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EX-32.2 - ENERGROUP HOLDINGS CORPv184081_ex32-2.htm
EX-31.1 - ENERGROUP HOLDINGS CORPv184081_ex31-1.htm
EX-32.1 - ENERGROUP HOLDINGS CORPv184081_ex32-1.htm
EX-31.2 - ENERGROUP HOLDINGS CORPv184081_ex31-2.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 


FORM 10-K/A
(Amendment No. 1)
 
(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2009

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______ to ______

Commission File Number 0-28806

ENERGROUP HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)

Nevada
 
87-0420774
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
     
No. 9, Xin Yi Street, Ganjingzi District
 
+86 411 867 166 96
Dalian City, Liaoning Province, PRC 116039
 
(Registrant’s telephone number, including area code)
(Address of principal executive offices, including zip code)
   
 
 Securities registered pursuant to Section 12(b) of the Act:
 
 None
 Securities registered pursuant to Section 12(g) of the Act:
 
 Common Stock, par value $0.001 per share
   
  (Title of Class)
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No x

Indicate by check mark whether the registrant is required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes x No o

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o


 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “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
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes oNo x

As of March 15, 2010, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $29.01 million based on a closing price of $4.75 per share of common stock as reported on the Over-the Counter Bulletin Board on such date.  On December 31, 2009, we had 21,136,392 shares of our common stock issued and outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE: None.
 
EXPLANATORY NOTE

This Annual Report on Form 10-K/A is being filed as Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2009, which was originally filed with the Securities and Exchange Commission on March 31, 2010. We are amending Item 1 Business of Part I, Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 8 Financial Statements and Supplementary Data and Item 9A Controls and Procedures of Part II, and Item 13 Certain Relationships and Related Transactions and Director Independence of Part III.

Except as specifically referenced herein, this Amendment No. 1 to Annual Report on Form 10-K/A does not reflect any event occurring subsequent to March 31, 2010, the filing date of the original report.
 
2

 
ENERGROUP HOLDINGS CORPORATION
 
FORM 10-K/A
For the Year Ended December 31, 2009

TABLE OF CONTENTS

       
Page
   
PART I
   
Item 1.
 
Business
 
4
         
Item 1A.
 
Risk Factors
 
22
         
Item 1B.
 
Unresolved Staff Comments
 
39
         
Item 2.
 
Properties
 
39
         
Item 3.
 
Legal Proceedings
 
40
         
Item 4.
 
Submission of Matters to a Vote of Security Holders
 
40
         
   
PART II
   
         
Item 5.
 
Market for Registrant’s Common Equity and Related Stockholder Matters
 
40
         
Item 6.
 
Selected Financial Data
 
41
         
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
42
         
Item 7A.
 
Quantitative and Qualitative Disclosures about Market Risk
 
53
         
Item 8.
 
Financial Statements and Supplementary Data
 
55
         
Item 9.
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
56
         
Item 9A.
 
Controls and Procedures
 
56
         
Item 9B.   Other Information   59
         
   
PART III
   
         
Item 10.
 
Directors, Executive Officers and Corporate Governance
 
59
         
Item 11.
 
Executive Compensation
 
61
         
Item 12.
 
SeSecurity Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
65
         
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence
 
67
         
Item 14.
 
Principal Accounting Fees and Services
 
69
         
   
PART IV
   
         
Item15.
 
Exhibits, Financial Statement Schedules
 
69
         
   
Signatures
 
73
 
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PART I

Item 1. BUSINESS

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 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 24 of this report.
 
 
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;
 
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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.

Company Background and History
 
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. The business and operations of the Chuming Operating Subsidiaries now comprise the principal business and operations of our 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.
 
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”
 
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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.

 Operating Business Overview

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 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.
 
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 increased by 21.08% from 2008 to 2009, and 41.43% from 2007 to 2008, and our net income has increased by 29% from 2008 to 2009, and 49.83% from 2007 to 2008. 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.
 
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.
 
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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.
 
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.
 
Pork is China’s most important source of meat and is consumed at a much higher rate than other categories of meat.
 
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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. 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.  

 
·
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.
 
8


 
·
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.  
 
 
·
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.
     
 
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·
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.
  
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.
 
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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.
 
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).
 
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 live hogs in 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).
 
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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
 
The public generally perceives 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.
 
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Prepared Food Products
 
Our prepared food products include prepared pork, seafood and pig by-products, which accounted for 15.59% of our 2009 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
 
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 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
 
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·
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. 

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.
 
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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. 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.
 
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.  Due to a shortage in supply, live hog prices rose significantly in 2008.  However, during the first half of 2009, the average pork price declined as compared to the average price during the same periods in December 2008.  The decline in pork prices was due to a decline in demand which was the result of wide public perception that the swine flu epidemic in late April and early May affected the health and quality of pork produced during such time.  In  June 2009, in response to the decline in pork prices and demand, the Chinese government purchased and placed into  storage large quantities of pork products.  This was done to help reduce public fear that the pork supplies were contaminated due to the swine flu epidemic and as an attempt to cause  the pork price to rebound to a reasonable level.  This action by the PRC government helped to regain consumer confidence to increase the purchase of pork products, and as the demand began to rise, the prices of pork began to rise again in July 2009, and by the end of the year ultimately rose to a level higher than the prices seen during the first half of 2009.  The average price of pork for fiscal year 2009 was RMB 11.62 and for fiscal year 2008 was RMB 14.63, which was a 20.6% decline. The prices are now continuing to trend higher.
 
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.
 
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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 9% and 8.4% respectively of our total turnover for the years ended December 31, 2008 and 2009.  Our top five customers together accounted for approximately 37.5% and 39.3% of our total turnover for the years ended December 31, 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.
 
Sales by Region for the Year Ended December 31, 2008
 
Dalian
   
62
%
Shenyang
   
22
%
East Liaoning
   
6
%
North Liaoning
   
4
%
West Liaoning
   
4
%
Others
   
2
%
 
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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.

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Chuming’s Distribution Network
 
aurora logo

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.
 
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.
 
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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 operate 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.
 
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Competition
 
We are currently one of the largest meat producers in the three northeast provinces of Jilin, Liaoning and Heilongjiang. 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.
 
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Advertising and Promotional Activities
 
Advertising and promotional expenses were $638,904 and $2,629,853 for the years ended December 31, 2009 and 2008, respectively. Our advertising and marketing expenditures decreased considerably from $2,629,853 in 2008 to $638,904, which was partly attributable to outsourcing some of the marketing and promotion of our products to our independent sales agents, and in return giving 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.
 
