical period of their brains
development, and, with nucleotide contents close to breast milk’s level,
to help boost children’s immunity.
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Formula
for 3 - 7 years old pre-schoolers - Geared toward children in the growth
acceleration period, when breast milk or infant food is gradually
substituted with adult foods.
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Multi-dimensional
formula for pregnant women and breast-feeding mothers - Designed for
pregnant women who need to supplement themselves with maternal and infant
nutrition needed to ensure the health of both mother and
infant.
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High
calcium milk powder for those 7 - 22 years old - Designed for the years
one spends as a student, it meets the daily nourishment supply standard
set by the Chinese Nourishment Academic
Association.
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Zinc,
Ferrum and Calcium milk powder for the whole family - Produced in
accordance with scientific processes and test standards to supply the body
with much needed calcium, ferrum and
zinc.
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High
calcium and sugar-free milk powder for the middle-aged and old-aged -
Based on the daily dietary nutrient supply standards of the middle-aged
and the physiological characteristics of the elderly, as recommended by
the Chinese Nutrition Institute.
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Low
fat and high calcium milk powder for women - This product was developed in
accordance with a woman’s physiological characteristics and nutritional
needs, to keep woman body fit and
healthy.
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Soy Powder Products
We began selling soybean powder
products in fiscal 2006 as a substitute for milk powder, for consumers who do
not like milk powder, or are allergic to milk powder. We began as
reseller of soybean powder products in fiscal 2006, but began producing soybean
powder in-house in fiscal 2007.
Rice Powder Products
We began
selling rice powder products in fiscal 2006 as a substitute for milk
powder. Prior to October 2007, we used a third party to produce rice
powder products, which were then resold by us under the “Xinganling” brand
name. Commencing in October 2007, we began producing rice powder
in-house.
Production,
Supply and Distribution
Production
Production capacity has been the
bottle neck for our growth in recent years. Production capacity for 2007 reached
7,000 tons, with annual revenue of approximately $29.6 million and net income of
approximately $3.6 million. In 2008, by adding a third shift to the existing two
shifts working schedule, our production capacity reached 9,000 tons, with
revenue of approximately $44.3 million and net income of approximately $2.4
million. In fiscal 2010, with the first production line of our
newly-constructed facility in Hailun City, Heilongjiang Province, PRC fully
equipped, our total production capacity is expected to reach approximately
18,000 tons with annual revenue of approximately $70.9 million and net income of
approximately $9.0 million.
Local farmers we purchase milk from
deposit fresh milk at third-party milking stations we utilize. The fresh milk is
stored in refrigerated tanks, and then trucked by the supplier’s trucking
service to one of our production facilities. When the refrigerated
fresh milk arrives at our production facility a sample is taken to be sure it
meets our product standards. If the sample passes inspection it goes
to production, where the necessary ingredients are added to the fresh milk to
make formula. If it fails inspection, it is rejected. The
formula passes through a high pressure gage, which sprays the formula out in a
fine spray. A high temperature fan instantly dries the formula
turning it into milk powder. The milk powder is first placed in large
containers, and then packaged into customer friendly bags or tins. After it has
been packaged, the finished product gets trucked to retail outlets for
sale. Since we are located close to the milking stations, the entire
production process can be completed in approximately 30 - 35
hours. The time it takes to go from processing the milk to retail
sale of the finished product is only an average of 45 days. Therefore,
our warehousing cost is reduced and capital turnover rate is
enhanced.
We strictly supervise resources
allotment, purchasing inspection, raw materials check, sales, and customer
service, and have already established a consummate quality control
process. Five approved dairy experts supervise the whole production
process to ensure that the products comply with national standards. These
experts are selected by us based on their education and experience in the
industry. We have established an advanced bacteria-free laboratory to
asses our products throughout the production process. We established a
professional sanitation, quality control and quality management group to make
the production comply with national food & sanitation
regulations. We also established sanitation, quality, operation,
management systems to improve the production and enforce worker’s awareness of
sanitation and quality. Each worker needs to go through a physical
check-up periodically and obtain a clean “health certificate.”
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In 2004, we adopted a method to that
enables us to assess our inventory each month. As a result,
inventories and efficiency of our supply chain are optimized and the operation
efficiency of capital is maximized. This is due to the fact that inventories are
controlled in real time.
We established a cost-control center,
and formed cost-control systems on working procedure and on each cost-control
point. With an established original date for each batch of our product on
record, we request that each department control production expenses and time,
and take responsibility. Through cost calculation, we make quantity difference
analysis and price difference analysis, and compare and analyze each month’s
cost budgets with the prior month’s, so we can gradually cut costs.
Our packaging facility is designed
based on the GMP 600,000 level standard of the pharmacy
industry. “GMP” refers to the Good Manufacturing Practice Regulations
promulgated by the U.S. Food and Drug Administration under the authority of the
Federal Food, Drug, and Cosmetic Act. GMP regulations address issues
including recordkeeping, personnel qualifications, sanitation, cleanliness,
equipment verification, process validation, and complaint
handling. Management believes our laboratory, which is 300 square
meters in size, is constructed in accordance with GMP standards.
In addition, the facility complies with
all HACCP standards. “HACCP,” or Hazard Analysis and Critical Central
Point (HACCP) (ISO 22000 Food Safety Management System), is a process control
system designed to identify and prevent microbial and other hazards in food
production and entire food chain. HACCP includes steps designed to
prevent problems before they occur and to correct deviations through a
systematic way as soon as they are detected. As a result,
we have achieved an ideal environment for productions and packaging. Our
automated intelligent program-controlled packaging line, which consists of some
of the most advanced packaging equipment in the Chinese dairy industry, is
capable of tinned milk powder packaging. It effectively reduces the touch of
workers and avoids second-time contamination.
Supply
Our production is based in farms along
the Bei’an long river in Heilongjiang Province, located in the southwest of
Xiaoing’anling, 47 degrees north latitude. The land sits on one of the only
three black plates in the world, giving it the unique soil, vegetation, climate
and ecological environment best for the growth of cows. As a result,
it is recognized as one of the premium cow raising belts
internationally. Bei’an’s grassland area amounts to 285 acres,
raising more than 41,000 cows, with the milk production of 72,000 tons annually. By using
such high-quality fresh milk as a raw material, we are able to maintain our
product as a natural, clean and green food.
We have signed contracts with over
1,200 local farmers, giving us access to the milk of approximately 21,000 cows.
Pursuant to the standard raw milk purchase agreements we enter into
with local farmers:
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The
term of raw milk purchase agreements is one
year.
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Farmers
have the option to discontinue the agreements any time during the one-year
term by giving one-week notice.
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We
are obligated to purchase from farmers the whole raw milk meeting certain
quality standards.
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The
purchase price of raw milk is approximately $0.16 per lb., which
fluctuates depending on the market price of raw
milk.
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If
there is a change in price, we must notify farmers within one week, or
risk losing them as suppliers.
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The terms set forth above are the
standard terms within the Chinese dairy industry, which is regulated by the
Office of Milk Source (a department of city government). The price of raw milk
is market driven and is most-closely linked to the Heilongjiang Province
regional market. The price of raw milk is also closely monitored by the Office
of Milk Source. We settle our accounts with the farmers
regularly.
The entire milking process is done
automatically, without any human contact. The farmers raise their own cattle,
however, we share certain know how and technical support with the farmers to
help them increase the quality and capacity of their milk. This model
not only enhances the milk farmers’ enthusiasm and breeding capability, and
stimulates local economic development, but it also assures the milk volume,
quality and the stability of the supply. In addition, this allows us to track
each cows’ health and milking capacity.
Since no other large-scaled dairy
enterprise is located nearby, our milk source is relatively plentiful and
readily available.
We have 101 cows of our own, to meet a
small amount of the total supply. These cows are mainly used to provide
scientific and quality service for dairy farmers including disease control and
treatment or other experiments. These cows also act as the examples to the local
farmers. At present, the available services include helping dairy farmers
improve farming methods, increasing milk yield, appointing experts to lectures,
popularizing the scientific knowledge, helping the farmers with the cow’s brand
choice, and strengthening disease surveillance and control.
We currently utilize 48 milking stations, all of
which are owned and operated by third parties. We pay market price for using the
milking stations. For administrative purposes, we group these milking stations
into several service districts.
The major raw materials we use to
produce our products include fresh milk, whey, degrease powder, vegetable
protein, and vegetable oil esters. These components are obtained mainly from the
long-term partnerships. After years of development, we have formed steady,
complementary and cooperative relationships with our suppliers. As our sales
increase, more capital will be obtained to strengthen our negotiation leverage,
allowing us to acquire less expensive and quality raw materials more easily. The
procurement of raw materials is mainly done through bidding and other forms of
network transactions.
Our principal suppliers are Yu Ya We Ye
Trading Company, which supplies us with whey, Xiang Yao Food Company, which
supplies us with rice and sweeteners, and Hua Mei Soybean Company, which
supplies us with soybeans. No single supplier accounts for more than 5% of the
whole purchase.
Product packages, packaging boxes,
packing cans, and other packaging materials are also mainly settled by the
long-term vendors.
We have found it relatively easy to
purchase all major raw materials we need from these suppliers, and have been
able to sell all the products we have produced. We believe the
suppliers of our raw materials and packaging materials will be able to keep up
with our growth for the foreseeable future.
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Distribution
We have a sales network consisting of
over 800 people, across 20 provinces in the PRC. Orders are initiated
by sales people depending on their customers’ needs, and are approved by their
province (regional) manager. Regional managers combine orders from
various sales teams and send orders to headquarters. After confirmation of the
orders from the regional managers, headquarters gives instructions to third
party trucking companies to distribute products, according to the combined
orders, to regional hub offices. We distribute our products from our
headquarters to the sale subsidiaries in a large combined order based on region,
as compiled by the regional manager.
We use three independent trucking
contractors to distribute our products to the 20 provinces in the PRC in which
we sell our products. We selected these trucking companies based on cost and
efficiency. There are many trucking companies available so that, if necessary,
any of the independent trucking contractors we currently use could easily be
replaced.
Railway transportation is also a major
means for the distribution of our products. It is usually used when the products
need to travel a long distance, because of the relatively low
cost. However, its speed is slower than that of the trucks, since the
products first need to get to Bei’an Station, before being distributed to their
ultimate destination.
Market
Opportunity
There are a total of 30 provinces in
mainland China. Our products are generally sold in 20 of the
provinces, through our 800-plus person sales network. Our sales are
evenly spread out, with no single province accounted for more than 10% of our
total sales. The 20 provinces in which we sell our products are the major
provinces along the pacific ocean and in central China. The 10
provinces in which our products are not sold, are those where the competition is
too intense, or the number of potential customers are either too poor or too
disbursed to make it economically feasible.
The PRC’s population of 1.3 billion
offers a huge market for the developing dairy industry. The dairy industry is
increasing much faster than the growth of the PRC’s gross domestic product
(GDP). Last year, according to the statistics from the Food and
Agriculture Organization of the United Nations (FAO), total Chinese milk
production was the seventh largest in the world. It is widely predicted that the
dairy industry in the PRC will continue at a growth rate of 15% per year. The “11th Five
Years Plan” urged that the average annual dairy consumption should reach 10kg
per person and should reach 16kg in 2015.
The average consumption of dairy per
person in the PRC is much lower than the world average. This means
the Chinese dairy market has tremendous room for growth, especially as the
economy continues to boom.
According to the “China Food and
Nutrition Development outline (2001-2010)” approved by Chinese State Council,
the dairy industry is one of the three food industries that should be developed
first. The outline required that in 2010, average consumption of dairy per
person should reach 16kg, in which the average consumption of dairy per person
for rural habitants and those who live in cities and towns are 32kg and 7kg,
respectively. Experts predict that the dairy output in the PRC will
be 20 million tons and 70 million tons in 2015 and 2030, respectively.
Therefore, over the next few years, the Chinese dairy industry should maintain a
fast and sound growth momentum and the consumption of dairy will continue to
increase with the rise in living standard and change in consumption
behavior.
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According to the National Bureau of
Statistics of the PRC, about 15 million infants are born in the PRC each year.
Each 0 - 6 month old baby will need 27.2 kg milk powder, for an annual total
demand of 90,000 tons. Each 6 - 12 month old baby will need 31 kg milk powder,
for an annual total demand of 110,000 tons. But the current supply is just
80,000 - 100,000 tons, leaving much room for growth. The infant dairy
market in the PRC is growing by 17% annually, and has surpassed Japan, becoming
the second largest infant formula dairy market in the world, behind the
U.S.
In mid-2008, a number of milk powder
products produced within the PRC were found to contain unsafe levels of
tripolycyanamide, also known as melamine, sickening thousands of
infants. This prompted the Chinese government to conduct a nationwide
investigation into how the milk powder was contaminated, and caused a worldwide
recall of certain milk powder products produced within the PRC. On
September 16, 2008, the PRC’s Administration of Quality Supervision, Inspection
and Quarantine (AQSIQ) revealed that it had tested samples from 175 dairy
manufacturers, and published a list of 22 companies whose products contained
melamine. We passed the emergency inspection and were not included on
AQSIQ’s list. We believe that the inevitable contraction in the
Chinese milk powder industry caused by this crisis will lead to increased demand
for our products, as well as present acquisition opportunities.
Company
Strategy
In order to benefit from the market
opportunities presented above, we plan to effect the following
strategies:
Production Strategy
Through a combination of internal
growth in production capacity and strategic acquisitions we believe we will be
capable of producing 20,000 - 27,000 tons of milk powder annually by
2011. Our growth strategy for the next three years will be primarily
focused on internal growth by expanding production capacity and strengthening
sales efforts. As a step toward implementing this strategy,
management commenced construction of a new production facility in July
2008. Initially, the new facility will have one production line,
which will have the capacity to produce 9,000 tons of milk power
annually. A second production line can be added at this new facility,
which, when completed, would enable us to produce an additional 9,000 tons of
milk powder per year, giving us a total annual production capacity of 27,000
tons of milk powder. We anticipate that production at this new facility will
commence in the first quarter of fiscal 2010. The cost to add the
second production line, would be an additional $15.0 million. We plan
to raise the funds needed for the new facility from the capital market through
private or public equity and/or debt offerings. There can be no
assurance that that any additional financing will become available to us, and if
available, on terms acceptable to us.
In addition, management will consider
making strategic acquisitions if good opportunities are available in the market
place. However, revenues from such acquisitions have not been included in the
planned growth numbers presented above.
Prior to October 2007, we used a third
party to produce rice powder products which were then resold under the
“Xinganling” brand name. Commencing in October 2007, we began
producing rice powder in-house. Rice powder products accounted for
approximately 2.5% and 3.3% of our total revenue in 2008 and 2007,
respectively. We expect that rice powder products will continue to
comprise approximately 3% of our total sales, unless our sales network detects
an increase in demand.
Similarly, we began reselling soy
powder products in fiscal 2006, and producing soy powder in-house in fiscal
2007. Soy powder products accounted for approximately 2.0% and 2.2%
of our total revenue in 2008 and 2007, respectively. We expect that
soy milk powder products will continue to comprise approximately 2% of our total
sales, unless its sales network detects an increase in demand.
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Currently, there are no organic label
milk powder products in the mainland China market. In February 2008, we obtained
organic label certification from Guangdong Zhongjian Certification Co.,
Ltd. We plan to create an organic label product line in fiscal 2010.
We will need to test the market to determine demand for organic milk products.
Initially, we expect sales of organic milk powder to be minor. However, over the
long term, we believe that, similar to the growth of the organic milk market in
the U.S., organic milk products will be very popular in the PRC. Over
time, we believe this will help increase our revenues.
Market Strategy
Brand
In the Chinese milk powder market,
positive brand image will bring high customer recognition, strong customer
loyalty, and good reputation. All that will convert to an increase in sales
revenue. Therefore, we have focused on establishing a positive brand image. Our
products are marketed under two brands:
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“Xing
An Ling,” which is designed for high-end customers;
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“Yi
Bai,” which is designed for middle and low-end
customers.
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Price
There is an interesting phenomenon in
the Chinese dairy market where similar products are sold at widely different
prices. The gap between prices could be 10 times. At present, the
consumers who have the highest income choose the high-end brand from foreign
companies, such as Nestle, Meadjohnson, and Dumex. Those who earn less choose
brands such as Shengyuan and Nanshan. Historically, our products were not as
popular because they were less expensive than similar products. To address this,
our new products are aimed at middle-end and high-end infant milk powder
market.
Sales Channel
We have over 800 people in our sales
network across 20 provinces covering more than 5,800 retail outlets (i.e.,
supermarkets) in the PRC. Over the past several years, no single
customer accounted for 5% or more of our total sales.
There are no limitations on the
geographic areas in which we can sell our products. There are a total
of 30 provinces in the PRC. The 20 provinces in which we sell our
products are the major provinces along the pacific ocean and in central
China. The 10 provinces in which the our products are not sold, are
those where either, we would not be able to compete due to intense competition,
or the potential customers are either too poor or too disbursed to make it
economically feasible.
Rather than using a wholesaler, our
sales people deal directly with the retail outlets. This business
model has higher sales expenses compared to traditional business model, where a
wholesale is used. The reason for this is that each of our sales
people can cover only so many retail outlets and, therefore, we have to employ
more sales people to achieve the same sales volume. On the other hand, by
skipping the middle man, we can sell products at a higher margin at retail,
since it does not have to sell to the wholesaler at a reduced
price. Ultimately, this creates better profit margins for
us. In addition, our sales people know the customers, so they obtain
better information on sales, demand, etc. We will continue to use our current
business model of selling directly to the retail outlets, without use of a
wholesaler, for the foreseeable future.
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Promotion
We plan to:
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Advertise
on the leading TV stations in important markets, publicize product
information and ideas by advertising in national or local newspapers and
magazines, and use our website and webpage advertisement to attract
internet users and introduce the products and
business;
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Promote
our products by attending and holding exhibitions and seminars, presenting
promotional items and hand out
leaflets;
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Teach
our “shopping guides,” which are generally women who give out free samples
of products in supermarkets and provide information on products, about our
products and how to promote the products by face to face communication and
illustration; and
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Invite
famous pediatricians to hold seminars on knowledge of nutrients and baby
tending for pregnant women, so as to promote the brand popularity and
attract customers.
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Currently,
we spend approximately 8% - 12% of total revenues on advertising and promotional
efforts through out the year. We spent approximately $3.0 million, $1.9 million
and $0.8 million on advertising and promotion in fiscal 2008, 2007 and 2006,
respectively. We currently expect to spend an aggregate of between $4.0 million
and $5.0 million on advertising and promotion in fiscal 2009, of which
$2,940,297 has already been spent as of September 30, 2009. This will still fall
within our standard budget for advertising and promotion of 8% - 12% of total
revenues, but in 2009 we plan to spread the expense over the entire year rather
than in the first half of the year as we did in 2008. The funds for advertising
and promotion will generally come out of our earnings.
Our English-language website is
located at www.emeralddairy.com. The English-language website went
live in May 2008. The website includes a link to our Chinese-language
website. The information on our websites does not constitute part of
this prospectus.
Human Resources Strategy
We believe employing talented people is
the best advantage we can have. Besides attracting quality employees from public
channels, we will also develop and train our own sales team.
Competition
Currently, five state owned dairy
groups control more than half of the dairy market in the PRC. They are Mengniu
(in Inner Mongolia), Yili Industrial Group (in Inner Mongolia), Bright Dairy
& Food (in Shanghai), Sanyuan (in Beijing) and Wandashan (in Heilongjiang).
Over half of the top 20 dairy manufactures have entered China. Most
of the dairy producers provide infant milk powder. However, the high-end infant
milk powder is less than one-third of the total
output. In the past, the dairy producers mainly gave discounts as the
major competition tactic. Now, however, the producers are beginning to focus on
the raw milk source, brand, and sales network.
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Our competitors are divided into three
major categories:
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Domestic
large-scale producers;
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Foreign
producers; and
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Domestic
middle & small-scale producers.
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Most of the larger players in the
Chinese dairy industry have been concentrating in the first-tier cities such as
Beijing and Shanghai with high end milk powder products. We focus on penetrating
less-competitive second and third tier cities. We have a 800-plus person sales
network across 20 provinces in China, covering more than 5,800 retail outlets.
Our closest competitors are American Dairy, Inc. and Wondersun Dairy in terms of
products, price range and geographic coverage.
We have a competitive advantage over
our competitors because:
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Our
production facilities are located close to the milking stations from which
we obtain it fresh milk and, therefore, the entire production process can
be completed in approximately 30 - 35 hours. The production
facilities of other multi-regional dairy enterprises are located up to two
days’ drive away from the milking stations they use. Therefore,
it may take them up to four days to process their milk
products.
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Our
business model of selling directly to the retail outlets, as opposed to
selling to a wholesaler, allows us to sell our products at a higher margin
at retail. Ultimately, this creates better profit margins for
us. In addition, our sales people know the customers, so they
obtain better information on sales, demand,
etc.
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In
February 2008, we obtained organic label certification from the Guangdong
Zhongjian Certification Co., Ltd. Currently, there is no
organic milk powder product being sold in the Chinese
market. We plan to create an organic label product line
beginning in fiscal 2010. Over the long term, we believes that,
similar to the growth of the organic milk market in the U.S., organic milk
products will be very popular in the
PRC.
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On the other hand, we are at a
competitive disadvantage because many of our current and potential competitors
have longer operating histories and greater name recognition, and possess
substantially greater financial, marketing and other competitive resources than
we do.
Intellectual
Property
We have obtained trademark
registrations for the use of our tradenames “Xing An Ling” and “Yi Bai”, which
have been registered with the Trademark Bureau of the State Administration for
Industry and Commerce with respect to our milk powder products. We believe our
trademarks are important to the establishment of consumer recognition of our
products. However, due to uncertainties in Chinese trademark law, the protection
afforded by our trademarks may be less than it currently expect and may, in
fact, be insufficient. Moreover even if it is sufficient, in the event it is
challenged or infringed, we may not have the financial resources to defend it
against any challenge or infringement and such defense could in any event be
unsuccessful. Moreover, any events or conditions that negatively impact our
trademarks could have a material adverse effect on its business, operations and
finances.
62
Regulatory
Matters
We are regulated under both national
and county laws in China. The following information summarizes certain aspects
of those regulations applicable to us and is qualified in its entirety by
reference to all particular statutory or regulatory provisions.
Regulations at the national, province
and county levels are subject to change. To date, compliance with governmental
regulations has not had a material impact on our level of capital expenditures,
earnings or competitive position, but, because of the evolving nature of such
regulations, management is unable to predict the impact such regulation may have
in the foreseeable future.
As a manufacturer and distributor of
food products, we are subject to regulations of the PRC’s Agricultural Ministry.
This regulatory scheme governs the manufacture (including composition and
ingredients), labeling, packaging and safety of food. It also regulates
manufacturing practices, including quality assurance programs, for foods through
its current good manufacturing practices regulations, and specifies the
standards of identity for certain foods, including the products we sell, and
prescribes the format and content of many of the products we sell, prescribes
the format and content of certain nutritional information required to appear on
food products labels and approves and regulates claims of health benefits of
food products.
In addition, the PRC’s Agricultural
Ministry authorizes regulatory activity necessary to prevent the introduction,
transmission or spread of communicable diseases. These regulations require, for
example, pasteurization of milk and milk products. Both us and our products are
also subject to province and county regulations through such measures as the
licensing of dairy manufacturing facilities, enforcement of standards for its
products, inspection of our facilities and regulation of its trade practices in
connection with the sale of dairy products.
To date, we have received the following
licenses to produce our products, which are significant for the reasons set
forth below:
License
|
Issuer
|
Effective Period
|
Significance
|
|||
Infant
& Baby Formula Milk Powder Production Permit
|
State
General Administration of Quality Supervision and Inspection and
Quarantine of the People’s Republic of China
|
April
2005 -
May
2010
|
Only
current license holders are permitted to produce formula milk powder in
the PRC. The Government is not currently issuing any additional
licenses. We expect that its license will be automatically
renewed.
|
|||
Organic
Production Certification
|
Guangdong
Zhongjian Certification Co., Ltd.
|
January
2008 - January 2009 (1)
|
This
certification will allow us to begin producing and selling organic milk
powder products. There are currently no organic milk powder
products in the PRC. We look to become a leader in this market, and have
first-mover advantage.
|
|||
ISO
9001 Certification
|
Beijing
New Century Certification Co. Ltd.
|
September
2007 - September 2010
|
ISO
9000 is a family of standards for quality management systems. ISO 9000 is
maintained by ISO, the International Organization for Standardization and
is administered by accreditation and certification bodies. ISO 9001 (which
is one of the standards in the ISO 9000 family) includes a set of
procedures that cover the establishment and monitoring all key processes
in a business. Only a company or organization that has been
independently audited and certified to be in conformance with ISO 9001 may
publicly state that it is “ISO 9001
certified.”
|
63
License
|
Issuer
|
Effective Period
|
Significance
|
|||
ISO
22000 / HACCP Certification
|
Beijing
New Century Certification Co. Ltd.
|
September
2007 - September 2010
|
The
ISO 22000 international standard specifies the requirements for a food
safety management system. ISO 22000 integrates the principles of the
Hazard Analysis and Critical Control Point (HACCP) system and application
steps developed by the Codex Alimentarius Commission. Hazard analysis is
the key to an effective food safety management system.
|
|||
Certificate
of Conformity of Quality System Certification
|
Standardization
Administration of the People's Republic of China
|
September
2005 - September 2010
|
This
certification is only given to companies that meet an international
standard of quality control and production. Consumers in the PRC give a
more positive reception to products that meet international
standards.
|
|||
Product
Exemption from Quality Surveillance Inspection
|
State
General Administration of Quality Supervision and Inspection and
Quarantine of the People's Republic of China
|
December
2005 - December 2008 (2)
|
A
company needs to pass a quality inspection for five (5) consecutive years
before an quality inspection exemption will be issued. Only nineteen (19)
enterprises in the PRC, including us, have been awarded with this
honor.
|
(1)
|
We
are in the process of renewing our Organic Production Certification from
the Guangdong Zhongjian Certification Co.,
Ltd.
|
(2)
|
Following
the recent milk powder crisis in the PRC, the Chinese government revoked
all Product Exemption from Quality Surveillance Inspection
certificates. All manufacturers of milk powder will now receive
periodic quality inspections.
|
Employees
As of the date hereof, we have 1,110
employees. Of these, 884 are in sales, 191 are in manufacturing and 35 are in
management and administration. None of the our employees is subject to a
collective bargaining agreement. We consider our relationship with its employees
to be good.
Facilities
Under Chinese law, the government owns
all of the land in the PRC and companies and individuals are authorized to use
the land only through land use rights granted by the PRC
government.
We have two manufacturing facilities,
which are located in Heilongjiang Province, PRC. The main production facility
occupies 38,600 square meters of land and the facility has 4,600 square meters
for production. The second facility has 13,000 square meters of land and the
facility has 3,400 square meters for production. Currently there are
three production lines with daily capacity to process 200 tons of fresh
milk.
We also have sales offices in each of
the 20 provinces in the PRC in which our products are sold. All
leases are on an annual basis and commence on January 1, of each
year.
64
For the years ended December 31, 2008
and 2007, we incurred aggregate rental expenses of $17,255 and $85,163,
respectively. As of December 31, 2008, we had outstanding lease
commitments totaling $147,798, all of which were due within the next
year.
In the opinion of our management, each
of our properties is adequately covered by insurance.
In July 2008, we commenced
construction of a new facility in Hailun City, Heilongjiang Province, PRC, as
discussed elsewhere in this report. We anticipate that production at
this new facility will commence in the first quarter of fiscal
2010. We plan to raise the funds needed for the expansion of this new
facility from the capital market through private or public equity and/or debt
offerings, although there can be no assurance that any additional financing will
be available to us on acceptable terms, if at all (see “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Liquidity and
Capital Resources — General.”).
In addition, in fiscal 2008 we
purchased and paid for an office building, located in Heilongjiang Province,
PRC, for approximately $1.8 million. This office building, which
contains approximately 6,900 square feet of space, will serve as our corporate
headquarters.
LEGAL
PROCEEDINGS
There are no legal proceedings pending
or threatened against us, and we are not aware of any proceedings that a
governmental authority is contemplating against us.
MANAGEMENT
Identification
of Directors and Executive Officers
The following table sets forth the
name, age and position of each of the members of our board of directors and
executive officers as of the date of this prospectus:
Name
|
Age
|
Position
|
||
Yang
Yong Shan
|
42
|
Chief
Executive Officer, President and Chairman of the Board
|
||
Shu
Kaneko
|
41
|
Chief
Financial Officer, Secretary and Director
|
||
Niu
Wan Chen
|
33
|
Vice
President of Sales and Director
|
||
Qin
Si Bo
|
46
|
Vice
President of Production and Director
|
||
Yuan
Yong Wei
|
54
|
Vice
President of Operation and
Director
|
YANG YONG SHAN, has been the
President and Chief Executive Officer of AIDH, and the Chairman of AIDH’s Board
of Directors since July 2000. As a result of our Reverse Merger,
effective as of October 9, 2007, he became our Chief Executive Officer,
President and Chairman. He has over 16 years of experience in the
dairy industry. He obtained his bachelors degree from the Northeast
Agricultural University in 1990. Mr. Yang has no additional
directorships with reporting companies.
SHU KANEKO, has been the Chief
Financial Officer and Secretary, and a Director, of ours since November 1,
2007. Prior to joining us, Mr. Kaneko was a Manager with Ernst &
Young Financial Services Advisory Group, commencing in June 2001. He
earned his M.B.A. degree from Georgetown University in 2001.
65
NIU WAN CHEN, has been Vice
President of Sales, and a Director, of AIDH since October 2005. As a
result of our Reverse Merger, effective as of October 9, 2007, he became our
Vice President of Sales and Director. Prior to this, from January
2000 through September 2005, he was Sales Manager at American Dairy,
Inc. He has over 10 years of experience handling sales of dairy
products. He obtained his bachelors degree in business administration
from Northeast Forest University in 1995. Mr. Niu has no additional
directorships with reporting companies.
QIN SI BO, has been Vice
President of Production, and a Director, of AIDH since July 2000. As
a result of our Reverse Merger, effective as of October 9, 2007, he became our
Vice President of Production and Director. He has many years of experience in
with respect to production process and equipment maintenance in the dairy
business. He graduated with a major in Food and Nutrition from the
Northeast Agricultural University in 1993. Mr. Qin has no additional
directorships with reporting companies.
YUAN YONG WEI, has been Vice
President of Operation, and a Director, of AIDH since July 2000. As a
result of our Reverse Merger, effective as of October 9, 2007, he became our
Vice President of Operation and Director. He has over 20 years of experience in
the dairy industry. Mr. Yuan has no additional directorships with
reporting companies.
Significant
Employees
As of December 31, 2008, we had 1,110
employees. Only our members of management, consisting of Yang Yong
Shan, Shu Kaneko, Niu Wan Chen, Qin Si Bo and Yuan Yong Wei, are expected to
make significant contributions to our business.
Family
Relationships
There are no family relationships among
our directors, executive officers, or persons nominated to become directors of
executive officers.
Involvement
in Certain Legal Proceedings
During the past five years, none of our
directors, persons nominated to become directors, executive officers, promoters
or control persons:
|
·
|
was
a general partner or executive officer of any business against which any
bankruptcy petition was filed, either at the time of the
bankruptcy or two years prior to that
time;
|
|
·
|
was
convicted in a criminal proceeding or named subject to a pending
criminal proceeding (excluding traffic violations and other
minor offenses);
|
|
·
|
was
subject to any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities or banking activities;
or
|
66
|
·
|
was
found by a court of competent jurisdiction (in a civil action), the SEC or
the Commodity Futures Trading Commission to have violated a federal or
state securities or commodities law, and the judgment has not
been reversed, suspended or
vacated.
|
Code
of Ethics
As of the date hereof, we have not
adopted a written code of ethics that applies to our principal executive
officer, principal financial officer or controller, or persons performing
similar functions. We intend to adopt a written code of ethics in the near
future.
Board
Committees
We intend to appoint such persons to
the Board of Directors and committees of the Board of Directors as are expected
to be required to meet the corporate governance requirements imposed by a
national securities exchange, although we are not required to comply with such
requirements until it elects to seek listing on a securities exchange. We intend
that a majority of our directors will be independent directors, of which at
least one director will qualify as an “audit committee financial expert,” within
the meaning of Item 407(d)(5) of Regulation S-K, as promulgated by the SEC.
Additionally, the Board of Directors is expected to appoint an audit committee,
nominating committee and compensation committee, and to adopt charters relative
to each such committee, in the near future. We do not currently have an “audit
committee financial expert” since we currently does not have an audit committee
in place.
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The table below sets forth, for the
last three fiscal years, the compensation earned by (1) Yang Yong Shan, who was
appointed as our Chairman, Chief Executive Officer and President as of October
9, 2007, (2) Shu Kaneko, who was appointed as our Chief Financial Officer on
November 1, 2007, and (3) Jeffrey Jenson, who resigned as our President on
October 9, 2007. Except as provided below, none of our executive officers
received annual compensation in excess of $100,000 during the last two fiscal
years.
SUMMARY
COMPENSATION TABLE
Name and Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
($)
|
All Other
Compensation
($)
|
Total
($)
|
||||||||||||||||||
Yang
Yong Shan
|
2008
|
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||||
Chairman,
Chief
|
2007
|
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||||
Executive
Officer
|
2006
|
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||||
and
President (1)
|
|||||||||||||||||||||||||||
Shu
Kaneko
|
2008
|
$ | 150,000 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 150.000 | ||||||||||
Chief
Financial
|
2007
|
$ | 25,000 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 25,000 | ||||||||||
Officer
and
|
2006
|
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||||
President
(2)
|
|||||||||||||||||||||||||||
Jeffrey
Jenson
|
2007
|
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||||
President
(3)
|
2006
|
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 |
67
(1) Yang
Yong Shan was appointed as our Chairman, Chief Executive Officer and President
as of October 9, 2007. Mr. Yang did not received any compensation
from us, or any of our affiliates, or our predecessor, during fiscal 2008, 2007
or 2006. He agreed not to take any compensation until we completed
our reverse merger, private placements and registration process. Our
board of directors is currently negotiating with Mr. Yang with respect to
compensation for future services. On March 2, 2009, Mr. Yang was
granted stock options to purchase 360,000 shares of our common stock under the
2009 Plan. 90,000 stock options vested on September 2,
2009. An additional 90,000 stock options will vest on each of March
2, 2010, September 2, 2010 and March 2, 2011. On November 10, 2009, Mr.
Yang was granted additional stock options to purchase 380,000 shares of our
common stock under the 2009 Plan. The Options will vest with respect
to 25% of the underlying shares on each of May 10, 2010, November 10, 2010, May
10, 2011 and November 10, 2011.
(2) Shu
Kaneko was appointed as our Chief Financial Officer on November 1,
2007. As of November 1, 2007, we entered into an Employment Agreement
with Mr. Kaneko, pursuant to which he will receive a base salary of $150,000 per
annum. For more information, see “— Employment Contracts and
Termination of Employment and Change-in-Control Arrangements — Employment
Agreement with Shu Kaneko” below. On March 2, 2009, Mr. Kaneko was
granted stock options to purchase 300,000 shares of our common stock, under our
2009 Equity Incentive Plan. 75,000 stock options vested on September
2, 2009. An additional 75,000 stock options will vest on each of
March 2, 2010, September 2, 2010 and March 2, 2011. On November 10, 2009, Mr.
Kaneko was granted share appreciation rights with respect to 380,000 shares of
our common stock under the 2009 Plan. The share appreciation rights
will vest with respect to 25% of the shares on each of May 10, 2010, November
10, 2010, May 10, 2011 and November 10, 2011.
(3)
Jeffrey Jenson resigned as our President on October 9, 2007
Outstanding
Equity Awards at Fiscal Year-End
We had no outstanding equity awards as
of the fiscal year ended December 31, 2008.
Compensation
of Directors
There are no standard arrangements
pursuant to which our directors are compensated for any services provided as
director. No additional amounts are payable to our directors for
committee participation or special assignments.
Limitation
on Liability and Indemnification of Directors and Officers
Chapter 78 of the Nevada Revised
Statutes (“NRS”) provides that a corporation may indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise (each a “Covered Person”), against expenses
(including attorneys’ fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he is not liable pursuant to NRS Section 78.138 or acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful.
68
NRS Chapter 78 further provides that a
corporation similarly may indemnify a Covered Person serving in any such
capacity who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by on in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a Covered Person, against expenses (including amounts paid in settlement
and attorneys’ fees) actually and reasonably incurred in connection with the
defense or settlement of such action or suit if he is not liable pursuant to NRS
78.138 or acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged by a court of competent jurisdiction,
after exhaustion of all appeals therefrom, to be liable to the corporation
unless and only to the extent that the court in which the action or suit was
brought or other court of competent jurisdiction determines upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, the person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper.
NRS Chapter 78 also includes other
provisions related to indemnification, including provisions that permit a
corporation, in certain circumstances set forth in NRS Chapter 78, (i) to
advance the expenses incurred by a director or officer in advance of the final
disposition of an action, suit or proceeding and (ii) obtain insurance or make
other financial arrangements on behalf of a Covered Person.
NRS Chapter 78 also provides that any
indemnification or advancement of expenses made pursuant to NRS Chapter 78 does
not exclude any other rights to which a person seeking indemnification or
advancement of expenses may be entitled under the corporation’s articles of
incorporation or any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, except that indemnification or the advancement of
expenses, unless ordered by a court, may not be made to or on behalf of any
director or officer if a final adjudication establishes that (i) his acts or
omissions involved intentional misconduct, fraud or a knowing violation of the
law and (ii) was material to the cause of action.
Our Articles of Incorporation eliminate
the personal liability of our directors and officers for damages for breach of
fiduciary duty, except that such protection does not apply to acts or omissions
involving intentional misconduct, fraud or knowing violation of the law or the
payment of dividends in violation of NRS 78.300.
Our Bylaws permit us to indemnify our
Covered Persons, advance expenses incurred by such persons and purchase and
maintain insurance on behalf of such persons. Our Bylaws further
provide that the indemnification permitted under the Bylaws is not exclusive of
any other indemnification granted under any provision of our Articles of
Incorporation, our Bylaws or pursuant to any statute, agreement, vote of the
stockholders or disinterested directors, or otherwise.
Employment
Contracts and Termination of Employment and Change-in-Control
Arrangements
Employment Agreement with Shu
Kaneko
On November 1, 2007 (the “Effective
Date”), we entered into an Employment Agreement with Shu Kaneko (the
“Employment Agreement”), pursuant to which Mr. Kaneko will serve as our Chief
Financial Officer. The Employment Agreement commenced on the Effective Date and
will terminate on the second anniversary thereof (the “Employment Period”),
unless extended as provided for in the Employment Agreement.
In consideration for Mr. Kaneko’s
services, we will pay Mr. Kaneko a minimum annual salary of $150,000 (the “Base
Salary”). In addition to the Base Salary, Mr. Kaneko may receive a discretionary
bonus at our fiscal year end, in an amount up to three (3) months of his Base
Salary. As additional consideration, Mr. Kaneko may receive issuances and/or
grants of our securities, in amounts, and subject to terms and conditions, to be
determined by the Board of Directors, in its sole discretion.
69
During the Employment
Period:
|
·
|
Mr.
Kaneko will serve as a member of our Board of Directors, for no additional
consideration, except as may be provided to all directors
generally;
|
|
·
|
We
will provide Mr. Kaneko with all benefits generally made available to our
senior executives;
|
|
·
|
We
will reimburse Mr. Kaneko for all reasonable business expenses;
and
|
|
·
|
Mr.
Kaneko will be entitled to twenty-five (25) days of paid vacation per
year.
|
Mr. Kaneko’s employment may be
terminated prior to the expiration of the Employment Period as
follows:
|
·
|
Mr.
Kaneko’s employment will terminate immediately upon his
death;
|
|
·
|
We
will have the right to terminate Mr. Kaneko’s employment during the
continuance of Mr. Kaneko’s “Disability” (as defined in the Employment
Agreement), upon fifteen (15) days’ prior
notice;
|
|
·
|
We
will have the right to terminate Mr. Kaneko’s employment with or without
“Good Cause” (as such term is defined in the Employment Agreement) by
written notice Mr. Kaneko; and
|
|
·
|
Mr.
Kaneko will have the right to voluntarily resign his employment with or
without “Good Reason” (as such term is defined in the Employment
Agreement) by written notice to us.
|
In each case, the “Termination Date”
will be date as of which Mr. Kaneko’s employment terminates.
In the event we terminate Mr. Kaneko’s
employment without Good Cause, or Mr. Kaneko resigns for Good Reason, we will
pay Mr. Kaneko his Base Salary for the period of six (6) months, and any Base
Salary, bonuses, vacation and unreimbursed expenses accrued but unpaid as of the
Termination Date. In addition, we will, at its sole expense, provide Mr. Kaneko
(and his dependents) with coverage under our medical and health insurance plans
for the period of twelve (12) months.
Upon termination of Mr. Kaneko’s
employment upon his death, as a result of his Disability, for Good Cause, or as
a result of his voluntary resignation, we will have no payment or other
obligations to Mr. Kaneko, except for the payment of any Base Salary, bonuses,
benefits or unreimbursed expenses accrued but unpaid as of the Termination
Date.
Mr. Kaneko has agreed to standard
confidentiality, non-compete and non-solicitation provisions. He has also agreed
that all “Work Product” he develops during the Employment Period belongs to
us.
We have agreed to indemnify and hold
Mr. Kaneko harmless to the full extent permitted by the Nevada Revised Statutes,
and other relevant statutes. In addition, we may, for our own benefit, in our
sole discretion, maintain “key-man” life and disability insurance policies
covering Mr. Kaneko.
Through December 31, 2008, and the
interim period ending on the date hereof, we had no other employment contracts,
compensatory plans or arrangements, including payments to be received from us,
with respect to any director or executive officer of ours which would in any way
result in payments to any such person because of his or her resignation,
retirement or other termination of employment with us or any subsidiary, any
change in control, or a change in the person’s responsibilities following a
change in control.
70
Stock Incentive Plans
We had no stock incentive plans as of
the fiscal year ended December 31, 2008, and the period ending on the date of
this report.
In March 2009, our board of directors
adopted and our stockholders approved the 2009 Plan to attract and retain the
best available personnel, provide additional incentives to employees, directors
and consultants and promote the success of our business. 1,500,000
shares of the Company’s common stock have been reserved for issuance under the
2009 Plan. The following paragraphs describe the principal terms of the 2009
Plan.
Types of
Awards
We may grant the following types of
awards under the 2009 Plan:
|
·
|
options
to purchase shares of our common
stock;
|
|
·
|
share
appreciation rights, which entitle the grantee the right to common stock
or cash compensation measured by the appreciation in the value of the
shares;
|
|
·
|
dividend
equivalent rights, which entitle the grantee to compensation equivalent to
dividends paid with respect to common
stock;
|
|
·
|
restricted
shares, which are shares of common stock issued to the grantee that are
subject to transfer restrictions, right of first refusal, repurchase,
forfeiture, and other terms and conditions as established by our plan
administrator;
|
|
·
|
restricted
share units, which may be earned upon the passage of time or the
attainment of performance criteria and which may be settled for cash,
common stock or other securities, or a combination of cash, common stock
or other securities as established by the plan
administrator;
|
|
·
|
share
payments, which may be (a) payments in the form of common stock; or
(b) options or other rights to purchase common stock, as part of any
bonus, deferred compensation or other arrangement, made in lieu of all or
any portion of the compensation;
and
|
|
·
|
deferred
shares, which are rights to receive a specified number of shares of common
stock during specified time
periods.
|
Plan
Administration
Our compensation committee will serve
as plan administrator for purposes of administering the 2009 Plan and
determining the provisions and terms and conditions of each award
grant. If no compensation committee exists, the 2009 Plan shall be
administered by our full board of directors.
71
Award
Agreement
Awards granted under the 2009 Plan will
be evidenced by an award agreement that sets forth the terms, conditions and
limitations for each award.
