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EX-23.1 - ENERGROUP HOLDINGS CORPv179663_ex23-1.htm
As filed with the Securities and Exchange Commission on April 9, 2010
Registration No. 333-149171   


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
ENERGROUP HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)

Nevada
 
2011
 
87-0420774
(State or Other Jurisdiction of
 
(Primary Standard Industrial
 
(I.R.S. Employer
Incorporation or Organization)
 
Classification Number)
 
Identification No.)
 

 
No. 9, Xin Yi Street, Ganjingzi District
Dalian City, Liaoning province, PRC 116039
Telephone: +86 411 867 166 96
(Address, Including Zip Code and Telephone Number,
Including Area Code, of Registrant’s Principal
Executive Offices)
 
The Corporation Trust Company of Nevada
6100 Neil Road, Suite 800
Reno, Nevada 89511
(775) 688-3061
(Name, Address, Including Zip Code and Telephone Number,
Including Area Code, of Agent for Service)

With copies of all correspondence to:
Mitchell S. Nussbaum, Esq.
Loeb & Loeb LLP
345 Park Avenue
New York, NY 10154
Tel. No.: 212-407-4159 Fax No.: 212-407-4990
 

 
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. þ 
 
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. ¨ 
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o
Accelerated Filer o
 
 
Non-Accelerated Filer o
Smaller Reporting Company x
(do not check if a smaller reporting company)  
 
 
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.
 


  

 
The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and no offer to buy these securities is being solicited in any state where the offer or sale is not permitted.
Subject to Completion, dated April 9, 2010
Prospectus

ENERGROUP HOLDINGS CORPORATION
 
6,197,305 shares
 
Common Stock
 

 
This prospectus covers the resale by selling shareholders of up to 6,197,305 shares of our common stock, $0.001 par value.
 
The selling shareholders may sell their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or quoted or in private transactions. These sales 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. See “Plan of Distribution”. We will not receive any of the proceeds from the sale of the common stock by the selling shareholders.
 
Our securities are not listed on any national securities exchange. Our common stock is currently quoted on the OTC Bulletin Board under the symbol “ENHD” The last reported closing sale price for our common stock was $5.00, as quoted on the OTC Bulletin Board on April 7, 2010.
 

 
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE “RISK FACTORS” BEGINNING ON PAGE 9.

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 __, 2010
 

 
No offers to sell are made, nor are offers sought to buy 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 as of the date on the front cover page of this prospectus only. Our business, financial condition, results of operations and prospectus may have changed since that date.
 
TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
Prospectus Summary
   
1
 
Summary Consolidated Financial Data
   
7
 
Risk Factors
   
8
 
Business
   
25
 
Special Note Regarding Forward-Looking Statements
   
48
 
Use of Proceeds
   
48
 
Plan of Distribution
   
49
 
Selling Shareholders
   
50
 
Selected Consolidated Financial Data
   
54
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
55
 
Legal Proceedings
   
76
 
Management
   
77
 
Security Ownership of Certain Beneficial Holders and Management
   
83
 
Certain Relationships and Related Party Transactions
   
84
 
Description of Securities
   
86
 
Dividends
   
88
 
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
   
89
 
Legal Matters
   
89
 
Experts
   
89
 
Disclosure of Commission Position on Indemnification
   
90
 
Additional Information
   
90
 
Index to Consolidated Financial Information
   
F-1
 
 

PROSPECTUS SUMMARY
  
This summary contains basic information about us and this offering. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under “Risk Factors.” Some of the statements contained in this prospectus, including statements under “Summary” and “Risk Factors” as well as those noted in the documents incorporated herein by reference, are forward-looking statements and may involve a number of risks and uncertainties. We note that our actual results and future events may differ significantly based upon a number of factors. You should not put undue reliance on the forward-looking statements in this document, which speak only as of the date on the cover of this prospectus.

References to “we,” “our,” “us,” the “Company,” or “Energroup” refer to Energroup Holdings Corporation, a Nevada corporation, and its consolidated subsidiaries.
 
ENERGROUP HOLDINGS CORPORATION

Energroup Holdings Corporation, through its subsidiaries, is engaged in the business of producing, packing, selling, marketing and distributing fresh pork and processed meat products to clients throughout the People’s Republic of China (“China” or the “PRC”). We sell our products to consumers in northeastern China, which has a population of approximately 108 million. In 2008, we had approximately US $176.36 million in sales and US $6.84 million in net income.

Our Business
 
We produce, pack, sell, market and distribute fresh and processed meat products to customers in the People’s Republic of China (“China” or the “PRC”). Our current corporate structure is shown below. We own three PRC operating subsidiaries (collectively, the “Chuming Operating Subsidiaries”):

 
1.
Dalian Chuming Slaughter and Packaging Pork Company Ltd., whose primary business activity is acquiring, slaughtering and packaging of pork and cattle;
 
 
2.
Dalian Chuming Processed Foods Company Ltd., whose primary business activity is the processing of raw and cooked meat products; and
 
 
3.
Dalian Chuming Sales Company Ltd., which is responsible for our sales, marketing and distribution activities.

Our three operating subsidiaries are spun off constituents of a former parent company, Dalian Chuming Group Co., Ltd. (the “Group”). Our company is separate and independent from the Group, which operates a different business and has different operations from ours. We took over ownership and control of the three Chuming Operating Subsidiaries from the Group in September 2007. We are headquartered in the City of Dalian, Liaoning Province of China. Throughout this prospectus, Energroup Holdings Corporation, Precious Sheen Investments Limited, Dalian Chuming Precious Sheen Investments Consulting Co., Ltd. and the Chuming Operating Subsidiaries are sometimes collectively referred to as “Chuming.”

1


Our Current Corporate Structure
 
chart
 
2

 
Our current customers are concentrated in the Liaoning Province (which has a population of approximately 42 million), and we are the largest pork producer in Dalian City, which has a population of approximately 3 million, or 6 million including the greater metropolitan area. At present, all of our sales are within China, which is the largest pork-consuming nation in the world, with a total of 54 million metric tons consumed in 2006. Due to the rapid development of the Chinese economy, urbanization and strong income growth, we have observed that pork consumption patterns are changing and consumption levels are continuing to increase. 
 
Our major products are:

 
·
Fresh meat - pork that is processed in a controlled environmental chamber with closely monitored temperatures to ensure quality and safety standards during processing right up to the time of delivery to the consumer.

 
·
Frozen fresh meat - butchered pigs that are processed and immediately frozen, which includes such products as smoked pork, ham and roasts.

 
·
Frozen/fresh byproducts - pork byproducts including pig’s liver, stomach, intestine, head and hoof.

We are part of an established pork production cycle that culminates in sales of fresh and frozen pork. This cycle includes feedstuff production, pig breeding, slaughtering, processing, packaging and distribution. We are involved in the slaughtering, processing, packaging and distribution aspects of the pork production cycle.

We are the first pork producer in China to receive “Green Food” certification from China’s Ministry of Agriculture. Green Food is an innovative certification program unique to China that is awarded to food processors who produce using environmentally sustainable methods and meet certain high technical standards of quality control, safety, and product quality, and generate low levels of pollution.

Financial Results

Our consolidated financial statements for the years ended December 31, 2009 and 2008 are included in this prospectus. In 2009 and 2008, we had approximately $213.5 million and $176.4 million in sales, respectively, and $6.1 million and $6.8 million in net income, respectively.

See“Index of Financial Statements” on page F-1.  
 
RISKS AFFECTING OUR BUSINESS

We are subject to a number of risks, which you should be aware of before deciding to purchase the securities in this offering. These risks are discussed in the summary below and in the section titled “Risk Factors” beginning on page 9 of this prospectus.
 
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SUMMARY OF RISK FACTORS

This document contains certain statements of a forward-looking nature. Such forward-looking statements, including but not limited to growth and strategies, future operating and financial results, financial expectations and current business indicators are based upon current information and expectations and are subject to change based on factors beyond our control. Forward-looking statements typically are identified by the use of terms such as “look,” “may,” “will,” “should,” “might,” “believe,” “plan,” “expect,” “anticipate,” “estimate” and similar words, although some forward-looking statements are expressed differently. The accuracy of such statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, including but not limited to:

 
·
our ability to timely and accurately complete orders for our products;
 
 
·
our dependence on a limited number of major customers;
 
 
·
political and economic conditions within the PRC;
 
 
·
our ability to expand and grow our distribution channels;
 
 
·
general economic conditions which affect consumer demand for our products;
 
 
·
the effect of terrorist acts, or the threat thereof, on consumer confidence and spending;
 
 
·
acceptance in the marketplace of our new products and changes in consumer preferences;
 
 
·
foreign currency exchange rate fluctuations;
 
 
·
our ability to identify and successfully execute cost control initiatives;
 
 
·
other risks outlined above and in our other public filings.
 
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document. We undertake no obligation to update this forward-looking information. While our management fully intends to make concerted efforts to manage these risks, we cannot assure you that we will be able to do so successfully. See “Risk Factors” beginning on page 9 of this prospectus.

STRATEGIC FINANCING

On December 31, 2007, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) pursuant to which we agreed to issue and sell 3,863,635 shares of our common stock to fifteen accredited investors for an aggregate purchase price of $17,000,000, or $4.40 per share (the “Financing”). The closing of the Financing coincided with the closing of the share exchange transaction with PSI and its shareholders.
    
4

 
In connection with the Purchase Agreement, we agreed to set aside $4.25 million of the purchase price in a holdback escrow account, which would be released to us as follows: $2.0 million upon appointment and confirmation of a board of directors comprised of a majority of independent directors, $1.5 million upon appointment of a new Chief Financial Officer meeting certain qualifications, $500,000 upon selection of a successor independent accounting firm, and $250,000 of which shall be applied towards certain investor relations activities. We agreed to pay partial liquidated damages to the investors equal to 0.5% per month (prorated daily) for each investor’s investment amount if, among other things, we did not successfully appoint a new CFO by March 31, 2008. Prior to March 31, 2008, a majority in interest of the investors and the Company agreed to extend the deadline for appointment of a qualified CFO to April 30, 2008. However, the Company did not appoint a CFO meeting the requirements, and as a result, under our agreement with the investors, the Company is obligated to pay liquidated damages of 0.5% of the total investment amount (i.e., $85,000) beginning on April 30, 2008. In March 2008, the investors in the financing agreed to release $2.0 million in restricted cash from escrow in connection with the appointment of independent directors to our board of directors. As of the date of this prospectus, there remains approximately $2.2 million in the holdback escrow account, which amounts are subject to release to us, or the investors under the terms of a Settlement Agreement we entered into with the investors on December 30, 2009.  The material terms of the Settlement Agreement are set forth in further detail below.
 
Under the terms of our arrangement with Hunter Wise Securities, LLC, our placement agent for the Financing, we paid a commission equal to 7% of the aggregate gross proceeds of the Financing, plus an a amount equal to 3% of such proceeds to reimburse expenses of the placement agent. We also issued a warrant to the placement agent for the purchase of 386,364 shares of the Company’s common stock at an exercise price of $4.40 per share. We also paid $75,000 to the lead investor in the Financing as reimbursement for fees and legal expenses. After deduction of these payments and our expenses, the resulting net proceeds to us was approximately $14.8 million.
 
Under the terms of the Financing, we agreed to a “make good” provision, under which certain of our founders’ shares were set aside in escrow, and must be released to the investors in the event that we do not meet specified earnings targets of $15.9 million in after-tax net income for 2008, and $20.9 million in after-tax net income and fully-diluted earnings per share of $0.99 for 2009. If the 2008 after-tax net income target is not met, 1,931,818 shares of common stock held by our founders (approximately 9.1% of the issued and outstanding shares) will be transferred to the investors pro rata in proportion to their investment in the Financing without any further consideration from or action by the investors. If both the 2009 after-tax net income and earnings per share targets are not met, an additional 1,931,818 shares of common stock (approximately 9.1% of the issued and outstanding shares) held by our founders will be transferred to the investors, also on a pro rata basis. If all of these “make good” shares were to be released to the investors, the investors would then hold 36.6% of our issued and outstanding stock, assuming a total of 21.2 million shares outstanding. “After-tax net income” is defined in the Purchase Agreement, and is calculated based upon our audited financial statements prepared by U.S. auditors in accordance with U.S. generally accepted accounting principles. For purposes of determining whether or not “after-tax net income” has been achieved by us, any direct or indirect tax breaks, tax holidays, tax credits or similar tax benefits, compensation, grant or any other remuneration or deduction granted by any governmental authority or body which benefits us are excluded from the calculation. As of the date of this prospectus, the investors have agreed to the release of the 2008 “make good” shares to our founder.

We are registering for resale 3,852,271 shares of common stock currently owned by the investors pursuant to a registration statement on Form S-1, of which this prospectus forms a part. We are also registering the 1,931,818 shares for the 2009 “make good” escrow. We were obligated to have the Registration Statement of which this prospectus forms a part, declared effective by the Securities and Exchange Commission (the “SEC”) no later than 135 days after the closing of the Financing, or be subject to the payment of liquidated damages payable in cash of 1% of the total Financing amount per month up to a maximum amount of 10% of the total Financing amount, or $1.7 million.  We were unable to meet this deadline, and as a result we currently owe liquidated damages in the amount of $1.7million.  Under the terms of the Settlement Agreement, the investors have agreed to waive the liquidated damages owing if we comply with new deadlines for the appointment of the new CFO, the independent directors and the effectiveness of the Registration Statement.
 
Our Chairman and Chief Executive Officer, who indirectly owns shares of our common stock through family-owned entities and trusts, agreed that his family-owned entities will enter into a lockup agreement under which these shareholders may not offer or sell their securities for a period of one year following the date on which the registration statement is declared effective. This lockup agreement was entered into at the closing of the Financing.
 
5

 
The investors in the Financing have a right of first refusal on any placement or offering by us of debt or equity securities for a one year period following the date on which the registration statement is declared effective. The investors’ right of first refusal does not apply to options or warrants that we may issue to employees or consultants, or to non-affiliates as compensation for services, to securities issued in acquisitions or strategic investments that are not related to raising capital for the Company, or to securities issued in underwritten public offerings.
 
The Financing was subject to the completion of customary due diligence procedures conducted by our investors and their advisors, and we made various representations and warranties in the Purchase Agreement regarding our business, operations and corporate affairs. The Financing is also subject to rescission by the investors in the event that the PRC government challenges or otherwise adversely affects the share exchange transaction with PSI and its shareholders (and the related corporate restructuring of Chuming in the PRC as a prelude to the transaction), if we cannot undo such governmental action or otherwise address the material adverse effect to the reasonable satisfaction of the investors within sixty (60) days after the action occurs.
 
At the closing of the share exchange transaction and the Financing, the shareholders of PSI owned 79.7%, the investors in the Financing own 18.3%, and other shareholders own 2%, respectively, of our presently issued and outstanding capital stock. The closing of these transactions occurred on December 31, 2007 (the “Closing Date”). At the Closing Date, we had a total of 21,136,391 shares of common stock issued and outstanding.

The securities were offered and sold in the Financing to accredited investors in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), under Regulation D. At the time of the closing, the offering was not registered under the Securities Act or any state securities or “blue sky” laws.
 
Recent Development
 
On December 30, 2009, we entered into a Settlement Agreement with the investors, pursuant to which among other things we have agreed to new deadlines for the appointment of a new Chief Financial Officer, the appointment of independent directors to serve on our board of directors, and the effectiveness of the Registration Statement, of which this prospectus forms a part.  We refer to these requirements as the Public Company Requirements.  The Settlement Agreement modifies and amends certain terms of the Securities Purchase Agreement, the Holdback Escrow Agreement, the Registration Rights Agreement and the Make Good Escrow Agreement, which provided that we comply with the Public Company Requirements.  We have agreed with the investors to comply with all of the Public Company Requirements by March 31, 2010, except that we have the right to extend the deadline to have the Registration Statement declared effective until May 15, 2010, if the financial statements to be included in the Registration Statement are no longer current and the audited financial statements for the fiscal year ended December 31, 2009 must be included in the Registration Statement.
 
The release of the funds from the Holdback Escrow shall be as follows:
 
1)           If we comply with all of the Public Company Requirements by March 31, 2010, all of the funds currently held in the Holdback Escrow will be released to us, and the liquidated damages in the amount of $1.7million for not having the Registration Statement timely declared effective will be waived.
 
2)           In the event, as a result of the extension, the requirement to have the S-1 declared effective is the only Public Company Requirement not met by March 31, 2010, we will have the funds in escrow, less the $1.7 million in liquidated damages, released to us, and the $1.7 million shall remain in escrow and will be released to us if we meet the May 15, 2010 extension deadline.  If we miss the extension deadline, then the $1.7 million will be distributed pro rata among the investors.
 
3)           If we fail to satisfy any one of the Public Company Requirements by March 31, 2010, other than having the Registration Statement declared effective if the extension to May 15, 2010 applies, then the investors will have the funds in escrow, less then $1.7million in liquidated damages released to them, on a pro rata basis, and the $1.7million remaining shall remain in escrow and will be released to us if we meet the May 15, 2010 deadline.  If we miss the extension deadline, then the $1.7 million will be distributed pro rata among the investors.
 
4)           If we fail to comply with any two of the Public Company Requirements all of the funds in escrow will be released to the investors on a pro rata basis.
 
We have also agreed with the investors to modify the requirements for the release of the 2009 “make good” shares, such that if we timely comply with all of the Public Company Requirements and meet the 2009 after-tax net income and earnings per share targets the right of a majority in interest of the investors to countersign the escrow release notice with respect to the release of the 2009 “make good” shares shall be automatically waived and we shall have the right to deliver such escrow release notice to the Escrow Agent instructing the Escrow Agent to deliver the 2009 “make good” shares to our founder.  Further, we agreed that if we do not meet any one of the Public Company Requirements and we do not meet the 2009 after-tax net income and earnings per share targets, that our right to countersign an escrow release notice with respect to the release of the 2009 “make good” shares shall be automatically waived and a majority in interest of the investors shall have the right to deliver such escrow release notice to the Escrow Agent instructing the Escrow Agent to deliver the 2009 Make Good Escrow Shares to the Investors.
 