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
 
Due to our advertising efforts and the consistent quality of our 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.
 
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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. 
 
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.
 
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.
 
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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.
 
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.
 
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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.

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. 
 
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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.

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.
 
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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.
 
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.
 
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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.

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.
 
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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.
 
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.
 
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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.
 
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.
 
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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.
 
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.
 
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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.
 
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.
 
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.
 
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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.
 
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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.
 
34

 
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.

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.
 
35

 
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.    
 
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.
 
36


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.
 
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.
 
37


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.
 
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;
     
 
38

 
 
·
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.
 
Item 1B. UNRESOLVED STAFF COMMENTS
 
On February 11, 2008, we filed a registration statement on Form S-1 in order to register shares of our common stock for resale by selling shareholders. On March 7, 2008, we received a letter from the staff of the Securities and Exchange Commission (“SEC”) with comments on our initial Form S-1 filing. On April 29, 2008, we filed Amendment No. 1 to our Form S-1 to respond to the staff’s comments.   On May 13, 2008, we received an additional comment letter from the SEC.  On May 27, 2008, we filed Amendment No. 2 to our Form S-1 in response to these comments.  On June 9, 2008, we received an additional comment letter from the SEC.  On December 31, 2009, we filed Amendment No. 3 to our Form S-1 in response to these comments.  On February 12, 2010, we received an additional comment letter from the SEC.  On February 12, 2010, we filed Amendment No. 4 to our Form S-1 in response to these comments.  On March 4, 2010, we received an additional comment letter from the SEC.  As of the date of this report, we have not filed an amendment to the S-1 registration statement in response to the SEC’s March 4, 2010 comments.
 
Item 2. PROPERTIES

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.
 
39

 
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 $84,000 and $69,000 in rent in 2009 and 2008 for these eleven offices, respectively.
 
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.
 
Item 3. LEGAL PROCEEDINGS

We are not aware of any material existing or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our current directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to us.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.
 
PART II

Item 5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Price of Common Equity

Our common stock is currently quoted on the OTC Bulletin Board under the symbol “ENHD.” As of December 31, 2009, there were approximately 176 shareholders of record of our common stock. The number of registered shareholders excludes any estimate by us of the number of beneficial owners of common shares held in street name. The following table sets forth the high and low bid information for the common stock for each quarter within the last three fiscal years, as reported by the OTC Bulletin Board. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
 
40

 
2009
   
Low 
     
High 
 
Quarter ended December 31, 2009
  $ 0.40     $ 1.05  
Quarter ended September 30, 2009
  $ 0.51     $ 2.15  
Quarter ended June 30, 2009
  $ 2.00     $ 3.05  
Quarter ended March 31, 2009
  $ 2.00     $ 3.00  
                 
 
2008
           
Quarter ended December 31, 2008
 
$
0.25
   
$
259.50
 
Quarter ended September 30, 2008
 
$
0.25
   
$
5.00
 
Quarter ended June 30, 2008
 
$
5.00
   
$
5.00
 
Quarter ended March 31, 2008
 
$
5.00
   
$
241.50
 
                 
2007
               
Quarter ended December 31, 2007
 
$
5.00
   
$
5.00
 
Quarter ended September 30, 2007
 
$
4.65
   
$
4.65
 
Quarter ended June 30, 2007
 
$
4.65
   
$
4.65
 
Quarter ended March 31, 2007
 
$
4.65
   
$
4.65
 
 
On March 15, 2010, the closing sale price of our common stock on the OTC Bulletin Board was $4.75 per share.
 
 Dividend Policy 

We do not anticipate declaring or paying any cash dividends on our capital stock. We currently intend to retain all of our net income for use in our business, and do not anticipate paying any cash dividends in the foreseeable future. Any future determination relating to dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including future earnings, capital requirements, financial condition and future prospects and other factors the Board of Directors may deem relevant. 
  
Item 6. SELECTED FINANCIAL DATA

You should read the summary consolidated financial data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our predecessor’s financial statements and the related notes included elsewhere in this report. The financial data for the twelve month period ending December 31, 2009 and 2008 were derived from audited financial statements included in this report. Historical results are not necessarily indicative of the results to be expected for any future period.
 
41


 
   
(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
 
 
Item 7. 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. 
 
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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 7.94%) in 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.

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.
 
43


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.
 
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.  Due to a shortage in supply, live hog prices rose significantly in 2008.  However, during the first half of 2009, the average pork price declined as compared to the average price during the same periods in December 2008.  The decline in pork prices was due to a decline in demand which was the result of wide public perception that the swine flu epidemic in late April and early May affected the health and quality of pork produced during such time.  In  June 2009, in response to the decline in pork prices and demand, the Chinese government purchased and placed into  storage large quantities of pork products.  This was done to help reduce public fear that the pork supplies were contaminated due to the swine flu epidemic and as an attempt to cause  the pork price to rebound to a reasonable level.  This action by the PRC government helped to regain consumer confidence to increase the purchase of pork products, and as the demand began to rise, the prices of pork began to rise again in July 2009, and by the end of the year ultimately rose to a level higher than the prices seen during the first half of 2009.  The average price of pork for fiscal year 2009 was RMB 11.62 and for fiscal year 2008 was RMB 14.63, which was a 20.6% decline. The prices are now 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.

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..
 
44

 
 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.

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 December 31, 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
 
45

 
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.

Property, Plant, and Equipment

Property, Plant, and Equipment are stated at cost. Repairs and maintenance to these assets are charged to expense as incurred; major improvements enhancing the function and/or useful life are capitalized. When items are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gains or losses arising from such transactions are recognized.

Property and equipment are depreciated using the straight-line method over their estimated useful life with a 5% salvage value. Their useful lives are as follows:

Fixed Asset Classification
  
Useful
Life
Land Improvements
 
10 years
Buildings
 
20 years
Building Improvements
 
10 years
Manufacturing Machinery & Equipment
 
10 years
Office Equipment
 
5 years
Furniture & Fixtures
 
5 years
Vehicles
 
5 years
 
46

 
Land Use Rights

Land Use Rights are stated at cost less accumulated amortization. Amortization is provided over its useful life, using the straight-line method. The useful life of the land use right is 50 years.