Eligibility
We may grant awards to our employees,
directors and consultants, including those of our
subsidiaries. However, we may grant options that are intended to
qualify as incentive stock options (“ISOs”) only to our employees and employees
of our subsidiaries.
Acceleration of Awards upon
Corporate Transactions.
The outstanding awards will terminate
and/or accelerate upon occurrence of certain significant corporate transactions,
including amalgamations, consolidations, liquidations or dissolutions, sales of
substantially all or all of our assets, reverse takeovers or acquisitions
resulting in a change of control. If the successor entity following
one of these transactions assumes or replaces our outstanding awards under the
2009 Plan, such assumed or replaced awards will become fully vested and
immediately exercisable and payable, and be released from repurchase or
forfeiture rights immediately upon termination of the grantee’s continuous
service to us if the grantee’s service is terminated by the successor entity
without cause within twelve (12) months after the effective date of the
transaction. Furthermore, if the successor entity does not assume or
replace our outstanding awards, each outstanding award will become fully vested
and immediately exercisable and payable, and will be released from any
repurchase or forfeiture rights immediately before the effective date of the
corporate transaction, as long as the grantee’s continuous service with us is
not terminated before this date.
Exercise Price and Term of
Awards.
In general, the plan administrator will
determine the exercise price of an option in the award agreement. The
exercise price may be a fixed price, or it may be a variable price related to
the fair market value of our common shares. If we grant an ISO to an
employee, the exercise price may not be less than 100% of the fair market value
of our common stock on the date of the grant, except that if the grantee, at the
time of that grant, owns shares representing more than 10% of the voting power
of all classes of the shares of our common stock, the exercise price may not be
less than 110% of the fair market value of our common stock on the date of that
grant. If we grant a non-qualified share option to a grantee, the
exercise price may not be less than 100% of the fair market value of its common
stock on the date of grant.
The term of each award under the 2009
Plan will be specified in the award agreement, but may not exceed ten years from
the earlier of the adoption or the approval of the 2009 Plan, unless sooner
terminated.
Vesting
Schedule.
In general, the plan administrator will
determine, or the award agreement specify, the vesting schedule.
The foregoing description of the 2009
Plan does not purport to be complete and is qualified in its entirety by
reference to the complete text of the 2009 Plan, which is filed as Exhibit 4.1
hereto and incorporated herein by reference.
72
Equity Compensation
Grants
As of the date hereof, we have issued
and outstanding under our 2009 Plan:
|
·
|
703,200
stock options, exercisable at a price of $0.42 per share, of which: (i)
175,800 vested on September 2, 2009, and (ii) an additional 175,800 will
vest on each of March 2, 2010, September 2, 2010 and March 2,
2011;
|
|
·
|
380,000
stock options, exercisable at a price of $1.80 per share, of which 95,000
will vest on each of May 10, 2010, November 10, 2010, May 10, 2011 and
November 10, 2011; and
|
|
·
|
380,000
share appreciation rights, exercisable at a price of $1.80 per share,
which will vest with respect to 25% of the underlying shares on each of
May 10, 2010, November 10, 2010, May 10, 2011 and November 10,
2011.
|
73
SECURITY
OWNERSHIP OF CERTAIN
BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth
certain information regarding the beneficial ownership of our common stock by
(i) each person who, to our knowledge, owns more than 5% of our common stock,
(ii) each of our directors and executive officers, and (iii) all of our
executive officers and directors as a group. Unless otherwise indicated in the
footnotes to the following table, each person named in the table has sole voting
and investment power. Shares of our common stock subject to options,
warrants, or other rights currently exercisable, or exercisable within 60 days
of the date hereof, are deemed to be beneficially owned and outstanding for
computing the share ownership and percentage of the person holding such options,
warrants or other rights, but are not deemed outstanding for computing the
percentage of any other person. As of the date of this prospectus, we had
32,927,191 shares of common stock issued and outstanding (not including an
additional 1,944,444 shares of common stock currently being held in
treasury).
Unless otherwise noted, the address for
each of the persons listed below is: c/o Emerald Dairy Inc., 10 Huashan-lu,
Xiangfang-qu, 9th floor, Wanda Building, Harbin City, Heilongjiang Province, PRC
150001.
Common Stock Beneficially Owned
|
||||||||
Name and Address
|
Number
|
Percent
|
||||||
5%
Stockholders:
|
||||||||
John
Winfield (1)
820
Moraga Drive
Los
Angeles, CA 90049
|
3,259,792 | 9.9 | % | |||||
JAG
Multi Investments LLC (2)
163
Washington Valley Road, Suite 103
Warren,
N.J. 07059
|
2,395,156 | 7.1 | % | |||||
Named
Executive Officers and Directors:
|
||||||||
Yang
Yong Shan (3)
Chief
Executive Officer, President and Chairman of the Board
|
14,063,329 | 42.5 | % | |||||
Shu
Kaneko (4)
Chief
Financial Officer, Secretary and Director
|
150,000 | * | ||||||
Niu
Wan Chen (5)
Vice
President of Sales and Director
|
7,600 | * | ||||||
Qin
Si Bo (6)
Vice
President of Production and Director
|
7,600 | * | ||||||
Yuan
Yong Wei (7)
Vice
President of Operations and Director
|
6,400 | * | ||||||
All
Executive Officers and Directors as a Group (5 persons)
(8)
|
14,234,992 | 42.8 | % |
*Less
than 1%
74
(1) Consists
of (i) 1,673,621 shares of common stock held by John Winfield, and (ii)
1,586,171 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Winfield. Does not include 527,058 shares of
common stock issuable upon exercise of additional currently exercisable warrants
held by Mr. Winfield, because they are the subject of agreements with us that
such warrants can not be exercised at any time when the result would be to cause
the holder to beneficially own more than 9.9% of our outstanding common
stock.
(2) Consists
of (i) 1,718,650 shares of common stock held by JAG Multi Investments LLC, and
(ii) 676,506 shares of common stock issuable upon exercise of currently
exercisable warrants held by JAG Multi Investments LLC. Alexander M.
Goren is the Manager of JAG Multi Investments LLC, and has sole voting and
investment power over the shares owned thereby. Mr. Goren disclaims
beneficial ownership of these shares, except to the extent of his pecuniary
interest therein.
(3) Consists
of (i) 13,883,329 shares of common stock held by Yang Yong Shan, and (ii)
180,000 shares of common stock underlying stock options which have vested, or
will vest within 60 days of the date hereof. Does not include shares
underlying stock options to purchase 180,000 shares of our common stock, which
will not vest within 60 days of the date hereof. 9,040,754 of the
shares of common stock held by Mr. Yang are pledged to secure our repayment of
promissory notes in the aggregate principal amount of $4,323,301, as further
described in “Certain Relationships and Related Transactions — Pledge of Shares
by Chief Executive Officer” below.
(4) Consists
of 150,000 shares of common stock underlying stock options which have vested, or
will vest within 60 days of the date hereof. Does not include shares
underlying stock options to purchase 150,000 shares of our common stock, which
will not vest within 60 days of the date hereof.
(5) Consists
of 7,600 shares of common stock underlying stock options which have vested, or
will vest within 60 days of the date hereof. Does not include shares
underlying stock options to purchase 7,600 shares of our common stock, which
will not vest within 60 days of the date hereof.
(6) Consists
of 7,600 shares of common stock underlying stock options which have vested, or
will vest within 60 days of the date hereof. Does not include shares
underlying stock options to purchase 7,600 shares of our common stock, which
will not vest within 60 days of the date hereof.
(7) Consists
of 6,400 shares of common stock underlying stock options which have vested, or
will vest within 60 days of the date hereof. Does not include shares
underlying stock options to purchase 6,400 shares of our common stock, which
will not vest within 60 days of the date hereof.
(8) Consists
of (i) 13,883,329 shares of common stock, and (ii) 351,600 shares of common
stock underlying stock options which have vested, or will vest within 60 days of
the date hereof. Does not include shares underlying stock options to
purchase 351,600 shares of our common stock, which will not vest within 60 days
of the date hereof.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
In our two prior fiscal years, and the
subsequent period through the date hereof, there have been no transactions
between members of management, five percent stockholders, “affiliates,”
promoters and finders, except as set forth below. Each of the
transactions listed below was negotiated on an “arm’s length”
basis.
Transactions
with Management and Others
Issuance, Rescission and Reissuance of
Tryant Shares
As of June 25, 2007, Tryant, LLC
(“Tryant”) loaned our predecessor filer, Micro-Tech, an aggregate of $38,434 in
order to pay ongoing expenses to keep Micro-Tech current with its SEC filings.
The loan was payable upon demand. Jeff Jenson was the managing member
of Tryant, which, at the time, was Micro-Tech’s majority
shareholder. On August 30, 2007, Tryant agreed to convert $12,971.40
of the loan into 518,856 “restricted’ shares (the “Tryant Shares”) of
Micro-Tech’s common stock. Given that there was no trading in
Micro-Tech’s common stock and no bid price, Micro-Tech’s board of directors
determined that, at that time, the fair value of a share of it’s common stock
was $0.025. Following the issuance of the above shares, Tryant owned 643,856
shares of common stock of Micro-Tech, representing 92.72% of the
total issued and outstanding shares.
75
Tryant acquired control of Micro-Tech
in August 2005. At such time, Micro-Tech agreed to issue shares to
certain of its existing shareholders. Just prior to its Reverse Merger with AIDH
it was determined that those shares had never been issued. In
addition, it was determined that shares owed to a former director of Micro-Tech
in consideration for his services, had also not been issued. Further,
certain individuals were now due to be issued shares as payment of expenses and
fees related to the Reverse Merger. It was decided by Tryant and
Micro-Tech that the best way to address this situation was to have Tryant return
to Micro-Tech a number of the shares it had received in August 2007, and then
have Micro-Tech reissue these shares in satisfaction of the above
obligations. Effective as of October 9, 2007, Tryant “rescinded” the
issuance of 230,645 of the 518,856 Tryant Shares it received on August 30, 2007,
by returning them to Micro-Tech for cancellation.
These shares were then reissued as
follows:
Name
|
Number of Shares
|
|||
Leonard
W. Burningham
|
103,308 | |||
John
V. Winfield
|
64,388 | |||
Rick
Krietemeier
|
57,949 | |||
Andrew
Chudd
|
5,000 | |||
Total:
|
230,645 |
Leonard Burningham received 103,308
shares as payment for legal fees incurred by Micro-Tech. John V.
Winfield received 64,388 of the shares as payment of a finder’s fee in
connection with the Reverse Merger. Micro-Tech issued 57,949 shares
to Rick Krietmeier to provide him with shares he was due to receive in August
2005, when Tryant took control of Micro-Tech. Andrew Chudd received
5,000 of the shares in consideration for his prior services as a director of
Micro-Tech.
We granted “piggyback registration
rights” to the holders of the Tryant Shares.
Purchase of Assets from Chief Executive
Officer
On May 28, 2006, AIDH purchased
machinery, facilities, housing and 100 cows from a Yang Yong Shan, our Chairman,
Chief Executive Officer and President, in exchange for a promissory note in the
amount of $183,516. The note does not bear interest and is due on
demand. We believe this was an arms-length transaction, since the
price paid for this property and equipment was approximately the same as the
seller’s cost in these assets, and was approximately the same amount we would
have had to pay to purchase similar assets from a third party.
Share Repurchase Agreement and Put/Call
Agreements
On October 9, 2007, we entered into a
Share Repurchase Agreement with Grand Orient Fortune Investment, Ltd. (“Grand
Orient”), a PRC company controlled by Mingwen Song, pursuant to which we
repurchased 1,944,444 shares (the “Repurchase Shares”) of our issued and
outstanding common stock from Grand Orient for an aggregate purchase price of
$3,169,444 (the “Repurchase Transaction”). We determined to
repurchase these shares, to reduce the overall dilution created by the First
Offering and Second Offering. The repurchased shares were initially
held in treasury, but have now been returned to our number of authorized but
unissued shares.
76
Immediately following the closing of
the Repurchase Transaction, we entered into Put/Call Agreements with Grand
Orient and Fortune Land Holding, Ltd., a PRC company controlled by Dexuan Yu
(jointly, the “Put/Call Shareholders). Pursuant to the Put/Call Agreements the
Put/Call Shareholders granted us an option to repurchase an aggregate of
1,944,444 shares (the “Put/Call Shares”) from the Put/Call Shareholders (the
“Call Option”), for a price of $1.63 per share (the “Call Option Price”), if the
following conditions have been met (the “Call Option Conditions”):
|
·
|
Either
(i) a registration statement (“Registration Statement”) covering the
resale of the Put/Call Shares has been declared effective by the SEC, and
has been kept continuously effective by us, or (ii) all of the Put/Call
Shares are available for sale without registration pursuant to Rule 144;
and
|
|
·
|
The
closing price of a share of our common stock as traded on the OTCBB (or
such other exchange or stock market on which the common stock may then be
listed or quoted) equals or exceeds $4.08 (appropriately adjusted for any
stock split, reverse stock split, stock dividend or other reclassification
or combination of the common stock occurring after the date hereof) for at
least ten (10) consecutive trading days immediately preceding the date
that the Call Option Exercise Notice is given by
us.
|
We may only exercise its Call Option by
delivering a written notice (a “Call Option Exercise Notice”) to the Put/Call
Shareholders within thirty (30) days of such time as all of the Call Option
Conditions have been met. The Call Option may be exercised for all, but
not less than all, of the Put/Call Shares. The repurchase shall be
consummated within ninety (90) days following the date of the Call Option
Exercise Notice.
In addition, the Put/Call Shareholders
shall have the right to cause us to repurchase the Put/Call Shares from the
Put/Call Shareholders (the “Put Right”), for a price shall be $1.63 per share
(the “Put Purchase Price”), if:
|
·
|
We
fail to exercise its Call Option within ten (10) days of a date on which
all of the Call Option Conditions have been met;
or
|
|
·
|
We
consummate a private offering of not less than $5,000,000 of its
securities (a “Qualified Offering”);
or
|
|
·
|
We
fail to consummate a Qualified Offering on or before October 9, 2009 (each
of the aforementioned conditions, a “Put Right
Trigger”).
|
Initially, our failure to (i) file the
Registration Statement within thirty (30) business days of October 9, 2007 (the
“Filing Date”), (ii) have the Registration Statement declared effective within
ninety (90) calendar days from the Filing Date, or, if reviewed by the SEC,
within one hundred eighty (180) calendar days after the Filing Date, or (iii)
keep the Registration Statement continuously effective until all of the
“Registrable Securities” were available for sale without registration pursuant
to Rule 144, would also have served as a Put Right Trigger. However, as of April
9, 2008, the Put/Call Shareholders agreed to amend the Put/Call Agreements to
delete this provision. We did not pay any consideration to the Put/Call
Shareholders in connection with their waiver of this provision.
77
We had recorded the value of the
Put/Call Agreements as a liability in the aggregate amount of $3,169,444 as of
October 9, 2007, based on the fair market value of the underlying common stock
of $1.63 as of such date. The parties mutually agreed that it was in the best
interests of the Company and its stockholders for the Put/Call Agreements to be
terminated. Therefore, as of March 3, 2009, the Put/Call Agreements were
terminated.
Pledges
of Shares by Chief Executive Officer
On December 24, 2009, we sold the
December 2009 Noteholders the December 2009 Notes, in the aggregate principal
amount of $1,750,000, and December 2009 Warrants to purchase an aggregate of
536,809 shares of our common stock in the December 2009 Note Offering, as
further described in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Recent Developments – December 2009 Note
Offering” above. Our repayment of amounts due under the December 2009
Notes is secured by a pledge of 5,883,329 shares of our common stock
beneficially owned by Yang Yong Shan, our Chairman, Chief Executive Officer and
President.
As of
December 31, 2009, we amended the June 2008 Notes originally issued in the June
2008 Note Offering, previously amended on December 31, 2008, to, among other
things, (i) extend the maturity date of the indebtedness represented by the June
2008 Notes from December 31, 2009 to December 31, 2010, and (ii) add the accrued
and unpaid interest on the June 2008 Notes, in the aggregate amount of $323,301,
to the principal amount outstanding (resulting in an aggregate principal balance
of $2,573,301). The June 2008 Note Offering is further described in
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Recent Developments – June 2008 Note Offering” above. Our
repayment of amounts due under the June 2008 Notes, as amended, is secured by a
pledge of 3,157,425 shares of our common stock
beneficially owned by Mr. Yang.
Director
Independence
Our common stock is currently approved
for quotation on the OTCBB maintained by the FINRA under the symbol “EMDY.OB.”
As soon as practicable, and assuming we satisfy all necessary initial listing
requirements, we intend to apply to have our common stock listed for trading on
the New York Stock Exchange, NYSE Amex Equities or the Nasdaq Stock
Market.
None of the directors currently on its
board of would qualify as independent directors under the rules of the New York
Stock Exchange, NYSE Amex Equities or The Nasdaq Stock Market because they all
(i) currently own a significant percentage of our shares, and/or (ii) are
currently employed by us, and/or (iii) have been actively involved in our
management, and/or (iv) otherwise fall into one or more of the enumerated
categories of people who cannot be considered independent
directors.
Review,
Approval and Ratification of Related Party Transactions
Given our small size and limited
financial resources, we had not adopted prior to our Reverse Merger formal
policies and procedures for the review, approval or ratification of
transactions, such as those described above, with our executive officers,
directors and significant shareholders. However, we intend that such
transactions will, on a going-forward basis, be subject to the review, approval
or ratification of our board of directors, or an appropriate committee
thereof.
As of the date hereof, we have not
adopted a written conflict of interest policy that applies to our executive
officers and directors. We intend to adopt a written conflict of interest policy
in the future.
78
DESCRIPTION
OF SECURITIES
We are authorized to issue 110,000,000
shares of capital stock, $0.001 par value per share, consisting of 100,000,000
shares of common stock, $0.001 par value per share, and 10,000,000 shares of
preferred stock, $0.001 par value per share.
Capital
Stock Issued and Outstanding
We have issued and outstanding
securities as follows:
|
·
|
32,927,191
shares of common stock (not including an additional 1,944,444 shares
currently held in treasury);
|
|
·
|
No
shares of preferred stock;
|
|
·
|
Warrants
to purchase an aggregate of 8,175,099 shares of common stock, of which (i)
373,334 are exercisable at a price of $0.94 per share; (ii) 1,333,333 are
exercisable at a price of $1.50 per share; (iii) 2,246,748 are exercisable
at a price of $1.63 per share, (iv) 714,286 will be exercisable at a price
of $1.68 per share if certain conditions are met; (v) 906,190 are
exercisable at a price of $2.04 per share; (vi) 75,000 are exercisable at
a price of $2.61 per share, and (vii) 2,526,208 are exercisable at a price
of $3.26 per share;
|
|
·
|
$6,573,301
of 10% promissory notes;
|
|
·
|
Stock
options to purchase (i) 703,200 shares of our common stock, at an exercise
price of $0.42 per share, of which 175,800 have vested, and (ii) 380,000
shares of our common stock, at an exercise price of $1.80 per share, of
which none have vested;
|
|
·
|
Share
appreciation rights with respect to 380,000 shares of our common stock, at
an exercise price of $1.80 per share, none of which have
vested.
|
Common
Stock
We are authorized to issue
100,000,000 shares of common stock, $0.001 par value per share, of which
32,927,191 shares of common stock are issued and outstanding (not including an
additional 1,944,444 shares currently held in treasury). The holders of
our common stock are entitled to one vote per share on each matter submitted to
a vote at a meeting of our stockholders. Our common stockholders have no
pre-emptive rights to acquire additional shares of common stock or other
securities. Our common stock is not subject to redemption rights and
carries no subscription or conversion rights. In the event of our
liquidation, the shares of common stock are entitled to share equally in
corporate assets after satisfaction of all liabilities. All shares of the
common stock now outstanding are fully paid and non-assessable.
Preferred
Stock
We are authorized to issue 10,000,000
shares of “blank check” preferred stock, $0.001 par value per share, none of
which is designated or outstanding. The Board of Directors is vested with
authority to divide the shares of preferred stock into series and to fix and
determine the relative designation, powers, preferences and rights of the shares
of any such series and the qualifications, limitations, or restrictions or any
unissued series of preferred stock.
79
Warrants
Warrants Issued in Connection with the
October 2007 Offerings
Warrant W-1 entitles the holder to
purchase 266,667 shares of our common stock, at an exercise price of $0.94 per
share. Warrant W-1 will expire on a date after the three-year anniversary of its
date of issuance, such date to be determined under provisions of Warrant W-1
providing for an extension of the scheduled expiration date due to our failure
to satisfy the registration requirements described in “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Recent
Developments — Reverse Merger, Private Placements and Related Transactions.”
Warrant W-1 is exercisable for cash only, provided a registration statement
covering the shares of common stock underlying Warrant W-1 is effective.
Otherwise, Warrant W-1 is exercisable on a cashless basis. The number of shares
of our common stock to be deliverable upon exercise of Warrant W-1 will be
subject to adjustment for, among other things, subdivision or consolidation of
shares, rights or warrants issues, dividend distributions, stock dividends,
bonus issues, asset distributions, and other standard dilutive events. Warrants
to purchase an aggregate of 106,667 shares of our common stock issued to a
finder, have terms and conditions identical to the those of Warrant
W-1.
Warrant W-2 entitles the holder to
purchase 1,333,333 shares of our common stock, at an exercise price of $1.50 per
share. Warrant W-2 will expire on a date after the two-year anniversary of its
date of issuance, such date to be determined under provisions of Warrant W-2
providing for an extension of the scheduled expiration date due to our failure
to satisfy the registration requirements described in “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Recent
Developments — Reverse Merger, Private Placements and Related Transactions.”
Warrant W-2 is exercisable for cash only, provided a registration statement
covering the shares of common stock underlying the Warrant W-2 is effective.
Otherwise, Warrant W-2 is exercisable on a cashless basis. The number of shares
of our common stock to be deliverable upon exercise of Warrant W-2 will be
subject to adjustment for, among other things, subdivision or consolidation of
shares, rights or warrants issues, dividend distributions, stock dividends,
bonus issues, asset distributions, and other standard dilutive events. At
anytime one year following the date a registration statement covering the shares
of common stock underlying the Warrant W-2 is declared effective, we will have
the ability to call the Warrant W-2 at a price of $0.01 per warrant, upon thirty
(30) days prior written notice to the holders of the warrants, if the closing
price of the common stock exceeded $1.88 for each of the ten (10) consecutive
trading days immediately preceding the date that the call notice is given by
us.
Our Class A Warrants entitle the
holders to purchase an aggregate of 749,134 shares of our common stock, at an
exercise price of $2.04 per share. The Class A Warrants will expire on a date
after the three-year anniversary of their date of issuance, such date to be
determined under provisions of the Class A Warrants providing for an extension
of the scheduled expiration date due to our failure to satisfy the registration
requirements described in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Recent Developments — Reverse Merger,
Private Placements and Related Transactions.” The Class A Warrants are
exercisable for cash only, provided a registration statement covering the shares
of common stock underlying the Class A Warrants is effective. Otherwise, the
Class A Warrants are exercisable on a cashless basis. The number of shares of
common stock to be deliverable upon exercise of the Class A Warrants will be
subject to adjustment for, among other things, subdivision or consolidation of
shares, rights or warrants issues, dividend distributions, stock dividends,
bonus issues, asset distributions, and other standard dilutive events. We have
also issued warrants to purchase 392,639 shares of our common stock to finders
and placement agents, which have terms and conditions identical to the those of
the Class A Warrants; except that, as of March 2, 2009, the exercise price of
235,583 of these warrants was reduced from $2.04 to $1.63, as partial
consideration for services rendered in connection with a consulting agreement
the Company entered into with one of these parties.
80
Our Class B Warrants entitle the
holders to purchase an aggregate of 2,526,208 shares of our common stock, at an
exercise price of $3.26 per share. The Class B Warrants will expire on a date
after the two-year anniversary of their date of issuance, such date to be
determined under provisions of the Class B Warrants providing for an extension
of the scheduled expiration date due to our failure to satisfy the registration
requirements described in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Recent Developments — Reverse Merger,
Private Placements and Related Transactions.” The Class B Warrants are
exercisable for cash only, provided a registration statement covering the shares
of common stock underlying the Class B Warrants is effective. Otherwise, the
Class B Warrants are exercisable on a cashless basis. The number of shares of
common stock to be deliverable upon exercise of the Class B Warrants will be
subject to adjustment for, among other things, subdivision or consolidation of
shares, rights or warrants issues, dividend distributions, stock dividends,
bonus issues, asset distributions, and other standard dilutive events. At
anytime one year following the date a registration statement covering the shares
of common stock underlying the Class B Warrants is declared effective, we will
have the ability to call the Class B Warrants at a price of $0.01 per Class B
Warrant, upon thirty (30) days prior written notice to the holders of the Class
B Warrants, if the closing price of the common stock exceeded $4.08 for each of
the ten (10) consecutive trading days immediately preceding the date that the
call notice is given by us.
Warrant W-1, Warrant W-2, the Class A
Warrants and the Class B Warrants (collectively, the “2007 Warrants”) provide
that in no event shall the holder be entitled to exercise a number of 2007
Warrants (or portions thereof) in excess of the number of 2007 Warrants (or
portions thereof) upon exercise of which the sum of (i) the number of shares of
common stock beneficially owned by the holder and its affiliates (other than
shares of common stock which may be deemed beneficially owned through the
ownership of the unexercised 2007 Warrants and the unexercised or unconverted
portion of any of our other securities (subject to a limitation on conversion or
exercise analogous to the limitation contained herein) and (ii) the number of
shares of common stock issuable upon exercise of the 2007 Warrants (or portions
thereof) with respect to which the determination described herein is being made,
would result in beneficial ownership by the holder and its affiliates of more
than 9.9% of the outstanding shares of common stock. For purposes of the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13D-G thereunder, except as otherwise provided in clause
(i) of the preceding sentence. Notwithstanding anything to the contrary
contained herein, the limitation on exercise of the 2007 Warrants may be waived
by written agreement between us and the holder; provided, however, such waiver
may not be effective less than ninety-one (61) days from the date
thereof.
If Warrant W-1, Warrant W-2, the
Class A Warrants and the Class B Warrants (including warrants issued to finders
and placement agents) were exercised for cash pursuant to their terms, we would
receive $12,818,999 in proceeds, although there can be no assurance that any of
these warrants will be exercised.
In connection with the October
Offerings, as further described in “— Recent Developments — Reverse Merger,
Private Placements and Related Transactions” above, we entered into Registration
Rights Agreements pursuant to which we agreed to register the shares of common
stock underlying Warrant W-1, Warrant W-2, the Class A Warrants and the Class B
Warrants. We also granted piggyback registration rights with respect to
the shares underlying the warrants issued to finders and placement agents in
connection with the October Offerings.
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Issued
in Connection with the June 2008 Note Offering
As amended on December 31, 2008, the
June 2008 Warrants entitle the holders to purchase an aggregate of 225,000
shares of our common stock, at an exercise price of $1.63 per share. The June
2008 Warrants will expire five years after the date of issuance. The June 2008
Warrants may be exercised for cash only. The number of shares of our common
stock deliverable upon exercise of the June 2008 Warrants will be subject to
adjustment for, among other things, subdivision or consolidation of shares, and
certain other standard dilutive events. A holder of the June 2008 Warrants will
not be entitled to exercise a number of June 2008 Warrants in excess of the
number of June 2008 Warrants upon exercise of which would result in beneficial
ownership by such holder and his, her or its affiliates of more than 9.9% of the
outstanding shares of our common stock, unless this provision is waived by
written agreement between us and the holder not less than sixty-one (61) days
from the date of such waiver. On December 31, 2009, in connection with the
further amendment of the June 2008 Notes, we granted the June 2008 Noteholders
additional three-year warrants to purchase an aggregate of 789,356 shares of our
common stock, at an exercise price of $1.63 per share (the “Additional
Noteholder Warrants”). All of the other terms and conditions of these
additional warrants are identical to the June 2008 Warrants.
In connection with the June 2008
Note Offering, we engaged a placement agent to whom we paid a placement fee in
the amount of $97,500, and granted warrants to purchase an aggregate of 45,000
shares of our common stock, the terms and conditions of which are identical to
the those of the June 2008 Warrants, as amended.
If all of the June 2008 Warrants
(including warrants issued to a placement agent) and Additional Noteholder
Warrants were exercised for cash pursuant to their terms, we would receive
$1,726,750 in proceeds, although there can be no assurance that any of these
warrants will be exercised.
In addition, as of July 4, 2009, we
issued warrants to purchase an additional 97,500 shares of our common stock to
the placement agent in consideration for its services in connection with
the amendment of the June 2008 Notes and June 2008 Warrants as of December 31,
2008. The terms and conditions of these additional warrants are identical to the
those of the June 2008 Warrants, as amended, except that they will expire on
December 31, 2011, and are exercisable either for cash, at an exercise price of
$1.63 per share, or on a cashless basis. If all of these additional warrants
were exercised for cash pursuant to their terms, we would receive $158,925 in
proceeds, although there can be no assurance that any of these additional
warrants will be exercised.
We have granted the holders of June
2008 Warrants (including warrants issued to a placement agent) and Additional
Noteholder Warrants “piggyback” registration rights with respect to the shares
underlying their warrants.
Warrants Issued in Connection with the
November 2008 Note Offering
The November 2008 Warrants entitle
the holder to purchase an aggregate of 50,000 shares of our common stock, at an
exercise price of $2.61 per share. The November 2008 Warrants will expire three
years after the date of issuance. The November 2008 Warrants may be exercised
for cash only. The number of shares of our common stock deliverable upon
exercise of the November 2008 Warrants will be subject to adjustment for, among
other things, subdivision or consolidation of shares, and certain other standard
dilutive events. A holder of the November 2008 Warrants will not be entitled to
exercise a number of November 2008 Warrants in excess of the number of November
2008 Warrants upon exercise of which would result in beneficial ownership by
such holder and his, her or its affiliates of more than 9.9% of the outstanding
shares of our common stock, unless this provision is waived by written agreement
between us and the holder not less than sixty-one (61) days from the date of
such waiver. On November 10, 2009, in connection with the amendment of the
November 2008 Notes, we granted the holder of the November 2008 Warrants
additional three-year warrants to purchase 100,000 shares of our common stock,
at an exercise price of $1.63 per share. All of the other terms of these
additional warrants are identical to the November 2008
Warrants.
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In connection with the November 2008
Note Offering, we engaged a placement agent to whom we paid a placement fee in
the amount of $40,000, and granted warrants to purchase an aggregate of 25,000
shares of our common stock, the terms and conditions of which are identical to
the those of the November 2008 Warrants. In addition, as of November 10,
2009, we issued warrants to purchase an additional 120,000 shares of our
common stock to the placement agent in consideration for, among other
things, its services in connection with the amendment of the November 2008
Notes. The terms and conditions of these additional warrants are identical
to those of the November 2008 Warrants, except that they will expire on November
10, 2014, and are exercisable either for cash, at an exercise price of $1.63 per
share, or on a cashless basis.
If all of the November 2008 Warrants
(including the warrants issued to the placement agent in November 2008 and 2009)
were exercised for cash pursuant to their terms, we would receive $551,350 in
proceeds, although there can be no assurance that any of these November 2008
Warrants or placement agent warrants will be exercised.
We have granted the holders of
November 2008 Warrants (and the holder of the placement agent warrants)
“piggyback” registration rights with respect to the shares underlying their
warrants.
Warrants Issued to an
Advisor
On
September 2, 2009 (the “Execution Date”), we issued an advisor five-year
warrants to purchase 714,286 shares of our common stock (the “Advisor
Warrants”), which are exercisable six (6) months after the Execution Date, at an
exercise price of $1.68 per share, payable (i) in cash, or (ii) on a cashless
basis; provided, however, that all of the Advisor Warrants will terminate
if certain conditions are not met. The number of shares of our common
stock deliverable upon exercise of the Advisor Warrants will be subject to
adjustment for, among other things, subdivision or consolidation of shares, and
certain other standard dilutive events. A holder of the Advisor Warrants will
not be entitled to exercise a number of Advisor Warrants in excess of the number
of Advisor Warrants upon exercise of which would result in beneficial ownership
by such holder and his, her or its affiliates of more than 9.9% of the
outstanding shares of our common stock, unless this provision is waived by
written agreement between us and the holder not less than sixty-one (61) days
from the date of such waiver.
Warrants Issued in Connection
with the December 2009 Note Offering
The
December 2009 Warrants entitle the holders to purchase an aggregate of 536,809
shares of our common stock, at an exercise price of $1.63 per share. The
December 2009 Warrants will expire three years after the date of issuance. The
December 2009 Warrants may be exercised for cash only. The number of shares of
our common stock deliverable upon exercise of the December 2009 Warrants will be
subject to adjustment for, among other things, subdivision or consolidation of
shares, and certain other standard dilutive events. A holder of December 2009
Warrants may not exercise a number of December 2009 Warrants in excess of the
number of December 2009 Warrants upon exercise of which would result in
beneficial ownership by such holder and his, her or its affiliates of more than
9.9% of the outstanding shares of our common stock, unless this provision is
waived by written agreement between us and the holder not less than sixty-one
(61) days from the date of such waiver. We have granted the holders of the
December 2009 Warrants “piggyback” registration rights with respect to the
shares underlying the December 2009 Warrants.
83
Promissory
Notes
As amended on December 31, 2008, and
further amended on December 31, 2009, the June 2008 Notes have an aggregate
principal balance of $2,573,301, which bears interest at a rate of 10% until the
June 2008 Notes become due and payable on December 31, 2010. Any amount of
principal or interest which is not paid when due will bear interest at a rate of
12%. We may prepay the entire amount due under the June 2008 Notes at any time
without penalty, upon 15 days prior written notice. Each holder of the June 2008
Notes has the right to be prepaid any amounts due under his, her or its June
2008 Note from the proceeds of any future offering we consummate resulting in
gross proceeds of $4,500,000 or more. So long as we have any obligation under
the June 2008 Notes, there are limitations on our ability to: (a) pay dividends
or make other distributions on our capital stock; (b) redeem, repurchase or
otherwise acquire any of our securities; (c) create, incur or assume any
liability for borrowed money (except as is related to the completion of the
construction of our new production facility); (d) sell, lease or otherwise
dispose of any significant portion of its assets; (e) lend money, give credit or
make advances; or (f) assume, guarantee, endorse, contingently agree to purchase
or otherwise become liable upon the obligation of any other person or entity. It
shall be deemed an “Event of Default” under each June 2008 Note if: (a) we fail
to pay principal or interest when due on the June 2008 Note; (b) we breach any
material covenant or other material term or condition contained in the June 2008
Note or securities purchase agreement entered into in connection with the June
2008 Note Offering (the “June Purchase Agreement”), and such breach continues
for a period of thirty (30) days after written notice thereof; (c) any
representation or warranty we made under the June 2008 Note or the June Purchase
Agreement shall be false or misleading in any material respect; (d) we, or any
subsidiary of ours, shall make an assignment for the benefit of creditors, or
apply for or consent to the appointment of a receiver or trustee, or such a
receiver or trustee shall otherwise be appointed; (e) a money judgment shall be
entered against us, or any subsidiary of ours, for more than $250,000, that
remains in effect for a period of twenty (20) days; (f) bankruptcy, insolvency,
reorganization or liquidation proceedings or other similar proceedings shall be
instituted by or against us, or any subsidiary of ours, which are not dismissed
within sixty (60) days; or (g) we fail to maintain the listing of our common
stock on at least one of the OTCBB, the Nasdaq National Market, the Nasdaq
SmallCap Market, the New York Stock Exchange, or the NYSE Amex Equities. Upon
the occurrence of any Event of Default under a June 2008 Note, unless such Event
of Default shall have been waived in writing by the holder, the holder may
consider the June 2008 Note immediately due and payable, without presentment,
demand, protest or notice of any kind, and the holder may immediately enforce
any and all of its rights and remedies provided in the June 2008 Note or any
other right or remedy afforded by law. Our repayment of amounts due under
the June 2008 Notes, as amended, is secured by a pledge of an aggregate of
3,157,425 shares of common stock of the Company beneficially owned by Yang Yong
Shan, our Chairman, Chief Executive Officer and President.
84
As amended on November 10, 2009, the
November 2008 Note has a principal balance of $500,000, and bears interest at a
rate of 10% until it becomes due and payable on May 10, 2010. Any amount of
principal or interest which is not paid when due will bear interest at a rate of
12%. We may prepay the entire amount due under the November 2008 Note at any
time without penalty, upon 15 days prior written notice. The holder of the
November 2008 Note has the right to be prepaid any amounts due under his
November 2008 Note from the proceeds of any future offering we consummate
resulting in gross proceeds of $6,500,000 or more. So long as we have any
obligation under the November 2008 Note, there are limitations on our ability
to: (a) pay dividends or make other distributions on our capital stock; (b)
redeem, repurchase or otherwise acquire any of our securities; (c) sell, lease
or otherwise dispose of any significant portion of its assets; (d) lend money,
give credit or make advances; or (e) assume, guarantee, endorse, contingently
agree to purchase or otherwise become liable upon the obligation of any other
person or entity. It shall be deemed an “Event of Default” under the November
2008 Note if: (a) we fail to pay principal or interest when due on the November
2008 Note; (b) we breach any material covenant or other material term or
condition contained in the November 2008 Note or securities purchase agreement
entered into in connection with the November 2008 Note Offering (the “November
Purchase Agreement”), and such breach continues for a period of thirty (30) days
after written notice thereof; (c) any representation or warranty we made under
the November 2008 Note or the November Purchase Agreement shall be false or
misleading in any material respect; (d) we, or any subsidiary of ours, shall
make an assignment for the benefit of creditors, or apply for or consent to the
appointment of a receiver or trustee, or such a receiver or trustee shall
otherwise be appointed; (e) a money judgment shall be entered against us, or any
subsidiary of ours, for more than $250,000, that remains in effect for a period
of twenty (20) days; (f) bankruptcy, insolvency, reorganization or liquidation
proceedings or other similar proceedings shall be instituted by or against us,
or any subsidiary of ours, which are not dismissed within sixty (60) days; or
(g) we fail to maintain the listing of our common stock on at least one of the
OTCBB, the Nasdaq National Market, the Nasdaq SmallCap Market, the New York
Stock Exchange, or the NYSE Amex Equities. Upon the occurrence of any Event of
Default under the November 2008 Note, unless such Event of Default shall have
been waived in writing by the holder, the holder may consider the November 2008
Note immediately due and payable, without presentment, demand, protest or notice
of any kind, and the holder may immediately enforce any and all of its rights
and remedies provided in the Note or any other right or remedy afforded by
law.
On November 30, 2009, we borrowed
$1,750,000 from the Term Loan Lender in consideration for which we issued a
non-negotiable promissory note, as further described in “— Recent Transactions —
Term Loan” above. The interest rate on the Term Loan Note is ten (10%) percent
per annum and is payable on maturity. The Term Loan Note has a stated maturity
date of November 30, 2010. Upon the maturity of the Term Loan Note, by
acceleration or otherwise, interest on unpaid amounts shall thereafter be
payable at the rate of twelve (12%) percent per annum (“Default Interest”),
until the obligation is paid in full. Any regular interest or Default
Interest not paid when due under the Term Loan Note shall be added to the
principal of the Term Loan Note. We may from time-to-time prepay any
amount due under the Term Loan Note, in whole or in part, without penalty.
The entire unpaid principal balance, together with accrued interest, shall
become due and payable, without presentment, demand, protest, notice of protest
or other notice of dishonor of any kind upon the occurrence of an “Event of
Default,” as defined in our Loan Agreement with the Term Loan
Lender.
On December 24, 2009, we issued the
December 2009 Notes, in the aggregate principal amount of $1,750,000, to the
December 2009 Noteholders. The December 2009 Notes bear interest at a rate of
10% until due and payable on December 24, 2010. Any amount of principal or
interest which is not paid when due will bear interest at a rate of 15%.
We may prepay the entire amount due under the December 2009 Notes at any time
without penalty, upon 15 days prior written notice; provided, however, in such
event the December 2009 Noteholers will be entitled to retain an amount of
prepaid interest equal to the greater of (i) the amount accrued as of the
prepayment date, and (ii) an aggregate of $105,000. The December 2009
Noteholders have the right to be prepaid any amounts due under the December 2009
Notes should we consummate certain additional offerings of equity or debt
securities. So long as we have any obligation under the December 2009 Notes,
there are limitations on our ability to: (a) pay dividends or make other
distributions on our capital stock; (b) redeem, repurchase or otherwise acquire
any of our securities; (c) create, incur or assume any liability for borrowed
money; (d) sell, lease or otherwise dispose of any significant portion of our
assets; (e) lend money, give credit or make advances; or (f) assume, guarantee,
endorse, contingently agree to purchase or otherwise become liable upon the
obligation of any other person or entity. The entire unpaid principal balance,
together with accrued interest, shall become due and payable, without
presentment, demand, protest, notice of protest or other notice of dishonor of
any kind upon the occurrence of an “Event of Default,” as defined in the
December 2009 Notes. Our repayment of amounts due under the December 2009
Notes is secured by a pledge of an aggregate of 5,883,329 shares of common stock
of the Company beneficially owned by Yang Yong Shan, our Chairman, Chief
Executive Officer and President.
85
Stock
Options and Share Appreciation Rights
In March 2009, our board of directors
adopted and our stockholders approved the 2009 Plan to attract and retain the
best available personnel, provide additional incentives to employees, directors
and consultants and promote the success of our business. 1,500,000 shares of our
common stock have been reserved for issuance under the 2009 Plan. The following
paragraphs describe the principal terms of the 2009 Plan.
Types of
Awards
We may grant the following types of
awards under the 2009 Plan:
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·
|
options
to purchase shares of our common
stock;
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·
|
share
appreciation rights, which entitle the grantee the right to common stock
or cash compensation measured by the appreciation in the value of the
shares;
|
|
·
|
dividend
equivalent rights, which entitle the grantee to compensation equivalent to
dividends paid with respect to common
stock;
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·
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restricted
shares, which are shares of common stock issued to the grantee that are
subject to transfer restrictions, right of first refusal, repurchase,
forfeiture, and other terms and conditions as established by our plan
administrator;
|
|
·
|
restricted
share units, which may be earned upon the passage of time or the
attainment of performance criteria and which may be settled for cash,
common stock or other securities, or a combination of cash, common stock
or other securities as established by the plan
administrator;
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|
·
|
share
payments, which may be (a) payments in the form of common stock; or
(b) options or other rights to purchase common stock, as part of any
bonus, deferred compensation or other arrangement, made in lieu of all or
any portion of the compensation;
and
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|
·
|
deferred
shares, which are rights to receive a specified number of shares of common
stock during specified time
periods.
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Plan
Administration
Our compensation committee will serve
as plan administrator for purposes of administering the 2009 Plan and
determining the provisions and terms and conditions of each award grant.
If no compensation committee exists, the Plan shall be administered by our full
board of directors.
Award
Agreement
Awards granted under the 2009 Plan will
be evidenced by an award agreement that sets forth the terms, conditions and
limitations for each award.
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Eligibility
We may grant awards to our employees,
directors and consultants, including those of our subsidiaries. However,
we may grant options that are intended to qualify as incentive stock options
(“ISOs”) only to our employees and employees of our subsidiaries.
Acceleration of Awards upon
Corporate Transactions.
The outstanding awards will terminate
and/or accelerate upon occurrence of certain significant corporate transactions,
including amalgamations, consolidations, liquidations or dissolutions, sales of
substantially all or all of our assets, reverse takeovers or acquisitions
resulting in a change of control. If the successor entity following one of
these transactions assumes or replaces our outstanding awards under the 2009
Plan, such assumed or replaced awards will become fully vested and immediately
exercisable and payable, and be released from repurchase or forfeiture rights
immediately upon termination of the grantee’s continuous service to us if the
grantee’s service is terminated by the successor entity without cause within
twelve (12) months after the effective date of the transaction.
