Attached files
file | filename |
---|---|
EX-32.1 - Yanglin Soybean, Inc. | v193539_ex32-1.htm |
EX-31.1 - Yanglin Soybean, Inc. | v193539_ex31-1.htm |
EX-31.2 - Yanglin Soybean, Inc. | v193539_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
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
¨
|
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 000-52127
YANGLIN
SOYBEAN, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
20-4136884
|
(State
or other jurisdiction of
incorporation
or organization)
|
(IRS
Employer
Identification
No.)
|
99
Fan Rong Street, Jixian County, Heilongjiang 155900 P.R. China
(Address
of principal executive offices)
Registrant’s
telephone number, including area code: (86) 469-467-8077
(Former
Name, Former Address And Former Fiscal Year, If Changed Since Last
Report)
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 ¨
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 ¨ No ¨
*The
registrant has not yet been phased into interactive data
requirement.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “accelerated filer”, “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
|
Accelerated filer
|
¨
|
Non-accelerated filer ¨
|
Smaller Reporting Company
|
x
|
(Do not check if a Smaller Reporting Company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
As of
August 13, 2010, the Company had 20,465,119 shares of Common Stock, $0.001
par value per share, issued and outstanding.
Yanglin
Soybean, Inc.
INDEX
Page
|
||||
Part
I — Financial Information
|
3
|
|||
Item
1.
|
Financial
Statements
|
3
|
||
(a)
|
Consolidated
Balance Sheets as of June 30, 2010 (unaudited) and December 31,
2009
|
3
|
||
(b)
|
Consolidated
Statements of Operations and Other Comprehensive Income for the three and
six months ended June 30, 2010 and 2009 (as
restated) (unaudited)
|
4
|
||
(c)
|
Consolidated
Statement of Changes in Stockholders’ Equity for the six months ended June
30, 2010 (unaudited)
|
5
|
||
(d)
|
Consolidated
Statements of Cash Flows for the six months ended June 30, 2010 and
2009 (as restated) (unaudited)
|
6
|
||
(e)
|
Notes
to Consolidated Financial Statements (unaudited)
|
7
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
50
|
||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
68
|
||
Item
4.
|
Controls
and Procedures
|
68
|
||
Part
II — Other Information
|
70
|
|||
Item
1
|
Legal
Proceedings
|
70
|
||
Item
1A.
|
Risk
Factors
|
70
|
||
Item
2
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
70
|
||
Item
3
|
Defaults
upon Senior Securities
|
70
|
||
Item
4
|
(Removed
and Reserved)
|
70
|
||
Item
5
|
Other
Information
|
70
|
||
Item
6.
|
Exhibits
|
70
|
||
Signatures
|
71
|
2
PART 1-FINANCIAL
INFORMATION
ITEM
1-FINANCIAL STATEMENTS
YANGLIN
SOYBEAN, INC.