Customer Deposits

Customer Deposits represents money we have received in advance for purchases of pork and pork products. We consider customer deposits as a liability until products have been shipped and revenue is earned. We collect a damage deposit (as a deterrent) recorded on other payable from showcase store operators as a means of enforcing the proper use of our trademark. We carry the amount of these deposits as a current liability because we will return the deposit to the operator when we cease to conduct business with the operator.

Statutory Reserve

Statutory reserve refers to the amount appropriated from the net income in accordance with laws or regulations, which can be used to recover losses and increase capital, as approved, and, are to be used to expand production or operations. PRC laws prescribe that an enterprise operating at a profit, must appropriate, on an annual basis, from its earnings, an amount to the statutory reserve to be used for future company development. Such an appropriation is made until the reserve reaches a maximum equaling 50% of the enterprise’s registered capital.

Earnings Per Share

We compute earnings per share (“EPS”) in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per share” (“FASB ASC 260”), and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). FASB ASC 260 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., contingent shares, convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS. The Company’s basic EPS reflects earnings that are available to common shareholders for the year.  The numerator in the basic and diluted EPS calculation was the net income of the Company.  The Company did have any to add back to its diluted EPS calculation because it did not have any convertible securities (such as convertibles notes or convertible preferred stock) outstanding.  The number of shareholders in the calculation is on weighted average basis.  The Company did not issue any stock for the year; however the number disclosed in the weighted average shares outstanding is equal to the total shares outstanding less the shares held in escrow, which, for the purposes of calculating EPS are considered contingent.  The contingent shares are considered potentially dilutive securities; therefore, they are include in the diluted EPS calculation.  The Company also considered but excluded the potentially dilutive effect of the warrants outstanding issued to the placement agent in the 2007 financing transaction.  They were exclude because they would have been antidilutive based on the Company weighted average stock price for the 2009.  The warrants were potentially dilutive in 2008, therefore, they were included in the diluted EPS calculation for 2008.

Recent Accounting Pronouncements

See Note 2(Z) to the consolidated financial statements included elsewhere in this Report for discussions on recently issued accounting announcements. We are currently evaluating the potential impact, if any, of the adoption of the above recent accounting pronouncements on our consolidated results of operations and financial condition. .
 
RESULTS OF OPERATIONS

Comparison of Years Ended December 31, 2009 and December 31, 2008.
 
The following table sets forth the results of our operations for the periods indicated as a percentage of net sales:
 
   
Year Ended
       
Year Ended
     
   
December 31,
 
% of
   
December 31,
 
% of
 
   
2009
 
Sales
   
2008
 
Sales
 
Sales  
 
$
213,545,175
   
100.00
%  
   
176,360,013
   
100.00
Cost of Sales
   
183,391,490
   
85.88
%
   
149,794,249
   
84.94
Gross Profit  
   
30,153,685
   
14.12
%
   
26,565,764
   
15.04
Selling Expenses  
   
2,151,988
   
1.01
%
   
5,147,366
   
2.92
General & Administrative Expenses  
   
2,507,688
   
1.17
%
   
2,675,661
   
1.52
Total operating Expense  
   
4,659,676
   
2.18
%
   
7,823,027
   
4.44
Operating Income / (Loss)  
   
25,494,009
   
11.94
%
   
18,742,737
   
11.32
Other Income (Expense)  
   
(17,349,307)
   
(8.12)
) %
   
(11,385,383
)
 
(6.46
) % 
Earnings Before Tax  
   
8,144,702
   
3.81
%
   
7,357,354
   
4.17
(Income Tax Expense) / Deferred Tax Benefit  
   
(2,090,260)
   
(0.98)
) %
   
(520,089
)
 
(0.29
) % 
Net Income  
 
$
6,054,442
   
2.84
%
   
6,837,265
   
3.88
Basic and Diluted Earnings Per Share
                           
- Basic
   
0.35
           
0.40
       
- Diluted
   
0.29
           
0.32
       
Weighted Average Shares Outstanding
                           
- Basic
   
17,272,756
           
17,272,756
       
- Diluted
   
21,136,392
           
21,182,756
       
 
47

  
Sales. Our sales include revenues from sales of our Fresh Pork, Frozen Pork, and Processed Food Products. During the year ended December 31, 2009, we had sales of $213,545,175, as compared to sales of $176,360,013 for the year ended December 31, 2008, an increase of approximately 21.08%. This increase consisted of an increase in the sales of Fresh Pork of $ 16.5 million or 11.66%, from $141.8 million in 2008 to $158.3 million in 2009, an increase in the sale of Frozen Pork of $7.7 million or 54.14%, from $14.1 million to $21.8 million, and an increase in the sale of Processed Food Products of $12.9 million or 62.95%, from $20.4 million in 2008 to $33.3 million in 2009.  In 2009, we reduced our average per-kilogram sale prices to our customers, which coincided with a decrease in the average cost of live pigs and other production costs as compared to fiscal year 2008.  The average price of pork for fiscal year 2009 fell 20.6%, from RMB 14.63 in fiscal year 2008 to RMB 11.62 in fiscal year 2009.  The average per-kilogram sales price for our Fresh Pork, Frozen Pork and Processed Foods to customers decreased by 25.25%, 33.01% and 69.13%, respectively, compared to the prior year.

Our sales volume of products (by weight) increased considerably for Fresh Pork and Frozen Pork by 49.38% and 130.09%, respectively, compared to 2008.  We usually sell our Fresh Pork through our independent sales agents and supermarkets.  Our profit margin for sales through supermarkets is generally higher than other channels, which is the reason why we are continuing to actively pursue this particular sales channel.  In 2009, many of our sales agents were able to achieve higher sales since we implemented the extension of payment terms to creditworthy customers.  Since many of our sales agents are long standing customers with good credit, they were able to take advantage of the extension of payment terms to generate greater cash flow and to create higher sales in 2009.  Another factor attributable to the increase of sales and sales volume was that we increased the number of our sales agents and showcase stores from 9,200 in 2008 to 9,659 in 2009.  Management believes that this increase in sales and sales volume resulted from increased consumer demand, and increased consumer awareness of our brand and availability of our products, much of which resulted from the activities of our sales agents.  We were able to achieve these results even though prices per unit sold to sales agents reflect a discount in recognition of the sales agents’ marketing contributions.  However, the sales volume of our Processed Food Products decreased slightly in 2009, with 3.65% less sales volume compared to the prior year.
 