Furthermore, if the successor entity does not assume or replace our outstanding
awards, each outstanding award will become fully vested and immediately
exercisable and payable, and will be released from any repurchase or forfeiture
rights immediately before the effective date of the corporate transaction, as
long as the grantee’s continuous service with us is not terminated before this
date.
Exercise Price and Term of
Awards.
In general, the plan administrator will
determine the exercise price of an option in the award agreement. The
exercise price may be a fixed price, or it may be a variable price related to
the fair market value of our common shares. If we grant an ISO to an
employee, the exercise price may not be less than 100% of the fair market value
of our common stock on the date of the grant, except that if the grantee, at the
time of that grant, owns shares representing more than 10% of the voting power
of all classes of the shares of our common stock, the exercise price may not be
less than 110% of the fair market value of our common stock on the date of that
grant. If we grant a non-qualified share option to a grantee, the exercise
price may not be less than 100% of the fair market value of its common stock on
the date of grant.
The term of each award under the 2009
Plan will be specified in the award agreement, but may not exceed ten years from
the earlier of the adoption or the approval of the plan, unless sooner
terminated.
Vesting
Schedule.
In general, the plan administrator will
determine, or the award agreement specify, the vesting schedule.
Equity Compensation
Grants
As of the date hereof, we have made the
following grants under the 2009 Plan:
On March
2, 2008, we issued an aggregate of 703,200 non-qualified, ten-year stock options
to our executive officers and directors (the “March Options”). Each
of the March Options has an exercise price of $0.42 per share, which was the
closing price of our common stock on the OTCBB on March 2, 2009. 175,800 of
the March Options vested on September 2, 2009. An additional 175,800 of
the March Options will vest on each of March 2, 2010, September 2, 2010 and
March 2, 2011. The exercise price of the March Options may be exercised on
a “cashless” basis and are subject to such other provisions as are contained in
the 2009 Plan.
87
On
November 10, 2009, we granted non-qualified, ten-year stock options to purchase
380,000 shares of our common stock to one of our executive officers (the
“November Options”). The November Options have an exercise price of $1.80 per
share, which was the closing price of our common stock on the OTCBB on November
9, 2009. The November Options will vest with respect to 25% of the
underlying shares on each of May 10, 2010, November 10, 2010, May 10, 2011 and
November 10, 2011. The November Options may be exercised on a “cashless” basis
and are subject to such other provisions as are contained in the 2009
Plan.
On
November 10, 2009, we also granted share appreciation rights (the “SARs”) with
respect to 380,000 shares of our common stock to one of our executive officers.
The SARs have an exercise price of $1.80 per share, which was the closing price
of our common stock on the OTCBB on November 9, 2009. The SARs have a term of
ten (10) years from the date of grant. The SARs will vest with respect to 25% of
the underlying shares on each of May 10, 2010, November 10, 2010, May 10, 2011
and November 10, 2011. The SARs are subject to such other provisions as are
contained in the 2009 Plan.
Indemnification
of Directors and Officers
Chapter 78 of the NRS provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that he
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise (each a “Covered Person”), against expenses (including attorneys’
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he is not
liable pursuant to NRS Section 78.138 or acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
NRS Chapter 78 further provides that a
corporation similarly may indemnify a Covered Person serving in any such
capacity who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by on in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a Covered Person, against expenses (including amounts paid in settlement
and attorneys’ fees) actually and reasonably incurred in connection with the
defense or settlement of such action or suit if he is not liable pursuant to NRS
78.138 or acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged by a court of competent jurisdiction,
after exhaustion of all appeals therefrom, to be liable to the corporation
unless and only to the extent that the court in which the action or suit was
brought or other court of competent jurisdiction determines upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, the person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper.
NRS Chapter 78 also includes other
provisions related to indemnification, including provisions that permit a
corporation, in certain circumstances set forth in NRS Chapter 78, (i) to
advance the expenses incurred by a director or officer in advance of the final
disposition of an action, suit or proceeding and (ii) obtain insurance or make
other financial arrangements on behalf of a Covered Person.
88
NRS Chapter 78 also provides that any
indemnification or advancement of expenses made pursuant to NRS Chapter 78 does
not exclude any other rights to which a person seeking indemnification or
advancement of expenses may be entitled under the corporation’s articles of
incorporation or any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, except that indemnification or the advancement of
expenses, unless ordered by a court, may not be made to or on behalf of any
director or officer if a final adjudication establishes that (i) his acts or
omissions involved intentional misconduct, fraud or a knowing violation of the
law and (ii) was material to the cause of action.
Our Articles of Incorporation eliminate
the personal liability of our directors and officers for damages for breach of
fiduciary duty, except that such protection does not apply to acts or omissions
involving intentional misconduct, fraud or knowing violation of the law or the
payment of dividends in violation of NRS 78.300.
Our Bylaws permit us to indemnify our
Covered Persons, advance expenses incurred by such persons and purchase and
maintain insurance on behalf of such persons. Our Bylaws further provide
that the indemnification permitted under the Bylaws is not exclusive of any
other indemnification granted under any provision of our Articles of
Incorporation, our Bylaws or pursuant to any statute, agreement, vote of the
stockholders or disinterested directors, or otherwise.
Trading
Information
Our common stock is currently approved
for quotation on the OTCBB maintained by FINRA under the symbol “EMDY.OB.”
As soon as practicable, and assuming we satisfy all necessary initial listing
requirements, we intend to apply to have our common stock listed for trading on
New York Stock Exchange, NYSE Amex Equities or the Nasdaq Stock Market, although
we cannot be certain that any of these applications will be
approved.
Transfer
Agent
The transfer agent for our common stock
is Computershare, Inc., 350 Indiana Street, 8th Floor Golden, CO 80401. We
serve as warrant agent with respect to our outstanding
warrants.
89
SELLING
STOCKHOLDERS
We are registering this offering under
the terms of registration rights agreements between us and the holders of
certain of our securities. Such securities were issued by us in transactions
that were exempt from the registration requirements of the Securities Act to
persons reasonably believed by us to be "accredited investors" as defined in
Regulation D under the Securities Act.
The selling stockholders acquired their
securities in the following transactions:
The
Tryant Shares
On August 30, 2007, our predecessor
filer, Micro-Tech, issued 518,856 “restricted” shares of its Common Stock to
Tryant, LLC (the “Tryant Shares”) in exchange for debt retirement in the amount
of $12,971. Following the issuance of the above shares, Tryant owned
643,856 shares of Micro-Tech’s Common Stock. As of October 9, 2007, Tryant
rescinded 230,645 of the Tryant Shares. Micro-Tech reissued the 64,388 of
the rescinded Tryant Shares to John V. Winfield in consideration for
services. Micro-Tech granted “piggyback registration rights” to Mr.
Winfield with respect to these shares. A more complete description of this
transaction can be found in “Certain Relationships and Related Transactions -
Issuance, Rescission and Reissuance of Tryant Shares” above.
The
October 2007 Offerings
In October 2007, we sold 1,333,333
units of our securities to John V. Winfield, consisting of: (i) 1,333,333 shares
of our common stock, (ii) Warrant W-1 to purchase 266,667 shares of our common
stock, and (iii) Warrant W-2 to purchase 1,333,333 shares of our common stock,
for an aggregate purchase price of $1,000,000. The rights and obligations under
Warrant W-1 and Warrant W-2 are further described in “Description of Securities
— Warrants” above.
In addition, in October 2007, we
conducted a private offering of up to a maximum of $8,000,000 of units of our
securities. On October 9, 2007, we sold 2,061,227 units of our securities
to certain “accredited investors” (the “Initial Purchasers”), consisting of
(i) 2,061,227 shares of our common stock, (ii) 412,245 Class A
Warrants, and (iii) 2,061,227 Class B Warrants, for an aggregate purchase
price of $3,359,800. On October 19, 2007, we sold 2,846,746 units of our
securities to additional “accredited investors” (the “Additional Purchasers”),
consisting of (i) 2,846,746 shares of our common stock, (ii) 569,346 Class
A Warrants, and (iii) 2,846,746 Class B Warrants, for an aggregate purchase
price of $4,640,200. The rights and obligations under the Class A Warrants
and the Class B Warrants are further described in “Description of Securities —
Warrants” above.
As of March 2, 2009, an aggregate of
183,457 of our Class A Warrants and 175,937 of our Class B Warrants were
exercised in connection with our First Warrant Tender Offer, as further
described in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Recent Developments – First Warrant Tender Offer”
above.
On August 14, 2009, the warrant holders
that participated in our Second Warrant Tender Offer, as further described
in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Recent Developments — Second Warrant Tender Offer” above exercised
all of the 2,254,828 Amended Warrants they received in connection therewith, at
an exercise price of $1.63 per share.
90
We entered into Registration Rights
Agreements with Mr. Winfield, the Initial Purchasers and Additional Purchasers
(the “October 2007 Investors”), pursuant to which we granted them certain
registration rights as further described in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Liquidity and
Capital Resources — Registration Rights and Liquidated Damages.” Pursuant
to the Registration Rights Agreements, we were required to pay liquidated
damages to the Investors, if we failed to satisfy certain registration
requirements. In addition, the Registration Rights Agreements require
that, if we fail to pay any partial liquidated damages in full within seven days
after the date payable, we will pay interest thereon at a rate of 15% per annum,
until such amounts, plus all such interest thereon, are paid in full. As
of October 5, 2009, we issued an aggregate of 775,833 shares in full payment of
the liquidated damages and interest, as further described in “— Recent
Developments — Reverse Merger, Private Placements and Related Transactions”
above., for which we granted the October 2007 Investors “piggyback registration
rights.”
In connection with the October
Offerings, we engaged finders and placement agents to whom we paid fees in the
aggregate of $700,452, and granted (i) warrants to purchase an aggregate of
106,667 shares of our common stock, at an exercise price of $0.94 per share, the
terms and conditions of which are identical to the those of Warrant W-1, and
(ii) warrants to purchase 392,639 shares of our common stock, at an exercise
price of $2.04, the terms and conditions of which are identical to the those of
the Class A Warrants. On March 2, 2009, the exercise prices of 235,583 of these
warrants were reduced from $2.04 to $1.63, as partial consideration for services
rendered in connection with a consulting agreement we entered into with one of
these parties. We granted the finders and placement agents “piggyback
registration rights” with respect to the shares underlying their
warrants.
The
Note Offerings
In June 2008, we conducted a private
offering of up to a maximum of (i) $3,000,000 of our 8% promissory notes (the
“June 2008 Notes”) and (ii) warrants to purchase 300,000 shares of our common
stock, at an exercise price of $2.61 per share (the “June 2008 Warrants”) (the
“June 2008 Note Offering”). On June 12, 2008, one “accredited investor”
purchased, for a purchase price of $1,500,000, a June 2008 Note in the principal
amount of $1,500,000, and June 2008 Warrants to purchase 150,000 shares of our
common stock. On June 20, 2008, an additional “accredited investor” purchased,
for a purchase price of $750,000, a June 2008 Note in the principal amount of
$750,000, and June 2008 Warrants to purchase 75,000 shares of our common stock.
As of December 31, 2008, certain of the terms of the June 2008 Notes and June
2008 Warrants were amended. The rights and obligations under the June 2008
Notes, as amended, are further described in “Description of Securities -
Promissory Notes” above. The rights and obligations under the June 2008
Warrants, as amended as of December 31, 2008, are further described in
“Description of Securities — Warrants” above.
In connection with the June 2008
Note Offering, we engaged a placement agent to whom we paid a placement fee in
the amount of $97,500, and granted warrants to purchase an aggregate of 45,000
shares of our common stock, the terms and conditions of which are identical to
the those of the June 2008 Warrants, as amended as of December 31,
2008.
In addition, as of July 4, 2009, we
issued warrants to purchase an additional 97,500 shares of our common stock to
the placement agent in consideration for its services in connection with
the amendment of the June 2008 Notes and June 2008 Warrants as of December 31,
2008 (the “Additional PA Warrants”). The terms and conditions of these
additional warrants are described in “Description of Securities — Warrants”
above.
On November 10, 2008, we sold to one
“accredited investor,” for a purchase price of $500,000, a 10% promissory note
(the “November 2008 Note”) in the principal amount of $500,000, and warrants to
purchase 50,000 shares of our common stock, at an exercise price of $2.61 per
share (the “November 2008 Warrants”) (the “November 2008 Note Offering”).
The rights and obligations under the November 2008 Note are further described in
“Description of Securities — Promissory Notes” above. The rights and
obligations under the November 2008 Warrants are further described in
“Description of Securities — Warrants” above.
91
In connection with the November 2008
Note Offering, we engaged a placement agent to whom we paid a placement fee in
the amount of $40,000, and granted warrants to purchase an aggregate of 25,000
shares of our common stock, the terms and conditions of which are identical to
the those of the November 2008 Warrants.
We granted the holders of June 2008
Warrants, as amended (including the warrants issued to a placement agent),
Additional PA Warrants and November 2008 Warrants (including the warrants issued
to a placement agent) “piggyback” registration rights with respect to the shares
underlying their warrants.
SELLING
STOCKHOLDER TABLE
As of the date hereof, we have
32,927,191 shares of common stock outstanding (not including an additional
1,944,444 currently held in treasury). The table below lists the selling
stockholders and other information regarding the beneficial ownership of the
shares of common stock by each of the selling stockholders. The second
column lists the number of shares of common stock beneficially owned by each
selling stockholder as of the date hereof, assuming exercise of all of the
warrants held by the selling stockholders on that date, without regard to any
limitations on conversion or exercise. The third column lists the shares of
common stock covered by this prospectus that may be disposed of by each of the
selling stockholders. The fourth column lists the number of shares that will be
beneficially owned by the selling stockholders assuming all of the shares
covered by this prospectus are sold.
The
inclusion of any securities in the following table does not constitute an
admission of beneficial ownership by the persons named below. Except as
indicated in the footnotes to the table, no selling stockholder has had any
material relationship with us or our predecessors or affiliates during the last
three years.
Except
for WestPark Capital, Inc. and Legend Merchant Group, Inc., no selling
stockholder is a registered broker-dealer or an affiliate of a
broker-dealer. While WestPark Capital, Inc. and Legend Merchant Group
are broker-dealers, they are not underwriters, since they obtained the
securities being registered for resale as compensation for investment banking
services. A total of 88,334 warrants were due to WestPark Capital,
Inc. as partial consideration for its services as a placement agent in
connection with the Offering. Of these warrants, 50,000 were issued
to Mark I. Lev, 12,884 were issued to Gross Capital Investments LLC, and 10,000
were issued to Starobin Partners, Inc., each of whom are affiliates of WestPark
Capital, Inc. These persons are not underwriters since, at the time
they obtained these securities, they had no agreements or understandings,
directly or indirectly, with any party to distribute the securities and they
acquired the shares to be offered and sold by them pursuant to this registration
statement in the ordinary course of business. In addition, an
additional 403,083 warrants were due to Legend Merchant Group, Inc., a
registered broker-dealer, as compensation for investing banking
services. Of these warrants, 140,500 were issued to Legend Merchant
Group, Inc., and 14,300 were granted to Andrew Gallion, 18,850 were issued to
Kevin Palmer, 31,850 were issued to Tiffany Palmer, 5,000 were issued to Gilad
N. Ottensoser, 5,000 were issued to John H. Shaw III, 187,000 were issued to
David W. Unsworth Jr., and 583 were issued to Suna Yalaz Angell, each of whom
are affiliates of Legend Merchant Group, Inc. These persons are not underwriters
since, at the time they obtained these securities, they had no agreements or
understandings, directly or indirectly, with any party to distribute the
securities and they acquired the shares to be offered and sold by them pursuant
to this registration statement in the ordinary course of business.
92
The
selling stockholders may decide to sell all, some, or none of the shares of
common stock listed below. We cannot provide you with any estimate of the number
of shares of common stock that any of the selling stockholders will hold in the
future. For purposes of this table, beneficial ownership is determined in
accordance with the rules of the SEC, and includes voting power and investment
power with respect to such shares.
Name
|
Number of
Shares of
Common
Stock
Beneficially
Owned
Prior to
Offering(1)
|
Number of
Shares of
Common
Stock
Being
Offered
|
Shares of
Common
Stock
Beneficially
Owned
After the
Offering(1)
|
Percentage
Beneficially
Owned
After the
Offering
|
||||||||||||
Akiva
Elessar Goren Trust
|
25,000 | (2) | 25,000 | 0 | * | |||||||||||
Reginald
Allen
|
35,896 | (3) | 35,896 | 0 | * | |||||||||||
Andax
LLC
|
25,000 | (4) | 25,000 | 0 | * | |||||||||||
Mohit
Aron
|
26,810 | (5) | 26,810 | 0 | * | |||||||||||
Arthur
M. Read, II, Esq LTD 401(k) u/a 10/5/06
|
46,810 | (6) | 46,810 | 0 | * | |||||||||||
Rocco
J. Brescia Jr.
|
23,405 | (7) | 23,405 | 0 | * | |||||||||||
Scott
Cacchione
|
82,240 | (8) | 82,240 | 0 | * | |||||||||||
Cherner
Family Irrevocable Trust
|
20,559 | (9) | 20,559 | 0 | * | |||||||||||
DAJ
LLC
|
250,000 | (10) | 250,000 | 0 | * | |||||||||||
Elvie
N. Davis
|
20,559 | (11) | 20,559 | 0 | * | |||||||||||
William
J. Del Biaggio
|
717,948 | (12) | 717,948 | 0 | * | |||||||||||
Devine
Property, Ltd.
|
33,077 | (13) | 33,077 | 0 | * | |||||||||||
Aaron
Dobrinsky and Cindy Dobrinsky
|
24,672 | (14) | 24,672 | 0 | * | |||||||||||
Francis
J. Elenio
|
20,559 | (15) | 20,559 | 0 | * | |||||||||||
Henry
G. Elkins, Jr. and Nancy P. Elkins
|
117,026 | 117,026 | 0 | * | ||||||||||||
Farallon
Capital Institutional Partners, L.P.
|
123,436 | (16) | 123,436 | 0 | * | |||||||||||
Farallon
Capital Institutional Partners II, L.P.
|
21,282 | (17) | 21,282 | 0 | * |
93
Name
|
Number of
Shares of
Common
Stock
Beneficially
Owned
Prior to
Offering(1)
|
Number of
Shares of
Common
Stock
Being
Offered
|
Shares of
Common
Stock
Beneficially
Owned
After the
Offering(1)
|
Percentage
Beneficially
Owned
After the
Offering
|
||||||||||||
Farallon
Capital Institutional Partners III, L.P.
|
12,769 | (18) | 12,769 | 0 | * | |||||||||||
Farallon
Capital Offshore Investors II, L.P.
|
170,256 | (19) | 170,256 | 0 | * | |||||||||||
Farallon
Capital Partners, L.P.
|
97,897 | (20) | 97,897 | 0 | * | |||||||||||
Abdallah
Farrukh and Daad Farrukh
|
23,405 | 23,405 | 0 | * | ||||||||||||
David
Fass and Marion Fass
|
41,120 | (21) | 41,120 | 0 | * | |||||||||||
Bai
Ye Feng
|
292,564 | (22) | 292,564 | 0 | * | |||||||||||
Ali
Foughi
|
23,405 | (23) | 23,405 | 0 | * | |||||||||||
Andrew
Gallion
|
14,300 | (24) | 14,300 | 0 | * | |||||||||||
Michael
D. Gordon and Deborah Z. Gordon
|
35,108 | (25) | 35,108 | 0 | * | |||||||||||
Goren
Brothers LP
|
300,000 | (26) | 300,000 | 0 | * | |||||||||||
Goren
Cousins I LLC
|
200,000 | (27) | 200,000 | 0 | * | |||||||||||
Elisabeth
J. Goren
|
100,000 | 100,000 | 0 | * | ||||||||||||
James
Goren
|
100,000 | 100,000 | 0 | * | ||||||||||||
Nigel
Gregg
|
41,120 | (28) | 41,120 | 0 | * | |||||||||||
Spencer
B. Grimes
|
71,795 | (29) | 71,795 | 0 | * | |||||||||||
Irwin
Gross and Linda Gross
|
41,120 | (30) | 41,120 | 0 | * | |||||||||||
Gross
Capital Partners LLC
|
12,884 | (31) | 12,884 | 0 | * | |||||||||||
Josef
Grunwald
|
358,974 | (32) | 358,974 | 0 | * | |||||||||||
Keith
Guenther
|
225,563 | (33) | 125,563 | 100,000 | * | |||||||||||
Barry
Honig
|
82,240 | (34) | 82,240 | 0 | * | |||||||||||
IRA
FBO Michael Nimaroff
|
41,120 | (35) | 41,120 | 0 | * |
94
Name
|
Number of
Shares of
Common
Stock
Beneficially
Owned
Prior to
Offering(1)
|
Number of
Shares of
Common
Stock
Being
Offered
|
Shares of
Common
Stock
Beneficially
Owned
After the
Offering(1)
|
Percentage
Beneficially
Owned
After the
Offering
|
||||||||||||
Jacobson/Sorensen
Revocable Trust
|
58,513 | (36) | 58,513 | 0 | * | |||||||||||
JAG
Multi Investments LLC
|
2,395,156 | (37) | 1,671,333 | 723,823 | * | |||||||||||
David
Kleinhandler
|
82,240 | (38) | 82,240 | 0 | * | |||||||||||
Mitchell
Krieger
|
20,559 | (39) | 20,559 | 0 | * | |||||||||||
Brooke
Kroeger
|
25,000 | 25,000 | 0 | * | ||||||||||||
Adrienne
Landau
|
20,559 | (40) | 20,559 | 0 | * | |||||||||||
Richard
A. Lannon
|
29,256 | 29,256 | 0 | * | ||||||||||||
Laurel
Ridge Management
|
46,810 | (41) | 46,810 | 0 | * | |||||||||||
Legend
Merchant Group, Inc.
|
417,000 | (42) | 97,000 | 320,000 | * | |||||||||||
Mark
I. Lev
|
50,000 | (43) | 50,000 | 0 | * | |||||||||||
Hanka
Lew
|
20,559 | (44) | 20,559 | 0 | * | |||||||||||
Alan
Listhaus and Barbara Listhaus
|
20,559 | (45) | 20,559 | 0 | * | |||||||||||
Joseph
Listhaus and Alan Listhaus
|
20,559 | (46) | 20,559 | 0 | * | |||||||||||
Arthur
Luxemberg
|
82,240 | (47) | 82,240 | 0 | * | |||||||||||
Alastair
McEwan
|
23,405 | (48) | 23,405 | 0 | * | |||||||||||
Bernard
Mermelstein
|
82,240 | (49) | 82,240 | 0 | * | |||||||||||
Michael
P. Sheinson Trust
|
287,179 | (50) | 287,179 | 0 | * | |||||||||||
Milton
H. Dresner Rev Trust U/A DTD 10/22/76
|
125,000 | (51) | 125,000 | 0 | * | |||||||||||
Stuart
Michael
|
20,559 | (52) | 20,559 | 0 | * | |||||||||||
MidSouth
Investor Fund LP
|
702,154 | (53) | 702,154 | 0 | * | |||||||||||
Patrick
C. Mobouck
|
46,810 | (54) | 46,810 | 0 | * | |||||||||||
Gilad
N. Ottensoser
|
5,000 | (55) | 5,000 | 0 | * | |||||||||||
Kevin
Palmer
|
18,850 | (56) | 18,850 | 0 | * |
95
Name
|
Number of
Shares of
Common
Stock
Beneficially
Owned
Prior to
Offering(1)
|
Number of
Shares of
Common
Stock
Being
Offered
|
Shares of
Common
Stock
Beneficially
Owned
After the
Offering(1)
|
Percentage
Beneficially
Owned
After the
Offering
|
||||||||||||
Tiffany
Palmer
|
31,850 | (57) | 31,850 | 0 | * | |||||||||||
Anastasia
Panagiotou
|
21,537 | (58) | 21,537 | 0 | * | |||||||||||
Eleni
Panagiotou
|
14,359 | (59) | 14,359 | 0 | * | |||||||||||
Phoenix
Capital Worldwide II, L.P.
|
139,808 | (60) | 139,808 | 0 | * | |||||||||||
Premier
Partners Investments, LLP
|
87,679 | (61) | 87,679 | 0 | * | |||||||||||
Gilbert
D. Raker
|
41,120 | (62) | 41,120 | 0 | * | |||||||||||
Nancy
L. Raker
|
10,281 | (63) | 10,281 | 0 | * | |||||||||||
Todd
D. Raker
|
5,337 | 5,337 | 0 | * | ||||||||||||
RFJM
Partners LLC
|
54,291 | (64) | 54,291 | 0 | * | |||||||||||
Jeffrey
Schnapper
|
41,120 | (65) | 41,120 | 0 | * | |||||||||||
Jeanine
Schreiber
|
10,281 | (66) | 10,281 | 0 | * | |||||||||||
Christopher
Semler
|
58,513 | (67) | 58,513 | 0 | * | |||||||||||
Rasesh
Shah
|
11,703 | (68) | 11,703 | 0 | * | |||||||||||
John
H. Shaw III
|
5,000 | (69) | 5,000 | 0 | * | |||||||||||
David
Sinclair
|
41,120 | (70) | 41,120 | 0 | * | |||||||||||
Sivan
Lilu Goren Trust
|
25,000 | (71) | 25,000 | 0 | * | |||||||||||
Robin
Smith
|
41,120 | (72) | 41,120 | 0 | * | |||||||||||
Starobin
Partners, Inc.
|
10,000 | (73) | 10,000 | 0 | * | |||||||||||
David
Steinberger
|
11,703 | (74) | 11,703 | 0 | * | |||||||||||
Harry
Steinmetz
|
61,795 | (75) | 61,795 | 0 | * | |||||||||||
Theodore
H. Swindells
|
215,327 | (76) | 215,327 | 0 | * | |||||||||||
Frances
Tedesco and Joseph Tedesco
|
20,559 | (77) | 20,559 | 0 | * | |||||||||||
The
Schreiber Family Trust Dated 02/08/95
|
26,729 | (78) | 26,729 | 0 | * |
96
Name
|
Number of
Shares of
Common
Stock
Beneficially
Owned
Prior to
Offering(1)
|
Number of
Shares of
Common
Stock
Being
Offered
|
Shares of
Common
Stock
Beneficially
Owned
After the
Offering(1)
|
Percentage
Beneficially
Owned
After the
Offering
|
||||||||||||
Thimos
LLC
|
315,969 | (79) | 315,969 | 0 | * | |||||||||||
Frederick
G. Tobin
|
29,256 | 29,256 | 0 | * | ||||||||||||
Trust
FBO Eliel Dax Goren
|
25,000 | (80) | 25,000 | 0 | * | |||||||||||
Constantine
Tsamasfyros
|
143,590 | (81) | 143,590 | 0 | * | |||||||||||
David
W. Unsworth Jr.
|
280,500 | (82) | 280,500 | 0 | * | |||||||||||
Steve
Vago
|
41,120 | (83) | 41,120 | 0 | * | |||||||||||
David
M. Weinberg
|
30,840 | (84) | 30,840 | 0 | * | |||||||||||
WestPark
Capital, Inc.
|
15,460 | (85) | 15,460 | 0 | * | |||||||||||
David
G. Whitenack
|
11,703 | (86) | 11,703 | 0 | * | |||||||||||
John
V. Winfield
|
3,786,850 | (87) | 3,248,100 | 538,750 | * | |||||||||||
Kevin
Chih-Heng Wu
|
58,513 | (88) | 58,513 | 0 | * | |||||||||||
Suna
Yalaz Angell
|
583 | (89) | 583 | 0 | * | |||||||||||
Krishna
Yarlagadda
|
46,810 | (90) | 46,810 | 0 | * | |||||||||||
Total Shares Registered for Selling
Stockholders:
|
12,589,979 |
_________________________________
* Less
than one percent
(1) Beneficial
ownership is determined in accordance with the Rule 13d-3(a) of the Exchange
Act, and generally includes voting or investment power with respect to
securities. Pursuant to the rules and regulations of the SEC, shares of our
common stock that an individual or group has a right to acquire within sixty
(60) days pursuant to the exercise of options or warrants, or the conversion of
preferred stock are deemed to be outstanding for the purposes of computing the
percentage ownership of such individual or group, but are not deemed to be
outstanding for the purposes of computing the percentage ownership of any other
person shown in the table. Except as subject to community property laws, where
applicable, the person named above has sole voting and investment power with
respect to all shares of our common stock shown as beneficially owned by
him.
(2) Andrea
Goren and Mitch Bredefeld are the Trustees of Akiva Elessar Goren Trust, and
have shared voting and investment power over the shares owned
thereby. Mr. Goren and Mr. Bredefeld disclaim beneficial ownership of
these shares, except to the extent of their pecuniary interest
therein.
(3) Includes
18,404 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Allen.
97
(4) Andrea
Goren is the Managing Member of Andax LLC, and has sole voting and investment
power over the shares owned thereby. Mr. Goren disclaims beneficial
ownership of these shares, except to the extent of his pecuniary interest
therein.
(5) Includes
24,000 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Aron.
(6) Arthur
Reade is the Trustee of Arthur M. Read, II, Esq LTD 401(k) u/a 10/5/06, and has
sole voting and investment power over the shares owned thereby. Mr.
Reade disclaims beneficial ownership of these shares, except to the extent of
his pecuniary interest therein.
(7) Includes
8,000 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Brescia.
(8) Includes
73,620 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Cacchione.
(9) Includes
18,404 shares of common stock issuable upon exercise of currently exercisable
warrants held by Cherner Family Irrevocable Trust. Stephen Cherner is
the Trustee of Cherner Family Irrevocable Trust, and has sole voting and
investment power over the shares owned thereby. Mr. Cherner disclaims
beneficial ownership of these shares, except to the extent of his pecuniary
interest therein.
(10) James
Goren is the Managing Member of DAJ LLC, and has sole voting and investment
power over the shares owned thereby. Mr. Goren disclaims beneficial
ownership of these shares, except to the extent of his pecuniary interest
therein.
(11) Includes
18,404 shares of common stock issuable upon exercise of currently exercisable
warrants held by Ms. Davis.
(12) Includes
368,098 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Del Biaggio.
(13) Includes
22,086 shares of common stock issuable upon exercise of currently exercisable
warrants held by Devine Property, Ltd. Melvyn L. Lieberman is the
Director of Devine Property, Ltd., and has sole voting and investment power over
the shares owned thereby. Mr. Lieberman disclaims beneficial
ownership of these shares, except to the extent of his pecuniary interest
therein.
(14) Includes
22,086 shares of common stock issuable upon exercise of currently exercisable
warrants jointly held by Mr. Dobrinsky and Ms. Dobrinsky.
(15) Includes
18,404 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Elenio.
(16) Includes
72,500 shares of common stock issuable upon exercise of currently exercisable
warrants held by Farallon Capital Institutional Partners, L.P. Monica
Landry is the Managing Member of Farallon Capital Institutional Partners, L.P.,
and has sole voting and investment power over the shares owned
thereby. Ms. Landry disclaims beneficial ownership of these shares,
except to the extent of her pecuniary interest therein.
(17) Includes
12,500 shares of common stock issuable upon exercise of currently exercisable
warrants held by Farallon Capital Institutional Partners II,
L.P. Monica Landry is the Managing Member of Farallon Capital
Institutional Partners II, L.P., and has sole voting and investment power over
the shares owned thereby. Ms. Landry disclaims beneficial ownership
of these shares, except to the extent of her pecuniary interest
therein.
(18) Includes
7,500 shares of common stock issuable upon exercise of currently exercisable
warrants held by Farallon Capital Institutional Partners III,
L.P. Monica Landry is the Managing Member of Farallon Capital
Institutional Partners III, L.P., and has sole voting and investment power over
the shares owned thereby. Ms. Landry disclaims beneficial ownership
of these shares, except to the extent of her pecuniary interest
therein.
98
(19) Includes
100,000 shares of common stock issuable upon exercise of currently exercisable
warrants held by Farallon Capital Offshore Investors II, L.P. Monica Landry is
the Managing Member of Farallon Capital Offshore Investors II, L.P., and has
sole voting and investment power over the shares owned thereby. Ms.
Landry disclaims beneficial ownership of these shares, except to the extent of
her pecuniary interest therein.
(20) Includes
57,500 shares of common stock issuable upon exercise of currently exercisable
warrants held by Farallon Capital Partners, L.P. Monica Landry is the Managing
Member of Farallon Capital Partners, L.P., and has sole voting and investment
power over the shares owned thereby. Ms. Landry disclaims beneficial
ownership of these shares, except to the extent of her pecuniary interest
therein.
(21) Includes
36,810 shares of common stock issuable upon exercise of currently exercisable
warrants jointly held by Mr. Fass and Ms. Fass.
(22) Includes
150,000 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Feng.
(23) Includes
8,000 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Foughi.
(24) Consists
of 14,300 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Gallion.
(25) Includes
8,000 shares of common stock issuable upon exercise of currently exercisable
warrants jointly held by Mr. Gordon and Ms. Gordon.
(26) James
Goren is General Partner of Goren Brothers LP, and has sole voting and
investment power over the shares owned by thereby. Mr. Goren
disclaims beneficial ownership of these shares, except to the extent of his
pecuniary interest therein.
(27) James
Goren is Manager of Goren Cousins I LLC, and has sole voting and investment
power over the shares owned by thereby. Mr. Goren disclaims
beneficial ownership of these shares, except to the extent of his pecuniary
interest therein.
(28) Includes
36,810 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Gregg.
(29) Includes
36,810 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Grimes.
(30) Includes
36,810 shares of common stock issuable upon exercise of currently exercisable
warrants jointly held by Mr. Gross and Ms. Gross.
(31) Consists
of 12,884 shares of common stock issuable upon exercise of currently exercisable
warrants held by Gross Capital Partners LLC. Irv Gross is the
Managing Member of Gross Capital Partners LLC, and has sole voting and
investment power over the shares owned thereby. Mr. Gross disclaims
beneficial ownership of these shares, except to the extent of his pecuniary
interest therein.
(32) Includes
184,049 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Grunwald.
(33) Includes
150,000 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Guenther.
99
(34) Includes
73,620 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Honig
(35) Includes
36,810 shares of common stock issuable upon exercise of currently exercisable
warrants held by IRA FBO Michael Nimaroff. Michael
Nimaroff has sole voting and investment power over the shares owned
thereby. Mr. Nimaroff disclaims beneficial ownership of these shares,
except to the extent of his pecuniary interest therein.
(36) Includes
30,000 shares of common stock issuable upon exercise of currently exercisable
warrants held by Jacobson/Sorensen Revocable Trust. Michael Jacobson
and Trine Sorensen are the Trustees of Jacobson/Sorensen Revocable Trust, and
has shared voting and investment power over the shares owned
thereby. Mr. Jacobson and Ms. Sorensen disclaim beneficial ownership
of these shares, except to the extent of their pecuniary interest
therein.
(37) Includes
676,506 shares of common stock issuable upon exercise of currently exercisable
warrants held by JAG Multi Investments LLC. Alexander M. Goren is the
Manager of JAG Multi Investments LLC, and has sole voting and investment power
over the shares owned thereby. Mr. Goren disclaims beneficial
ownership of these shares, except to the extent of his pecuniary interest
therein.
(38) Includes
73,620 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Kleinhandler.
(39) Includes
18,404 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Krieger.
(40) Includes
18,404 shares of common stock issuable upon exercise of currently exercisable
warrants held by Ms. Landau.
(41) W.
Russell G. Byers Jr. is the President of Laurel Ridge Management, and has sole
voting and investment power over the shares owned thereby. Mr. Byers
disclaims beneficial ownership of these shares, except to the extent of his
pecuniary interest therein.
(42) Includes
202,000 shares of common stock issuable upon exercise of currently
exercisable warrants held by Legend Merchant Group, Inc. David W.
Unsworth Jr. is the President of Legend Merchant Group, Inc., and has sole
voting and investment power over the shares owned thereby. Mr.
Unsworth disclaims beneficial ownership of these shares, except to the extent of
his pecuniary interest therein.
(43) Consists
of 50,000 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Lev.
(44) Includes
18,404 shares of common stock issuable upon exercise of currently exercisable
warrants held by Ms. Lew.
(45) Includes
18,404 shares of common stock issuable upon exercise of currently exercisable
warrants jointly held by Mr. Listhaus and Ms. Listhaus.
(46) Includes
18,404 shares of common stock issuable upon exercise of currently exercisable
warrants jointly held by Mr. J. Listhaus and Mr. A. Listhaus.
(47) Includes
73,620 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Luxemberg.
(48) Includes
12,000 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. McEwan.
(49) Includes
73,620 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Mermelstein.
100
(50) Includes
147,239 shares of common stock issuable upon exercise of currently exercisable
warrants held by Michael P. Sheinson Trust. Michael P. Sheinson is the Trustee
of Michael P. Sheinson Trust, and has sole voting and investment power over the
shares owned thereby. Mr. Sheinson disclaims beneficial ownership of
these shares, except to the extent of his pecuniary interest
therein.
(51) Milton
H. Dresner is the Trustee of Milton H. Dresner Rev Trust U/A DTD 10/22/76, and
has sole voting and investment power over the shares owned
thereby. Mr. Dresner disclaims beneficial ownership of these shares,
except to the extent of his pecuniary interest therein.
(52) Includes
18,404 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Michael.
(53) Lyman
D. Heidtke is the General Partner of MidSouth Investor Fund LP, and has sole
voting and investment power over the shares owned thereby. Mr.
Heidtke disclaims beneficial ownership of these shares, except to the extent of
his pecuniary interest therein.
(54) Includes
24,000 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Mobouck.
(55) Consists
of 5,000 shares of common stock issuable upon exercise of currently exercisable
warrants held by Ms. Ottensoser.
(56) Consists
of 18,850 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Palmer.
(57) Consists
of 31,850 shares of common stock issuable upon exercise of currently exercisable
warrants held by Ms. Palmer.
(58) Includes
11,042 shares of common stock issuable upon exercise of currently exercisable
warrants held by Ms. A. Panagiotou.
(59) Includes
7,362 shares of common stock issuable upon exercise of currently exercisable
warrants held by Ms. E. Panagiotou.
(60) Includes
125,153 shares of common stock issuable upon exercise of currently exercisable
warrants held by Phoenix Capital Worldwide II, L.P. Joseph L. Tedesco
is the General Partner of Phoenix Capital Worldwide II, L.P., and has sole
voting and investment power over the shares owned thereby. Mr.
Tedesco disclaims beneficial ownership of these shares, except to the extent of
his pecuniary interest therein.
(61) Includes
55,214 shares of common stock issuable upon exercise of currently exercisable
warrants held by Premier Partners Investments, LLP. Irwin Gross is
the Manager of Premier Partners Investments, LLP, and has sole voting and
investment power over the shares owned thereby. Mr. Gross disclaims
beneficial ownership of these shares, except to the extent of his pecuniary
interest therein.
(62) Includes
36,810 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Raker.
(63) Includes
9,203 shares of common stock issuable upon exercise of currently exercisable
warrants held by Ms. Raker.
(64) Includes
48,600 shares of common stock issuable upon exercise of currently exercisable
warrants held by RFJM Partners LLC. Jeffrey Markowitz is the Managing
Member of RFJM Partners LLC, and has sole voting and investment power over the
shares owned thereby. Mr. Markowitz disclaims beneficial ownership of
these shares, except to the extent of his pecuniary interest
therein.
101
(65) Includes
36,810 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Schnapper.
(66) Includes
9,203 shares of common stock issuable upon exercise of currently exercisable
warrants held by Ms. Schreiber.
(67) Includes
30,000 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Semler.
(68) Includes
20 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Shah.
(69) Consists
of 5,000 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Shaw.
(70) Includes
36,810 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Sinclair.
(71) Andrea
Goren and Mitch Bredefeld are the Trustees of Siva Lilu Goren Trust, and have
shared voting and investment power over the shares owned thereby. Mr.
Goren and Mr. Bredefeld disclaim beneficial ownership of these shares, except to
the extent of their pecuniary interest therein.
(72) Includes
36,810 shares of common stock issuable upon exercise of currently exercisable
warrants held by Ms. Smith.
(73) Consists
of 10,000 shares of common stock issuable upon exercise of currently exercisable
warrants held by Starobin Partners, Inc. Mark I. Lev is the President
of Starobin Partners, Inc., and has sole voting and investment power over the
shares owned thereby. Mr. Lev disclaims beneficial ownership of these
shares, except to the extent of his pecuniary interest therein.
(74) Includes
6,000 shares of common stock issuable upon exercise of currently exercisable
warrants held by Ms. Steinberger.
(75) Includes
36,810 shares of common stock issuable upon exercise of currently exercisable
warrants held by Ms. Steinmetz.
(76) Includes
110,400 shares of common stock issuable upon exercise of currently exercisable
warrants held by Ms. Swindells.
(77) Includes
18,404 shares of common stock issuable upon exercise of currently exercisable
warrants jointly held by Mr. Tedesco and Ms. Tedesco.
(78) Includes
23,927 shares of common stock issuable upon exercise of currently exercisable
warrants held by The Schreiber Family Trust Dated 02/08/95. Daniel J.
Schreiber is the Trustee of The Schreiber Family Trust Dated 02/08/95, and has
sole voting and investment power over the shares owned thereby. Mr.
Schreiber disclaims beneficial ownership of these shares, except to the extent
of his pecuniary interest therein.
(79) Includes
162,000 shares of common stock issuable upon exercise of currently exercisable
warrants held by Thimos LLC. Martin Monty is the Partner of Thimos
LLC, and has sole voting and investment power over the shares owned
thereby. Mr. Monty disclaims beneficial ownership of these shares,
except to the extent of his pecuniary interest therein.
(80) Andrea
Goren and Mitch Bredefeld are the Trustees of Trust FBO Eliel Dax Goren, and
have shares voting and investment power over the shares owned
thereby. Mr. Goren and Mr. Bredefeld disclaim beneficial ownership of
these shares, except to the extent of their pecuniary interest
therein.
102
(81) Includes
73,620 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Tsamasfyros.
(82) Consists
of 245,500 shares of common stock issuable upon exercise of currently
exercisable warrants held by Mr. Unsworth.
(83) Includes
36,810 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Vago.
(84) Includes
27,607 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Weinberg.
(85) Consists
of 15,460 shares of common stock issuable upon exercise of currently exercisable
warrants held by WestPark Capital, Inc. Tony Pinsopolous is the
President of WestPark Capital, Inc., and has sole voting and investment power
over the shares owned thereby. Mr. Pinsopolus disclaims beneficial
ownership of these shares, except to the extent of his pecuniary interest
therein.
(86) Includes
2,500 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Whitenack.
(87) Includes
1,586,171 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Winfield. An aggregate of 527,058 of the offered
shares are subject to certain agreements Mr. Winfield has with us that at no
time will he beneficially own more than 9.9% of our outstanding common
stock.
(88) Includes
20,000 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Wu.
(89) Consists
of 583 shares of common stock issuable upon exercise of currently exercisable
warrants held by Ms. Yalaz-Angell.
(90) Includes
24,000 shares of common stock issuable upon exercise of currently exercisable
warrants held by Mr. Yarlagadda.
103
PLAN
OF DISTRIBUTION
The selling stockholders, which as used
herein includes donees, pledgees, transferees or other successors-in-interest
selling shares of common stock or interests in shares of common stock received
after the date of this prospectus from a selling stockholder as a gift, pledge,
partnership distribution or other transfer, may, from time to time, sell,
transfer or otherwise dispose of any or all of their shares of common stock or
interests in shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These
dispositions may be at fixed prices, at prevailing market prices at the time of
sale, at prices related to the prevailing market price, at varying prices
determined at the time of sale, or at negotiated prices.
The selling stockholders may use any
one or more of the following methods when disposing of shares or interests
therein:
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ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
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block
trades in which the broker-dealer will attempt to sell the shares as
agent, but may position and resell a portion of the block as principal to
facilitate the transaction;
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purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
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an
exchange distribution in accordance with the rules of the applicable
exchange;
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privately
negotiated transactions;
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short
sales effected after the date the registration statement of which this
Prospectus is a part is declared effective by the
SEC;
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through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
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broker-dealers
may agree with the selling stockholders to sell a specified number of such
shares at a stipulated price per share;
and
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a
combination of any such methods of
sale.
