Attached files
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EX-32.1 - China Cattle Holding Corp | v173561_ex32-1.htm |
EX-31.2 - China Cattle Holding Corp | v173561_ex31-2.htm |
EX-32.2 - China Cattle Holding Corp | v173561_ex32-2.htm |
EX-31.1 - China Cattle Holding Corp | v173561_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934:
For
the Quarterly Period ended December 31, 2009
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the
transition period from __________________ to __________________
Commission
File Number: 000-53777
CHINA CATTLE HOLDING
CORPORATION
(Name
of Small Business Issuer in its Charter)
Delaware
|
942-1768735
|
(State
or Other Jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
The Northeast Corner of
Fengqing Park Road
Xi’an
City
Shaanxi Province 710077,
PRC
(Address
of Principal Executive Offices)
+(86-29)
8420-4991
(Issuer’s
Telephone Number)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes o No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
Reporting Company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
Number of
shares outstanding of each of the issuer’s classes of
common
equity, as of November 1, 2009: 10,000,000 shares
of Common Stock, par value US $0.001
CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION
The
discussion contained in this 10-Q under the Securities Exchange Act of 1934, as
amended, contains forward-looking statements that involve risks and
uncertainties. The issuer’s actual results could differ significantly from those
discussed herein. These include statements about our expectations, beliefs,
intentions or strategies for the future, which we indicate by words or phrases
such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,” “the
Company believes,” “management believes” and similar language, including those
set forth in the discussions under “Notes to Financial Statements” and
“Management’s Discussion and Analysis or Plan of Operation” as well as those
discussed elsewhere in this Form 10-Q. We base our forward-looking statements on
information currently available to us, and we assume no obligation to update
them. Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements that are subject to the “safe harbor” created by the
Private Securities Litigation Reform Act of 1995.
2
TABLE
OF CONTENTS
PART
I. FINANCIAL INFORMATION
|
||||
ITEM
1. FINANCIAL STATEMENTS (UNAUDITED)
|
5
|
|||
Consolidated
Balance Sheets
|
5
|
|||
Consolidated
Statements of Income and Comprehensive Income
|
6
|
|||
Consolidated
Statements of Cash Flows
|
7
|
|||
Notes
to Consolidated Financial Statements
|
8
|
|||
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS
|
25
|
|||
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
32
|
|||
ITEM
4T. CONTROLS AND PROCEDURES
|
32
|
|||
PART
II. OTHER INFORMATION
|
||||
ITEM
1. LEGAL PROCEEDINGS
|
33
|
|||
ITEM
1A. RISK FACTORS AFFECTING FUTURE RESULTS
|
33
|
|||
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
33
|
|||
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
|
33
|
|||
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
33
|
|||
ITEM
5. OTHER INFORMATION
|
33
|
|||
ITEM
6. EXHIBITS
|
33
|
|||
SIGNATURES
|
34
|
|||
INDEX
TO EXHIBITS
|
35
|
3
PART
I. FINANCIAL INFORMATION
|
||||
ITEM
1. FINANCIAL STATEMENTS (UNAUDITED)
|
5
|
|||
Index
to Financial Statements
|
||||
Consolidated
Balance Sheets
|
5
|
|||
Consolidated
Statements of Income and Comprehensive Income
|
6
|
|||
Consolidated
Statements of Cash Flows
|
7
|
|||
Notes
to Consolidated Financial Statements
|
8
|
4
PART
I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHINA
CATTLE HOLDING CORPORATION
CONSOLIDATED
BALANCE SHEETS
December 31,
|
June 30,
|
|||||||
2009
|
2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
|
$ | 4,058,771 | $ | 3,395,945 | ||||
Accounts
receivable
|
3,998,982 | 2,717,898 | ||||||
Other
receivables, net
|
203,061 | 113,698 | ||||||
Inventories
|
3,356,796 | 978,869 | ||||||
Advances
to suppliers
|
480,068 | 96,179 | ||||||
Due
from related parties - current
|
366 | 646,227 | ||||||
Total
Current Assets
|
12,098,044 | 7,948,816 | ||||||
Property,
Plant & Equipment, net
|
3,472,197 | 3,585,931 | ||||||
Construction
in progress
|
4,704,977 | 2,497,608 | ||||||
Due
from related parties
|
585,395 | 483,919 | ||||||
Other
assets
|
27,005 | 29,740 | ||||||
Total
Assets
|
$ | 20,887,618 | $ | 14,546,014 | ||||
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Short-term
loans
|
$ | 860,001 | $ | 748,013 | ||||
Special
accounts payable
|
637,645 | 607,747 | ||||||
Accounts
payable and accrued expenses
|
69,752 | 30,101 | ||||||
Advances
from customers
|
43,878 | 76,897 | ||||||
Other
payables
|
294,668 | 470,187 | ||||||
Taxes
payable
|
2,905,135 | 2,022,081 | ||||||
Due
to related parties
|
1,912,135 | 1,846,084 | ||||||
Total
Current Liabilities
|
6,723,214 | 5,801,110 | ||||||
Long-term
loans
|
855,613 | 1,000,760 | ||||||
Total Liabilities
|
7,578,827 | 6,801,870 | ||||||
Stockholders’
Equity:
|
||||||||
Common
stock, par value $0.001, 100,000,000 shares
|
||||||||
authorized,
10,000,000 shares issued and outstanding
|
10,000 | 10,000 | ||||||
Additional
paid-in capital
|
544,703 | 534,703 | ||||||
Statutory
surplus reserve
|
219,684 | 219,684 | ||||||
Retained
earnings
|
13,070,080 | 7,523,209 | ||||||
Comprehensive
losses
|
(535,676 | ) | (543,452 | ) | ||||
Total
Stockholders' Equity
|
13,308,791 | 7,744,144 | ||||||
Total
Liabilities and Stockholders' Equity
|
$ | 20,887,618 | $ | 14,546,014 |
The
accompanying notes form an integral part of these financial
statements.
5
CHINA
CATTLE HOLDING CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
For the six months ended December 31,
|
For the three months ended December 31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
Revenue
|
$ | 12,210,937 | $ | 8,576,850 | $ | 7,283,752 | $ | 5,342,473 | ||||||||
Cost
of Revenue
|
5,959,342 | 3,970,185 | 3,947,752 | 2,830,503 | ||||||||||||
Gross
Profit
|
6,251,595 | 4,606,665 | 3,336,000 | 2,511,970 | ||||||||||||
Operating
Expenses:
|
||||||||||||||||
Selling
expense
|
42,080 | 19,599 | 26,800 | 11,487 | ||||||||||||
General
and administrative expenses
|
494,904 | 392,377 | 219,045 | 223,357 | ||||||||||||
Total
operating expenses
|
536,984 | 411,976 | 245,845 | 234,844 | ||||||||||||
Operating
Income
|
5,714,611 | 4,194,689 | 3,090,155 | 2,277,126 | ||||||||||||
Other
Income/ (Expenses):
|
||||||||||||||||
Interest
income/ (expenses)
|
(116,273 | ) | (93,402 | ) | (61,972 | ) | (522,70 | ) | ||||||||
Subsidy
income
|
511,992 | 201,146 | 511,992 | 160,507 | ||||||||||||
Other
income
|
125,227 | 5,089 | 925 | 3,610 | ||||||||||||
Other
expenses
|
(2,128 | ) | (29,323 | ) | (160 | ) | (138 | ) | ||||||||
Total
other income
|
518,818 | 83,510 | 450,785 | 111,709 | ||||||||||||
Income
Before Income Taxes
|
6,233,429 | 4,278,199 | 3,540,940 | 2,388,835 | ||||||||||||
Provision
for Income Taxes
|
686,558 | 338,996 | 357,420 | 295,215 | ||||||||||||
Net
Income
|
5,546,871 | 3,939,203 | 3,183,520 | 2,093,620 | ||||||||||||
Other
Comprehensive Income
|
7,776 | 1,252 | (1,697 | ) | 65 | |||||||||||
Comprehensive
income
|
$ | 5,554,647 | $ | 3,940,455 | $ | 3,181,823 | $ | 2,093,685 | ||||||||
Earnings
per shares: Basic and diluted
|
$ | 0.55 | $ | 0.39 | $ | 0.32 | $ | 0.21 | ||||||||
Basic
and diluted shares outstanding
|
10,000,000 | 10,000,000 | 10,000,000 | 10,000,000 |
The
accompanying notes form an integral part of these financial
statements.
6
CHINA
CATTLE HOLDING CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the six months ended December
31,
|
||||||||
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income
|
$ | 5,546,871 | $ | 3,939,203 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
196,696 | 179,369 | ||||||
Bad
debt write back
|
(13,531 | ) | ||||||
(Increase)
/ decrease in current assets:
|
||||||||
Accounts
receivable
|
(1,278,278 | ) | (1,317,078 | ) | ||||
Receivables
due from related party
|
(143,660 | ) | (95,744 | ) | ||||
Other
receivables
|
(65,719 | ) | 539,153 | |||||
Advances
to suppliers
|
(383,847 | ) | (8,463 | ) | ||||
Inventories
|
(2,377,240 | ) | (3,501,286 | ) | ||||
Increase
/ (decrease) in current liabilities:
|
||||||||
Accounts
payable
|
45,703 | 984,260 | ||||||
Other
payables
|
(182,049 | ) | 160,491 | |||||
Advances
from customers
|
(33,109 | ) | 45,704 | |||||
Taxes
payable
|
880,955 | 620,774 | ||||||
Total
adjustments
|
(3,354,079 | ) | (2,392,820 | ) | ||||
NET
CASH PROVIDED BY OPERATING ACTIVITIES
|
2,192,791 | 1,546,383 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchase
of property, plant & equipment
|
(2,281,152 | ) | (955,709 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Repayment
on borrowing from related party
|
577,308 | 43,775 | ||||||
Repayment
by related party
|
176,095 | 209,182 | ||||||
Repayment
of short-term loans
|
140,403 | (70,040 | ) | |||||
Repayment
of long-term loans
|
(146,283 | ) | (145,916 | ) | ||||
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
747,523 | 37,001 | ||||||
EFFECT
OF EXCHANGE RATE CHANGES ON CASH & CASH EQUIVALENT
|
3,664 | 1,376 | ||||||
NET
INCREASE IN CASH AND CASH EQUIVALENT
|
659,162 | 627,674 | ||||||
CASH
& CASH EQUIVALENT - BEGINNING BALANCE
|
3,395,945 | 571,253 | ||||||
CASH
& CASH EQUIVALENT- ENDING BALANCE
|
$ | 4,058,771 | $ | 1,200,303 | ||||
SUPPLEMENTAL
DISCLOSURES:
|
||||||||
Cash
paid during the year for:
|
||||||||
Interest
|
$ | 128,315 | $ | 97,387 | ||||
Income
taxes
|
$ | - | $ | - |
The
accompanying notes form an integral part of these financial
statements.