Cost of Sales. Cost of sales for 2009 increased by $33,597,241 or 22.43%, from $149,794,249 for the year ended December 31, 2008 to $183,391,490 for the year ended December 31, 2009. The increase in cost of sales was mainly attributable to an increase in sales volume. Our cost of sales for our various product categories in 2009 is summarized as follows:
 
   
(In thousands of U.S. Dollars)
 
       
% of
       
% of
 
   
2009
 
Sales
   
2008
 
Sales
 
Fresh Pork    
 
$
141,174
 
77
 
$
121,742
 
81.2
%
Frozen Pork    
   
17,438
 
9.5
%
   
11,026
 
7.4
%
Processed Food Products    
   
24,779
 
13.5
%
   
17,026
 
11.4
%
Total Cost of Sales:    
 
$
183,391
 
100
%
 
$
149,794
 
100
%
 
48

 
The following table shows the average per-kilogram price we paid for live pigs in 2009 and 2008:

  
 
Average
Unit
Price Per
Kilogram
in 2009
(in RMB)
   
Average
Unit
Price Per
Kilogram
in 2008
(in RMB)
   
Price
Increase/(Decrease)
(in RMB)
   
%
Increase/(Descrease)
from 2008 to 2009
 
First Quarter
   
12.06
     
16.00
     
(3.94)
     
(24.63)
%
Second Quarter
   
10.27
     
15.76
     
(5.49)
     
(34.84)
%
Third Quarter
   
11.95
     
14.43
     
(2.48)
     
(17.19)
%
Fourth Quarter
   
12.23
     
14.43
     
(2.2)
     
(15.25)
%
 
Our average price paid for live pigs in 2009 decreased from RMB14.63 per kilogram to  RMB11.62 per kilogram or by approximately 20.6% for 2009, as compared with the prior year.  Even though our cost decreased year over year, our average cost fluctuated during 2009, continuing to decrease during the first two quarters, and then increasing in the last two quarters but still ending the year below 2008 levels.  We believe that the price we pay for our pigs is in-line with the applicable local market price but may differ in certain situations depending on the grade of pig purchased, which ranges from grade 1 through 4.  We believe that the changes in the prices that we pay for live pigs, even though price fluctuations may reduce or increase cost of sales, is generally offset by changes in revenue resulting from similar, directional price changes in the average per kilogram sales price of our products.
 
In 2009, we experienced price increases in electricity, water and coal, all of which we use in our production process.  However, this increase in utilities was in proportion to the increase of our sales volume, and not due to an increase in the unit price of the utilities, with the exception of coal for which the unit price did increase slightly.  Total wages increased in 2009 due to the addition of new employees to handle the increase of our sales, but the salaries of our employees remained stable.  Lastly, similar to 2008, we experienced slight increases in transportation and delivery costs in 2009, corresponding with the increased sales.   Management also believes that productivity remained steady, with no significant changes from 2008 to 2009. Our increased use of sales agents did not increase our cost of sales as unit price discounts granted to sales agents during a given period are reflected as a reduction in sales for that period.  Instead, operating expenses were decreased because the marketing activities of our sales agents allowed us to decrease our direct marketing expenses.
 
Gross Profit. Gross profit was $30,153,685 for the year ended December 31, 2009 as compared to $26,565,764 for the year ended December 31, 2008, representing an increase of $3,587,921, or approximately 14%.  The gross profits for Fresh Pork, Frozen Pork and Processed Foods in 2009 were $17,161,348, $4,352,234 and $8,498,235, respectively.  Management attributes the increase in gross profit to strong increases in sales, driven by strong demand for our products.  In 2009, though the price of fresh pork and frozen pork was decreased, the strong demand for these two products led to the increase in gross profit in 2009. Our gross profit as a percentage of sales was 14.12% in 2009 as compared to 15.04% in 2008. The slight decrease in gross profit as a percentage of sales was attributable to lower sales prices per unit. Any reduction in sales due to discounts granted to sales agents did not have a material effect on gross profit due to the increase in sales generated by the marketing activities of the new sales agents, and the decrease in our direct selling expenses given our greater reliance on the marketing activities of the sales agents. We believe that, in the long run, the increased end users of our products generated by sales agents will outweigh any discounts granted to sales agents.
 
The table below presents gross profit and the associated margin for each product group in 2009 and 2008.
 
 
2009
Sales by Product
% of Sales
Cost of Sales by Product
% of Cost of Sales
Gross Profit by Product
% of Gross Profit
Fresh Pork
158,440,717
74.20%
141,174,109
76.98%
17,266,608
57.26%
Frozen Pork
21,804,771
10.21%
17,438,051
9.51%
4,366,720
14.48%
Processed Food Products   
33,299,687
15.59%
24,779,330
13.51%
8,520,357
28.26%
Sales    
213,545,175
100.00%
183,391,490
100.00%
30,153,685
100.00%
 
 
2008
Sales by Product
% of Sales
Cost of Sales by Product
% of Cost of Sales
Gross Profit by Product
% of Gross Profit
Fresh Pork
141,801,862
80.40%
121,742,234
81.27%
20,059,628
75.51%
Frozen Pork
14,136,226
8.02%
11,026,256
7.36%
3,109,970
11.71%
Processed Food Products   
20,421,925
11.58%
17,025,759
11.37%
3,396,166
12.78%
Sales    
176,360,013
100.00%
149,794,249
100.00%
26,565,764
100.00%
 
The decrease in our gross profit margin results from (i) the active policy of the PRC government to avoid spikes in the prices of food products like pork considered to be necessities for consumers, thereby reducing our average sales price per kilogram and (ii) our revenue being affected downward because we have issued larger discounts to sales agents.  Given that our larger use of sales agents has reduced our selling expenses in a larger amount than our extension of discounts to sales agents reduced revenue, on a non-GAAP, aggregate basis, these items have had a net positive effect on net profit.  On a GAAP basis, this increase was overshadowed by the compensatory expense related to the release of our shares held in escrow.
 
