Attached files
file | filename |
---|---|
EX-31.1 - YUHE INTERNATIONAL, INC. | v193745_ex31-1.htm |
EX-31.2 - YUHE INTERNATIONAL, INC. | v193745_ex31-2.htm |
EX-32.2 - YUHE INTERNATIONAL, INC. | v193745_ex32-2.htm |
EX-10.1 - YUHE INTERNATIONAL, INC. | v193745_ex10-1.htm |
EX-32.1 - YUHE INTERNATIONAL, INC. | v193745_ex32-1.htm |
EX-10.2 - YUHE INTERNATIONAL, INC. | v193745_ex10-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10−Q
(Mark
One)
x
QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended: June 30, 2010
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: 001-34512
YUHE
INTERNATIONAL, INC.
(Exact
name of Registrant as Specified in its Charter)
Nevada
|
33-0215298
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer Identification.
No.)
|
301
Hailong Street
Hanting
District, Weifang, Shandong Province
The
People’s Republic of China
(Address
of principal executive offices)
86
536 736 3688
(Registrant’s
Telephone Number)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes o
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. 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 Exchange Act).
Yes
o
No x
The
number of shares outstanding of each of the issuer’s classes of common equity as
of June 30, 2010 is as follows:
Class
of Securities
|
Shares
Outstanding
|
|
Common
Stock, $0.001 par value
|
15,809,563
|
TABLE
OF CONTENTS
Page
|
|||
PART
I FINANCIAL INFORMATION
|
|||
Item
1.
|
Financial
Statements
|
F-1
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
3
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
11
|
|
Item
4.
|
Controls
and Procedures
|
11
|
|
PART
II OTHER INFORMATION
|
|||
Item
1.
|
Legal
Proceedings
|
13
|
|
Item
1A.
|
Risk
Factors
|
13
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
13
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
13
|
|
Item
4.
|
Reserved
|
13
|
|
Item
5.
|
Other
Information
|
13
|
|
Item
6.
|
Exhibits
|
14
|
|
Signatures
|
2
PART
I
FINANCIAL
INFORMATION
ITEM
1. FINANCIAL STATEMENTS.
YUHE
INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 AND YEAR ENDED DECEMBER 31, 2009
Index to
condensed consolidated financial statements
Page
|
||
Condensed
Consolidated Balance Sheets - unaudited
|
F-2
|
|
Condensed
Consolidated Statements of Income and Comprehensive Income -
unaudited
|
F-4
|
|
Condensed
Consolidated Statements of Cash Flows - unaudited
|
F-5
|
|
Notes
to the Condensed Consolidated Financial Statements -
unaudited
|
F-7
|
F-1
YUHE INTERNATIONAL,
INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
June
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(unaudited)
|
||||||||
US
|
$ | |||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 19,633,056 | $ | 14,047,147 | ||||
Accounts
receivable, net of allowances of $18,947 and $18,868
|
842 | 838 | ||||||
Inventories
|
9,344,534 | 6,560,783 | ||||||
Advances
to suppliers
|
264,991 | 359,179 | ||||||
Deferred
tax assets
|
11,888 | 17,766 | ||||||
Total
current assets
|
29,255,311 | 20,985,713 | ||||||
Plant
and equipment, net
|
32,625,090 | 29,556,712 | ||||||
Deposits
paid for acquisition of long-term assets
|
11,342,811 | 16,082,613 | ||||||
Notes
receivable, net and other receivable, net
|
52,866 | 33,635 | ||||||
Unlisted
investments held for sale
|
301,433 | 300,172 | ||||||
Intangible
assets, net
|
2,830,463 | 2,851,411 | ||||||
Net
investment in direct financing lease
|
400,436 | 382,742 | ||||||
Long-term
prepaid rent
|
8,118,188 | 6,570,038 | ||||||
Total
assets
|
$ | 84,926,598 | $ | 76,763,036 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 6,008,463 | $ | 5,740,912 | ||||
Current
portion of long term loans
|
2,026,848 | 9,433,686 | ||||||
Other
payable
|
1,061,094 | 1,343,901 | ||||||
Accrued
expenses and payroll related liabilities
|
3,001,702 | 2,366,134 | ||||||
Advances
from customers
|
1,860,833 | 678,366 | ||||||
Other
taxes payable
|
149,941 | 150,764 | ||||||
Loan
from director
|
293,746 | 292,517 | ||||||
Other
liabilities
|
144,553 | 143,949 | ||||||
Due
to related companies
|
1,208 | 1,208 | ||||||
Total
current liabilities
|
14,548,388 | 20,151,437 | ||||||
Non-current
liabilities
|
||||||||
Long-term
loans
|
8,518,638 | 1,360,206 | ||||||
Total
liabilities
|
23,067,026 | 21,511,643 |
F-2
YUHE INTERNATIONAL,
INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
(Continued)
Stockholders'
Equity
|
||||||||
Preferred
stock, $.001 par value, 1,000,000 shares authorized,
no
shares issued and outstanding
|
- | - | ||||||
Common
stock, $.001 par value; authorized 500,000,000 shares, 15,809,563 and
15,722,180 shares issued and outstanding at June 30, 2010 and December 31,
2009, respectively
|
15,809 | 15,722 | ||||||
Additional
paid-in capital
|
31,034,149 | 30,672,849 | ||||||
Retained
earnings
|
29,299,177 | 23,316,794 | ||||||
Accumulated
other comprehensive income
|
1,510,437 | 1,246,028 | ||||||
Total
stockholders’ equity
|
61,859,572 | 55,251,393 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 84,926,598 | $ | 76,763,036 | ||||
The
accompanying notes are an integral part of the unaudited condensed
consolidated financial statements
|
F-3
YUHE
INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
For
The Three Months Ended
|
For
The Six Months Ended
|
|||||||||||||||
June
30
|
June
30
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
US
|
$ | |||||||||||||||
Net
revenue
|
$ | 12,478,631 | $ | 9,834,373 | $ | 24,235,548 | $ | 20,748,763 | ||||||||
Cost
of revenue
|
(8,355,543 | ) | (7,031,426 | ) | (16,212,105 | ) | (13,883,779 | ) | ||||||||
|
|
|
|
|||||||||||||
Gross
profit
|
$ | 4,123,088 | 2,802,947 | $ | 8,023,443 | $ | 6,864,984 | |||||||||
Operating
Expenses
|
||||||||||||||||
Selling
expenses
|
(201,568 | ) | (108,656 | ) | (312,515 | ) | (201,596 | ) | ||||||||
General
and administrative expenses
|
(810,623 | ) | (635,247 | ) | (1,631,139 | ) | (1,379,237 | ) | ||||||||
|
|
|
|
|||||||||||||
Total
operating expenses
|
$ | (1,012,191 | ) | (743,903 | ) | $ | (1,943,654 | ) | $ | (1,580,833 | ) | |||||
Income
from operations
|
3,110,897 | 2,059,044 | 6,079,789 | 5,284,151 | ||||||||||||
Non-operating
income (expenses)
|
||||||||||||||||
Interest
income
|
81 | 45 | 139 | 141 | ||||||||||||
Other
income (expenses)
|
(3,081 | ) | 5,126 | 8,084 | 4,661 | |||||||||||
(Loss)
gain on disposal of fixed assets
|
- | 27,778 | (176 | ) | 27,778 | |||||||||||
Investment
income
|
3 | - | 15,615 | 15,509 | ||||||||||||
Interest
expenses
|
(49,188 | ) | - | (115,138 | ) | (325,427 | ) | |||||||||
|
|
|
|
|||||||||||||
Total
other income (expenses)
|
$ | (52,185 | ) | 32,949 | $ | (91,476 | ) | $ | (277,338 | ) | ||||||
Net
income before income taxes
|
3,058,712 | 2,091,993 | 5,988,313 | 5,006,813 | ||||||||||||
Income
tax expenses
|
(3,329 | ) | - | (5,930 | ) | - | ||||||||||
|
|
|
|
|||||||||||||
Net
income
|
$ | 3,055,383 | $ | 2,091,993 | $ | 5,982,383 | $ | 5,006,813 | ||||||||
Other
comprehensive income
|
||||||||||||||||
Foreign
currency translation
|
255,534 | 3,806 | 264,409 | 52,078 | ||||||||||||
Comprehensive
income
|
$ | 3,310,917 | $ | 2,095,799 | $ | 6,246,792 | $ | 5,058,891 | ||||||||
Earnings
per share
|
||||||||||||||||
Basic
|
$ | 0.19 | $ | 0.13 | $ | 0.38 | $ | 0.32 | ||||||||
Diluted
|
$ | 0.19 | $ | 0.13 | $ | 0.37 | $ | 0.32 | ||||||||
Weighted
average shares outstanding
|
||||||||||||||||
Basic
|
15,809,563 | 15,722,180 | 15,772,872 | 15,722,180 | ||||||||||||
Diluted
|
16,029,036 | 15,722,180 | 16,041,393 | 15,722,180 |
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
F-4
YUHE
INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For
The Six Months Ended
|
||||||||
June
30
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities
|
US
|
$ | ||||||
Net
income
|
$ | 5,982,383 | $ | 5,006,813 | ||||
Adjustments
to reconcile net income to net cash used in operating
activities:
|
||||||||
Stock
based compensation
|
361,387 | 361,421 | ||||||
Depreciation
|
1,123,534 | 1,027,465 | ||||||
Amortization
|
32,800 | 32,759 | ||||||
Capitalized
interest in construction in progress
|
(370,223 | ) | (302,058 | ) | ||||
Loss
(gain) on disposal of fixed assets
|
176 | (27,778 | ) | |||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
- | (75 | ) | |||||
Advances
to suppliers
|
10,128 | (526,528 | ) | |||||
Inventories
|
(2,745,647 | ) | 199,889 | |||||
Deferred
tax assets
|
5,930 | 29,459 | ||||||
Long-term
prepaid rent
|
104,930 | - | ||||||
Accounts
payable
|
242,505 | 1,011,712 | ||||||
Other
payable
|
(287,265 | ) | 254,103 | |||||
Accrued
expenses and payroll related liabilities
|
624,891 | 344,100 | ||||||
Advances
from customers
|
1,175,104 | 588,416 | ||||||
Other
taxes payable
|
(1,451 | ) | 9,090 | |||||
Net
investment in direct financing lease
|
(16,025 | ) | - | |||||
Net
cash provided by operating activities
|
6,243,157 | 8,008,788 | ||||||
Cash
flows from investing activities
|
||||||||
Deposit
paid and acquisition of property, plant and equipment
|
(438,884 | ) | (4,371,637 | ) | ||||
Advance
to notes receivable
|
(11,370 | ) | (23,602 | ) | ||||
Advance
to related parties
|
(3,022,463 | ) | (144,350 | ) | ||||
Proceeds
from related parties
|
3,022,463 | |||||||
Proceeds
from disposal of fixed assets
|
- | 27,778 | ||||||
Proceeds
received from related parties receivables
|
- | |||||||
Net
cash used in investing activities
|
(450,254 | ) | (4,511,811 | ) | ||||
Cash
flows from financing activities
|
||||||||
Repayment
of loan payable
|
(292,622 | ) | - | |||||
Proceeds
from related party payable
|
- | 360,094 | ||||||
Net
cash flows (used in) provided by financing activities:
|
(292,622 | ) | 360,094 |
F-5
YUHE
INTERNATIONAL, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Effect
of foreign currency translation on cash and cash
equivalents
|
85,628 | 20,210 | ||||||
Net
increase in cash
|
5,585,909 | 3,877,281 | ||||||
Cash-
beginning of period
|
14,047,147 | 13,412,205 | ||||||
Cash-
end of period
|
$ | 19,633,056 | $ | 17,289,486 | ||||
Cash
paid during the period for:
|
||||||||
Interest
paid
|
$ | 447,091 | $ | 448,487 | ||||
Income
taxes paid
|
$ | - | $ | - | ||||
Supplemental
disclosure
|
||||||||
Transfer
from construction in progress to fixed assets
|
$ | 2,656,342 | $ | 1,831,131 | ||||
Transfer
from advances to suppliers and deposit paid for acquisition of long-term
assets to fixed assets
|
$ | 3,316,607 | $ | - | ||||
Transfer
from deposit paid for acquisition of long-term assets to long-term prepaid
rent
|
$ | 1,619,664 | $ | - | ||||
Cashless
exercise of 142,816 warrants
|
$ | 87 | $ | - |
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-6
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Basis
of presentation
|
The
interim condensed consolidated financial statements included herein, presented
in accordance with United States generally accepted accounting principles and
stated in US dollars, have been prepared by the Company, pursuant to the rules
and regulations of the Securities and Exchange Commission. These statements
reflect all adjustments, consisting of normal recurring adjustments, which, in
the opinion of management, are necessary for fair presentation of the
information contained therein. These interim condensed consolidated
financial statements should be read in conjunction with the financial statements
of the Company for the year ended December 31, 2009 and notes thereto included
in the Form 10-K of Yuhe International, Inc. filed on March 31,
2010. The Company follows the same accounting policies in the
preparation of interim reports.