7
CHINA
CATTLE HOLDING CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009
(UNAUDITED)
NOTE 1 - ORGANIZATION AND
DESCRIPTION OF BUSINESS
China
Cattle Holding Corporation (hereinafter as “China Cattle” or “the Company”) was
incorporated on September 27, 2007 in New Jersey with authorized common stock of
100,000,000 shares and outstanding shares of 100,000 shares. Such outstanding
shares were issued to Mr. Chenghai Du to hold in trust for five actual investors
of Baoji Wuyin Green Food Co., Ltd. (hereinafter as “Baoji Wuyin”), a company
formed under the laws of the People’s Republic of China (the “PRC”). The Company
was set up to acquire the business of Baoji Wuyin in the future. In addition,
China Cattle established a representative office in Xi’an, Shaanxi,
China.
Baoji
Wuyin was incorporated on June 26, 1998 in Fufeng County, China with registered
capital of $136,478. On November 20, 2001 pursuant to the resolution of a
shareholder’s meeting, Baoji Wuyin transferred additional paid-in capital of
$227,000 to registered capital. Baoji Wuyin’s registered capital was then
$363,478. Baoji Wuyin engages in breeding, fattening Qinchuan beef cattle,
further processing of beef and sale of cattle sperm.
Pursuant
to the Share Exchange Agreement by and among the Company and the shareholders of
all outstanding shares of Baoji Wuyin, on December 12, 2007, Baoji Wuyin
exchanged 100% of its common stock for all the issued and outstanding shares of
the Company. The Company then owned 100% the issued and outstanding shares of
Baoji Wuyin. Because the Company and Baoji Wuyin were under common control since
September 2007, Baoji Wuyin’s financial statements were combined at historical
cost into the Company from the date the Company acquired control. Therefore, the
acquisition transaction (“the Merger”) was accounted for at historical cost in a
manner similar to a pooling of interest.
On July
10, 2009, the Company reincorporated in the State of Delaware. In connection
with the incorporation, the Company effected a one hundred (100) for one (1)
stock split of its shares of common stock, $.001 par value. As a result, the
Company had 10,000,000 shares of common stock outstanding as of July 10, 2009.
Total authorized shares and par value remain unchanged. All references in the
financial statements and notes to financial statements, numbers of shares and
per share data were retroactively restated to reflect the stock
split.
NOTE 2 - BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
presentation
The
Consolidated Financial Statements are prepared in accordance with generally
accepted accounting principles in the United States of America (“US GAAP”). The
Company’s functional currency is the Chinese Renminbi (“RMB”); however the
accompanying consolidated financial statements are translated and presented in
United States Dollars (“$”).
8
SFAS No.
131, “Disclosure about Segments of an Enterprise and Related Information”
(codified in FASB ASC Topic 280) requires use of the “management approach” model
for segment reporting. The management approach model is based on the way a
company’s management organizes segments within the company for making operating
decisions and assessing performance. The Company determined it has three
reportable segments (See Note 15). The Company had previously
reported its operations as three separate segments since the three operations
were allocated in difference products.
Principle of
consolidation
The
accompanying consolidated balance sheets as of December 31, 2009 and June 30,
2009 and consolidated statements of income and comprehensive income for six and
three month periods ended December 31, 2009 and 2008 include the accounts of the
Company, the representative office of the Company and Baoji Wuyin, the Company’s
wholly-owned subsidiary. All significant inter-company accounts and
transactions have been eliminated in consolidation.
The
companies are related through common ownership. Therefore, the acquisition
transaction was accounted for at historical cost in a manner similar to the
pooling of interest. Furthermore, as the Company was formed prior to the Merger
and lacked any significant operations, the consolidated financial statements
include historical information prior to the Company’s incorporation and were
prepared to give retroactive effect to reflect the historical activity of Baoji
Wuyin since its inception. Therefore, this Merger was recorded as a
recapitalization due to the Company’s lack of prior operations before the
Merger. Under such method, the stockholders’ equity of Baoji Wuyin was
retroactively restated for the equivalent number of common shares currently held
after giving effect to any differences in the par value to offset to
paid-in-capital. In addition, as the Company did not have any assets or
liabilities as of the set-up date, there is no recapitalization.
Use of
estimates
The
preparation of consolidated financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the consolidated financial statements and the amount
of revenues and expenses during the reporting periods. Management makes these
estimates using the best information available at the time the estimates are
made. However, actual results could differ materially from those
results.
Risks and
uncertainties
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility of
public markets.
9
Foreign currency
transactions and comprehensive income (loss)
As of
December 31, 2009 and for the period then ended, the accounts of Baoji Wuyin
were maintained, and its financial statements were expressed, in RMB. Such
financial statements were translated into US dollars in accordance with
Statement of Financial Accounts Standards (“SFAS”) No. 52, “Foreign Currency
Translation” (codified in FASB ASC Topic 830), with the RMB as the functional
currency. According to the Statement, all assets and liabilities were translated
at the then current exchange rate, stockholder’s equity is translated at
historical rates and income statement items are translated at the average
exchange rate for the period. The resulting translation adjustments are reported
under other comprehensive income in accordance with SFAS No. 130, “Reporting
Comprehensive Income” (codified in FASB ASC Topic 220) as a component of
shareholders’ equity.
Until
July 21, 2005, RMB was pegged to the US dollar at RMB8.28: $1.00. On July 21,
2005, the PRC government reformed the exchange rate system into a managed
floating exchange rate system. In addition, the exchange rate of RMB to the US
dollar was adjusted to RMB8.11: $1.00 as of July 21, 2005. The Peoples Bank of
China (“PBOC”) announces the closing price of a foreign currency such as the US
dollar traded against the RMB in the inter-bank foreign exchange market after
the closing of the market on each working day, which will become the unified
exchange rate for the trading against the RMB on the following working day. The
daily trading price of the US dollar against the RMB in the inter-bank foreign
exchange market is allowed to float within a band of 0.3% around the unified
exchange rate published by the PBOC. This quotation of exchange rates does not
imply free convertibility of the RMB to other foreign currencies. All foreign
exchange transactions continue to take place either through the Bank of China or
other banks authorized to buy and sell foreign currencies at the exchange rates
quoted by the PBOC. Approval of foreign currency payments by the Bank of China
or other institutions requires submitting a payment application form together
with invoices, shipping documents and signed contracts.
Translations
adjustments resulting from this process are included in accumulated other
comprehensive loss in the consolidated statement of stockholders’ equity and
were $535,676 and $543,452 as of December 31, 2009 and June 30, 2009,
respectively.
Cash and cash
equivalents
For
Statement of Cash Flows purposes, the Company considers all cash on hand and in
banks, including accounts in book overdraft positions, certificates of deposit
and other highly-liquid investments with maturities of three months or less,
when purchased, to be cash and cash equivalents. The Company maintains cash with
various banks and trust companies located in China. Cash accounts are not
insured or otherwise protected. Should any bank or trust company holding cash
deposits become insolvent, or if the Company is otherwise unable to withdraw
funds, the Company would lose the cash on deposit with that particular bank or
trust company.
Accounts
receivable
The
Company’s policy is to maintain reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and
analyzes historical bad debts, customer concentrations, customer credit
worthiness, current economic trends and changes in customer payment patterns to
evaluate the adequacy of these reserves. No provision for doubtful accounts has
been made in these financial statements since its inception, as the accounts
were considered collectible in full.
Management
reviews the changes in debtor’s payment patterns, frequency of transactions and
coverage from related payables to evaluate the adequacy of the reserves for
related party receivables.
10
Inventories
Inventories
are stated at the lower of cost (determined on a weighted average basis) or
market. The management compares the cost of inventories with the fair
market value and an allowance is made for writing down the inventories to fair
market value, if lower than the cost. As of December 31, 2009, no allowance for
writing down inventories to their fair market value is considered
necessary.
The
Company’s cattle are classified as reproduction and raised cattle, Cattle used
to produce sperm seeds are classified as reproduction cattle and recorded as
PP&E. The reproduction cattle purchased are recorded at cost. The cost of
self-cultivated reproduction cattle was recorded at its proportionate cost of
sperm seed, breeding, depreciation, labor cost, and other cost related to its
cultivation through the date these cattle were selected as reproduction cattle.
Prior to becoming reproduction cattle, they are classified as
inventory.
Costs of
raised animals for sale include proportionate costs of breeding, including
depreciation of the breeding herd, plus the costs of maintenance through the
balance sheet date. Purchased cattle are carried at purchase cost plus costs of
maintenance through the balance sheet date.