     
2009
 
Type of Cost
Product Type
   
Raw Materials
   
Utilities
   
Labor
   
Depreciation
   
Other
   
Total
 
Fresh Pork 
Product Cost Composition in $
  $ 139,055,196     $ 303,024     $ 344,232     $ 994,686     $ 476,971     $ 141,174,109  
Product Cost Composition in %
    98.50 %     0.21 %     0.24 %     0.70 %     0.34 %     100.00 %
Frozen Pork    
Product Cost Composition in $
  $ 17,176,320     $ 37,430     $ 42,520     $ 122,865     $ 58,916     $ 17,438,051  
Product Cost Composition in %
    98.50 %     0.21 %     0.24 %     0.70 %     0.34 %     100.00 %
Processed Food Products
Product Cost Composition in $
  $ 23,195,189     $ 346,866     $ 354,719     $ 759,172     $ 123,384     $ 24,779,330  
Product Cost Composition in %
    93.61 %     1.40 %     1.43 %     3.06 %     0.50 %     100.00 %
Cost of Sales
    $ 179,426,705     $ 687,320     $ 741,471     $ 1,876,723     $ 659,271     $ 183,391,490  
 
     
2008
 
Type of Cost
Product Type
   
Raw Materials
   
Utilities
   
Labor
   
Depreciation
   
Other
   
Total
 
Fresh Pork
Product Cost Composition in $
  $ 119,762,993     $ 307,382     $ 350,557     $ 999,010     $ 322,292     $ 121,742,234  
Product Cost Composition in %
    98.37 %     0.25 %     0.29 %     0.82 %     0.26 %     100.00 %
Frozen Pork
Product Cost Composition in $
  $ 10,846,995     $ 27,840     $ 31,750     $ 90,481     $ 29,190     $ 11,026,256  
Product Cost Composition in %
    98.37 %     0.25 %     0.29 %     0.82 %     0.26 %     100.00 %
Processed Food Products
Product Cost Composition in $
  $ 15,596,680     $ 271,565     $ 361,030     $ 701,548     $ 94,937     $ 17,025,759  
Product Cost Composition in %
    91.61 %     1.60 %     2.12 %     4.12 %     0.56 %     100.00 %
Cost of Sales
    $ 146,206,668     $ 606,787     $ 743,337     $ 1,791,039     $ 446,419     $ 149,794,249  
 
Other than changes in our costs for live pigs, our costs have remained stable and the percentages of cost of sales reflected by our major cost drivers have experienced minimal changes. Our overhead costs, which include utilities, labor, depreciation, and miscellaneous expenses, have decreased slightly as a percentage of cost of sales reflecting economies of  are being spread over a greater volume of sales.
 
Selling Expenses. Selling expenses totaled $2,151,988 for the year ended December 31, 2009, as compared to $5,147,366 for the year ended December 31, 2008, a decrease of $2,995,378 or 58.2%.  The decrease in our selling expenses in 2009 is attributable to the increase of sales to sales agents, through whom selling expenses are lower than through other sales channels because we do not have to market our products to end users who buy our products from sales agents. In fact, our advertising and marketing expenditures decreased considerably because the major part of the marketing and promotion of our products were handled directly by sales agents.  In return for these services, we granted our sales agents larger discounts and incentives on our products.
 
General and Administrative Expenses. General and Administrative Expenses totaled $2,507,688 for the year ended December 31, 2009 as compared to $2,675,661 for the year ended December 31, 2008, a decrease of $167,973 or 6.3%. We achieved this small decrease by being able to reduce slightly the costs of doing business as a public company. In 2009, for example, our expenses for hiring independent directors decreased, as compared to the prior year, as the number of independent directors reduced to one in 2009 from four in 2008.  In 2009, the local government granted exemption of a portion of our land use tax which also decreased our general expenses.

Other Income (Expense). Our other income (expense) consisted of Other Income, Interest Income, Other Expenses, Interest Expense, and Release of Escrowed Make Good Shares. We had total Other Expenses of $17,349,307 for the year ended December 31, 2009 as compared to $11,385,383 for the year ended December 31, 2008, an increase of $86,515, or 30.38%. The substantial increase in Other Expenses in 2009 was primarily attributable to the accrual of the expected release of escrowed shares pursuant to a make good agreement related to the Exchange Transaction and Financing on December 31, 2007. Our Other Income (Expense) for the years ended December 31, 2009 and 2008 is summarized as follows:

     
2009
     
2008
 
Other Income (Expenses)
               
Other Income
   
43,568
     
5,780
 
Other Expense
   
(91,943
)
   
(100,183
)
Interest Income
   
198,259
     
284,774
 
Interest Expense
   
(1,031,197
)
   
(953,460
)
Release of Escrowed Make Good Shares
   
(16,467,994
)
   
(10,622,294
)
Total Other Income and Expense
   
(17,349,307
)
   
(11,385,383
)
 
49


Pursuant to such make good agreement, a total of 3,863,636 shares of our common stock held by a trust, the beneficiaries of which include our CEO Mr. Shi Huashan and his family, were deposited into a make good escrow account.  These shares were to be released back to Mr. Shi and his family if the Company met the following earnings targets of $15.9 million, and $20.9 million in after-tax net income for the years ended December 31, 2008, and 2009 respectively.  In the event that the Company did not meet the aforementioned financial targets, the escrowed shares would be released, on a pro-rata basis, to the investors in the Financing. In accordance with a settlement agreement that we signed with certain investors in the Financing, the 1,931,818 shares held in escrow in connection with the 2008 earnings targets have been released.  In accordance with Topic 5.T of the Staff Accounting Bulletins (SAB 79), the Company has recorded a compensatory expense for the shares with a corresponding credit to the Company’s contributed paid in capital.  The compensatory expense in the aggregate is equal to $16.5 million and $10.6 million for the years ended December 31, 2009 and 2008.  For the year ended December 31, 2009, the Company has met its financial target, and therefore the remaining 1,931,818 shares will be released.
 
Net Income. Our net income for the year ended December 31, 2009 was $6,054,442 as compared to $6,837,265 for the year ended December 31, 2008, a decrease of $782,823 or 11%. This decrease in net income is basically attributable to the recorded expense in the amount of $16,467,994 in 2009 as above-mentioned.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Cash Flows

Twelve Months Ended December 31, 2009

Net cash inflow sources from operating activities was $28.98 million in fiscal 2009 while net cash flow used in operating activities was $3.23 million in fiscal 2008.  Prior to 2007, we offered flexible payment terms to agents who purchase pork products from us for resale to retailers, but in March of 2007, we eliminated this practice and required agents to pay promptly for products ordered.   In 2008, we established a more comprehensive set of payment terms determined by the creditworthiness and the length of time we have worked with such agents and retailers.  For example, we require our new customers to pre-pay or pay upon delivery for our products since we are unfamiliar with their history and creditworthiness.  For customers we have worked with over a period of time and with good credit, we give them until the end of the month to pay for our products.  For customers we have worked with for over 3 years and have established their creditworthiness, we offer them payment terms of 30 to 60 days.  We are more lenient toward large retailers and supermarkets since they have a more complete accounting and purchasing system and there is a lesser possibility of breach of payment terms or non-payment.  The payment terms for such large retailers usually range between 45 to 75 days, to be negotiated with each individual retailer prior to the execution of contract.  To improve our process of collecting accounts receivable as compared to the prior year, we have also placed a cap on accounts receivable in proportion to the quantity ordered.  The agent or retailer must pay down the balance of the accounts payable once the maximum cap is reached on their accounts, even if it is prior to the expiration of their payment terms.