Results
of operations for the interim periods are not indicative of annual
results.
2.
|
Organization
and Basis of Preparation of Financial
Statements
|
Yuhe
International, Inc.
Yuhe
International, Inc., formerly known as First Growth Investors, Inc., “Yuhe” or
“the Company”, was originally organized under the laws of the State of Nevada on
September 9, 1997. Prior to its business combination with Bright Stand, the
Company was not engaged in any business activities and had no operations, income
producing assets or significant operating capital. At December 31, 2007, the
Company was at development stage until its business combination with Bright
Stand on March 12, 2008.
On March
12, 2008, the Company completed a reverse acquisition transaction with Bright
Stand International Limited, or “Bright Stand”, and Kunio Yamamoto, a Japanese
person and the sole former shareholder of Bright Stand.
This
share exchange transaction resulted in Bright Stand’s former shareholder
obtaining a majority voting interest in the Company. Generally accepted
accounting principles of the United States require that the company whose
shareholders retain the majority interest in a combined business be treated as
the acquirer for accounting purposes, resulting in a reverse acquisition with
Bright Stand as the accounting acquirer and Yuhe International Inc. as the
acquired party. Accordingly, the share exchange transaction has been accounted
for as a recapitalization of the Company.
F-7
2.
|
Organization
and Basis of Preparation of Financial Statements –
continued
|
Bright
Stand International Limited, or “Bright Stand”
On August
3, 2007, Bright Stand was incorporated with limited liability in the British
Virgin Islands. On January 31, 2008, Bright Stand completed the acquisition of
100% common stock of Weifang Yuhe Poultry Co., Ltd., or “PRC Yuhe,” and 43.75%
of Weifang Taihong Feed Co., Ltd., or “Taihong”. As a result, Bright Stand owned
100% of PRC Yuhe and owned 43.75% direct interest of Taihong and 56.25% indirect
interest of Taihong through PRC Yuhe. PRC Yuhe and Taihong became the
wholly-owned subsidiaries of Bright Stand.
PRC
Yuhe
PRC Yuhe
was established in Weifang, Shandong province of the People’s Republic of China,
or the “PRC”, as a limited liability company on March 8, 1996. PRC Yuhe is a
supplier of day-old chicken raised for meat production, or broilers, in the
People’s Republic of China.
Taihong
Taihong
was established in Weifang, Shandong province of the PRC, as a limited liability
company on May 26, 2003. Taihong is a feed stock company whose primary purpose
is to supply feed stock for PRC Yuhe’s breeder chicken.
The
Company’s operations are conducted through PRC Yuhe and Taihong. The Company and
its subsidiaries, hereinafter, collectively referred to as “the Group”, are
engaged in the business of chicken and feed production.
F-8
3.
|
Summary
of significant accounting policies
|
(a)
Principles of consolidation
The
condensed consolidated financial statements, prepared in accordance with
generally accepted accounting principles in the United States of America,
include the assets, liabilities, revenues, expenses and cash flows of the
Company and all its subsidiaries. This basis of accounting differs in certain
material respects from that used for the preparation of the books and records of
the Company’s principal subsidiaries, which are prepared in accordance with the
accounting principles and the relevant financial regulations applicable to
enterprises with limited liabilities established in the PRC, “PRC GAAP”, the
accounting standards used in the place of their domicile. The accompanying
consolidated financial statements reflect necessary adjustments not recorded in
the books and records of the Company’s subsidiaries to present them in
conformity with generally accepted accounting principles in the United States of
America.
The
condensed consolidated financial statements of the Company include the accounts
of Yuhe International, Inc, Bright Stand International Limited, PRC Yuhe and
Taihong after the date of acquisitions. All significant intercompany accounts,
transactions and cash flows are eliminated on consolidation.
(b) Use
of estimates
The
preparation of the financial statements in conformity with generally accepted
accounting principles in the United States of America 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 periods. Management makes these estimates using
the best information available at the time the estimates are made; however
actual results could differ materially from those estimates.
(c) Basic
and diluted earnings per share
The
Company reports basic earnings per share in accordance with the FASB accounting
standard. Basic earnings per share are computed using the weighted average
number of shares outstanding during the periods presented. The weighted average
number of shares of the Company represents the common stock outstanding during
the reporting periods.
F-9
3.
|
Summary
of significant accounting policies –
continued
|
Diluted
earnings per share are based on the assumption that all dilutive options were
converted or exercised. Dilution is computed by applying the treasury stock
method. Under this method, options are assumed to be exercised at the time of
issuance, and as if funds obtained thereby were used to purchase common stock at
the average market price during the year.
Fair
Value Measurements
The
Company defines fair value as the price that would be received from selling an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value
measurements for assets and liabilities, which are required to be recorded at
fair value, the Company considers the principal or most advantageous market in
which the Company would transact and the market-based risk measurements or
assumptions that market participants would use in pricing the asset or
liability, such as inherent risk, transfer restrictions and credit risk. The
Company applies the following fair value hierarchy, which prioritizes the inputs
used to measure fair value into three levels and bases the categorization within
the hierarchy upon the lowest level of input that is available and significant
to the fair value measurement:
Level 1 –
Quoted prices in active markets for identical assets or
liabilities.
Level 2 –
Observable inputs other than quoted prices in active markets for identical
assets and liabilities, quoted prices for identical or similar assets or
liabilities in inactive markets, or other inputs that are observable or can be
corroborated by observable market data for substantially the full term of the
assets or liabilities.
Level 3 –
Inputs that are generally unobservable and typically reflect management’s
estimates of assumptions that market participants would use in pricing the asset
or liability.
The
carrying amounts of financial assets and liabilities, such as cash and cash
equivalents, trade accounts receivable, other receivables, accounts payable, and
other payables, approximate their fair values because of the short maturity of
these instruments and market rates of interest.
In
January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires disclosure of transfers of assets and liabilities between Level 1 and
Level 2 of the fair value measurement hierarchy, including the reasons and the
timing of the transfers and information on purchases, sales, issuance, and
settlements on a gross basis in the reconciliation of the assets and liabilities
measured under Level 3 of the fair value measurement hierarchy. The guidance for
Level 3 reconciliation disclosures will be effective for annual and interim
periods beginning after December 15, 2010. The Company will adopt this guidance
beginning January 1, 2011. Adoption will not have a material impact on the
Company’s consolidated financial statements.
F-10
4.
|
Inventories
|
Inventories
consist of the following:
June
30
|
December 31
|
|||||||
|
2010
|
2009
|
||||||
|
||||||||
Raw
materials
|
$
|
7,109,990
|
$
|
5,275,629
|
||||
Work
in progress
|
2,234,544
|
1,285,154
|
||||||
Finished
goods
|
-
|
-
|
||||||
$
|
9,344,534
|
$
|
6,560,783
|
5.
|
Unlisted
investments
|
Unlisted
investments at June 30, 2010 and December 31, 2009 represent the 3% investment
in Hanting Rural Credit Cooperative, “Hanting”, which was recorded at
cost. For the three months ended June 30, 2010 and 2009, the Company
recorded no dividend income from unlisted investment in
Hanting. For the six months ended June 30, 2010 and 2009,
the Company recorded $15,615 and $15,509, respectively, as income from unlisted
investment for dividends received from Hanting. Management of the Company
has reviewed the investment in Hanting for impairment and determined there is no
indication that the carrying amount of Hanting may not be
recoverable.
F-11
6.
|
Plant
and equipment, net
|
Plant and
equipment consists of the following:
June
30,
|
December 31,
|
|||||||
|
2010
|
2009
|
||||||
|
||||||||
At
cost
|
||||||||
Buildings
|
$
|
25,147,810
|
$
|
19,071,808
|
||||
Machinery
|
6,061,015
|
6,006,596
|
||||||
Motor
vehicles
|
120,574
|
120,069
|
||||||
Furniture
and equipment
|
121,569
|
102,154
|
||||||
31,450,968
|
25,300,627
|
|||||||
Less:
accumulated depreciation
|
(4,853,464)
|
(3,716,677
|
)
|
|||||
26,597,504
|
21,583,950
|
|||||||
Construction
in progress
|
6,027,586
|
7,972,762
|
||||||
$
|
32,625,090
|
$
|
29,556,712
|
During
the three months ended June 30, 2010, depreciation expenses amounted to
$570,038, of which $560,906 and $9,132 were recorded as cost of revenue and
general and administrative expenses, respectively. During the six months ended
June 30, 2010, depreciation expenses amounted to $1,123,534, of which $1,060,514
and $63,020 were recorded as cost of revenue and general and administrative
expenses, respectively.