On March 23, 2010, we appointed two new independent directors to serve on our board of directors and on March 31, 2010 our new Chief Financial Officer took office.  As a result of these appointments, we timely complied with two of the three Public Company Requirements and are entitled to the release of approximately $0.5 million from the Holdback Escrow.  As a result of the extension, we now have until May 15, 2010 to satisfy the third Public Company Requirements, which is to have the Registration Statement declared effective.
 
GENERAL INFORMATION
 
Our principal executive offices are located at No. 9, Xin Yi Street, Ganjingzi District Dalian City, Liaoning Province, PRC 116039 , and our main telephone number is +86 411 867 166 96 .  
 
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SUMMARY CONSOLIDATED FINANCIAL DATA

 
   
(US dollars in thousands)
 
   
Twelve Months Ended 
December 31,
 
   
2009
(audited)
 
2008
(audited)
 
2007
(audited)
 
2006
(audited)
 
2005
(audited)
 
Consolidated Statements of Operations Data:
                     
                       
Sales  
   
$213,545
 
$176,360
 
$124,696
 
$70,396
   
$54,119
 
Cost of Sales  
   
183,391
 
149,794
 
104,379
 
57,794
   
45,284
 
Gross Profit  
   
30,154
 
26,566
 
20,317
 
12,601
   
8,835
 
Operating Expenses  
   
4,660
 
7,823
 
6,246
 
2,891
   
1,647
 
Income from Operations  
   
25,494
 
18,743
 
14,071
 
9,709
   
7,188
 
Other Income (Expense), net  
   
(17,349)
 
(11,385
)
(1,476
)
(1,583)
   
(1,008)
 
Income Before Taxes  
   
8,144
 
7,357
 
12,620
 
8,126
   
6,180
 
(Income Taxes Expenses)/Deferred Tax Benefit
   
(2,090)
 
(520)
 
968
 
1.6
   
191
 
Net Income  
   
6,054
 
6,837
 
11,652
 
8,128
   
5,988
 
Foreign Currency Translation  
   
1,776
 
528
 
2,064
 
611
   
286
 
Comprehensive Income  
   
7,831
 
7,366
 
13,716
 
8,739
   
6,274
 
Basic Net Income Per Share (in US$)  
   
0.35
 
0.40
 
0.67
 
0.47
   
0.35
 
Diluted Net Income Per Share (in US$)  
   
0.29
 
0.32
 
0.67
 
0.47
   
0.35
 
Basic Weighted Average Number of Shares Outstanding  
   
17,272,756
 
17,272,756
 
13,409,120
 
13,409,120
   
13,409,120
 
Diluted Weighted Average Number of Shares Outstanding
   
21,136,392
 
21,182,756
 
17,272,756
 
17,272,756
   
17,272,756
 
 
   
(US dollars in thousands)
 
   
At December 31,
 
   
2009 
(audited)
   
2008 
(audited)
   
2007 
(audited)
   
2006 
(audited)
   
2005 
(audited)
 
Balance Sheet Data:
                             
Total Assets
  $ 133,482     $ 90,683     $ 66,620     $ 56,846     $ 50,993  
Current Liabilities
    42,259       23,758       17,682       16,764       18,979  
Long Term Liabilities
    -       -       -       17,909       18,580  
Stockholders Equity
    91,224       66,926       48,938       22,174       13,434  
 
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RISK FACTORS

You should carefully consider the risks described below together with all of the other information included in this report before making an investment decision with regard to our securities. The statements contained in or incorporated into this report that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.
 
 
Our limited operating history makes it difficult to evaluate our future prospects and results of operations.
 
We have a limited operating history. Our holding company in China, Chuming WFOE, and the companies that form its present subsidiaries were incorporated in 2004. Accordingly, you should consider our future prospects in light of the risks and uncertainties experienced by early stage companies in evolving industries such as the meat industry in China. Some of these risks and uncertainties relate to our ability to:
 
 
·
maintain our market position in the meat business in China;
 
 
·
offer new and innovative products to attract and retain a larger customer base;
 
 
·
attract additional customers and increase spending per customer;
 
 
·
increase awareness of our brand and continue to develop user and customer loyalty;
 
 
·
respond to competitive market conditions;
 
 
·
respond to changes in our regulatory environment;
 
 
·
manage risks associated with intellectual property rights;
 
 
·
maintain effective control of our costs and expenses;
 
 
·
raise sufficient capital to sustain and expand our business;
 
 
·
attract, retain and motivate qualified personnel; and
 
 
·
upgrade our technology to support additional research and development.
 
If we are unsuccessful in addressing any of these risks and uncertainties, our business may be materially and adversely affected.
 
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If there are any interruptions to or decline in the amount or quality of our live pigs, raw pork or other major raw material supply, our business could be materially and adversely affected.
 
Live pigs and raw pork are the principal raw materials used in our production. We procure approximately 60% of our live pigs from the Group, and the remainder from various of third party suppliers who are independent farmers. Our third party suppliers may not continue to be able to supply an adequate number of live pigs to satisfy our present and future production needs. The supply of pigs is dependent on the output of pig farms, which may be affected by outbreaks of diseases or epidemics. Our current suppliers may not be able to provide live pigs of sufficient quality to meet our stringent quality control requirements. Any interruptions to or decline in the amount or quality of our live pig supply could materially disrupt our production and adversely affect our business. In addition to live pigs, we also use additives and packaging in our production, which we source from third party suppliers. Any interruptions to or decline in the amount or quality of our additives or packaging supply, could also disrupt our production or sales and adversely affect our business.
 
We are vulnerable to increases in the price of live pigs and other operating costs, and we may not be able to entirely offset these increasing costs by increasing the prices of our products, particularly our processed meat products.
 
We purchase agricultural products, such as live pigs, for use in our production process and for resale. The price of such commodities is subject to fluctuations that are attributable to a number of factors, such as the price of animal feed, diseases and infections, and weather conditions. If for example, worldwide and local grain prices should increase, this would affect the price of animal feed, which may increase the price of live pigs. Higher pig prices may force us to raise the prices we charge our customers for our products, however we may not always be able to pass on the entire amount of price increases to our customers, and/or consumers might cut back on consumption of meat products.
 
We may be unable to anticipate changes in consumer preferences for processed meat products, which may result in decreased demand for our products.
 
Our continued success in the processed meat products market is in large part dependent on our ability to anticipate and develop products that appeal to the changing tastes, dietary habits and preferences of customers. If we are not able to anticipate and identify new consumer trends and develop new products accordingly, demand for our products may decline and our operating results may be adversely affected. In addition, we may incur significant costs relating to developing and marketing new products or expanding our existing product offerings in reaction to what we perceive to be a consumer preference or demand. Such development or marketing may not result in the level of market acceptance, volume of sales or profitability anticipated.
 
If the chilled and frozen pork market in China does not grow as we expect, our results of operations and financial conditions may be adversely affected.
 
If the chilled and frozen pork market in China does not grow as we expect, our business may be harmed, we may need to adjust our growth strategy and our results of operation may be adversely affected.
 
9

 
We require various licenses and permits to operate our business, and the loss of or failure to renew any or all of these licenses and permits could materially adversely affect our business.
 
In accordance with PRC laws and regulations, we are required to maintain various licenses and permits in order to operate our business, including, without limitation, a slaughtering permit in respect of each of our chilled and frozen pork production facilities and a permit for production of industrial products in respect of each of our processed meat production facilities. We are required to comply with applicable hygiene and food safety standards in relation to our production processes. Our premises and transportation vehicles are subject to regular inspections by the regulatory authorities for compliance with applicable regulations. Failure to pass these inspections, or the loss of or failure to renew our licenses and permits, could require us to temporarily or permanently suspend some or all of our production or distribution operations, which could disrupt our operations and adversely affect our business.
 
We are highly dependent on senior management and key research and development personnel.
 
We are highly dependent on our senior management to manage our business and operations and our key research and development personnel for the development of new processing methods and technologies, food products and the enhancement of our existing products. In particular, we rely substantially on our chairman and chief executive officer, Mr. Shi Huashan, to manage our operations. We also depend on our key research personnel. In addition, we also rely on information technology and logistics personnel for the production, storage and shipment of our products and on marketing and sales personnel, engineers and other personnel with technical and industry knowledge to transport, market and sell our products. We do not maintain key man life insurance on any of our senior management or key personnel. The departure of any one of them, in particular Mr. Shi, would have a material adverse effect on our business and operations. Competition for senior management and research and development personnel is intense and the pool of suitable candidates is limited. We may be unable to locate a suitable replacement for any senior management or key research and development personnel that we lose. In addition, if any member of our senior management or key research and development personnel joins a competitor or forms a competing company, they may compete with us for customers, business partners and other key professionals and staff members of our company. 
 
We compete for qualified personnel with other food processing companies, food retailers, logistics companies and research institutions. Intense competition for these personnel could cause our compensation costs to increase significantly, which could have a material adverse effect on our results of operations. Our future success and ability to grow our business will depend in part on the continued service of these individuals and our ability to identify, hire and retain additional qualified personnel. If we are unable to attract and retain qualified employees, we may be unable to meet our business and financial goals.
 
We currently rely upon and conduct significant related-party transactions, and most of these stem from our the status of our Operating Subsidiaries, which were formerly subsidiaries of the Dalian Chuming Group Co., Ltd. prior to their spin off to become a part of the Company. While we intend to require independent directors, or appropriate committee of the board, to review all related-party transactions, these transactions may present a conflict of interest situation in which the interests of the Group are directly opposed to the interests of the Company. If these conflicts of interest are not effectively dealt with in a manner satisfactory to the Company, our interests may be harmed, which may adversely affect our operations and financial condition.

We presently conduct business with the Group in several capacities - the main areas where we have transactions with this related party are the purchase of feed for hogs by us from the Group, and the purchase of live pigs by us from the Group, with live pigs being by far the most significant set of transactions (under our Long Term Hog Procurement Agreement). We paid the Group an aggregate of $64.7 million, $72.7 million and $61.7 million for live pigs during the full years of 2009, 2008 and 2007, respectively.
 
10

 
Mr. Shi Huashan, who is our Chief Executive Officer, is also the Chief Executive Officer of the Group, our former parent company. See also, “Certain Relationships and Related Party Transactions” on page 72. Due to the non-exclusive roles of Mr. Shi as our CEO and the principal executive officer of the Group, with whom we conduct business from time to time, potential conflicts of interest may arise. In particular, situations could arise in which we transact business with the Group, and certain terms of agreements could be favorable to us, but conversely unfavorable to the Group, and vice versa. If we are not able to effectively handle such conflicts of interest to serve the Company’s best interest, our business could be harmed or adversely affected.  In an effort to reinforce management’s efforts to handle these potential conflicts of interest effectively and fairly, we have retained two additional independent directors for our board of directors, and intend to submit all appropriate related party transactions to our independent board members, or appropriate committee of the board, for review and approval.
 
Our buildings and land use rights are pledged to secure an obligation of the Group, and those assets would be at risk if the Group were to default on this obligation.  Loss of those assets would have a material adverse effect on our business, financial condition and results of operations.

In addition, in 2004 we obtained a loan of $20,466,901 (RMB 160,000,000) from the Group, which in turn, obtained these funds in a joint loan commitment from both China Development Bank and Shenzhen Development Bank (“Banks”) via a collateralized loan. The Group collateralized the loan by purchasing a bond from China Export and Credit Insurance Corporation (“Bond Issuer”). The bond guarantees to the Banks the entire principal and accrued interest of the loan. The cost of the bond is RMB 1,000,000 annually, or in USD: $120,668, 121,902, and 125,284 for the years 2004, 2005, and 2006, respectively, which was paid by the Company. The loan carries a fixed interest of 5.76% per annum. We pledged both land use rights and buildings to the Bond Issuer. We pursued a loan from the Group as the financing solution of choice at the time because our tangible assets, at the time of origination, were insufficient to collateralize the loan. Additionally, at that time we lacked the favorable credit history to directly establish credit facility with the bank.
 
At December 31, 2007, we repaid our debt in its entirety to the Group by setting off receivables owed by the Group to us. We repaid the loan in order to meet the requirements of the equity financing transaction detailed in Note 18 of our consolidated financial statements for the years ended December 31, 2005, 2006 and 2007. The balances are now owed by the Group to the Banks, and liability for paying the bonding insurance annually lies with the Group. The pledged collateral of land use rights and buildings made to the Bond Issuer still underlie the loan currently owed by the Group, and as such, our assets, namely the buildings and land use rights would be at risk if the Group were to default on this loan.   Loss of those assets would have a material adverse effect on our business, financial condition and results of operations.
 
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Our growth strategy may prove to be disruptive and divert management resources.
 
Our growth strategy may involve large transactions and present financial, managerial and operational challenges, including diversion of management attention from existing businesses, difficulty with integrating personnel and financial and other systems, increased expenses, including compensation expenses resulting from newly-hired employees, assumption of unknown liabilities and potential disputes. We could also experience financial or other setbacks if any of our growth strategies incur problems of which we are not presently aware. We may require additional financing in the future.
 
We may need to obtain additional debt or equity to fund future capital expenditures. Additional equity may result in dilution to the holders of our outstanding shares of capital stock. Additional debt financing may include conditions that would restrict our freedom to operate our business, such as conditions that:
 
 
·
limit our ability to pay dividends or require us to seek consent for the payment of dividends;
     
 
·
increase our vulnerability to general adverse economic and industry conditions;
     
 
·
require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund capital expenditures, working capital and other general corporate purposes; and
     
 
·
limit our flexibility in planning for, or reacting to, changes in our business and our industry.
 
We cannot guarantee that we will be able to obtain any additional financing on terms that are acceptable to us, or at all.
 
Our operations are cash intensive and our business could be adversely affected if we fail to maintain sufficient levels of working capital.
 
We expend a significant amount of cash in our operations, principally to fund our raw material procurement. Our suppliers, in particular, third party suppliers of pigs, typically require payment in full within seven days after delivery, although some of our suppliers provide us with credit. In turn, we typically require our customers of chilled and frozen pork to make payment in full on delivery, although we offer some of our long-standing customers credit terms. We generally fund most of our working capital requirements out of cash flow generated from operations. If we fail to generate sufficient revenues from our sales, or if we experience difficulties collecting our accounts receivables, we may not have sufficient cash flow to fund our operating costs and our business could be adversely affected.
 
We may be unable to maintain our profitability in the face of a consolidating retail environment in China.
 
We sell substantial amounts of our products to supermarkets and large retailers. The supermarket and food retail industry in China has been, and is expected to continue, undergoing a trend of development and consolidation. As the food retail trade continues to consolidate and our retail customers grow larger and become more sophisticated, they may demand lower pricing and increased promotional programs. Furthermore, larger customers may be better able to operate on reduced inventories and potentially develop or increase their focus on private label products. If we fail to maintain a good relationship with our large retail customers, or fail to maintain a wide offering of quality products, or if we lower our prices or increase promotional support of our products in response to pressure from our customers and are unable to increase the volume of our products sold, our profitability could decline.
 
Our operating results may fluctuate from period to period and if we fail to meet market expectations for a particular period, our share price may decline.
 
Our operating results have fluctuated from period to period and are likely to continue to fluctuate as a result of a wide range of factors, including seasonal variations in live pig supply and processed meat products consumption. Our production and sales of chilled and frozen pork are generally lower in the summer, due to lower supply of live pigs. Interim reports may not be indicative of our performance for the year or our future performance, and period-to-period comparisons may not be meaningful due to a number of reasons beyond our control. We cannot assure you that our operating results will meet the expectations of market analysts or our investors. If we fail to meet their expectations, there may be a decline in our share price.
 
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We derive all of our revenues from sales in China and any downturn in the Chinese economy could have a material adverse effect on our business and financial condition.
 
All of our current revenues are generated from sales in China. We anticipate that revenues from sales of our products in China will continue to represent a substantial proportion of our total revenues in the near future. Any significant decline in the condition of the PRC economy could, among other things, adversely affect consumer buying power and discourage consumption of our products, which in turn would have a material adverse effect on our business and financial condition.

We rely on our exclusive network of showcase stores, network stores and supermarket brand counters for the success of our sales and our brand image, and should they perform poorly, our business and brand image could be materially and adversely affected.
 
In addition to our sales to wholesale customers, we sell our products through showcase stores, network stores and supermarket brand counters. All of these retail based stores exclusively sell our pork products and display the Chuming logo on our store facades. In 2009, these retail outlets accounted for approximately 38% of our total revenue.  If the sales performance of our retail based stores deteriorates, this could adversely affect the financial results of the company. In addition, any sanitation, hygiene, or food quality problems that might arise from the retail based stores could adversely affect our brand image and lead to a loss of sales. Chuming does not own any of the retail based stores.
 
We rely on the performance of our wholesaler, retailer and mass merchant customers for the success of our sales, and should they perform poorly or give priority to our competitors’ products, our business could be materially and adversely affected.
 
In addition to our retail sales channel, we sell our products to supermarkets and large retailers, which in turn sell the products to end consumers. If the sales performance of our wholesale customers deteriorates, this could adversely affect our sales. Furthermore, our wholesale customers also carry products which directly compete with our products for retail space and consumer purchases. There is a risk that our wholesale customers may give higher priority to products of, or form alliances with, our competitors. If our wholesale customers do not continue to purchase our products, or provide our products with similar levels of promotional support, our sales performance and brand imaging could be adversely affected.
 
The loss of any of our significant customers could have an adverse effect on our business.
 