Costs of
sperm seeds include consumption of breeding feeds by reproduction cattle after
they are selected as reproduction cattle and start producing sperm seeds,
proportionate depreciation of reproduction cattle and other PP&E, and labor
costs.
Property, plant and
equipment
Property,
plant and equipment are recorded at cost. Gains or losses on disposals are
reflected as gain or loss in the year of disposal. The cost of improvements that
extend the life of plant, property, and equipment are capitalized. These
capitalized costs may include structural improvements, equipment, and fixtures.
All ordinary repair and maintenance costs are expensed as incurred.
Cattle
for reproduction are recorded at cost less any accumulated depreciation and any
accumulated impairment losses.
Depreciation
for financial reporting purposes is provided using the straight-line method over
the estimated useful lives of assets as set out below. Herd depreciation is
affected by such factors as natural disasters, including insect infestations,
epidemic disease and market demand changes.
Estimated Useful Life
|
|
Buildings
|
10-20
years
|
Machinery
and equipment
|
5
years
|
Vehicle
|
10
years
|
Office
equipment
|
5
years
|
Cattle
for reproduction
|
5-8
years
|
11
Construction in
progress
All
direct and indirect costs related to the acquisition or construction of
property, plant and equipment, incurred before the assets are ready for their
intended uses, are capitalized as construction in progress. Those costs include
borrowing costs, which include foreign exchange differences, on specific
borrowings for the construction of the assets during the construction
period.
Construction
in progress is transferred to property, plant and equipment when it is ready for
its intended use.
As of
December 31, 2009 and June 30, 2009 construction in progress amounted to
$4,704,977 and $2,497,608 respectively, which included a “Yangling” project that
amounted to $4,699,350 and $2,497,608. The Yangling project is comprised of
three parts which include construction of barrier walls (fencing), installation
and building of cow house, as at December 31, 2009, the three parts were
completed approximately 80%, 43% and 33% respectively,
Long-lived
assets
The
Company applies the provisions of SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets” (codified in FASB ASC Topic 360). SFAS No. 144
requires long-lived assets be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable through the estimated undiscounted cash flows expected to result
from the use and eventual disposition of the assets. Whenever any such
impairment exists, an impairment loss will be recognized for the amount by which
the carrying value exceeds the fair value.
The
Company tests long-lived assets, including property, plant and equipment and
intangible assets subject to periodic amortization, for recoverability at least
annually or more frequently upon the occurrence of an event or when
circumstances indicate that the net carrying amount is greater than its fair
value. Assets are grouped and evaluated at the lowest level for their
identifiable cash flows that are largely independent of the cash flows of other
groups of assets. The Company considers historical performance and future
estimated results in its evaluation of potential impairment and then compares
the carrying amount of the asset to the future estimated cash flows expected to
result from the use of the asset. If the carrying amount of the asset exceeds
estimated expected undiscounted future cash flows, the Company measures the
amount of impairment by comparing the carrying amount of the asset to its fair
value. The estimation of fair value is generally measured by discounting
expected future cash flows as the rate the Company utilizes to evaluate
potential investments. The Company estimates fair value based on the information
available in making whatever estimates, judgments and projections are considered
necessary. There was no impairment of long-lived assets for the six months ended
December 31, 2009.
Capitalized
interest
Interest
associated with major development and construction projects is capitalized and
included in the cost of the project. When no debt is incurred specifically for a
project, interest is capitalized on amounts expended on the project using
weighted-average cost of the Company’s outstanding borrowings. Capitalization of
interest ceases when the project is substantially complete or development
activity is suspended for more than a brief period.
12
Provision for product
warranty
The
Company generally provides a warranty relating to product defects for a
specified period of time after sales to all customers. A warranty is not sold
separately and is not considered a separate element of revenue. Sales returns
are reduced to sales and its cost of goods sold when it incurred. However, as
there were no products liability claims or product recalls since its inception,
the Company did not accrue any provision for product warranty in these financial
statements considering the low possibility of the potential costs for product
liability lawsuits.
Earnings per
share
The
Company reports earnings per share in accordance with the provisions of SFAS
128, “Earnings per Share” (codified in FASB ASC Topic 260). FASB ASC Topic 260
requires presentation of basic and diluted earnings per share in conjunction
with the disclosure of the methodology used in computing such earnings per
share. Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average common shares
outstanding during the period. Diluted earnings per share takes into account the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised and converted into common stock using the treasury
method.
Common
stock equivalents represent the dilutive effect of the assumed exercise of the
outstanding stock options and warrants, using the treasury stock method, at
either the beginning of the respective period presented or the date of issuance,
whichever is later, and only if the common stock equivalents are considered
dilutive based upon the Company’s net income (loss) position at the calculation
date.
Revenue
recognition
The
Company’s revenue recognition policies are in compliance with Securities and
Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) 104. Sales revenue
is recognized at the date of shipment to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other
significant obligations of the Company exist and collectability is reasonably
assured. Payments received before all of the relevant criteria for revenue
recognition are satisfied are recorded as unearned revenue. The Company’s
revenue consists of invoiced value of goods, net of a value-added tax (VAT) and
product return or sales discount allowance. The Company records revenue net of
sales rebates.
Sales
revenue represents the invoiced value of goods, net of value-added tax (“VAT”).
This VAT may be offset by VAT paid by the Company on purchases. The Company
recorded VAT payable and VAT receivable net of payments in the financial
statements. The VAT tax return is filed offsetting the payables against the
receivables.
VAT
payables on sales were $173,585 and $276,633 for the six months ended December
31, 2009 and 2008, respectively, were $118,699 and $182,081 for the three months
ended December 31, 2009 and 2008, respectively. Sales and purchases are recorded
net of VAT collected and paid as the Company acts as an agent for the PRC
Government. VAT taxes are not affected by the income tax holiday. See “Income
Taxes” below and Note 11.
Sales
returns and allowances were $0 for both six months ended December 31, 2009 and
2008. The Company does not provide an unconditional right of return, price
protection or any other concessions to its customers.
13
The
Company had implemented sales rebates policy in 2006, in order to increase sales
of semen and high-grade beef. Customers would receive sales rebates on monthly
accumulated purchase quantity. Sales rebates were $1,319,944 and $984,133 for
the six months ended December 31, 2009 and 2008, were $646,825 and $220,495 for
the three months ended December 31, 2009 and 2008. Sales rebates are accrued
monthly.
For the
six months ended December 31, 2009 and 2008, net revenue is summarized as
follows:
2009
|
2008
|
|||||||
Gross
revenue
|
$ | 13,704,466 | $ | 9,837,616 | ||||
Less:
VAT
|
(173,585 | ) | (276,633 | ) | ||||
Sales
rebate
|
(1,319,944 | ) | (984,133 | ) | ||||
Net
revenue
|
$ | 12,210,937 | $ | 8,576,850 |
For the
three months ended December 31, 2009 and 2008, net revenue is summarized as
follows:
2009
|
2008
|
|||||||
Gross
revenue
|
$ | 8,049,276 | $ | 5,745,049 | ||||
Less:
VAT
|
(118,699 | ) | (182,081 | ) | ||||
Sales
rebate
|
(646,825 | ) | (220,495 | ) | ||||
Net
revenue
|
$ | 7,283,752 | $ | 5,342,473 |
Concentration of
risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash and trade accounts receivable. The Company
places its cash with high credit quality financial institutions in the U.S. and
in China. Almost all of the Company’s sales are credit sales which are primarily
to customers whose ability to pay is dependent upon the industry economics
prevailing in these areas; however, concentrations of credit risk with respect
to trade accounts receivables is limited due to the wide distribution of our
products and shorter payment terms than is customary in the PRC. The Company
also performs ongoing credit evaluations of its customers to help further reduce
credit risk.
The
Company’s insurance may not provide enough coverage in the event of damage or
loss to its properties due to the limited business insurance products offered in
China. If a natural disaster, fire, widespread disease or other significant
event beyond the Company’s control occurred, all of the book value of the
Company’s properties may be subject to write-off and, in such case, the Company
would incur a significant loss thereon.
Advertising
costs
The
Company expenses advertising as incurred or, as appropriate, the first time the
advertising takes place. Advertising expense for six months ended December 31,
2009 and 2008 were not material.
14
Income
taxes
The
Company accounts for income taxes using an asset and liability approach which
allows for the recognition and measurement of deferred tax assets based upon the
likelihood of realization of tax benefits in future years. Under the asset and
liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. A
valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to realize
their benefits, or that future deductibility is uncertain.
The
Company records a valuation allowance for deferred tax assets, if any, based on
its estimates of its future taxable income as well as its tax planning
strategies when it is more likely than not that a portion or all of its deferred
tax assets will not be realized. If the Company is able to utilize more of its
deferred tax assets than the net amount previously recorded when unanticipated
events occur, an adjustment to deferred tax assets would increase the Company
net income when those events occur. The Company does not have any significant
deferred tax asset or liabilities in the PRC tax jurisdiction.
Commencing
January 1, 2008, the PRC’s new Enterprise Income Tax (“EIT”) law replaced the
existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
(“FIEs”). The new standard EIT rate of 25% replaced the 33% rate formerly
applicable to both DES and FIEs. The two-year tax exemption and three-year 50%
tax reduction tax holiday for production-oriented FIEs were
eliminated.
The
Company’s major products (sperms seeds and live cattle) were farm products and
free of income tax under PRC taxation law. As for the Company’s beef products,
it is subject to income tax of 25% for 2008 and 2009 under the EIT
law.
See Note
10, Taxes Payable.
Government
support
The
Company receives two types of government support, which are loans (with interest
or without interest) and government subsidies.