During
the three months ended June 30, 2009, depreciation expenses amounted to
$526,920, of which $480,070 and $46,850 were recorded as cost of revenue and
general and administrative expenses, respectively. During the six months ended
June 30, 2009, depreciation expenses amounted to $1,027,465, of which $924,404
and $103,061 were recorded as cost of revenue and general and administrative
expenses, respectively.
Capitalized
interest expense included in construction in progress totaled $164,160 and
$302,058 for the three months ended June 30, 2010 and 2009,
respectively.
Capitalized
interest expense included in construction in progress totaled $370,223 and
$302,058 for the six months ended June 30, 2010 and 2009,
respectively.
As of June 30, 2010 and December 31,
2009, buildings and machinery of the Company with net book value of $341,109 and
$556,178, respectively, were pledged as collateral under certain loan
arrangements (Note 12).
F-12
7.
|
Deposits
paid for acquisition of long term
assets
|
Deposits
paid consist of the following:
June
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Deposit
paid for purchase of buildings
|
$
|
6,979,275
|
$
|
12,139,473
|
||||
Deposits
paid for construction in progress
|
662,102
|
218,336
|
||||||
Deposits
paid for purchase of equipment
|
3,701,434
|
3,724,804
|
||||||
|
||||||||
Total
Deposits paid for acquisition of long term assets
|
$
|
11,342,811
|
$
|
16,082,613
|
F-13
8.
|
Intangible
assets, net
|
Intangible
assets consist of the following:
June
30,
|
December 31,
|
|||||||
|
2010
|
2009
|
||||||
|
||||||||
Land
use rights, at cost
|
$
|
2,989,603
|
$
|
2,977,098
|
||||
Less:
accumulated amortization
|
(159,140)
|
(125,687)
|
||||||
$
|
2,830,463
|
$
|
2,851,411
|
As of
June 30, 2010 and December 31, 2009, land use rights of the Company with net
book value of $2,830,463 and $2,851,411, respectively, were pledged as
collateral under certain loan arrangements.
During
the three months ended June 30, 2010 and 2009, amortization expenses included in
the cost of revenue were $16,403 and $16,388, respectively.
During
the six months ended June 30, 2010 and 2009, amortization expenses included in
the cost of revenue were $32,800 and $32,759, respectively.
The
estimated aggregate amortization expenses for the land use right for the five
succeeding years are as follows:
Year
|
||||
Remainder
of 2010
|
$ | 32,926 | ||
2011
|
65,851 | |||
2012
|
65,851 | |||
2013
|
65,851 | |||
2014
|
65,851 | |||
thereafter
|
2,534,133 | |||
|
||||
$ | 2,830,463 |
F-14
9.
|
Due
to related companies
|
June
30,
|
December 31,
|
|||||||
|
2010
|
2009
|
||||||
Others
|
$
|
1,208
|
$
|
1,208
|
The
amount due to related company is unsecured, interest free, has no fixed
repayment date and is used for working capital purposes.
10.
|
Loan
from director
|
Loan from
director totaled $293,746 (approximately Rmb2,000,000) and $292,517
(approximately Rmb 1,989,116) at June 30, 2010 and December 31, 2009,
respectively, representing bank loan principal borrowed by a director on behalf
of the Company. The loan is due on November 26, 2011 and bears
interest at 8.19% per annum.
11.
|
Other
payable
|
June
30,
|
December 31,
|
|||||||
|
2010
|
2009
|
||||||
Interest
payable
|
$
|
69,484
|
$
|
69,193
|
||||
Deposits
received
|
97,825
|
471,344
|
||||||
Others
|
893,785
|
803,364
|
||||||
$
|
1,061,094
|
$
|
1,343,901
|
Deposit
received represent deposits collected from customers as security for
non-payment.
Others
represent apartment rental reimbursement to staff and insurance
payable.
F-15
12.
|
Long-term
loans
|
The
long-term loans are denominated in Chinese Renminbi and are presented in US
dollars as follows:
June
30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Loans
from Nansun Rural Credit, interest rate at 7.56% per annum, the various
loans are due on Dec 10, 2011, Jan 26, 2013 and Mar 16,
2013
|
$ | 8,518,638 | $ | 8,775,521 | ||||
Loan
from Shuangyang Rural Credit, interest rate at 9.83% per annum, due on Oct
13, 2010
|
954,675 | 950,682 | ||||||
Loan
from Hanting Kaiyuan Rural Credit Cooperative, interest rate at 7.56% per
annum, due on January 7, 2011
|
1,072,173 | 1,067,689 | ||||||
10,545,486 | 10,793,892 | |||||||
Less:
current portion of long-term loans
|
(2,026,848 | ) | (9,433,686 | ) | ||||
$ | 8,518,638 | $ | 1,360,206 |
Future
maturities of long-term loans as at the relevant period indicated are as
follows:
June
30,
|
||||
2011
|
$ | 2,026,848 | ||
2012
|
293,746 | |||
2013
|
8,224,892 | |||
$ | 10,545,486 |
F-16
13.
|
Accrued
expenses and payroll related
liabilities
|
June
30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Salary
|
$ | 1,753,820 | $ | 1,254,780 | ||||
Employee
benefits
|
126,237 | 102,385 | ||||||
Others
|
- | 224,185 | ||||||
Accrued
expenses
|
1,121,645 | 784,784 | ||||||
$ | 3,001,702 | $ | 2,366,134 |
Payroll
related liabilities represent accrued payroll and welfare benefits to
employees.
F-17
14.
|
Income
tax
|
The
Company was incorporated in Nevada and is subject to U.S. income tax at the
statutory tax rate of 34%. No provision for income taxes have been
made for the U.S. entity as it has a taxable loss for the three and six months
ended June 30, 2010 and 2009, respectively. The Company has accumulated net
operating loss carry forward of $1,491,792 as of June 30, 2010. A full valuation
allowance of $507,209 has been provided against the deferred tax asset as of
June 30, 2010.
Bright
Stand was incorporated in the British Virgin Islands and is not subject to
income taxes under the current laws of the British Virgin Islands.
PRC Yuhe
is operating in the PRC, and in accordance with the relevant tax laws and
regulations of the PRC, the corporation income tax rate is 25%. However, PRC
Yuhe is an agricultural company, and in accordance with the relevant regulations
regarding tax exemption, it is tax-exempt as long as it is registered as an
agricultural entity.
Taihong
is operating in the PRC, and in accordance with the relevant tax laws and
regulations of the PRC, the corporate income tax rate is 25%.
The
Company uses the asset and liability method, where deferred tax assets and
liabilities are determined based on the expected future tax consequences of
temporary differences between the carrying amounts of assets and liabilities for
financial and income tax reporting purposes. Taihong has a net operating loss
carry forward and temporary difference, which resulted in deferred tax assets of
$6,792 and $5,096, respectively, as of June 30, 2010.
F-18
14.
|
Income
tax – continued
|
The
provision for income taxes consists of the following:
For
The Three Months Ended
|
For
The Six Months Ended
|
|||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
PRC
(current)
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Deferred
tax
|
||||||||||||||||
Decrease
(increase) in deferred tax
asset
|
3,329 | (49,370 | ) | 5,930 | (46,925 | ) | ||||||||||
Change
in valuation allowance
|
- | 49,370 | - | 46,925 | ||||||||||||
Income
Tax Expenses
|
$ | 3,329 | $ | - | $ | 5,930 | $ | - |
F-19
14.
|
Income
tax - continued
|
Actual
income tax expenses reported in the consolidated statements of income and
comprehensive income differ from the amounts computed by applying the PRC
statutory income tax rate of 25% to income before income taxes for the three and
six months ended June 30, 2010 and 2009, respectively, for the following
reasons:
For The Three Months Ended
|
For The Six Months Ended
|
|||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Income
before income taxes
|
$ | 3,058,712 | $ | 2,091,993 | $ | 5,988,313 | $ | 5,006,813 | ||||||||
Computed ”expected”
income tax expense at 25%
|
764,678 | 522,998 | 1,497,078 | 1,251,703 | ||||||||||||
Tax
effect on permanent differences
|
(19,904 | ) | (49,370 | ) | (43,013 | ) | (46,925 | ) | ||||||||
Parent
company losses for which no benefit has been recognized
|
116,837 | 84,691 | 213,674 | 177,136 | ||||||||||||
Effect
of tax holiday
|
(858,282 | ) | (558,319 | ) | (1,661,809 | ) | (1,381,914 | ) | ||||||||
Income
Tax Expenses
|
$ | 3,329 | $ | - | $ | 5,930 | $ | - | ||||||||
F-20
14.
|
Income
tax - continued
|
The tax
effects of temporary differences and carryforwards that give rise to significant
portions of deferred tax assets as of June 30, 2010 and December 31, 2009, were
as follows:
As of
|
As of
|
|||||||
|
June
30,
|
December 31,
|
||||||
|
2010
|
2009
|
||||||
Deferred
tax assets
|
||||||||
Net
operating loss carryforwards
|
$
|
6,792
|
$
|
12,691
|
||||
Bad
debt allowance
|
5,096
|
5,075
|
||||||
11,888
|
17,766
|
|||||||
Valuation
Allowance
|
-
|
-
|
||||||
Total
deferred tax assets
|
$
|
11,888
|
$
|
17,766
|
F-21
14.
|
Income
tax – continued
|
On
January 1, 2008, the Company adopted FASB ASC 740.10, which prescribes a
more-likely-than-not threshold for financial statement recognition and
measurement of a tax position taken in the tax return. This interpretation also
provides guidance on de-recognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities,
accounting for interest and penalties associated with tax positions, accounting
for income taxes in interim periods and income tax disclosures.
Through
June 30, 2010, the management considered that the Company had no uncertain tax
positions which affected its consolidated financial position and results of
operations or cash flow, and will continue to evaluate for the uncertain
position in future. There are no estimated interest costs and penalties provided
in the Company’s financial statements for the three and six months ended June
30, 2010 and 2009.
Cumulative
undistributed earnings of foreign subsidiaries, for which no U.S. income or
foreign withholding taxes have been recorded, approximated $31 million at June
30, 2010. As the company intends to indefinitely reinvest all such
earnings, no provision has been made for income taxes that may become payable
upon distribution of such earnings as allowed under ASC 740.30, “Accounting for
Income Taxes-Other considerations or special areas”.
15.
|
Fair
value of financial instruments
|
The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties. The carrying amounts
of financial assets and liabilities, such as cash and cash equivalents, trade
accounts receivable, other receivables, accounts payable, and other payables,
approximate their fair values because of the short maturity of these instruments
and market rates of interest.
The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties. The carrying amounts
of financial assets and liabilities, such as cash and cash equivalents, trade
accounts receivable, other receivables, accounts payable, and other payables,
approximate their fair values because of the short maturity of these instruments
and market rates of interest.
F-22
16.
|
Common
stock and warrants
|
(a) Common
Stock
Total
common stock issued and outstanding of the Company as at June 30, 2010 and
December 31, 2009 was 15,809,563 and 15,722,180 shares,
respectively.