Our key customers are principally supermarkets and large retailers in the PRC. We have not entered into long-term supply contracts with any of these major customers. There can be no assurance that we will maintain or improve the relationships with these customers, or that we will be able to continue to supply these customers at current levels or at all. If we cannot maintain long-term relationships with our major customers, the loss of a significant portion of our sales to them could have an adverse effect on our business, financial condition and results of operations. Further, the loss of any one of our top five customers could cause us to suffer a temporary setback in our sales, which could have a short term negative effect on our financial results.
 
Recent regulatory enforcement crackdowns on food processing companies in the PRC could adversely affect our businesses.
 
Recently, the PRC government authorities have taken certain measures to maintain the PRC food market in good order and to improve the integrity of the PRC food industry, such as enforcing full compliance with industry standards and closing certain food processing companies in the PRC that did not meet regulatory standards. We cannot assure you that our businesses and operations will not be affected as a result of the deteriorating reputation of the food industry in the PRC due to recent scandals regarding food products.
 
Environmental regulations and related litigation could have a material adverse effect on our business and results of operations.
 
Our operations and properties are subject to extensive and increasingly stringent laws and regulations pertaining to, among other things, the discharge of materials into the environment and the handling and disposition of wastes (including solid and hazardous wastes) or otherwise relating to protection of the environment. Failure to comply with any laws and regulations and future changes to them may result in significant consequences to us, including civil and criminal penalties, liability for damages and negative publicity.
 
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We have incurred, and will continue to incur, significant capital and operating expenditures to comply with these laws and regulations. We cannot assure you that additional environmental issues will not require currently unanticipated investigations, assessments or expenditures, or that requirements applicable to us will not be altered in ways that will require us to incur significant additional costs.
 
Deterioration of our perishable products may occur due to delivery delays, malfunctioning of freezer facilities or poor handling during transportation, which could adversely affect our business, results of operations and financial condition.
 
The condition of our food products (being perishable goods) may deteriorate due to shipment or delivery delays, malfunctioning of freezer facilities or poor handling during delivery by shippers or intermediaries. We are not aware of any instances whereby we were made to compensate for delivery delays, malfunctioning of freezer facilities or poor handling during transportation. However, there is no assurance that such incidents will not occur in the future. In the event of any delivery delays, malfunctioning of freezer facilities or poor handling during transportation, we may have to make compensation payments and our reputation, business goodwill and revenue will be adversely affected.
 
Unexpected business interruptions could adversely affect our business.
 
Our operations are vulnerable to interruption by fire, power failure and power shortages, floods, computer viruses and other events beyond our control. In particular, China, especially eastern and southern China, is experiencing frequent electricity shortages. In addition, we do not carry business interruption insurance to compensate us for losses that may occur as a result of these kinds of events and any such losses or damages incurred by us could disrupt our production and other operations.
 

If we fail to develop and maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud; as a result, current and potential shareholders could lose confidence in the integrity of our financial reports, which could harm our business and the trading price of our common stock.
 
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal controls over financial reporting and beginning with our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 have our independent registered public accounting firm annually attest to our evaluation. The process of strengthening our internal controls and complying with Section 404 is expensive and time consuming, and requires significant management attention. During the assessment of our internal controls over financial reporting for the year ended December 31, 2009, our management concluded that our controls were ineffective as a result of several material weaknesses.  Many of the weaknesses stem from our operation as a private company where a formal control system was not in place prior to our becoming public.  We have developed a remediation plan, which we anticipate will be completed during 2010.  Our remediation plan consists of (1) hiring a third party SOX 404 compliance consultant to help us implement an internal controls system, (2) establishing an internal audit department, (3) purchasing a new ERP system with built-in controls and (4) appointing additional members to the Board of directors, who shall serve as independent directors  and serve on the audit committee.  We cannot be certain that these measures we will undertake will ensure that we will maintain adequate controls over our financial processes and reporting in the future. Furthermore, if we are able to rapidly grow our business, the internal controls that we will need may become more complex, and significantly more resources may be required to ensure our internal controls remain effective. Failure to implement required controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we fail to execute the remediation plan for 2010, our stockholders and other potential investors may lose confidence in our business operations and the integrity of our financial statements, and may be discouraged from future investments in our company, which may delay or hinder any future business development or expansion plans if we are unable to raise funds in future financings, and our current stockholders may choose to dispose of the shares of common stock they own in our company, which could have a negative impact on our stock price. In addition, non-compliance with Section 404 could subject us to a variety of administrative sanctions, including the suspension of trading, ineligibility for listing on one of the Nasdaq Stock Markets or other national securities exchanges, and the inability of registered broker-dealers to make a market in our common stock, which could further reduce our stock price.
 
14

 
We will incur increased costs as a public company which may affect our profitability.
 
As a public company, Chuming will incur significant legal, accounting and other expenses that it did not incur as a private company. We are now subject to the SEC’s rules and regulations relating to public disclosure. SEC disclosures generally involve a substantial expenditure of financial resources. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the SEC, have required changes in corporate governance practices of public companies. We expect that full compliance with these new rules and regulations will significantly increase our legal and financial compliance costs and make some activities more time-consuming and costly. For example, we will be required to create additional board committees and adopt policies regarding internal controls and disclosure controls and procedures. In addition, we expect to increase our financial and accounting staff in order to meet the demands and requirements of being a public reporting company. Such additional personnel, public relations, reporting and compliance costs may negatively impact our financial results.
 
 
We have no business insurance coverage.
 
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products. We do not have any business liability or disruption insurance coverage for our operations in China. Any business disruption, litigation or natural disaster may result in our incurring substantial costs and the diversion of our resources. In addition, since our business operations are based outside of the U.S. directors and officers insurance may not be readily available to us at the prices and on terms acceptable to us. If we are not able to secure satisfactory D & O insurance coverage, we may not be able to attract the most qualified directors and officers, and our business could be indirectly adversely affected.
 
Risks Relating To Our Industry
 
The pig slaughtering and processed meat industries in China are subject to extensive government regulation, which is in the process of change and development.
 
The pig slaughtering and processed meat industries in China are heavily regulated by a number of governmental agencies, including primarily the Ministry of Agriculture, the Ministry of Commerce, the Ministry of Health, the General Administration of Quality Supervision, Inspection and Quarantine and the State Environmental Protection Administration. These regulatory bodies have broad discretion and authority to regulate many aspects of the pig slaughtering and processed meat industries in China, including, without limitation, setting hygiene standards for production and quality standards for processed meat products. In addition, the pig slaughtering and processed meat products regulatory framework in China is still in the process of being developed. If the relevant regulatory authorities set standards with which we are unable to comply or which increase our production costs and hence our prices so as to render our products non-competitive, our ability to sell products in China may be limited.
 
15

 
The pig slaughtering and processed meat industries in China may face increasing competition from both domestic and foreign companies, as well as increasing industry consolidation, which may affect our market share and profit margin.
 
The pig slaughtering and processed meat industries in China are highly competitive. Our processed meat products are targeted at mid- to high-end consumers, a market in which we face increasing competition, particularly from foreign suppliers. In addition, the evolving government regulations in relation to the pig slaughtering industry have driven a trend of consolidation through the industry, with smaller operators unable to meet the increasing costs of regulatory compliance and therefore are at a competitive disadvantage. We believe that our ability to maintain our market share and grow our operations within this landscape of changing and increasing competition is largely dependent upon our ability to distinguish our products and services.
 
In addition, prior to China’s entry into the World Trade Organization (“WTO”), high barriers to entry existed for many potential competitors in our business through the use of tariffs and restrictive import licensing and distribution practices. China’s admission to WTO has lowered some of the tariffs and other barriers to entry so we can expect that competition will increase.
 
We cannot assure you that our current or potential competitors will not develop products of a comparable or superior quality to ours, or adapt more quickly than we do to evolving consumer preferences or market trends. In addition, our competitors in the raw meat market may merge or form alliances to achieve a scale of operations or sales network which would make it difficult for us to compete. Increased competition may also lead to price wars, counterfeit products or negative brand advertising, all of which may adversely affect our market share and profit margin. We cannot assure you that we will be able to compete effectively with our current or potential competitors.
 
The outbreak of animal or human diseases could adversely affect our operations.
 
An occurrence of serious animal or human diseases, such as foot-and-mouth disease or swine influenza (A/H1N1 flu), or any outbreak of other epidemics in China affecting animals or humans, might result in material disruptions to our operations, material disruptions to the operations of our customers or suppliers, a decline in the supermarket or food retail industry or slowdown in economic growth in China and surrounding regions, any of which could have a material adverse effect on our operations and turnover. Even though it is believed that A/H1N1 flu cannot be contracted by humans through eating properly-handled and cooked pork or pork products, negative association of the A/H1N1 flu with pigs and pork products could have a negative impact on sales of pork products. Accordingly, there can be no assurance that our facilities or products will not be affected by an outbreak of A/H1N1 or any other disease or outbreak in the future, or that the market for pork products in the PRC will not decline as a result of fear of disease. In either case, our business, results of operations and financial condition would be adversely and materially affected.
 
Consumer concerns regarding the safety and quality of food products or health concerns could adversely affect sales of our products.
 
Our sales performance could be adversely affected if consumers lose confidence in the safety and quality of our products. Consumers in the PRC are increasingly conscious of food safety and nutrition. Consumer concerns about, for example, the safety of pork products, or about the safety of food additives used in processed meat products, could discourage them from buying certain of our products and cause our results of operations to suffer.
 
16

 
We may be subject to substantial liability should the consumption of any of our products cause personal injury or illness.
 
The sale of food products for human consumption involves an inherent risk of injury to consumers. Such injuries may result from tampering by unauthorized third parties or product contamination or degeneration, including the presence of foreign contaminants, chemical substances or other agents or residues during the various stages of the procurement and production process. While we are subject to governmental inspections and regulations, we cannot assure you that consumption of our products will not cause a health-related illness in the future, or that we will not be subject to claims or lawsuits relating to such matters.
 
Even if a product liability claim is unsuccessful or is not fully pursued, the negative publicity surrounding any assertions that our products caused personal injury or illness could adversely affect our reputation with customers and our corporate and brand image. Consistent with industry practice in China, we do not maintain product liability insurance. Furthermore, our products could potentially suffer from product tampering, contamination or degeneration or be mislabeled or otherwise damaged. Under certain circumstances, we may be required to recall products. Even if a situation does not necessitate a product recall, we cannot assure you that government sanctions or product liability claims will not be asserted against us as a result. A product liability judgment against us or a product recall could have a material adverse effect on our business, financial condition or results of operations.
 
Our product and company name may be subject to counterfeiting and/or imitation, which could impact upon our reputation and brand image as well as lead to higher administrative costs.
 
We regard brand positioning as the core of our competitive strategy, and intend to position our brand, “Chuming™” to create the perception and image of health, nutrition, freshness and quality in the minds of our customers. There have been frequent occurrences of counterfeiting and imitation of products in the PRC in the past. We cannot guarantee that counterfeiting or imitation of our products will not occur in the future or that we will be able to detect it and deal with it effectively. Any occurrence of counterfeiting or imitation could impact negatively upon our corporate and brand image, particularly if the counterfeit or imitation products cause sickness, injury or death to consumers. In addition, counterfeit or imitation products could result in a reduction in our market share, a loss of revenues or an increase in our administrative expenses in respect of detection or prosecution.
 
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Risks Relating To Conducting Business in the PRC
 
Substantially all of our assets and projects are located in the PRC, and substantially all of our revenue is sourced from the PRC. Accordingly, our results of operations and financial position are subject to a significant degree to economic, political and legal developments in the PRC, including the following risks:
 
Economic, political and social conditions and government policies in China could have a material adverse effect on our business, financial condition and results of operations.

Economic, political and social conditions and government policies in China differ in many respects from other more fully industrialized nations, and below are examples of such differences.
 
 
Structure. Agriculture still plays an important role in Chinese economy and employment. Agriculture still represents around 50% of the employment, which is substantially higher than most developed countries.
 
 
·
Capital re-investment. Compared with more highly developed nations, there may be less availability to Chinese firms of all types of investment capital within China.
 
 
·
Government involvement. China is still transitioning from a centrally planned economic model to that of a free market. As a result, the Chinese government has traditionally had a greater degree of regulatory involvement in the economic affairs and conduct of firms in China, as compared with firms in more advanced market-based economies.
 
 
·
Allocation of resources. Related to the above point, the Chinese government may have greater ability to influence the allocation of capital, labor, materials, and other resources than governments of other advanced market-based economies.
 
 
·
Level of development. Although China’s economy has been rapidly growing in recent years, certain aspects such as public infrastructure, poverty rate, and other measurements of development still lag behind highly developed nations, and this affects how companies must conduct business in China.
 
 
·
Control of foreign exchange. China still maintains strict foreign exchange controls which has been in place since 1979, although steps have been taken to increase the exchangeability of the Chinese RMB with other currencies.
 
 
·
Growth rate. For several years, China’s economy has achieved consistent double digit growth rates, and this may put strain on infrastructure, availability on raw materials, and ability of firms to manage growth.
 
 
·
Rate of inflation. According to the Consumer Price Index (CPI) compiled by the National Statistics Bureau of China, the overall rate of inflation (CPI) in 2009 is -0.7% and the rate of inflation for food in 2009 was 0.7% and these factors affect the local market environment in which Chinese firms must operate.
 
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The economy of China has been transitioning from a centrally planned economy to a more market-oriented economy. Although in recent years the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, a substantial portion of productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industries by imposing industrial policies. It also exercises significant control over China’s economic growth through allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
 
Policies and other measures taken by the PRC government to regulate the economy could have a significant negative impact on economic conditions in China, with a resulting negative impact on our business. For example, our financial condition and results of operations may be materially and adversely affected by:
 
 
·
new laws and regulations and the interpretation of those laws and regulations;
     
 
·
the introduction of measures to control inflation or stimulate growth;
     
 
·
changes in the rate or method of taxation;
     
 
·
the imposition of additional restrictions on currency conversion and remittances abroad; or
     
 
·
any actions which limit our ability to develop, produce, import or sell our products in China, or to finance and operate our business in China.
 
Uncertainties with respect to the PRC legal system could adversely affect us.
 
We conduct our business primarily through our Chuming Operating Subsidiaries which are located in China and are governed by PRC laws and regulations. In addition, because the parent companies that hold these entities, namely PSI and Energroup Holdings Corporation, are outside of China, we are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to wholly foreign-owned enterprises. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value.
 
Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
 
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on United States or other foreign laws against us, our management or the experts named in this prospectus.
 
We conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, while we are incorporated in the State of Nevada, all of our senior executive officers reside within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon our senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, our PRC counsel has advised us that the PRC does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts.
 
19

 
Governmental control of currency conversion may affect the value of your investment.
 
The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current structure, our income is primarily derived from payments from Chuming WFOE. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries and our affiliated entity to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency denominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders.
 
Fluctuation in the value of RMB may have a material adverse effect on your investment.
 
The value of RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions. Our revenues and costs are mostly denominated in RMB, while we report our financial results and position in U.S. dollars. Any significant fluctuation in value of RMB may materially and adversely affect our reported cash flows, revenues, earnings and financial position, and the value of, and any dividends payable on, our stock in U.S. dollars. For example, an appreciation of RMB against the U.S. dollar would make any new RMB denominated investments or expenditures more costly to us, to the extent that we need to convert U.S. dollars into RMB for such purposes. An appreciation of RMB against the U.S. dollar would also result in foreign currency translation losses for financial reporting purposes when we translate our U.S. dollar denominated financial assets into RMB, as RMB is our reporting currency.  There remains significant international pressure on the PRC government to adopt a more flexible currency policy, which could result in further and more significant appreciation of the RMB against the U.S. dollar and other foreign currencies.
 
As very limited types of hedging transactions are available in the PRC to reduce our exposure to exchange rate fluctuations, we have not entered into any such hedging transactions. Accordingly, we cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign exchange losses in the future.
 
We face risks related to health epidemics and other outbreaks.
 
Our business could be adversely affected by the effects of SARS or another epidemic or outbreak. China reported a number of cases of SARS in 2004 and A/H1N1 in 2009. Any prolonged recurrence of SARS, A/H1N1 or other adverse public health developments in China may have a material adverse effect on our business operations. For instance, health or other government regulations adopted in response may require temporary closure of our production facilities or of our offices. Such closures would severely disrupt our business operations and adversely affect our results of operations. We have not adopted any written preventive measures or contingency plans to combat any future outbreak of SARS, A/H1N1 or any other epidemic.

Risks Related to Our Corporate Structure
 
In order to comply with PRC laws limiting foreign ownership of Chinese companies, we conduct our business in the PRC through Chuming by means of certain ownership arrangements. If the PRC government determines that these ownership arrangements do not comply with applicable regulations, our business could be adversely affected and we could be subject to sanctions.
 
 
As a result of the share exchange transaction disclosed elsewhere in this prospectus, we own 100% of the equity interest in PSI, a British Virgin Islands company. PSI owns 100% of the equity in Chuming WFOE, a wholly foreign owned enterprise in the PRC. Chuming WFOE is a holding company for the following three operating subsidiaries: (i) Meat Company, (ii) Food Company, and (iii) Sales Company, each of which is a limited liability company headquartered in, and organized under the laws of, China.
 
The PRC government restricts foreign investment in businesses in China. Accordingly, we operate our business in China through Chuming. Chuming holds the licenses and approvals necessary to operate our business in China.
 
Although we believe we comply with current PRC regulations, we cannot assure you that the PRC government would agree that these operating arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. If in the future the PRC government determines that we do not comply with applicable PRC law, it could impose fines on our PRC shareholders, and in extreme cases, the PRC government could take steps to revoke our business and operating licenses, require us to discontinue or restrict our operations, restrict our right to collect revenues, require us to restructure our operations, impose additional conditions or requirements with which we may not be able to comply, impose restrictions on our business operations or on our customers, or take other regulatory or enforcement actions against us that could be harmful to our business. Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.
 