The loans
granted are recorded as liabilities according to maturity date. Loans without
maturity date are classified as current liabilities in special accounts payable.
Others are classified as short-term loans and long-term loans due to the
maturity date.
Government
subsidies are recorded as subsidy income or deferred income according to its
benefit period. The Company has received approximately $2.4 million as subsidies
from the Chinese Government from the Company’s inception through the balance
sheet date. The Company has received $511,992 and $201,146, respectively for the
six months ended December 31, 2009 and 2008.
Fair values of financial
instruments
SFAS No.
107, “Disclosures about Fair Value of Financial Instruments” (codified in FASB
ASC Topic 820), requires the Company disclose estimated fair values of financial
instruments. The carrying values of the Company’s financial instruments,
including cash and cash equivalents, restricted cash, marketable securities,
trade bills and other receivables, deposits, trade bills and other payables
approximate their fair values due to the short-term maturity of such
instruments. See Note 9.
15
Research and
development
Research
and development costs are expensed as incurred and amounted to $0 and $0 for the
six months ended December 31, 2009 and 2008, respectively, and are included in
general and administrative expenses on the accompanying statements of income and
other comprehensive income. Research and development costs are incurred on a
project specific basis.
Statements of cash
flows
In
accordance with SFAS No. 95, “Statements of Cash Flows” (codified in FASB ASC
Topic 230), cash flows from the Company’s operations are calculated based upon
the local currencies. As a result, amounts related to assets and liabilities
reported on the statement of cash flows may not necessarily agree with changes
in the corresponding balances on the balance sheet.
Segment
reporting
Statement
of Financial Accounting Standards No. 131 (“SFAS 131”), “Disclosure about
Segments of an Enterprise and Related Information” (codified in FASB ASC Topic
280), requires use of the “management approach” model for segment reporting. The
management approach model is based on the way a company’s management organizes
segments within the company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure, or any other manner in which management
disaggregates a company. As per FASB ASC Topic 280, the Company operates in
three segments based on nature of products and services: of beef, live cattle
trade and of semen. See Note 14, Segment Reporting.
Recent accounting
pronouncements
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets — an amendment of FASB Statement No. 140,” codified as FASB
ASC Topic 860, which requires entities to provide more information
regarding sales of securitized financial assets and similar transactions,
particularly if the entity has continuing exposure to the risks related to
transferred financial assets. SFAS No. 166 eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets and requires additional disclosures. SFAS No. 166 is
effective for fiscal years beginning after November 15, 2009. The Company does
not believe the adoption of SFAS No. 166 will have an impact on its financial
condition, results of operations or cash flows.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R),” codified as FASB ASC Topic 810-10, which modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. SFAS
No. 167 clarifies that the determination of whether a company is required to
consolidate an entity is based on, among other things, an entity’s purpose
and design and a company’s ability to direct the activities of the entity that
most significantly impact the entity’s economic performance. SFAS No. 167
requires an ongoing reassessment of whether a company is the primary beneficiary
of a variable interest entity. SFAS No. 167 also requires additional
disclosures about a company’s involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. SFAS No. 167
is effective for fiscal years beginning after November 15, 2009. The Company
does not believe the adoption of SFAS No. 167 will have an impact on its
financial condition, results of operations or cash flows.
16
On July
1, 2009, the Company adopted Accounting Standards Update (“ASU”) No.
2009-01, “Topic 105 - Generally Accepted Accounting Principles - amendments
based on Statement of Financial Accounting Standards No. 168 , “The FASB
Accounting Standards Codification™ and the Hierarchy of Generally Accepted
Accounting Principles” (“ASU No. 2009-01”). ASU No. 2009-01
re-defines authoritative US GAAP for nongovernmental entities to be only
comprised of the FASB Accounting Standards Codification™ (“Codification”) and,
for SEC registrants, guidance issued by the SEC. The Codification is
a reorganization and compilation of all then-existing authoritative US GAAP for
nongovernmental entities, except for guidance issued by the SEC. The
Codification is amended to effect non-SEC changes to authoritative US
GAAP. Adoption of ASU No. 2009-01 only changed the referencing
convention of US GAAP in notes to the Consolidated Financial
Statements.
On
August 28, 2009, the FASB issued ASU 2009-05, “Measuring Liabilities at
Fair Value,” to provide guidance on measuring the fair value of liabilities
under ASC Topic 820. This ASU clarifies the fair value measurements for a
liability in an active market and the valuation techniques in the absence of a
Level 1 measurement. This ASU is effective for the first reporting period
(including interim periods) beginning after issuance, which is October 1,
2009 for the Company. The adoption of this ASU is not anticipated to have a
material impact on the Company’s consolidated financial statements.
In
September 2009, the FASB ratified the consensus reached by the EITF with respect
to EITF Issue No. 08-1, “Revenue Arrangements with Multiple Deliverables,”
which amends the criteria for when to evaluate individual delivered items in a
multiple deliverable arrangement and how to allocate consideration received.
This Issue is effective for fiscal periods beginning on or after June 15,
2010, which is July 1, 2010 for the Company. The adoption of this guidance
is not expected to have a material impact on the Company’s consolidated
financial statements.
In
September 2009, the FASB ratified the consensus reached by the EITF with respect
to EITF Issue No. 09-3, “Applicability of Statement of Position 97-2 to
Certain Arrangements that Include Software Elements,” which clarifies the
accounting guidance for sales of tangible products containing both software and
hardware elements. This Issue is effective for fiscal periods beginning on or
after June 15, 2010, which is July 1, 2010 for the Company. The
adoption of this guidance is not expected to have a material impact on the
Company’s consolidated financial statements.
On
September 30, 2009, the FASB issued ASU 2009-12, “Investments in
Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),”
to provide guidance within ASC Topic 820 on measuring the fair value of
certain alternative investments in entities that calculate net asset values.
This ASU is effective for interim and annual periods ending after
December 15, 2009, which is June 30, 2010 for the Company. The
adoption of this ASU is not expected to have a material impact on the Company’s
consolidated financial statements.
All new
accounting pronouncements issued but not yet effective have been deemed to not
be applicable, hence the adoption of these new standards is not expected to have
a material impact on the consolidated financial statements.
NOTE 3 - ACCOUNTS
RECEIVABLE
Credit
risks with respect to trade receivables are limited because a large number of
geographically diverse customers make up the Company’s customer base, thus
spreading the trade credit risk. The Company controls credit risk through its
credit evaluation process, credit limits, monitoring procedures and reasonably
short collection terms. Bad debt expenses have been insignificant, and
generally, the Company does not require collateral or other security to support
accounts receivable.
17
Major
Customers
·
|
During
the six months ended December 31, 2009, the top five customers accounted
for 17%, 15%, 15%, 11% and 10% of sales of live cattle while the top two
customers accounted for 48% and 47% of live cattle sales during the six
months ended December 31, 2008. And the top five customers accounted for
31%, 22%, 20%, 15% and 12% of sales of live cattle during the three months
ended December 31, 2009 while the top two customers accounted for 50% and
50% of live cattle sales during the three months ended December 31,
2008.
|
As of
December 31, 2009, the top customers accounted for approximately 7%, 13%, 9%, 6%
and 1% of the Company’s outstanding accounts receivable. As of December 31,
2008, the top one customer accounted for approximately 37% of the Company’s
outstanding accounts receivable.
·
|
During
the six months ended December 31, 2009, no customer accounted for 10%
or more of sales of sperm seeds while the top one customer accounted for
10% of sperm seeds sales during the six months ended December 31, 2008. No
customer accounted for 10% or more of sales of sperm seeds during the
three months ended December 31, 2009 while the top one customer accounted
for 16% of sperm seeds sales during the three months ended December 31,
2008.
|
As of
December 31, 2008, the top customer accounted for approximately 4% of
the Company’s outstanding accounts receivable.
·
|
During
the six months and three months ended December 31, 2009 and 2008, no
customer accounted for 10% or more of sales of beef
products.
|
NOTE 4 - OTHER
RECEIVABLES
As of
December 31 and June 30, 2009 (audited), other receivables include the
following:
December 31
|
June 30
|
|||||||
Loans
to third parties
|
$ | 190,137 | $ | 26,128 | ||||
Advances
to employees
|
2,924 | 87,497 | ||||||
Others
|
10,000 | 13,587 | ||||||
Total
amounts of other receivables
|
203,061 | 127,212 | ||||||
Less:
Allowance for bad debts
|
- | (13,514 | ) | |||||
Other
receivables, net
|
$ | 203,061 | $ | 113,698 |
As of
December 31, 2009, the loan receivables were due from non-related companies
which are, Fu Lai Wo Co., Ltd. and Hong Guo Co., Ltd. As of June 30, 2009, the
loan receivables were due from non-related companies which are, Zhenghua Textile
Co., Ltd; Association of Shaanxi Province, Beef Chaffy Dish Co., Ltd; and
Yanglin Agriculture Engineering Centre. The above loans were non-interest
bearing, unsecured and due on demand, and used for business operation. Advances
to employees are mostly prepayments for business operations.