(b) Warrants
On March
18, 2010, the Company issued 87,383 of common shares to WLT Brothers Capital,
Inc as a result of its cashless exercise of 142,816 warrants. There
are no warrants
outstanding as at June 30, 2010.
17.
|
Stock
options
|
As at
June 30, 2010, the total number of stock options outstanding was 383,151
shares. The Company recognizes compensation expense, net of estimated
forfeitures, over the requisite service period, which is the period during which
the grantee is required to provide services in exchange for the
award. The Company has elected to recognize compensation cost for
awards with only a service condition that has a graded vesting schedule on a
straight-line basis over the requisite service period for the entire
award.
The
Company uses the Black-Scholes option pricing model to calculate the grant-date
fair value of an award, with the following assumptions: no dividend yield,
expected volatility of 109.40%, and a risk-free interest rate of 3.00%. In
determining volatility of the Company’s options, the Company used the average
volatility of the Company’s stock. Fair value per the Black-Scholes model is
$2,186,499. In accordance with FASB ASC 718, the Company has recorded
stock-based compensation expense during the three and six months ended June 30,
2010, of $181,692 and $361,387, respectively, in connection with the issuance of
this option. Stock-based compensation expense during the three and six months
ended June 30, 2009 totaled $181,709 and $361,421, respectively.
The
weighted average grant date fair value of options granted was $5.71 per
share. The weighted average exercise price of these options was
$3.708 per share. The total number of stock options outstanding as at
June 30, 2010 and December 31, 2009 was 383,151 shares.
Following
is a summary of the status of options outstanding at June 30, 2010:
|
Options outstanding
|
|
|
Options exercisable
|
||||||||||||||||||||
Exercise
price
|
|
Number
outstanding
|
|
|
Weighted
average
remaining
contractual life
(years)
|
|
|
Weighted
Average
Exercise
price
|
|
|
Number
exercisable
|
|
|
Weighted
average
remaining
contractual life
(years)
|
|
|
Weighted
Average
Exercise price
|
|||||||
$
|
3.708
|
383,151
|
2.96
|
$
|
3.708
|
255,179
|
2.96
|
$
|
3.708
|
F-23
18.
|
Earnings
per share
|
Basic
earnings per share are computed on the basis of the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per
share are computed on the basis of the weighted average number of shares of
common stock plus the effect of dilutive potential common shares outstanding
during the period. The following table sets forth the computation of basic
and diluted net income per share:
For
The Three Months Ended
|
For
The Six Months Ended
|
|||||||||||||||
June
30,
|
June
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
income attributable to the common stockholders
|
$ | 3,055,383 | $ | 2,091,993 | $ | 5,982,383 | $ | 5,006,813 | ||||||||
Weighted
average outstanding shares of common stock
|
15,809,563 | 15,722,180 | 15,772,872 | 15,722,180 | ||||||||||||
Dilutive
effect of options, warrants, and contingently issuable
shares
|
219,473 | - | 268,521 | - | ||||||||||||
Common
stock and common stock equivalents
|
16,029,036 | 15,722,180 | 16,041,393 | 15,722,180 | ||||||||||||
Earnings
per share:
|
||||||||||||||||
Basic
|
$ | 0.19 | $ | 0.13 | $ | 0.38 | $ | 0.32 | ||||||||
Diluted
|
$ | 0.19 | $ | 0.13 | $ | 0.37 | $ | 0.32 | ||||||||
Basic and
diluted earnings per share are the same as there was no dilutive effect of the
warrants and stock options for the three and six months ended June 30,
2009.
F-24
19.
|
Significant
concentrations and risk
|
(a) Customer
Concentrations
The
Company has the following concentrations of business with each customer
constituting greater than 10% of the Company’s gross sales:
For
The Three Months Ended
|
For
The Six Months Ended
|
||||
June
30,
|
June
30,
|
||||
2010
|
2009
|
2010
|
2009
|
||
Wei
Yunchao
|
13.05%
|
11.62%
|
12.72%
|
10.21%
|
|
Wang
Jianbo
|
10.83%
|
*
|
12.37%
|
*
|
|
Li
Chuanwang
|
10.13%
|
*
|
10.16%
|
*
|
*
Constitutes less than 10% of the Company’s gross sales.
The
Company has not experienced any significant difficulty in collecting its
accounts receivable in the past and is not aware of any financial difficulties
being experienced by its major customers.
The
Company has the following concentrations of business with each supplier
constituting greater than 10% of the Company’s purchase:
For
The Three Months Ended
|
For
The Six Months Ended
|
||||
June
30,
|
June
30,
|
||||
2010
|
2009
|
2010
|
2009
|
||
Gao
Ping
|
*
|
*
|
11.22%
|
*
|
|
Wang
Jianbo
|
*
|
*
|
11.15%
|
*
|
|
Ma
Suping
|
*
|
*
|
*
|
14.19%
|
*
Constitutes less than 10% of the Company’s purchase.
F-25
19.
|
Significant
concentrations and risk – continued
|
(b) Credit
Risk
Financial
instruments that potentially subject the Company to significant concentration of
credit risk consist primarily of cash and cash equivalents. As of
June 30, 2010, substantially all of the Company’s cash and cash equivalents were
held by major financial institutions located in the PRC, which management
believes are of high credit quality.
(c) Company’s
operations are in China
All of
the Company’s products are produced in China. The Company’s
operations are subject to various political, economic, and other risks and
uncertainties inherent in China. Among other risks, the Company’s
operations are subject to the risks of transfer of funds; domestic and
international customs and tariffs; changing taxation policies; foreign exchange
restrictions; and political conditions and governmental
regulations.
F-26
20.
|
Business
and geographical segments
|
The
Company’s operations are classified into two principal reportable segments that
provide different products or services. PRC Yuhe is engaged in the
business of breeding chicken while Taihong is engaged in the business of feed
production, in which most of the products were used internally. Separate
management of each segment is required because each business unit is subject to
different production and technology strategies.
Reportable
Segments
For The Three Months Ended
June
30, 2010
|
For The Three Months Ended June 30, 2009 |
For The Three Months
Ended
June 30,
|
||||||||||||||||||||||||||||||
Production
of chicks
|
Production
of feed
|
Corporate
|
Production
of chicks
|
Production
of feed
|
Corporate
|
Total
|
||||||||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||||||||||||||
External
revenue
|
$ | 12,425,421 | $ | 53,210 | $ | - | $ | 9,774,170 | $ | 60,203 | $ | - | $ | 12,478,631 | $ | 9,834,373 | ||||||||||||||||
Intersegment
revenue
|
$ | - | $ | 2,047,225 | $ | - | $ | - | $ | 2,184,498 | $ | - | $ | 2,047,225 | $ | 2,184,498 | ||||||||||||||||
Interest
income
|
$ | 81 | $ | 0 | $ | - | $ | 45 | $ | - | $ | - | $ | 81 | $ | 45 | ||||||||||||||||
Interest
expense
|
$ | - | $ | (49,188 | ) | $ | - | $ | - | $ | - | $ | - | $ | (49,188 | ) | $ | - | ||||||||||||||
Depreciation
and amortization
|
$ | (557,658 | ) | $ | (28,783 | ) | $ | - | $ | (511,062 | ) | $ | (32,245 | ) | $ | - | $ | (586,441 | ) | $ | (543,307 | ) | ||||||||||
Net
profit/(loss) after tax
|
$ | 3,433,130 | $ | 89,603 | $ | (467,350 | ) | $ | 2,233,277 | $ | 197,478 | $ | (338,762 | ) | $ | 3,055,383 | $ | 2,091,993 | ||||||||||||||
Expenditures
for long-lived assets
|
$ | 106,728 | $ | - | $ | - | $ | 4,321,477 | $ | 9,027 | $ | - | $ | 106,728 | $ | 4,330,504 |
Note:
Intersegment revenue of $2,047,225 was eliminated in consolidation.
F-27
20.
|
Business
and geographical segments -
continued
|
For The Six Months Ended June 30, 2010 | For The Six Months Ended June 30, 2009 |
For The Six Months
Ended
June 30,
|
||||||||||||||||||||||||||||||
Production
of chicks
|
Production
of feed
|
Corporate
|
Production
of chicks
|
Production
of feed
|
Corporate
|
Total
|
||||||||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||||||||||||||
External
revenue
|
$ | 24,121,606 | $ | 113,942 | $ | - | $ | 20,602,014 | $ | 146,749 | $ | - | $ | 24,235,548 | $ | 20,748,763 | ||||||||||||||||
Intersegment
revenue
|
$ | - | $ | 3,787,219 | $ | - | $ | - | $ | 4,590,411 | $ | - | $ | 3,787,219 | $ | 4,590,411 | ||||||||||||||||
Interest
income
|
$ | 139 | $ | 0 | $ | - | $ | 134 | $ | 7 | $ | - | $ | 139 | $ | 141 | ||||||||||||||||
Interest
expense
|
$ | - | $ | (115,138 | ) | $ | - | $ | (115,400 | ) | $ | (210,027 | ) | $ | - | $ | (115,138 | ) | $ | (325,427 | ) | |||||||||||
Depreciation
and amortization
|
$ | (1,096,727 | ) | $ | (59,608 | ) | $ | - | $ | (995,787 | ) | $ | (64,437 | ) | $ | - | $ | (1,156,335 | ) | $ | (1,060,224 | ) | ||||||||||
Net
profit/(loss) after tax
|
$ | 6,647,235 | $ | 189,843 | $ | (854,695 | ) | $ | 5,527,658 | $ | 187,694 | $ | (708,539 | ) | $ | 5,982,383 | $ | 5,006,813 | ||||||||||||||
Expenditures
for long-lived assets
|
$ | 438,883 | $ | - | $ | - | $ | 4,804,393 | $ | 69,490 | $ | - | $ | 438,883 | $ | 4,873,883 |
Note:
Intersegment revenue of $3,787,219 was eliminated in consolidation.
The
Company’s operations are located in the PRC. All revenue is from customers in
the PRC. All of the company’s assets are located in the PRC.
Accordingly, no analysis of the Company’s sales and assets by geographical
market is presented.
F-28
21.
|
Commitments
and contingencies
|
Operating
Leases - In the normal course of business, the Company leases the land for hen
houses under operating lease agreements. The Company rents land, primarily for
the feeding of the chicken. The operating lease agreements generally contain
renewal options that may be exercised at the Company’s discretion after the
completion of the base rental terms. The Company was obligated under operating
leases requiring minimum rentals as follows:
Remainder
of six months ended June 30, 2010
|
||||
2010
|
$
|
34,860
|
||
2011
|
69,721
|
|||
2012
|
69,721
|
|||
2013
|
69,721
|
|||
2014
|
69,721
|
|||
Thereafter
|
1,251,216
|
|||
Total
minimum lease payments
|
1,564,960
|
During
the three months ended June 30, 2010 and 2009, rental expenses were $55,437 and
$28,623, respectively.