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The selling stockholders may, from time
to time, pledge or grant a security interest in some or all of the shares of
common stock owned by them and, if they default in the performance of their
secured obligations, the pledgees or secured parties may offer and sell the
shares of common stock, from time to time, under this prospectus, or under an
amendment to this prospectus under Rule 424(b)(3) or other applicable provision
of the Securities Act amending the list of selling stockholders to include the
pledgee, transferee or other successors in interest as selling stockholders
under this prospectus. The selling stockholders also may transfer the shares of
common stock in other circumstances, in which case the transferees, pledgees or
other successors in interest will be the selling beneficial owners for purposes
of this prospectus.
104
In connection with the sale of our
common stock or interests therein, the selling stockholders may enter into
hedging transactions with broker-dealers or other financial institutions, which
may in turn engage in short sales of the common stock in the course of hedging
the positions they assume. The selling stockholders may also sell shares of our
common stock short and deliver these securities to close out their short
positions, or loan or pledge the common stock to broker-dealers that in turn may
sell these securities. The selling stockholders may also enter into option or
other transactions with broker-dealers or other financial institutions or the
creation of one or more derivative securities which require the delivery to such
broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such
transaction).
The aggregate proceeds to the selling
stockholders from the sale of the common stock offered by them will be the
purchase price of the common stock less discounts or commissions, if any. Each
of the selling stockholders reserves the right to accept and, together with
their agents from time to time, to reject, in whole or in part, any proposed
purchase of common stock to be made directly or through agents. We will not
receive any of the proceeds from this offering. Upon any exercise of the
warrants by payment of cash, however, we will receive the exercise price of the
warrants.
The selling stockholders also may
resell all or a portion of the shares in open market transactions in reliance
upon Rule 144 under the Securities Act of 1933, provided that they meet the
criteria and conform to the requirements of that rule.
The selling stockholders and any
underwriters, broker-dealers or agents that participate in the sale of the
common stock or interests therein may be "underwriters" within the meaning of
Section 2(11) of the Securities Act. Any discounts, commissions, concessions or
profit they earn on any resale of the shares may be underwriting discounts and
commissions under the Securities Act. Selling stockholders who are
"underwriters" within the meaning of Section 2(11) of the Securities Act will be
subject to the prospectus delivery requirements of the Securities
Act.
To the extent required, the shares of
our common stock to be sold, the names of the selling stockholders, the
respective purchase prices and public offering prices, the names of any agents,
dealer or underwriter, any applicable commissions or discounts with respect to a
particular offer will be set forth in an accompanying prospectus supplement or,
if appropriate, a post-effective amendment to the registration statement that
includes this prospectus.
In order to comply with the securities
laws of some states, if applicable, the common stock may be sold in these
jurisdictions only through registered or licensed brokers or dealers. In
addition, in some states the common stock may not be sold unless it has been
registered or qualified for sale or an exemption from registration or
qualification requirements is available and is complied with.
We have advised the selling
stockholders that the anti-manipulation rules of Regulation M under the Exchange
Act may apply to sales of shares in the market and to the activities of the
selling stockholders and their affiliates. In addition, to the extent applicable
we will make copies of this prospectus (as it may be supplemented or amended
from time to time) available to the selling stockholders for the purpose of
satisfying the prospectus delivery requirements of the Securities Act. The
selling stockholders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against certain liabilities,
including liabilities arising under the Securities Act.
We have agreed to indemnify the selling
stockholders against liabilities, including liabilities under the Securities Act
and state securities laws, relating to the registration of the shares offered by
this prospectus.
We have agreed with the selling
stockholders to keep the registration statement of which this prospectus
constitutes a part effective until the earlier of (1) such time as all of the
shares covered by this prospectus have been disposed of pursuant to and in
accordance with the registration statement or (2) the date on which the shares
may be sold pursuant to Rule 144 of the Securities Act.
105
LEGAL
MATTERS
Snell & Wilmer LLP, Hughes Center,
3883 Howard Hughes Parkway, Suite 1100, Las Vegas, Nevada, will opine upon the
validity of the common stock offered by this prospectus.
EXPERTS
The consolidated financial statements
of Emerald Dairy Inc. as of and for the years ended December 31, 2008 and 2007
appearing in this prospectus have been audited by Windes & McClaughry
Accountancy Corporation, Independent Registered Public Accountants, as set forth
in their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL
DISCLOSURE
Effective as of November 19, 2007, we
dismissed Mantyla McReynolds, LLC as our independent
accountants. Mantyla McReynolds, LLC had previously been engaged as
the principal accountant to audit our financial statements. The reason for the
dismissal of Mantyla McReynolds, LLC is that, following our consummation of the
Reverse Merger on October 9, 2007 (a) the former stockholders of AIDH owned a
majority of the outstanding shares of our common stock, and (b) our primary
business became the business previously conducted by AIDH. The independent
registered public accountant of AIDH was the firm of Murrell, Hall, McIntosh
& Co., PLLP. At the time, we believed that it was in our best
interest to have Murrell, Hall, McIntosh & Co., PLLP continue to work with
our business, and we therefore retained Murrell, Hall, McIntosh & Co., PLLP
as our independent registered accounting firm, effective as of November 19,
2007. The decision to change accountants was approved by our Board of
Directors on November 19, 2007.
The report of Mantyla McReynolds, LLC
on our December 31, 2006 financial statements did not contain an adverse opinion
or disclaimer of opinion, nor was it qualified or modified as to uncertainty,
audit scope or accounting principles.
During fiscal 2005 and 2006, and
through the date of dismissal on November 19, 2007, there were no disagreements
with Mantyla McReynolds, LLC on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which,
if not resolved to the satisfaction of Mantyla McReynolds, LLC, would have
caused it to make reference to the matter in connection with its
reports.
A copy of Mantyla McReynolds, LLC’s
letter to the SEC is included as Exhibit 16.1 hereto.
As of November 19, 2007, Murrell, Hall,
McIntosh & Co., PLLP was engaged as our new independent registered public
accountants. During our two prior fiscal years, and the subsequent
interim periods through August 9, 2007 (the date of engagement of Murrell, Hall,
McIntosh & Co., PLLP), we did not consult Murrell, Hall, McIntosh & Co.,
PLLP regarding either: (a) the application of accounting principles to a
specific completed or contemplated transaction, or the type of audit opinion
that might be rendered on our financial statements; or (ii) any matter that was
the subject of a disagreement as defined in Item 304(a)(1)(iv) of Regulation
S-B.
106
Effective as of January 25, 2008, we
dismissed Murrell, Hall, McIntosh & Co., PLLP as our independent registered
public accounting firm. The decision to change accountants was
approved by our Board of Directors as of January 14, 2008.
Prior to its dismissal, Murrell, Hall,
McIntosh & Co., PLLP had neither audited any of our consolidated financial
statements, nor reviewed any of our unaudited interim reports, having replaced
its previous independent registered public accounting firm, Mantyla McReynolds,
LLC, on November 19, 2007.
Murrell, Hall, McIntosh & Co., PLLP
had previously served as independent registered public accounting firm for AIDH,
which became a wholly-owned subsidiary of ours in a Reverse Merger transaction
consummated on October 9, 2007. In connection with their services in
this capacity, Murrell, Hall, McIntosh & Co., PLLP had:
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audited
AIDH’s financial statements for the fiscal years ended December 31, 2006
and 2005, incorporated into the Form 8-K we filed on October 15,
2007;
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reviewed
AIDH’s unaudited financial statements for the six months ended June 30,
2007 and 2006, incorporated into the Form 8-K we filed on October 15,
2007; and
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reviewed
AIDH’s unaudited financial statements for the nine months ended September
30, 2007 and 2006, incorporated into the Form 8-K we filed on November 19,
2007.
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From the date of Murrell, Hall,
McIntosh & Co., PLLP’s engagement, through the date of dismissal, there were
no disagreements with Murrell, Hall, McIntosh & Co., PLLP on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure which, if not resolved to the satisfaction of Murrell, Hall,
McIntosh & Co., PLLP, would have caused it to make reference to the matter
in connection with its reports. In addition, there were no
“reportable events” as that term is described in Item 304(a)(1)(v) of Regulation
S-B.
A copy of Murrell, Hall, McIntosh &
Co., PLLP’s letter to the SEC is included as Exhibit 16.2 hereto.
As of January 25, 2008, Windes &
McClaughry Accountancy Corporation was engaged as our new independent registered
public accountants. During our two prior fiscal years, and the subsequent
interim period through January 25, 2008 (the date of engagement of Windes &
McClaughry Accountancy Corporation), we did not consult Windes & McClaughry
Accountancy Corporation regarding either: (a) the application of accounting
principles to a specific completed or contemplated transaction, or the type of
audit opinion that might be rendered on our financial statements; or (ii) any
matter that was the subject of a disagreement as defined in Item 304(a)(1)(iv)
of Regulation S-B.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We file reports, proxy statements, and
other information with the SEC. We have also filed a registration statement on
Form S-1 (Commission file No. 333-132165), including exhibits, with the SEC with
respect to the shares being offered in this offering. This prospectus is part of
the registration statement, but it does not contain all of the information
included in the registration statement or exhibits. You may read and copy the
registration statement and our other filed reports, proxy statements, and other
information at the SEC's Public Reference Room at Room 1580, 100 F Street, N.E.,
Washington, D.C. 20549. You can obtain information about operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an
Internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC at
http://www.sec.gov. Copies of the materials filed with the SEC can be obtained
from the public reference section of the SEC at prescribed rates. Statements
contained in this prospectus as to the contents of any contract or other
document filed as an exhibit to the registration statement are not necessarily
complete and in each instance reference is made to the copy of the document
filed as an exhibit to the registration statement, each statement made in this
prospectus relating to such documents being qualified in all respect by such
reference.
107
For further information about us and
the securities being offered under this prospectus, reference is hereby made to
the registration statement, including the exhibits thereto and the financial
statements, notes, and schedules filed as a part thereof.
108
FINANCIAL
STATEMENTS
Page
|
|
September
30, 2009 Financial Statements
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2009 (Unaudited) and
December
31, 2008
|
F-2
|
Condensed
Consolidated Statements of Operations for the Nine Months Ended
September 30, 2009 and 2008 (Unaudited)
|
F-3
|
Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2009 and 2008 (Unaudited)
|
F-4
|
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
|
F-5
- F-25
|
December
31, 2008 Financial Statements
|
|
Report
of Windes & McClaughry Accountancy Corporation
|
F-26
|
Consolidated
Balance Sheet as of December 31, 2008 and 2007
|
F-27
|
Consolidated
Statements of Operations for the Years Ended December 31,
2008 and 2007
|
F-28
|
Consolidated
Statements of Stockholders’ Equity and Accumulated Other
Comprehensive Income for the Years Ended December 31, 2008 and
2007
|
F-29
|
Consolidated
Statements of Cash Flows for the Years Ended December 31,
2008 and 2007
|
F-30
|
Notes
to Consolidated Financial Statements
|
F-31
- F-60
|
F-1
Emerald
Dairy Inc. and Subsidiaries
Condensed
Consolidated Balance Sheets
September
30, 2009 and December 31, 2008
September 30,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
|
||||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 9,681,007 | $ | 7,343,588 | ||||
Trade
accounts receivable,net
|
6,702,521 | 6,146,228 | ||||||
Inventory,
net
|
1,719,833 | 883,233 | ||||||
Other
current assets
|
4,194,359 | 4,337,332 | ||||||
Total
current assets
|
22,297,720 | 18,710,381 | ||||||
Property, plant and equipment | ||||||||
Property,
plant and equipment, net
|
5,743,716 | 6,101,566 | ||||||
Contruction
in progress
|
7,009,886 | 2,482,339 | ||||||
12,753,602 | 8,583,905 | |||||||
Intangible
assets, net
|
1,351,110 | 1,380,089 | ||||||
$ | 36,402,432 | $ | 28,674,375 | |||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable and accrued expenses
|
$ | 4,224,772 | $ | 4,651,947 | ||||
Notes
payable, net of debt discount of $21,972 and $87,888 at
|
||||||||
September
30, 2009 and December 31, 2008, respectively
|
2,728,028 | 2,662,112 | ||||||
Other
current liabilites
|
414,561 | 728,859 | ||||||
Loan
from shareholder
|
210,164 | 210,265 | ||||||
Total
current liabilities
|
7,577,525 | 8,253,183 | ||||||
Commitments
and Contingencies (Note 21)
|
||||||||
Stockholders'
Equity
|
||||||||
Preferred
stock ($0.001 par value, 10,000,000 shares authorized, none issued and
outstanding at September 30, 2009 and December 31, 2008)
|
- | - | ||||||
Common
stock ($0.001 par value, 100,000,000 shares authorized, 33,895,802 and
31,243,776 issued and outstanding at September 30, 2009 and December 31,
2008, respectively)
|
33,896 | 31,244 | ||||||
Treasury
Stock (1,944,444 shares at Septmeber 30, 2009 and December 31, 2008,
respectively)
|
(1,944 | ) | (1,944 | ) | ||||
Additional
paid-in capital
|
12,936,917 | 8,225,922 | ||||||
Retained
earnings (of which $1,834,742 and $1,314,861 are restricted at September
30, 2009 and December 31, 2008, respectively, for common welfare
reserves)
|
13,806,869 | 10,106,402 | ||||||
Accumulated
other comprehensive income
|
2,049,169 | 2,059,568 | ||||||
Total
stockholders' equity
|
28,824,907 | 20,421,192 | ||||||
$ | 36,402,432 | $ | 28,674,375 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
F-2
Emerald
Dairy Inc. and Subsidiaries
Condensed
Consolidated Statements of Income
For
the Three and Nine Months Ended September 30, 2009 and 2008
Three months ended
|
Nine months ended
|
|||||||||||||||
September 30,
|
September 30,
|
September 30,
|
September 30,
|
|||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Sales
|
$ | 10,158,004 | $ | 11,221,019 | $ | 31,261,491 | $ | 32,560,256 | ||||||||
Cost
of Goods Sold
|
5,569,598 | 6,552,835 | 17,057,583 | 19,845,232 | ||||||||||||
Gross
Profit
|
4,588,406 | 4,668,184 | 14,203,908 | 12,715,024 | ||||||||||||
Operating
Expenses
|
||||||||||||||||
Selling
expenses and adminstrative expenses
|
3,348,522 | 3,319,484 | 9,448,920 | 10,283,634 | ||||||||||||
Depreciation
and amortization
|
43,595 | 41,905 | 130,107 | 72,336 | ||||||||||||
Total
operating expenses
|
3,392,117 | 3,361,389 | 9,579,027 | 10,355,970 | ||||||||||||
Other
Income (Expense)
|
||||||||||||||||
Interest
income
|
1,277 | 2,455 | 4,421 | 12,061 | ||||||||||||
Interest
expense
|
(67,887 | ) | (231,517 | ) | (67,887 | ) | (274,923 | ) | ||||||||
Total
other income (expense)
|
(66,610 | ) | (229,062 | ) | (63,466 | ) | (262,862 | ) | ||||||||
Net
Income Before Provision for Income Tax
|
1,129,679 | 1,077,733 | 4,561,415 | 2,096,192 | ||||||||||||
Provision
for Income Taxes
|
||||||||||||||||
Current
|
245,054 | 269,666 | 860,948 | 586,957 | ||||||||||||
245,054 | 269,666 | 860,948 | 586,957 | |||||||||||||
Net
Income
|
$ | 884,625 | $ | 808,067 | $ | 3,700,467 | $ | 1,509,235 | ||||||||
Basic
Earnings Per Share
|
$ | 0.03 | $ | 0.03 | $ | 0.12 | $ | 0.05 | ||||||||
Basic
Weighted Average Shares Outstanding
|
30,844,547 | 29,299,332 | 29,979,356 | 29,299,332 | ||||||||||||
Diluted
Earnings Per Share
|
$ | 0.03 | $ | 0.03 | $ | 0.12 | $ | 0.05 | ||||||||
Diluted
Weighted Average Shares Outstanding
|
31,631,381 | 29,563,708 | 30,429,024 | 29,563,708 | ||||||||||||
The
Components of Other Comprehensive Income
|
||||||||||||||||
Net
Income
|
$ | 884,625 | $ | 808,067 | $ | 3,700,467 | $ | 1,509,235 | ||||||||
Foreign
currency translation adjustment
|
24,487 | 259,312 | (14,933 | ) | 1,634,624 | |||||||||||
Income
tax related to other comprehensive income
|
(8,326 | ) | (88,166 | ) | 5,077 | (555,772 | ) | |||||||||
Comprehensive
Income
|
$ | 900,786 | $ | 979,213 | $ | 3,690,611 | $ | 2,588,087 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
F-3
Emerald
Dairy Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
For
the Nine Months Ended September 30, 2009 and 2008
2009
|
2008
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
Income
|
$ | 3,700,467 | $ | 1,509,235 | ||||
Adjustments
to reconcile net cash provided by operating activities
|
||||||||
Depreciation
and amortization
|
400,227 | 309,749 | ||||||
Amortization
of loan discount
|
65,916 | 114,683 | ||||||
Capitalized
interest
|
(351,071 | ) | - | |||||
Stock
issued for services
|
33,475 | - | ||||||
Warrants
modified for services
|
3,975 | - | ||||||
Warrants
issued for loan costs
|
117,155 | - | ||||||
Incentive
stock options
|
125,452 | - | ||||||
Net
change in assets and liabilities
|
||||||||
Trade
accounts receivable
|
(559,266 | ) | (1,290,662 | ) | ||||
Inventory
|
(837,027 | ) | (251,318 | ) | ||||
Other
current assets
|
140,875 | 2,480,834 | ||||||
Accounts
payable and accrued expenses
|
(424,925 | ) | 1,876,980 | |||||
Other
current liabilities
|
(313,945 | ) | 206,295 | |||||
Net
cash provided by operating activities
|
2,101,308 | 4,955,796 | ||||||
Cash
flows from investing activities
|
||||||||
Deposit
on equipment purchase
|
- | (3,699,058 | ) | |||||
Purchases
of fixed assets and intangibles including construction in
progress
|
(4,194,717 | ) | (6,489,860 | ) | ||||
Net
cash used in investing activities
|
(4,194,717 | ) | (10,188,918 | ) | ||||
Cash
flows from financing activities
|
||||||||
- | - | |||||||
Exercise
of warrants
|
4,433,590 | - | ||||||
Repayments
of notes payable
|
- | (290,918 | ) | |||||
Advances
on notes payable
|
- | 2,250,000 | ||||||
Net
cash provided by financing activities
|
4,433,590 | 1,959,082 | ||||||
Effect
of exchange rate
|
(2,762 | ) | 461,855 | |||||
Net
increase in cash
|
2,337,419 | (2,812,185 | ) | |||||
Cash
and cash equivalents at beginning of period
|
7,343,588 | 6,560,931 | ||||||
Cash
and cash equivalents at end of period
|
$ | 9,681,007 | $ | 3,748,746 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
F-4
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
1.
|
Description
of Business
|
Emerald
Dairy, Inc. (the “Company”), a Nevada corporation, is a producer of milk powder,
rice powder and soybean milk powder in the People’s Republic of China (“PRC”)
through its wholly owned subsidiaries.
The
Company’s wholly owned subsidiary, American International Dairy Holdings, Inc.
(“AIDH”), a Nevada corporation, was formed in 2005 for the purpose of acquiring
the stock in Heilongjiang Xing An Ling Dairy, Co. (“XAL”), a corporation formed
on September 8, 2003 in Heilongjiang Providence, pursuant to the laws of the
PRC. On May 30, 2005, AIDH acquired XAL, pursuant to a Share Transfer
Agreement. This transaction was treated as a recapitalization of XAL for
financial reporting purposes. The effect of this recapitalization was rolled
back to the inception of XAL for financial reporting purposes.
XAL is a
dairy company engaged in manufacturing of milk powder, soybean powder and rice
powder. Through the Company’s network of over 800 salespeople, the Company’s
products are distributed throughout 20 provinces in the PRC, and sold in over
5,800 retail outlets.
Prior to
September 23, 2006, XAL owned 57.69% of Heilongjiang Be’ian Nongken Changxing
LvBao Dairy Limited Liability Company (“LvBao”), with the remaining balance
being held by the Company’s sole shareholder. On September 23, 2006, the
remaining 42.31% ownership in LvBao was transferred to XAL and was treated as an
additional capital contribution. The effect of this contribution by the sole
shareholder was rolled back to September 8, 2003 for financial reporting
purposes. LvBao was formed on January 20, 2000 and is engaged in manufacturing
and sales of dairy products.
On May
22, 2008, the Company formed a new wholly-owned subsidiary,
Hailun Xinganling Dairy Co., Ltd. (“HXD”), pursuant to the laws of the
PRC. In July 2008, HXD commenced construction of a production facility in
Hailun City, Heilongjiang Province, PRC. It is expected that the
construction and equipping of this new facility will be completed in the fourth
fiscal quarter of 2009. Upon completion, it is anticipated that HXD will engage
in the manufacture of the Company's milk powder, soybean powder and rice powder
products at this new facility.
2.
|
Basis
of Preparation of Financial
Statements
|
XAL,
LvBao and HXD maintain their books and accounting records in Renminbi
(“RMB”).
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles (“GAAP”) in
the United States of America (“U.S.”) for interim financial information and with
the instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements and
related notes. The accompanying unaudited condensed consolidated financial
statements and related notes should be read in conjunction with the audited
consolidated financial statements of the Company and notes thereto for the year
ended December 31, 2008, which are included in the Company’s Form 10-K for the
fiscal year ended December 31, 2008 filed with the Securities and Exchange
Commission (“SEC”) on April 9, 2009.
In June
2009 the Financial Accounting Standards Board (“FASB”) established the
Accounting Standards Codification (“Codification” or “ASC”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
accordance with GAAP. Rules and interpretive releases of the SEC issued under
authority of federal securities laws are also sources of GAAP for SEC
registrants. Existing GAAP was not intended to be changed as a result of the
Codification, and accordingly the change did not impact the Company’s financial
statements. The ASC does change the way the guidance is organized and
presented.
In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (which include only normal
recurring adjustments) necessary to present fairly the balance sheets of the
Company and its subsidiaries as of September 30, 2009, the results of their
operations for the three and nine months ended September 30, 2009 and 2008, and
their cash flows for the nine months ended September 30, 2009 and
2008.
F-5
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
3.
|
Summary
of Significant Accounting Policies
|
The
results of operations for the nine months ended September 30, 2009 and 2008 are
not necessarily indicative of the results to be expected for the entire
year.
The
financial statements have been prepared in order to present the consolidated
financial position and consolidated results of operations in accordance with
GAAP and are expressed in terms of U.S. dollars (see paragraph “Foreign
Currency” below).
The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, XAL,
LvBao and
HXD. All inter-company transactions and balances have been eliminated in
consolidation.
Use of estimates - The
preparation of these consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affected the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements and the
reported amounts of net sales and expenses during the reported
periods.
Significant
estimates and assumptions by management include, among others, values and lives
assigned to acquired intangible assets, reserves for customer returns and
allowances, uncollectible accounts receivable, slow moving, obsolete and/or
damaged inventory, deferred tax assets, property, plant and equipment, reserve
for employee benefit obligations, stock warrant valuation, income tax
uncertainties and other uncertainties. Actual results may differ from these
estimates. The current economic environment has increased the degree
of uncertainty inherent in these estimates and assumptions.
Cash and cash equivalents -
Cash and cash equivalents represent cash on hand, demand deposits and all
highly liquid investments placed with banks or other financial institutions with
original maturities of three months or less. Substantially all of the Company’s
cash is held in bank accounts in the PRC and is not protected by the Federal
Deposit Insurance Corporation (“FDIC”) insurance or any other similar insurance.
Accounts held at U.S. financial institutions are insured by the FDIC up to
$250,000. As of September 30, 2009, $126,823 of the Company’s cash balances held
in U.S. balances are in excess of insured amounts. Given the current economic
environment and risks in the banking industry, there is a risk that the deposits
may not be readily available or covered by such insurance.
Accounts receivable - Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. Amounts collected on trade accounts receivable are included in net
cash provided by operating activities in the consolidated statements of cash
flows. The Company maintains an allowance for doubtful accounts for estimated
losses inherent in its accounts receivable portfolio. In establishing the
required allowance, management considers historical losses, current receivables
aging, and existing industry and PRC economic data. The Company reviews its
allowance for doubtful accounts monthly. Past due balances over 90 days and over
a specified amount are reviewed individually for collectibility. Account
balances are charged off against the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote. At
September 30, 2009 and December 31, 2008, there were no allowances for doubtful
accounts based on the review of the above factors. There were no write-off’s for
the three and nine months ended September 30, 2009 and 2008. The Company does
not have any off-balance sheet credit exposure related to its
customers.
Construction-in-Progress -
Plant and production lines currently under development are accounted for as
construction-in-progress. Construction-in-progress is recorded at acquisition
cost, including land rights cost, development expenditure, professional fees and
the interest expenses capitalized during the course of construction for the
purpose of financing the project. Upon completion and readiness for use of the
project, the cost of construction-in-progress is to be transferred to fixed
assets, at which time depreciation will commence. As of September 30, 2009, the
Company has incurred and capitalized into construction-in-progress $6,568,948 of
construction costs from the construction contract and $440,938 of capitalized
interest for a balance of $7,009,886. The estimated cost to be
incurred in 2009 to complete the project is approximately
$1,868,145.
F-6
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
3.
|
Summary
of Significant Accounting Policies
(Continued)
|
Capitalized Interest – The
Company’s policy is to capitalize interest costs on debt during the construction
of major projects exceeding one year. A reconciliation of total
interest cost to interest expense as reported in the consolidated statements of
income for three months ended September 30, 2009 and 2008 is as
follows:
Three Months
Ended September 30,
|
Nine Months
Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Interest
cost capitalized
|
$ | 130,343 | $ | — | $ | 351,070 | $ | — | ||||||||
Interest
cost charged to income
|
67,887 | 231,517 | 67,877 | 274,923 | ||||||||||||
$ | 198,230 | $ | 231,517 | $ | 418,947 | $ | 274,923 |
Foreign Currency - The
Company’s principal country of operations is the PRC. The financial position and
results of operations of the Company are determined using RMB as the functional
currency. The results of operations denominated in foreign currency are
translated at the average rate of exchange during the reporting
period.
Assets
and liabilities denominated in foreign currencies at the balance sheet date are
translated at the exchange rates prevailing at the balance sheet date. The
registered equity capital denominated in the functional currency is translated
at the historical rate of exchange at the time of capital contribution. All
translation adjustments resulting from the translation of the financial
statements into U.S. dollars are dealt with as a separate component within
stockholders’ equity. Translation adjustments net of tax totaled $16,161 and
$171,146, for the three months ended September 30, 2009 and 2008, respectively
and ($9,856) and $1,078,852 for the nine months ended September 30, 2009 and
2008, respectively.
As of
September 30, 2009 and 2008, the exchange rate was 6.8263 RMB and 6.8485 RMB per
U.S. Dollar, respectively.
Revenue recognition - The
Company recognizes revenues in accordance with the guidelines of the SEC Staff
Accounting Bulletin (“SAB”) No. 104 “Revenue Recognition”. Revenue is
recognized when the following criteria are met: (1) persuasive evidence of
an arrangement exists; (2) the service has been rendered; (3) the
selling price is fixed or determinable; and (4) collection of the resulting
receivable is reasonably assured.
Interest
income is recognized when earned, taking into account the average principal
amounts outstanding and the interest rates applicable.
As of
September 30, 2009, the Company has no sales or contracts that included multiple
deliverables that would fall under accounting guidance.
Earnings per share - Basic net
earnings per common share is computed by dividing net earnings applicable to
common shareholders by the weighted-average number of common shares outstanding
during the period. The FASB ASC Topic 260, “Earnings Per Share,” requires the
Company to include additional shares in the computation of earnings per share,
assuming dilution. Diluted net earnings per common share is determined using the
weighted-average number of common share shares outstanding during the period,
adjusted for the dilutive effect of common stock equivalents, using the treasury
stock method, consisting of shares that might be issued upon exercise of common
stock warrants. In periods where losses are reported, the weighted-average
number of common shares outstanding excludes common stock equivalents, because
their inclusion would be anti-dilutive.
Taxation - Taxation on
profits earned in the PRC has been calculated on the estimated assessable
profits for the year at the rates of taxation prevailing in the PRC in which the
Company operates after taking into effect the benefits from any special tax
credits or “tax holidays” allowed in the country of operations.
F-7
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
3.
|
Summary
of Significant Accounting Policies
(Continued)
|
The
Company accounts for income tax under accounting guidance that requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of the events that have been included in the financial statements
or tax returns. Deferred income taxes are recognized for all significant
temporary differences between tax and financial statements bases of assets and
liabilities. Valuation allowances are established against net deferred tax
assets when it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
The
Company does not have any long-term deferred tax assets or liabilities in the
PRC that will exist once the tax holiday (See Note 10) expires. The Company
does not have any significant deferred tax asset or liabilities that relate to
tax jurisdictions not covered by the tax holiday.
The
Company does not accrue U.S. income tax on unremitted earnings from foreign
operations, as it is the Company’s intention to invest these earnings in the
foreign operations indefinitely.
Enterprise income
tax
The
Company is subject to income taxes in the U.S. and the PRC. Significant judgment
is required in evaluating the Company’s uncertain tax positions and determining
the Company’s provision for income taxes. In accordance with FASB ASC Topic 740,
“Income Taxes,” the Company provides for the recognition of deferred tax assets
if realization of such assets is more likely than not.
Under the
Provisional Regulations of The People’s Republic of China Concerning Income Tax
on Enterprises promulgated by the State Council which came into effect on
January 1, 1994, income tax is payable by a Wholly Foreign Owned Enterprises at
a rate of 15% of their taxable income. Preferential tax treatment may, however,
be granted pursuant to any law or regulations from time to time promulgated by
the State Council. XAL enjoyed a 100% exemption from enterprise income taxes
starting on January 10, 2006 due to its classification as a “Wholly Foreign
Owned Enterprise.” On March 16, 2007, the PRC enacted a new Enterprise Income
Tax Law for the purpose of unifying the tax treatment of domestic and foreign
enterprises. This new law eliminates the preferential tax treatment for new
Wholly Foreign Owned Enterprises but allows previously granted exemptions to
stay in place through 2012, with the exception that the statutory tax rate will
increase by 2% per year from 15% in 2006 to 25% by 2012. This exemption ended on
January 10, 2008, at which time XAL qualified under the current tax structure
for a 50% reduction in the statutory enterprise income tax rates for an
additional three years.
Freestanding Financial Instruments
with Characteristics of Both Liabilities and Equity - The Company
accounts for financial instruments as a liability if it embodies an obligation
to repurchase the issuer’s equity shares, or is indexed to such an obligation,
and that requires or may require the issuer to settle the obligation by
transferring assets. Freestanding financial instruments are financial
instruments that are entered into separately and apart from any of the entity's
other financial instruments or equity transactions, or that is entered into in
conjunction with some other transaction and is legally detachable and separately
exercisable. The liability recorded is the per share price to be paid and is
offset to equity.
Stock Based Compensation – The
Company has adopted accounting guidance which requires all share-based payments
to employees, including grants of employee stock options, to be recognized in
the financial statements based on the grant date fair value of the
award.
Fair value of financial instruments -
The Company applies the provisions accounting guidance that requires all
entities to disclose the fair value of financial instruments, both assets and
liabilities recognized and not recognized on the balance sheet, for which it is
practicable to estimate fair value. The accounting guidance defines
fair value of a financial instrument as the amount at which the instrument could
be exchanged in a current transaction between willing parties. As
of September 30, 2009 and December 31, 2008 the fair value of cash,
accounts receivable, other receivables, accounts payable, commercial notes
payable, and accrued expenses approximated carrying value due to the short
maturity of the instruments, quoted market prices, or interest rates, which
fluctuate with market rates.
F-8
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
3.
|
Summary
of Significant Accounting Policies
(Continued)
|
Fair
Value Measurements
Effective
April 1, 2009, the FASB ASC Topic 825, “Financial Instruments,” requires
disclosures about fair value of financial instruments in quarterly reports as
well as in annual reports.
The FASB
ASC Topic 820, “Fair Value Measurements and Disclosures,” clarifies the
definition of fair value for financial reporting, establishes a framework for
measuring fair value and requires additional disclosures about the use of fair
value measurements.
Various
inputs are considered when determining the fair value of the Company’s financial
instruments. The inputs or methodologies used for valuing securities are
not necessarily an indication of the risk associated with investing in these
securities. These inputs are summarized in the three broad levels
listed below.
|
·
|
Level
1 – observable market inputs that are unadjusted quoted prices for
identical assets or liabilities in active
markets.
|
|
·
|
Level
2 – other significant observable inputs (including quoted prices for
similar securities, interest rates, credit risk,
etc…).
|
|
·
|
Level
3 – significant unobservable inputs (including the Company’s own
assumptions in determining the fair value of financial
instruments).
|
The
Company’s adoption of FASB ASC Topic 825 did not have a material impact on the
Company’s consolidated financial statements.
The
carrying value of financial assets and liabilities recorded at fair value is
measured on a recurring or nonrecurring basis. Financial assets and liabilities
measured on a non-recurring basis are those that are adjusted to fair value when
a significant event occurs. The Company had no financial assets or liabilities
carried and measured on a nonrecurring basis during the reporting periods.
Financial assets and liabilities measured on a recurring basis are those that
are adjusted to fair value each time a financial statement is prepared. The
Company’s had no financial assets and/or liabilities carried at fair value on a
recurring basis at September 30, 2009.
The
availability of inputs observable in the market varies from instrument to
instrument and depends on a variety of factors including the type of instrument,
whether the instrument is actively traded, and other characteristics particular
to the transaction. For many financial instruments, pricing inputs are readily
observable in the market, the valuation methodology used is widely accepted by
market participants, and the valuation does not require significant management
discretion. For other financial instruments, pricing inputs are less observable
in the market and may require management judgment.
Recently
Enacted Accounting Standards
Accounting
Standards Update ("ASU") ASU No. 2009-05 (ASC Topic 820), which amends Fair
Value Measurements and Disclosures - Overall, ASU No. 2009-08, Earnings per
Share, ASU No. 2009-12 (ASC Topic 820), Investments in Certain Entities That
Calculate Net Asset Value per Share, and various other ASU's No. 2009-2 through
ASU No. 2009-15 which contain technical corrections to existing guidance or
affect guidance to specialized industries or entities were recently issued.
These updates have no current applicability to the Company, or their effect on
the financial statements would not have been significant.
F-9
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
4.
|
Concentrations
of Business and Credit Risk
|
The
Company conducts all of its primary trade in the PRC. There can be no
assurance that the Company will be able to successfully conduct its trade, and
failure to do so would have a material adverse effect on the Company’s financial
position, results of operations and cash flows. Also, the success of the
Company’s operations is subject to numerous contingencies, some of which are
beyond management’s control. These contingencies include general economic
conditions, price of raw material, competition, governmental and political
conditions, and changes in regulations. Because the Company is dependant on
foreign trade in the PRC, the Company is subject to various additional
political, economic and other uncertainties. Among other risks, the Company’s
operations will be subject to risk of restrictions on transfer of funds,
domestic and international customs, changing taxation policies, foreign exchange
restrictions, and political and governmental regulations.
Substantially
all of the Company’s bank accounts are in banks located in the PRC and are not
covered by any type of protection similar to that provided by the FDIC on funds
held in U.S banks. Accounts held at U.S. financial institutions are insured by
the FDIC up to $250,000. As of September 30, 2009 $126,823 of the cash balances
held in the U.S. are in excess of insured amounts.
Milk
powder historically represents 75% to 95% of the Company’s total sales. Dairy
product consumption in the PRC has historically been lower than in many other
countries in the world. Growing interest in milk products in the PRC is a
relatively recent phenomenon which makes the market for the Company’s products
less predictable. Consumers may lose interest in the
products. As a result, achieving and maintaining market acceptance
for the Company’s products will require substantial marketing efforts and the
expenditure of significant funds to encourage dairy consumption in general, and
the purchase of the Company’s products in particular. There is
substantial risk that the market may not accept or be receptive to the Company’s
products. Market acceptance of the Company’s current and proposed
products will depend, in large part, upon its ability to inform potential
customers that the distinctive characteristics of the Company’s products make
them superior to competitive products and justify their pricing. The
Company’s current and proposed products may not be accepted by consumers or able
to compete effectively against other premium or non-premium dairy
products. Lack of market acceptance would limit the Company’s
revenues and profitability.
The
Company operates in the PRC, which may give rise to significant foreign currency
risks from fluctuations and the degree of volatility of foreign exchange rates
between U.S. dollars and RMB.
In
mid-2008, a number of milk powder products produced within the PRC were found to
contain unsafe levels of tripolycyanamide, also known as melamine, sickening
thousands of infants. This prompted the PRC’s government to conduct a nationwide
investigation into how the milk powder was contaminated, and caused a worldwide
recall of certain milk powder products produced within the PRC. On September 16,
2008, the PRC’s Administration of Quality Supervision, Inspection and Quarantine
(“AQSIQ”) revealed that it had tested samples from 175 dairy manufacturers, and
published a list of 22 companies whose products contained melamine. The Company
passed the emergency inspection and were not included on AQSIQ’s list. Although
the Company believes that the inevitable contraction in the PRC’s milk powder
industry caused by this crisis will lead to increased demand for its products,
the Company can’t be certain that the illnesses caused by contamination in the
milk powder industry, whether or not related to the Company’s products, won’t
lead to decreased demand for milk powder products produced within the PRC,
thereby having a material adverse effect on its business.
Financial
instruments that potentially subject the Company to concentration of credit risk
consist principally of cash and trade receivables, the balances of which are
stated on the balance sheet. Concentration of credit risk with respect to trade
receivables is limited due to the Company's large number of diverse customers in
different locations in the PRC. The Company does not require collateral or other
security to support financial instruments subject to credit risk.
For the
three and nine months ended September 30, 2009 and 2008, no single customer
accounted for 10% or more of the Company’s sales revenues.
F-10
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
4.
|
Concentrations
of Business and Credit Risk
(Continued)
|
As of
September 30, 2009 and December 31, 2008, the Company had no insurance coverage
of any kind. Accrual for losses is not recognized by the Company until such time
as an uninsured loss has occurred.
Payments
of dividends may be subject to some restrictions due to the fact that the
operating activities are conducted in subsidiaries residing in the
PRC.
The
operations of the Company are located in the PRC. Accordingly, the Company’s
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, as well as by the
general state of the PRC economy.
5.
|
Inventory
|
As of
September 30, 2009 and December 31, 2008, inventory consists of the
following:
2009
|
2008
|
|||||||
Raw
materials
|
$ | 1,094,471 | $ | 557,128 | ||||
Work-in-process
|
546,613 | 299,931 | ||||||
Finished
goods
|
69,906 | 17,305 | ||||||
Repair
parts
|
8,843 | 8,869 | ||||||
$ | 1,719,833 | $ | 883,233 |
6.
|
Other
Current Assets
|
As of
September 30, 2009 and December 31, 2008, other current assets consist of the
following:
2009
|
2008
|
|||||||
Advances
to milk suppliers
|
$ | 332,783 | $ | 388,406 | ||||
Advances
to equipment supplier
|
3,711,088 | 3,712,883 | ||||||
Advances
to staff
|
25,960 | 76,712 | ||||||
Deposit
on contract
|
82,036 | 74,614 | ||||||
Prepaid
expenses
|
42,492 | 84,717 | ||||||
$ | 4,194,359 | $ | 4,337,332 |
7.
|
Property,
Plant, and Equipment
|
As of
September 30, 2009 and December 31, 2008, property, plant, and equipment consist
of the following:
2009
|
2008
|
|||||||
Building
|
$
|
3,703,182
|
$
|
3,704,971
|
||||
Plant
and Machinery
|
2,971,446
|
2,972,883
|
||||||
Motor
vehicles
|
526,651
|
526,906
|
||||||
Dairy
cows
|
250,657
|
242,102
|
||||||
Office
equipment
|
68,401
|
59,739
|
||||||
7,520,337
|
7,506,601
|
|||||||
Less:
Accumulated depreciation
|
(1,776,621
|
)
|
(1,405,035
|
)
|
||||
$
|
5,743,716
|
$
|
6,101,566
|
F-11
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
7.
|
Property,
Plant, and Equipment (Continued)
|
Depreciation
expenses totaled $124,421 and $371,939 for the three and nine months ended
September 30, 2009, respectively, and $106,862 and $290,164 for the three and
nine months ended September 30, 2008, respectively. $90,258 and $270,120 were
included as a component of cost of goods sold for the three and nine months
ended September 30, 2009, respectively, and $84,542 and $237,413 for the three
and nine months ended September 30, 2008, respectively.
8.
|
Construction-in-progress
|
As of
September 30, 2009 and December 31, 2008, construction in progress was the
following:
|
September 30,
2009
|
December 31,
2008
|
||||||
Construction
in progress
|
$
|
7,009,886
|
$
|
2,482,339
|
Construction-in-progress
represents construction and installations of the new plant and machinery for the
production facility in Hailun City.
9.
|
Intangible
Assets
|
As of
September 30, 2009 and December 31, 2008, intangible assets consisted of the
following:
|
September 30,
2009
|
December 31,
2008
|
||||||
Land
use rights
|
$
|
1,355,728
|
$
|
1,356,384
|
||||
Patents
|
53,177
|
53,202
|
||||||
1,408,905
|
1,409,586
|
|||||||
Less:
Accumulated amortization
|
(57,795
|
)
|
(29,497
|
)
|
||||
$
|
1,351,110
|
$
|
1,380,089
|
Amortization
expense totaled $9,432 and $28,288 for the three and nine months ended September
30, 2009, respectively, and $11,398 and $19,585 the three and nine months ended
September 30, 2008, respectively.
Amortization
expense is estimated to be $37,712 for each of the next five years.
10.
|
Income
Taxes
|
On May
30, 2005, AIDH executed a Share Transfer Agreement with XAL, a corporation
organized and existing under the laws of the PRC. XAL applied to be as a foreign
invested company right after the share transfer, which business license has been
approved as a foreign invested company on January 10, 2006. According to the
PRC’s taxation policy, there is income tax exemption for 2 years and half for 3
years suitable to foreign invested company, advanced Technology Company or
Software Development Company. XAL is considered an Advanced Technology Company.
Therefore the Company receives this income tax exemption policy from January 10,
2006, the date approval as a foreign invested company. The Company received a
100% tax holiday as of January 10, 2006. On January 10, 2008 the Company’s tax
exemption was reduced to 50% of the prevailing tax rate and will continue at
this reduced rate for three additional years.
LvBao is
currently subject to the Enterprise Income Tax of 25%.
F-12
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
10.
|
Income
Taxes (Continued)
|
A
reconciliation of the provision for income taxes with amounts determined by the
U.S. federal income tax rate to income before income taxes is as
follows.
The
components of net income (loss) before provision for income tax consist of
following:
Three Months
Ended September 30,
|
Nine Months
Ended September 30,
|
||||||||||||
2009
|
2008
|
2009
|
2008
|
||||||||||
U.S.