18
NOTE 5 -
INVENTORIES
Inventories
consist of the following as of December 31 and June 30, 2009
(audited):
December 31
|
June 30
|
|||||||
Raw
materials
|
$ | 492,955 | $ | 93,165 | ||||
Living
cattle and sperm seeds
|
2,805,627 | 801,652 | ||||||
Finished
goods
|
48,317 | 80,554 | ||||||
Other
|
9,897 | 3,498 | ||||||
Total
|
$ | 3,356,796 | $ | 978,869 |
NOTE 6 - PROPERTY, PLANT AND
EQUIPMENT
Property,
plant and equipment consist of the following as of December 31 and June 30, 2009
(audited):
December 31
|
June 30
|
|||||||
Buildings
|
$ | 4,450,817 | $ | 4,445,875 | ||||
Machinery
|
608,063 | 570,210 | ||||||
Vehicle
|
19,837 | 19,815 | ||||||
Office
equipment
|
60,066 | 34,235 | ||||||
Cattle
for reproduction
|
254,515 | 241,084 | ||||||
Total
costs
|
5,393,298 | 5,311,219 | ||||||
Less:
Accumulated Depreciation
|
(1,921,102 | ) | (1,725,288 | ) | ||||
Net
|
$ | 3,472,196 | $ | 3,585,931 |
Depreciation
expenses for the six months ended December 31, 2009 and 2008 was $191,035 and
$150,941 respectively. Depreciation expenses for
the three months ended December 31, 2009 and 2008 was $94,228 and $55,356
respectively.
NOTE 7 -
OTHER PAYABLES
Other
payables consist of the following as of December 31 and June 30, 2009
(audited):
December 31
|
June 30
|
|||||||
Loans
|
$ | 119,636 | $ | 35,355 | ||||
Sales
rebate
|
167,335 | 221,073 | ||||||
Payable
to employees
|
7,507 | 114,253 | ||||||
Other
|
190 | 99,506 | ||||||
Total
|
$ | 294,668 | $ | 470,187 |
The loans
at December 31, 2009 were due to Aidi Investment Co., Ltd., Shaanxi Joint
Construction Co., Ltd., Fu Nong Livestock Co., Ltd., Shaanxi Improved Livestock
Breeding Farm and Hua Yu You Gang Co., Ltd. The loans at June 30, 2009 were due
to Shaanxi Joint Construction Co., Ltd.; Fu Nong Livestock Co., Ltd.; and Dali
Lv Ao Co., Ltd. and others. All loans are for working capital purpose and were
non-interest bearing, unsecured and due on demand.
19
NOTE 8 - LOANS
PAYABLE
At
December 31 and June 30, 2009 (audited), loans payable consisted of the
following:
Description
|
December 31
|
June 30,
|
||||||
Agricultural
Bank of China Fufeng County Branch:
|
||||||||
Due
on June 21, 2010. Interest only payable monthly at 6.318%.
|
$ | 292,517 | $ | 292,193 | ||||
Fufeng
County Rural Credit Union Duanjia Branch:
|
||||||||
Due
on April 15, 2010. Interest only payable monthly at
0.798%.
|
241,327 | 241,059 | ||||||
Due
on February 21, 2011. Interest only payable monthly at
0.96%.
|
489,967 | 489,423 | ||||||
China
Development Bank Shaanxi Branch:
|
||||||||
Due
on September 26, 2011. Interest only payable monthly at
5.76%.
|
365,646 | 511,337 | ||||||
Red
Sun (customer):
|
||||||||
Non-interest
bearing and due on demand.
|
73,129 | 73,048 | ||||||
Fufeng
County Local Bureau of Finance
|
||||||||
Non-interest
bearing and due on demand.
|
43,878 | - | ||||||
Baoji Science
and Technology Committee
|
||||||||
Non-interest
bearing and due on demand.
|
73,129 | - | ||||||
Farmers:
|
||||||||
Non-interest
bearing and due on demand.
|
136,021 | 141,713 | ||||||
Total
loans payable
|
1,715,614 | 1,748,773 | ||||||
Less:
Current Portion
|
(860,001 | ) | (748,013 | ) | ||||
Total
Long-term Loans
|
$ | 855,613 | $ | 1,000,760 |
Loans
from banks were secured by the office building, workshop and land use rights.
Loans from other companies are unsecured.
The
combined aggregate amounts of maturities for all long-term loans as of December
31, 2009 are as follows by years:
Year
|
Amount
|
|||
2011
|
$ | 855,613 |
The fair
value of loan payables at imputed interest rate of 6% and estimated payment
date of June 30, 2010 is approximately $831,000.
NOTE 9 -
SPECIAL ACCOUNTS PAYABLE
The
Company’s business of breeding Qinchuan cattle and selling cattle semen is
encouraged by the local government, which provides assistance to the Company to
develop the market for Qinchuan cattle. The Company obtained non-interest
bearing loans from the government, business associates and the World Bank, which
had to be used for specific purposes, such as purchasing cattle and building
cow-houses for farmers. There is no minimum contractual term for the loans. The
loans are repayable after the business of breeding Qinchuan Cattle becomes
profitable in the local area. Such loans are classified as current liabilities
because they are due on demand. However, as of December 31 and June
30, 2009, the Company does not foresee the loans will be repaid in the short
term. At December 31 and June 30, 2009 (audited), special accounts
payable consisted of the following:
20
Description
|
December 31
|
June 30
|
||||||
Fufeng
County Financial Bureau:
|
$ | 14,626 | $ | 43,828 | ||||
Baoji
City Science and Technology Bureau:
|
- | 73,048 | ||||||
Agriculture
Integrative Development World Bank Credit Financing
Department:
|
237,014 | 403,213 | ||||||
Shaanxi
Province Allocated Funds:
|
298,250 | - | ||||||
Shanxi
Qinchuan Cattle Co., Ltd.
|
- | 58,439 | ||||||
Beijing
Nonghuo Project Center
|
87,755 | 29,219 | ||||||
Total Special Accounts
Payable
|
$ | 637,645 | $ | 607,747 |
The fair
value of special accounts payables at imputed interest rate of 6% and
estimated payment date of June 30, 2010 is approximately $619,000.
NOTE 10 - TAXES
PAYABLE
Taxes
payables consist of the following as of December 31 and June 30, 2009
(audited):
December 31
|
June 30
|
|||||||
VAT
payable
|
$ | 1,166,357 | $ | 977,429 | ||||
Income
tax payable
|
1,666,795 | 979,265 | ||||||
Other
levies
|
71,983 | 65,387 | ||||||
Total
|
$ | 2,905,135 | $ | 2,022,081 |
Baoji
Wuyin is governed by the EIT Law of the PRC concerning private-run enterprises,
which are generally subject to tax at a statutory rate of 25% (starting from
2008) on income reported in the statutory financial statements after appropriate
tax adjustments.
Two of
the Company’s major products, sperm seeds and live cattle, were both farm
products and free of income tax under PRC taxation law. However, beef products
are still subject to the full income tax provision under the EIT Law. The tax
exempt income in the table below represents the tax exemption for the sperm
seeds and live cattle business.
The
Company had a taxable income of approximately $1,355,984 and $1,611,169 for the
six months and three months ended December 31, 2008 respectively, and taxable
income from selling processed beef of approximately $2,746,231 and $1,429,677
for the six months and three months ended December 31, 2009.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the six months ended December 31, 2009 and 2008:
2009
|
2008
|
|||||||
Tax
at federal statutory rate
|
34 | % | 34 | % | ||||
Tax
rate difference
|
(9 | )% | (9 | )% | ||||
Benefit
of net operating loss carry forward
|
- | (1 | )% | |||||
Tax
exempt income
|
(14 | )% | (16 | )% | ||||
Tax
per financial statements
|
11 | % | 8 | % |
21
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the three months ended December 31, 2009 and 2008:
2009
|
2008
|
|||||||
Tax
at federal statutory rate
|
34 | % | 34 | % | ||||
Tax
rate difference
|
(9 | )% | (9 | )% | ||||
Benefit
of net operating loss carry forward
|
- | - | ||||||
Tax
exempt income
|
(15 | )% | (13 | )% | ||||
Tax
per financial statements
|
10 | % | 12 | % |
NOTE 11 - RELATED PARTY
TRANSACTIONS
Related
Party Receivables consist of the following as of December 31 and June 30, 2009
(audited):
Relationship
|
December 31
|
June 30
|
|||||||
Shaanxi
Qinchuan Cattle Food & Beverage Co., Ltd.
|
Affiliate
|
$ | 195,229 | $ | 684,655 | ||||
Fufeng
County Cattle Association
|
Trade
Association
|
84,706 | 297,578 | ||||||
Shaanxi
Province Qinchuan Cattle Trade Association
|
Trade
Association
|
193,547 | 139,070 | ||||||
Shaanxi
Qinchuan Cattle Co., Ltd.
|
Affiliate
|
- | 8,478 | ||||||
Mr.Zan
Zhizhou
|
Officer
|
39,370 | - | ||||||
Mr.Zan
Junfu
|
Baoji
Wuyin Executive
|
146 | 146 | ||||||
Mr.Zan
Yongheng
|
Baoji
Wuyin Executive
|
72,689 | 146 | ||||||
Mr.Zan
Gaochao
|
Baoji
Wuyin Executive
|
73 | 73 | ||||||
Total
amounts of Due from related parties
|
585,761 | 1,130,146 | |||||||
Less:
Current Portion
|
(366 | ) | (646,227 | ) | |||||
Due
from related parties - long-term
|
$ | 585,395 | $ | 483,919 |
Related
Party Payables consist of the following as of December 31 and June 30, 2009
(audited):
Relationship
|
December 31
|
June 30
|
|||||||
Mr.
Zan Wuyin
|
Officer
|
$ | 280,647 | $ | 592,702 | ||||
Aidi Investment
Inc.
|
Affiliate
|
535,914 | 360,003 | ||||||
Mr.