CONSOLIDATED
BALANCE SHEETS
AS
AT JUNE 30, 2010 (UNAUDITED), AND DECEMBER 31, 2009
(Stated
in US Dollars)
June 30, 2010
|
December 31, 2009
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
|
$
|
29,881,178
|
$
|
34,811,611
|
||||
Cash-restricted
|
2,157,311
|
1,740,605
|
||||||
Trade
receivables, net
|
333
|
332
|
||||||
Inventories
|
6,294,298
|
8,356,345
|
||||||
Advances
to suppliers
|
12,504
|
12,451
|
||||||
Prepaid
VAT and other taxes
|
6,100,872
|
4,917,250
|
||||||
Other
receivables and prepaid expenses
|
79,353
|
108,200
|
||||||
Total
current assets
|
44,525,849
|
49,946,794
|
||||||
Property,
plant and equipment, net
|
25,978,075
|
27,297,365
|
||||||
Assets
held for sale
|
219,487
|
570,409
|
||||||
Intangible
assets, net
|
4,326,358
|
4,415,908
|
||||||
TOTAL
ASSETS
|
$
|
75,049,769
|
$
|
82,230,476
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities
|
||||||||
Short-term
bank loans
|
$
|
18,652,880
|
$
|
20,476,218
|
||||
Loans
from related parties – current
|
54,132
|
53,676
|
||||||
Accounts
payable
|
10,086
|
20,866
|
||||||
Other
payables
|
39
|
824,424
|
||||||
Customers
deposits
|
1,887,386
|
1,395,524
|
||||||
Accrued
liabilities
|
690,045
|
635,474
|
||||||
Total
current liabilities
|
21, 294,568
|
23,406,182
|
||||||
Long-term
liabilities
|
||||||||
Loan
from related parties – non-current
|
275,484
|
314,191
|
||||||
Warrant
liability
|
15,753,325
|
27,573,698
|
||||||
TOTAL
LIABILITIES
|
37,323,377
|
51,294,071
|
||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Convertible
preferred stock:
|
||||||||
Series
A $0.001 par value, 50,000,000 shares authorized; 9,534,883 shares issued
and outstanding
|
9,535
|
9,535
|
||||||
Series
B $0.001 par value, 10,000,000 shares authorized; no shares issued and
outstanding
|
- |
-
|
||||||
Common
stock:
|
||||||||
$0.001
par value, 100,000,000 shares authorized; 20,465,119 shares issued and
outstanding
|
20,465
|
20,465
|
||||||
Additional
paid-in capital
|
27,918,477
|
27,899,749
|
||||||
Statutory
reserves
|
5,628,636
|
5,628,636
|
||||||
Accumulated
deficit
|
(3,406,792
|
)
|
(9,953,046
|
)
|
||||
Accumulated
other comprehensive income
|
7,556,071
|
7,331,066
|
||||||
Total
stockholders’ equity
|
37,726,392
|
30,936,405
|
||||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
75,049,769
|
$
|
82,230,476
|
The
accompanying notes are an integral part of these consolidated financial
statements
3
YANGLIN
SOYBEAN, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME FOR THE THREE AND SIX
MONTHS ENDED JUNE 30, 2010, AND 2009, AS RESTATED (UNAUDITED)
(Stated
in US Dollars)
For the three months ended June 30
|
For the six months ended June 30
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(As restated)
|
(As restated)
|
|||||||||||||||
Net
sales
|
$ | 49,916,626 | $ | 39,753,637 | $ | 83,996,598 | $ | 82,787,863 | ||||||||
Cost
of sales
|
(52,540,598 | ) | (43,973,079 | ) | (86,603,456 | ) | (88,143,629 | ) | ||||||||
Gross
profit (loss)
|
(2,623,972 | ) | (4,219,442 | ) | (2,606,858 | ) | (5,355,766 | ) | ||||||||
Operating
Expenses
|
||||||||||||||||
Selling
expenses
|
(67,110 | ) | (60,303 | ) | (131,885 | ) | (129,553 | ) | ||||||||
General
and administrative expenses
|
(807,741 | ) | (559,881 | ) | (1,657,793 | ) | (1,592,065 | ) | ||||||||
Impairment
loss of assets held for sale
|
(352,032 | ) | - | (351,967 | ) | - | ||||||||||
Total
operating expenses
|
(1,226,883 | ) | (620,184 | ) | (2,141,645 | ) | (1,721,618 | ) | ||||||||
Loss