Operations
|
$ | (713,000 | ) | $ | (874,000 | ) | $ | (1,543,000 | ) | $ | (2,065,000 | ) | |
Chinese
Operations
|
1,843,000 | 1,952,000 | 6,105,000 | 4,161,000 | |||||||||
$ | 1,130,000 | $ | 1,078,000 | $ | 4,562,000 | $ | 2,096,000 |
The
components of the provision for income taxes are approximately as
follows:
Three Months
Ended September 30,
|
Nine Months
Ended September 30,
|
||||||||||||
2009
|
2008
|
2009
|
2008
|
||||||||||
Federal,
State and Local
|
$
|
- |
$
|
- |
$
|
- | $ | - | |||||
Peoples
Republic of China -Federal and Local
|
245,000 | 269,700 | 861,000 | 586,900 | |||||||||
$
|
245,000 |
$
|
269,700 |
$
|
861,000 | $ | 586,900 |
The table
below approximately summarizes the reconciliation of the Company’s income tax
provision (benefit) computed at the statutory U.S. Federal rate and the actual
tax provision:
Three Months
Ended September 30,
|
Nine Months
Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Income
tax provision at Federal statutory rate
|
$ | 384,100 | $ | 366,400 | $ | 1,550,900 | $ | 712,700 | ||||||||
State
income taxes, net of Federal benefit
|
-0- | 64,600 | -0- | 125,800 | ||||||||||||
U.S.
tax rate in excess of foreign tax rate
|
(165,900 | ) | (136,700 | ) | (549,400 | ) | (291,300 | ) | ||||||||
Abatement
of foreign income taxes
|
(215,800 | ) | (370,900 | ) | (665,200 | ) | (778,000 | ) | ||||||||
Increase
in valuation allowance
|
242,600 | 346,300 | 524,700 | 817,700 | ||||||||||||
Tax
provision
|
$ | 245,000 | $ | 269,700 | $ | 861,000 | $ | 586,900 |
The
Company has a U.S net operating loss carryforwards of approximately $3,779,000
as of December 31, 2008, which expires in 2027. The deferred tax asset
associated with these net operating loss carryforwards was fully reserved as of
September 30, 2009.
The
change in the valuation allowance as of September 30, 2009 and 2008 was $524,700
and $817,700, respectively.
F-13
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
10.
|
Income
Taxes (Continued)
|
The
effects of the tax exemption per share were as follows:
Three Months
Ended September 30,
|
Nine Months
Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Tax
Saving
|
$ | 215,800 | $ | 370,900 | $ | 665,200 | $ | 778,000 | ||||||||
Benefit
per share:
|
||||||||||||||||
Basic
|
$ | 0.01 | $ | 0.01 | $ | 0.02 | $ | 0.03 | ||||||||
Diluted
|
$ | 0.01 | $ | 0.01 | $ | 0.02 | $ | 0.03 |
Had the
tax exemption not been in place for the three and nine months ended September
30, 2009 and 2008, the Company estimates the following proforma financial
statement impact:
Three Months
Ended September 30,
|
Nine Months
Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
income before tax provision, as reported
|
$ | 1,130,000 | $ | 1,078,000 | $ | 4,562,000 | $ | 2,096,000 | ||||||||
Less
Tax provision not exempted
|
245,000 | 269,700 | 861,000 | 586,900 | ||||||||||||
Less
Tax provision exempted
|
215,800 | 370,900 | 665,200 | 778,000 | ||||||||||||
$ | 669,200 | $ | 437,400 | $ | 3,035,800 | $ | 731,100 |
11.
|
Employee
Retirement Benefits and Post Retirement
Benefits
|
According
to the Heilongjiang Provincial regulations on state pension program, both
employees and employers have to contribute toward pensions. The pension
contributions range from 2% to 8% that was contributed by individuals
(employees), and the Company is required to make contributions to the state
retirement plan based on 20% of the employees’ monthly basic salaries. Employees
in the PRC are entitled to retirement benefits calculated with reference to
their basic salaries on retirement and their length of service in accordance
with a government managed benefits plan. The PRC government is responsible for
the benefit liability to these retired employees. During the three and nine
months ended September 30, 2009, respectively, the Company contributed $59,264
and $204,448 in pension contributions. For the three and nine months ended
September 30, 2008 the Company contributed $28,883 and $83,970,
respectively.
12.
|
Accounts
Payable and accrued Expenses
|
At
September 30, 2009 and December 31, 2008 accrued expenses consisted
of:
|
September 30,
2009
|
December 31,
2008
|
||||||
Accounts
payable
|
$
|
2,630,458
|
$
|
3,264,066
|
||||
Liquidated
damages
|
1,201,998
|
1,201,998
|
||||||
Accrued
payroll
|
47,606
|
56,404
|
||||||
Accrued
interest
|
311,537
|
105,287
|
||||||
Accrued
insurance
|
33,173
|
24,192
|
||||||
$
|
4,224,772
|
$
|
4,651,947
|
F-14
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
13.
|
Notes
payable
|
At
September 30, 2009 and December 31, 2008 notes payable consisted of the
following:
September 30,
2009
|
December 31,
2008
|
|||||||
Notes
dated June 2008, due December 31, 2009 with a interest rate of 10%, net of
debt
discount of $10,028 and $40,113 at September 30, 2009 and December 31,
2008,
respectively
|
$
|
2,239,972
|
$
|
2,209,887
|
||||
Note
dated November 2008, due November 10, 2009 with a interest rate of 10%,
net of debt discount of $11,944 and $47,775 at September 30, 2009 and
December 31, 2008, respectively*
|
$
|
488,056
|
452,225
|
|||||
$
|
2,728,028
|
$
|
2,662,112
|
*As
of November 10, 2009, the maturity date of this Note was extended to May 10,
2010.
14.
|
Put/Call
Liability
|
On
October 9, 2007 (the “Closing Date”), the Company entered into Put/Call
Agreements with two (2) of its stockholders (the “Put/Call Stockholders”),
pursuant to which the Put/Call Shareholders granted the Company an option to
repurchase an aggregate of 1,944,444 shares (the “Put/Call Shares”) from the
Put/Call Stockholders (the “Call Option”), for an exercise price of $1.63 per
share (the “Call Option Price”), if the following conditions were met (the “Call
Option Conditions”):
·
|
Either
(i) a registration statement (“Registration Statement”) covering the
resale of the Put/Call Shares was declared effective by the SEC, and has
been kept continuously effective by the Company, or (B) all of the
Put/Call Shares were available for sale without registration pursuant to
Rule 144 promulgated under the Securities Act of 1933 (“Rule 144”);
and
|
·
|
The
closing price of a share of common stock of the Company as traded on the
Over-the-Counter Bulletin Board (or such other exchange or stock market on
which the common stock may then be listed or quoted) equaled or exceeded
$4.08 (appropriately adjusted for any stock split, reverse stock split,
stock dividend or other reclassification or combination of the common
stock occurring after the date of the closing) for at least ten (10)
consecutive trading days immediately preceding the date that the Call
Option Exercise Notice is given by the
Company.
|
Term of the Call Option - the
Company was only permitted to exercise its Call Option by delivering a written
notice (a “Call Option Exercise Notice”) to the Put/Call Stockholders within
thirty (30) days of such time as all of the Call Option Conditions were met. The
Call Option was only exercisable for all, but not less than all, of the Put/Call
Shares. The repurchase was required to be consummated within ninety (90) days
following the date of the Call Option Exercise Notice.
In
addition, the Put/Call Stockholders had the right to cause the Company to
repurchase the Put/Call Shares from the Put/Call Stockholders (the “Put Right”),
for a price of $1.63 per share (the “Put Purchase Price”), if:
·
|
the
Company failed to exercise its Call Option within ten (10) days of a date
on which all of the Call Option Conditions were met;
or
|
·
|
the
Company consummated a private offering of not less than $5,000,000 of its
securities (a “Qualified Offering”);
or
|
F-15
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
14.
|
Put/Call
Liability
|
·
|
the
Company failed to (i) file the Registration Statement within thirty (30)
business days of the Closing Date (the “Filing Date”), (B) have the
Registration Statement declared effective within ninety (90) calendar days
from the Filing Date, or, if reviewed by the SEC, within one hundred
eighty (180) calendar days after the Filing Date, or (C) keep the
Registration Statement continuously effective until all of the Shares are
available for sale without registration pursuant to Rule 144;
or
|
·
|
the
Company failed to consummate a Qualified Offering within two (2) years of
the date hereof (each of the aforementioned conditions, a “Put Right
Trigger”).
|
Term of the Put Option - the
Put/Call Stockholders were able to exercise their Put Right by giving written
notice (“Put Exercise Notice”) of their exercise of the Put Right to the Company
within thirty (30) days of a Put Right Trigger. The Put/Call Stockholders were
only able to exercise their Put Right as to all, but not less than all, of the
Put/Call Shares. Upon exercise of the Put Right by the Shareholder, the
repurchase of the Put/Call Shares by the Company was to be consummated within
ninety (90) days following the date of the Put Exercise Notice.
In
accordance with accounting guidance regarding distinguishing liabilities from
equity, the Company
recorded the value of the Put/Call agreement of $3,169,444 as a liability as of
October 9, 2007. The value of the Put/Call agreement was based on the fair
market value of the underlying common stock of $1.63 at October 9,
2007.
On April
9, 2008 the Company and the Put/Call Stockholders executed a waiver and
amendment to the Put/Call Agreement reaffirming that the Put/Call Agreement is
still in full force and removing the following provision as a Put Right
Trigger:
·
|
The
Company failed to (i) file the Registration Statement within thirty (30)
business days of the Filing Date, (B) have the Registration Statement
declared effective within ninety (90) calendar days from the Filing Date,
or, if reviewed by the SEC, within one hundred eighty (180) calendar days
after the Filing Date, or (C) keep the Registration Statement continuously
effective until all of the Shares are available for sale without
registration pursuant to Rule 144.
|
On March
3, 2009 the Company and the Put/Call Stockholders terminated the Put/Call
Agreement.
The
termination of the Put/Call Agreements was considered a type 1 event due to the
culmination of events that started with the waiver executed on April, 9, 2008
and ending with the termination of the Put/Call Agreement on March 3,
2009. As a type 1 event, the termination provided additional evidence
with respect to the valuation of the Put/Call agreement as of December 31, 2008.
As of December 31, 2008, the Company reclassified the $3,169,444 value previous
recorded from liabilities to additional paid-in capital.
15.
|
Equity
|
Registration
Rights Agreement
On
October 9, 2007 and October 19, 2007, the Company entered into Registration
Rights Agreements with certain accredited investors (“Investors”), in connection
with private offerings (the “Offerings”) it consummated on such dates. Pursuant
to the Registration Rights Agreements, the Company agreed to register the shares
of common stock, and shares underlying warrants, purchased in the
Offerings. Further, if the Company did not satisfy its registration
requirements, liquidated damages would accumulate at the rate of 1.5% of the
purchase price paid by the Investors for each thirty (30) day period
during which a registration default continued.
F-16
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
15.
|
Equity
(Continued)
|
The
Company did not satisfy the registration requirements. However, as of
October 20, 2008, the liquidated damages stopped accruing because the shares
covered by the Registration Rights Agreements could then be sold under Rule
144.
There are
accrued liquidated damages of $1,201,998 at September 30, 2009 and December 31,
2008, Liquidated damages of $414,000 and $966,799 were accrued in the
three and nine months ended September 30, 2008, respectively.
Per the
Registration Rights Agreements the Company can pay the $1,201,998 in liquidated
damages in cash or Company common stock. The Company plans to issue
667,777 shares of the Company’s common stock in payment of the liquidated
damages based on the closing price of the Company’s common stock on October 20,
2008 of $1.80.
Warrants
Information
with respect to stock warrants outstanding as of September 30, 2009 is as
follows:
Exercise Price
|
Outstanding
December
31, 2008
|
Granted
|
Modified,
Expired or
Exercised
|
Outstanding
September
30, 2009
|
Expiration
Date
|
||||||||||||
$0.94
|
373,334
|
-0-
|
-0-
|
373,334
|
10/09/2010
|
||||||||||||
$1.50
|
1,333,333
|
-0-
|
-0-
|
1,333,333
|
10/09/2009
|
||||||||||||
$2.04
|
804,884
|
-0-
|
(226,000
|
)
|
578,884
|
10/09/2010
|
|||||||||||
$2.04
|
569,346
|
-0-
|
(242,040
|
)
|
327,306
|
10/19/2010
|
|||||||||||
$1.63
|
195,000
|
-0-
|
-0-
|
195,000
|
6/12/2011
|
||||||||||||
$1.63
|
75,000
|
-0-
|
-0-
|
75,000
|
6/20/2011
|
||||||||||||
$1.63
|
-0-
|
-0-
|
235,583
|
235,583
|
10/19/2010
|
||||||||||||
$1.63
|
-0-
|
97,500
|
-0-
|
97,500
|
12/31/2011
|
||||||||||||
$3.26
|
2,061,227
|
-0-
|
(1,130,308
|
)
|
930,919
|
10/09/2009
|
|||||||||||
$3.26
|
2,846,746
|
-0-
|
(1,256,457
|
)
|
1,590,289
|
10/19/2009
|
|||||||||||
$2.61
|
75,000
|
-0-
|
-0-
|
75,000
|
11/10/2011
|
As of
September 30, 2009 all outstanding warrants are exercisable.
Modification
of Warrants
On March
2, 2009, the Company entered into a Consulting Agreement with a placement agent
holding warrants to purchase 235,583 shares of the Company’s common stock at
$2.04 per share, pursuant to which, in consideration for certain consulting
services to be provided to the Company by the placement agent, the Company
agreed to (i) pay the placement agent a one-time consulting fee of $38,000, and
(ii) reduce the per share exercise price of the warrants received by the
placement agent and its designees in connection with the private
offerings consummated by the Company in October 2007, from $2.04 to
$1.63.
Pursuant
to accounting guidance regarding equity-based payments to non-employees, the Company evaluated the
value of the warrants before and after the modification to determine the
incremental change in the value of the warrants.
F-17
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
15.
|
Equity
(Continued)
|
The fair
value of the warrants as of March 2, 2009 before modification of the terms was
calculated to be $18,625. The following assumptions were used to
calculate the fair value of the warrants:
Dividend
yield
|
0 | % | ||
Expected
volatility
|
114.83 | % | ||
Risk-free
interest rate
|
0.75 | % | ||
Expected
life
|
1.58
years
|
|||
Stock
price
|
$ | 0.42 | ||
Exercise
price
|
$ | 2.04 |
The fair
value of the warrants as of March 2, 2009 after modification of the terms was
calculated to be $22,600. The following assumptions were used to
calculate the fair value of the warrants:
Dividend
yield
|
0 | % | ||
Expected
volatility
|
114.83 | % | ||
Risk-free
interest rate
|
0.75 | % | ||
Expected
life
|
1.58
years
|
|||
Stock
price
|
$ | 0.42 | ||
Exercise
price
|
$ | 1.63 |
The
incremental change in the value of the warrants is $22,600 less $18,625 or
$3,975, which was recorded to consulting expense.
Warrant
Tender Offers
As of
April 24, 2008, the Company commenced an offer (the “First Warrant Tender
Offer”) to the holders of the Company’s then outstanding warrants, pursuant to
which the warrant holders were entitled to tender their warrants for shares of
the Company’s common stock at a reduced exercise price as follows:
·
|
With
respect to warrants having an exercise price of $0.94 per share, a holder
accepting the First Warrant Tender Offer was entitled to exercise some or
all of such warrants at $0.75 per share of common
stock;
|
·
|
With
respect to warrants having an exercise price of $1.50 per share, a holder
accepting the First Warrant Tender Offer was entitled to exercise some or
all of such warrants at $1.20 per share of common
stock;
|
·
|
With
respect to warrants having an exercise price of $2.04 per share, a holder
accepting the First Warrant Tender Offer was entitled to exercise some or
all of such warrants at $1.63 per share of common stock;
and
|
·
|
With
respect to warrants having an exercise price of $3.26 per share, a holder
accepting the First Warrant Tender Offer was entitled to exercise some or
all of such warrants at $2.61 per share of common
stock.
|
On March
2, 2009, the Company closed on the First Warrant Tender Offer. In
connection with the First Warrant Tender Offer:
|
·
|
A
total of 183,457 warrants were tendered at the reduced exercise price of
$1.63 per share (originally $2.04 per share), for an aggregate exercise
price of $299,034; and
|
·
|
A
total of 175,937 warrants were tendered at the reduced exercise price of
$2.61 per share (originally $3.26 per share), for an aggregate exercise
price of $459,196.
|
As a
result, (a) a total of 359,394 shares of the Company’s common stock were issued
in connection with the exercise of such warrants and (b) the Company received
gross proceeds of $758,230 as payment of the exercise prices.
F-18
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
15.
|
Equity
(Continued)
|
As of
June 19, 2009, the Company commenced an offer (the “Second Warrant Tender
Offer”) to the holders of its then outstanding warrants, pursuant to which they
may tender their warrants (“Original Warrants”) for warrants exercisable at
reduced exercise prices (“Amended Warrants”) as follows:
·
|
With
respect to warrants having an exercise price of $0.94 per share, a holder
accepting the Second Warrant Tender Offer was entitled to exchange some or
all of such warrants for Amended Warrants exercisable at $0.75 per share
of common stock;
|
·
|
With
respect to warrants having an exercise price of $1.50 per share, a holder
accepting the Second Warrant Tender Offer was entitled to exchange some or
all of such warrants for Amended Warrants exercisable at $1.20 per share
of common stock;
|
·
|
With
respect to warrants having an exercise price of $1.63 per share, a holder
accepting the Second Warrant Tender Offer was entitled to exchange some or
all of such warrants for Amended Warrants exercisable at $1.30 per share
of common stock;
|
·
|
With
respect to warrants having an exercise price of $2.04 per share, a holder
accepting the Second Warrant Tender Offer was entitled to exchange some or
all of such warrants for Amended Warrants exercisable at $1.63 per share
of common stock; and
|
|
·
|
With
respect to warrants having an exercise price of $3.26 per share, a holder
accepting the Second Warrant Tender Offer was entitled to exchange some or
all of such warrants for Amended Warrants exercisable at $1.63 per share
of common stock.
|
On August
13, 2009, the Company closed the Second Warrant Tender Offer. In
connection with the Second Warrant Tender Offer:
·
|
a
total of 49,000 Original Warrants with an exercise price of $2.04 per
share were exchanged for Amended Warrants with a reduced exercise price of
$1.63 per share;
and
|
·
|
a
total of 2,210,828 Original Warrants with an exercise price of $3.26 per
share were exchanged for Amended Warrants with a reduced exercise price of
$1.63 per share.
|
On August
14, 2009, the holders of the Amended Warrants exercised all 2,254,828 of the
warrants at $1.63 per share. As a result the Company received gross
proceeds of $3,675,370.
Stock
Issued for Consulting
The
Company entered into an Investor Relations Consulting Agreement (the “IR
Agreement”) with an consultant, as of January 1, 2009. Pursuant to
the IR Agreement, in consideration for investor relations services to be
provided to the Company by the consultant, the Company agreed to pay a monthly
retainer of $9,000, consisting of (i) $4,500 in cash, and (ii) such number of
shares of restricted stock of the Company to be determined by dividing $4,500 by
85% of the average closing trading price of the Company’s common stock for the
first ten trading days of the applicable month, capped at 10,588 shares per
month.
On June
30, 2009, the Company issued 37,804 shares of common stock with a fair value of
$33,475 pursuant to the IR Agreement. The fair value of the stock was
determined by the closing price of the stock on the 10th day of
each month, which is the day the number of shares is determined.
F-19
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
15.
|
Equity
(Continued)
|
Placement
Agent Warrants
On July
4, 2009, the Company agreed to issue 97,500 warrants to purchase the Company’s
common stock at $1.63 per share, expiring December 31, 2011, to a placement
agent for assistance in the extension of the June 2008 notes. The fair value of
the warrants as of July 4, 2009 was calculated to be $117,155. The
following assumptions were used to calculate the fair value of the
warrants:
Dividend
yield
|
0 | % | ||
Expected
volatility
|
136.86 | % | ||
Risk-free
interest rate
|
1.68 | % | ||
Expected
life
|
2.5
years
|
|||
Stock
price
|
$ | 1.65 | ||
Exercise
price
|
$ | 1.63 |
The
$117,155 fair value of the warrants were treated as loan costs to be amortized
over the life of the loan, therefore, $58,577 of the cost was recorded in
interest expense and the remaining $58,578 will be record in prepaid loan costs
to be amortized over the remaining life of the loan.
Financial
Advisor Warrants
On
September 2, 2009, the Company entered into an advisory agreement with a
financial advisor for a period commencing on September 2, 2009 and continuing
for six months.
Pursuant
to the agreement, in consideration for the services to be provided to the
Company by the financial advisor, the Company agreed to (a) pay the advisor a
cash fee equal to $700,000, payable in 24 equal monthly installments, deferred
until the closing of a funding proposed financing; provided, however, that the
Company pay the advisor a non-refundable retainer of $15,000 (which was paid
9/15/09) to be deducted from the cash fee, (b) grant to the financial advisor
five-year warrants to purchase 714,286 shares of the Company’s common stock,
which are exercisable six months after September 2, 2009, subject to certain
conditions, (i) at an exercise price of $1.68 per share, or (ii) on a cashless
basis; provided, however, that all of the warrants will terminate if certain
conditions are not met, and (c) reimburse the advisor for up to an aggregate of
$35,000 of their accountable actual out-of-pocket reasonable
expenses.
The
Company will record the fair value of the warrants as determined at the date of
the closing of the proposed financing when the warrants will become fully
vested.
16.
|
Common
Welfare Reserves
|
The
Company is required to transfer 10% of its net income, as determined in
accordance with PRC accounting rules and regulations, to the general reserve.
The balance of these reserves at September 30, 2009 and December 31, 2008, was
$1,834,742 and $1,314,861, respectively. These amounts are restricted and are
included in retained earnings.
This fund
can only be utilized on capital items for the collective benefit of the
Company’s employees, such as construction of dormitories, cafeteria facilities,
and other staff welfare facilities. The fund is non-distributable other than
upon liquidation.
17.
|
Earnings
Per Share
|
FASB ASC
Topic 260, “Earnings Per Share,” requires a reconciliation of the numerator and
denominator of the basic and diluted earnings per share (“EPS”)
computations.
F-20
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
17.
|
Earnings
Per Share (Continued)
|
For the
three months ended September 30, 2009, dilutive shares include stock options of
703,200, outstanding warrants to purchase 373,334 shares of common stock at an
exercise price of $0.94 and outstanding warrants to purchase 1,333,333 shares of
common stock at an exercise price of $1.50. Warrants to purchase 4,105,481 share
of common stock were not included in dilutive shares as the effect would have
been anti-dilutive.
For the
nine months ended September 30, 2009, dilutive shares include stock options of
703,200 and outstanding warrants to purchase 373,334 shares of common stock at
an exercise price of $0.94. Warrants to purchase 5,438,814 share of common stock
were not included in dilutive shares as the effect would have been
anti-dilutive.
For the
three and nine months ended September 30, 2008, dilutive shares include
outstanding warrants to purchase 373,334 shares of common stock at an exercise
price of $0.94 and warrants to purchase 1,333,333 shares at an exercise price of
$1.50. Warrants to purchase 6,552,193 share of common stock were not included in
dilutive shares as the effect would have been anti-dilutive.
The
following reconciles the components of the EPS computation:
Income
|
Shares
|
Per Share
|
||||||||||
(Numerator)
|
(Denominator)
|
Amount
|
||||||||||
For
the three months ended September 30, 2009:
|
||||||||||||
Net
income
|
$
|
884,625
|
||||||||||
Basic
EPS income available to common shareholders
|
$
|
884,625
|
30,844,547
|
$
|
0.03
|
|||||||
Effect
of dilutive securities:
|
||||||||||||
Warrants
|
264,376
|
|||||||||||
Stock
options
|
—
|
522,458
|
||||||||||
Diluted
EPS income available to common shareholders
|
$
|
884,625
|
31,631,381
|
$
|
0.03
|
|||||||
For
the three months ended September 30, 2008:
|
||||||||||||
Net
income
|
$
|
808,067
|
||||||||||
Basic
EPS income available to common shareholders
|
$
|
808,067
|
29,299,332
|
$
|
0.03
|
|||||||
Effect
of dilutive securities:
|
||||||||||||
Warrants
|
—
|
264,376
|
||||||||||
Diluted
EPS income available to common shareholders
|
$
|
808,067
|
29,563,708
|
$
|
0.03
|
|
Income
|
Shares
|
Per Share
|
|||||||||
|
(Numerator)
|
(Denominator)
|
Amount
|
|||||||||
For
the nine months ended September 30, 2009:
|
||||||||||||
Net
income
|
$
|
3,700,467
|
||||||||||
Basic
EPS income available to common shareholders
|
$
|
3,700,467
|
29,979,356
|
$
|
0.12
|
|||||||
Effect
of dilutive securities:
|
||||||||||||
Warrants
|
88,022
|
|||||||||||
Stock
options
|
—
|
361,646
|
||||||||||
Diluted
EPS income available to common shareholders
|
$
|
3,700,467
|
30,429,024
|
$
|
0.12
|
|||||||
For
the nine months ended September 30, 2008:
|
||||||||||||
Net
income
|
$
|
1,509,235
|
||||||||||
Basic
EPS income available to common shareholders
|
$
|
1,509,235
|
29,299,332
|
$
|
0.05
|
|||||||
Effect
of dilutive securities:
|
||||||||||||
Warrants
|
—
|
264,376
|
||||||||||
Diluted
EPS income available to common shareholders
|
$
|
1,509,235
|
29,563,708
|
$
|
0.05
|
F-21
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
18.
|
Equity
Incentive Plan
|
In March
2009, the Company’s board of directors and majority stockholders adopted the
Emerald Dairy Inc. 2009 Equity Incentive Plan (the “Plan”) to attract and retain
the best available personnel, provide additional incentives to employees,
directors and consultants and promote the success of the Company’s business.
1,500,000 shares of the Company’s common stock have been reserved for issuance
under the Plan.
Eligibility
The
Company may grant awards to its employees, directors and consultants, including
those of the Company’s subsidiaries. However, the Company may grant options that
are intended to qualify as incentive stock options (“ISOs”) only to its
employees and employees of its subsidiaries.
Acceleration of Awards upon
Corporate Transactions.
The
outstanding awards will terminate and/or accelerate upon occurrence of certain
significant corporate transactions, including amalgamations, consolidations,
liquidations or dissolutions, sales of substantially all or all of the Company’s
assets, reverse takeovers or acquisitions resulting in a change of
control.
Exercise Price and Term of
Awards.
In
general, the plan administrator will determine the exercise price of an option
in the award agreement. The exercise price may be a fixed price, or it may be a
variable price related to the fair market value of the Company’s ordinary
shares. If the Company grants an ISO to an employee, the exercise price may not
be less than 100% of the fair market value of its common stock on the date of
the grant, except that if the grantee, at the time of that grant, owns shares
representing more than 10% of the voting power of all classes of the Company’s
shares of common stock, the exercise price may not be less than 110% of the fair
market value of its common stock on the date of that grant. If the Company
grants a non-qualified share option to a grantee, the exercise price may not be
less than 100% of the fair market value of its common stock on the date of
grant.
The term
of each award under the Plan will be specified in the award agreement, but may
not exceed ten years from the earlier of the adoption or the approval of the
plan, unless sooner terminated.
Total
share-based compensation costs included on the Condensed Consolidated Statements
of Income were $49,764 and none during the three months ended September 30, 2009
and 2008, respectively, and $125,452 and none during the nine months ended
September 30, 2009 and 2008, respectively. All share-based compensation costs
are included in selling expenses and administrative expenses.
The
Company estimates the fair value of stock options using a Black-Scholes option
pricing valuation model, consistent with accounting guidance. Key inputs and
assumptions used to estimate the fair value of stock options include the grant
price of the award, the expected option term, volatility of the Company’s stock,
the risk-free rate and the Company’s dividend yield. Estimates of fair value are
not intended to predict actual future events or the value ultimately realized by
grantees, and subsequent events are not indicative of the reasonableness of the
original estimates of fair value made by the Company.
F-22
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
18.
|
Equity
Incentive Plan (Continued)
|
The fair
value of each stock option is estimated on the date of the grant using the
Black-Scholes option pricing model. No dividends were assumed due to the nature
of the Company’s current business strategy. The following table presents the
weighted average assumptions used for options granted:
Number
of options
|
703,200 | |||
Risk
free interest rate
|
.67 | % | ||
Expected
life (year)
|
2 | |||
Expected
volatility
|
252.69 | % | ||
Weighted
average fair value per option
|
$ | 0.34 |
The risk
free interest rate was determined from the daily interest rate of United State
Treasury securities for the expected life on the date of grant. The
expected volatility was based on the Company’s common stock past trading
history.
Share
Options
A summary
of the Company’s outstanding share option award grants as of September 30, 2009
and changes during the nine months then ended are presented below:
Shares
|
Weighted-Average
Exercise Price
|
Weighted-Average
Remaining Contractual
Term
|
Aggregate
Intrinsic Value
|
||||||||
(in years)
|
(in millions)
|
||||||||||
Outstanding
at December 31, 2008
|
-0-
|
$
|
—
|
||||||||
Granted
|
703,200
|
0.42
|
|||||||||
Exercised
|
-0-
|
—
|
|||||||||
Expired
|
-0-
|
—
|
|||||||||
Forfeited
|
-0-
|
—
|
|||||||||
Outstanding
at September 30, 2009
|
703,200
|
$
|
0.42
|
9.42
|
$
|
794,616
|
|||||
Non-vested
and expected to vest at September 30, 2009
|
527,400
|
$
|
0.42
|
9.42
|
$
|
—
|
|||||
Exercisable
at September 30, 2009
|
175,800
|
$
|
0.42
|
9.42
|
$
|
—
|
As of
September 30, 2009, there was $112,935 of total unrecognized compensation
costs related to non-vested Company share options granted under Company share
option plans. The cost is expected to be recognized over a weighted-average
period of 1.03 years.
19.
|
Commitments
and Contingencies
|
The
Company has various purchase commitments for materials, supplies and services
incident to the ordinary conduct of business, generally for quantities required
for the Company’s business and at prevailing market prices. No material annual
loss is expected from these commitments.
F-23
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
19.
|
Commitments
and Contingencies (Continued)
|
The
Company has contracted for construction of a second production facility in
Hailun City, Heilongjiang Province, PRC. The contract is for
$8,437,093 of which $6,568,948 has been paid. The remaining
$1,868,145 is to be paid in 2009 for completion of the facility.
The
Company has contracted to purchase equipment from a supplier for the second
processing facility for $5,301,554 of which $3,711,088 has been
paid. The remaining $1,590,466 will be paid on delivery of the
equipment in 2009.
The
Company has advances to milk suppliers of $332,783 which will be offset against
future milk purchases from those suppliers (see Note 6, Other current
assets).
In order
for the Company to conduct its current operations, a milk powder production
license is required from the State General Administration of Quality Supervision
and Inspection and Quarantine of the PRC (the “Administration”). The Company’s
current license expires in May 2010. The Administration will inspect the quality
of the Company’s production process in 2010. Depending on the results of this
inspection, the State General Administration will either (i) grant the Company a
license renewal, or (ii) advise the Company of material deficiencies it has
discovered and schedule another inspection for 2011. The Company expects that it
will pass the inspection. If it does not, it will have an opportunity to cure
any deficiencies prior to the follow up inspection that would have been
scheduled for 2011. Other than the foregoing, no government approvals are
required to conduct the Company’s principal operations, and the Company is not
aware of any probable governmental regulation of its business sectors in the
near future. Although management believes that the Company is in material
compliance with the statutes, laws, rules and regulations of every
jurisdiction in which it operates, no assurance can be given that the Company’s
compliance with the applicable statutes, laws, rules and regulations will
not be challenged by governing authorities or private parties, or that such
challenges will not lead to a material adverse effect on the Company’s financial
position, results of operations, or cash flows.
The
Company and its subsidiaries are self-insured, and they do not carry any
property insurance, general liability insurance, or any other insurance that
covers the risks of their business operations. As a result any material loss or
damage to its properties or other assets, or personal injuries arising from its
business operations would have a material adverse effect on the Company’s
financial condition and operations.
The
Company is not involved in any legal matters arising in the normal course of
business. While incapable of estimation, in the opinion of the management, the
individual regulatory and legal matters in which it might involve in the future
are not expected to have a material adverse effect on the Company’s financial
position, results of operations, or cash flows.
The
Company’s employees were required to pay an employee deposit upon commencement
of employment, which was standard in the PRC. As of January 1, 2009, these
deposits are no longer allowed in the PRC and all amounts were returned to the
employees. As of December 31, 2008, the Company held employee deposits in the
aggregate amount of $248,424 which were reflected in advances from
employees in the financials statements.
20.
|
Operating
Leases
|
The
Company leases various distribution facilities. All leases are on an annual
basis and commence on January 1, of each year. The Company also leases office
space which expires September 2010. For the three months ended
September 30, 2009 and 2008, the Company incurred rental expense of $39,518 and
$30,811, respectively. For the nine months ended September 30, 2009 and 2008,
the Company incurred rental expense of $117,927 and $94,771, respectively. As of
September 30, 2009, the Company had outstanding lease commitments totaling
$39,335, all of which are due within the next year.
F-24
Emerald
Dairy Inc. and Subsidiaries
Footnotes
to Condensed Consolidated Financial Statements
September
30, 2009 and 2008
21.
|
Subsequent
Events
|
In May
2009, the FASB issued accounting guidance now codified as FASB ASC Topic 855,
“Subsequent Events,” which establishes general standards of accounting for, and
disclosures of, events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. FASB ASC Topic
855 is effective for interim or fiscal periods ending after June 15,
2009.
Management
has evaluated subsequent events from September 30, 2009 to November 16, 2009,
the date which the Company’s financial statements have been issued and were
available to be issued, and has concluded the following events should be
reported during this period. Subsequent events that may occur after
November 16, 2009 have not been evaluated in the financial statements as of
September 30, 2009.
On
November 10, 2009, the Company amended the outstanding $500,000 note payable,
which was due to be paid on November 10, 2009, to extend its due date to May 10,
2010. In connection with the amendment of the notes payable the
Company issued to the note holder warrants to purchase 100,000 shares of the
Company’s common stock, exercisable at $1.63 per share. The fair
value of these warrants will be treated as additional loan discount an amortized
over the remaining life of the note.
22.
|
Segment
Reporting
|
The
Company operates in one operating segment in accordance with the provisions
accounting guidance regarding segment reporting. Although the Company has key
product lines of milk, soybean milk, and rice powder, the Company’s chief
operating decision maker reviews and evaluates one set of combined financial
information deciding how to allocate resources and in assessing
performance. The Company
determines its operating segments in accordance with FASB ASC Topic 280,
“Segment Reporting.”
For the
three and nine months ended September 30, 2009 and 2008, the Company’s sales
revenue from various products are as follows:
Three Months
Ended September 30,
|
Nine Months
Ended September 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Milk
powder
|
$ | 8,922,796 | $ | 9,362,555 | $ | 27,318,421 | $ | 26,144,060 | ||||||||
Soybean
milk powder
|
267,138 | 221,124 | 822,026 | 644,233 | ||||||||||||
Rice
powder
|
319,942 | 275,722 | 954,482 | 813,645 | ||||||||||||
Sub-contract
processing
|
648,128 | 1,361,618 | 2,166,562 | 4,958,318 | ||||||||||||
$ | 10,158,004 | $ | 11,221,019 | $ | 31,261,491 | $ | 32,560,256 |
F-25
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Emerald Dairy, Inc.:
We have
audited the accompanying consolidated balance sheets of Emerald Dairy, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of income, stockholders’ equity and accumulated other comprehensive
income and cash flows for each of the years in the two-year period ended
December 31, 2008. Emerald Dairy, Inc’s management is responsible for
these consolidated financial statements. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit
to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. The company is
not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Emerald Dairy, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows the each of the years in the two-year period
ended December 31, 2008, in conformity with accounting principles generally
accepted in the United States of America.
/s/
Windes & McClaughry
Windes
& McClaughry Accountancy Corporation
Long
Beach, California
April 7,
2009
F-26
Emerald
Dairy Inc. and Subsidiaries
Consolidated
Balance Sheet
December
31, 2008
2008
|
2007
|
|||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 7,343,588 | $ | 6,560,931 | ||||
Trade
accounts receivable,net
|
6,146,228 | 5,096,828 | ||||||
Inventory,
net
|
883,233 | 1,000,427 | ||||||
Advances
to equipment supplier
|
3,712,883 | - | ||||||
Advances
to suppliers and other receivables
|
549,835 | 761,409 | ||||||
Deposits
|
74,614 | 3,175,342 | ||||||
Total
current assets
|
18,710,381 | 16,594,937 | ||||||
Property,
plant and equipment
|
||||||||
Property,
plant and equipment, net
|
6,101,566 | 3,320,081 | ||||||
Contruction
in progress
|
2,482,339 | - | ||||||
8,583,905 | 3,320,081 | |||||||
Intangible
assets, net
|
1,380,089 | 115,228 | ||||||
$ | 28,674,375 | $ | 20,030,246 | |||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$ | 3,264,066 | $ | 2,126,194 | ||||
Accrued
expenses
|
1,387,881 | 268,996 | ||||||
Notes
payable, net of debt discount of $87,888 at December 31,
2008
|
2,662,112 | 273,973 | ||||||
Advances
from employees
|
248,424 | 301,644 | ||||||
Taxes
payable
|
480,435 | 313,333 | ||||||
Loan
from shareholder
|
210,265 | 196,526 | ||||||
Total
current liabilities
|
8,253,183 | 3,480,666 | ||||||
Put/Call
Liability
|
- | 3,169,444 | ||||||
Commitments
and Contingencies (Note 21)
|
||||||||
Stockholders'
Equity
|
||||||||
Preferred
stock ($0.001 par value, 10,000,000 shares authorized,
none
|
||||||||
issued
and outstanding at December 31, 2008 and 2007)
|
- | - | ||||||
Common
stock ($0.001 par value, 100,000,000 shares authorized,
|
||||||||
31,243,776
and 31,241,276 issued and outstanding at December 31, 2008
|
||||||||
and
2007, respectively)
|
31,244 | 31,241 | ||||||
Treasury
Stock (1,944,444 shares at December 31, 2008 and 2007)
|
(1,944 | ) | (1,944 | ) | ||||
Additional
paid-in capital
|
8,225,922 | 4,666,244 | ||||||
Retained
earnings (of which $1,314,861 and $659,903 are restricted
at
|
||||||||
December
31, 2008 and 2007, respectively, for common welfare
reserves)
|
10,106,402 | 7,791,895 | ||||||
Accumulated
other comprehensive income
|
2,059,568 | 892,700 | ||||||
Total
stockholders' equity
|
20,421,192 | 13,380,136 | ||||||
$ | 28,674,375 | $ | 20,030,246 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-27
Emerald
Dairy Inc. and Subsidiaries
Consolidated
Statements of Operations
For
the Years Ended December 31, 2008 and 2007
2008
|
2007
|
|||||||
Sales
|
$ | 44,325,179 | $ | 29,618,008 | ||||
Cost
of Goods Sold
|
26,546,291 | 19,064,905 | ||||||
Gross
Profit
|
17,778,888 | 10,553,103 | ||||||
Operating
Expenses
|
||||||||
Selling
expenses
|
10,602,185 | 5,331,489 | ||||||
Adminstrative
expenses
|
3,494,733 | 1,492,642 | ||||||
Depreciation
and amortization
|
113,660 | 51,066 | ||||||
Total
operating expenses
|
14,210,578 | 6,875,197 | ||||||
Other
Income (Expense)
|
||||||||
Interest
income
|
13,041 | 9,724 | ||||||
Interest
expense
|
(426,646 | ) | (19,167 | ) | ||||
Total
other income (expense)
|
(413,605 | ) | (9,443 | ) | ||||
Net
Income Before Provision for Income Tax
|
3,154,705 | 3,668,463 | ||||||
Provision
for Income Taxes
|
||||||||
Current
|
840,198 | 118,325 | ||||||
840,198 | 118,325 | |||||||
Net
Income
|
$ | 2,314,507 | $ | 3,550,138 | ||||
Basic
Earnings Per Share
|
$ | 0.08 | $ | 0.15 | ||||
Basic
Weighted Average Shares Outstanding
|
29,299,332 | 24,211,872 | ||||||
Diluted
Earnings Per Share
|
$ | 0.08 | $ | 0.15 | ||||
Diluted
Weighted Average Shares Outstanding
|
29,518,067 | 24,271,991 | ||||||
The
Components of Other Comprehensive Income
|
||||||||
Net
Income
|
$ | 2,314,507 | $ | 3,550,138 | ||||
Foreign
currency translation adjustment
|
1,767,982 | 962,241 | ||||||
Income
tax related to other comprehensive income
|
(601,114 | ) | (327,162 | ) | ||||
Comprehensive
Income
|
$ | 3,481,375 | $ | 4,185,217 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-28
Emerald
Dairy Inc. and Subsidiaries
Consolidated
Statements of Stockholders' Equity and Accumulated Other Comprehensive
Income
For
the Years Ended December 31, 2008 and 2007
Common Stock
|
Accumulated
|
|||||||||||||||||||||||||||
Number
|
Additional
|
Other
|
Total
|
|||||||||||||||||||||||||
of
|
Par
|
Treasury
|
Paid-In
|
Retained
|
Comprehensive
|
Stockholders'
|
||||||||||||||||||||||
Shares
|
Value
|
Stock
|
Capital
|
Earnings
|
Income
|
Equity
|
||||||||||||||||||||||
Balance
at December 31, 2006
|
20,416,658 | $ | 20,417 | $ | - | $ | 999,464 | $ | 4,241,757 | $ | 257,621 | $ | 5,519,259 | |||||||||||||||
Private
placement of common stock
|
3,888,888 | 3,889 | - | 1,996,111 | - | - | 2,000,000 | |||||||||||||||||||||
Effects
of recapitalization
|
694,424 | 694 | - | (694 | ) | - | - | |||||||||||||||||||||
Private
placement of common stock
|
||||||||||||||||||||||||||||
and
warrants, net of expenses
|
6,241,306 | 6,241 | - | 8,008,307 | - | - | 8,014,548 | |||||||||||||||||||||
Warrants
issued for syndication fees
|
- | - | - | - | - | - | - | |||||||||||||||||||||
Purchase
of treasury stock
|
- | - | (1,944 | ) | (3,167,500 | ) | - | - | (3,169,444 | ) | ||||||||||||||||||
Put/Call
agreement for common stock
|
- | - | - | (3,169,444 | ) | (3,169,444 | ) | |||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | - | 635,079 | 635,079 | |||||||||||||||||||||
Net
income for the year ended
|
||||||||||||||||||||||||||||
December
31, 2007
|
- | - | - | - | 3,550,138 | - | 3,550,138 | |||||||||||||||||||||
Balance
at December 31, 2007
|
31,241,276 | 31,241 | (1,944 | ) | 4,666,244 | 7,791,895 | 892,700 | 13,380,136 | ||||||||||||||||||||
Transfer
agent correction of shares
|
2,500 | 3 | - | (3 | ) | - | - | - | ||||||||||||||||||||
Warrants
issued as loan discount
|
- | - | - | 305,163 | - | - | 305,163 | |||||||||||||||||||||
Warrants
issued for issuance costs
|
- | - | - | 85,074 | - | - | 85,074 | |||||||||||||||||||||
Termination
of Put/Call agreement
|
3,169,444 | 3,169,444 | ||||||||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | - | 1,166,868 | 1,166,868 | |||||||||||||||||||||
Net
income for the year ended
|
||||||||||||||||||||||||||||
December
31, 2008
|
- | - | - | - | 2,314,507 | - | 2,314,507 | |||||||||||||||||||||
Balance
at December 31, 2008
|
31,243,776 | $ | 31,244 | $ | (1,944 | ) | $ | 8,225,922 | $ | 10,106,402 | $ | 2,059,568 | $ | 20,421,192 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-29
Emerald
Dairy Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
For
the Years Ended December 31, 2008 and 2007
2008
|
2007
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
Income
|
$ | 2,314,507 | $ | 3,550,138 | ||||
Adjustments
to reconcile net cash provided by
|
||||||||
operating
activities
|
||||||||
Depreciation
and amortization
|
438,521 | 203,669 | ||||||
Amortization
of loan discount
|
217,275 | - | ||||||
Capitalized
interest
|
(89,868 | ) | - | |||||
Net
change in assets and liabilities
|
||||||||
Trade
accounts receivable
|
(716,373 | ) | (806,146 | ) | ||||
Inventory
|
182,562 | 622,842 | ||||||
Advances
to suppliers and other receivables
|
346,398 | (478,594 | ) | |||||
Deposits
|
1,459,633 | (1,534,247 | ) | |||||
Accounts
payable
|
998,946 | (23,018 | ) | |||||
Accrued
expenses
|
1,101,309 | 228,533 | ||||||
Advances
from employees
|
(72,929 | ) | 21,779 | |||||
Taxes
payable
|
146,629 | 107,474 | ||||||
Net
cash provided by operating activities
|
6,326,610 | 1,892,430 | ||||||
Cash
flows from investing activities
|
||||||||
Deposit
on equipment purchase
|
(3,712,883 | ) | (1,641,095 | ) | ||||
Construction
in progress
|
(2,392,471 | ) | - | |||||
Purchases
of fixed assets and intangibles
|
(2,411,832 | ) | (1,763,656 | ) | ||||
Net
cash used in investing activities
|
(8,517,186 | ) | (3,404,751 | ) | ||||
Cash
flows from financing activities
|
||||||||
Sale
of stock for cash
|
- | 10,014,548 | ||||||
Repayments
of notes payable
|
(291,874 | ) | - | |||||
Advances
on notes payable
|
2,750,000 | 273,973 | ||||||
Repurchase
of common stock
|
- | (3,169,444 | ) | |||||
Net
cash provided by financing activities
|
2,458,126 | 7,119,077 | ||||||
Effect
of exchange rate
|
515,107 | 313,011 | ||||||
Net
increase in cash
|
782,657 | 5,919,767 | ||||||
Cash
and cash equivalents at beginning of period
|
6,560,931 | 641,164 | ||||||
Cash
and cash equivalents at end of period
|
$ | 7,343,588 | $ | 6,560,931 | ||||
Supplemental
disclosure of cash flow information
|
||||||||
Interest
paid
|
$ | 1,295 | $ | 19,167 | ||||
Enterprise
incomes taxes paid
|
$ | 629,515 | $ | 215,859 | ||||
Supplemental
schedule of noncash investing and financing activities
|
||||||||
Warrants
issued as loan discount
|
$ | 305,163 | $ | - | ||||
Warrants
issued as loan issuance cost
|
$ | 85,074 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-30
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
1.
|
Description
of Business
|
Emerald
Dairy, Inc. (the Company), a Nevada corporation, is a producer of milk powder,
rice powder and soybean milk powder in the People’s Republic of China through
its wholly owned subsidiaries.