Zan Zhizhou
|
Officer
|
157,015 | 129,295 | ||||||
GM
Zan
|
General
Manager
|
36,210 | - | ||||||
Shaanxi
Province Qinchuan Cattle Trade Association
|
Trade
Association
|
2,048 | - | ||||||
Shaanxi
Qinchuan Cattle Co., Ltd.
|
Affiliate
|
900,301 | 764,084 | ||||||
Total
|
$ | 1,912,135 | $ | 1,846,084 |
The
company, Shaanxi Qinchuan Cattle
Food & Beverage Co., Ltd., Shaanxi Qinchuan Cattle Co., Ltd. and
Aidi Investment Inc. are related through common ownership. The trade
associations were established by Baoji Wuyin to assist business operations such
as certification, consultation and researches, etc. However, except for Shaanxi Province Qinchuan Cattle Trade
Association (“Shaanxi Association”) and
Shaanxi Qinchuan Cattle Food & Beverage Co., Ltd. (“F&B”), other trade
associates did not have operational transactions with the Company, merely
lending or borrowing funds for working capital purposes. All borrowings were
non-interest bearing, unsecured, without priority and convertibility and due on
demand. As these payables are without maturity date, the fair values of related
party payables are the book value of such payables. Shaanxi Association and F&B
are the Company’s main customers of beef products. In the six months ended
December 31, 2009, the Company’s sale to Shaanxi Association was 4% and a sale
to F&B was 4% of total sales, respectively.
22
The fair
value of related party payables at imputed interest rate of 6% and estimated
payment date of December 31, 2010 is approximately $1,857,000.
NOTE 12 - STATUTORY
RESERVE
As
stipulated by the Company Law of the PRC executed in 2006, net income after
taxation can only be distributed as dividends after appropriation has been made
for the following:
1. Making
up cumulative prior years’ losses, if any;
2.
Allocations to the “Statutory surplus reserve” of at least 10% of income after
tax, as determined under PRC accounting rules and regulations, until the fund
amounts to 50% of the Company’s registered capital;
3.
Allocations of 5-10% of income after tax, as determined under PRC accounting
rules and regulations, to the Company’s “Statutory common welfare fund,” which
is established for the purpose of providing employee facilities and other
collective benefits to the Company’s employees. This reserve is no longer
required for the foreign invested enterprises since 2006;
4.
Allocations to the discretionary surplus reserve, if approved in the
shareholders’ general meeting.
According
to the new Company Law of the PRC executed in 2007, the Company is not required
to reserve the “Statutory common welfare fund.” Accordingly, the Company did not
reserve the common welfare fund in 2009.
In
accordance with the Company Law, the Company allocated $219,684 to statutory
reserve at December 31, 2009.
NOTE 13 - CURRENT
VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The
Company’s operations are all carried out 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, and by the general state
of the PRC economy.
The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company’s results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.
NOTE 14 - SEGMENT
REPORTING
Statement
of Financial Accounting Standards No. 131 (“SFAS 131”), “Disclosure about
Segments of an Enterprise and Related Information” (codified in FASB ASC Topic
280) requires use of the “management approach” model for segment reporting. The
management approach model is based on the way a company’s management organizes
segments within the company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure, or any other manner in which management
disaggregates a company.
23
2009
|
2008
|
|||||||
Revenue
|
||||||||
Beef
products
|
$ | 5,773,103 | $ | 4,610,548 | ||||
Live
cattle
|
4,076,850 | 2,293,660 | ||||||
Sperm
seeds
|
2,360,984 | 1,672,642 | ||||||
Consolidated
|
$ | 12,210,937 | $ | 8,576,850 | ||||
Gross
profit
|
||||||||
Beef
products
|
$ | 2,981,505 | $ | 2,496,777 | ||||
Live
cattle
|
946,864 | 472,792 | ||||||
Sperm
seeds
|
2,323,226 | 1,637,096 | ||||||
Consolidated
|
$ | 6,251,595 | $ | 4,606,665 | ||||
Income
before income taxes
|
||||||||
Beef
products
|
$ | 3,056,054 | $ | 2,374,513 | ||||
Live
cattle
|
970,503 | 449,673 | ||||||
Sperm
seeds
|
2,381,225 | 1,557,048 | ||||||
Un-allocated
|
(174,353 | ) | (103,035 | ) | ||||
Consolidated
|
$ | 6,233,429 | $ | 4,278,199 | ||||
Net
income
|
||||||||
Beef
products
|
$ | 2,369,496 | $ | 2,035,517 | ||||
Live
cattle
|
970,503 | 449,673 | ||||||
Sperm
seeds
|
2,381,225 | 1,557,048 | ||||||
Un-allocated
|
(174,353 | ) | (103,035 | ) | ||||
Consolidated
|
$ | 5,546,871 | $ | 3,939,203 |
Un-allocated
losses are primarily related to general corporate expenses.
NOTE 15 -
CAPITAL STOCK
The
Company is authorized to issue 100,000,000 shares of common stock with $.001 par
value per. As of December 31 and June 30, 2009 (audited), the Company had
10,000,000 shares of common stock issued and outstanding.
NOTE 16 - SUBSEQUENT
EVENTS
In
preparing these financial statements, the Company has evaluated events and
transactions for potential recognition or disclosure through January 29, 2010,
the date the financial statements were issued.
24
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our audited consolidated financial
statements, related notes, and other detailed information included elsewhere in
this Registration Statement. Our financial statements have been prepared in
accordance with United States generally accepted accounting principles (“GAAP).
Certain information contained below and elsewhere in this Registration
Statement, including information regarding our plans and strategy for our
business, constitutes forward-looking statements. See "Cautionary Statement
Regarding Forward-Looking Information.”
Overview
We were
incorporated in September 2007 in New Jersey and reincorporated in Delaware in
July 2009. We have a representative office in Xi’an, Shaanxi Province, PRC,
where our operating subsidiary, Baoji Wuyin, is headquartered. Baoji Wuyin was
incorporated in June 1998 in Fufeng County, China. Our principal business,
through Baoji Wuyin, is the breeding and fattening of Qinchuan beef cattle,
processing of beef products, and the selling of cattle semen. The principal
market for our products is in China, although we plan to develop an export
market in the Middle East.
Pursuant
to a Share Exchange Agreement by and among CCHC and the shareholders of all of
the outstanding shares of Baoji Wuyin in December 2007, we acquired 100% of the
issued and outstanding shares of Baoji Wuyin.
Our
fiscal year ends on June 30.
Trends
We plan
to construct the standard fattening base of Qinchuan beef cattle for the
production of 20,000 cattle per year and a self-owned production line in
Yangling Agricultural District which is the exclusive agricultural technology
R&D zone in China. Completion of this project, which is expected during
2010, will enable us to produce fresh beef, which is the largest consumption
market in the Chinese beef industry, through our own factory rather than
engaging third-party processors. Further, we expect to increase our market share
of cooked beef through increased production, expand our marketing network, and
commence exports to certain Middle East countries. We expect to manage our
budgets closely and control our costs effectively in order to minimize the
impact of these projects on our operations and net income.
Some
enterprises in the Chinese beef industry experienced losses in 2008 due to the
decrease of prices in the retail market and the increase of prices in the
wholesale market. However, since we operate in the wholesale market, we were not
adversely impacted by retail prices. In the six months and three months ended
December 31, 2009, we substantially increased our sales of fattened cattle,
resulting in a more balanced product mix. Sales of fattened cattle for
the six months and three months ended December 31, 2009 accounted for 33.3
% and 41.9% of revenue respectively compared to 26.7% and 40.7% in the six
months and three months ended December 31, 2008 respectively. Consequently, our
sales of cooked beef products, expressed as a percentage to total revenues,
decreased from 53.8% in the six months ended December 31, 2008 to 47.3% in
the six months ended December 31, 2009, and decreased from 45.0% in
the three months ended December 31, 2008 to 43.5% in the three months
ended December 31, 2009. We expect this trend towards a more balanced product
mix between our sales of cooked beef products and fattened cattle to continue in
the future, with sales of frozen semen remaining relatively stable.
We also
benefit from the policies and support of the government, including subsidies and
favorable tax treatment, as discussed under Item 1. Business,
above.
25
Results
of Operations
Six
months and three months ended December 31, 2009 compared with six months and
three months ended December 31, 2008
We had
total assets of $20.9 million as of December 31, 2009, a 100.4% increase over
total assets at December 31, 2008 of $10.4 million.
Six months ended
December 31, 2009
|
Six months ended
December 31, 2008
|
Percent
Change
|
||||||||||
Net
Revenue
|
$ | 12,210,937 | $ | 8,576,850 | 42.3 | % | ||||||
Cost
of Revenue
|
5,959,342 | 3,970,185 | 50.1 | % | ||||||||
Gross
Profit
|
6,251,595 | 4,606,665 | 35.7 | % | ||||||||
Selling
expense
|
42,080 | 19,599 | 114.7 | % | ||||||||
General
and administrative expense
|
494,904 | 392,377 | 26.1 | % | ||||||||
Operating
Income (Loss)
|
5,714,611 | 4,194,689 | 36.2 | % | ||||||||
Other
Income (Expense)
|
518,818 | 83,510 | 521.2 | % | ||||||||
Income
Before Income Taxes
|
6,233,429 | 4,278,199 | 45.7 | % | ||||||||
Income
Tax Expenses
|
686,558 | 338,996 | 102.5 | % | ||||||||
Net
Income
|
$ | 5,546,871 | $ | 3,939,203 | 40.9 | % |
Three months ended
December 31, 2009
|
Three months ended
December 31, 2008
|
Percent
Change
|
||||||||||
Net
Revenue
|
$ | 7,283,752 | $ | 5,342,473 | 36.3 | % | ||||||
Cost
of Revenue
|
3,947,752 | 2,830,503 | 39.4 | % | ||||||||
Gross
Profit
|
3,336,000 | 2,511,970 | 32.8 | % | ||||||||
Selling
expense
|
26,800 | 11,487 | 133.3 | % | ||||||||
General
and administrative expense
|
219,045 | 223,357 | (1.9 | )% | ||||||||
Operating
Income (Loss)
|
3,090,155 | 2,277,126 | 35.7 | % | ||||||||
Other
Income (Expense)
|
450,785 | 111,709 | 303.5 | % | ||||||||
Income
Before Income Taxes
|
3,540,940 | 2,388,835 | 48.2 | % | ||||||||
Income
Tax Expenses
|
357,420 | 295,215 | 21.1 | % | ||||||||
Net
Income
|
$ | 3,183,520 | $ | 2,093,620 | 52.1 | % |
Net
Income.