20


Recent PRC regulations relating to acquisitions of PRC companies by foreign entities may limit our ability to acquire PRC companies and adversely affect the implementation of our strategy as well as our business and prospects.
 
The PRC State Administration of Foreign Exchange, or SAFE, issued a public notice in January 2005 concerning foreign exchange regulations on mergers and acquisitions in China. The public notice states that if an offshore company controlled by PRC residents intends to acquire a PRC company, such acquisition will be subject to strict examination by the relevant foreign exchange authorities. The public notice also states that the approval of the relevant foreign exchange authorities is required for any sale or transfer by the PRC residents of a PRC company’s assets or equity interests to foreign entities, such as us, for equity interests or assets of the foreign entities.
 
In April 2005, SAFE issued another public notice further explaining the January notice. In accordance with the April notice, if an acquisition of a PRC company by an offshore company controlled by PRC residents has been confirmed by a Foreign Investment Enterprise Certificate prior to the promulgation of the January notice, the PRC residents must each submit a registration form to the local SAFE branch with respect to their respective ownership interests in the offshore company, and must also file an amendment to such registration if the offshore company experiences material events, such as changes in the share capital, share transfer, mergers and acquisitions, spin-off transactions or use of assets in China to guarantee offshore obligations.
 
On May 31, 2007, SAFE issued another official notice known as “Circular 106,” which requires the owners of any Chinese company to obtain SAFE’s approval before establishing any offshore holding company structure for foreign financing as well as subsequent acquisition matters in China.
 
If we decide to acquire a PRC company, we cannot assure you that we or the owners of such company, as the case may be, will be able to complete the necessary approvals, filings and registrations for the acquisition. This may restrict our ability to implement our acquisition strategy and adversely affect our business and prospects. In addition, if such registration cannot be obtained, our company will not be able to receive dividends declared and paid by our subsidiaries in the PRC and may be forbidden from paying dividends for profit distribution or capital reduction purposes.
 
Chuming is subject to restrictions on making payments to our parent company.
 
We are a holding company incorporated in the State of Nevada and do not have any assets or conduct any business operations other than our investment in Chuming and their operating subsidiaries in China. As a result of our holding company structure, we rely entirely on payments or dividends from Chuming for our cash flow to fund our corporate overhead and regulatory obligations. The PRC government also imposes controls on the conversion of RMB into foreign currencies and the remittance of currencies out of China. We may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currency. Further, if our subsidiaries in China incur debt on their own in the future, the instruments governing the debt may restrict their ability to make payments. If we are unable to receive all of the revenues from our operations through these contractual or dividend arrangements, we may be unable to pay dividends on our shares of common stock.    
 
21

 
Risk Relating to an Investment in Our Securities
 
Generally, we have not paid any cash dividends to our shareholders and no cash dividends will be paid in the foreseeable future.
 
We do not anticipate paying cash dividends on our common stock in the foreseeable future and we may not have sufficient funds legally available to pay dividends. Even if the funds are legally available for distribution, we may nevertheless decide or may be unable due to pay any dividends. We intend to retain all earnings for our company’s operations.
 
The application of the “penny stock” rules could adversely affect the market price of our common stock and increase your transaction costs to sell those shares.
 
As long as the trading price of our common shares is below $5 per share, the open-market trading of our common shares will be subject to the “penny stock” rules. The “penny stock” rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of US$1,000,000 or annual income exceeding US$200,000 or US$300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser’s written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the Securities and Exchange Commission relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell our common stock, and may result in decreased liquidity for our common stock and increased transaction costs for sales and purchases of our common stock as compared to other securities.
 
Our common stock is thinly traded and, you may be unable to sell at or near “ask” prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.
 
We cannot predict the extent to which an active public market for our common stock will develop or be sustained. However, we do not rule out the possibility of applying for listing on the Nasdaq Global Select Market, Nasdaq Global Market, Nasdaq Capital Market (the “Nasdaq Markets”), or other exchanges. Our common stock has historically been sporadically or “thinly-traded” on the “Over-the-Counter Bulletin Board,” meaning that the number of persons interested in purchasing our common stock at or near bid prices at any given time may be relatively small or nonexistent. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-adverse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we become more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained.
 
The market price of our common stock is particularly volatile given our status as a relatively small company with a small and thinly traded “float” that could lead to wide fluctuations in our share price. The price at which you purchase our common stock may not be indicative of the price that will prevail in the trading market. You may be unable to sell your common stock at or above your purchase price if at all, which may result in substantial losses to you.
 
The market for our common stock is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. As noted above, our common stock is sporadically and/or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. The following factors also may add to the volatility in the price of our common stock: actual or anticipated variations in our quarterly or annual operating results; adverse outcomes; additions to or departures of our key personnel, as well as other items discussed under this “Risk Factors” section, as well as elsewhere in this Report. Many of these factors are beyond our control and may decrease the market price of our common stock, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common stock will be at any time, including as to whether our common stock will sustain its current market prices, or as to what effect the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price. However, we do not rule out the possibility of applying for listing on the Nasdaq Markets or another exchange.
 
22

 
Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through pre-arranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the volatility of our share price.
 
Volatility in our common stock price may subject us to securities litigation.
 
The market for our common stock may be characterized by significant price volatility when compared to seasoned issuers, and we expect our share price will be more volatile than a seasoned issuer for the indefinite future. In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.
 
Future sales of shares of our common stock may decrease the price for such shares.
 
Actual sales, or the prospect of sales by our shareholders, may have a negative effect on the market price of the shares of our common stock. We may also register certain shares of our common stock that are subject to outstanding convertible securities, if any, or reserved for issuance under our stock option plans, if any. Once such shares are registered, they can be freely sold in the public market upon exercise of the options. If any of our shareholders either individually or in the aggregate cause a large number of securities to be sold in the public market, or if the market perceives that these holders intend to sell a large number of securities, such sales or anticipated sales could result in a substantial reduction in the trading price of shares of our common stock and could also impede our ability to raise future capital.
 
Our corporate actions are substantially controlled by our principal shareholders and affiliated entities.
 
Our principal shareholders and their affiliated entities will own approximately 69.5% of our outstanding shares of common stock, representing approximately 69.5% of our voting power. These shareholders, acting individually or as a group, could exert substantial influence over matters such as electing directors and approving mergers or other business combination transactions. In addition, because of the percentage of ownership and voting concentration in these principal shareholders and their affiliated entities, elections of our board of directors will generally be within the control of these shareholders and their affiliated entities. While all of our shareholders are entitled to vote on matters submitted to our shareholders for approval, the concentration of shares and voting control presently lies with these principal shareholders and their affiliated entities. As such, it would be difficult for shareholders to propose and have approved proposals not supported by management. There can be no assurances that matters voted upon by our officers and directors in their capacity as shareholders will be viewed favorably by all shareholders of our company.
 
23

 
The elimination of monetary liability against our directors, officers and employees under Nevada law and the existence of indemnification rights to our directors, officers and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
 
Our articles of incorporation contain specific provisions that eliminate the liability of our directors for monetary damages to our company and shareholders, and we are prepared to give such indemnification to our directors and officers to the extent provided by Nevada law. We may also have contractual indemnification obligations under our employment agreements with our officers. The foregoing indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit our company and shareholders.
 
The market price for our stock may be volatile.
 
The market price for our stock may be volatile and subject to wide fluctuations in response to factors including the following:
 
 
·
actual or anticipated fluctuations in our quarterly operating results;
     
 
·
changes in financial estimates by securities research analysts;
     
 
·
conditions in agricultural markets;
     
 
·
changes in the economic performance or market valuations of other meat processing companies;
     
 
·
announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments;
     
 
·
addition or departure of key personnel;
     
 
·
fluctuations of exchange rates between RMB and the U.S. dollar;
     
 
·
intellectual property litigation;
     
 
·
general economic or political conditions in China.

In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our stock.
 
We may need additional capital, and the sale of additional shares or other equity securities could result in additional dilution to our shareholders.
 
We may in the future require additional cash resources due to changed business conditions or other developments, including any capital expenditures, investments or acquisitions we may wish to pursue. If our resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
 
24

 
BUSINESS
 
Company Organization
 
We produce, pack, sell, market and distribute fresh pork and processed meat products to customers in the People’s Republic of China (“China” or the “PRC”).

We own three PRC operating subsidiaries (collectively, the “Chuming Operating Subsidiaries”):
 
 
1.
Dalian Chuming Slaughter and Packaging Pork Company Ltd. (the “Meat Company”), whose primary business activity is acquiring, slaughtering and packaging of pork;
 
 
2.
Dalian Chuming Processed Foods Company Ltd. (the “Food Company”), whose primary business activity is the processing of raw and cooked meat products; and
 
 
3.
Dalian Chuming Sales Company Ltd. (the “Sales Company”), which is responsible for our sales, marketing and distribution activities.
 
The three operating subsidiaries are spun off constituents of a former parent company, Dalian Chuming Group Co., Ltd. (the “Group”). Our company is separate and independent from the Group, which operates a different business and has different operations from ours. We took over ownership and control of the three Chuming Operating Subsidiaries from the Group in September 2007 following our corporate reorganization. We are headquartered in the City of Dalian, Liaoning Province of China.
 
Corporate Reorganization
 
PRC law currently limits foreign ownership of certain companies based in the PRC. In order for us to raise equity capital from investors outside of China, we established an offshore holding company by the name of Precious Sheen Investments Limited (“PSI”) in the British Virgin Islands in May 2007. On September 26, 2007, Dalian Precious Sheen Investments Consulting Co., Ltd. ("Chuming WFOE") entered into share transfer agreements with the Group, under which the Group agreed to transfer ownership of the Chuming Operating Subsidiaries to Chuming WFOE. On October 23, 2007, Chuming WFOE completed all required registrations to complete the share transfer, and became the 100% owner of the Chuming Operating Subsidiaries. On November 14, 2007 the Dalian Commerce Bureau approved the transfer of the Group’s 68% interest in Chuming WFOE to PSI, and upon this transfer, Chuming WFOE became a wholly foreign owned enterprise, with PSI as the 100% owner of Chuming WFOE (including its subsidiaries). On December 13, 2007, the PRC government authorities issued Chuming WFOE a business license formally recognizing it as a wholly foreign owned enterprise, of which PSI is the sole shareholder.

Following this corporate restructuring, PSI became the 100% owner and parent company of Chuming WFOE, which in turn owns 100% of the Chuming Operating Subsidiaries: the Meat Company, the Food Company and the Sales Company.

Throughout this prospectus, PSI, Chuming WFOE and the Chuming Operating Subsidiaries are sometimes collectively referred to as “Chuming.”
 
Share Exchange Transaction
 
On December 31, 2007, we acquired all of the outstanding shares of PSI in exchange for the issuance of 16,850,000 restricted shares of our common stock to the shareholders of PSI, which represented approximately 97.55% of then-issued and outstanding common stock (excluding the shares issued in our December 31, 2007 financing transaction). As a result of that transaction, PSI became our wholly owned subsidiary and we acquired the business and operations of Chuming.
 
25

 
Prior to the share exchange transaction, Energroup was a public reporting “shell” company with nominal assets whose sole business was to identify, evaluate and investigate various companies with the intent that, if such investigation warrants, a reverse merger transaction be negotiated and completed pursuant to which Energroup would acquire a target company with an operating business with the intent of continuing the acquired company’s business as a publicly held entity.

As a result of the share exchange transaction, PSI (and its subsidiaries) became the 100% owned subsidiary of Energroup Holdings Corporation, and we acquired the business and operations of Chuming which  now comprise the principal business and operations, and we became a U.S. public reporting company incorporated in the State of Nevada.  Through our holding companies, we own the Chuming Operating Subsidiaries that continue to operate in the city of Dalian, in Liaoning Province, China. Our common stock is quoted on the OTC Bulletin Board under the symbol “ENHD”
 
Concurrently with the closing of the reverse take-over transaction, on December 31, 2007 we closed our $17 million private placement financing involving the issuance of our common stock to 15 accredited investors. The financing yielded net proceeds to us of approximately $14.7 million.
 
Company Overview and History
 
Our business originated from the founding in 1999 of Dalian Chuming Group Co., Ltd. (the “Group”), the former parent of Chuming.  The Group began as a processor and supplier of fresh and frozen meat and meat products. Among industrialized farming corporations in northeastern China, the Group pursued distinction in the Chinese food industry by maintaining high quality management standards and international safety certifications. 

In 2004, the Group formed the Chuming Operating Subsidiaries, which now form the core of our business, and these companies began producing and supplying fresh and processed meats under the Chuming brand name. Since then we have rapidly become a significant producer and supplier in China’s meat industry, and have achieved consistent profitability and growth since inception. In the last three years of operation, our sales have grown at an average rate of 31% per annum, and our net income from 2006 to 2007 has grown at a rate of 31%. We sell our products to consumers in northeastern China, which has a population of approximately 108 million. In particular, our current customers are concentrated in the Liaoning Province (which has a population of approximately 42 million), and we are the largest pork producer in Dalian City, which has a population of approximately 3 million, or 6 million including the greater metropolitan area. At present, all of our sales are within China, which is the largest pork-consuming nation in the world, with a total of 54 million metric tons consumed in 2006. Due to the rapid development of the Chinese economy, urbanization and strong income growth, we have observed that pork consumption patterns are changing and consumption levels are continuing to increase. 
 
Our major products are:
 
 
·
Fresh meat - pork that is processed in a controlled environmental chamber with closely monitored temperatures to ensure quality and safety standards during processing right up to the time of delivery to the consumer.
     
 
·
Frozen fresh meat - butchered pigs that are processed and immediately frozen, which includes such products as smoked pork, ham and roasts.
     
 
·
Frozen fresh byproducts - pork byproducts including pig’s liver, stomach, intestine, head and hoof.
 
We are part of an established pork production cycle that culminates in sales of fresh and frozen pork. This cycle includes feedstuff production, pig breeding, slaughtering, processing, packaging and distribution. We are involved in the slaughtering, processing, packaging and distribution aspects of the pork production cycle.
 
26

 
We are the first pork producer in China to receive “Green Food” certification from China’s Ministry of Agriculture. Green Food is an innovative certification program unique to China that is awarded to food processors who produce using environmentally sustainable methods and meet certain high technical standards of quality control, safety, and product quality, and generate low levels of pollution. Under strict supervision, control and regulation in production, processing, packing, storage and transportation, Green Food-certified companies must apply these quality control standards from field to customer and regulate the application of inputs, including pesticide, fertilizer, veterinary drug and additives to minimize environmental pollution and prevent toxic and harmful substances from entering the food supply chain. The Green Food certification is based on standards defined by the Codex Alimentarius Commission (“CAC”), a joint body of the United Nations Food and Agriculture Organization and the World Health Organization.
 
PRC law currently limits foreign ownership of certain companies based in the PRC. In order for us to raise equity capital from investors outside of China, we established an offshore holding company by the name of Precious Sheen Investments Limited (“PSI”) in the British Virgin Islands in May 2007. On September 26, 2007, In 2007, the Group completed a corporate reorganization whereby the Chuming Operating Subsidiaries (namely, the Meat Company, the Food Company and the Sales Company) spun off and separated from the Group. On October 23, 2007, Chuming WFOE completed all required registrations to complete the share transfer, and became the 100% owner of the Chuming Operating Subsidiaries. On November 14, 2007 the Dalian Commerce Bureau approved the transfer of the Group’s 68% interest in Chuming WFOE to PSI, and upon this transfer, Chuming WFOE became a wholly foreign owned enterprise, with PSI as the 100% owner of Chuming (including its subsidiaries). On December 13, 2007, the PRC government authorities issued Chuming WFOE a business license formally recognizing it as a wholly foreign owned enterprise, of which PSI is the sole shareholder.

Following this corporate restructuring, PSI became the 100% owner and parent company of  Chuming WFOE, which in turn owns 100% of the Chuming Operating Subsidiaries: the Meat Company, the Food Company and the Sales Company. The business and operations of the Chuming Operating Subsidiaries now comprise the principal business and operations of our company.

In December 2007, PSI completed a reverse-takeover transaction with a U.S. publicly reporting company, which resulted in our current corporate structure. Today, we are a U.S. public reporting company incorporated in the State of Nevada, and we own the Chuming Operating Subsidiaries that continue to operate in the city of Dalian, in Liaoning Province, China. Our common stock is quoted on the OTC Bulletin Board under the symbol “ENHD.OB.”

Concurrently with the closing of the reverse take-over transaction, on December 31, 2007 we closed our $17 million private placement financing involving the issuance of our common stock to 15 accredited investors. The financing yielded net proceeds to us of approximately $14.7 million. For an additional discussion of this financing, please refer to the section above entitled “Strategic Financing” beginning on page 4 of this prospectus.
 
Industry Overview
 
The following overview in certain instances cites to materials that are publicly available without charge. If no citation is provided with respect to certain information presented in this “Industry Overview” section, that information is attributed to our own research regarding the world pork market and China’s pork industry.
 
World Pork Market
 
According to a November 2007 report of the United States Department of Agriculture (USDA), China is the largest pork producer and consumer in the world. China is the leading producer among other countries in the world by a wide margin, and produces and consumes more than half of the world’s pork. Preliminary numbers for 2007 worldwide production of pork was 94.7 million metric tons (MMT, carcass weight equivalent) and consumption was 93.8 MMT. The USDA forecast for 2008 is that both the production and the consumption in China are expected to expand by more than 2% over 2007 levels.