In 2009, there was a decrease in interest paid to $0.83 million compared to the prior year.  The decrease of such interest paid was due to the fact that all the outstanding loans were made during the fourth quarter of 2009, which carried on a small amount of interest expenses in 2009. We had a decrease in interest earned of $198,259 in 2009.
 
We had $4.25 million in escrowed funds in December 2007.  Pursuant to a holdback escrow agreement executed on December 31, 2007, $2 million was held in escrowed funds subject to hiring a certain number of independent directors, $1.5 million was held subject to hiring a qualified Chief Financial Officer, $250,000 was held to hire one of the agreed upon investor relations firms, and $500,000 was held to hire one of the independent public accounting firms of record.  As of fiscal year 2009, only $35,675 in the escrow account has been released for in connection with the hiring of an investor relations firm.  Currently, we no longer are retaining such firm. Net cash flow used in investing activities was $3.99 million in fiscal 2009, compared to cash used in investing activities of $3.76 million in fiscal 2008.  There was a decrease from $5.8 million to $3.70 in expenditures for plant and equipment in 2009.  We used $327,647 in purchasing intangible assets.
 
On December 30, 2009, we entered into a settlement agreement (the “Settlement Agreement”) with certain investors (the “Investors”) in our December 2007 $17 million common stock financing (the “Financing”). Pursuant to the Settlement Agreement, we agreed to new arrangements with the Investors regarding (i) the release of certain “make good” shares placed into escrow by certain our affiliates in connection with the Financing, (ii) the potential waiver of $1.7 million of liquidated damages owed by the Company in connection with the Financing (the “Liquidated Damages”) if a resale registration statement relating to the shares of our common stock held by the Investors is declared effective by March 31, 2010, or alternatively, if certain conditions are met, May 15, 2010 (the “S-1 Requirement”),and (iii) the release of certain cash amounts that were held back pending our appointment of independent directors and our appointment of a new Chief Financial Officer.  The make good shares have been released to our affiliate and the cash holdback amounts  have been released to us (less the $1.7 million Liquidated Damages amount) because we have satisfied the conditions precedent set forth in the Settlement Agreement for the release of those shares and holdback amounts.  Certain conditions also have been met so as to extend the deadline for the S-1 Requirement to May 15, 2010. If we meet the S-1 Requirement by May 15, 2010, then the $1.7 million Liquidated Damages amount will be released to us within 10 days of the deadline.  If we do not meet the S-1 Requirement by May 15, 2010, then the $1.7 million Liquidated Damages amount will be released to the Investors on a pro rata basis within 10 days of the deadline.  The parties have agreed that, subject to the receipt of the make good shares and holdback amounts in accordance with the Settlement Agreement, to waive and release one another from all other claims relating to the matters governed by the Settlement Agreement.  In May 2010, all the investors who are parties to the Settlement Agreement agreed to extend the deadline for the S-1 Requirement to June 30, 2010.
 
Net cash flow sourced in financing activities was $9.52 million in fiscal 2009 as compared to net cash used from financing activities of $1.44 million in fiscal 2008. We borrowed additional monies in fiscal year 2009 because the term of certain of our credit facilities was expiring, and we determined that, given the tightening of credit in China, that it would be in our best interest to take this extension of credit when available. We plan to use the cash sourced in financing activities for general working capital purposes. The Company maintains three revolving bank loans with the Bank of China (Liaoning Branch) in the term of 12 months and one bank   loan with the Agricultural Bank of China (Wafangdian Branch) in the term of 3 months, one bank loan with the Shanghai Pudong Development Bank (Dalian Branch) in the term of 12 month and one bank loan with the Bank of East Asia (Dalian Branch) in the term of 12 months. The amount of credit and interest rate of the bank loans are re-negotiated at the end of each term, and the parties re-execute a new revolving loan agreement every year after negotiation.   Compared to 2008, the total amount of our revolving bank loans increased by $ 9.52 million in 2009.  For additional details concerning the repayment, see Note 9(B) in the footnotes to our financial statements included with this report.
 
Our Accounts Payable decreased significantly in 2009 to $3.27 million.  The reason was attributable to the payments we made in cash for purchasing live pigs from farmers and the Group in order for us to obtain more sufficient amount of and high quality live pigs.  Our taxes payable also increased in 2009 due to an increase of our payable value-added tax.  Our Customer Advances decreased to $2.41 million in 2009.  The decrease of such advances was due to the fact that we offered our creditworthy customers longer and more flexible payment terms, which in turn reduced our Customer Advances.
 
50


Our Related Party Receivable decreased to zero in 2009.   The significant decrease is due to the accounting of the Company’s transactions with certain related parties. In the normal course of business which includes the purchases of hogs and other raw materials, sale of pork and pork products, the Company conducts transactions with the following related parties: Dalian Chuming Group Co., Ltd (“Group”) and the Group subsidiaries, that are not consolidated into Energroup Holdings or Energroup’s subsidiary, Dalian Chuming Precious Sheen Investments Consulting Co. Ltd. (Chuming): (1) Dalian Chuming Industrial Development Co., Ltd., (“Industrial Development Co.”) (2) Dalian Chuming Trading Co., Ltd, (“Trading Co.”) (3) Dalian Mingxing Livestock Product Co. Ltd., (“Mingxing”) (4) Dalian Chuming Stockbreeding Combo Development Co., Ltd., (“Combo Development Co.”) (5) Dalian Chuming Fodder Co., Ltd. (“Fodder Co.”), and (6) Dalian Chuming Biological Technology Co., Ltd., (“Biological Co.”) and (7) Dalian Huayu Seafood Food Co., Ltd. (“Huayu”).  The Company and the aforementioned related parties share common beneficial ownership.  All transactions with related parties are generally performed at arm’s length.
 