American
International Dairy Holdings, Inc., a Nevada corporation, was formed in 2005 for
the purpose of acquiring the stock in Heilongjiang Xing An Ling Dairy, Co. On
May 30, 2005, AIDH, pursuant to the Share Transfer Agreement acquired
Heilongjiang Xing An Ling Dairy Co. Limited, (XAL) a corporation formed on
September 8, 2003 in Heilongjiang Providence, The People’s Republic of China,
(PRC). This transaction was treated as a recapitalization of XAL for financial
reporting purposes. The effect of this recapitalization was rolled back to the
inception of XAL for financial reporting purposes.
XAL is a
dairy company engaged in manufacturing of milk, soybean and rice powder. Through
the Company’s network of over 800 salespeople, the Company’s products are
distributed throughout 20 provinces in the People’s Republic of China, and sold
in over 5,800 retail outlets.
Prior to
September 23, 2006, XAL owned 57.69% of Heilongjiang Be’ian Nongken Changxing
LvBao Dairy Limited Liability Company (“LvBao”) with the remaining balance being
held by the Company’s sole shareholder. On September 23, 2006, the remaining
42.31% ownership in LvBao was transferred to XAL and was treated as an
additional capital contribution. The effect of this contribution by the sole
shareholder was rolled back to September 8, 2003 for financial reporting
purposes. LvBao was formed on January 20, 2000 and is engaged in manufacturing
and sales of dairy products.
On
May 22, 2008, the Company formed a new wholly-owned subsidiary,
Hailun Xinganling Dairy Co., Ltd. (“HXD”), under the laws of the
PRC. In July 2008, HXD commenced construction of a production
facility in Hailun City, Heilongjiang Province, PRC. It is
anticipated that HXD will engage in the manufacture of the Company's milk,
soybean and rice powder products at this new facility
2.
|
Basis
of Preparation of Financial
Statements
|
XAL,
LvBao and HXD maintain their books and accounting records in Renminbi
(“RMB”).
The
financial statements have been prepared in order to present the consolidated
financial position and consolidated results of operations in accordance with
accounting principles generally accepted in the United States of America (“US
GAAP”) and are expressed in terms of US dollars (see paragraph “Foreign
Currency” below).
The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, XAL, LvBao and HXD. All inter-company transactions
and balances have been eliminated in consolidation.
3.
|
Summary
of Significant Accounting Policies
|
Use of estimates - The
preparation of these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affected the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements and the
reported amounts of net sales and expenses during the reported
periods.
Significant
estimates and assumptions by management include, among others, values and lives
assigned to acquired intangible assets, reserves for customer returns and
allowances, uncollectible accounts receivable, slow moving, obsolete and/or
damaged inventory, deferred tax assets, property, plant and equipment, reserve
for employee benefit obligations, stock warrant valuation, income tax
uncertainties and other uncertainties. Actual results may differ from these
estimates. The current economic environment has increased the degree
of uncertainty inherent in these estimates and assumptions.
F-31
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
3.
|
Summary
of Significant Accounting Policies
(Continued)
|
Cash and cash equivalents -
Cash and cash equivalents represent cash on hand, demand deposits and all
highly liquid investments placed with banks or other financial institutions with
original maturities of three months or less. Substantially all of the Company’s
cash is held in bank accounts in The Peoples Republic of China and is not
protected by FDIC insurance or any other similar insurance. Accounts held at
United States financial institutions are insured by the Federal Deposit
Insurance Corporation up to $250,000. As of December 31, 2008, no U.S. balances
are in excess of insured amounts. Given the current economic environment and
risks in the banking industry, there is a risk that the deposits may not be
readily available or covered by such insurance.
Inventory - Inventory is
stated at the lower of cost or market. Cost is determined using the weighted
average method. Market value represents the estimated selling price in the
ordinary course of business less the estimated costs necessary to complete the
sale.
Raw
materials consist of raw milk, soybeans, rice and rice powder. Work in process
consists of materials and products in process of conversion to powder but not
yet packaged.
The cost
of inventories comprises all costs of purchases, costs of conversion and other
costs incurred in bringing the inventories to their present location and
condition. The costs of conversion of inventories include fixed and variable
production overheads, taking into account the stage of completion.
Accounts receivable - Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. Amounts collected on trade accounts receivable are included in net
cash provided by operating activities in the consolidated statements of cash
flows. The Company maintains an allowance for doubtful accounts for estimated
losses inherent in its accounts receivable portfolio. In establishing the
required allowance, management considers historical losses, current receivables
aging, and existing industry and PRC economic data. The Company reviews its
allowance for doubtful accounts monthly. Past due balances over 90 days and over
a specified amount are reviewed individually for collectibility. Account
balances are charged off against the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote. At
December 31, 2008 and 2007 there was no allowance for doubtful accounts based on
the review of the above factors. There were no write-off’s for 2008 and 2007,
respectively. The Company does not have any off-balance-sheet credit exposure
related to its customers.
Advances to Suppliers - In
order to insure a steady supply of raw materials, the Company is required from
time to time to make cash advances when placing its purchase
orders.
Property and equipment -
Property and equipment is stated at the historical cost, less accumulated
depreciation. Depreciation on property, plant, and equipment is provided using
the straight-line method over the estimated useful lives of the assets after
taking into account any salvage value as follows:
Buildings
|
30
years
|
Communication
equipment, plant and machinery
|
10
- 30 years
|
Motor
vehicles
|
10
years
|
Dairy
cows
|
5
years
|
Furniture,
Fixtures, and Equipment
|
5 -
10 years
|
Expenditures
for renewals and betterments were capitalized, while repairs and maintenance
costs are normally charged to the statement of operations in the year in which
they are incurred. In situations where it can be clearly demonstrated that the
expenditure has resulted in an increase in the future economic benefits expected
to be obtained from the use of the asset, the expenditure is capitalized as an
additional cost of the asset.
Upon sale
or disposal of an asset, the historical cost and related accumulated
depreciation or amortization of such asset were removed from their respective
accounts and any gain or loss is recorded in the statements of
operations.
F-32
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
3.
|
Summary
of Significant Accounting Policies
(Continued)
|
Intangible Assets - Intangible
assets consist of land use rights acquired by the Company and are amortized on a
straight line basis over the lives of the rights agreements, which is fifty
years and purchased patents which are amortized on a straight line basis over
the remaining life of the patents which is five years.
Long Lived Assets - The
Company reviews the carrying value of its long lived assets, such as property,
plant, and equipment and purchased intangible assets for impairment whenever
events and circumstances indicate that the carrying value of an asset may not be
recoverable from the estimated future cash flows expected to result from its use
and eventual disposition. In cases where undiscounted expected future cash flows
are less than the carrying value, an impairment loss is recognized equal to an
amount by which the carrying value exceeds the fair value of assets. Fair value
is determined through various valuation techniques including discounted cash
flow models, quoted market values and third-party independent appraisals, as
considered necessary. The Company evaluates the carrying value of long lived
assets during the fourth quarter of each year and between annual evaluations if
events occur or circumstances change that would more likely than not reduce the
fair value of the intangible asset below its carrying amount. The factors
considered by management in performing this assessment include current operating
results, trends and prospects, the manner in which the property is used, and the
effects of obsolescence, demand, competition, and other economic factors. Based
on this assessment, there was no impairment at December 31, 2008. There can be
no assurance, however, that market conditions will not change or demand for the
Company’s products or services will continue, which could result in impairment
of long-lived assets in the future.
Construction-in-Progress -
Plant and production lines currently under development are accounted for as
construction-in-progress. Construction-in-progress is recorded at acquisition
cost, including land rights cost, development expenditure, professional fees and
the interest expenses capitalized during the course of construction for the
purpose of financing the project. Upon completion and readiness for use of the
project, the cost of construction-in-progress is to be transferred to fixed
assets, at which time depreciation will commence. As of December 31, 2008, the
Company has incurred and capitalized into construction-in-progress approximately
$2,392,471 of construction costs and $89,868 of capitalized
interest. The estimated cost to be incurred in 2009 to complete the
project is approximately $6,398,083.
Capitalized Interest – The
Company’s policy is to capitalize interest costs on debt during the construction
of major projects exceeding one year. A reconciliation of total
interest cost to interest expense as reported in the consolidated statements of
income for 2008 and 2007 is as follows:
2008
|
2007
|
|||||||
Interest
cost capitalized
|
$ | 89,868 | $ | — | ||||
Interest
cost charged to income
|
426,646 | 19,167 | ||||||
$ | 516,514 | $ | 19,167 |
Foreign Currency - The
Company’s principal country of operations is The People’s Republic of China. The
financial position and results of operations of the Company are determined using
the local currency (“Renminbi” or “Yuan”) as the functional currency. The
results of operations denominated in foreign currency are translated at the
average rate of exchange during the reporting period.
Assets
and liabilities denominated in foreign currencies at the balance sheet date are
translated at the exchange rates prevailing at the balance sheet date. The
registered equity capital denominated in the functional currency is translated
at the historical rate of exchange at the time of capital contribution. All
translation adjustments resulting from the translation of the financial
statements into the reporting currency (“US Dollars”) are dealt with as a
separate component within stockholders’ equity. Translation adjustments net of
tax totaled $1,166,868 and $635,079, for the years ended December 31, 2008 and
2007, respectively.
As of
December 31, 2008 and 2007, the exchange rate was 6.823 Yuan and 7.3 Yuan per
U.S. Dollar, respectively.
F-33
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
3.
|
Summary
of Significant Accounting Policies
(Continued)
|
Revenue recognition - Revenue
is recognized in accordance with Staff Accounting Bulletin No. 104, Revenue
Recognition, which states that revenue should be recognized when the following
criteria are met: (1) persuasive evidence of an arrangement exists;
(2) the service has been rendered; (3) the selling price is fixed or
determinable; and (4) collection of the resulting receivable is reasonably
assured.
Interest
income is recognized when earned, taking into account the average principal
amounts outstanding and the interest rates applicable.
As of
December 31, 2008, the Company has no sales or contracts that included multiple
deliverables that would fall under the scope of EITF 00-21, “Revenue
Arrangements with Multiple Deliverables.”
Sales returns - The Company
does not allow return of products except for unsold products after expiration
date and for products that were damaged during shipment. The total amount of
returned product is less than 0.05% of total sales. The cost of unsold products
and damaged products are netted against sales and cost of goods sold,
respectively.
Research and Development Costs
– Research and development costs are expenses as incurred.
Advertising - The Company
expenses advertising costs the first time the respective advertising takes
place. These costs were included in selling, general and administrative
expenses. The total advertising expenses incurred for the years ended December
31, 2008 and 2007 were $3,438,187 and $78,063, respectively.
Product display fees -
The Company has entered into a number of agreements with the resellers of its
products, whereby the Company pays the reseller an agreed upon amount to display
its products. As prescribed by the Emerging Issues Task Force Issue 01-09:
Accounting for Consideration Given by a Vendor to a Customer, the Company has
reduced sales by the amounts paid under these agreements. For the years ended
December 31, 2008 and 2007, these totaled $1,339,735 and $763,490,
respectively.
Shipping and handling costs -
The Company's shipping and handling costs are included in cost of sales for all
periods presented.
Earnings per share - Basic net
earnings per common share is computed by dividing net earnings applicable to
common shareholders by the weighted-average number of common shares outstanding
during the period. Diluted net earnings per common share is determined using the
weighted-average number of common share shares outstanding during the period,
adjusted for the dilutive effect of common stock equivalents, using the treasury
stock method, consisting of shares that might be issued upon exercise of common
stock warrants. In periods where losses are reported, the weighted-average
number of common shares outstanding excludes common stock equivalents, because
their inclusion would be anti-dilutive.
Taxation - Taxation on
profits earned in the PRC has been calculated on the estimated assessable
profits for the year at the rates of taxation prevailing in the PRC in which the
Company operates after taking into effect the benefits from any special tax
credits or “tax holidays” allowed in the country of operations.
The
Company accounts for income tax under the provisions of SFAS 109 Accounting for Income Taxes,
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of the events that have been included in the
financials statements or tax returns. Deferred income taxes are recognized for
all significant temporary differences between tax and financial statements bases
of assets and liabilities. Valuation allowances are established against net
deferred tax assets when it is more likely than not that some portion or all of
the deferred tax asset will not be realized.
The
Company does not have any long-term deferred tax assets or liabilities in China
that will exist once the tax holiday (See Note 10) expires. The
Company does not have any significant deferred tax asset or liabilities that
relate to tax jurisdictions not covered by the tax holiday.
F-34
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
3.
|
Summary
of Significant Accounting Policies
(Continued)
|
The
Company does not accrue United States income tax on unremitted earnings from
foreign operations, as it is the Company’s intention to invest these earnings in
the foreign operations indefinitely.
Enterprise income
tax
Under the
Provisional Regulations of The People’s Republic of China Concerning Income Tax
on Enterprises promulgated by the State Council which came into effect on
January 1, 1994, income tax is payable by a Wholly Foreign Owned Enterprises at
a rate of 15% of their taxable income. Preferential tax treatment may, however,
be granted pursuant to any law or regulations from time to time promulgated by
the State Council. XAL enjoyed a 100% exemption from enterprise income taxes
starting on January 10, 2006 due to its classification as a “Wholly Foreign
Owned Enterprise.” On March 16, 2007, The People’s Republic of China enacted a
new Enterprise Income Tax Law for the purpose of unifying the tax treatment of
domestic and foreign enterprises. This new law eliminates the preferential tax
treatment for new Wholly Foreign Owned Enterprises but allows previously granted
exemptions to stay in place through 2012, with the exception that the statutory
tax rate will increase by 2% per year from 15% in 2006 to 25% by 2012. This
exemption ended on January 10, 2008, at which time XAL will qualify under the
current tax structure for a 50% reduction in the statutory enterprise income tax
rates for an additional three years.
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax
assets, including tax loss and credit carryforwards, and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect of deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Deferred income tax expense represents the change during the period in the
deferred tax assets and deferred tax liabilities. The components of the deferred
tax assets and liabilities are individually classified as current and noncurrent
based on their characteristics. 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.
A
provision has not been made at December 31, 2008 for U.S. or additional foreign
withholding taxes on approximately $13,558,000 of undistributed earnings of
foreign subsidiaries because it is the present intention of management to
reinvest the undistributed earnings indefinitely in foreign operations.
Generally, such earnings become subject to U.S. tax upon the remittance of
dividends and under certain other circumstances. It is not practicable to
estimate the amount of deferred tax liability on such undistributed
earnings.
In 2006,
the Financial Accounting Standards Board (FASB) issued FIN 48, which clarifies
the application of Statement of Financial Accounting Standards (SFAS) 109 by
defining a criterion that an individual income tax position must meet for any
part of the benefit of that position to be recognized in an enterprise’s
financial statements and provides guidance on measurement, derecognition,
classification, accounting for interest and penalties, accounting in interim
periods, disclosure and transition. In accordance with the transition
provisions, the Company adopted FIN 48 effective January 1, 2007.
The
Company recognizes that virtually all tax positions in the PRC are not free of
some degree of uncertainty due to tax law and policy changes by the State.
However, the Company cannot reasonably quantify political risk factors and thus
must depend on guidance issued by current State officials.
Based on
all known facts and circumstances and current tax law, the Company believes that
the total amount of unrecognized tax benefits as of December 31, 2008, is not
material to its results of operations, financial condition or cash flows. The
Company also believes that the total amount of unrecognized tax benefits as of
December 31, 2007, if recognized, would not have a material effect on its
effective tax rate. The Company further believes that there are no tax positions
for which it is reasonably possible, based on current Chinese tax law and
policy, that the unrecognized tax benefits will significantly increase or
decrease over the next 12 months producing, individually or in the aggregate, a
material effect on the Company’s results of operations, financial condition or
cash flows.
F-35
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
3.
|
Summary
of Significant Accounting Policies
(Continued)
|
Value added
tax
The
Provisional Regulations of The People’s Republic of China Concerning Value Added
Tax promulgated by the State Council came into effect on January 1, 1994. Under
these regulations and the Implementing Rules of the Provisional Regulations of
the PRC Concerning Value Added Tax, value added tax is imposed on goods sold in
or imported into the PRC and on processing, repair and replacement services
provided within the PRC.
Value
added tax payable in The People’s Republic of China is charged on an aggregated
basis at a rate of 13% or 17% (depending on the type of goods involved) on the
full price collected for the goods sold or, in the case of taxable services
provided, at a rate of 17% on the charges for the taxable services provided, but
excluding, in respect of both goods and services, any amount paid in respect of
value added tax included in the price or charges, and less any deductible value
added tax already paid by the taxpayer on purchases of goods and services in the
same financial year.
Warrants - the Company
evaluates its Warrants (as defined in Note 14) on an ongoing basis considering
the provisions of SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, which
establishes standards for issuers of financial instruments with characteristics
of both liabilities and equity related to the classification and measurement of
those instruments. The Warrants are evaluated considering the provisions of SFAS
No. 133, Accounting for
Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities, considering EITF Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock
and EITF 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity's Own Stock.
Freestanding Financial Instruments
with Characteristics of Both Liabilities and Equity - In accordance with
SFAS 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity, the Company accounts for financial instruments as a liability if
it embodies an obligation to repurchase the issuer’s equity shares, or is
indexed to such an obligation, and that requires or may require the issuer to
settle the obligation by transferring assets. Freestanding financial instruments
are financial instruments that are entered into separately and apart from any of
the entity's other financial instruments or equity transactions, or that is
entered into in conjunction with some other transaction and is legally
detachable and separately exercisable. The liability recorded is the per share
price to be paid and is offset to equity.
Retirement benefit costs -
According to The People’s Republic of China regulations on pensions, the Company
contributes to a defined contribution retirement program organized by the
municipal government in the province in which the Company was registered and all
qualified employees are eligible to participate in the program. Contributions to
the program are calculated at 23.5% of the employees’ salaries above a fixed
threshold amount and the employees contribute 2% to 8% while the Company
contributes the balance contribution of 21.5% to 15.5%. The Company has no other
material obligation for the payment of retirement benefits beyond the annual
contributions under this program.
Stock Based Compensation - On December 16, 2004,
the FASB issued SFAS No. 123R, Share-Based Payment (“SFAS
No. 123R”) , which requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on the grant date fair value of the award. Under SFAS No. 123R, the
Company must determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the
transition method to be used at date of adoption. The transition methods include
prospective and retroactive adoption options. Under the retroactive option,
prior periods may be restated either as of the beginning of the year of adoption
or for all periods presented. The prospective method requires that compensation
expense be recorded for all unvested stock options and restricted stock at the
beginning of the first quarter of adoption of SFAS No. 123R, while the
retroactive methods would record compensation expense for all unvested stock
options and restricted stock beginning with the first period restated. The
Company has adopted the requirements of SFAS No. 123R for the fiscal year
beginning on January 1, 2006.
F-36
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
3.
|
Summary
of Significant Accounting Policies
(Continued)
|
Fair value of financial instruments -
The Company applies the provisions of Statement of Financial Accounting
Standards (SFAS) No. 107,
Disclosures about Fair Value of Financial Instruments (SFAS No. 107). SFAS No. 107 requires all
entities to disclose the fair value of financial instruments, both assets and
liabilities recognized and not recognized on the balance sheet, for which it is
practicable to estimate fair value. SFAS No. 107 defines fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties. As of
December 31, 2008 and 2007 the fair value of cash, accounts receivable, other
receivables, accounts payable, commercial notes payable, and accrued expenses
approximated carrying value due to the short maturity of the instruments, quoted
market prices, or interest rates, which fluctuate with market
rates.
Fair Value Measurements - In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 establishes a framework for measuring fair value in generally
accepted accounting principles, clarifies the definition of fair value within
that framework, and expands disclosures about the use of fair value
measurements. SFAS No. 157 applies to fair value measurements required by
existing accounting pronouncements and does not require any new fair value
measurements. The Company adopted SFAS No. 157 on January 1,
2008.
The
Company has not adopted SFAS No. 157 for non-financial assets and
non-financial liabilities that are recognized or disclosed at fair value in the
consolidated financial statements on a nonrecurring basis as permitted by FASB
Staff Position No. FAS 157-2, which provided a deferral of such provisions until
2009. The Company is in the process of evaluating the impact, if any, of
applying these provisions on its consolidated financial position and results of
operations.
The
carrying value of financial assets and liabilities recorded at fair value is
measured on a recurring or nonrecurring basis. Financial assets and liabilities
measured on a non-recurring basis are those that are adjusted to fair value when
a significant event occurs. The Company had no financial assets or liabilities
carried and measured on a nonrecurring basis during the reporting periods.
Financial assets and liabilities measured on a recurring basis are those that
are adjusted to fair value each time a financial statement is prepared. The
Company’s had no financial assets and/or liabilities carried at fair value on a
recurring basis at December 31, 2008.
The
availability of inputs observable in the market varies from instrument to
instrument and depends on a variety of factors including the type of instrument,
whether the instrument is actively traded, and other characteristics particular
to the transaction. For many financial instruments, pricing inputs are readily
observable in the market, the valuation methodology used is widely accepted by
market participants, and the valuation does not require significant management
discretion. For other financial instruments, pricing inputs are less observable
in the market and may require management judgment.
Recent accounting
pronouncements
In
September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans (SFAS No. 158),
an amendment of FASB Statements No. 87, 88, 106 and 132(R).
SFAS No. 158 requires (a) recognition of the funded status
(measured as the difference between the fair value of the plan assets and the
benefit obligation) of a benefit plan as an asset or liability in the employer’s
statement of financial position, (b) measurement of the funded status as of
the employer’s fiscal year-end with limited exceptions, and (c) recognition
of changes in the funded status in the year in which the changes occur through
comprehensive income. The requirement to recognize the funded status of a
benefit plan and the disclosure requirements are effective as of the end of the
fiscal year ending after December 15, 2006. The requirement to measure the
plan assets and benefit obligations as of the date of the employer’s fiscal
year-end statement of financial position is effective for fiscal years ending
after December 15, 2008. This Statement has no current applicability to the
Company’s financial statements. Management adopted this Statement on
December 31, 2006 and the adoption of SFAS No. 158 did
not have a material impact to the Company’s financial position, results of
operations, or cash flows.
F-37
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
3.
|
Summary
of Significant Accounting Policies
|
In
February 2007, the FASB issued Statement No. 159 The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159). This statement permits
companies to choose to measure many financial assets and liabilities at fair
value. Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The adoption of this standard did not have a
material impact on our financial condition, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141(R)). SFAS 141(R) will change the accounting for business combinations. Under
SFAS No. 141(R), an acquiring entity will be required to recognize all the
assets acquired and liabilities assumed in a transaction at the acquisition-date
fair value with limited exceptions. SFAS No. 141(R) will change the
accounting treatment and disclosure for certain specific items in a business
combination. SFAS No. 141(R) applies prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. SFAS 141(R) will
impact the Company in the event of any future acquisition.
In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51 (SFAS 160). SFAS 160 establishes new accounting and reporting
standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008. The adoption of this standard did
not have a material impact on the Company’s financial position, results of
operations, or cash flows.
In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 133 (SFAS 161). FAS 161 changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. The guidance in SFAS
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application
encouraged. This Statement encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. The Company is currently
assessing the impact of SFAS 161.
In May
2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted
Accounting Principles (SFAS 162). SFAS 162 is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
U.S. generally accepted accounting principles (GAAP). SFAS 162 directs the GAAP
hierarchy to the entity, not the independent auditors, as the entity is
responsible for selecting accounting principles for financial statements that
are presented in conformity with GAAP. SFAS 162 is effective 60 days following
the Securities and Exchange Commission's approval of the Public Company
Accounting Oversight Board amendments to remove the GAAP hierarchy from the
auditing standards. The adoption of this standard did not have a material impact
on the Company’s financial position, results of operations, or cash
flows.
In June
2008, the Emerging Issues Task Force (EITF) reached final consensuses on EITF
Issue 08-4, Transition
Guidance for Conforming Changes to Issue No. 98-5. Certain conclusions
reached in EITF Issue No. 98-5, “Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,”
were nullified in EITF Issue No. 00-27, “Application of Issue No. 98-5 to
Certain Convertible Instruments.” Moreover, some of the conclusions in Issue No.
98-5 and Issue No. 00-27 were superseded by SFAS No. 150 , Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. While the conclusions reached in Issue No. 98-5 were subsequently
updated to reflect the issuance of Issue No. 00-27 and SFAS No. 150, the
transition guidance in Issue No. 98-5 was not revised. The EITF reached a
consensus on Issue No. 08-4, which provides such guidance and requires that (1)
conforming changes made to Issue No. 98-5 resulting from Issue No. 00-27 and
SFAS No. 150 be effective for financial statements of fiscal years ending after
December 15, 2008, with early application allowed, and (2) the effect of
applying the conforming changes be presented retrospectively (with the
cumulative effect of the change reported in retained earnings as of the
beginning of the first period presented). The adoption of this standard did not
have a material impact on our financial condition, results of operations or cash
flows.
F-38
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
3.
|
Summary
of Significant Accounting Policies
(Continued)
|
In June
2008, the Emerging Issues Task Force (EITF) reached final consensuses on EITF
Issue 07-5, Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own
Stock. In EITF Issue 07-5, the EITF reached the consensus that
evaluation of whether an equity-linked financial instrument (or embedded
feature) is indexed to the company's own stock should be based on a two-step
approach. Under the two-step approach, an equity-linked financial instrument (or
embedded feature) is not deemed indexed to the entity's own stock if the strike
price is denominated in a currency other than the issuer's functional currency
(but the determination of whether the instrument is indexed to the company's own
stock is not affected by the currency in which the underlying shares are
traded). Also, market-based employee stock valuation instruments are not
considered to be indexed to the entity's own stock (presumably because they are
influenced by, among other factors, employee behavior, which is not an input
used to estimate the fair value of the forward contract or option). An exercise
contingency is a provision entitling the entity (or the counterparty) to
exercise an equity-linked financial instrument or embedded feature based on
changes in an underlying, which includes the occurrence (or nonoccurrence) of a
specified event. Provisions that accelerate the timing of the entity's (or
counterparty's) ability to exercise an instrument or that extend the length of
time that an instrument is exercisable are exercise contingencies. EITF 07-5 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The Company is
currently assessing the impact of EITF 07-5.
In July
2008, the FASB issued FASB Staff Position (FSP) No. EITF 03-6-1, Unvested Share-Based Awards as
Participating Securities for EPS Purposes (FSP No. EITF
03-6-1). FSP No. EITF 03-6-1 clarifies the circumstances under which
unvested share-based payment awards should be considered participating
securities for purposes of determining basic earnings per share (EPS). FSP No.
EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008 (and
for interim periods within such years). The Company is currently assessing the
impact of FSP No. FAS 157-3.
In
December 2008, the FASB issued FASB Staff Position (FSP) no. FAS 132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets. The FSP amends SFAS No. 132 (revised
2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits,
to provide guidance on an employer's disclosures about plan assets of a defined
benefit pension or other postretirement plan. The disclosures about plan assets
required by FSP No. FAS 123(R)-1 are to be provided for fiscal years beginning
after December 15, 2009. The Company is currently assessing the impact of FSP
No. FAS 123(R)-1.
4.
|
Concentrations
of Business and Credit Risk
|
The
Company conducts all of its primary trade in Peoples Republic of China
(PRC). There can be no assurance that the Company will be able to
successfully conduct its trade, and failure to do so would have a material
adverse effect on the Company’s financial position, results of operations and
cash flows. Also, the success of the Company’s operations is subject to numerous
contingencies, some of which are beyond management’s control. These
contingencies include general economic conditions, price of raw material,
competition, governmental and political conditions, and changes in regulations.
Because the Company is dependant on foreign trade in PRC, the Company is subject
to various additional political, economic and other uncertainties. Among other
risks, the Company’s operations will be subject to risk of restrictions on
transfer of funds, domestic and international customs, changing taxation
policies, foreign exchange restrictions, and political and governmental
regulations.
Substantially
all of the Company’s bank accounts are in banks located in the PRC and are not
covered by any type of protection similar to that provided by the FDIC on funds
held in U.S banks. Accounts held at U.S. financial institutions are insured by
the Federal Deposit Insurance Corporation up to $250,000. As of December 31,
2008 none of the U.S. cash balances are in excess of insured
amounts.
F-39
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
4.
|
Concentrations
of Business and Credit Risk
(Continued)
|
Milk
powder is historically 75% to 80% of our total sales. Dairy product consumption
in China has historically been lower than in many other countries in the
world. Growing interest in milk products in China is a relatively
recent phenomenon which makes the market for our products less
predictable. Consumers may lose interest in the
products. As a result, achieving and maintaining market acceptance
for our products will require substantial marketing efforts and the expenditure
of significant funds to encourage dairy consumption in general, and the purchase
of our products in particular. There is substantial risk that the
market may not accept or be receptive to our products. Market
acceptance of our current and proposed products will depend, in large part, upon
our ability to inform potential customers that the distinctive characteristics
of our products make them superior to competitive products and justify their
pricing. Our current and proposed products may not be accepted by
consumers or able to compete effectively against other premium or non-premium
dairy products. Lack of market acceptance would limit our revenues
and profitability.
The
Company operates in China, which may give rise to significant foreign currency
risks from fluctuations and the degree of volatility of foreign exchange rates
between U.S. dollars and the Chinese currency RMB.
Recently,
a number of milk powder products produced within China were found to contain
unsafe levels of tripolycyanamide, also known as melamine, sickening thousands
of infants. This prompted the Chinese government to conduct a nationwide
investigation into how the milk powder was contaminated, and caused a worldwide
recall of certain milk powder products produced within China. On September 16,
2008, China’s Administration of Quality Supervision, Inspection and Quarantine
(AQSIQ) revealed that it had tested samples from 175 dairy manufacturers, and
published a list of 22 companies whose products contained melamine. We passed
the emergency inspection and were not included on AQSIQ’s list. Although we
believe that the inevitable contraction in the Chinese milk powder industry
caused by this crisis will lead to increased demand for our products, we can’t
be certain that the illnesses caused by contamination in the milk powder
industry, whether or not related to our products, won’t lead to decreased demand
for milk powder products produced within China, thereby having a material
adverse effect on our business.
Financial
instruments that potentially subject the Company to concentration of credit risk
consist principally of cash and trade receivables, the balances of which are
stated on the balance sheet. Concentration of credit risk with respect to trade
receivables is limited due to the Company's large number of diverse customers in
different locations in China. The Company does not require collateral or other
security to support financial instruments subject to credit risk.
For the
years ended December 31, 2008 and 2007, no single customer accounted for 10% or
more of sales revenues.
As of
December 31, 2008, the Company had no insurance coverage of any kind. Accrual
for losses is not recognized until such time as an uninsured loss has
occurred.
Payments
of dividends may be subject to some restrictions due to the fact that the
operating activities are conducted in subsidiaries residing in the Peoples
Republic of China; therefore in accordance with Rule 504/4.08 (e) (3) of
Regulation S-X, the following are condensed parent company only financial
statements for the two years ended December 31, 2008 and 2007.
F-40
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
EMERALD DAIRY,
INC.
CONDENSED
PARENT COMPANY ONLY BALANCE SHEETS
AS OF
DECEMBER 31, 2008 and 2007
2008
|
2007
|
|||||||
Current
assets:
|
||||||||
Cash
|
$ | 169,324 | $ | 826,191 | ||||
Prepaid
expenses
|
80,669 | - | ||||||
Total
current assets
|
249,993 | 826,191 | ||||||
Property
and equipment, net
|
2,834 | 2,117 | ||||||
Investment
in subsidiaries, reported on equity method
|
24,376,090 | 15,937,908 | ||||||
Total
assets
|
$ | 24,628,917 | $ | 16,766,216 | ||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
$ | 1,545,613 | $ | 215,299 | ||||
Notes
payable, net of debt discount of $87,888 at December 31,
2008
|
2,662,112 | - | ||||||
Total
current liabilities
|
4,207,725 | 215,299 | ||||||
Put/Call
Liability
|
— | 3,169,444 | ||||||
4,207,725 | 3,384,743 | |||||||
Stockholders'
equity:
|
||||||||
Preferred
Stock ($0.001 par value, 10,000,000 shares authorized, none issued and
outstanding at December 31, 2008
|
||||||||
Common
stock, $.001 par value; 100,000,000 shares authorized; 31,243,776 and
31,241,276 shares issued and outstanding December 31, 2008 and
2007
|
31,244 | 31,241 | ||||||
Treasury
stock (1,944,444 shares at December 31, 2008 and 2007)
|
(1,944 | ) | (1,944 | ) | ||||
Additional
paid-in capital
|
8,225,922 | 4,625,886 | ||||||
Accumulated
other comprehensive income
|
2,059,568 | 892,755 | ||||||
Retained
earnings
|
10,106,402 | 7,833,535 | ||||||
Total
stockholders' equity
|
20,421,192 | 13,381,473 | ||||||
Total
liabilities and stockholders' equity
|
$ | 24,628,917 | $ | 16,766,216 |
F-41
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
EMERALD
DAIRY, INC.
CONDENSED
PARENT COMPANY ONLY INCOME STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007
SALES
|
$
|
—
|
$
|
—
|
||||
OPERATING
AND ADMINISTRATIVE
|
||||||||
EXPENSES:
|
||||||||
General
and administrative expenses
|
2,529,024
|
695,431
|
||||||
Income
from operations
|
(2,529,024
|
)
|
(695,431)
|
|||||
OTHER
INCOME (EXPENSE):
|
||||||||
Interest
income
|
8,596
|
3,695
|
||||||
Interest
expense
|
(425,351
|
)
|
—
|
|||||
Equity
in earnings of unconsolidated subsidiaries
|
5,260,286
|
4,498,813
|
||||||
INCOME
BEFORE INCOME TAXES
|
2,314,507
|
3,807,077
|
||||||
(PROVISION
FOR) BENEFIT FROM
|
||||||||
INCOME
TAXES
|
—
|
—
|
||||||
NET
INCOME
|
$
|
2,314,507
|
$
|
3,807,077
|
F-42
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
EMERALD
DAIRY, INC.
CONDENSED
PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS
FOR THE
YEARS ENDED DECEMBER 31, 2008 AND 2007
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
income
|
$ | 2,314,507 | $ | 3,807,077 | ||||
Adjustments
to reconcile net income to operating activities -
|
||||||||
Less
: Equity in earnings of unconsolidated subsidiaries
|
(5,260,286 | ) | (4,498,813 | ) | ||||
Depreciation
|
443 | - | ||||||
Amortization
of loan discount
|
217,275 | - | ||||||
Net
change in assets and liabilities
|
||||||||
Prepaid
expenses
|
4,405 | - | ||||||
Accounts
payable and accrued expenses
|
1,330,314 | 215,299 | ||||||
Net
cash (used in) operating activities
|
(1,393,342 | ) | (476,437 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchase
of fixed assets
|
(1,160 | ) | ||||||
Investments
in subsidiaries
|
(2,012,365 | ) | (6,454,992 | ) | ||||
Net
cash provided (used in) investing activities
|
(2,013,525 | ) | (6,454,992 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Sale
of common stock
|
- | 9,974,190 | ||||||
Advances
on notes payable
|
2,750,000 | |||||||
Repurchase
of common stock
|
- | (3,169,444 | ) | |||||
Net
cash provided by financing activities
|
2,750,000 | 6,804,746 | ||||||
Effect
of exchange rate change on cash and cash equivalents
|
— | — | ||||||
NET
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
|
(656,867 | ) | 826,191 | |||||
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
826,191 | — | ||||||
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 169,324 | 826,191 | |||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||
Interest
paid
|
$ | — | $ | — | ||||
Income
taxes paid
|
$ | — | $ | — |
F-43
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
Emerald
Dairy, Inc.
Notes to
Condensed Parent Company Only Financial Statements
Note 1 -
These condensed parent company only financial statements should be read in
connection with the consolidated financial statements and notes
thereto.
The
operations of the Company are located in the PRC. Accordingly, the Company’s
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, as well as by the
general state of the PRC economy.
F-44
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
5.
|
Inventory
|
As of
December 31, 2008 and 2007 inventory consists of the following:
2008
|
2007
|
|||||||
Raw
materials
|
$ | 557,128 | $ | 634,018 | ||||
Work-in-process
|
299,931 | 349,334 | ||||||
Finished
goods
|
17,305 | 8,490 | ||||||
Repair
parts
|
8,869 | 8,585 | ||||||
$ | 883,233 | $ | 1,000,427 |
6.
|
Advances
to equipment supplier
|
As of
December 31, 2008 advances to equipment supplier consisted of $3,712,883 in
advances on a contracted to purchase equipment from a supplier for the second
processing facility under construction. The $1,591,235 remaining on
the contract will be due when the equipment is installed during
2009.
7.
|
Advances
to suppliers and other receivables
|
As of
December 31, 2008 and 2007, advances to suppliers and other receivables consist
of the following:
2008
|
2007
|
|||||||
Advances
to milk suppliers
|
$ | 388,406 | $ | 652,398 | ||||
Other
Receivables
|
- | 50,000 | ||||||
Advances
to staff
|
76,712 | 18,924 | ||||||
Prepaid
expenses
|
84,717 | 40,087 | ||||||
$ | 549,835 | $ | 761,409 |
8.
|
Deposits
|
As of
December 31, 2008 and 2007, deposits consist of the following:
2008
|
2007
|
|||||||
Deposit
on building purchase
|
- | 1,101,370 | ||||||
Deposit
on new facility site
|
- | 539,725 | ||||||
Deposit
on contract
|
74,614 | 1,534,247 | ||||||
$ | 74,614 | $ | 3,175,342 |
During
the year ended December 31, 2008 the $1,101,370 deposit on the building was
transferred to property, plant and equipment upon completion of the purchase of
the building and the $539,725 deposit on the new facility site was transferred
to intangible assets when the land use right agreement was
completed. During the year ended December 31, 2008, $1,459,633 of the
advertising contract was completed and was recorded as advertising
expense.
F-45
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
9.
|
Property,
Plant, and Equipment
|
As of
December 31, 2008 and 2007, Property, Plant, and Equipment consist of the
following:
2008
|
2007
|
|||||||
Building
|
$ | 3,704,973 | $ | 1,007,475 | ||||
Plant
and Machinery
|
2,972,883 | 2,512,451 | ||||||
Motor
vehicles
|
526,906 | 459,547 | ||||||
Dairy
cows
|
242,102 | 211,220 | ||||||
Office
equipment
|
59,739 | 52,696 | ||||||
7,506,603 | 4,243,389 | |||||||
Less:
Accumulated depreciation
|
(1,405,035 | ) | (923,308 | ) | ||||
$ | 6,101,568 | $ | 3,320,081 |
Depreciation
expenses totaled $409,563 and $202,332 for the years ended December 31, 2008 and
2007, respectively, of which $323,457 and $152,549 were included as a component
of cost of goods sold for the years ended December 31, 2008 and 2007,
respectively.
During
the year ended December 31, 2008 a deposit on the new building of $1,101,370 was
transferred to property, plant and equipment upon completion of the purchase of
the office building.
10.
|
Construction
in progress
|
December 31,
2008
|
December 31,
2007
|
|||||||
Construction
in progress
|
$ | 2,482,339 | $ | - |
Construction-in-progress
represents construction and installations of the new plant and machinery for the
production facility in Hailun City.
11.
|
Intangible
Assets
|
December 31,
2008
|
December 31,
2007
|
|||||||
Land
use rights
|
$ | 1,356,384 | $ | 66,839 | ||||
Patents
|
53,202 | 49,726 | ||||||
1,409,586 | 116,565 | |||||||
Less:
Accumulated amortization
|
(29,497 | ) | (1,337 | ) | ||||
$ | 1,380,089 | $ | 115,228 |
For the
years ended December 31, 2008 and 2007, amortization expenses totaled $28,958
and $1,337, respectively.
Amortization
expense is estimated to be $35,463 for each of the next five
years.
F-46
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
12.
|
Income
Taxes
|
On May
30, 2005, American International Dairy Holdings, Inc. executed a Share Transfer
Agreement with Heilongjiang Xing An Ling Dairy Co., Ltd., a corporation
organized and existing under the laws of People’s Republic of China. XAL applied
to be as a foreign invested company right after the share transfer, which
business license has been approved as a foreign invested company on January 10,
2006. According to Chinese taxation policy, there is income tax exemption for 2
years and half for 3 years suitable to foreign invested company, advanced
Technology Company or software Development Company. XAL is considered an
Advanced Technology Company. Therefore the Company receives this income tax
exemption policy from January 10, 2006 the date approval as a foreign invested
company. The Company received a 100% tax holiday as of January 10, 2006. On
January 10, 2008 the Company’s tax exemption was reduced to 50% of the
prevailing tax rate and will continue at this reduced rate for three additional
years.
LvBao is
currently subject to the Enterprise income tax of 33%.
A
reconciliation of the provision for income taxes with amounts determined by the
U.S. federal income tax rate to income before income taxes is as
follows.
The
components of net income (loss) before provision for income tax consist of
following:
Year Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
U.S.
Operations
|
$ | (2,945,700 | ) | $ | (832,000 | ) | ||
Chinese
Operations
|
6,100,400 | 4,500,000 | ||||||
$ | 3,154,700 | $ | 3,668,000 |
The
components of the provision for income taxes are approximately as
follows:
Year Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Federal,
State and Local
|
$ | - | $ | - | ||||
People’s
Republic of China -Federal and Local
|
840,200 | 118,300 | ||||||
$ | 840,200 | $ | 118,300 |
The table
below approximately summarizes the reconciliation of the Company’s income tax
provision (benefit) computed at the statutory U.S. Federal rate and the actual
tax provision:
Year Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Income
tax (benefit) provision at Federal statutory rate
|
$ | 1,072,600 | 1,265,000 | |||||
State
income taxes, net of Federal benefit
|
189,300 | 311,000 | ||||||
U.S.
tax rate in excess of foreign tax rate
|
(427,000 | ) | (307,000 | ) | ||||
Abatement
of foreign income taxes
|
(1,161,200 | ) | (1,464,300 | ) | ||||
Increase
in valuation allowance
|
1,166,500 | 313,600 | ||||||
Tax
(benefit) provision
|
$ | 840,200 | $ | 118,300 |
The
Company has a U.S net operating loss carryforward of approximately $3,779,000 as
of December 31, 2008 which expires in 2027. The deferred tax asset associated
with these net operating loss carryforwards was fully reserved as of December
31, 2008.