27

Pork Production (1,000 Metric Tons, Carcass Weight Equivalent), 2003-2008 (Estimated)
 
   
2003
 
2004
 
2005
 
2006
 
2007
 
2008
November
China   
   
45,186
 
47,016
   
50,106
 
51,972
   
47,000
 
48,000
EU-27      
   
21,712
 
21,753
   
21,676
 
21,677
   
22,040
 
21,910
United States
   
9,056
 
9,312
   
9,392
 
9,559
   
9,877
 
10,108
Brazil
   
2,560
 
2,600
   
2,710
 
2,830
   
2,980
 
3,095
Russian Federation
   
1,710
 
1,725
   
1,735
 
1,805
   
1,880
 
2,000
Canada
   
1,882
 
1,936
   
1,920
 
1,898
   
1,850
 
1,790
Japan
   
1,260
 
1,272
   
1,245
 
1,247
   
1,260
 
1,255
Mexico
   
1,100
 
1,150
   
1,195
 
1,200
   
1,200
 
1,250
Korea, Republic of
   
1,149
 
1,100
   
1,036
 
1,000
   
1,065
 
1,095
Taiwan
   
893
 
898
   
911
 
905
   
910
 
910
Ukraine
   
630
 
558
   
493
 
485
   
530
 
540
   
3,350
 
3,481
   
3,720
 
3,926
   
4,086
 
1,039
Total      
   
90,488
 
92,801
   
96,136
 
98,504
   
94,678
 
92,992
 
Sources: USDA report, Livestock and Poultry: World Markets and Trade, November 2007.   
Note: 2007 data is preliminary and 2008 is forecast.
 
28

Pork Consumption (1,000 Metric Tons, Carcass Weight Equivalent), 2003-2007 (Estimated)

   
2003
 
2004
 
2005
 
2006
 
2007
 
2008
November
China    
   
45,054
 
46,648
   
49,703
 
51,467
   
46,690
 
47,700
EU-27    
   
20,683
 
20,528
   
20,632
 
20,518
   
20,790
 
20,800
United States    
   
8,816
 
8,817
   
8,670
 
8,640
   
8,939
 
9,129
Russian Federation    
   
2,417
 
2,338
   
2,486
 
2,639
   
2,734
 
2,874
Japan    
   
2,331
 
2,529
   
2,482
 
2,458
   
2,500
 
2,490
Brazil    
   
1,957
 
1,979
   
1,949
 
2,191
   
2,265
 
2,320
Mexico    
   
1,423
 
1,556
   
1,556
 
1,580
   
1,565
 
1,580
Korea, Republic of    
   
1,286
 
1,336
   
1,311
 
1,420
   
1,518
 
1,550
Canada
   
1,003
 
1,068
   
967
 
971
   
970
 
930
Taiwan    
   
934
 
948
   
944
 
928
   
927
 
928
Ukraine
   
623
 
606
   
544
 
544
   
609
 
619
Others    
   
3,621
 
3,697
   
3,906
 
4,158
   
4,332
 
1,249
     
   
90,148
 
92,050
   
95,150
 
97,514
   
93,839
 
92,169
 
Sources: USDA report, Livestock and Poultry: World Markets and Trade, November 2007.   
Note: 2007 data is preliminary and 2008 is forecast.
 
China’s Pork Industry
 
According to China’s National Bureau of Statistics, China’s US$176 billion animal husbandry sector is the second largest in the country’s basket of agricultural related industries including farming, forestry and fishery. The present size of the pork and processed meat market in China is an estimated US$32 billion.
 
Our research indicates that China’s per capita meat consumption was just over 55 kilograms by 2000, which is significantly smaller than the consumption level of over 100 kg per year by western standards. Based on what is known about Chinese culinary culture and habits, however, our management believes that the Chinese population is expected to consume more meat as their disposable income increases. For example, our research indicates that Hong Kong residents, who have a significantly higher per capita income, consumed on average 124 kg of meat in 2000.
 
The manner in which meat sales are conducted has changed as a result of new hygiene and food safety regulations that were introduced by the Chinese government in 1995. Historically, the great majority of meat sales in China had taken place in open-air markets or on streets, i.e. in free wet markets. These markets provided a location through which the consumer could buy live poultry or freshly slaughtered meat produced direct from local farmers. As a result of the new regulations, however, governmental agencies recently have encouraged the replacement of open-air markets by supermarkets and convenience stores, and the market share of open-air markets has continued to decline. Even with these new regulations, however, the open-air markets still currently represent 80% of the overall meat-processing sector in China.
 
The meat industry in China is characterized by fragmentation, sanitation and hygiene issues, as well as social demographic trends. Supply is extremely localized with limited distribution capability. China’s vast geography and ‘in-development’ transport infrastructure have made it difficult to create national or even regional level competition in the industry. Our management believes that the trend towards greater sales through formal supermarkets and chain stores, coupled with the expansion of our sales and distribution network, will continue to favorably impact our business.
 
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Pork is China’s most important source of meat and is consumed at a much higher rate than other categories of meat. The following 2007 USDA Report shows that pork is consumed in China with five times greater volume than poultry or “broiler meat” and almost seven times more than beef:

   
Kg Per Person
   
Relative %
 
Beef
    5.6       11 %
Broiler Meat
    7.9       15 %
Pork
    39.4       74 %
Total:
    52.9       100 %
 
Sources: USDA report, Livestock and Poultry: World Markets and Trade, April 2007.  
 
In addition to a greater general preference for pork, urbanization and rapid income growth are working in parallel to create more demand for pork and processed pork products. An emerging middle class of relatively high-income consumers is forming in certain Chinese cities. As household incomes rise, these high-income residents consume more of all categories of foods on a per capita basis. According to the Urban Household Survey conducted in 2000 by China’s National Bureau of Statistics, pork consumption by low-income residents was 13.4 kg whereas it was 19.6 kg for high-income residents.  These residents not only demand a greater quantity of food, but also higher quality (e.g. better cuts of meat, foods that are safer or healthier) and convenience (processed foods). Reports of food poisoning and dangerous chemical residues have given rise to strong demand for “green” foods for which we are certified. We believe that affluent consumers would be willing to pay premium prices for foods which have safety-related certifications, foods with purported health benefits or foods with other desirable attributes. We offer a wide range of food products that appeal to demands for safety, convenience, quality and health attributes demanded by high-income urban consumers.
 
Our management expects China’s meat industry, which includes the meat processing business, to grow due to key driving forces including food safety concerns that we believe will accelerate the transition from the traditional wet market to the modern dry market; rising modern retail channels; government mandates and supports of agricultural and meat processing companies; and consolidating forces.  
 
30

 
 
·
Transitioning from “wet-market” to “dry-market” 

We believe that food safety is a top concern of Chinese consumers who purchase meat products, and that this will eventually compel modernization of China’s meat processing industry. Consumer surveys showed that food safety, nutritional value and taste are the top three concerns of consumers, while price was ranked fourth. Furthermore, surveys showed that 60% of the consumers have a low degree of confidence in meat products in general. There are a number of food safety concerns facing the Chinese pork industry, including swine streptococcus and Foot and Mouth Disease, the use of antibiotics and illegal feed additives such as Clenbutero, pork injected with water and illegal slaughterhouses. China’s meat industry traditionally has been dominated by small and family-operated butcher shops that would slaughter the livestock in the open-air marketplaces and without the necessary safety and sterilized equipment. These unsanitary operations create what is commonly known as the “wet market,” which currently represents 80% of the overall meat-processing sector. However, the industry is changing rapidly. Along with the prevalent use of refrigerators in urban households, health conscious consumers are demanding more sanitary quality meat products which can only be processed and delivered in a temperature controlled cold chain environment. This presents significant opportunities to meat processors with advanced processing plants and refrigerated transportation capabilities.
  
 
·
Government quality control 

Frequent occurrences of food safety scares have hastened the Chinese government’s effort in regulating food safety and quality. For example, in 2006 pork containing Clenbutero were found to be sold in several wet markets in Shanghai that resulted in over 330 people being poisoned, and an outbreak of swine Streptococcus in Sichuan Province led to the death of 17 people. A number of Chinese organizations are involved in an effort to bring the Chinese meat industry’s safety, hygiene and sanitation standards to an international level, including the Ministry of Agriculture, Ministry of Health, State Administration of Quality Supervision, Inspection, and Quarantine, State Food and Drug Administration, and the Ministry of Commerce. Tougher quality standards set for the meat processing industry represent barriers to newcomers while forcing operationally inadequate and financially unsound companies to shut down. Our management anticipates that companies such as ours, with quality meat processing and modern logistics systems, will benefit as they capture market share and build consumer brand loyalty.
 
 
·
Government’s strong support of meat processing industry 

The main theme of China’s 11th Five Year Plan is the development of China’s rural economy. With the widening wealth gap between the rich and poor or between urban and rural regions, China’s central government has shifted its focus from urban industrial growth to rural agricultural development aimed at improving the standard of living in the poorer regions. Many preferential policies were enacted to help the farming communities including subsidized livestock insurance and interest free loans. Scaled meat processors are considered active agents in galvanizing the rural economies by providing jobs, injecting capital, and introducing new technology and management expertise to the local economies. The Five Year Plans are a series of economic development initiatives promulgated by the Chinese government, however, they do not constitute binding or substantive policies or regulations. The Chinese economy has been shaped primarily through the plenary sessions of the Central Committee and National Congress. The Five Year Plan serves, in part, as a mapping strategy for economic development, setting growth targets, and launching reforms. The plan usually includes detailed economic development guidelines for all its regions and the nation as a whole. As China has transited from a centrally-planned economy to market economy, the name for the 11th Five-Year Plan has been characterized as a “guideline” rather than a strict “plan”. The 11th Five-Year Plan covers the period from 2006 to 2011.  
 
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·
National retailers provide platform for growth 

The increasingly widespread use of refrigerators in urban Chinese households has attracted many retailers to carry more frozen food products, making available a wide variety of frozen products to consumers. Major domestic retailers, including LianHua, have made an impact in introducing more brands of frozen food products in their retail stores. Even more significantly going forward will be the rapid expansion of international hypermarkets in China, including France’s Carrefour, the U.S.’s Walmart, and Germany’s Metro. These retailers with national reach will significantly change the retail industry landscape as they provide the platform for the large branded food companies to efficiently and rapidly distribute their products to large and untapped markets. These international retail chains can also provide excellent export opportunities to scaled, quality meat processing companies.

 
·
Industry consolidation benefits scaled players 

In the more mature U.S. meat market, the top three producers represent about 50% of the meat industry there. But in China the meat-processing industry is very fragmented, with over 3,000 meat-processors most of which are small operators. The top three producers represent less than 5% of the overall market. Pig farms in China are also very fragmented, with over 90% of the farms possessing fewer than 10 pigs. As smaller players experience pressure from margin compression and stricter government regulations, we believe scaled meat processors will make attractive acquisitions in order to capture market share, gain scale, secure raw material, and move closer to clients. The combination of stricter hygiene regulations, increasing competition from well-financed players, struggling meat suppliers, and increasing international competition from companies like Hormel will induce major industry shakeout and consolidation in the coming years.
 
Macro and Demographic Trends

It is widely believed that a middle class is rapidly emerging in China. China’s GDP has been growing at over 9% per year for the past 10 years and has created millions of new consumers. Management believes that these trends will translate into higher demand for pork products:
    
 
·
China’s middle class - citizens making at least 60,000 Yuan (US$8,785) - are expected to double by 2010 to 25% of the country’s population, fueling domestic consumption.
     
 
·
While overall income grew rapidly, urban per capita disposable income grew even faster at 9.8% from 2008 to 2009, compared to 8.5% for per capita rural income during the same period. Urban per capita consumption of meat is twice that of the national average.
     
 
·
Due to the increasing rural migration to urban cities, China expects to double its major cities by 2010 creating new waves of Chinese urban meat consumers. The number of Chinese cities with over 1 million people is projected to reach 125 by 2010 according to the Chinese Academy of Sciences, and cities with over 2 million people are projected to reach 300 by 2020.
     
 
·
Domestic demand for meat products in China is expected to grow to a projected 100 million metric tons in 2010 from an actual 72.4 million metric tons in 2004 according to Access Asia, an independent research firm. Total production value of meat products are expected to increase to a projected US$120 billion from an actual US$84 billion and per capita meat consumption is expected to increase from an actual 49 kg to a projected 75 kg during the same period. Pork represents the bulk of meat products consumed in China.
 
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With higher standards of living and more a demanding working lifestyle, urban Chinese consumers are purchasing more processed meat products and spending more on dining on meat products outside of the home. Our research indicates that:
 
 
·
Currently less than an estimated 10% of the meat consumed in China is processed. Meat consumption out of the home has surpassed in-home meat consumption in 11 Chinese provinces, especially in more economically developed regional markets such as Shanghai, Beijing, and Shenzhen, according to the National Bureau of Statistics.
 
 
·
Chinese consumers have become more conscious of food safety and quality, fueling demand for branded foods. This has become more evident after the occurrence of a series of disease outbreaks across Asia including SARS and the avian flu. With changing lifestyles and food quality awareness, Chinese consumers are seeking more name brands to ensure the quality in processed meat that they purchase.
     
 
·
The new health-conscious consumer group has become more educated and concerned with the freshness and nutritional value of various meat products. For example, LTMP (low temperature meat product) pork has become more popular recently as urban consumers become aware that LTMP has better nutritional value and fresher taste than the longer-shelf-life HTMP (high temperature meat product) pork products.
 
Processing of Meat Products in China
 
In the PRC, regulations relating to the processing of meat products are set forth in the PRC Law of Food Hygiene and the Administrative Measures for the Hygiene of Meat and Meat Products. A PRC food processing company is required to obtain a hygiene permit from the Hygiene Bureau of the relevant districts before it is permitted to apply to the Ministry of Industry and Commerce for a business license.
 
A food processing company may not purchase or use meat that has not been inspected and approved by the Animal Supervision Authority. Even if the meat has been so inspected, it must still satisfy other hygiene requirements. Each food processing company must have facilities to conduct regular laboratory testing of its products to ensure food safety requirements are met. For instance, sometimes traceable levels of contaminants and radioactive substances are found in meat products, and these must not exceed certain established national standards.
 
Food processing companies are required to possess hygienic cold storage facilities, and proper management of such cold storage facilities must be set out. All storage equipment and packing materials must also comply with hygienic standards. All meat products which are packed must be labeled, specifying requisite information such as name of the product, place of manufacture, manufacture date, lot number or code, final consumption date and ingredients. Any meat product to be exported shall be inspected by the Animal and Plant Quarantine Authority when passing through customs. Only meat products which have passed such inspections may be exported.
 
Business
 
We are principally engaged in the production, processing, sale and distribution of fresh and prepared meat products in China. Our products are classified as fresh and frozen pork, and prepared foods, which includes prepared pork, seafood and by-products.
 
33

 
Our production facilities are located in Dalian, a coastal city with a population of 3 million (6 million including the greater metropolitan area). Referred to as the “Boston of China” due to its Northeast proximity and port orientation, Dalian is the most affluent city in the Liaoning Province, with a population of 42 million. Dalian serves as a finance and export trade center of Northeast China, and is also the center of the “Buo Sea Economical Zone” (“BSEZ”). According to China’s National Bureau of Statistics, the BSEZ covers 12% of the territory and 20% of the population in China, and is the most important economic center in Northern China. The National Bureau of Statistics also projects that these two areas may generate a more rapid growth rate than the overall GDP growth of China in next 10 years. Our facilities include 5 production lines with the slaughtering capacity of 123,318 metric tons and prepared food capacity of 16,000 metric tons. Our prepared food facilities are the largest in Liaoning Province.
 
Our production lines are imported from international manufacturing automation leader Stork™ of the Netherlands, with the state-of-the-art technology and specialized for their in-process testing and quality controls. Our production facilities are certified under ISO9001 and HACCP. Our pork products are qualified “Green Food” by the National Green Food Development Center and qualified as one of 14 “National Safe Foods” by the National Slaughtering Authentication Center.
 
Our products are sold under the brand name of “Chuming™.” We target consumers who desire high quality pork products. We distribute our products through dealers and agents to more than 500 supermarkets, including Carrefour, Walmart, Metro, New-mart, Hymall and others. We also distribute our products to over 5,000 schools, hospitals, factory canteens and restaurants, and more than 900 “Chuming” branded showcase stores or specialty counters in wet markets. These showcase stores and specialty counters are operated by resellers of our products with whom we have arrangements to sell our product under the Chuming brand name (the principal difference between showcase stores and specialty counters being location within a supermarket for the former, and location in a wet market for the latter).
 
Our business activities are the slaughter, processing, packing and distribution of meat products for sale to clients throughout the PRC. We have a 250,000 square meter campus which houses an international standards-based meat processing plant located in the city of Dalian in Liaoning Province, PRC. We have a total of five production lines and an aggregate capacity to slaughter approximately 1.5 million pigs per year. We purchase hogs from more than 3,000 farms in Liaoning Province and nearby areas, in addition to having an exclusive contract with farms owned and operated by the Group to supply us with 750,000 live hogs in 2008, 800,000 in 2009, and 800,000 in 2010, at local market prices. The Group provides breeding pigs, animal feed, vaccination, veterinary services and technology support to our subcontractor pig farmers, resulting in more favorable relations with these small independent suppliers.
    
Principal Products
 
We produce, distribute and sell fresh meat and prepared food products under the brand name “Chuming™,” through our dealership distribution network, our own sales force and resellers in the PRC.
 
We produce two main types of Processed Meat Products - High Temperature Meat Products (HTMPs) and Low Temperature Meat Products (LTMPs).
 
34

 
High Temperature Meat Products. HTMPs are cooked at a temperature of approximately 121°C and at approximately 2.5 times atmospheric pressure. These meat products can be stored at room temperature and have a shelf life of approximately six months from the date of production. However, the permitted shelf life of these products is 120 days from the date of production, even though the actual shelf life of these products is six months. HTMPs are generally priced lower than LTMP and do not require refrigeration. Therefore, they are affordable and accessible to the average PRC consumer.