During
the six months ended June 30, 2010 and 2009, rental expenses were $107,013 and
$57,218, respectively.
F-29
21.
|
Commitments
and contingencies - continued
|
The
Company entered into various breeder farm acquisition and construction
contracts; the following is a summary of the commitments as of June 30,
2010:
Total
Consideration
|
Total Amount
Paid as of
June
30, 2010
|
Remaining
Balance as of
June
30, 2010
|
Expected Date
of Payment
|
Starting Date
of Project
|
Date /
Expected
Date of
Completion
|
Notes
|
|||||||||||||||
Constructions
of:
|
|||||||||||||||||||||
Breeding
Farm No. 1 and No. 28
|
$ | 6,120,000 | $ | 4,704,000 | $ | 1,416,000 |
Progressively
from May 2010
|
May
2005
|
April
2010
|
- | |||||||||||
Steel
Structural Surface for Hatchery No. 3
|
572,805 | 467,056 | 105,749 |
Within
three months upon completion
|
December
2008
|
August
2010
|
- | ||||||||||||||
Acquisition
of 13 Breeder Farms
|
15,255,706 | 3,065,241 | 12,190,465 |
End
of December 2010
|
Acquired
on
December
24,
2009
|
End
of December 2010
|
Expected
to spend $2.49m for renovation
|
||||||||||||||
Acquisition
of 5 Breeder Farms (Note 23)
|
3,121,426 | - | 3,121,426 |
End
of July 2010
|
July
14,2010
|
End
of December 2010
|
- | ||||||||||||||
Total | $ | 25,069,937 | $ | 8,236,297 | $ | 16,833,640 |
F-30
21.
|
Commitments
and contingencies - continued
|
Construction
of Breeding Farm No. 1 and No. 28
On August
15, 2008, PRC Yuhe completed construction work and facilities to set up the
southern farm of breeding farm No 1. On August 30, 2008, PRC Yuhe
purchased 100,000 sets of parent breeders and began to feed. By the end of
December 2008, PRC Yuhe has spent $4.5 million, approximately equivalent to
RMB29 million, to build breeding farm No 1. The breeding farm can be split
into the southern and the northern regions. The northern farm construction
work and facilities have been set up by the end of February 2010. The
capacity of the northern factory is 130,000 sets of parent
broilers. The residual payment is $0.88 million, approximately
equivalent to RMB6 million, for the building and facilities; and $0.53 million,
approximately equivalent to RMB3.6 million, in machinery and is scheduled to be
paid progressively from May 2010. On March 1, 2010, PRC Yuhe completed
construction work and facilities of breeding farm no. 28. This
breeder farm covers an area of 20.6 acres (125 mu) and has capacity for 130,000
parent breeders.
Construction
of Breeding Farm No. 2, 3, 5, 6, and 7
On
December 6, 2008, PRC Yuhe entered into a construction agreement with a
contractor to build and renovate five of its breeding farms for a total
consideration of $380,000, approximately equivalent to RMB2.6 million. The
construction has been completed at the end of October 2009. The
residual payment of $87,770, approximately equivalent to RMB600,000, has been
paid by the end of March 2010.
Construction
of Steel Structural Surface for Hatchery No. 3
On
December 10, 2008, PRC Yuhe entered into a construction agreement with a
contractor to build the steel structure for its hatchery farm No. 3 for a total
consideration of $572,805, approximately equivalent to RMB3.9 million. The steel
structural surface has been completed and the interior remodeling is expected to
complete in August 2010. The residual scheduled payment is $105,749,
approximately equivalent to RMB 0.72 million, and is scheduled to be paid three
months after completion of construction.
F-31
21.
|
Commitments
and contingencies - continued
|
Construction of
Breeding Farm and Steel Structural Surface
On June
23, 2009, PRC Yuhe entered into two construction agreements with contractors to
build part of the above breeding farms and construct the steel structure for a
total consideration of $894,120, approximately equivalent to RMB6,112,300, and
$861,280, approximately equivalent to RMB5,887,800, respectively. The
constructions have been completed as of December 31, 2009. As of
March 31, 2010, the Company has paid $781,150, approximately equivalent to
RMB5,340,000, and $751,890, approximately equivalent to RMB5,140,000,
respectively to these two suppliers. The residual payments of
$112,970, approximately equivalent to RMB772,300, and $109,390, approximately
equivalent to RMB747,800, have been paid by the end of June, 2010.
Acquisition
of 13 Breeder Farms
On
December 24, 2009, PRC Yuhe entered into an agreement to purchase thirteen
breeder farms at a total consideration of $15,255,706, approximately equivalent
to RMB103,870,000. As of June 30, 2010, PRC Yuhe has paid 80% of the
total consideration, or $12,190,465, approximately equivalent to RMB83,000,000.
The remaining balance of $3,065,241, approximately equivalent to RMB20,870,000,
is expected to be paid by the end of December 2010. The farms cover a total area
of 37 hectares (560 mu), for which PRC Yuhe acquired all the ground buildings as
well as the land use rights for 36 years. The purchase price also includes
in-house breeding facilities which supply feed, water and air to the parent
breeders.
Purchase
of Land Use Right and Construction of Breeding Farm
On
December 26, 2009, PRC Yuhe entered into an agreement to purchase land use right
and buildings on this land for a total consideration of $2,937,000,
approximately equivalent to RMB 20,000,000. The land use right is for 50
years. As of June 30, 2010, full payment has already been made. PRC
Yuhe plans to build a breeding farm on this piece of land, construction contract
has not been entered into as of June 30, 2010. Construction is expected to
commence in October 2010 and the estimated completion date is December
2010.
F-32
22.
|
Equipment
Leasing and Rental Arrangement
|
On
November 11, 2008, PRC Yuhe entered into equipment leasing agreement and
property rental agreement, collectively, the “Agreements”, with Shandong
Nongbiao Purina Feed Co., Ltd., “Shandong Nongbiao Purina”.Shandong Nongbiao
Purina will construct a feed production facility on a property leased from PRC
Yuhe and become the exclusive feed supplier for PRC Yuhe. Pursuant to the terms
and conditions of the Agreements, Shandong Nongbiao Purina will lease certain
equipment for feed production from, and install them at the premises owned by
PRC Yuhe. The lease term for both the equipment leasing agreement and property
rental agreement is 10 years. After completion of the feed production facility,
the lease term commenced in July 2009 when the production
began. Shandong Nongbiao Purina shall pay to PRC Yuhe an annual
rental payment for the leased land, premises and facilities of $219,420,
approximately equivalent to RMB1,500,000. The rent payable by Shandong Nongbiao
Purina under the rental agreement will be offset against the prepaid equipment
rental costs of $1,462,820, approximately equivalent to
RMB10,000,000. As at June 30, 2010, Shandong Nongbiao Purina advanced
$710,808, approximately equivalent to RMB4,839,610, to PRC Yuhe as rental
payment and was recorded as advances from customers.
In
connection with the execution of the Agreements, Shandong Yuhe Food Group Co.,
Ltd., “Yuhe Group”, a PRC company based in Shandong Province, would be the
guarantor of PRC Yuhe for $658,000, approximately equivalent to RMB4,500,000,
for the first five years and for $439,000, approximately equivalent to
RMB3,000,000, for the next five years. No guarantee fee is required according to
the above Agreements.
The
leasing arrangement with Purina is accounted for as operating lease with the
exception of the lease of equipment. The equipment leased to Purina
are accounted for as direct financing lease because the equipment has an
economic useful life of 10 years and the term of the equipment lease is for 10
years.
The
following lists the components of the net investment in direct financing as of
June 30, 2010 and December 31, 2009, respectively:
June
30,
|
December 31,
|
|||||||
|
2010
|
2009
|
||||||
Minimum
lease payments receivable
|
$
|
547,192
|
$
|
544,903
|
||||
Less:
Unearned income
|
(146,756
|
)
|
(162,161
|
)
|
||||
Net
investment in direct financing lease
|
$
|
400,436
|
$
|
382,742
|
F-33
22.
|
Equipment
Leasing and Rental Arrangement –
continued
|
As of
June 30, 2010, future minimum lease payments to be received for each of the five
succeeding fiscal years are as follows: $0 in 2010 to 2013 and $25,719 in
2014. There were no minimum lease payments to be received in 2010 to
2013 because Purina has advanced $553,695 for equipment rental as of June 30,
2010.
There are no contingent rentals
included in income for the three and six months ended June 30, 2010 and
2009.
23.
|
Subsequent
Event
|
On July
14, 2010, PRC Yuhe entered into an asset purchase agreement, or the “Purchase
Agreement”, with Liaoning Haicheng Songsen Stock Farming and Feed Co., Ltd., or
“Haicheng Songsen”, and Mr. Jiang Zhaolin, the controlling shareholder of
Haicheng Songsen, collectively, the “Seller”. Neither Haicheng Songsen nor Mr.
Jiang Zhaolin is affiliated with the Company.
Pursuant
to the Purchase Agreement, the Seller has agreed to sell to PRC Yuhe certain
assets of Haicheng Songsen, including five breeder farms with a total area of
approximately 52 acres and total building coverage of approximately 680,000
square feet in Haicheng, Liaoning Province, China, for a purchase price of
approximately $3,121,426, equivalent to RMB 21,252,540, or the
“Transaction”.
Concurrently,
PRC Yuhe entered into a service agreement, or the “Service Agreement”,
with Mr. Jiang
Zhaolin. Pursuant to the
Service Agreement, Mr. Jiang Zhaolin has agreed to provide PRC Yuhe with
certain services related to completion and closing of the Transaction in
consideration for certain number of restricted shares of common stock of
the Company calculated at a price of $10 per share with total
consideration equal to approximately $2,943,336, equivalent to RMB 20
million. Based on such calculation, Mr. Jiang Zhaolin will receive
approximately 300,000 restricted shares at the closing of the
Transaction.
|
F-34
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Special
Note Regarding Forward Looking Statements
This
Quarterly Report on Form 10-Q, including the following “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” contains
forward-looking statements that are based on the beliefs of the Company’s
management and involve risks and uncertainties, as well as assumptions that, if
they ever materialize or prove incorrect, could cause the results of the Company
to differ materially from those expressed or implied by such forward-looking
statements. The words “believe,” “expect,” “anticipate,” “project,” “targets,”
“optimistic,” “intend,” “aim,” “will” or similar expressions are intended to
identify forward-looking statements. All statements other than statements of
historical fact are statements that could be deemed forward-looking statements,
including statements regarding new and existing products, technologies and
opportunities; statements regarding market and industry segment growth and
demand and acceptance of new and existing products; any projections of sales,
earnings, revenue, margins or other financial items; any statements of the
plans, strategies and objectives of management for future operations; any
statements regarding future economic conditions or performance; uncertainties
related to conducting business in China; any statements of belief or intention;
any of the factors mentioned in the “Risk Factors” section of the Company’s S-1
or amendment thereof or annual report on Form 10-K; and any statements of
assumptions underlying any of the foregoing. Except as otherwise indicated by
the context, references in this report to the “Company,” “Yuhe International,”
“we,” “us,” or “our,” are references to the combined business of Yuhe
International, Inc. and its subsidiaries.