F-47
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
12.
|
Income
Taxes (Continued)
|
The
change in the valuation allowance as of December 31, 2008 and 2007 was
$1,166,500 and $313,600, respectively.
The
effects of the tax exemption per share were as follows:
Year Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Tax
savings
|
$ | 1,161,200 | $ | 1,464,300 | ||||
Benefit
per share:
|
||||||||
Basic
|
$ | 0.04 | $ | 0.06 | ||||
Diluted
|
$ | 0.04 | $ | 0.06 |
Had the
tax exemption not been in place for the years ended December 31, 2008 and 2007,
the Company estimates the following proforma financial statement
impact:
Year Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Net
income before tax provision, as reported
|
$ | 3,154,700 | $ | 3,668,000 | ||||
Less
Tax provision not exempted
|
840,200 | 118,300 | ||||||
Less
Tax provision exempted
|
1,161,200 | 1,464,300 | ||||||
Proforma
Net income
|
$ | 1,153,300 | $ | 2,085,400 | ||||
Proforma
Net income per share
|
||||||||
Basic
|
$ | 0.04 | $ | 0.09 | ||||
Diluted
|
$ | 0.04 | $ | 0.09 |
13.
|
Employee
Retirement Benefits and Post Retirement
Benefits
|
According
to the Heilongjiang Provincial regulations on state pension program, both
employees and employers have to contribute toward pensions. The pension
contributions range from 2% to 8% that was contributed by individuals
(employees), and the Company is required to make contributions to the state
retirement plan based on 20% of the employees’ monthly basic salaries. Employees
in the PRC are entitled to retirement benefits calculated with reference to
their basic salaries on retirement and their length of service in accordance
with a government managed benefits plan. The PRC government is responsible for
the benefit liability to these retired employees. During the years ended
December 31, 2008 and 2007, respectively, the Company contributed $172,622 and
$126,593 in pension contributions.
14.
|
Accrued
Expenses
|
At
December 31, 2008 and 2007 accrued expenses consisted of:
December 31,
2008
|
December 31,
2007
|
|||||||
Liquidated
damages
|
$ | 1,201,998 | $ | 215,299 | ||||
Accrued
payroll
|
56,404 | 42,174 | ||||||
Accrued
interest
|
105,287 | — | ||||||
Accrued
insurance
|
24,192 | 11,523 | ||||||
$ | 1,387,881 | $ | 268,996 |
F-48
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
15.
|
Notes
payable
|
In June,
2008 the Company sold 8% promissory notes maturing December 31, 2008 and
three-year warrants to purchase 225,000 shares of common stock at an exercise
price of $2.61 for $2,250,000. Any amount of principal or interest
outstanding after December 31, 2008 will bear interest at a rate of 12%. In
accordance with Accounting Principles Board Opinion No. 14, "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants", the proceeds
from issuance of the notes were allocated to the notes and warrants based upon
their relative fair values. This allocation resulted in allocating $210,600 to
the warrants to be treated as loan discount to be amortized over the life of the
notes. During the year ended December 31, 2008, $210,600 of the loan discount
was amortized to interest expense. The following assumptions were used to
calculate the fair value of the warrants using the Black - Scholes
Model
Dividend
yield
|
0 | % | ||
Expected
volatility
|
118.01 | % | ||
Risk-free
interest rate
|
3.35 – 3.17 | % | ||
Expected
life
|
3
years
|
|||
Stock
price
|
$ | 1.63 | ||
Exercise
price
|
$ | 2.61 |
The notes
may be prepaid in their entirety without penalty upon 15 day notice. So long as
the Company has any obligation under the notes, there are limitations on its
ability to: (a) pay dividends or make other distributions on its capital stock;
(b) redeem, repurchase or otherwise acquire any of its securities; (c) create,
incur or assume any liability for borrowed money; (d) sell, lease or otherwise
dispose of any significant portion of its assets; (e) lend money, give credit or
make advances; or (f) assume, guarantee, endorse, contingently agree to purchase
or otherwise become liable upon the obligation of any other person or
entity.
In
connection with the sale of the notes the Company paid a placement agent
$122,500 in fees and delivered 45,000 three- year warrants to purchase 45,000
shares of common stock at an exercise price of $2.61. The warrants were valued
at $46,507 using a Black-Scholes Model and together with the fee were treated as
deferred issuance costs to be amortized over the life of the notes. Amortization
of the deferred issuance costs for the year ended December 31, 2008 was
$169,007. The following assumptions were used to calculate the fair
value of the warrants:
Dividend
yield
|
0 | % | ||
Expected
volatility
|
118.01 | % | ||
Risk-free
interest rate
|
3.35 | % | ||
Expected
life
|
3 years
|
|||
Stock
price
|
$ | 1.63 | ||
Exercise
price
|
$ | 2.61 |
In
connection with the sale of the June 20, 2008 notes the Company paid legal fees
of $15,000 that were treated as deferred issuance costs and are being amortized
to interest expense over the life of the notes.
On
December 31, 2008 the Company and the note holders entered into an agreement,
pursuant to which:
(a)
|
the
Maturity Date of each Original Note was extended from December 31, 2008 to
December 31, 2009;
|
(b)
|
as
of December 31, 2008, the initial interest rate of the Original Notes of
8% per annum was increased to 10% per
annum;
|
(c)
|
activities
related to the completion of the construction of the Company’s new
production facility were carved out of the noteholders’ “Prepayment
Option” and requirement for the Company to obtain the noteholders’ written
consent for certain additional
borrowings;
|
F-49
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
15.
|
Notes
payable (Continued)
|
(d)
|
The
expiration date of the Original Warrants was extended from the third
anniversary of their original issue date to the fifth anniversary of their
original issue date and;
|
(f)
|
The
exercise price of the Original Warrants was reduced from $2.61 to
$1.63.
|
In
accordance with EITF 96-19. Debtor's Accounting for a
Modification or Exchange of Debt Instruments, The Company evaluated the
present value of the cash flows under the terms of the amended debt instrument
to determine if they were at least 10 percent different from the present value
of the remaining cash flows under the terms of the original instrument. It was
determined that the terms were substantially different and therefore should be
accounted for as a debt extinguishment and the amended debt instrument should be
initially recorded at fair value which was determined to be $2,209,887 with the
discount to be amortized over the remaining life of the note. No debt
extinguishment gain was recorded as the gain was offset by the value of the
change in the warrants as computed per FAS123(R).
Per
guidance in FAS123(R) the difference in the value of the warrants before and
after the change in terms should be recorded as costs provided to the
creditor. The difference in the value was calculated to be $40,113,
which is recorded as a loan discount to be amortized over the extended term of
the notes to interest expense.
The fair
value of the warrants as of December 31, 2008 before modification of the terms
was calculated to be $91,191. The following assumptions were used to
calculate the fair value of the warrants:
Dividend
yield
|
0 | % | ||
Expected
volatility
|
149.89 | % | ||
Risk-free
interest rate
|
1.0 | % | ||
Expected
life
|
2.45 years
|
|||
Stock
price
|
$ | 0.70 | ||
Exercise
price
|
$ | 2.61 |
The fair
value of the warrants as of December 31, 2008 after modification of the terms
was calculated to be $131,304. The following assumptions were used to
calculate the fair value of the warrants:
Dividend
yield
|
0 | % | ||
Expected
volatility
|
149.89 | % | ||
Risk-free
interest rate
|
1.0 | % | ||
Expected
life
|
4.45 years
|
|||
Stock
price
|
$ | 0.70 | ||
Exercise
price
|
$ | 1.63 |
In
November, 2008 the Company sold 10% promissory notes maturing November 10, 2009
and three-year warrants to purchase 50,000 shares of common stock at an exercise
price of $2.61 for $500,000. Any amount of principal or interest
outstanding after November 30, 2008 will bear interest at a rate of 12%. In
accordance with Accounting Principles Board Opinion No. 14, "Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants", the proceeds
from issuance of the notes were allocated to the notes and warrants based upon
their relative fair values. This allocation resulted in allocating $54,450 to
the warrants to be treated as loan discount to be amortized to interest expense
over the life of the notes. During the year ended December 31, 2008, $6,675 of
the loan discount was amortized to interest expense.
F-50
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
15.
|
Notes
payable (Continued)
|
The
following assumptions were used to calculate the fair value of the warrants
using the Black - Scholes Model:
Dividend
yield
|
0 | % | ||
Expected
volatility
|
131 | % | ||
Risk-free
interest rate
|
1.78 | % | ||
Expected
life
|
3
years
|
|||
Stock
price
|
$ | 1.75 | ||
Exercise
price
|
$ | 2.61 |
The notes
may be prepaid in their entirety without penalty upon 15 day notice. So long as
the Company has any obligation under the notes, there are limitations on its
ability to: (a) pay dividends or make other distributions on its capital stock;
(b) redeem, repurchase or otherwise acquire any of its securities; (c) create,
incur or assume any liability for borrowed money; (d) sell, lease or otherwise
dispose of any significant portion of its assets; (e) lend money, give credit or
make advances; or (f) assume, guarantee, endorse, contingently agree to purchase
or otherwise become liable upon the obligation of any other person or
entity.
In
connection with the sale of the notes the Company paid a placement agent $40,000
in fees and delivered 25,000 three- year warrants to purchase 25,000 shares of
common stock at an exercise price of $2.61. The warrants were valued at $30,544
using a Black-Scholes Model and together with the fee were treated as deferred
issuance costs and recorded in prepaid expenses to be amortized to interest
expense over the life of the notes. Amortization of the deferred issuance costs
for year ended December 31, 2008 was $8,648, respectively. The
following assumptions were used to calculate the fair value of the
warrants:
Dividend
yield
|
0 | % | ||
Expected
volatility
|
131 | % | ||
Risk-free
interest rate
|
1.78 | % | ||
Expected
life
|
3
years
|
|||
Stock
price
|
$ | 1.75 | ||
Exercise
price
|
$ | 2.61 |
At
December 31, 2008 and 2007 notes payable consisted of the
following:
Year Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Notes
dated June, 2008, due December 31, 2009 with a interest rate of 10%, net
of debt discount of $40,113
|
$ | 2,209,887 | $ | — | ||||
Notes
dated November, 2008 due November 10, 2009 with a interest rate of 10%,
net of debt discount of $47,775
|
452,225 | — | ||||||
Notes
payable
|
— | 273,973 | ||||||
$ | 2,662,112 | $ | 273,973 |
F-51
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
16.
|
Put/Call
Liability
|
On
October 9, 2007, the Company entered into Put/Call Agreements with two (2) of
its stockholders (the “Put/Call Stockholders”), pursuant to which the Put/Call
Shareholders granted the Company an option to repurchase an aggregate of
1,944,444 shares (the “Put/Call Shares”) from the Put/Call Stockholders (the
“Call Option”), for an exercise price of $1.63 per share (the “Call Option
Price”), if the following conditions have been met (the “Call Option
Conditions”):
·
|
Either
(i) a registration statement (“Registration Statement”) covering the
resale of the Put/Call Shares has been declared effective by the
Commission, and has been kept continuously effective by the Company, or
(B) all of the Put/Call Shares are available for sale without registration
pursuant to Rule 144(k); and
|
·
|
The
closing price of a share of Common Stock of the Company as traded on the
Over-the-Counter Bulletin Board (or such other exchange or stock market on
which the Common Stock may then be listed or quoted) equals or exceeds
$4.08 (appropriately adjusted for any stock split, reverse stock split,
stock dividend or other reclassification or combination of the Common
Stock occurring after the date hereof) for at least ten (10) consecutive
trading days immediately preceding the date that the Call Option Exercise
Notice is given by the
Company.
|
Term of the Call Option, the
Company may only exercise its Call Option by delivering a written notice (a
“Call Option Exercise Notice”) to the Put/Call Stockholders within thirty (30)
days of such time as all of the Call Option Conditions have been met. The Call
Option may be exercised for all, but not less than all, of the Put/Call Shares.
The repurchase shall be consummated within ninety (90) days following the date
of the Call Option Exercise Notice.
In
addition, the Put/Call Stockholders shall have the right to cause the Company to
repurchase the Put/Call Shares from the Put/Call Stockholders (the “Put Right”),
for a price of $1.63 per share (the “Put Purchase Price”), if:
|
·
|
the
Company fails to exercise its Call Option within ten (10) days of a date
on which all of the Call Option Conditions have been met;
or
|
|
·
|
the
Company consummates a private offering of not less than $5,000,000 of its
securities (a “Qualified Offering”);
or
|
|
·
|
the
Company fails to (i) file the Registration Statement within thirty (30)
business days of the Closing Date (the “Filing Date”), (B) have the
Registration Statement declared effective within ninety (90) calendar days
from the Filing Date, or, if reviewed by the Commission, within one
hundred eighty (180) calendar days after the Filing Date, or (C) keep the
Registration Statement continuously effective until all of the Shares are
available for sale without registration pursuant to Rule 144(k);
or
|
|
·
|
the
Company fails to consummate a Qualified Offering within two (2) years of
the date hereof (each of the aforementioned conditions, a “Put Right
Trigger”).
|
Term of the Put option, the
Put/Call Stockholders shall exercise their Put Right by giving written notice
(“Put Exercise Notice”) of their exercise of the Put Right to the Company within
thirty (30) days of a Put Right Trigger. The Put/Call Stockholders may only
exercise their Put Right as to all, but not less than all, of the Put/Call
Shares. Upon exercise of the Put Right by the Shareholder, the repurchase of the
Put/Call Shares by the Company shall be consummated within ninety (90) days
following the date of the Put Exercise Notice.
In
accordance with SFAS 150 Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity the
Company recorded the value of the Put/Call agreement of $3,169,444 as a
liability as of October 9, 2007. The value of the Put/Call agreement was based
on the fair market value of the underlying common stock of $1.63 at October 9,
2007.
F-52
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
16.
|
Put/Call
Liability
|
On April
9, 2008 the company and the Put/Call Stockholders executed a waiver and
amendment to the Put/Call Agreement reaffirming that the Put/Call Agreement is
still in full force and removing the following provision as a Put Right
Trigger:
|
·
|
The
Company fails to (i) file the Registration Statement within thirty (30)
business days of the Closing Date (the “Filing Date”), (B) have the
Registration Statement declared effective within ninety (90) calendar days
from the Filing Date, or, if reviewed by the Commission, within one
hundred eighty (180) calendar days after the Filing Date, or (C) keep the
Registration Statement continuously effective until all of the Shares are
available for sale without registration pursuant to Rule
144(k).
|
On March
3, 2009 the Company and the Put/Call Stockholders terminated the Put/Call
Agreement.
The
termination of the Put/Call agreements was considered a type 1 event due to the
culmination of events that started with the waiver executed on April, 9, 2008
and ending with the termination of the Put/Call Agreement on March 3,
2009. As a type 1 event, the termination provided additional evidence
with respect to the valuation of the Put/Call agreement as of December 31, 2008.
As of December 31, 2008, Company reclassified the $3,169,444 value previous
recorded from liabilities to additional paid-in capital.
17.
|
Equity
|
Registration
Rights Agreement
On
October 9, 2007 and October 19, 2007, the Company entered into Registration
Rights Agreements (each, a “Registration Rights Agreement,” and collectively the
“Registration Rights Agreements”) with the accredited investors,( the
“Investors”), pursuant to which it agreed that within thirty (30) business days
of the Closing Date (the Filing Date), the Company will file a registration
statement (the Registration Statement) with the Securities and Exchange
Commission (the “Commission”) covering the resale of (i) the shares of Common
Stock purchased in the above placements (collectively, the “Offerings”) (the
“Purchased Shares”), (ii) the Common Stock issuable upon exercise of the
warrants issued in the Offerings (the “Registrable Securities”). Further, the
Company agreed to use its best efforts to (i) cause the Registration Statement
to be declared effective within ninety (90) calendar days from the Filing Date,
or, if reviewed by the Commission, within one hundred eighty (180) calendar days
after the Filing Date, and (ii) keep the Registration Statement continuously
effective until two (2) years after the Closing Date, subject to normal and
customary blackout periods. After two years the Company’s obligation to keep the
Registration Statement ends.
Pursuant
to the Registration Rights Agreements, the Company will be required to pay
liquidated damages (payable in cash in arrears at the end of each month during
which a registration default occurs and is continuing) to the holders of the
Purchased Shares, the First Investor Warrants, the Class A Warrants, the Class B
Warrants, or the Common Stock issued upon exercise of the First Investor
Warrants, Class A Warrants and Class B Warrant (collectively, the “Securities”)
if (i) the Company fails to file the Registration Statement within thirty (30)
business days from the Closing Date, (ii) the Commission does not declare the
Registration Statement effective within ninety (90) days of the Filing Date (or
one hundred eighty (180) days in the event of a review by the Commission) (the
“Effectiveness Date”), (iii) the Company fails to request acceleration of
effectiveness within five (5) business days of a notice of no further review
from the Commission, (iv) the Company fails to respond to the Commission within
ten (10) business days of receipt by the Company of any comments on the
Registration Statement, or (v) after it has been declared effective, the
Registration Statement ceases to be effective or available or if the Company
suspends the use of the prospectus forming a part of the Registration Statement
(A) for more than thirty (30) days in any period of 365 consecutive days if the
Company suspends in reliance on its ability to do so due to the existence of a
development that, in the good faith discretion of its board of directors, makes
it appropriate to so suspend or which renders the Company unable to comply with
SEC requirements, or (B) for more than sixty (60) days in any period of 365
consecutive days for any reason. The liquidated damages will accumulate at the
rate of one and one-half percent (1.5%) of the purchase price paid by the
Investors for the Securities offered for each thirty (30) day period during
which a registration default is continuing.
F-53
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
17.
|
Equity
(Continued)
|
Notwithstanding
anything to the contrary stated in the Registration Rights Agreements, the
Company shall be entitled to limit the Registrable Securities to the extent
necessary to avoid any issues arising from the recent interpretations by the SEC
of Rule 415 of the Securities Act of 1933, as amended.
As of
December 31, 2008 the registration statement filed with the Commission has been
withdrawn.
As of
October 20, 2008 liquidated damages stopped accruing because the shares covered
by the Registration Rights Agreements could be sold under SEC Rule 144. There
are accrued liquidated damages of $1,201,998 at December 31, 2008, which
represents the total damages payable under the agreement to October 20,
2008. Liquidated damages of $986,699 and $215,299 were accrued in the
years ended December 31, 2008 and 2007.
Per the
Registration Rights Agreements the Company can pay the $1,201,998 in liquidated
damages in cash or Company common stock. The Company plans to issue
667,777 shares of the Company’s common stock for the based on the closing price
of the Company’s common stock on October 20, 2008 of $1.80.
Warrants
Information
with respect to stock warrants outstanding as of December 31, 2008 are as
follows:
Exercise Price
|
Outstanding
December
31, 2007
|
Granted
|
Expired or
Exercised
|
Outstanding
December
31, 2008
|
Expiration
Date
|
||||||||||||
$0.94
|
373,334 | -0- | -0- | 373,334 |
10/09/2010
|
||||||||||||
$1.50
|
1,333,333 | -0- | -0- | 1,333,333 |
10/09/2009
|
||||||||||||
$2.04
|
804,884 | -0- | -0- | 804,884 |
10/09/2010
|
||||||||||||
$2.04
|
569,346 | -0- | -0- | 569,346 |
10/19/2010
|
||||||||||||
$1.63
|
-0- | 195,000 | -0- | 195,000 |
6/12/2011
|
||||||||||||
$1.63
|
-0- | 75,000 | -0- | 75,000 |
6/20/2011
|
||||||||||||
$3.26
|
2,061,227 | -0- | -0- | 2,061,227 |
10/09/2009
|
||||||||||||
$3.26
|
2,846,746 | -0- | -0- | 2,846,746 |
10/19/2009
|
||||||||||||
$2.61
|
-0- | 75,000 | -0- | 75,000 |
11/10/2011
|
As of
December 31, 2008 all outstanding warrants are exercisable.
Warrant
Tender Offer
As of
April 24, 2008, we commenced an offer (“Offer”) to the holders
(“Warrantholders”) of our then outstanding warrants, pursuant to which the
Warrantholders may tender their Warrants for shares of our Common Stock at a
reduced exercise price as follows:
|
·
|
With
respect to warrants having an exercise price of $0.94 per share, a holder
accepting the Offer may exercise some or all of such warrants at $0.75 per
share of Common Stock;
|
|
·
|
With
respect to warrants having an exercise price of $1.50 per share, a holder
accepting the Offer may exercise some or all of such warrants at $1.20 per
share of Common Stock;
|
|
·
|
With
respect to warrants having an exercise price of $2.04 per share, a holder
accepting the Offer may exercise some or all of such warrants at $1.63 per
share of Common Stock; and
|
F-54
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
17.
|
Equity
(Continued)
|
|
·
|
With
respect to warrants having an exercise price of $3.26 per share, a holder
accepting the Offer may exercise some or all of such warrants at $2.61 per
share of Common Stock.
|
On March
2, 2009, the Company closed on its Offer to existing warrant holders to exercise
their warrants on amended terms. In connection with the Offer:
|
·
|
A
total of 183,457 warrants were tendered at the reduced exercise price of
$1.63 per share (originally $2.04 per share), for an aggregate exercise
price of $299,034.91; and
|
|
·
|
A
total of 175,937 warrants were tendered at the reduced exercise price of
$2.61 per share (originally $3.26 per share), for an aggregate exercise
price of $459,195.57.
|
As a
result, (a) a total of 359,394 shares of the Company’s common stock were issued
in connection with the exercise of such warrants and (b) the Company received
gross proceeds of $758,230.48 as payment of the exercise prices.
18.
|
Common
Welfare Reserves
|
The
Company is required to transfer 10% of its net income, as determined in
accordance with PRC accounting rules and regulations, to the general reserve.
The Company voluntarily contributed an additional 5% in the years ended December
31, 2008 and 2007. The balance of these reserves at December 31, 2008 and
December 31, 2007, was $1,340,713 and $659,903, respectively. These amounts are
restricted and are included in retained earnings.
This fund
can only be utilized on capital items for the collective benefit of the
Company’s employees, such as construction of dormitories, cafeteria facilities,
and other staff welfare facilities. The fund is non-distributable other than
upon liquidation.
19.
|
Other
Comprehensive Income
|
SFAS No.
130, Reporting Comprehensive
Income, requires the reporting of comprehensive income in addition to net
income from operations. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial information
that historically has not been recognized in the calculation of net
income.
The
Company reports comprehensive income (loss) in its consolidated statements of
stockholders’ equity. Comprehensive income (loss) represents changes in
stockholders’ equity from non-owner sources. The components of other
comprehensive income included adjustments from foreign currency
translation.
20.
|
Earnings
Per Share
|
SFAS 128
requires a reconciliation of the numerator and denominator of the basic and
diluted earnings per share (EPS) computations.
For the
year ended December 31, 2008, dilutive shares include outstanding warrants to
purchase 373,334 shares of common stock at an exercise price of $0.94 and
warrants to purchase 1,333,333 shares at an exercise price of $1.50. Warrants to
purchase 6,627,203 share of common stock were not included in dilutive shares as
the effect would have been anti-dilutive.
For the
year ended December 31, 2007, dilutive shares include outstanding warrants to
purchase 373,334 shares of common stock at an exercise price of $0.94 and
warrants to purchase 1,333,333 shares at an exercise price of $2.04. Warrants to
purchase 6,282,193 share of common stock were not included in dilutive shares as
the effect would have been anti-dilutive.
F-55
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
20.
|
Earnings
Per Share (Continued)
|
The
following reconciles the components of the EPS computation:
Income
|
Shares
|
Per Share
|
||||||||||
(Numerator)
|
(Denominator)
|
Amount
|
||||||||||
For
the year ended December 31, 2008:
|
||||||||||||
Net
income
|
$ | 2,314,507 | ||||||||||
Basic
EPS income available to common shareholders
|
$ | 2,314,507 | 29,299,332 | $ | 0.08 | |||||||
Effect
of dilutive securities:
|
||||||||||||
Warrants
|
— | 218,735 | ||||||||||
Diluted
EPS income available to common shareholders
|
$ | 2,314,507 | 29,518,067 | $ | 0.08 | |||||||
For
the year ended December 31, 2007:
|
||||||||||||
Net
income
|
$ | 3,550,138 | ||||||||||
Basic
EPS income available to common shareholders
|
$ | 3,550,138 | 24,211,872 | $ | 0.15 | |||||||
Effect
of dilutive securities:
|
||||||||||||
Warrants
|
— | 60,119 | ||||||||||
Diluted
EPS income available to common shareholders
|
$ | 3,550,138 | 24,271,991 | $ | 0.15 |
21.
|
Commitments
and Contingencies
|
The
Company has various purchase commitments for materials, supplies and services
incident to the ordinary conduct of business, generally for quantities required
for the Company’s business and at prevailing market prices. No material annual
loss is expected from these commitments.
The
Company has contracted for construction of a second production facility in
Hailun City, Heilongjiang Province, PRC. The contract is for
$8,441,173 of which $2,043,090 has been paid and $349,381 has been accrued in
accounts payable. The remaining $6,398,083 is to be paid in 2009 for
completion of the facility.
The
Company has contracted to purchase equipment from a supplier for the second
processing facility for $5,304,118 of which $3,712,883 has been
paid. The remaining $1,519,235 will be paid on delivery of the
equipment in 2009.
The
Company has advances to milk suppliers of $388,406 which will be offset against
future milk purchases from those suppliers (see Note 7, Advances to suppliers
and other receivables).
In order
for the Company to conduct its current operations, a milk powder production
license is required from the State General Administration of Quality Supervision
and Inspection and Quarantine of the People’s Republic of China (the
“Administration”). The Company’s current license expired in December 2008. The
Administration will inspect the quality of the Company’s production process in
2009. Depending on the results of this inspection, the State General
Administration will either (i) grant the Company a license renewal, or (ii)
advise the Company of material deficiencies it has discovered and schedule
another inspection for 2010. The Company expects that it will pass the
inspection. If it does not, it will have an opportunity to cure any deficiencies
prior to the follow up inspection that would have been scheduled for 2010. Other
than the foregoing, no government approvals are required to conduct the
Company’s principal operations, and the Company is not aware of any probable
governmental regulation of our business sectors in the near future. Although
management believes that the Company is in material compliance with the
statutes, laws, rules and regulations of every jurisdiction in which it
operates, no assurance can be given that the Company’s compliance with the
applicable statutes, laws, rules and regulations will not be challenged by
governing authorities or private parties, or that such challenges will not lead
to a material adverse effect on the Company’s financial position, results of
operations, or cash flows.
F-56
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
21.
|
Commitments
and Contingencies (Continued)
|
The
Company and its subsidiaries are self-insured, and they do not carry any
property insurance, general liability insurance, or any other insurance that
covers the risks of their business operations. As a result any material loss or
damage to its properties or other assets, or personal injuries arising from its
business operations would have a material adverse effect on the Company’s
financial condition and operations.
The
Company is not involved in any legal matters arising in the normal course of
business. While incapable of estimation, in the opinion of the management, the
individual regulatory and legal matters in which it might involve in the future
are not expected to have a material adverse effect on the Company’s financial
position, results of operations, or cash flows.
The
Company’s employees are required to pay an employee deposit upon commencement of
employment, which is standard in the PRC. The deposits are protection against
potential loss in the event of a dishonest act by an employee, such as theft,
forgery, larceny, or embezzlement. The Company considers this obligation as
short term liability for the following two reasons:
·
|
The
purpose of the advance by employee is for potential loss as a result of
dishonest act by such employee. Since the Company does not know when it
may happen, the Company believes it makes sense to consider it a short
term liability; and
|
·
|
The
Company needs to return the fund to the employee who leaves the Company
without any wrongdoing. Since the Company does not know the precise timing
of refund, the Company believes it makes sense to consider it a short term
liability.
|
The basic
terms of advances from employees are:
·
|
All
Company employees must to pay an employee
deposit.
|
·
|
The
deposit amount depends on employee position, as
follows:
|
Position
|
|
Deposit Amount
|
|
|
General
Manager
|
$
|
4,000
|
||
Assistant
General Manager
|
$
|
2,667
|
||
Senior
Manager
|
$
|
2,533
|
||
Assistant
Senior Manager
|
$
|
2,400
|
||
Manager
|
$
|
2,000
|
||
Administrative
Staff
|
$
|
1,600
|
||
Other
Employee
|
$
|
1,333
|
·
|
All
new employees must pay the deposit before they start
work.
|
·
|
The
deposit must be paid in cash to the Company’s accounting department and
receipt will be issued for the deposit
amount.
|
·
|
If
an employee leaves the Company for any reason (except in the event of a
dishonest act by an employee, such as theft, forgery, larceny, or
embezzlement), the accounting department will refund the
deposit.
|
·
|
No
interest accrues on these advances.
|
As of
December 31, 2008 and 2007, the Company held employee deposits in the aggregate
amount of $248,424 and $301,644 which are reflected in advances from employees
in the financials statements.
F-57
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
22.
|
Operating
Leases
|
The
Company leases various distribution facilities. All leases are on an annual
basis and commence on January 1, of each year. The Company also leases office
space which expires September, 2009. For the years ended December 31,
2008 and 2007, the Company incurred rental expense of $17,255 and $85,163,
respectively. As of December 31, 2008, the Company had outstanding lease
commitments totaling $147,798, all of which are due within the next
year.
23.
|
Subsequent
events
|
Warrant
Tender Offer
On March
2, 2009, the Company closed on its Offer to existing warrant holders to exercise
their warrants on amended terms. In connection with the Offer:
|
·
|
A
total of 183,457 warrants were tendered at the reduced exercise price of
$1.63 per share (originally $2.04 per share), for an aggregate exercise
price of $299,034.91; and
|
|
·
|
A
total of 175,937 warrants were tendered at the reduced exercise price of
$2.61 per share (originally $3.26 per share), for an aggregate exercise
price of $459,195.57.
|
As a
result, (a) a total of 359,394 shares of the Company’s common stock were issued
in connection with the exercise of such warrants and (b) the Company received
gross proceeds of $758,230.48 as payment of the exercise prices.
Equity
Incentive Plan
On March
2, 2009, the Company’s board of directors and majority stockholders adopted the
Emerald Dairy Inc. 2009 Equity Incentive Plan (the “Plan”) to attract and retain
the best available personnel, provide additional incentives to employees,
directors and consultants and promote the success of the Company’s business.
1,500,000 shares of the Company’s common stock have been reserved for issuance
under the Plan.
Eligibility
The
Company may grant awards to its employees, directors and consultants, including
those of the Company’s subsidiaries. However, the Company may grant options that
are intended to qualify as incentive stock options (“ ISOs”) only to its
employees and employees of its subsidiaries.
Acceleration of Awards upon
Corporate Transactions.
The
outstanding awards will terminate and/or accelerate upon occurrence of certain
significant corporate transactions, including amalgamations, consolidations,
liquidations or dissolutions, sales of substantially all or all of the Company’s
assets, reverse takeovers or acquisitions resulting in a change of control. If
the successor entity following one of these transactions assumes or replaces the
Company’s outstanding awards under the Plan, such assumed or replaced awards
will become fully vested and immediately exercisable and payable, and be
released from repurchase or forfeiture rights immediately upon termination of
the grantee’s continuous service to the Company if the grantee’s service is
terminated by the successor entity without cause within twelve (12) months after
the effective date of the transaction. Furthermore, if the successor entity does
not assume or replace the Company’s outstanding awards, each outstanding award
will become fully vested and immediately exercisable and payable, and will be
released from any repurchase or forfeiture rights immediately before the
effective date of the corporate transaction, as long as the grantee’s continuous
service with the Company is not terminated before this date.
F-58
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
23.
|
Subsequent
events (Continued)
|
Exercise Price and Term of
Awards.
In
general, the plan administrator will determine the exercise price of an option
in the award agreement. The exercise price may be a fixed price, or it may be a
variable price related to the fair market value of the Company’s ordinary
shares. If the Company grants an ISO to an employee, the exercise price may not
be less than 100% of the fair market value of its common stock on the date of
the grant, except that if the grantee, at the time of that grant, owns shares
representing more than 10% of the voting power of all classes of the Company’s
shares of common stock, the exercise price may not be less than 110% of the fair
market value of its common stock on the date of that grant. If the Company
grants a non-qualified share option to a grantee, the exercise price may not be
less than 100% of the fair market value of its common stock on the
date of grant.
The term
of each award under the Plan will be specified in the award agreement, but may
not exceed ten years from the earlier of the adoption or the approval of the
plan, unless sooner terminated.
Equity
Compensation Grants
Following
the adoption of the Plan, the board of directors of the Company approved the
grant of stock option awards to the Company’s executive officers and directors,
as set forth in the table below:
Name
|
Title
|
Stock Option
Awards
|
||
Yang
Yong Shan
|
|
Chief
Executive Officer, President and Chairman of the Board
|
|
360,000
|
Shu
Kaneko
|
|
Chief
Financial Officer, Secretary and Director
|
|
300,000
|
Niu
Wan Chen
|
|
Vice
President of Sales and Director
|
|
15,200
|
Qin
Si Bo
|
|
Vice
President of Production and Director
|
|
15,200
|
Yuan
Yong Wei
|
|
Vice
President of Operation and Director
|
|
12,800
|
(1)
|
The
amounts shown in the table reflect the number of shares of the Company’s
common stock issuable upon exercise of the stock options awarded. The
options were issued under the Emerald Dairy Inc. 2009 Equity Incentive
Plan (the “Plan”). Each option has an exercise price of $0.42 per share,
which was the closing price of the Company’s common stock on the Financial
Industry Regulatory Authority’s Over-the-Counter Bulletin Board on March
2, 2009, the date on which the options were granted. Each option has a
term of ten (10) years from the date of grant and will vest with respect
to 25% of the shares underlying the option on each of September 2, 2009,
March 2, 2010, September 2, 2010 and March 2,
2011.
|
F-59
Emerald
Dairy, Inc and Subsidiaries
Footnotes
to Consolidated Financial Statements
December
31, 2008 and 2007
24.
|
Segment
reporting
|
The
Company operates in one operating segment in accordance with the provisions of
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related
Information”. Although the Company has key product lines of milk, soybean milk,
and rice powder, the Company’s chief operating decision maker reviews and
evaluates one set of combined financial information deciding how to allocate
resources and in assessing performance.
For the
years ended December 31, 2008 and 2007, the Company’s sales revenue from various
products are as follows:
Year
Ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Milk
powder
|
$ | 36,245,495 | $ | 22,821,548 | ||||
Soybean
milk powder
|
882,185 | 641,053 | ||||||
Rice
powder
|
1,105,837 | 985,746 | ||||||
Sub-contract
processing
|
6,091,662 | 5,169,661 | ||||||
$ | 44,325,179 | $ | 29,618,008 |
F-60
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The
following table sets forth an estimate of the costs and expenses, other than the
underwriting discounts and commissions, payable by us in connection with the
issuance and distribution of the common stock being registered. All amounts
except the SEC registration fee are estimated.
SEC
registration fee
|
$ | 1,250.49 | ||
Legal
fees and expenses
|
$ | 60,000 | ||
Accountants'
fees and expenses
|
$ | 25,000 | ||
Printing
expenses
|
$ | 5,000 | ||
Blue
sky fees and expenses
|
$ | 2,500 | ||
Transfer
agent and registrar fees and expenses
|
$ | 1,000 | ||
Miscellaneous
|
$ | 5,249.51 | ||
Total:
|
$ | 100,000 |
All
amounts except the SEC registration fee are estimated. All of the expenses set
forth above are being paid by us.
Item
14. Indemnification of Directors and Officers
Chapter 78 of the Nevada Revised
Statutes (“NRS”) provides that a corporation may indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise (each a “Covered Person”), against expenses
(including attorneys’ fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he is not liable pursuant to NRS Section 78.138 or acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful.
NRS Chapter 78 further provides that a
corporation similarly may indemnify a Covered Person serving in any such
capacity who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by on in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a Covered Person, against expenses (including amounts paid in settlement
and attorneys’ fees) actually and reasonably incurred in connection with the
defense or settlement of such action or suit if he is not liable pursuant to NRS
78.138 or acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged by a court of competent jurisdiction,
after exhaustion of all appeals therefrom, to be liable to the corporation
unless and only to the extent that the court in which the action or suit was
brought or other court of competent jurisdiction determines upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, the person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper.
II-1
NRS Chapter 78 also includes other
provisions related to indemnification, including provisions that permit a
corporation, in certain circumstances set forth in NRS Chapter 78, (i) to
advance the expenses incurred by a director or officer in advance of the final
disposition of an action, suit or proceeding and (ii) obtain insurance or make
other financial arrangements on behalf of a Covered Person.
NRS Chapter 78 also provides that any
indemnification or advancement of expenses made pursuant to NRS Chapter 78 does
not exclude any other rights to which a person seeking indemnification or
advancement of expenses may be entitled under the corporation’s articles of
incorporation or any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, except that indemnification or the advancement of
expenses, unless ordered by a court, may not be made to or on behalf of any
director or officer if a final adjudication establishes that (i) his acts or
omissions involved intentional misconduct, fraud or a knowing violation of the
law and (ii) was material to the cause of action.
Our Articles of Incorporation eliminate
the personal liability of our directors and officers for damages for breach of
fiduciary duty, except that such protection does not apply to acts or omissions
involving intentional misconduct, fraud or knowing violation of the law or the
payment of dividends in violation of NRS 78.300.
Our Bylaws permit us to indemnify our
Covered Persons, advance expenses incurred by such persons and purchase and
maintain insurance on behalf of such persons. Our Bylaws further
provide that the indemnification permitted under the Bylaws is not exclusive of
any other indemnification granted under any provision of our Articles of
Incorporation, our Bylaws or pursuant to any statute, agreement, vote of the
stockholders or disinterested directors, or otherwise.
Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
Item
15. Recent Sales of Unregistered Securities
Recent
Sales of Unregistered Securities
The
following is a list of securities we have sold or issued during the past three
years. There were no underwriting discounts or commissions paid in connection
with the sale of these securities, except as otherwise noted.
Sales
by American International Dairy Holding Co., Inc.
On April
18, 2007, American International Dairy Holding Co., Inc. (“AIDH”), entered into
an Equity Investment Agreement with Carret China Opportunity Investment Co.
(“Carret”), pursuant to which AIDH sold Carret 3,809,524 shares of its capital
stock for an aggregate purchase price of $2,000,000.
We
believe that this transaction is exempt from registration under the Securities
Act of 1933, as amended, pursuant to Section 4(2), and/or Regulation D
promulgated thereunder, as a transaction by an issuer not involving a public
offering.
II-2
Sales
by Micro-Tech Identification Systems, Inc.
The
Tryant Shares
As of
June 25, 2007, Tryant, LLC (“Tryant”) loaned our predecessor filer, Micro-Tech
Identification Systems, Inc. (“Micro-Tech”) an aggregate of $38,434 in order to
pay ongoing expenses to keep Micro-Tech current with its SEC filings. The loan
was payable upon demand. Jeff Jenson was the managing member of
Tryant, which, at the time, was Micro-Tech’s majority shareholder. On
August 30, 2007, Tryant agreed to convert $12,971 of the loan into 518,856
“restricted’ shares (the “Tryant Shares”) of Micro-Tech’s common
stock. Given that there was no trading in Micro-Tech’s common stock
and no bid price, Micro-Tech’s board of directors determined that, at that time,
the fair value of a share of it’s common stock was $0.025. Following the
issuance of the above shares, Tryant owned 643,856 shares of common stock of
Micro-Tech, representing 92.72% of the total issued and
outstanding shares.
Tryant
acquired control of Micro-Tech in August 2005. At such time,
Micro-Tech agreed to issue shares to certain of its existing shareholders. Just
prior to its Reverse Merger with American International Dairy Holding Co., Inc.,
it was determined that those shares had never been issued. In
addition, it was determined that shares owed to a former director of Micro-Tech
in consideration for his services, had also not been issued. Further,
certain individuals were now due to be issued shares as payment of expenses and
fees related to the Reverse Merger. It was decided by Tryant and
Micro-Tech that the best way to address this situation was to have Tryant return
to Micro-Tech a number of the shares it had received in August 2007, and then
have Micro-Tech reissue these shares in satisfaction of the above
obligations. Effective as of October 9, 2007, Tryant “rescinded” the
issuance of 230,645 of the 518,856 Tryant Shares it received on August 30, 2007,
by returning them to Micro-Tech for cancellation.
These
shares were then reissued as follows:
Name
|
Number
of Shares
|
|||
Leonard
W. Burningham
|
103,308 | |||
John
V. Winfield
|
64,388 | |||
Rick
Krietemeier
|
57,949 | |||
Andrew
Chudd
|
5,000 | |||
Total:
|
230,645 |
Leonard
Burningham received 103,308 shares as payment for legal fees incurred by
Micro-Tech. John V. Winfield received 64,388 of the shares as payment
of a finder’s fee in connection with the Reverse Merger. Micro-Tech
issued 57,949 shares to Rick Krietmeier to provide him with shares he was due to
receive in August 2005, when Tryant took control of
Micro-Tech. Andrew Chudd received 5,000 of the shares in
consideration for his prior services as a director of Micro-Tech.
Micro-Tech
granted “piggyback registration rights” to the holders of the Tryant
Shares.
We
believe that these transactions are exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2), and/or Regulation
D promulgated thereunder, as transactions by an issuer not involving a public
offering.
II-3
Sales
by Emerald Dairy Inc. f/k/a Amnutria Dairy Inc.
The
Reverse Merger
On
October 9, 2007, we entered into an Agreement and Plan of Reorganization and
Merger (the “Merger Agreement”) with AIDH Acquisition, Inc., a newly formed,
wholly-owned Nevada subsidiary of ours (“Acquisition Sub”), Tryant, and American
International Holding Co., Inc., a privately-held Nevada corporation (“AIDH”),
pursuant to which, as of such date, Acquisition Sub was merged with and into
AIDH, and AIDH became our wholly-owned subsidiary. Upon consummation of the
Reverse Merger, each share of AIDH’s capital stock issued and outstanding
immediately prior to the closing of the Reverse Merger was converted into the
right to receive 1.020833 shares of our common stock. As a result, we issued an
aggregate of 24,305,546 shares of our common stock to the holders of AIDH’s
capital stock.
We
believe that this transaction is exempt from registration under the Securities
Act of 1933, as amended, pursuant to Section 4(2), and/or Regulation D
promulgated thereunder, as a transaction by an issuer not involving a public
offering.
The
First Offering
On
October 9, 2007, we sold to one purchaser (the “Investor”) 1,333,333 units of
our securities, consisting of: (i) 1,333,333 shares of common stock, (ii)
three-year warrants to purchase 266,667 additional shares of common stock, at an
exercise price of $0.94 per share (“Warrant No. W-1”), and (iii) two-year
warrants to purchase 1,333,333 additional shares of common stock, at an exercise
price of $1.50 per share (“Warrant No. W-2,” and together with Warrant No. W-1,
the “Investor Warrants”), for an aggregate purchase price of $1,000,000 (the
“First Offering”).
Warrant
No. W-1 entitles the holder to purchase 266,667 shares of our common stock, at
an exercise price of $0.94 per share. Warrant No. W-1 will expire on a date
after October 9, 2010, such date to be determined under provisions of Warrant
W-1 providing for an extension of the scheduled expiration date due to our
failure to satisfy the registration requirements described below. Warrant No.