 Low Temperature Meat Products. LTMPs are cooked at lower temperatures ranging from 65 to 85°C, under 1 atmospheric pressure. These meat products have a shelf life of three months from the date of production if they are stored at a temperature of 0°C. In 2003, we introduced our LTMPs to the PRC market. The Group’s R&D studies have shown that LTMPs generally taste better than HTMPs because they are cooked at lower temperatures and thus are able to preserve the taste and nutrients found in the ingredients. The LTMPs generally cater to the taste of consumers in PRC cities who have higher purchasing power.
 
Currently, we have two main series of products for both HTMP and LTMP: the “Ham” series and the “Sausage” series. The Ham series has chunkier pieces of meat and thus has a meatier texture. It also has a corresponding higher percentage of meat content. The Sausage series has a lower percentage of meat content and has a smoother texture. The range of products we offer includes more than 300 varieties of hams and sausages.
 
The following is a summary of some of the types of Fresh and Processed Meat Products that we manufacture and how they are categorized:
 
Fresh Pork
 
Chinese people generally perceive that fresh meat retains a better flavor as compared with frozen meat. As such, the price of fresh pork meat is approximately 20% higher than frozen pork meat. The other producers of fresh pork meat in the PRC are generally farm-based suppliers, which supply the areas around the farms. The key difference between our fresh pork and that of farm-based suppliers is that our fresh pork is produced and packed in a highly controlled sanitized environment in our own facilities. Therefore, consumers have added assurance that our fresh pork meat is safe for consumption.
 
In order for the pork to remain fresh, at our facilities the pigs are slaughtered and then processed within 30 minutes. The meat is then cooled but not frozen at a temperature between 32° F (0° C) and 39.2° F (4° C) for about 20 hours. Following this cooling process, fresh pork is cut into various parts in a sterilized room with the constant temperature of 12° C. This reduces the risk of exposure to germs and bacterial contamination. Before delivery, the fresh pork is kept in our storage room at a controlled temperature of 0 to 4° C. The meat is stored in airtight sterilizing rooms filled with ozone, which acts as a sterilizing agent, killing remaining germs and bacteria in the meat.
 
With our own temperature-controlled vans and trucks, we deliver the fresh pork to our customers including dealers, supermarkets and our resellers’ stores. The entire process of cold production, cold storage and cold delivery is what we refer to as the “cold chain system.” This cold chain system ensures the freshness and quality of our product. Our fresh pork products have an average shelf life of 7 days from the date of production.
 
Frozen Pork
 
In the production of our frozen pork, the meat is frozen at -31° F (-35° C) to -40° F (-40° C) for 48 hours. It is then stored or transported at a constant temperature of between -0.4° F (-18° C) to -13° F (-25° C). Since frozen pork can be preserved for longer periods of time, our frozen meat products are ideal for distribution across longer distances to Northeast and North China as well as potentially to international markets such as Korea, Russia and Japan. These products have an average shelf life of 180 days from the date of production. We also sell our frozen pork to restaurants, supermarkets and fresh food markets.
 
35


Prepared Food Products
 
Our prepared food products include prepared pork, seafood and pig by-products, which accounted for 11.57% of our 2008 revenues.
 
Prepared Pork Products. Our prepared pork products are mainly LTMPs, which are cooked at lower temperatures ranging from 65° C to 85° C and under atmospheric pressure. These meat products generally have a shelf life of 30 days from the date of production if they are stored at a temperature ranging from 0° C to 4° C. For LTMPs, we currently have two series and more than 300 products. These foods are all made from the fresh pork that we produce. The following is a description of the types of prepared pork products we offer:
 
Ham
 
 
·
Chuming Cumin Ham
     
 
·
Cooked Ham

 
·
Roast Ham
     
 
·
Premium Ham

 
·
Sandwich Ham
     
 
·
Square Ham

 
·
Chunky Ham
     
 
·
Baby Ham

 
·
Salted Loin
     
 
·
Smoked Ham
 
Sausage
 
 
·
Diary Sausage
     
 
·
Garlic Sausage

 
·
Spicy Sausage
     
 
·
Chinese Sausage

 
·
Taiwan Sausage
     
 
·
Baby Sausage
 
36


Seafood Products.   Our prepared seafood products are made from fish, shrimp and other varieties of seafood. With our techniques of prepared food production, we prepare seafood products such as fish sausage and shellfish sausage. Seafood products accounted for approximately 5.8% of our revenue in 2009. Due to the abundance of seafood in Dalian, located on the Northern coast of China, as well as relatively high profit margins for these products, we plan to expand our seafood output in the future. The following is a description of the varieties of seafood products we offer:
 
Seafood sausage
 
 
·
Baked Fish Sausage
     
 
·
Barbequed Prawn Sausage

 
·
Crab Sausage
 
 
·
Scallop Sausage

 
·
Squid Sausage
 
Pig By-Products. In China, virtually all parts of the pig are valued for consumption and are used in local cuisine. Pig “by-products” that are not typically used or sold in other parts of the world are prepared and sold in the Chinese market. This includes pig innards, pig skin, pig tails, lard and pig heads. Pig liver, stomach, intestine, head and hoofs are commonly used in Chinese cuisine and are sold to a ready market.
 
We produce our products through two of the Chuming Operating Subsidiaries: (i) the Meat Company in Wangfangdian, and (ii) the Food Company in Dalian.
 
Our fresh and frozen pork is produced by our subsidiary Meat Company. The Meat Company’s facilities cover 150,000 square meters and utilize state-of-art slaughtering and cutting lines imported from Stork Co. of the Netherlands. The Meat Company has a slaughtering capacity of 250 pigs per hour, which is 1,500,000 pigs per year at full capacity. Our cutting line has a capacity of 30,132 metric tons per year. Our cold and freezing storage facilities can store up to 6,000 metric tons of fresh product. The fresh pork and frozen pork produced by the Meat Company are typically sold either in whole carcass form or in cuts.
 
The prepared foods are produced by our subsidiary Food Company, located in the Ganjingzi District of Dalian. The Food Company includes a 10,000 square meter processing facility. There are three prepared food production lines including one pork processing line with the capacity of 10,000 metric tons, one seafood sausage production line with the capacity of 4,500 metric tons and one deli by-product production line with the capacity of 1,500 metric tons. All of the Food Company’s production line equipment is imported from Germany and features state-of-the-art technology. Based on our own market research on our competitors, management believes that the Food Company is now the largest prepared food production plant in the Liaoning Province. 

37

 
Supply of Pigs
 
We do not rear pigs, but instead purchase them from our former parent company, the Group, and from other suppliers who aggregate supply from local pig farms. We purchase live pigs from the Group and third party suppliers on a cash-on-delivery basis.  While the Group’s breeding operations are well developed and large scale, most of the pig farming in the PRC is generally not well commercialized. Our third party suppliers aggregate supplies from hundreds of small pig farms, which are typically operated as independent family-owned farms. One advantage of decentralized supply is that we obtain competitive market pricing for our supply of pigs. Another advantage is that any outbreak of livestock disease is likely to be confined to a one or more of these farms and would not affect our entire supply. Potential disadvantages from a decentralized supply of pigs include variations in quality of stock, and potential variation in quantity and timing of the supply of hogs to our plant for processing. However, because all pig farmers who supply pigs to us are all located within the greater Dalian City metropolitan area (within a two hour radius by truck), the logistical issues have so far not interfered with our ability to secure a steady supply of hogs. Since we have around 6,000 local pig farmers who will supply hogs to us, we ordinarily are able to obtain a reasonably stable supply of hogs, even when some farms cannot meet our requests for any reason. Also, because our former parent company, the Group, acquires pigs directly from independent farmers then sell pigs to us in lots (under our Hog Procurement Agreement), to some extent we have minimized the potential disadvantages discussed above.
 
Our pig suppliers supply us with regular quantities of pigs based on the current prevailing market price of pigs on the day of delivery. We typically order a certain number of pigs per day from each of the farms that supply us pigs. For instance, if we expect to order 80,000 pigs per annum from a supplier, that supplier will supply somewhere between 240 and 260 pigs per day.
 
In order to ensure a consistent supply of fresh pork to our customers, we have made agreements with approximately 6,000 pig farms in the Dalian, to supplement our usual supply of live pigs. These pig farms agreed to supply us approximately 650,000 pigs in 2009. Our suppliers have an aggregate capacity to supply us with approximately 1,100 pigs per day.
 
We normally pay a higher than average price per pig, which is typically RMB 1.25 per kg above the average market price for live pigs, in order to acquire what we believe to be a higher quality supply of pigs. Although we pay a premium for a higher quality supply of pigs, our management believes that the benefits of this strategy outweigh the costs because of the goodwill that results from providing a consistently high-quality product to our customers.
 
We pay different “market prices” for live pigs depending on quality and weight.  Incoming live pigs are graded by our quality control personnel based on a number of criteria (including fat content, health of the animal, absence of injuries, the net weight), into several categories including “Grades 1- 4” and “below-grade,” with Grade 1 being the highest quality (and accordingly the highest price per kilogram).  We then determine prevailing market prices for live pigs for these various grades based on market data drawn from the local marketplace, which fluctuates daily.  Approximately 80% of the live pigs purchased by us are in the Grade 1 and Grade 2 categories.  For example, for the first quarter of 2009, approximately 76% of the live pigs purchased by us were Grade 1 and 2, with the remainder in Grade 3 and 4. Since we generally select higher-quality pigs (Grades 1 and 2) among all live pigs available for purchase in the marketplace, as a result we pay a higher than average price per kilogram for our overall supply of live pigs.
 
In 2007, 2008 and 2009, we paid a total of $110.4 million, $125.6 million and $144.1 million, respectively, for our total supply of live pigs.   We paid the Group an aggregate of $61.7 million and $72.7 million and $64.7 million for live pigs during the full years of 2007, 2008 and 2009, respectively, and the amounts paid were determined as described above.
 
Under our Long-Term Hog Procurement Agreement between the Group and the Meat Company, the Group agreed to supply no less than 800,000 live hogs in 2009, 2010 and 2011 and the price for the hogs is set at the fair market price at the time of delivery.
 
Due to a shortage in supply, live hog prices rose significantly in 2008. Retail pork prices are an important component of China’s Consumer Price Index (CPI), a key inflation indicator. In order to moderate increases in the CPI and maintain the living standard of its lower-income population, the Chinese government (as it pertains to the pork industry) has implemented a number of policies to encourage pork production.  The average pork price has declined somewhat from the first quarter of 2009, mainly because of perceptions arising from the appearance of swine flu in late April and early May.  In June 2009, the Chinese government purchased and placed in storage large quantities of pork products in order to adjust the pork price in an effort to cause it to rebound to a reasonable level.  As a result of this action, the prices of pork have been rising since July 2009, and have risen to a level higher than the prices seen during the first quarter of 2009.  The prices are continuing to trend higher. We processed approximately 1.2 million live pigs through December 31, 2009, the amount of which met our target for fiscal year 2009.
 
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We participate in a breeding program with local farmers - under this program, after a careful selection process, every participating breeder must have a pig farmer provide a guarantee of supply, who must be responsible for making up any differences between the agreed amount and actual number of pigs supplied to us. This program has been in existence since 1998. Management believes that since our breeding program has successfully increased farmer income and tax revenue in our region, our local government has welcomed these programs.
 
Among our suppliers, Zheng Baojiang, Zhang Zhiying, Wang Fuzhi, Ge Hongqi, and Chen Lianhe are the most successful pig farmers in our supply chain, and they supplied an aggregate of 15,603, 13,165, 12,056, 11,956 and 19,866 hogs respectively through each of the 12 months of 2009, contributing to 6.26% of our total supply.
 
In addition to the quality of our suppliers’ stock, and their health and safety controls, we have a quality control system of our own to ensure that pigs supplied to us are healthy and fit for human consumption. We require that pigs supplied to us be accompanied by required health certificates, and each must weigh at least between 90kg and 100kg. If the pigs meet the above criteria, we are then obligated to accept delivery of the pigs. (A pig that weighs between 90 and 100 kg, has more saleable meat per kilogram. If it is below this weight range, the ratio of meat to innards would be lower, resulting in less saleable meat per kilogram).
 
Customers and Distribution Methods
 
Customers
 
We have three primary types of customers for our products, which are (1) city and town households, (2) canteens and restaurants, and (3) food processing companies.
 
We have found that Chinese households prefer fresh pork to frozen pork. Consumers typically buy fresh pork in small quantities, in frequent visits to markets where it is sold. Households usually choose the supermarkets, the wet market, or Chuming™ branded showcase stores to buy the fresh pork based on convenience. This type of customer accounted for 89% of our revenues in 2009.
 
Canteens include the cafeterias of government agencies, schools, factories and hospitals. These customers, including restaurants, often purchase our pork from Chuming™ branded showcase stores or directly from agents or wholesalers of the Company. This customer segment accounted for 7% of our revenues in 2009.
 
In addition to the above two types of customers, we also provide branded food processing companies with fresh and frozen pork. However, this customer segment accounted for less than 4% of our revenue in 2009. Since our sourced pigs are of good breed and have strict quality control in the production process, these food processors regularly rely on our pork as an ingredient in their products. Our clients in this segment include Taiwan Dachan, a feed supplier and food processor in Taiwan. These food processing companies typically get access to our products from Chuming agents or wholesalers.
 
Our largest customer accounted for approximately 8.8%, 9% and 8.4% respectively of our total turnover for the years ended December 31, 2007, 2008 and 2009.  Our top five customers together accounted for approximately 45%, 37.5% and 39.3% of our total turnover for the years ended December 31, 2007, 2008 and 2009 respectively. None of our directors, their associates or any significant shareholder of the Company has any interest in any of our five largest customers.
Distribution Network
 
Our distribution network is organized and divided by geographic markets and sales regions, including: Dalian Metropolitan, Eastern Liaoning, Western Liaoning, Jilin, Heilongjiang and Hebei markets. In each market, we have a team led by a sales officer whose objective is to expand the Chuming sales network by developing potential dealers, agents and wholesalers, and to maintain the existing network by assisting our sellers. Our Sales Company works with dealers, agents and wholesalers, who then submit orders directly to us.
 
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Sales by Region for the Year Ended December 31, 2009
 
Dalian
   
62
%
Shenyang
   
22
%
East Liaoning
   
6
%
North Liaoning
   
4
%
West Liaoning
   
4
%
Others
   
2
%
 
Retail Strategy
 
To differentiate ourselves, we have a unique retail strategy to complement our wholesale operations. We sell our product to “showcase stores” which are owned and operated by independent operators. These specialty boutique-type stores must have the same design and physical layout and must follow our operating methodologies. These storefronts are highly visible with the Chuming™ brand name. We also set merchandising and pricing policies and all employees must undergo a mandatory training program. There are currently over 500 such boutique stores in Liaoning Province, providing high brand recognition and communicating a message of quality that will benefit all channels. These boutique stores target the new middle class that desire and can afford high quality goods and services. They provide particular convenience to a typical busy two-income, middle-class family which shops frequently after work. Most of these boutique shops are located in Dalian and the major cities of Liaoning Province. Each store has a minimum monthly sales requirement depending on the city and store.
 
Dealers, agents and wholesalers who we work with serve their own diverse distribution channels. Our affiliated dealers organize their sales to stores and supermarkets, such as Carrefour, Walmart, Hymall, New-mart and Metro. Our affiliated agents assist in identifying locations and opening Chuming™ branded showcase stores in their region, important to the expanding our revenues. Our affiliated wholesalers typically organize the sales to canteens and restaurants as well as food processing companies. In some regions, our affiliated agents will also directly contact local canteens and restaurants.
 
40

 
Chuming’s Distribution Network
 

 
We have our Chuming™ branded counters in large stores and supermarkets, which are the most important and highly visible locations to enhance our brand and image. Since large supermarkets such as Carrefour and Walmart have strict requirements to approve any suppliers, having Chuming™ counters in these megaretailers’ flagship stores reinforces the consumer confidence in our products. We have Chuming™ counters in more than 581 large supermarkets located in Northeast China.
  
Our most popular product, fresh pork, is sold primarily though our Chuming™ branded showcase stores. Chuming™ branded showcase stores are usually located in high-density, urban residential areas easily accessible by our customers. The Chuming™ branded showcase stores also save time compared to long lines sometimes found at large supermarkets. Chuming™ branded showcase stores are all equipped with refrigerators to keep the pork fresh. We have established more than 942 Chuming™ branded showcase stores as of December 31, 2009 now operating in Dalian and throughout the Liaoning Province. In the next few years, we aim to increase the number of our Chuming™ branded showcase stores to more than 1,000 outlets.
 
41

 
We provide operators of showcase stores and specialty counters with equipment (refrigerated showcases, signage, uniforms, heating equipment for processed food and other equipment), labels and packaging, technical assistance, and permission to sell our products under the Chuming brand name. These operators pay us an equipment deposit (to cover the cost of equipment), a trademark usage guarantee deposit, a uniform fee (for the cost of employee uniforms), a one-time start-up fee to cover the costs of certain materials, and an ongoing fee of approximately 0.5% of the total purchase amount of the products these operators purchase from us. Operators agree to sell our products exclusively, and may sell other products only with our consent. Operators are responsible for payment of their own taxes and government fees, leasing expenses, and other operating costs. If an operator is terminated, we will refund the equipment deposit upon return of the equipment, and the trademark deposit if the operator has complied with the trademark usage guidelines we provide to them. We generally reward high-volume operators with discounts and incentives on a case-by-case basis. We do not collect any material “franchise fees” from these resellers.
 