For the six
months and three months ended December 31, 2009, the Company had net income of
$5.5 million and $3.2 million, a 40.9% and 52.1% increase over net income of
$3.9 million and 2.1 $million for the six months and three months ended
December 31, 2008 respectively. The increase in net income is primarily due to
the ramping up of the Company’s live cattle production capabilities, which
contributed $4.1 million and $3.0 million in revenue in the six months and
three months ended December 31, 2009 respectively. Increased revenues were
offset by a higher cost of revenues associated with the increase in livestock
headcount during the year. Cost of revenue is expected to benefit in future
periods from capacity efficiencies. Gross profit margins declined due to the
lower margins from sales of fattened cattle compared with the Company’s other
products.
Net
Revenue.
The
Company has three principal product groups as shown in the table
below:
26
Segment
|
Six month ended
December 31,
2009
|
%
|
Six month ended
December 31,
2008
|
%
|
Change
|
%
|
||||||||||||||||||
Cooked
Beef
|
$ | 5,773,103 | 47.3 | $ | 4,610,548 | 53.8 | $ | 1,162,555 | 25.2 | |||||||||||||||
Fattened
Cattle
|
4,066,691 | 33.3 | 2,293,660 | 26.7 | 1,773,031 | 77.3 | ||||||||||||||||||
Semen
|
2,371,143 | 19.4 | 1,672,642 | 19.5 | 698,501 | 41.8 | ||||||||||||||||||
Total
|
$ | 12,210,937 | 100.0 | $ | 8,576,850 | 100.0 | $ | 3,634,087 | 42.4 |
Segment
|
Three month
ended December
31, 2009
|
%
|
Three month
ended December
31, 2008
|
%
|
Change
|
%
|
||||||||||||||||||
Cooked
Beef
|
$ | 3,166,202 | 43.5 | $ | 2,403,687 | 45.0 | $ | 762,515 | 31.7 | |||||||||||||||
Fattened
Cattle
|
3,049,948 | 41.9 | 2,174,154 | 40.7 | 875,794 | 40.3 | ||||||||||||||||||
Semen
|
1,063,933 | 14.6 | 764,689 | 14.3 | 299,244 | 39.1 | ||||||||||||||||||
Total
|
$ | 7,280,083 | 100.0 | $ | 5,342,530 | 100.0 | $ | 1,937,553 | 36.3 |
Net
revenue for the six months and three months ended December 31, 2009 increased
42.4% and 36.3% to $12.2 million and $7.3 million compared to $8.6 million and
$5.3 million for the six months and three months ended December 31, 2008. The
principal factor in the increase of net revenues was the substantial increase in
sales of fattened cattle, which rose to $4.1 million and $3.0 million in
the six months and three months ended December 31, 2009 from $2.3 million
and $2.2 million in six months and three months ended December 31, 2008,
representing 33.3% and 41.9% of net revenue in six months and three months ended
December 31, 2009. The increased sales of fattened cattle are primarily the
result of the Company’s expanded infrastructure and production capacity efforts
during 2008 and 2009, aided by the increased demand in China for cooked beef
products. Sales of semen and cooked beef products, also increased, benefiting
from the Company’s growing operations and marketing network. Translation
differences between the Company’s functional currency, the RMB, and the U.S.
dollar accounted for $0.008 million of the increase in the six months ended
December 31, 2009.
Products
sales in the six months and three months ended December 31, 2009 were
comprised principally of cooked beef products, which gained increased market
acceptance during the period and benefited from promotional activities. Sales of
semen in the six months and three months ended December 31, 2009 benefited
from increased customer demand for Qinchuan Cattle, while sales of the Company’s
fattened cattle has increased steadily.
Cooked
beef products continued to be the Company’s primary product during the two
periods under review, although the Company expects continued and significant
growth in its sales of fattened cattle. The Company expects that sales growth of
semen will experience moderate growth, as that market is coming to maturity.
Cooked beef products and sales of fattened cattle provide the most substantial
prospects for revenue growth due in large part to the Company’s expansion of its
production capacity and the continuing market demand in China for premium beef
products.
Cost of Revenue.
Segment
|
Six month ended
December 31, 2009
|
%
|
Six month
ended
December 31,
2008
|
%
|
Change
|
%
|
||||||||||||||||||
Cooked
Beef
|
$ | 2,791,598 | 46.8 | $ | 2,113,771 | 53.2 | $ | 677,828 | 32.1 | |||||||||||||||
Fattened
Cattle
|
3,129,986 | 52.5 | 1,820,870 | 45.9 | 1,309,116 | 71.9 | ||||||||||||||||||
Semen
|
37,758 | 0.7 | 35,545 | 0.9 | 2,212 | 6.2 | ||||||||||||||||||
Total
|
$ | 5,959,342 | 100.0 | $ | 3,970,186 | 100.0 | $ | 1,989,156 | 50.1 |
27
Segment
|
Three month ended
December 31, 2009
|
%
|
Three month
ended
December 31,
2008
|
%
|
Change
|
%
|
||||||||||||||||||
Cooked
Beef
|
$ | 1,588,902 | 40.2 | $ | 1,088,640 | 38.5 | $ | 500,262 | 46.0 | |||||||||||||||
Fattened
Cattle
|
2,339,534 | 59.3 | 1,726,183 | 61.0 | 613,351 | 35.5 | ||||||||||||||||||
Semen
|
17,818 | 0.5 | 15,701 | 0.5 | 2,117 | 13.5 | ||||||||||||||||||
Total
|
$ | 3,946,254 | 100.0 | $ | 2,830,524 | 100.0 | $ | 1,115,730 | 39.4 |
Cost of
revenue increased 50.1% and 39.4% to $6.0 million and $4.0 million for
the six months and three months ended December 31, 2009 compared to $4.0
million and $2.8 million for the six months and three months ended December 31,
2008. Cost of revenue includes feedstuffs, raw materials, bull depreciation,
wrappages and wages. Cost of revenue rose in the six months and three
months ended December 31, 2009 principally as a result of the larger number of
livestock in production requiring a larger volume of feedstuffs and raw
materials together with significant investment in fixed assets to increase
production capacity. Investment in infrastructure in the six months and
three months ended December 31, 2008 was not material. Cost of revenue is
affected principally by prices of feedstuffs and raw materials, which remained
relatively stable in six months and three months ended December 31, 2009. Costs
of revenue associated with sales of semen is expected to remain relatively
stable in future periods in proportion to sales from this mature product
group.
Gross
profit for the six months and three months ended December 31, 2009 was $6.3
million and $3.3 million compared to $4.6 million and $2.5 million for
the six months and three months ended December 31, 2008. Gross
profit margin decreased from 53.7% and 47.0% for the six months and three
months ended December 31, 2008 to 51.2% and 45.8% for the six months and
three months ended December 31, 2009. The significant decrease in gross profit
margin is principally attributable to the shift in product mix caused by
increased sales of fattened cattle which have a lower gross profit margin (six
months ended December 31, 2009: 23.0%; six months ended December 31, 2008:
20.6%; three months ended December 31, 2009: 23.3%; three months ended December
31, 2008: 20.6%) than sales of frozen semen (six months ended December 31, 2009:
98.4%; six months ended December 31, 2008: 97.9%; three months ended December
31, 2009: 98.3%; three months ended December 31, 2008: 97.9%) and cooked beef
(six months ended December 31, 2009: 51.6%; six months ended December 31, 2008:
54.2%; three months ended December 31, 2009: 49.8%; three months ended December
31, 2008: 54.7%).
Operating
Income/Expenses.
Total
operating income rose 36.2% and 35.7% to $5.7 million and $3.1 million in
the six months and three months ended December 31, 2009 from $4.2 million
and $2.3 million in the six months and three months ended December 31,
2008. Operating expenses increased by 30.3% and 4.63% to $536,984 and $245,845
for the six months and three months ended December 31, 2009 compared to
$411,976 and $234,844 for the six months and three months ended December
31, 2008. Selling expense increased 114.7% and 133.3% in the six months and
three months ended December 31, 2009 respectively due to volume increases in
revenues and benefiting from economies of scale as more production capacity has
come into operation. The Company expanded its marketing activities and network
of sales agents during the six months and three months ended December 31,
2009, reflecting its increased efforts to broaden the market for its products.
Selling expenses in both periods under review benefited from lower advertising
costs due to development costs incurred in prior periods.
General
and administrative expense rose 26.1%, an increase of $102,527, during
the six months ended December 31, 2009 compared with the six months
ended December 31, 2008, in large part due to professional, administrative,
employee costs and listing and financing costs. Listing and financing costs
accounted for approximately $130,000 during the six months ended December
31, 2009. The expense for three months ended December 31, 2009 was at a same
level to that of the three months in 2008.
28
Total
other income (expense) – net increased from $83,510 and $111,709 for
the six months and three months ended December 31, 2008 to $518,818 and
$450,785 for the six months and three months ended December 31, 2009. This
increase is attributable in part to a government subsidy received in this period
which amounted to $511,992.
Income
Taxes.
The
Company had a taxable income of approximately $1,355,984 and $1,611,169 for the
six months and three months ended December 31, 2008 respectively, and taxable
income from selling processed beef of approximately $2,746,231 and $1,429,677
for the six months and three months ended December 31, 2009.