Overview
The
Company is in the middle of the broiler chicken supply chain. The Company
purchases parent breeding stocks from primary breeder farms, raises them for
hatching eggs and sells live day-old broilers to the market. The Company’s
business segment has the highest margin along the supply chain. The Company
produces high-quality day-old broilers supported by its know-how in the areas of
feed ingredient composition, immunizations system and breeding techniques,
gained through over a decade of experience.
Unless
otherwise noted, all dollar figures provided herein are translated into United
States Dollars from Renminbi at year-end exchange rates as to assets and
liabilities and average exchange rates as to revenues and expenses. Capital
accounts are translated at their historical exchange rates when the capital
transactions occurred.
Unless
otherwise noted, all historical financial information prior to March 12, 2008
refers to PRC Yuhe, which includes the accounts of Taihong.
The
Company’s Business Operations
The
Company’s business is part of the commercial broiler supply chain.
Day-old
broilers are one-day-old broilers that are sold to broiler raisers. Day-old
broilers sold by the Company’s wholly-owned subsidiary, PRC Yuhe, are its
primary source of revenue.
3
The
Company purchases parent breeding chicken from grandparent breeder farms and
raises them to maturity. Once these parent breeding chicken have matured, they
produce hatching eggs that the Company incubates and then sells the resulting
day-old broiler chicks to its customers.
Under
normal circumstances, female parent breeder chicken become productive from the
26th
week, and are no longer commercially productive after the 66th week. Typically a
breeder is capable of producing approximately 167 eggs which will be hatched to
137 broilers over its production lifetime and the breeders are maintained by the
Company for a period of 420 days. The Company sources its parent breeder chicken
from licensed suppliers located in Beijing, and Shandong and Jiangsu provinces
and these suppliers are required to have a vaccination certificate and a breeder
production certificate for the sale of the breeders. The Company’s hatching eggs
typically must be incubated for a period of 21 days. At least 28 weeks usually
pass from the Company’s receipt of a day-old parent breeder to its sale of the
first day-old broilers.
The
Company operates in two elements of the broiler supply chain: day-old broiler
production and feed production. These activities are operated under two separate
subsidiaries, PRC Yuhe and Taihong, respectively.
4
The
following is a discussion of the Company’s results of operations for the three
months ended June 30, 2010 compared to the three months ended June 30,
2009.
Three
Months Ended June 30, 2010 Compared to Three Months Ended June 30,
2009
Year
to Date
|
All amounts,
|
As a
|
All amounts,
|
As a
|
Increase/
|
Increase/
|
other than
|
percentage of
|
other than
|
percentage of
|
(Decrease)
|
(Decrease)
|
|
percentage, are
in
|
net revenue
|
percentage, are
in
|
net revenue
|
Dollar ($)
|
Percentage
|
|
U.S. dollars
|
|
U.S. dollars
|
|
|
|
|
For
the three
|
For
the three
|
For
the three
|
For
the three
|
For
the three
|
For
the three
|
|
months
ended
|
months
ended
|
months
ended
|
months
ended
|
months
ended
|
months
ended
|
|
June
30
|
June
30
|
June
30
|
June
30
|
June
30
|
June
30
|
|
2010
|
2010
|
2009
|
2009
|
2010
|
2010
|
|
|
|
|
|
|
||
Sales
revenue
|
12,478,631
|
100.00%
|
9,834,373
|
100.00%
|
2,644,258
|
26.89%
|
Cost
of revenue
|
8,355,543
|
66.96%
|
7,031,426
|
71.50%
|
1,324,117
|
18.83%
|
Gross
profit
|
4,123,088
|
33.04%
|
2,802,947
|
28.50%
|
1,320,141
|
47.10%
|
|
|
|
|
|
|
|
Selling
expenses
|
201,568
|
1.62%
|
108,656
|
1.10%
|
92,912
|
85.51%
|
General
and administrative expenses
|
810,623
|
6.50%
|
635,247
|
6.46%
|
175,376
|
27.61%
|
Operating
income
|
3,110,897
|
24.93%
|
2,059,044
|
20.94%
|
1,051,853
|
51.08%
|
Interest
income
|
81
|
0.00%
|
45
|
0.00%
|
36
|
80.00%
|
Other
(expense) income
|
(3,081)
|
-0.02%
|
5,126
|
0.05%
|
(8,207)
|
-160.11%
|
Loss
on disposal of fixed assets
|
-
|
0.00%
|
27,778
|
0.28%
|
(27,778)
|
-100.00%
|
Investment
income
|
3
|
0.00%
|
-
|
0.00%
|
3
|
-100.00%
|
Interest
expenses
|
49,188
|
0.39%
|
-
|
0.00%
|
49,188
|
-100.00%
|
Income
tax expenses
|
3,329
|
0.03%
|
-
|
0.00%
|
3,329
|
-100.00%
|
Net
income
|
3,055,383
|
24.48%
|
2,091,993
|
21.27%
|
963,390
|
46.05%
|
5
The
Company has consolidated the results of PRC Yuhe and Taihong into its
Consolidated Financial Statements from January 1, 2010 to June 30, 2010 and
January 1, 2009 to June 30, 2009.
Net revenue. Sales
revenue amounted to $12.48 million for the three months ended June 30, 2010,
increased by $2.64 million, or 27%, from $9.83 million for the three months
ended June 30, 2009. The revenue increase was driven by the increase in sales
volume of the Company’s day-old broilers by 8.9 million birds, or 34%, from 25.7
million birds in 2009 to 34.6 million birds in 2010 for the three-month period
ended on June 30. The increase in sales volume of the broilers was a result of
capacity expansion in the first quarter of fiscal year 2010. Nevertheless, the
sales revenue increase as a result of the broiler sales volume increase was
partially offset from $3.12 million to $2.64 million by the revenue decrease in
retired parent broilers and by-products by $0.48 million. The unit selling price
of the broilers of RMB 2.38 per bird remained unchanged year over year for the
three months ended June 30, 2010.
For the
breakdown of the total revenue, $12.08 million, or 96.8% of total sales, came
from day old broilers sales; $0.15 million, or 1.2% of the total sales, came
from the sales of retired parent broilers, which contributed a gross income of
$42,000 for the three-month period; $0.11 million, or 0.9% of total sales, came
from sales of non-fecundated eggs; $0.09 million, or 0.7% of total sales, came
from chicken dung and other business; and $0.05 million, or 0.4% of total sales,
came from external feed sales of Taihong.
Cost of revenues. The
Company’s cost of revenues increased by $1.32 million, or 18.83%, to $8.36
million for the three months ended June 30, 2010 from $7.03 million for the
three months ended June 30, 2009. The increase in the cost of revenues was
mainly driven by the increase in the sales volume of day-old broilers, and was
partially offset by a decrease in unit cost of the broilers. The unit
cost of day-old broilers decreased by 4.3% from RMB1.71 for the three months
ended June 30, 2009 to RMB1.64 for the three months ended June 30, 2010.
This decrease was due to the decreased
proportion of our internally-produced
broilers, which had higher costs than those
of the externally-purchased broilers in the three months ended June 30,
2010. We retired selected
breeders earlier than expected, and conducted feather changing solution
on selected breeders in our fiscal year 2010 production plan, both of which contributed to the decrease of the
unit cost of day-old broilers. As a
percentage of net revenues, the cost of revenues decreased by 4.54%, from 71.5%
for the three months ended June 30, 2009, to 66.96% for the three months ended
June 30, 2010.
Gross profit. The Company’s
gross profit increased by $1.32 million, or 47.1%, to $4.12 million for the
three months ended June 30, 2010 from $2.8 million for the three months ended
June 30, 2009. Gross margin as a percentage of net revenues was 33% for the
three months ended June 30, 2010, as compared to 28.5% for the three months
ended June 30, 2009. The increase was mainly because of the good management
of the external eggs and
hence the cost of day-old broilers has decreased as discussed
above.
General and administrative
expenses. The general and administrative expenses increased by $0.18
million, or 27.61%, to $0.81 million for the three months ended June 30, 2010
from $0.64 million for the three months ended June 30, 2009. The increase in
general and administrative expenses was mainly due to increased legal and
compliance expenses related to public company status. S3 filing expenses
increased by $0.13 million, and additional SOX compliance advisory fees
increased by $0.04 million.
The
general and administrative expenses comprised mainly of public company related
expenses of $0.47 million, including stock based compensation of $181,692,
representing 58% of total general and administrative expenses; human resources
and related expenses of $0.13 million, representing 16% of total general and
administrative expenses; auditing and advisory expenses of $0.05 million,
representing 6% of total general and administrative expenses; transportation
costs of $0.03 million, representing 4% of total general and administrative
expenses; facilities and utility expenses of $0.06 million, representing 7% of
total general and administrative expense; travel expenses of $0.03million,
representing 4% of total general and administrative expenses; and tax expense of
$0.03 million ,representing 4% of total general and administrative
expenses.
Selling Expenses. The
Company’s selling expenses increased by $92,912, or 86%, to $201,568 for the
three months ended June 30, 2010 from $108,656 for the same period in 2009.
Selling expenses comprised mainly of packaging and transportation expenses of
$163,371, representing 81% of total selling expenses; human resources and
related expenses of $14,593, representing 7% of total selling expenses; and
travel, office expenses and advertising expenses of $16,361, representing 8% of
total selling expense. The increase in selling expenses was primarily due to the
increase in packaging and transportation expenses as a result of increased sales
volume. In addition, the unit cost of day old broiler box increased by RMB0.35,
or 12%, to RMB3.36 for the three months ended June 30, 2010 from RMB3.01 for the
same period in 2009. As a percentage of net revenue, selling expenses increased
by 0.5%, from 1.1% for the three months ended June 30, 2009, to 1.6% for the
three months ended June 30, 2010.
6
Interest expenses. Interest
expenses increased by $49,188 for the three months ended June 30, 2010 from $0
for the same period in 2009. The increase in interest expense was attributed to
the fact that all financing interest was capitalized in construction in progress
in the second quarter of fiscal 2009. Capitalized interest for the three
months ended June 30, 2010 and 2009 was $164,160 and $302,000 respectively. If
interest was not capitalized, interest expenses on bank loans would have been
$213,348 and $302,000 for the three months ended June 30, 2010 and 2009
respectively. This year over year decrease was mainly due to the interest rate
decrease in the second quarter of 2010, and the Company has repaid a loan
of $292,622(RMB2,000,000) on May 17,2010.