Delivery
 
In China, one of the main obstacles to expanding market share and developing national brands has been logistical management during processing. We address this issue by equipping our processing plant with modern technologically advanced, state-of-the art equipment and production lines. Our advanced logistical infrastructure includes the use of bar coding and electronic interchange to enhance the speed and accuracy of data flow. Over the years, we have built an extensive logistical system that includes 21 contracted refrigerated container trucks that allow us to better preserve the meat and to expand our market scope by delivering food to farther retail points. As a result, we have been able to make deliveries within a 500km radius of our Dalian processing plant. Furthermore, our modern information technology system adds additional competitive advantage as it provides us real time market and production data which in turn enables us to capitalize on the timely information regarding market pricing, inventory levels, and changes in demand.
 
After orders are gathered and processed at the Sales Company, our products are delivered utilizing our transportation fleet and through pick-up by certain accounts at our facilities. The quality of our fresh pork is highly dependent on the storage room and delivery vehicles once they leave the chill room. We currently operates 43 temperature-controlled vehicles, which we employ in our operations to help guarantee the freshness of pork at the point of delivery to customer locations in our primary market which is within a two-hour radius of Dalian.
 
Quality Control
 
We maintain all required licenses and certificates from the relevant central and local government authorities with regard to our pork production business. In 2005, we were awarded ISO 9001:2000 certification that covers our production, research and development and sales activities. ISO 9001 certification indicates that our abattoirs and pork production operations comply with international standards of quality assurance established by the International Standards Organization. All of our production lines have also passed the Hazard Analysis and Critical Control Point (HACCP) test, which is certified by Moody International Certification Ltd.
 
We currently have 82 Quality Control (QC) personnel who run and refine our quality assurance system. This system is divided into two sections: Meat Production Supervision and Processed Meat Supervision. The 64 employees who work in our quality assurance program consist of 22 quality control engineers, and 42 staff. All members of the QC team are trained technicians with qualifications and experience in animal husbandry, quarantines and veterinary medicine. The quality control laboratory meets and exceeds all standards set by the authorities and relevant agencies in the PRC.
 
In addition, on average 11 government inspectors work in our slaughtering and packaging plant every shift. They examine animals before slaughter, supervise sanitation, inspect carcasses and internal organs for diseases during the slaughtering and processing procedures, and then certify carcasses and packaged products as to consumer readiness.
 
As discussed in the above section regarding our principal products, the pork products produced from freshly slaughtered pigs at our facilities are chilled or frozen after slaughtering to prevent deterioration of the meat caused by bacteria or chemical changes. The chilled and frozen pork are maintained within the requisite temperature ranges, during subsequent handling, transportation and distribution to retain freshness and to prevent deterioration of the meat
 
42

 
Competition
 
We are currently one of the largest meat producers in the three northeast provinces of Jilin, Liaoning and Heilongjiang. According to management’s estimates, in Liaoning Province, we are the market leader for both fresh pork with 8.5% market share and for meat products with a 2.8% market share. Management estimates that in Dalian, we are the market leader for fresh pork with a 55% market share, and share the lead position for meat products with a 25% market share. As we expand geographically, we expect to encounter additional regional and local competitors. Our management believes that all food segments in China compete on the basis of price, product quality, brand identification and customer service, and that we are well positioned in all of these areas.
 
Major Domestic Competitors
 
Currently, our primary competition comes from the domestic players that operate in a very fragmented industry environment. Presently, there is no clearly dominant producer in the PRC pork industry. The three largest producers in China, Shuanghui, People’s Food and China Yurun, together capture less than 5% of the total market. Most of the companies in the industry tend to focus on different product and market segments. Shuanghui has the largest market share in the HTMP pork segment, while Yurun is the leader in the LTMP space. Both companies have done well in the top tier markets. People’s Food, on the one hand, tends to focus more of its distribution efforts on smaller cities, where mass distribution is more difficult, and typically does not sell through large retail channels. On the other hand, about 40% of China Yurun’s sales are through supermarket and hypermarket chains. In terms of geographical focus, we believe People’s Food has a strong presence in Northeastern China. China Yurun has announced plans to expand into the Northeast with plans for two new plants in Shenyang and Harbin.
 
New International Entrants
 
After China joined the WTO, many domestic industries were opened to international competition, including the meat-processing industry. Foreign companies have already entered China’s major cities, mainly though the major hypermarkets such as Carrefour. So far, domestic players have an advantage in the introduction of new products based on local tastes and distribution in below super-tier cities such as Beijing and Shanghai. Tyson Foods, Inc., U.S.A. has a joint venture with Shanghai Ocean Wealth Fish Products Corporation Limited. Hormel Foods Corporation, U.S.A., has set up representative offices in China since 1995 and currently operates processing factories in Shanghai and Beijing.
 
Dalian Competitors - Fresh Pork
 
In Dalian, our key fresh pork competitors are Bangchui Island with an 20% market share and Jiuxing (Nine Stars) with a 10% market share.
 
43


Name
 
Market
share
 
Chuming
   
50
%
Bangchui Island
   
20
%
Nine Stars
   
10
%
Taifu
   
8
%
Tianxin
   
6
%
Yurun
   
6
%
 
Dalian Competitors - Meat Products
 
In Dalian, our main meat products competitors are Chengxin with a 15% market share, Chunhe with a 12% market share, Jin Baiwei with a 18% market share, and Yurun with a 15% market share.

]
 
Name
 
Market
share
 
Chuming
   
25
%
Chengxin
   
15
%
Chunhe
   
12
%
Jin Baiwei
   
18
%
Yurun
   
15
%
Others
   
15
%
 
Advertising and Promotional Activities
 
Advertising and promotional expenses were $638,904, $2,629,853 and $3,611,666 for the years ended December 31, 2009, 2008 and 2007, respectively. Our advertising and marketing expenditures decreased considerably from $2,629,853 in 2008 to $638,904, partly attributable to outsourcing some of the marketing and promotion of our products to our independent sales agents, and in return the Company gave them bigger discounts and incentives on our products. The Company believes that advertisements can be handled more effectively at a regional and local level by the sales agents individually, and at the same time it is also more cost effective for the Company. In 2009, we allocated more of our resources to increase the advertising and promotional activities aimed at higher performing regions, retailers and supermarkets.
 
44

 
Advertisements are principally for Processed Meat Products and Fresh Pork and are targeted at consumers in the Northeast PRC. We advertise periodically in the local media to create and maintain public awareness of our products and branding. These activities include television commercials, radio, magazine and newspaper advertisements, and exhibitions. We increase the frequency of advertisements whenever new products are launched.
 
Intellectual Property Rights
 
Through our advertising efforts and the consistent quality of its products, our management believes that consumers in the PRC have come to associate our “Chuming™” brand name with quality meat products. Thus, our management believes that the goodwill in the “Chuming™” branding is a valuable asset to us. The “Chuming” trademark and rights to the “Huayu” trademark application in the PRC are owned by Dalian Chuming Industry Development Co., Ltd., a subsidiary of the Group.  We have been granted a perpetual fully paid up license to use both of these trademarks in connection with our business under two trademark agreements with Dalian Chuming Industry Development Co., Ltd.
 
We believe that the protection of our brand names is important to our marketing efforts and believe that we have taken appropriate steps to protect our brand. We have not discovered any counterfeiting or any infringements of our Chuming™ or Huayu brand names.

We require all resellers who we work with, including specialty counters and showcase store operators, to comply with our trademark usage policy, and require them to pay trademark usage guarantee deposits. We also employ approximately 29 engineers who randomly inspect the facilities of the over 942 operators we work with to ensure compliance with our policies and other guidelines. We will generally terminate our business relationship with operators found violating our policies.
 
Research and Development
 
We have two operations, a Meat Engineering Center and a Sea Products Center, focused on the development of new products to the market. In addition to meeting the taste demands of consumers, these groups focus on quality, nutrition and safety standards. These groups draw upon a 39 employee research and development staff, including three professors in the field of animal nutrition and biology, supporting the safe and rapid introduction to the market of new products, specifically in the areas of seafood and meat by-products. We currently have more than 149 products available to consumers, with the average rate of two new products ready for the market per month. We are also working on anti-freezing experiments to facilitate preservation of our meats so as to minimize or eliminate the use of chemical preservatives.
 
Government Approval and Regulation of Principal Products
 
The Chinese government is actively promulgating a plan for “safe meat” and is expected to raise the proportion of slaughtering automation to over seventy percent of all meat and actively enforce authorized slaughtering and quarantine. Government initiatives take the form of benefits ranging from special grants, subsidized financing, preferential tax policies, direct government funding and other types of subsidies aimed at encouraging the modernization of the meat industry. In addition, while it is possible that the Chinese central or provincial governments may enact more stringent regulations that raise standards for the meat processing industry, we believe that our company is currently a leader in meat processing safety standards, and would not be affected by such increased standards.

Compliance with Environmental Laws
 
We own two wastewater treatment plants on premises with a daily treating capacity of six hundred tons for each plant. These plants are designed to comply with the Integrated Wastewater Discharge Standard of the PRC and the Environmental Protection Regulation of Dalian City. To the knowledge of our management, we have not breached any environment protection regulations during any of the past three years. 
 
45

 
Employees
 
We currently have approximately 735 employees, the composition of which is as follows:
 
   
R&D and Engineering
   
Production
   
General and Administrative
   
Sales and Marketing
   
Quality Control
   
Total
 
Meat Company
    14       171       25       52       40       302  
Food Company
    25       163       13       28       14       243  
Sales Company
    0       0       12       178       0       190  
Total
    39       334       50       258       54       735  
 
We and our predecessor companies have experienced excellent employee retention, which we believe is a result of our consistently-applied management policies and proactive employee benefit program participation. The average tenure is four years for factory workers and twelve years for management staff. All employees are provided with health insurance, unemployment insurance and retirement benefits that are provided by the government. We make regular payments into these government-sponsored health insurance and retirement programs for each employee. Additionally, we provide free meals and accommodations to all employees on shift.
 
Certain of our employees are represented by a labor union which is governed by PRC Company and Labor Laws. There have been no adverse labor incidents or work stoppages in our history or our predecessor companies. Management believes that our relationship with our employees and the union are good.
 
Corporate Information
 
Our principal executive offices are located at No. 9, Xin Yi Street, Ganjingzi District, Dalian City, Liaoning province, PRC 116039. Our main telephone number is +86 411 867 166 96 and our fax number is +86 411 867 166 90.
 
Description of Property
 
Facilities
 
Our main facility and principal executive offices are located at No. 9, Xin Yi Street, Ganjingzi District, Dalian City, Liaoning Province, PRC 116039, which also serves as the headquarters for our food subsidiary and sales subsidiary. Our main facility is located on 95 acres in the industrial area of Dalian, where we have developed over 74,000 sq. meters of factory floor. In addition to our corporate offices, we also own and maintain housing for up to 760 employees, and health maintenance facilities. Our slaughtering subsidiary’s principal facility is located at No.2026, Zhuanshi Street, Wafangdian Town, Dalian City, Liaoning Province, PRC. We believe that these facilities will be sufficient to house our operations for at least the next 3 years, and we have the capacity to accommodate our projected long-term growth plans.
 
46

 
Land Lease on Main Facility and Other Company Offices
 
We have acquired the land use certificate for 89 acres of land in Dalian City, which entitles us to use and dispose of the land and the commercial or residential buildings located on the land. Our Food Company occupies this land.

We have also opened offices in eleven cities outside of Dalian. We have entered into leasing agreements for these office spaces for terms ranging from one and three years. These offices are mainly sales offices and they are generally very small in size. They are located in surrounding cities, mainly in Liaoning Province. In total, we paid approximately $58,000 rent in 2007 for these eleven offices.
        
Real Property Rights
 
We have rights to use and occupy two parcels of state-owned land, which are 106,466 square meters and 48,461 square meters in area, respectively, on which our operations are located. These land use rights are granted to us under two certificates dated March 3, 2003, granted by the Government of the Ganjingzi District of Dalian: (i) Gan Guo Yong [2003] No. 04010 for Site Number 4-17-03-09 (106,466 square meters), and (ii) Gan Guo Yong [2003] No. 04009 for Site Number 4-17-03-10 (48,461 square meters). These land use rights entitle us to use of the land for a period of fifty years (until March 20, 2053) for industrial purposes. Our Food Company occupies these two pieces of land.
 
We pledged our land use rights in the second parcel above (Gan Guo Yong [2003] No. 04009 for Site Number 4-17-03-10) to the Bank of China, Liaoning Province Branch, and the pledge has a term from December 14, 2006 to December 13, 2011. Our plant, warehouse and office building have all been completed, and we are in the process of filing the proper documentation with the local PRC government to bring these properties into operation.
 
47

 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

All statements contained in this prospectus, other than statements of historical facts, that address future activities, events or developments, are forward-looking statements, including, but not limited to, statements containing the words “believe,” “anticipate,” “expect” and words of similar import. These statements are based on certain assumptions and analyses made by us in light of our experience and our assessment of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. However, whether actual results will conform to the expectations and predictions of management is subject to a number of risks and uncertainties that may cause actual results to differ materially. Such risks are summarized on page 4, in the section entitled “Risk Factors” on page 8, and in our previous SEC filings.

Consequently, all of the forward-looking statements made in this prospectus are qualified by these cautionary statements and there can be no assurance that the actual results anticipated by management will be realized or, even if substantially realized, that they will have the expected consequences to or effects on our business operations.
 
USE OF PROCEEDS
 
We will not receive any proceeds from the sale of the shares by the selling shareholders. All proceeds from the sale of the shares offered by the selling shareholders under this prospectus will be for the account of the selling shareholders, as described below in the sections entitled “Selling shareholders” and “Plan of Distribution.” With the exception of any brokerage fees and commissions which are the respective obligations of the selling shareholders, we are responsible for the fees, costs and expenses of this offering which includes our legal and accounting fees, printing costs and filing and other miscellaneous fees and expenses.
 
48

 
PLAN OF DISTRIBUTION
 
The selling shareholders and any of their pledgees, donees, transferees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or quoted or in private transactions. These sales may be at fixed or negotiated prices. The selling shareholders may use any one or more of the following methods when selling shares:
 
 
·
ordinary brokerage transactions and transactions in which the broker-dealer solicits Investors;
 
  
·
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;
 
  
·
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
 
  
·
an exchange distribution in accordance with the rules of the applicable exchange;
 
  
·
privately negotiated transactions;
 
  
·
to cover short sales made after the date that this registration statement is declared effective by the Securities and Exchange Commission;
 
  
·
broker-dealers may agree with the selling shareholders to sell a specified number of such shares at a stipulated price per share;
 
  
·
a combination of any such methods of sale; and
 
  
·
any other method permitted pursuant to applicable law.
 
The selling shareholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.
 
Broker-dealers engaged by the selling shareholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling shareholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The selling shareholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.
 
The selling shareholders may from time to time pledge or grant a security interest in some or all of the shares owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell 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 of 1933 amending the list of selling shareholders to include the pledgee, transferee or other successors in interest as selling shareholders under this prospectus.
 
49

 
When we are notified in writing by a selling shareholder that any material arrangement has been entered into with a broker-dealer for the sale of common stock through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, a supplement to this prospectus will be filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing (i) the name of each such selling shareholder and of the participating broker-dealer(s), (ii) the number of shares involved, (iii) the price at which such the shares of common stock were sold, (iv) the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus, and (vi) other facts material to the transaction. In addition, when we are notified in writing by a selling shareholder that a donee or pledgee intends to sell more than 500 shares of common stock, a supplement to this prospectus will be filed if then required in accordance with applicable securities law.
 
The selling shareholders 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.
 
The selling shareholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Discounts, concessions, commissions and similar selling expenses, if any, that can be attributed to the sale of securities will be paid by the selling shareholder and/or the purchasers. Each selling shareholder has represented and warranted to us that it acquired the securities subject to this prospectus and the registration statement of which it forms a part, in the ordinary course of such selling shareholder’s business and, at the time of its purchase of such securities such selling shareholder had no agreements or understandings, directly or indirectly, with any person to distribute any such securities.
 
We have advised each selling shareholder that it may not use shares covered under this prospectus and the registration statement of which it forms a part, to cover short sales of common stock made prior to the date on which the registration statement shall have been declared effective by the Securities and Exchange Commission. If a selling shareholder uses this prospectus for any sale of the common stock, it will be subject to the prospectus delivery requirements of the Securities Act. The selling shareholders will be responsible to comply with the applicable provisions of the Securities Act and Exchange Act, and the rules and regulations thereunder promulgated, including, without limitation, Regulation M, as applicable to such selling shareholders in connection with resales of their respective shares under the related registration statement.
 
We are required to pay all fees and expenses incident to the registration of the shares, but we will not receive any proceeds from the sale of the common stock. We have agreed to indemnify the selling shareholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
 
SELLING SHAREHOLDERS

We are registering this offering under the terms of securities purchase 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. We are registering these securities in order to permit the selling shareholders who purchased them from us to dispose of the shares of common stock, or interests therein, from time to time. The selling shareholders may sell all, some, or none of their shares in this offering. See “Plan of Distribution.”
 
50

 
The table below lists the selling shareholders and other information regarding the beneficial ownership of the shares of common stock by each of the selling shareholders. The second column lists the number of shares of common stock beneficially owned by each selling shareholder as of December 30, 2009. The third column lists the shares of common stock covered by this prospectus that may be disposed of by each of the selling shareholders. The fourth column lists the number of shares that will be beneficially owned by the selling shareholders assuming all of the shares covered by this prospectus are sold. As of April 2, 2010, we have 21,136,392 shares of common stock issued and outstanding.

The selling shareholders 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 shareholders 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.

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 shareholder has had any material relationship with us or our predecessors or affiliates during the last three years. Except as indicated below, no selling shareholder is the beneficial owner of any additional shares of common stock or other equity securities issued by us or any securities convertible into, or exercisable or exchangeable for, our equity securities. Except as indicated below, no selling shareholder is a registered broker-dealer or an affiliate of a broker-dealer.
 