In the event that the Company has both receivables from, and payables to the Group, it will setoff the balances in order to arrive at a single balance that is either due from, or due to the Group.  The Company’s net payable balance at December 31, 2009 was 2,307,429.  
 
Twelve Months Ended December 31, 2008

Net cash inflow used from operating activities was $3.23 million in fiscal 2008 and while net cash flow sourced in operating activities was $1.97 million in fiscal 2007.  

In 2008, there was an increase in interest paid to $1.76 million compared to the prior year.  We owed interest payment of $809,994 in 2007 which the Group has paid on our behalf in 2007.  We repaid the Group the 2007 interest payment of $809,994 in 2008.  In 2008, we also made an interest payment for the interest we owed in 2008 in the amount of $953,460.  We had an increase in interest earned of $264,774 in 2008 due to the deposit of more money in our bank accounts and we also earned higher interest by moving some of our money to certificate of deposit accounts.
 
We had $4.25 million in escrowed funds in December 2007.  Pursuant to a holdback escrow agreement executed on December 31, 2007, $2 million was held in escrowed funds subject to hiring a certain number of independent directors, $1.5 million was held subject to hiring a qualified Chief Financial Officer, $250,000 was held to hire one of the agreed upon investor relations firms, and $500,000 was held to hire one of the independent public accounting firms of record.  As of fiscal year 2008, only $2 million in the escrow account has been released for satisfying the criteria of hiring the independent directors.  Net cash flow used in investing activities was $3.76 million in fiscal 2008, compared to cash used in investing activities of $11.3 million in fiscal 2007.   There was an increase from $2.8 million to $5.8 million in expenditures for plant and equipment in 2008.  The $3 million increase in spending was used in the renovation and expansion of the production facilities for prepared foods.  As a result of the expansion, starting 2009 we can increase our production of prepared foods from 15,000 metric tons to 30,000 metric tons per year.  We did not incur any expenses for land use rights in 2008 compared to the $4.1 million we paid for land use rights in 2007. The expense for land use rights in 2007 was a one-time payment that we paid off in 2007.

Net cash flow used in financing activities was $1.44 million in fiscal 2008 as compared to net cash sourced from financing activities of $18.26 million in fiscal 2007.  The Company maintains two revolving bank loans with the Bank of China (Liaoning Branch) in the term of eleven months.  The amount of credit and interest rate of the bank loans are re-negotiated at the end of each term, and the parties re-execute a new revolving loan agreement every year after negotiation.   Upon the expiration of both of our revolving loan agreements executed with the Bank of China (Liaoning Branch) in 2007 that expired during October 2008, we renegotiated and executed two new revolving loan agreements in the total amount of $9.26 million in November 2008.  However, this cash inflow was offset by repayment of the above mentioned 2007 bank loans that expired in October 2008 in the amount of $10.07 million.  Compared to 2007, the total amount of our revolving bank loans decreased by $1.44 million in 2008.  For additional details concerning the repayment, see Note 9(B) in the footnotes to our financial statements included with this report.
 
51

 
The cash flow statement shows that there was an $18 million increase in Accounts Receivable in 2008 compared to 2007.  The significant increase was attributable to the more comprehensive billing system implemented by the Company in 2008, which offered our creditworthy customers longer and more flexible payment terms.  The implementation of the new billing system boosted our Accounts Receivable and also increased our sales and gross profits.  Other Receivable also increased by over $1 million in 2008 because we implemented new credit/debit card machines and had to make adjustments in our accounting to correspond with such change.  Many of our showcase stores and customers made cash payments in the past.  Due to safety reasons and the problem of counterfeit money, we no longer accepted cash payments in 2008 and switched to using credit/debit card machines provided by the Bank of China.  The time of process for the actual payment to be deposited into our bank account takes approximately 4 business days.  During this time, the payments are recorded in Other Receivable since they are not actually received and cannot be counted as Accounts Receivable yet.  After the money has been transferred into our bank account, we settle and deduct the relevant Accounts Receivable from Other Receivable accordingly.

Our Related Party Receivable decreased by $9.2 million in 2007, yet has an increase of $6.9 million in 2008.   The significant increase is due to the accounting of the Company’s transactions with certain related parties. In the normal course of business which includes the purchases of hogs and other raw materials, sale of pork and pork products, the Company conducts transactions with the following related parties: Dalian Chuming Group Co., Ltd (“Group”) and the Group subsidiaries, that are not consolidated into Energroup Holdings or Energroup’s subsidiary, Dalian Chuming Precious Sheen Investments Consulting Co. Ltd. (Chuming): (1) Dalian Chuming Industrial Development Co., Ltd., (“Industrial Development Co.”) (2) Dalian Chuming Trading Co., Ltd, (“Trading Co.”) (3) Dalian Mingxing Livestock Product Co. Ltd., (“Mingxing”) (4) Dalian Chuming Stockbreeding Combo Development Co., Ltd., (“Combo Development Co.”) (5) Dalian Chuming Fodder Co., Ltd. (“Fodder Co.”), and (6) Dalian Chuming Biological Technology Co., Ltd., (“Biological Co.”) and (7) Dalian Huayu Seafood Food Co., Ltd. (“Huayu”).  The Company and the aforementioned related parties share common beneficial ownership.  All transactions with related parties are generally performed at arm’s length.
 
In the event that the Company has both receivables from, and payables to the Group, it will setoff the balances in order to arrive at a single balance that is either due from, or due to the Group.  The Company’s net receivable balance at December 31, 2008 was $10,919,777.  Of the $10,919,777 net receivable owed by the Group to the Company, the entire amount has been securitized by bank drafts issued by the bank on behalf of subsidiaries of the Group to the Company.  These notes are collateralized by deposits at the bank by those particular subsidiaries of the Group.  The drafts can be endorsed and discounted to the bank for cash; however the Company currently intends to hold these drafts until maturity.
 
Our Accounts Payable increased significantly in 2008 to $3.9 million.  The reason was attributable to the extension of our billing period from the original 30 to 60 days granted by our supplier who sells us supplementary materials and packaging materials.  The extension of payment term was to reward us for being a good customer.  Another contributing factor was we had to pay for the renovation and equipment costs due to the expansion of our production facilities in 2008.  Our taxes payable also increased in 2008 due to an increase of our payable value-added tax.  Our Customer Advances increased by $3.2 million in 2008.  The increase of such advances was for the renovation and expansion of production facilities and purchasing of new equipments.  Since the Company has yet to receive an invoice for such renovation and equipment expenses, such costs cannot be accounted into the Company’s assets yet.
 