Net profit. Net profit
increased by $0.96 million, or 46%, to $3.06 million for the three months ended
June 30, 2010 from $2.09 million for the three months ended June 30, 2009, as a
result of the factors described above.
Six
Months Ended June 30, 2010 Compared to Six Months Ended June 30,
2009
Year
to Date
|
All amounts,
|
As a
|
All amounts,
|
As a
|
Increase/
|
Increase/
|
other than
|
percentage of
|
other than
|
percentage of
|
(Decrease)
|
(Decrease)
|
|
percentage,
are in
|
net revenue
|
percentage, are
in
|
net revenue
|
Dollar ($)
|
Percentage
|
|
U.S. dollars
|
|
U.S. dollars
|
|
|
|
|
For
the six
|
For
the six
|
For
the six
|
For
the six
|
For
the six
|
For
the six
|
|
months
ended
|
months
ended
|
months
ended
|
months
ended
|
months
ended
|
months
ended
|
|
June
30
|
June
30
|
June
30
|
June
30
|
June
30
|
June
30
|
|
2010
|
2010
|
2009
|
2009
|
2010
|
2010
|
|
|
|
|
|
|
||
Sales
revenue
|
24,235,548
|
100.00%
|
20,748,763
|
100.00%
|
3,486,785
|
16.80%
|
Costs
of revenue
|
16,212,105
|
66.89%
|
13,883,779
|
66.91%
|
2,328,326
|
16.77%
|
Gross
profit
|
8,023,443
|
33.11%
|
6,864,984
|
33.09%
|
1,158,459
|
16.87%
|
|
|
|
|
|
|
|
Selling
expenses
|
312,515
|
1.29%
|
201,596
|
0.97%
|
110,919
|
55.02%
|
General
and administrative expenses
|
1,631,139
|
6.73%
|
1,379,237
|
6.65%
|
251,902
|
18.26%
|
Operating
income
|
6,079,789
|
25.09%
|
5,284,151
|
25.47%
|
795,638
|
15.06%
|
Interest
income
|
139
|
0.00%
|
141
|
0.00%
|
(2)
|
-1.41%
|
Other
income (expense)
|
8,084
|
0.03%
|
4,661
|
0.02%
|
3,423
|
73.44%
|
Loss
on disposal of fixed assets
|
176
|
0.00%
|
27,778
|
0.13%
|
(27,602)
|
-99.37%
|
Investment
income
|
15,615
|
0.06%
|
15,509
|
0.07%
|
106
|
0.68%
|
Interest
expenses
|
115,138
|
0.48%
|
325,427
|
1.57%
|
(210,289)
|
-64.62%
|
Income
tax expenses
|
5,930
|
0.02%
|
-
|
0.00%
|
5,930
|
100.00%
|
Net
income
|
5,982,383
|
24.68%
|
5,006,813
|
24.13%
|
975,569
|
19.48%
|
The
Company has consolidated the results of PRC Yuhe and Taihong into its
Consolidated Financial Statements from January 1, 2010 to June 30, 2010 and
January 1, 2009 to June 30, 2009.
7
Net revenue. Sales revenue
amounted to $24.24 million for the six months ended June 30, 2010, increased by
$3.49 million, or 16.8%, from $20.75 million for the six months ended June 30,
2009. The revenue increase was driven by the increase in sales volume of the
Company’s day-old broilers by 11.4 million birds, or 23%, from 48.8 million
birds in 2009 to 60.2 million birds in 2010, for the six-month period ended on
June 30. The revenue impact resulted from the increased sales volume was
partially offset by the decreased unit selling price. The selling price of
day-old broilers decreased from RMB 2.67 per bird for the six months ended June
30, 2009 to RMB 2.61 per bird, or 2%, for the six months ended June 30,
2010.
For the
breakdown of the total revenue, $22.97 million, or 94.8% of total sales, came
from day old broilers sales; $0.78 million, or 3.2% of the total sales, came
from the sale of retired parent broilers, which contributed a gross income of
$324,046 for the six-month period; $0.19 million, or 0.8% of total sales, came
from sales of non-fecundated eggs; $0.19 million, or 0.8% of total sales, came
from chicken dung and other business; and $0.11 million, or 0.4% of total sales,
came from external feed sales of Taihong.
Cost of revenues. The
Company’s cost of revenues increased by $2.3 million, or 16.8%, to $16.2 million
for the six months ended June 30, 2010 from $13.9 million for the six months
ended June 30, 2009. The increase in the cost of revenues was mainly driven by
the increase in sales volume of day-old broilers. As a percentage of net
revenues, the cost of revenues remained at the same level of 67% year over year.
Another factor of the increase in the cost of revenues was the increased unit
cost per bird. The unit cost per bird increased by RMB 0.02, or 1%, from RMB
1.78 per bird in 2009 to RMB 1.8 per bird in 2010 for the six months ended June
30. The increase in unit cost per bird was a result of the increased feed stock
price in the
six-month period.
Gross profit. The Company’s
gross profit increased by $1.2 million, or 16.9%, to $8 million for the six
months ended June 30, 2010, from $6.9 million for the six months ended June 30,
2009. Gross profit as a percentage of net revenues was 33.11% for the six
months ended June 30, 2010, as compared to 33.09% for the six months ended June
30, 2009.
General and administrative expenses.
The general and administrative expenses increased by $0.25 million, or
18%, to $1.63 million for the six months ended June 30, 2010, from $1.38 million
for the six months ended June 30, 2009. The increase in general and
administrative expenses was mainly due to the increase of certain public company
related expenses by $0.15 million for the six months ended June 30, 2010. The
general and administrative expenses comprised mainly of public company related
expenses of $0.85 million, representing 52% of total general and administrative
expenses, human resources and related expenses of $0.28 million, representing
17% of total general and administrative expenses, transportation costs of $0.06
million, representing 3% of total general and administrative expenses;
facilities and utility expenses of $0.15 million, representing 9% of total
general and administrative expense, auditing and advisory expenses of $0.05
million, representing 3% of total general and administrative expense, and travel
expenses of $0.04 million, representing 2% of total general and administrative
expenses.
Selling Expenses. The
Company’s selling expenses increased by $110,919, or 55%, to $312,515 for the
six months ended June 30, 2010 from $201,596 for the same period of 2009.
Selling expenses comprised mainly of packaging and transportation expenses of
$241,440, representing 77% of total selling expenses; human resources and
related expenses of $29,123, representing 9% of total selling expenses; and
travel and office expenses of $30,280, representing 10% of total selling
expense. The increase in selling expenses was primarily due to the increase in
sales volume. As a percentage of net revenues, selling expenses increased by
0.32%, to 1.29% for the six months ended June 30, 2010 from 0.97% for the same
period of 2009.
Interest expenses. Interest
expenses decreased by $210,289, or 65% to $115,138 for the six months ended June
30, 2010 from $325,427 for the six months ended June 30, 2009. Excluding
capitalized interest, interest expenses on bank loans would have been $485,361
for the six months ended June 30, 2010 and $627,486 for the six months ended
June 30, 2009. This decrease in interest expenses of $142,125 was due to the
lower interest rate of 7.56% for the six months ended June 30, 2010, compared
with the interest rates varying between 8.64% and 13.82% for the same period of
2009.
Net profit. Net profit
increased by $0.98 million, or 19%, to $5.98 million for the six months ended
June 30, 2010 from net profit of $5 million for the six months ended June 30,
2009, as a result of the factors described above.
8
Liquidity
and Capital Resources
The
Company expects that its strong working capital of $14.71 million and positive
cash flow of $6.24 million generated from operating activities as of June 30,
2010 will meet its working capital requirements sufficiently for the next 12
months from the date of this report. In the first quarter of fiscal year 2010,
the Company renewed seven bank loans for a total amount of $8.19 million, with
the expected expiry dates in the calendar year of 2013.
The
Company has entered into a fixed annual interest rate agreement on these bank
loans at a reduced rate of 7.56%, compared to the previous variable interest
rates ranging from 8.64% and 13.82% .
On May
17, 2010, the Company paid off a bank loan by the amount of
$292,622(RMB2,000,000). The outstanding bank loan balance was approximately
$10.55 million as of June 30, 2010. Under the renewed terms of the bank loans,
the Company’s average bank loan interest rate will be reduced from 10.8% to
7.8%. The Company expects to reduce interest expense prior to any capitalized
interest from approximately $1.2 million per annum, or approximately RMB 8.2
million, to $0.83 million per annum, or approximately RMB 5.8
million.
General
As of
June 30, 2010, the Company had cash and cash equivalents of approximately $19.63
million. The following table provides detailed information about the Company’s
net cash flow for the six months ended June 30, 2010.
Quarter ended
|
||||
June
30, 2010
|
||||
Net
cash provided by operating activities
|
$
|
6,243,157
|
||
Net
cash used in investing activities
|
(450,254)
|
|||
Net
cash used in financing activities
|
(292,622)
|
|||
Effect
of foreign currency translation on cash
|
85,628
|
|||
Net
cash inflow
|
5,585,909
|
|||
Cash
at beginning of period
|
14,047,147
|
|||
Cash
at end of period
|
$
|
19,633,056
|
Operating Activities. Net
cash provided by operating activities was $6.24 million for the six months ended
June 30, 2010. Net cash provided by operating activities was primarily
attributable from the net income of $5.98 million; an increase of $2.75 million
of inventories; an increase of $0.10 million of long term prepaid rent; a
decrease of $0.29 million of other payables; an increase of $0.24 million of
accounts payables; an increase of $1.18 million of advances from customers; an
increase of $0.62 million of accrued expenses and payroll related liabilities
and non cash adjustment for depreciation and amortization of $1.16 million; non
cash compensation of $0.36 million; and capitalized interest in construction in
progress of $0.37 million.
Investing Activities. Net
cash used in investing activities for the six months ended June 30, 2010 was
$0.45 million. It comprised of capital expenditure of $0.44 million related to
the construction of breeder farms and equipment purchase, and repayment of note
receivables of $0.01 million for the six months ended June 30, 2010. The
following is a summary of the $0.44 million cash spent on capital
expenditure:
|
Six
Months ended
|
|||
June
30, 2010
|
||||
Deposits
paid for construction of breeding farm
|
$ | 314,307 | ||
Deposits
paid for purchase of property, plant and equipment
|
69,761 | |||
Purchase
of equipment
|
54,816 | |||
Total
deposit paid and acquisition of property, plant and
equipment
|
$ | 438,884 |
Financing Activities. Net
cash used in financing activities for the six months ended June 30, 2010 was
$292,622. Net cash used in financing activities was attributed to the repayment
of loans payables.