W-1 is exercisable for cash only, provided a registration statement covering the
shares of common stock underlying Warrant No. W-1 is effective. The number of
shares of our common stock to be deliverable upon exercise of Warrant No. W-1
will be subject to adjustment for, among other things, subdivision or
consolidation of shares, rights or warrants issues, dividend distributions,
stock dividends, bonus issues, asset distributions, and other standard dilutive
events. Warrants to purchase an aggregate of 106,667 shares of our
common stock issued to a finder in connection with the First Offering, have
terms and conditions identical to the those of Warrant W-1.
Warrant
No. W-2 represents the right to purchase 1,333,333 shares of our common stock,
at an exercise price of $1.50 per share. Warrant No. W-2 will expire on a date
after October 9, 2009, such date to be determined under provisions of Warrant
W-2 providing for an extension of the scheduled expiration date due to our
failure to satisfy the registration requirements described below. Warrant No.
W-2 is exercisable for cash only, provided a registration statement covering the
shares of common stock underlying the Warrant No. W-2 is effective. The number
of shares of our common stock to be deliverable upon exercise of Warrant No. W-2
will be subject to adjustment for, among other things, subdivision or
consolidation of shares, rights or warrants issues, dividend distributions,
stock dividends, bonus issues, asset distributions, and other standard dilutive
events. At anytime one year following the date a registration statement covering
the shares of common stock underlying the Warrant No. W-2 is declared effective,
we will have the ability to call the Warrants at a price of $0.01 per warrant,
upon thirty (30) days prior written notice to the holders of the warrants, if
the closing price of the common stock exceeded $1.88 for each of the ten (10)
consecutive trading days immediately preceding the date that the call notice is
given by us.
II-4
The
Investor Warrants provide that in no event shall the Holder be entitled to
exercise a number of Investor Warrants (or portions thereof) in excess of the
number of Investor Warrants (or portions thereof) upon exercise of which the sum
of (i) the number of shares of common stock beneficially owned by the Holder and
its affiliates (other than shares of common stock which may be deemed
beneficially owned through the ownership of the unexercised Investor Warrants
and the unexercised or unconverted portion of any other securities of the Issuer
(subject to a limitation on conversion or exercise analogous to the limitation
contained herein) and (ii) the number of shares of common stock issuable upon
exercise of the Investor Warrants (or portions thereof) with respect to which
the determination described herein is being made, would result in beneficial
ownership by the Holder and its affiliates of more than 9.9% of the outstanding
shares of common stock. For purposes of the immediately preceding sentence,
beneficial ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13D-G thereunder,
except as otherwise provided in clause (i) of the preceding sentence.
Notwithstanding anything to the contrary contained herein, the limitation on
exercise of the Investor Warrants may be waived by written agreement between the
Holder and us; provided, however, such waiver may not be effective less than
sixty-one (61) days from the date thereof.
We
entered into a Registration Rights Agreement (the “Registration Rights
Agreement”) with the Investor, pursuant to which it agreed that within thirty
(30) business days of the Closing Date (the “Filing Date”), we will file a
registration statement with the SEC (the “Registration Statement”) covering the
resale of (i) the shares of common stock purchased in the First Offering (the
“Purchased Shares”), (ii) the common stock issuable upon exercise of the
Investor Warrants (collectively (i) and (ii), the “Registrable Securities”).
Further, we agreed to use our best efforts to (i) cause the Registration
Statement to be declared effective within ninety (90) calendar days from the
Filing Date, or, if reviewed by the SEC, within one hundred eighty (180)
calendar days after the Filing Date, and (ii) keep the Registration Statement
continuously effective until all of the Registrable Securities have been sold,
or may be sold without volume restrictions pursuant to Rule 144.
Pursuant
to the Registration Rights Agreement, we are required to pay liquidated damages
to the holders of the Purchased Shares if (i) we fail to file the Registration
Statement within thirty (30) business days from the Closing Date, (ii) the SEC
does not declare the Registration Statement effective within ninety (90) days of
the Filing Date (or one hundred eighty (180) days in the event of a review by
the SEC) (the “Effectiveness Date”), (iii) we fail to request acceleration of
effectiveness within five (5) business days of a notice of no further review
from the SEC, (iv) we fail to respond to the SEC within ten (10) business days
of receipt by us of any comments on the Registration Statement, or (v) after it
has been declared effective, the Registration Statement ceases to be effective
or available or if we suspend the use of the prospectus forming a part of the
Registration Statement (A) for more than thirty (30) days in any period of 365
consecutive days if we suspend in reliance on its ability to do so due to the
existence of a development that, in the good faith discretion of its board of
directors, makes it appropriate to so suspend or which renders us unable to
comply with SEC requirements, or (B) for more than ninety (60) days in any
period of 365 consecutive days for any reason. The liquidated damages
accumulated at the rate of one and one-half percent (1.5%) of the purchase price
paid by the Investors for units of our securities purchase in the October
Offerings for each thirty (30) day period during which a registration default is
continuing; provided, however, that (i) we are not liable for liquidated damages
with respect to any warrants or shares of common stock underlying the warrants,
and (ii) in no event are we liable for liquidated damages in excess of 1.5% of
the aggregate purchase price of the securities purchased in the First Offering
in any 30 day period, and (iii) the maximum aggregate liquidated damages payable
to the Investor is 20% of the aggregate purchase price paid by the
Investor. The Registration Rights Agreement further requires that if
we fail to pay any partial liquidated damages in full within seven days after
the date payable, we will pay interest thereon at a rate of 15% per annum, until
such amounts, plus all such interest thereon, are paid in full.
II-5
Notwithstanding
anything to the contrary stated in the Registration Rights Agreements, we are
entitled to limit the Registrable Securities to the extent necessary to avoid
any issues arising from the recent interpretations by the SEC of Rule 415 of the
Securities Act of 1933, as amended.
We
believe that these transactions are exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2), and/or Regulation
D promulgated thereunder, as transactions by an issuer not involving a public
offering.
The
Second Offering
On
October 9, 2007, we sold to certain accredited investors (the “Initial
Purchasers”) 2,061,227 units of our securities, consisting of (i) 2,061,227
shares of common stock, (ii) three-year warrants to purchase 412,245 additional
shares of common stock, at an exercise price of $2.04 per share (the “Class A
Warrants”), and (iii) two-year warrants to purchase 2,061,227
additional shares of common stock, at an exercise price of $3.26 per share (the
“Class B Warrants”) for an aggregate purchase price of $3,359,800 (the “Initial
Closing of the Second Offering”).
On
October 19, 2007, we sold to certain additional accredited investors (the
“Additional Purchasers”) 2,846,746 units of our securities, consisting of (i)
2,846,746 shares of common stock, (ii) 569,346 additional Class A Warrants, and
(iii) 2,846,746 additional Class B Warrants, for an aggregate purchase price of
$4,640,200 (the “Additional Closing of the Second Offering,” and, together with
Initial Closing of the Second Offering, the “Second Offering”).
Prior to
the exercise of 183,457 of the Class A Warrants in our First Warrant Tender
Offer (as described below), and tender of 49,000 of the Class A Warrants in our
Second Warrant Tender Offer (as described below), our Class A Warrants
represented the right to purchase an aggregate of 981,591 shares of our common
stock, at an exercise price of $2.04 per share. The Class A Warrants will expire
on a date after the three-year anniversary of their date of issuance, such date
to be determined under provisions of the Class A Warrants providing for an
extension of the scheduled expiration date due to our failure to satisfy the
registration requirements described below. The Class A Warrants will
be exercisable for cash only, provided a registration statement covering the
shares of common stock underlying the Class A Warrants is effective. The number
of shares of common stock to be deliverable upon exercise of the Class A
Warrants will be subject to adjustment for, among other things, subdivision or
consolidation of shares, rights or warrants issues, dividend distributions,
stock dividends, bonus issues, asset distributions, and other standard dilutive
events. Warrants to purchase 392,639 shares of our common stock issued to
finders and placement agents, have terms and conditions identical to the those
of the Class A Warrants; except that, as of March 2, 2009, the exercise price of
235,583 of these warrants was reduced from $2.04 to $1.63, as partial
consideration for services rendered in connection with a consulting agreement
the Company entered into with one of these parties.
II-6
Prior to
the exercise of 175,937 of the Class B Warrants in our First Warrant Tender
Offer (further described below), and tender of 2,205,828 of the Class B Warrants
in our Second Warrant Tender Offer (further described below), our Class B
Warrants represent the right to purchase an aggregate of 4,907,973 shares of our
common stock, at an exercise price of $3.26 per share. The Class B Warrants will
expire on a date after the two-year anniversary of their date of issuance, such
date to be determined under provisions of the Class B Warrants providing for an
extension of the scheduled expiration date due to our failure to satisfy the
registration requirements described below. The Class B Warrants will
be exercisable for cash only, provided a registration statement covering the
shares of common stock underlying the Class B Warrants is effective. The number
of shares of common stock to be deliverable upon exercise of the Class B
Warrants will be subject to adjustment for, among other things, subdivision or
consolidation of shares, rights or warrants issues, dividend distributions,
stock dividends, bonus issues, asset distributions, and other standard dilutive
events. At anytime one year following the date a registration statement covering
the shares of common stock underlying the Class B Warrants is declared
effective, we will have the ability to call the Class B Warrants at a price of
$0.01 per Class B Warrant, upon thirty (30) days prior written notice to the
holders of the Class B Warrants, if the closing price of the common stock
exceeded $4.08 for each of the ten (10) consecutive trading days immediately
preceding the date that the call notice is given by us.
The Class
A Warrants and Class B Warrants (collectively, the “A and B Warrants”) provide
that in no event shall the Holder be entitled to exercise a number of A and B
Warrants (or portions thereof) in excess of the number of A and B Warrants (or
portions thereof) upon exercise of which the sum of (i) the number of shares of
common stock beneficially owned by the Holder and its affiliates (other than
shares of common stock which may be deemed beneficially owned through the
ownership of the unexercised A and B Warrants and the unexercised or unconverted
portion of any other securities of the Issuer (subject to a limitation on
conversion or exercise analogous to the limitation contained herein) and (ii)
the number of shares of common stock issuable upon exercise of the A and B
Warrants (or portions thereof) with respect to which the determination described
herein is being made, would result in beneficial ownership by the Holder and its
affiliates of more than 9.9% of the outstanding shares of common stock. For
purposes of the immediately preceding sentence, beneficial ownership shall be
determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and Regulation 13D-G thereunder, except as otherwise provided
in clause (i) of the preceding sentence. Notwithstanding anything to the
contrary contained herein, the limitation on exercise of the A and B Warrants
may be waived by written agreement between the Holder and us; provided, however,
such waiver may not be effective less than sixty-one (61) days from the date
thereof.
We
entered into Registration Rights Agreements with the Initial Purchasers and
Additional Purchasers, granting them registration rights similar to those
granted to the Investor, as further described above.
We
believe that these transactions are exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2), and/or Regulation
D promulgated thereunder, as transactions by an issuer not involving a public
offering.
The
June 2008 Sale of Notes and Warrants
In
June 2008, we conducted a private offering of up to a maximum of (i) $3,000,000
of our 8% promissory notes (the “June 2008 Notes”) and (ii) warrants to purchase
300,000 shares of our common stock, at an exercise price of $2.61 per share (the
“June 2008 Warrants”) (the “June 2008 Note Offering”). On June 12, 2008,
one “accredited investor” purchased, for a purchase price of $1,500,000, a June
2008 Note in the principal amount of $1,500,000, and June 2008 Warrants to
purchase 150,000 shares of our common stock. On June 20, 2008, an additional
“accredited investor” purchased, for a purchase price of $750,000, a June 2008
Note in the principal amount of $750,000, and June 2008 Warrants to purchase
75,000 shares of our common stock. As of December 31, 2008, the terms of the
June 2008 Notes and June 2008 Warrants were amended. As of December
31, 2009, the terms of the June 2008 Notes were further amended, as described
below.
II-7
As
amended on December 31, 2008, and further amended on December 31, 2009, the June
2008 Notes have an aggregate principal balance of $2,573,301, which bears
interest at a rate of 10% until the June 2008 Notes become due and payable on
December 31, 2010. Any amount of principal or interest which is not paid when
due will bear interest at a rate of 12%. We may prepay the entire amount due
under the June 2008 Notes at any time without penalty, upon 15 days prior
written notice. Each holder of the June 2008 Notes has the right to be prepaid
any amounts due under his, her or its June 2008 Note from the proceeds of any
future offering we consummate resulting in gross proceeds of $4,500,000 or more.
So long as we have any obligation under the June 2008 Notes, there are
limitations on our ability to: (a) pay dividends or make other distributions on
our capital stock; (b) redeem, repurchase or otherwise acquire any of our
securities; (c) create, incur or assume any liability for borrowed money (except
as is related to the completion of the construction of our new production
facility); (d) sell, lease or otherwise dispose of any significant portion of
its assets; (e) lend money, give credit or make advances; or (f) assume,
guarantee, endorse, contingently agree to purchase or otherwise become liable
upon the obligation of any other person or entity. It shall be deemed an “Event
of Default” under each June 2008 Note if: (a) we fail to pay principal or
interest when due on the June 2008 Note; (b) we breach any material covenant or
other material term or condition contained in the June 2008 Note or securities
purchase agreement entered into in connection with the June 2008 Note Offering
(the “June Purchase Agreement”), and such breach continues for a period of
thirty (30) days after written notice thereof; (c) any representation or
warranty we made under the June 2008 Note or the June Purchase Agreement shall
be false or misleading in any material respect; (d) we, or any subsidiary of
ours, shall make an assignment for the benefit of creditors, or apply for or
consent to the appointment of a receiver or trustee, or such a receiver or
trustee shall otherwise be appointed; (e) a money judgment shall be entered
against us, or any subsidiary of ours, for more than $250,000, that remains in
effect for a period of twenty (20) days; (f) bankruptcy, insolvency,
reorganization or liquidation proceedings or other similar proceedings shall be
instituted by or against us, or any subsidiary of ours, which are not dismissed
within sixty (60) days; or (g) we fail to maintain the listing of our common
stock on at least one of the OTCBB, the Nasdaq National Market, the Nasdaq
SmallCap Market, the New York Stock Exchange, or the NYSE Amex Equities. Upon
the occurrence of any Event of Default under a June 2008 Note, unless such Event
of Default shall have been waived in writing by the holder, the holder may
consider the June 2008 Note immediately due and payable, without presentment,
demand, protest or notice of any kind, and the holder may immediately enforce
any and all of its rights and remedies provided in the June 2008 Note or any
other right or remedy afforded by law. Our repayment of amounts due
under the June 2008 Notes, as amended, is secured by a pledge of an aggregate of
3,157,425 shares of common stock of the Company beneficially owned by Yang Yong
Shan, our Chairman, Chief Executive Officer and President.
As
amended on December 31, 2008, the June 2008 Warrants entitle the holders to
purchase an aggregate of 225,000 shares of our common stock, at an exercise
price of $1.63 per share. The June 2008 Warrants will expire five years after
the date of issuance. The June 2008 Warrants may be exercised for cash only. The
number of shares of our common stock deliverable upon exercise of the June 2008
Warrants will be subject to adjustment for, among other things, subdivision or
consolidation of shares, and certain other standard dilutive events. A holder of
the June 2008 Warrants will not be entitled to exercise a number of June 2008
Warrants in excess of the number of June 2008 Warrants upon exercise of which
would result in beneficial ownership by such holder and his, her or its
affiliates of more than 9.9% of the outstanding shares of our common stock,
unless this provision is waived by written agreement between us and the holder
not less than sixty-one (61) days from the date of such waiver. On
December 31, 2009, in connection with the further amendment of the June 2008
Notes, we granted the June 2008 Noteholders additional three-year warrants to
purchase an aggregate of 789,356 shares of our common stock, at an exercise
price of $1.63 per share (the “Additional Noteholder Warrants”). All
of the other terms and conditions of these additional warrants are identical to
the June 2008 Warrants.
In connection with the June 2008
Note Offering, we engaged a placement agent to whom we paid a placement fee in
the amount of $97,500, and granted warrants to purchase an aggregate of 45,000
shares of our common stock, the terms and conditions of which are identical to
the those of the June 2008 Warrants, as amended.
II-8
In addition, as of July 4, 2009, we
issued warrants to purchase an additional 97,500 shares of our common stock to
the placement agent in consideration for its services in connection with
the amendment of the June 2008 Notes and June 2008 Warrants as of December 31,
2008. The terms and conditions of these additional warrants are identical to the
those of the June 2008 Warrants, as amended, except that they will expire on
December 31, 2011, and are exercisable either for cash, at an exercise price of
$1.63 per share, or on a cashless basis.
We have granted the holders of June
2008 Warrants (including warrants issued to a placement agent) and additional
Noteholder Warrants “piggyback” registration rights with respect to the shares
underlying their warrants.
In consideration for its services in
connection with the amendment of the June 2008 Notes, as of December 31, 2009,
we issued 200,000 shares of its common stock (the “Shares”) to the entity that
had acted as placement agent for the June 2008 Note Offering.
We
believe that these transactions are exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2), and/or Regulation
D promulgated thereunder, as transactions by an issuer not involving a public
offering.
The
November 2008 Sale of Notes and Warrants
On
November 10, 2008, we sold to one “accredited investor,” for a purchase price of
$500,000, a 10% promissory note (the “November 2008 Note”) in the principal
amount of $500,000, and warrants to purchase 50,000 shares of our common stock,
at an exercise price of $2.61 per share (the “November 2008 Warrants”) (the
“November 2008 Note Offering”).
As
amended on November 10, 2009, the November 2008 Note has a principal balance of
$500,000, and bears interest at a rate of 10% until it becomes due and payable
on May 10, 2010. Any amount of principal or interest which is not paid when due
will bear interest at a rate of 12%. We may prepay the entire amount due under
the November 2008 Note at any time without penalty, upon 15 days prior written
notice. The holder of the November 2008 Note has the right to be prepaid any
amounts due under his November 2008 Note from the proceeds of any future
offering we consummate resulting in gross proceeds of $6,500,000 or more. So
long as we have any obligation under the November 2008 Note, there are
limitations on our ability to: (a) pay dividends or make other distributions on
our capital stock; (b) redeem, repurchase or otherwise acquire any of our
securities; (c) sell, lease or otherwise dispose of any significant portion of
its assets; (d) lend money, give credit or make advances; or (e) assume,
guarantee, endorse, contingently agree to purchase or otherwise become liable
upon the obligation of any other person or entity. It shall be deemed an “Event
of Default” under the November 2008 Note if: (a) we fail to pay principal or
interest when due on the November 2008 Note; (b) we breach any material covenant
or other material term or condition contained in the November 2008 Note or
securities purchase agreement entered into in connection with the November 2008
Note Offering (the “November Purchase Agreement”), and such breach continues for
a period of thirty (30) days after written notice thereof; (c) any
representation or warranty we made under the November 2008 Note or the November
Purchase Agreement shall be false or misleading in any material respect; (d) we,
or any subsidiary of ours, shall make an assignment for the benefit of
creditors, or apply for or consent to the appointment of a receiver or trustee,
or such a receiver or trustee shall otherwise be appointed; (e) a money judgment
shall be entered against us, or any subsidiary of ours, for more than $250,000,
that remains in effect for a period of twenty (20) days; (f) bankruptcy,
insolvency, reorganization or liquidation proceedings or other similar
proceedings shall be instituted by or against us, or any subsidiary of ours,
which are not dismissed within sixty (60) days; or (g) we fail to maintain the
listing of our common stock on at least one of the OTCBB, the Nasdaq National
Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or the NYSE
Amex Equities. Upon the occurrence of any Event of Default under the November
2008 Note, unless such Event of Default shall have been waived in writing by the
holder, the holder may consider the November 2008 Note immediately due and
payable, without presentment, demand, protest or notice of any kind, and the
holder may immediately enforce any and all of its rights and remedies provided
in the Note or any other right or remedy afforded by law.
II-9
The
November 2008 Warrants entitle the holder to purchase an aggregate of 50,000
shares of our common stock, at an exercise price of $2.61 per share. The
November 2008 Warrants will expire three years after the date of issuance. The
November 2008 Warrants may be exercised for cash only. The number of shares of
our common stock deliverable upon exercise of the November 2008 Warrants will be
subject to adjustment for, among other things, subdivision or consolidation of
shares, and certain other standard dilutive events. A holder of the November
2008 Warrants will not be entitled to exercise a number of November 2008
Warrants in excess of the number of November 2008 Warrants upon exercise of
which would result in beneficial ownership by such holder and his, her or its
affiliates of more than 9.9% of the outstanding shares of our common stock,
unless this provision is waived by written agreement between us and the holder
not less than sixty-one (61) days from the date of such waiver. On
November 10, 2009, in connection with the amendment of the November 2008 Notes,
we granted the holder of the November 2008 Warrants additional three-year
warrants to purchase 100,000 shares of our common stock, at an exercise price of
$1.63 per share. All of the other terms of these additional warrants
are identical to the November 2008 Warrants.
In connection with the November 2008
Note Offering, we engaged a placement agent to whom we paid a placement fee in
the amount of $40,000, and issued warrants to purchase an aggregate of 25,000
shares of our common stock, the terms and conditions of which are identical to
the those of the November 2008 Warrants. In addition, as of November
10, 2009, we issued warrants to purchase an additional 120,000 shares of our
common stock to the placement agent in consideration for, among other things,
its services in connection with the amendment of the November 2008
Notes. The terms and conditions of these additional warrants are
identical to those of the November 2008 Warrants, except that they will expire
on November 10, 2014, and are exercisable either for cash, at an exercise price
of $1.63 per share, or on a cashless basis.
We
believe that these transactions are exempt from registration under the
Securities Act of 1933, as amended, pursuant to Section 4(2), and/or Regulation
D promulgated thereunder, as transactions by an issuer not involving a public
offering.
Warrant
Tender Offers
As of
April 24, 2008, we commenced an offer (the “First Warrant Tender Offer”) to the
holders of our then outstanding warrants, pursuant to which the holders had the
opportunity to tender their warrants for shares of our common stock at a reduced
exercise price as follows:
|
·
|
With
respect to warrants having an exercise price of $0.94 per share, a holder
accepting the Warrant Tender Offer could exercise some or all of such
warrants at $0.75 per share of common
stock;
|
|
·
|
With
respect to warrants having an exercise price of $1.50 per share, a holder
accepting the Warrant Tender Offer could exercise some or all of such
warrants at $1.20 per share of common
stock;
|
II-10
|
·
|
With
respect to warrants having an exercise price of $2.04 per share, a holder
accepting the Warrant Tender Offer could exercise some or all of such
warrants at $1.63 per share of common stock;
and
|
|
·
|
With
respect to warrants having an exercise price of $3.26 per share, a holder
accepting the Warrant Tender Offer could exercise some or all of such
warrants at $2.61 per share of common
stock.
|
On March
2, 2009, we closed on the First Warrant Tender Offer. In connection
with the First Warrant Tender Offer:
|
·
|
a
total of 183,457 warrants were tendered at the reduced exercise price of
$1.63 per share (originally $2.04 per share), for an aggregate exercise
price of $299,035; and
|
|
·
|
a
total of 175,937 warrants were tendered at the reduced exercise price of
$2.61 per share (originally $3.26 per share) for an aggregate exercise
price of $459,196.
|
As a
result, we received gross proceeds of $758,231 and issued an aggregate of
359,394 shares of our common stock.
We
believe that this transaction is exempt from registration under the Securities
Act of 1933, as amended, pursuant to Section 4(2), and/or Regulation D
promulgated thereunder, as a transaction by an issuer not involving a public
offering.
As of
June 19, 2009, we commenced an offer (the “Second Warrant Tender Offer”) to all
holders of warrants to purchase shares of our common stock, having exercise
prices of either $0.94, $1.50, $1.63, $2.04 or $3.26 per share, originally
issued in connection with the October Offerings (the “Original Warrants”), the
opportunity to voluntarily exchange any or all of the Original Warrants for
amended warrants exercisable at reduced exercise prices (“Amended Warrants”),
for a limited period of time.
The terms
of the Amended Warrants, include the following:
|
·
|
With
respect to the 373,344 warrants having an exercise price of $0.94 per
share, a holder accepting the Second Warrant Tender Offer may exchange
some or all of the warrants for amended warrants exercisable at $0.75 per
share;
|
|
·
|
With
respect to the 1,333,333 warrants having an exercise price of $1.50 per
share, a holder accepting the Second Warrant Tender Offer may exchange
some or all of the warrants for amended warrants exercisable at $1.20 per
share;
|
|
·
|
With
respect to the 235,583 warrants having an exercise price of $1.63 per
share, a holder accepting the Second Warrant Tender Offer may exchange
some or all of the warrants for amended warrants exercisable at $1.30 per
share;
|
|
·
|
With
respect to the 955,190 warrants having an exercise price of $2.04 per
share, a holder accepting the Second Warrant Tender Offer may exchange
some or all of the warrants for amended warrants exercisable at $1.63 per
share; and
|
|
·
|
With
respect to the 4,732,036 warrants having an exercise price of $3.26 per
share, a holder accepting the Second Warrants Tender Offer may exchange
some or all of the warrants for amended warrants exercisable at $1.63 per
share.
|
II-11
On August
13, 2009, we closed the Second Warrant Tender Offer. In connection with the
Second Warrant Tender Offer:
|
·
|
a
total of 49,000 Original Warrants with an exercise price of $2.04 per
share were exchanged for Amended Warrants with a reduced exercise price of
$1.63 per share; and
|
|
·
|
a
total of 2,205,828 Original Warrants with an exercise price of $3.26 per
share were exchanged for Amended Warrants with a reduced exercise price of
$1.63 per share.
|
The only
differences between the Original Warrants and the Amended Warrants issued in
connection with the Second Warrant Tender Offer, are that the Amended
Warrants:
|
·
|
had
the lower exercise prices described
above;
|
|
·
|
were
due to expire on August 28, 2009, and the expiration date would not be
extended for our failure to register the underlying
shares;
|
|
·
|
were
not subject to the limitation contained in the 2007 Warrants, which
provides that the 2007 Warrants may not be exercised if the exercise would
cause the holder and its affiliates to hold an aggregate of more than 9.9%
of the outstanding shares of our common stock;
and
|
|
·
|
had
to be exercised for cash, as a cashless exercise of the Amended Warrants
was not be permitted.
|
We
believe that the issuance of the Amended Warrants in connection with this
transaction was exempt from registration under the Securities Act of 1933, as
amended, pursuant to Section (3)(a)(9) thereof.
Exercise
of Amended Warrants
August
14, 2009, the 22 warrant holders that participated in the Warrant Tender Offer
exercised all of the 2,254,828 Amended Warrants they received in connection
therewith, at an exercise price of $1.63 per share. As a result, we
received gross proceeds of $3,675,370.
We
believe that this transaction is exempt from registration under the Securities
Act of 1933, as amended, pursuant to Section 4(2), and/or Regulation D
promulgated thereunder, as a transaction by an issuer not involving a public
offering.
Grant
of Warrants to Advisor
On September 2, 2009 (the “Execution
Date”), we entered into a letter agreement (the “Advisory Agreement”) with a
financial advisor, pursuant to which the advisor will provide us with certain
financial advisory services for a period commencing on September 2, 2009 and
continuing for six (6) months, subject to cancellation (i) by thirty (30) days
written notice anytime after the six (6) month anniversary of the Execution
Date, or (ii) automatically, on June 30, 2010 in the event certain
conditions are not met. As partial consideration for the services to be provided
by the advisor, we granted the advisor five-year warrants to purchase 714,286
shares of our common stock (the “Advisor Warrants”), which are exercisable six
(6) months after the Execution Date, at an exercise price of $1.68 per share,
payable, (i) in cash, or (ii) on a cashless basis; provided, however, that all
of the Advisor Warrants will terminate if certain conditions are not
met.
II-12
We
believe that the issuance of the Advisor Warrants in this transaction is exempt
from registration under the Securities Act of 1933, as amended, pursuant to
Section 4(2), and/or Regulation D promulgated thereunder, as a transaction by an
issuer not involving a public offering.
Payment
of Liquidated Damages
In
connection with the First Offering and Second Offering described above, we
entered into Registration Rights Agreements. Pursuant to the
Registration Rights Agreements, we were required to pay liquidated damages to
the Investors, if we failed to satisfy certain registration requirements, as
further described above. As a result, we accrued a total of
$1,201,998 in liquidated damages through October 19, 2008, the date the shares
purchased in the October Offerings became eligible for sale pursuant to Rule 144
under the Securities Act. Pursuant to the Registration Rights
Agreement, the liquidated damages were payable in cash or shares of our common
stock, at our discretion. As of October 5, 2009, in full payment of
the liquidated damages, we issued an aggregate of 667,777 shares of our common
stock to the Investors, valued at $1.80 per share, the closing price on the
OTCBB on October 20, 2008. In addition, pursuant to the Registration
Rights Agreements, if we failed to pay any liquidated damages in full within
seven days after the date payable, we were required to pay interest thereon at a
rate of 15% per annum until such amounts, plus all such interest thereon, are
paid in full. Therefore, as of October 5, 2009, we paid interest in
the aggregate amount of approximately $172,900, by issuing an aggregate of
108,056 additional shares of our common stock, valued at $1.60 per share, the
closing price of our common stock on the OTCBB on October 2, 2009.
We
granted the Investor, the Initial Purchaser and the Additional Purchasers
“piggyback” registration rights with respect to these shares.
We
believe that this transaction is exempt from registration under the Securities
Act of 1933, as amended, pursuant to Section 4(2), and/or Regulation D
promulgated thereunder, as a transaction by an issuer not involving a public
offering.
December
2009 Note Offering
On
December 24, 2009, we sold to three “accredited investors” (the “December 2009
Noteholders”) (i) promissory notes in the aggregate principal amount of
$1,750,000, with an interest rate of 10% per annum (the “December 2009 Notes”)
and (ii) three-year warrants to purchase an aggregate of 536,809 shares of our
common stock, at an exercise price of $1.63 per share (the “December 2009
Warrants”) (the “December 2009 Note Offering”). At the closing of the December
2009 Note Offering, we paid the December 2009 Noteholders a closing
fee in the aggregate amount of $35,000, and prepaid interest on the December
2009 Notes in the aggregate amount of $175,000. As a result, we received net
proceeds of $1,540,000.
The
December 2009 Notes bear interest at a rate of 10% until due and payable on
December 24, 2010. Any amount of principal or interest which is not paid when
due will bear interest at a rate of 15%. We may prepay the entire amount due
under the December 2009 Notes at any time without penalty, upon 15 days prior
written notice; provided, however, in such event the December 2009 Noteholders
will be entitled to retain an amount of prepaid interest equal to the greater of
(i) the amount accrued as of the prepayment date, and (ii) an aggregate of
$105,000. The December 2009 Noteholders have the right to be prepaid any amounts
due under the December 2009 Notes should we consummate certain additional
offerings of equity or debt securities. So long as we have any obligation under
the December 2009 Notes, there are limitations on our ability to: (a) pay
dividends or make other distributions on its capital stock; (b) redeem,
repurchase or otherwise acquire any of its securities; (c) create, incur or
assume any liability for borrowed money; (d) sell, lease or otherwise dispose of
any significant portion of its assets; (e) lend money, give credit or make
advances; or (f) assume, guarantee, endorse, contingently agree to purchase or
otherwise become liable upon the obligation of any other person or entity. The
entire unpaid principal balance, together with accrued interest, shall become
due and payable, without presentment, demand, protest, notice of protest or
other notice of dishonor of any kind upon the occurrence of an “Event of
Default,” as defined in the December 2009 Notes. Our repayment of
amounts due under the December 2009 Notes is secured by a pledge of 5,883,329
shares of our common stock beneficially owned by Yang Yong Shan, our Chairman,
Chief Executive Officer and President.
II-13
The
December 2009 Warrants entitle the holders to purchase an aggregate of 536,809
shares of our common stock, at an exercise price of $1.63 per share. The
December 2009 Warrants will expire three years after the date of issuance. The
December 2009 Warrants may be exercised for cash only. The number of shares of
our common stock deliverable upon exercise of the December 2009 Warrants will be
subject to adjustment for, among other things, subdivision or consolidation of
shares, and certain other standard dilutive events. A holder of December 2009
Warrants may not exercise a number of December 2009 Warrants in excess of the
number of December 2009 Warrants upon exercise of which would result in
beneficial ownership by such holder and his, her or its affiliates of more than
9.9% of the outstanding shares of our common stock, unless this provision is
waived by written agreement between us and the holder not less than sixty-one
(61) days prior to the date of such waiver. The Company has granted the
Investors “piggyback” registration rights with respect to the shares underlying
the Warrants.
We
believe that the issuance of the December 2009 Warrants in this transaction is
exempt from registration under the Securities Act of 1933, as amended, pursuant
to Section 4(2), and/or Regulation D promulgated thereunder, as a transaction by
an issuer not involving a public offering.
Purchases
of Equity Securities by the Registrant and Affiliated Purchasers
On
October 9, 2007, we entered into a Share Repurchase Agreement with Grand Orient
Fortune Investment, Ltd. (“Grand Orient”), a PRC company controlled by Mingwen
Song, pursuant to which we repurchased 1,944,444 shares (the “Repurchase
Shares”) of our issued and outstanding common stock from Grand Orient for an
aggregate purchase price of $3,169,444 (the “Repurchase
Transaction”). We determined to repurchase these shares, to reduce
the overall dilution created by the First Offering and Second
Offering. The repurchased shares were initially held in treasury, but
have now been returned to our number of authorized but unissued
shares.
The
following table summarizes the purchases of the shares described
above:
Period
|
Total Number
of
Shares (or
Units)
Purchased
|
Average Price
Paid Per Share
(or Unit)
|
Total Number
of Shares (or
Units)
Purchased as
Part of Publicly
Announced
Plans or
Programs
|
Maximum
Number (or
Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased
Under the Plans
or Programs
|
||||||||||||
October
1, 2007 - October 31, 2007
|
1,944,444 | $ | 1.63 | 1,944,444 | 1,944,444 | |||||||||||
Total
|
1,944,444 | $ | 1.63 | 1,944,444 | 1,944,444 |
II-14
Item
16. Exhibits and Financial Statement Schedules
The
following exhibits are filed as part of this registration
statement.
Exhibit No.
|
Description
|
|
2.1
|
Agreement
and Plan of Merger and Reorganization, dated October 9, 2007, by and among
the Company, AIDH Acquisition, Inc., Tryant LLC and American International
Dairy Holding Co., Inc. - Incorporated by reference from our Current
Report on Form 8-K, filed on October 15, 2007
|
|
2.2
|
Articles
of Merger, dated October 9, 2007, of AIDH Acquisition, Inc. with and into
American International Dairy Holding Co., Inc. - Incorporated by reference
from our Current Report on Form 8-K, filed on October 15,
2007
|
|
3.1
|
Bylaws
- Incorporated by reference from our Registration Statement on Form 10-SB
filed August 10, 2006
|
|
3.2
|
Articles
of Incorporation - Incorporated by reference from our Registration
Statement on Form 10-SB filed August 10, 2006
|
|
3.3
|
Certificate
of Amendment to Articles of Incorporation of the Company, dated October 9,
2007 - Incorporated by reference from our Current Report on Form 8-K,
filed on October 15, 2007
|
|
3.4
|
Certificate
of Amendment to Articles of Incorporation of the Company, dated January
25, 2008 - Incorporated by reference from our Current Report on Form 8-K,
filed on January 30, 2008
|
|
4.1
|
Warrant
No. W-1 - Incorporated by reference from our Current Report on Form 8-K,
filed on October 15, 2007
|
|
4.2
|
Warrant
No. W-2 - Incorporated by reference from our Current Report on Form 8-K,
filed on October 15, 2007
|
|
4.3
|
Form
of Class A Warrant - Incorporated by reference from our Current Report on
Form 8-K, filed on October 15, 2007
|
|
4.4
|
Form
of Class B Warrant - Incorporated by reference from our Current Report on
Form 8-K, filed on October 15, 2007
|
|
4.5
|
Form
of June 2008 Note — Incorporated by reference from our Current Report on
Form 8-K, filed on June 12, 2008
|
|
4.6
|
Form
of First Amended and Restated Note — Incorporated by reference from our
amended Current Report on Form 8-K/A, filed on January 7,
2009
|
|
4.7
|
Form
of Second Amended and Restated Promissory Note — Incorporated by reference
from our Current Report on Form 8-K, filed on January 7,
2010
|
|
4.8
|
Form
of June 2008 Warrant — Incorporated by reference from our Current Report
on Form 8-K, filed on June 12,
2008
|
II-15
Exhibit No.
|
Description
|
|
4.9
|
Form
of Amended and Restated June 2008 Warrant — Incorporated by reference from
our amended Current Report on Form 8-K/A, filed on January 7,
2009
|
|
4.10
|
Form
of Warrants — Incorporated by reference from our Current Report on Form
8-K, filed on January 7, 2010
|
|
4.11
|
Form
of 10% Promissory Note — Incorporated by reference from our Quarterly
Report on Form 10-Q, filed on November 14, 2008
|
|
4.12
|
Form
of First Amended and Restated Note — Filed herewith
|
|
4.13
|
Form
of Warrant — Incorporated by reference from our Quarterly Report on Form
10-Q, filed on November 14, 2008
|
|
4.14
|
10%
Promissory Note — Incorporated by reference from our Current Report on
Form 8-K, filed on December 4, 2009
|
|
4.15
|
Form
of 10% Promissory Note — Incorporated by reference from our Current Report
on Form 8-K, filed on December 31, 2009
|
|
4.16
|
Form
of Warrant — Incorporated by reference from our Current Report on Form
8-K, filed on December 31, 2009
|
|
4.17
|
2009
Equity Incentive Plan — Incorporated by reference from our Current Report
on Form 8-K, filed on March 6, 2009
|
|
5.1
|
Opinion
of Snell & Wilmer LLP – Filed herewith
|
|
|
||
10.1
|
Form
of Securities Purchase Agreement for $1,000,000 Unit Offering —
Incorporated by reference from our Current Report on Form 8-K, filed on
October 15, 2007
|
|
10.2
|
Form
of Securities Purchase Agreement for Minimum $3,000,000, Maximum
$8,000,000 Unit Offering - Incorporated by reference from our Current
Report on Form 8-K, filed on October 15, 2007
|
|
10.3
|
Form
of Registration Rights Agreement - Incorporated by reference from our
Current Report on Form 8-K, filed on October 15, 2007
|
|
10.4
|
Share
Repurchase Agreement, dated October 9, 2007, by and between the Company
and Grand Orient Fortune Investment Ltd. - Incorporated by reference from
our Current Report on Form 8-K, filed on October 15,
2007
|
|
10.5
|
Put/Call
Agreement, dated October 9, 2007, by and between the Company and Grand
Orient Fortune Investment, Ltd. - Incorporated by reference from our
Current Report on Form 8-K, filed on October 15, 2007
|
|
10.6
|
Waiver
and First Amendment the Put/Call Agreement, dated April 9, 2008, by and
between the Company and Grand Orient Fortune Investment, Ltd. -
Incorporated by reference from our Form 10-KSB filed on April 15,
2008
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II-16
Exhibit No.
|
Description
|
|
10.7
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Put/Call
Agreement, dated October 9, 2007, by and between the Company and Fortune
Land Holding, Ltd. - Incorporated by reference from our Current Report on
Form 8-K, filed on October 15, 2007
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|
10.8
|
Waiver
and First Amendment the Put/Call Agreement, dated April 9, 2008, by and
between the Company and Fortune Land Holding, Ltd. - Incorporated by
reference from our Form 10-KSB filed on April 15, 2008
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|
10.9
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Employment
Agreement, dated November 1, 2007, by and between the Company and Shu
Kaneko - Incorporated by reference to our Current Report on Form 8-K,
filed November 7, 2007
|
|
10.10
|
Form
of June 2008 Securities Purchase Agreement for Sale of up to $3,000,000 of
8% Promissory Notes and 300,000
Warrants — Incorporated by reference from our
Current Report on Form 8-K, filed on June 12, 2008
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|
10.11
|
First
Amendment to June 2008 Securities Purchase Agreement, dated December 31,
2008 – Incorporated by reference from our amended Current Report on Form
8-K/A, filed January 7, 2009
|
|
10.12
|
Second
Amendment to June 2008 Securities Purchase Agreement, dated December 31,
2009 — Incorporated by reference from our Current Report on Form 8-K,
filed January 7, 2010
|
|
10.13
|
Form
of November 2008 Securities Purchase Agreement for Sale of up to
$2,000,000 of 10% Promissory Notes and 200,000
Warrants — Incorporated by reference from our
Quarterly Report on Form 10-Q, filed on November 14,
2008
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|
10.14
|
First
Amendment to November 2008 Securities Purchase Agreement — Filed
herewith
|
|
10.15
|
Loan
Agreement for Loan of $1,750,000 — Incorporated by reference from our
Current Report on Form 8-K, filed on December 4,
2009
|
|
10.16
|
Securities
Purchase Agreement for Sale of $1,750,000 of 10% Promissory Notes and
536,809 Warrants — Incorporated by reference from
our Current Report on Form 8-K, filed on December 31,
2009
|
|
16.1
|
Letter
from Mantyla McReynolds, LLC, dated November 19, 2007 - Incorporated by
reference from Amendment No. 2 to our Current Report on Form 8-K/A, filed
on November 19, 2007
|
|
16.2
|
Letter
from Murrell, Hall, McIntosh & Co., PLLP, dated January 29, 2008
- Incorporated by reference from our Current Report on Form
8-K, filed on January 30, 2008
|
|
21.1
|
List
of Subsidiaries - Incorporated by reference from Amendment No. 1 to our
Current Report on Form 8-K/A, filed October 25, 2007
|
|
23.1
|
Consent
of Windes & McClaughry - Filed herewith
|
|
23.2
|
Consent
of Snell & Wilmer LLP - (included in Exhibit
5.1)
|
II-17
Item
17. Undertakings
The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(b) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b) if, in aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the “Calculation of Registration
Fee” table in the effective registration statement; and
(c) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2) That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser:
(a) If
the Company is relying on Rule 430B:
(i) Each
prospectus filed by the Company pursuant to Rule 424(b)(3) shall be deemed to be
part of the registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and
(ii) Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as
part of a registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of
providing the information required by section 10(a) of the Securities Act shall
be deemed to be part of and included in the registration statement as of the
earlier of the date such form of prospectus is first used after effectiveness or
the date of the first contract of sale of securities in the offering described
in the prospectus. As provided in Rule 430B, for liability purposes of the
issuer and any person that is at that date an underwriter, such date shall be
deemed to be a new effective date of the registration statement relating to the
securities in the registration statement to which that prospectus relates, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof; provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such effective
date, supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or made in
any such document immediately prior to such effective date; or
II-18
(b) If
the Company is subject to Rule 430C: Each prospectus filed pursuant to Rule
424(b) as part of a registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A, shall be deemed to be part of and included in the
registration statement as of the date it is first used after effectiveness;
provided, however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such date of first use.
(5) Insofar
as Indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provision, or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-19
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Reston, State of
Virginia, on January 14, 2010.
EMERALD
DAIRY INC.
|
||
By:
|
/s/ Yang Yong
Shan
|
|
Yang
Yong Shan
|
||
President
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed below by the following persons in the capacities and on the
dates indicated.
Name
|
Title
|
Date
|
||
/s/ Yang Yong Shan
|
Chairman,
Chief Executive Officer
|
January
14, 2010
|
||
Yang
Yong Shan
|
and
President (principal executive officer)
|
|||
/s/ Shu Kaneko
|
Chief
Financial Officer and
|
January
14, 2010
|
||
Shu
Kaneko
|
Secretary
(principal financial and accounting officer)
|
|||
/s/ Niu Wan Chen
|
Vice
President of Sales and Director
|
January
14, 2010
|
||
Niu
Wan Chen
|
||||
/s/ Qin Si Bo
|
Vice
President of Production and
|
January
14, 2010
|
||
Qin
Si Bo
|
Director
|
|||
/s/ Yuan Yong Wei
|
Vice
President of Operation and
|
January
14, 2010
|
||
Yuan
Yong Wei
|
Director
|
*By:
|
/s/ Yang Yong Shan
|
||
Yang
Yong Shan
|
|||
Attorney-in-fact
|