Selling Shareholder Table
 
Name
 
Shares Owned
 
Shares Offered
 
Shares Held
After Offering
 
% Ownership
After Offering
 
Pinnacle China Fund, L.P.
4965 Preston Park Blvd, Suite 240
Plano, TX 75093 (1)  
 
 
1,022,727
 
 
1,022,727
 
 
0
 
 
0
%
The Pinnacle Fund, L.P.
4965 Preston Park Blvd, Suite 240
Plano, TX 75093 (1)  
 
 
1,022,727
 
 
1,022,727
 
 
0
 
 
0
%
Westpark Capital, L.P.
4965 Preston Park Blvd, Suite 240
Plano, TX 75093 (2)  
 
 
409,091
 
 
409,091
 
 
0
 
 
0
%
Atlas Allocation Fund, L.P.
100 Crescent Court #880,
Dallas, TX 75201
c/o Atlas Capital Management (3)  
 
 
409,091
 
 
409,091
 
 
0
 
 
0
%
Southwell Partners, L.P.
1901 North Akerd Street
Dallas, TX 75201 (4)  
 
 
409,091
 
 
409,091
 
 
0
 
 
0
%
Centaur Value Fund
1460 Main St., Suite 234
Southlake, TX 76092 (5)  
 
 
62,500
 
 
62,500
 
 
0
 
 
0
%
 
51

 
Sandor Capital Master Fund, L.P.
2828 Routh Street, Suite 500
Dallas, TX 75201 (6)  
 
 
113,636
 
 
113,636
 
 
0
 
 
0
%
Precept Capital Master Fund, G.P.
200 Crescent Court, Suite 1450
Dallas, TX 75201 (7)  
 
 
113,636
 
 
113,636
 
 
0
 
 
0
%
Roth Capital Partners, LLC
24 Corporate Plaza
Newport Beach, CA 92660 (8)  
 
 
90,910
 
 
90,910
 
 
0
 
 
0
%
Aaron M. Gurewitz
Trustee of AMG Trust
30 Twilight Bluff
Newport Coast, CA 92657 (9)  
 
 
5,681
 
 
5,681
 
 
0
 
 
0
%
Gordon Roth
189 Monarch Bay
Dana Point, CA 92629  
 
 
5,681
 
 
5,681
 
 
0
 
 
0
%
Glacier Partners, L.P.
812 Anacapa St, Suite B
Santa Barbara, CA 93101 (10)  
 
 
90,909
 
 
90,909
 
 
0
 
 
0
%
Matthew Hayden
7582 Windermere Ct.
Lake Worth, FL 33467  
 
 
34,091
 
 
34,091
 
 
0
 
 
0
%
Shine Gold Holdings Limited
Palm Grove House, P.O. Box 438
Road Town, Tortola,
British Virgin Islands (11)
 
 
10,690,668
 
 
1,931,818
 
 
8,758,850
 
 
41.4
%
Halter Financial Investments, LP
12890 Hill Top Road
Argyle, TX 76226 (12)
   
347,827
   
347,827
   
0
   
0
%
Jenson Services, Inc.
4685 S. Highland Drive, Suite 202
Salt Lake City, UT 84117 (13)
   
65,389
   
65,389
   
0
   
0
%
SCG Private Holdings, LLC
20400 Stevens Creek Blvd., Ste 840
Cupertino, CA 95014 (14)
    62,500     62,500     0     0 %
TOTAL
 
 
14,944,791
 
 
6,197,305
 
 
8,758,850
 
 
41.4
%
 
 
(1)
Barry Kitt has dispositive and voting power over the shares and may be deemed to be the beneficial owner of the shares of common stock beneficially owned by each of Pinnacle China Fund, L.P. and The Pinnacle Fund, L.P.  Mr. Kitt disclaims beneficial ownership of the shares to the extent of his direct or indirect pecuniary interest.
     
  
(2)
Mr. Patrick J. Brosnahan has voting and dispositive control over securities held by Westpark Capital, L.P.
 
  
(3)
Mr. Robert H. Alpert has voting and dispositive control over securities held by Atlas Allocation Fund, L.P.
     
  
(4)
Mr. Wilson S. Jaeggli has voting and dispositive control over securities held by Southwell Partners, L.P.
 
  
(5)
Mr. Zeke Aston has voting and dispositive control over securities held by Centaur Value Fund.
     
  
(6)
Mr. John S. Lemak has voting and dispositive control over securities held by Sandor Capital Master Fund, L.P.
     
  
(7)
Mr. D. Blair Baker has voting and dispositive control over securities held by Precept Capital Master Fund, G.P.
     
  
(8)
Mr. Gordon Roth has voting and dispositive control over securities held by Roth Capital Partners, LLC.
     
  
(9)
Mr. Aaron M. Gurewitz has voting and dispositive control over securities held by the Aaron M. Gurewitz, Trustee of AMG Trust.
 
52

 
 
(10)
Mr. Peter Castellanos has voting and dispositive control over securities held by Glacier Partners, L.P.
     
  
(11)
Shine Gold Holdings Limited is a company organized under the laws of the British Virgin Islands. The registered address for Shine Gold Holdings is Palm Grove House, P.O. Box 438, Road Town, Tortola, British Virgin Islands. Mr. Shi Huashan and certain of his relatives (the “Shi Family”) have entered into a trust agreements with a non-PRC individual, under which the non-PRC individual holds the shares of Shine Gold Holdings as a trustee for the benefit of Mr. Shi and his family. The natural persons with voting power and investment power on behalf of Shine Gold Holdings is Chong Shun. As beneficiaries of the trust arrangement, members of the Shi family have only economic rights with respect to the shares held by Shine Gold Holdings. Mr. Shi Huashan and the Shi family hereby disclaim beneficial ownership except to the extent of their pecuniary interest in the Energroup shares held by Shine Gold Holdings.
 
 
(12)
Mr. Timothy Halter has voting and dispositive control over securities held by Halter Financial Investments, LP.
     
 
(13)
Mr. Travis Jenson has voting and dispositive control over securities held by Jenson Services, Inc.
     
  (14)  Dr. David Burny has voting and dispositive control over securities held by SCG Private Holdings, LLC.  
 
53

 
SELECTED CONSOLIDATED FINANCIAL DATA

 
   
(US dollars in thousands)
 
   
Twelve Months Ended 
December 31,
 
   
2009
(audited)
 
2008
(audited)
 
2007
(audited)
 
2006
(audited)
 
2005
(audited)
 
Consolidated Statements of Operations Data:
                           
                             
Sales  
  $
213,545
  $
176,360
  $
124,696
  $
70,396
  $
54,119
 
Cost of Sales  
   
183,391
   
149,794
   
104,379
   
57,794
   
45,284
 
Gross Profit  
   
30,154
   
26,566
   
20,317
   
12,601
   
8,835
 
Operating Expenses  
   
4,660
   
7,823
   
6,246
   
2,891
   
1,647
 
Income from Operations  
   
25,494
   
18,743
   
14,071
   
9,709
   
7,188
 
Other Income (Expense), net  
   
(17,349)
   
(11,385
)
 
(1,476
)
 
(1,583)
   
(1,008)
 
Income Before Taxes  
   
8,144
   
7,357
   
12,620
   
8,126
   
6,180
 
(Income Taxes Expenses)/Deferred Tax Benefit
   
(2,090)
   
(520)
   
968
   
1.6
   
191
 
Net Income  
   
6,054
   
6,837
   
11,652
   
8,128
   
5,988
 
Foreign Currency Translation  
   
1,776
   
528
   
2,064
   
611
   
286
 
Comprehensive Income  
   
7,831
   
7,366
   
13,716
   
8,739
   
6,274
 
Basic Net Income Per Share (in US$)  
   
0.35
   
0.40
   
0.67
   
0.47
   
0.35
 
Diluted Net Income Per Share (in US$)  
   
0.29
   
0.32
   
0.67
   
0.47
   
0.35
 
Basic Weighted Average Number of Shares Outstanding  
   
17,272,756
   
17,272,756
   
13,409,120
   
13,409,120
   
13,409,120
 
Diluted Weighted Average Number of Shares Outstanding
   
21,136,392
   
21,182,756
   
17,272,756
   
17,272,756
   
17,272,756
 

 
(US dollars in thousands)
 
     
Twelve Months Ended
December 31,
 
     
2009
(audited)
 
2008
(audited)
 
2007
(audited)
 
2006
(audited)
 
2005
(audited)
 
Balance Sheet Data:   
                   
Total Assets      
 
$
133,482
   
$
90,683
   
$
66,620
   
$
56,846
     
50,993
 
Current Liabilities      
   
42,259
     
23,758
     
17,682
     
16,764
     
18,979
 
Long Term Liabilities      
   
-
     
-
     
-
     
17,909
     
18,580
 
Stockholders Equity      
   
91,224
     
66,926
     
48,938
     
22,174
     
13,434
 
   
54

 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of the results of operations and financial condition of the Company for the fiscal years ended December 31, 2008 and 2009  should be read in conjunction with the Selected Consolidated Financial Data, the consolidated financial statements, and the notes to those financial statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business sections in this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. 
 
OVERVIEW

Headquartered in the City of Dalian, Liaoning Province of the People’s Republic of China (the “PRC” or “China”), we are a meat processing company primarily involved in the slaughtering, processing, packaging and distribution of pork and pork products. We also process and sell seafood, such as minced fillet products, which accounted for a small portion of our revenue (approximately 7.86%) in the third quarter of 2009.

We are the first pork producer in China to receive “Green Food” certification from China’s Ministry of Agriculture. Green Food is an innovative certification program unique to China that is awarded to food processors who produce using environmentally sustainable methods and meet certain high technical standards of quality control, safety, and product quality, and generate low levels of pollution. The Green Food certification is based on standards defined by the Codex Alimentarius Commission (“CAC”), a joint body of the United Nations Food and Agriculture Organization and the World Health Organization. We also received ISO 9001:2000 certification that covers our production, research and development and sales activities.

Currently we have a wholesale and retail distribution network and sell either directly or indirectly across northeast China, including supermarkets and hypermarkets.

As of December 31, 2009, we had 735 employees, of whom 388 were operating personnel, 258 were sales personnel, 39 were research and development personnel and 50 were administrative personnel.
 
55

 
Dalian Precious Sheen Investments Consulting Co., Ltd., or Chuming WFOE, is our holding company established in China for our three PRC operating subsidiaries, collectively referred to elsewhere in this report as the “Chuming Operating Subsidiaries”:

 
1.
Dalian Chuming Slaughter and Packaging Pork Company Ltd. ( “Meat Company”), whose primary business activity is acquiring, slaughtering and packaging of pork;
 
2.
Dalian Chuming Processed Foods Company Ltd. ( “Food Company”), whose primary business activity is the processing of raw and cooked meat products; and
 
3.
Dalian Chuming Sales Company Ltd. (“Sales Company”), which is responsible for our sales, marketing and distribution operations.
 
 The Chuming Operating Subsidiaries are spin-off constituents of a former parent company, Dalian Chuming Group Co., Ltd., or the “Group.” Our primary business activities are the production and packing of fresh pork and production of processed meat products for distribution and sale to clients throughout the PRC.  Chuming WFOE was incorporated in China as a wholly foreign owned enterprise in December 2007. Chuming WFOE is 100% owned by Precious Sheen Investments Limited (“PSI”), a holding company established in the British Virgin Islands in May 2007.

Pork is widely regarded as China’s most important source of meat and is consumed at a much higher rate than other categories of meat. We believe that increasing levels of consumption of pork products in China is linked to the rapid development of the Chinese economy, urbanization and strong income growth.

Aside from increasing aggregate consumption, based on management’s research, pork consumption patterns in recent years have shown two main characteristics. The first is that per capita pork is consumed at higher rates in the urban areas of China as opposed to rural areas, although the rate of growth in these urban consumption rates is relatively slight. The second is that consumers’ consumption preferences appear to have shifted from frozen meat to fresh meat, and from fat meat to lean meat, with a tendency toward high quality cuts. Management believes these trends continue to be very favorable to our business which is based on mechanized meat processing and sales to urban consumers.
 
56


Our total sales volume was 31,327 metric tons in the fourth quarter of 2009, 82,585 metric tons in the third quarter of 2009, 27,697 metric tons in the second quarter of 2009, 18,512 metric tons in the first quarter of 2009, 18,007 metric tons in the fourth quarter of 2008.

Due to a shortage in supply, live hog prices rose significantly in 2008. Retail pork prices are an important component of China’s Consumer Price Index (CPI), a key inflation indicator. In order to moderate increases in the CPI and maintain the living standard of its lower-income population, the Chinese government (as it pertains to the pork industry) has implemented a number of policies to encourage pork production.  The average pork price has declined somewhat from the first quarter of 2009, mainly because of perceptions arising from the appearance of swine flu in late April and early May.  In June 2009, the Chinese government purchased and placed in storage large quantities of pork products in order to adjust the pork price in an effort to cause it to rebound to a reasonable level.  As a result of this action, the prices of pork have been rising since July 2009, and have risen to a level higher than the prices seen during the first quarter of 2009.  The prices are continuing to trend higher.
 
We expect that the combined factors of stricter hygiene regulations, increasing competition from well-financed players, and struggling meat suppliers, will induce industry consolidation in the coming years. We believe we are in a strong position to continue to take advantage of the Chinese government’s support for leading pork producers, these market consolidation trends, and the emerging hog supply situation. Management believes that this is a long-term trend.

Given the current competitive market conditions, we constantly strive to impose strict quality control in our products and utilize state-of-art slaughtering and cutting lines (which are imported from Stork Co. of the Netherlands), to ensure our product quality, increase awareness of our brand and develop customer loyalty. Our research suggests that consumers in China are increasingly conscious of food safety and nutrition, and they are using their purchasing power to demand safer and higher quality food products for their families.
 
57


We place a very high priority on food safety and integrity. For the feeds which are used for our hogs, we control and monitor our feed sources by acquiring feeds only from qualified suppliers who are licensed in the nation or the province, and then carry out comprehensive tests to ensure quality. All of our production lines have also passed the Hazard Analysis and Critical Control Point (HACCP) test, which is certified by Moody International Certification Ltd. Management anticipates that companies such as ours, with quality meat processing and modern logistics systems, will benefit as they capture market share and build consumer brand loyalty.
 
Management believes that we need to broaden our geographic sales network and diversify our customer base. Our distribution network has been expanded to all three northeastern provinces where we have established our branches in the cities of Harbin and Daqing, Heilongjiang Province, and the City of Changchun, Jilin Province.  A broader customer base can not only mitigate our reliance on certain big customers, but also bring us more opportunities. We believe a broader market for our products can increase demand for our products, reduce our vulnerability to market changes, and provide additional areas of growth in the future.

Our top five customers accounted for 39.3% for our total sales for the fiscal year 2009. We plan to position our business to diversify our customer base, which is expected to lower this percentage gradually in the future.

Management presently anticipates continued growth in volume of sales.  Nevertheless, our ability to meet increased customer demand and maintain profitability will however continue to depend on factors such as our production capacity, availability of working capital, input costs, as well as the other factors described throughout this report..
 
  CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our management’s discussion and analysis of our financial condition and results of operations are based on our combined financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
58


While our significant accounting policies are more fully described in Note 2 to our combined financial statements included elsewhere in this prospectus, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this management discussion and analysis:

Method of Accounting

We maintain our general ledger and journals with the accrual method accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies adopted by us conform to generally accepted accounting principles in the United States of America and have been consistently applied in the presentation of financial statements, which are compiled on the accrual basis of accounting.
 
Principles of Consolidation

The consolidated financial statements, which include the Company and its subsidiaries, are compiled in accordance with generally accepted accounting principles in the United States of America. All significant inter-company accounts and transactions have been eliminated. The consolidated financial statements include 100% of assets, liabilities, and net income or loss of those wholly-owned subsidiaries.
 
Our founders have directly or indirectly owned the three operating subsidiaries since their inception. We also own two intermediary holding companies. As of September 30, 2009, the detailed identities of the consolidating subsidiaries are as follows:

Name of Company
  
Place of
Incorporation
  
Attributable
Equity
Interest
  
Registered
Capital
             
Precious Sheen Investments Limited
 
BVI
 
100%
 
USD 10,000
             
Dalian Chuming Precious Sheen Investment Consulting Co., Ltd.
 
PRC
 
100%
 
RMB 91,009,955
             
Dalian Chuming Slaughtering & Pork Packaging Co. Ltd.
 
PRC
 
100%
 
RMB 10,000,000
             
Dalian Chuming Processed Foods Co. Ltd.
 
PRC
 
100%
 
RMB 5,000,000
             
Dalian Chuming Sales Co. Ltd.
 
PRC
 
100%
 
RMB 5,000,000
 
59

 
The consolidation of these operating subsidiaries into a newly formed holding company i.e. “the Company” is permitted by United States GAAP: ARB51 paragraph 22 and 23.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management makes these estimates using the best information available at the time the estimates are made; however, actual results could differ materially from these estimates.

Accounts Receivable

We extend unsecured, non-interest bearing credit to our customers; accordingly, we carry an allowance for doubtful accounts, which is an estimate, made by management. Management makes its estimate based on prior experience rates and assessment of specific outstanding customer balances.  Management may extend credit to new customers who have met the criteria of our revised credit policy.

Inventory Carrying Value

Inventory, consisting of raw materials in the form of livestock, work in progress, and finished products, is stated at the lower of cost or market value. Finished products are comprised of direct materials, direct labor and an appropriate proportion of overhead. Periodic evaluation is made by management to identify if inventory needs to be written down because of damage, or spoilage. Cost is computed using the weighted average method.
 
60

 
Property, Plant, and Equipment