9
Loan
Facilities
As
at June 30, 2010, maturities of the Company’s bank loans are as
follows:
|
As of
June 30,
|
|||
1
year
|
2,026,848 | |||
2
years
|
293,746 | |||
3
years
|
8,224,892 | |||
$ | 10,545,486 |
All
amounts, other than percentages, are in U.S. dollars
Type
|
Contracting Party
|
Valid period
|
Duration
|
Amount
|
||||||
|
|
|
|
|||||||
Bank loan
|
Hanting Kaiyuan
Rural Credit Cooperative
|
January 8, 2009-Jan 7, 2011
|
24 months
|
$
|
1,072,173
|
|||||
Bank loan
|
Nansun Rural Credit
|
Mar 19, 2010-Mar
16, 2013
|
36 months
|
4,846,811
|
||||||
Bank loan
|
Nansun Rural Credit
|
Dec 11, 2009-
Dec 10 2011
|
24 months
|
293,746
|
||||||
Bank loan
|
Nansun Rural Credit
|
Jan 29, 2010-Jan
26, 2013
|
36 months
|
3,378,081
|
||||||
Bank loan
|
Shuangyang Rural Credit
|
Oct 13,2008 -Oct 13, 2010
|
24
months
|
954,675
|
||||||
Total
|
$
|
10,545,486
|
The
Company has ten loan facilities from three institutional lenders. The following
are the material terms of such bank loans:
Loan
from Hanting Kaiyuan Rural Credit Cooperative:
On
January 8, 2009, PRC Yuhe renewed the loan agreement with Hanting Kaiyuan Rural
Credit Cooperative. Pursuant to the loan agreement, Hanting Kaiyuan Rural Credit
Cooperative loaned PRC Yuhe $1,072,173 at an interest rate of 7.56% per annum.
PRC Yuhe is obligated under such loan agreement to pay interest monthly and
repay the loan on its maturity date of January 7, 2011. The loan is secured by
the plant and equipment of PRC Yuhe with a net book value of $341,109 as of June
30, 2010.
Loans
from Nansun Rural Credit:
PRC Yuhe
renewed four loan agreements with Nansun Rural Credit on March 19,
2010. The interest rate of the renewed loan agreements is 7.56% per
annum, reduced from the original interest rate of 13.82% due to government
policy support. The total amount of these four bank loans is
$4,846,811.
Three
other loans with an aggregate outstanding balance of $3,378,081 from Nansun
Rural Credit have an interest rate reduced from 8.64% to 7.56% due to the
interest rate adjustment by the PRC government.
The other
bank loan from Nansun Rural Credit with an outstanding balance of $293,746 was
entered into in December 2009, and has an interest rate of 7.56% per
annum.
All loans
are secured by the land use right and building of PRC Yuhe and Taihong with a
net book value of $2,509,244 as of June 30, 2010.
Loan from
Shuangyang Rural Credit:
Taihong
renewed the loan agreements with Shuangyang Rural Credit on October 13 2008,
amounting to $954,675. The interest rate on the loans is 9.83% per annum.
Taihong is obligated under such loan agreements to pay interest monthly and
repay the loans on their maturity date of October 13, 2010. The loans are
secured by the land use right with a net book value of $321,219 as of June
30, 2010.
Due to
related companies:
As of
June 30, 2010, the Company has $1,208 due to Halter Financial Investments
LP. The amounts due to this related company are unsecured, interest
free and have no fixed repayment date. These loans are used for
working capital purposes.
10
Obligations
Under Material Contracts
Below
is a table setting forth the Company’s material contractual obligations as of
June 30, 2010:
|
Payment due by period
|
|||||||||||||||||||
Contractual Obligations
|
Total
|
Less than 1
year
|
1-3 years
|
3-5 years
|
More than
5 years
|
|||||||||||||||
Long-Term
Debt Obligations
|
$
|
10,545,486
|
$
|
2,026,848
|
$
|
8,518,638
|
-
|
-
|
||||||||||||
Due
to Related Companies
|
$
|
1,208
|
$
|
1,208
|
-
|
-
|
-
|
|||||||||||||
Operating
Lease Obligations
|
$
|
1,564,960
9
|
$
|
69,721
|
$
|
139,442
|
$
|
139,442
|
$
|
1,216,355
9
|
||||||||||
Capital
Lease Obligations
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
Purchase
Obligations
|
$
|
4,090,685
|
$
|
4,090,685
|
-
|
-
|
-
|
|||||||||||||
Other
Long-Term Liabilities Reflected on the Registrant’s Balance Sheet under
GAAP
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
Total
|
$
|
16,202,339
|
$
|
6,188,462
|
$
|
8,658,080
|
$
|
139,442
|
$
|
1,216,355
|
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
4. CONTROLS AND PROCEDURES
(a) Evaluation
of disclosure controls and procedures.
The
Company’s management, under the supervision and with the participation of its
chief executive officer and chief financial officer, Messrs. Gao Zhentao and Hu
Gang, respectively, evaluated the effectiveness of the Company’s disclosure
controls and procedures as of June 30, 2010, the end of the period covered by
this Report. The term “disclosure controls and procedures,” as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports, such as this Form 10-Q, that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Based on that
evaluation, Messrs. Gao and Hu concluded that the Company’s disclosure controls
and procedures were effective as of June 30, 2010.
11
(b) Changes
in internal control over financial reporting.
As
previously reported, management concluded that certain related party loans
between the Company and Shandong Yuhe Food Group Co., Ltd., “Yuhe Food”,
constituted prohibited transactions under Section 402 of the Sarbanes-Oxley Act
of 2002. All such related party loans had been repaid as of the end of
February 2010. In addition, there were certain audit adjustments identified by
the Company’s former independent auditors related to the Company’s financial
statements for the year ended December 31, 2009 indicating a material weakness
in the Company’s internal control over financial reporting. The
adjustments were mainly related to transferring amounts from work-in-progress to
fixed assets, separating the current portion of long-term debt from long-term
debt, and verifying the nature of capital leases and operating
leases.
In order
to address the foregoing material weaknesses, the Company has taken certain
remedial action to strengthen its internal control over financial reporting
during the quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, its internal control over financial
reporting. In March 2010, the Company’s Audit Committee engaged Ernst &
Young (China) Advisory Limited, or “Ernst & Young”, to review its payment
procedures. Ernst & Young has finished its review, which covered all
payments made between January 1, 2010 and March 31, 2010. Ernst & Young
delivered a report on its review to all board members of the
Company. On May 4, 2010, based on discussions with the Company’s
management team and its review of the Ernst & Young report, the Board of
Directors and the Audit Committee concluded that (1) the Company has cleared all
inter-company balances with related party companies; (2) there was no payment
between the Company and its related party companies from March 1, 2010 to March
31, 2010; and (3) no material exception was noted during the review of payment
procedures.
In
addition, the Board of Directors has implemented the following measures to
ensure adequate internal controls in the payment procedures, prevent recurrence
of unauthorized or improper related party payments and timely detect related
party transactions.
A:
Update and Revision of Relevant Policies and Procedures
The
Company intends to update its code of business ethics and other relevant
policies and procedures to clearly stipulate that.
(1)
|
Related
party loans are a violation of the Company’s code of business ethics and
are strictly prohibited.
|
(2)
|
All
related party transactions are required to be reported to and approved by
the Board of Directors in advance.
|
B:
Implementation of the relevant policies and procedures
The
revised policies will be communicated within the Company. All department heads
will be required to confirm their acknowledgement of the revised policies in
writing. The Finance Department will play a major role in the implementation of
the revised policies and will strictly follow the revised policy and report any
transactions that violate or appear to violate the policies.
C:
Monitoring of the Operation of Internal Controls
The
Company will fill the new position of Internal Auditor, who will directly
report to the Chairman of the Audit Committee functionally, and to the Chief
Financial Officer from an administrative perspective. The Internal Auditor will
conduct an internal audit quarterly to review the Company’s payment procedures
and test the controls as stated in the revised policies. The Internal Auditor
will also conduct a specific audit to review all related party transactions
quarterly to examine whether the revised policies are properly implemented. The
Internal Auditor is required to report the results of these audits to the Board
of Directors. The Internal Auditor has started to work on June 1, 2010. The
Board of Directors has reviewed the background and experience of candidates and
refined the job description of the Internal Auditor.
Under the
direction of the Audit Committee, management will continue to review and make
necessary changes to the system of internal controls and the control
environment, as well as policies and procedures to improve the overall
effectiveness of internal control over financial reporting.
12
PART
II
OTHER
INFORMATION
ITEM
1. LEGAL PROCEEDINGS
From time
to time, the Company becomes involved in various lawsuits and legal proceedings
that arise in the ordinary course of business. While the ultimate outcome of
these lawsuits and legal proceedings cannot be determined at this time, it is
the opinion of management that the resolution of these actions will not have a
material adverse effect on the Company’s financial condition, results of
operations or cash flows.
ITEM
1A. RISK FACTORS
Not
applicable.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. RESERVED
ITEM
5. OTHER INFORMATION
None.
13
ITEM
6. EXHIBITS
10.1
|
Asset
Purchase Contract dated July 14, 2010 between Weifang Yuhe Poultry Co.,
Ltd. and Haicheng Songsen Farming Feed Co.,
Ltd.*
|
10.2
|
Service
Agreement dated July 14, 2010 between Haicheng Songsen Farming Feed Co.,
Ltd., Mr. Jiang Zhaolin and Weifang Yuhe Poultry Co.,
Ltd.*
|
31.1
|
Certification
of Principal Executive Officer filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. **
|
31.2
|
Certification
of Principal Financial Officer filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. **
|
32.1
|
Certification
of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. **
|
32.2
|
Certification
of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. **
|
*
this exhibit is an English translation of a foreign language document
pursuant to Rule 306 of Regulation S-T
|
|
**
filed herewith
|
14
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DATED:
August 13, 2010
YUHE
INTERNATIONAL, INC.
By:
|
/s/
Gao Zhentao
|
|
Gao
Zhentao
|
||
Chief
Executive Officer
|
||
(On
behalf of the Registrant and as Principal Executive
Officer)
|
||
By:
|
/s/
Hu Gang
|
|
Hu
Gang
|
||
Chief
Financial Officer
|
||
(On
behalf of the Registrant and as Principal Financial
Officer)
|
EXHIBIT
INDEX
Exhibit
|
||
Number
|
Description
|
|
10.1
|
Asset
Purchase Contract dated July 14, 2010 between Weifang Yuhe Poultry Co.,
Ltd. and Haicheng Songsen Farming Feed Co., Ltd.*
|
|
10.2
|
Service
Agreement dated July 14, 2010 between Haicheng Songsen Farming Feed Co.,
Ltd., Mr. Jiang Zhaolin and Weifang Yuhe Poultry Co.,
Ltd.*
|
|
31.1
|
Certification
of Principal Executive Officer filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
31.2
|
Certification
of Principal Financial Officer filed pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
|
|
32.1
|
Certification
of Principal Executive Officer furnished pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
|
|
32.2
|
Certification
of Principal Financial Officer furnished pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
|
* this
exhibit is an English translation of a foreign language document pursuant to
Rule 306 of Regulation S-T
** filed
herewith