52

 
Contractual Obligations and Off-Balance Sheet Arrangements
 
Contractual Obligations
 
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.

The following tables summarize our contractual obligations as of December 31, 2009, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
 
   
 
Payments Due by Period
 
   
 
Total
   
Less than 1
year
   
1-3 Years
   
3-5 Years
 
5 Years +
 
Contractual Obligations :
                           
Bank Indebtedness  
 
$
15,942,197
   
$
15,942,197
   
$
-
   
$
-
   
$
-
 
Other Indebtedness  
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
Capital Lease Obligations  
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
Operating Leases  
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
Purchase Obligations  
 
$
164,674,737
   
$
164,674,737
   
$
-
   
$
-
   
$
-
 
Total Contractual Obligations:  
 
$
180,616,934
   
$
180,616,934
   
$
-
   
$
-
     
-
 
 
As indicated in the table, as of December 31, 2009 we had $164,674,737 in purchase obligations, which relates to our agreement for the purchase and sale of hogs. On December 19, 2007, we entered into a hog purchase agreement whereby the Group will provide, at fair market prices, a minimum number of hogs to us.

At December 31, 2009, management projected minimum quantities of hogs as detailed in the following table:
 
Year
 
Hogs
   
Price Per Hog
   
Amount
 
2010
      800,000     $ 205.84     $ 164,674,737  

For purposes of estimating future payments, we project that the fair market price of the hogs will increase by 10% each year. The assumption of 10% reflects our expectations with regard to inflation and the rising costs of inputs in breeding livestock.
 
Off-balance Sheet Arrangements
 
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
 
Related Party Transactions

For a description of our related party transactions, see the section of this Report entitled “Certain Relationships and Related Party Transactions.” 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures about Market Risk 

We do not use derivative financial instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash and cash equivalents, trade accounts receivable, accounts payable and long-term obligations. We consider investments in highly liquid instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents. However, in order to manage the foreign exchange risks, we may engage in hedging activities to manage our financial exposure related to currency exchange fluctuation. In these hedging activities, we might use fixed-price, forward, futures, financial swaps and option contracts traded in the over-the-counter markets or on exchanges, as well as long-term structured transactions when feasible.

Interest Rates. Our exposure to market risk for changes in interest rates relates primarily to our short-term obligations; thus, fluctuations in interest rates would not have a material impact on the fair value of these securities. At December 30, 2009, we had approximately $41.98 million in cash and cash equivalents. A hypothetical 10% increase or decrease in interest rates would not have a material impact on our earnings or loss, or the fair market value or cash flows of these instruments.
 
53

 
Foreign Exchange Rate. All of our sales and inputs are transacted in Renminbi (“RMB”). As a result, changes in the relative values of U.S. Dollars and RMB affect our reported levels of revenues and profitability as the results are translated into U.S. Dollars for reporting purposes. However, since we conduct our sales and purchase inputs in RMB, fluctuations in exchange rates are not expected to significantly affect our financial stability, or gross and net profit margins. We do not currently expect to incur significant foreign exchange gains or losses, or gains or losses associated with any foreign operations. 

Our exposure to foreign exchange risk primarily relates to currency gains or losses resulting from timing differences between signing of sales contracts and settling of these contracts. Furthermore, we translate monetary assets and liabilities denominated in other currencies into RMB, the functional currency of our operating business. Our results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the unified exchange rate as quoted by the People’s Bank of China at the end of the period. Translation adjustments resulting from this process are included in accumulated other comprehensive income in our statement of shareholders’ equity. We recorded net foreign currency gains of $2,064,272, $528,277 and 1,776,168 in 2007, 2008 and 2009, respectively. We have not used any forward contracts, currency options or borrowings to hedge our exposure to foreign currency exchange risk. We cannot predict the impact of future exchange rate fluctuations on our results of operations and may incur net foreign currency losses in the future. As our sales denominated in foreign currencies, such as RMB, continue to grow, we may consider using arrangements to hedge our exposure to foreign currency exchange risk. Our financial statements are expressed in U.S. dollars but the functional currency of our operating subsidiary is RMB. The value of your investment in our stock will be affected by the foreign exchange rate between U.S. dollars and RMB. A decline in the value of RMB against the U.S. dollar could reduce the U.S. dollar equivalent amounts of our financial results, the value of your investment in our company and the dividends we may pay in the future, if any, all of which may have a material adverse effect on the price of our stock.
 
54

 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 

Energroup Holdings Corporation

Audited Consolidated Financial Statements

December 31, 2009 and 2008

(Stated in US Dollars)
 
55

 
Energroup Holdings Corporation



Contents
Pages
   
Report of Registered Public Accounting Firm
F-1
   
Consolidated Balance Sheets
F-2 – F-3
   
Consolidated Statements of Operations
F-4
   
Consolidated Statements of Changes in Stockholders’ Equity
F-5 – F-6
   
Consolidated Statements of Cash Flows
F-7 – F-8
   
Notes to Consolidated Financial Statements
F-9 – F-32



Board of Directors and Stockholders
Energroup Holdings Corporation


Report of Registered Independent Public Accounting Firm


We have audited the accompanying consolidated balance sheets of Energroup Holdings Corporation as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Energroup Holdings Corporation as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.






South San Francisco, California
Samuel H. Wong & Co., LLP
January 26, 2010
Certified Public Accountants

F-1


Energroup Holdings Corporation
Consolidated Balance Sheets
As of December 31, 2009 and 2008
(Stated in US Dollars)

 
Notes
 
At
   
At
 
     
December 31,
   
December 31,
 
ASSETS
   
2009
   
2008
 
Current Assets
             
Cash
2(D)
  $ 41,984,101     $ 5,695,798  
Restricted Cash
3
    2,176,224       2,177,091  
Accounts Receivable
2(E),4
    39,876,187       18,661,065  
Other Receivable
      591,025       2,162,412  
Related Party Receivable
5
    -       10,919,777  
Inventory
2(F),6
    3,683,989       6,051,109  
Purchase Deposit
2(G)
    844,964       1,453,861  
Prepaid Expenses
      30,103       62,734  
Prepaid Taxes
      231,567       334,413  
Deferred Tax Asset
2(Q)
    468,922