Sales of
two of the Company’s products, sperm and live cattle, are not subject to income
tax under the EIT Law. Sales of cooked beef products are subject to the regular
statutory rate of 25% under the EIT Law. The Company’s effective tax rate for
fiscal year 2009 was 12%. The following tables reconcile the U.S. statutory
rates to the Company’s effective tax rate for the six months and three months
ended December 31, 2009 and 2008:
Six months ended
December 31, 2009
|
Six months ended
December 31, 2009
|
|||||||
Tax
at federal statutory rate
|
34 | % | 34 | % | ||||
Tax
rate difference
|
(9 | )% | (9 | )% | ||||
Benefit
of net operating loss carry forward
|
- | (1 | )% | |||||
Tax
exempt income
|
(14 | )% | (16 | )% | ||||
Tax
per financial statements
|
11 | % | 8 | % |
Three months ended
December 31, 2009
|
Three months ended
December 31, 2009
|
|||||||
Tax
at federal statutory rate
|
34 | % | 34 | % | ||||
Tax
rate difference
|
(9 | )% | (9 | )% | ||||
Benefit
of net operating loss carry forward
|
- | - | ||||||
Tax
exempt income
|
(15 | )% | (13 | )% | ||||
Tax
per financial statements
|
10 | % | 12 | % |
Net
Comprehensive Income
Net
comprehensive income, after accounting for a foreign currency transaction gain
of $7,776 and loss of $1,697 for the six months and three months ended
December 31, 2009, were $5.6 million and $3.2 million respectively, compared
with a foreign currency transaction gain of $1,252 and $65 for the six
months and three months ended December 31, 2008, resulting in net comprehensive
income of $3.9 million and $2.1 million respectively.
29
Liquidity
and Capital Resources
Our
business is capital intensive and requires substantial expenditures for, among
other things, the purchase and maintenance of equipment used in our operations.
Our short-term and long-term liquidity needs arise primarily from capital
expenditures, working capital requirements and principal and interest payments
related to our outstanding indebtedness. We will continue to meet these
liquidity requirements with cash provided by operations, equity financing, and
bank debt.
At
December 31, 2009, we had cash of approximately $4.1 million, compared to $1.2
million at December 31, 2008.
Cash
flows provided by operating activities were $2,192,792 for the six months
ended December 31, 2009 compared to that of $1,546,383 for the six months
ended December 31, 2008. Cash flows damaged from increases in accounts
receivable and inventories, which was offset by decreases in accounts payable
and taxes payable.
Cash
flows used in investing activities rose to $2.3 million for the six months
ended December 31, 2009 compared to $1.0 million for the six months ended
December 31, 2008, principally due to a $1.1 million investment in the
construction of the Company’s fattening facilities.
Cash
flows provided by financing activities increased to $747,523 for the six
months ended December 31, 2009, compared to that of $37,001 for the six
months ended December 31, 2008. As of December 31, 2009, the Company has total
outstanding loans of $0.9 million (current portion $860,001). The Company’s
outstanding loans include: (i) $365,646 from China Development Bank, which is
due on September 26, 2011, with interest payable monthly at 5.76%; (ii) $241,327
from Fufeng County Rural Credit Union Duanjia Branch, which is due on April 15,
2010, with interest payable monthly at 0.798%; (iii) $489,967 from Fufeng County
Rural Credit Union Duanjia Branch, which is due on February 21, 2011, with
interest only payable monthly at 0.96%; (iv) $292,517 from Agricultural Bank of
China Fufeng County Branch, which is due on June 21, 2010, with interest only
payable monthly at 6.318%; (v) $73,129, non-interest bearing, due on demand from
Red Sun, a customer; (vi) $136,021, non-interest bearing, due on demand from
farmers; (vii) $43,878, non-interest bearing, due on demand from Fufeng County
Local Bureau of Finance; (viii) $73,129, non-interest bearing, due on demand
from Baoji Science and Technology Committee.
In
addition, the Company obtained non-interest bearing loans due on demand of
$637,645 from the provincial government, certain customers and affiliates and
the World Bank for the six months ended December 31, 2009, to be used for
specified purposes, including the purchase of cattle and construction of
cow-houses for farmers, as follows: (i) $14,626 from the Fufeng County Financial
Bureau, (ii) $237,014 from Agriculture Integrative Development World Bank Credit
Financing Department, (iii) $298,250 from Shaanxi Province Allocated Funds and
(v) $87,755 from Beijing Nonghuo Project Center.
Loans due
on demand are classified as current. However, based upon conversations with the
respective lender, the Company does not expect any of the loans due on demand
will be payable prior to June 30, 2010.
30
Capital
Expenditures
For the
nine months ending September 30, 2010, we expect that our capital expenditures
will be approximately $12.6 million, principally related to the construction of
the proposed beef processing center and fattening base facilities in the
Yangling District. We intend to expand the fattening capacity to 20,000 head per
year during 2010. We expect to invest more $7.7 million from available working
capital in 2010 for the construction of increased production facilities. For the
balance of the capital required for this project, we intend to secure private
funds through the sale of our debt or equity securities or, if unavailable, bank
financing. Sales of our securities will be subject to prevailing economic and
market conditions as well as terms we are able to negotiate, if at all, with
potential investors. There can be no assurance we will be able to secure the
requisite funding for the planned expansion.
Off-Balance
Sheet Arrangements
As of
December 31, 2009, we did not have any off-balance sheet
arrangements.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods.
Our
management routinely makes judgments and estimates about the effects of matters
that are inherently uncertain. As the number of variables and assumptions
affecting the probable future resolution of the uncertainties increase, these
judgments become even more subjective and complex. We have identified the
following accounting policies, described below, as the most critical to an
understanding of our current financial condition and results of
operations.
Impairment
of Long-Lived Assets
We
adopted ASC 360, “Property, Plant and Equipment,” which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of,” and the accounting and reporting
provision of APB Opinion No. 30, “reporting the Results of Operations for a
Disposal of a Segment of a Business.” We periodically evaluate the carrying
value of long-lived assets to be held and used in accordance with SFAS 144. SFAS
144 requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets’ carrying
amounts. In that event, a loss is recognized based on the amount by which the
carrying amount exceeds the fair market value of the long-lived assets. Loss on
long-lived assets to be disposed of is determined in a similar manner, except
that fair market values are reduced for the cost of disposal.
Inventories
and Herd Depreciation
Inventories
are valued at the lower of costs (determined on a weighted average basis) or net
realizable value. The management compares the cost of inventories with the net
realizable value and an allowance is made for writing down the inventories to
their net realizable value, if lower than the cost. Costs of raised animals
include proportionate costs of breeding, including depreciation of the breeding
herd, plus the costs of maintenance through the balance sheet date. Purchased
cattle are carried at purchase cost plus costs of maintenance through the
balance sheet date.
31
Herd
depreciation is affected by such factors as natural disasters, including insect
infestations, epidemic disease, and market demand changes. As a result, the
depreciation period is estimated by management according to the average life of
the specific type of herd.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
information to be reported under this Item is not required of smaller reporting
companies.
ITEM
4T. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures designed to ensure that information
required to be disclosed in reports filed under the Exchange Act is recorded,
processed, summarized and reported within the specified time
periods. Our Chief Executive Officer (principal executive officer)
and our Chief Financial Officer (principal financial officer) (collectively, the
“Certifying Officers”) are responsible for maintaining our disclosure controls
and procedures. The controls and procedures established by us are designed to
provide reasonable assurance that information required to be disclosed by the
issuer in the reports that it files or submits under the Exchange Act are
recorded, processed, summarized and reported within the time periods specified
in the Commission’s rules and forms.
During
the second quarter of fiscal 2010, our Certifying Officers evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on the evaluation, the
Certifying Officers concluded that our disclosure controls and procedures were
effective to provide reasonable assurance that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the applicable rules and forms, and that it is accumulated and communicated
to our management, including the Certifying Officers, as appropriate to allow
timely decisions regarding required disclosure.
Changes
in Internal Control Over Financial Reporting
There was
no change in our internal control over financial reporting that occurred during
the period covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. We are aware that any system of controls, however well
designed and operated, can only provide reasonable, and not absolute, assurance
that the objectives of the system are met, and that maintenance of disclosure
controls and procedures is an ongoing process that may change over
time.
32
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
None.
ITEM
1A. RISK FACTORS
The
information to be reported under this Item is not required for smaller reporting
companies.
ITEM
2. UNREGISTERED SALES OF EQUITY AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
(1)
|
Exhibits:
Exhibits required to be attached by Item 601 of Regulation S-K are listed
in the Index to Exhibits following the signature page of this Form 10-Q,
which is incorporated herein by
reference.
|
33
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHINA
CATTLE HOLDING CORPORATION
|
|||
Dated: February
9, 2010
|
By:
|
/s/ Xiao Duan
|
|
Xiao
Duan
|
|||
Chief
Executive Officer and Director
|
|||
(Principal
Executive Officer)
|
|||
Dated:
February 9, 2010
|
By:
|
/s/ Yaru Du
|
|
Yaru
Du
|
|||
Chief
Financial Officer and Director
|
|||
(Principal
Financial and Accounting Officer)
|
34
INDEX
TO EXHIBITS
Exhibit
No.
|
Description
|
|
10.1
|
COMPANY
TO ADVISE IF ANY MATERIAL CONTRACTS SINCE FORM 10 FILED
|
|
31.1
|
Certification
of Chief Executive Officer
|
|
31.2
|
Certification
of Chief Financial Officer
|
|
32.1
|
Statement
required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002
|
|
32.2
|
Statement
required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of
2002
|
35