from operations
|
(3,850,855 | ) | (4,839,626 | ) | (4,748,503 | ) | (7,077,384 | ) | ||||||||
Interest
expense
|
(298,107 | ) | (94,091 | ) | (576,716 | ) | (245,517 | ) | ||||||||
Interest
income
|
25,197 | 71,795 | 51,450 | 119,312 | ||||||||||||
Other
(expenses) income
|
- | - | (350 | ) | (1,031 | ) | ||||||||||
Changes
in fair value of warrants
|
6,698,802 | 2,441,628 | 11,820,373 | 29,556,583 | ||||||||||||
Income(Loss)
before income taxes and other comprehensive income
|
2,575,037 | (2,420,294 | ) | 6,546,254 | 22,351,963 | |||||||||||
Income
tax
|
- | - | - | - | ||||||||||||
Net
income(loss)
|
2,575,037 | (2,420,294 | ) | 6,546,254 | 22,351,963 | |||||||||||
Foreign
currency translation adjustment
|
215,605 | (16,447 | ) | 225,005 | 101,058 | |||||||||||
Other
comprehensive income
|
$ | 2,790,642 | $ | (2,436,741 | ) | $ | 6,771,259 | $ | 22,453,021 | |||||||
Earnings
per share
|
||||||||||||||||
Basic
|
$ | 0.13 | $ | (0.12 | ) | $ | 0.32 | $ | 1.12 | |||||||
Diluted
|
$ | 0.09 | $ | (0.12 | ) | $ | 0.22 | $ | 0.68 | |||||||
Weighted
average shares outstanding
|
||||||||||||||||
Basic
|
20,465,119 | 20,000,003 | 20,465,119 | 20,000,003 | ||||||||||||
Diluted
|
30,000,002 | 20,000,003 | 30,003,867 | 32,903,049 |
The
accompanying notes are an integral part of these consolidated financial
statements
4
YANGLIN
SOYBEAN, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE SIX MONTHS ENDED JUNE 30, 2010 (UNAUDITED)
(Stated
in US Dollars)
Preferred stock
|
|
|
|
|
|
|
|
|
(Accumulated
|
|
|
Accumulated
|
|
|
|
|||||||||||||||||||||
|
|
Series A
|
|
|
Common stock
|
|
|
Additional
|
|
|
|
|
deficit)
|
|
|
other
|
|
|
|
|||||||||||||||||
|
|
Number of
shares
|
|
|
Amount
|
|
|
Number of
shares
|
|
|
Amount
|
|
|
paid-in
capital
|
|
|
Statutory
reserves
|
|
|
retained
earnings
|
|
|
comprehensive
income
|
|
|
Total
|
||||||||||
Balance,
December 31, 2009
|
9,534,883
|
$
|
9,535
|
20,465,119
|
$
|
20,465
|
$
|
27,899,749
|
$
|
5,628,636
|
$
|
(9,953,046
|
)
|
$
|
7,331,066
|
$
|
30,936,405
|
|||||||||||||||||||
Net
income
|
- | - | - | - | - | - |
6,546,254
|
- |
6,546,254
|
|||||||||||||||||||||||||||
Share-based
compensation expense
|
- | - | - | - |
18,728
|
- | - | - |
18,728
|
|||||||||||||||||||||||||||
Foreign
currency translation adjustment
|
- | - | - | - | - | - | - |
225,005
|
225,005
|
|||||||||||||||||||||||||||
Balance,
June 30, 2010
|
9,534,883
|
$
|
9,535
|
20,465,119
|
$
|
20,465
|
$
|
27,918,477
|
$
|
5,628,636
|
$
|
(3,406,792
|
)
|
$
|
7,556,071
|
$
|
37,726,392
|
The
accompanying notes are an integral part of these consolidated financial
statements
5
YANGLIN
SOYBEAN, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2010, AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
For the six months ended June 30
|
||||||||
2010
|
2009
|
|||||||
(as
restated)
|
||||||||
Cash
flows from operating activities
|
||||||||
Net
income
|
$
|
6,546,254
|
$
|
22,351,963
|
||||
Adjustments
to reconcile net income to net cash used in operating
activities:
|
||||||||
Depreciation
|
1,428,470
|
1,591,048
|
||||||
Amortization
|
107,686
|
107,552
|
||||||
Share-based
compensation expense
|
18,728
|
11,292
|
||||||
Bad
debt expense
|
398
|
159
|
||||||
Impairment
loss of assets held for sale
|
351,967
|
-
|
||||||
Loss
on disposal of property, plant and equipment
|
-
|
230,025
|
||||||
Change
in fair value of warrants
|
(11,820,373
|
)
|
(29,556,583
|
)
|
||||
Changes
in operating assets and liabilities:
|
||||||||
Trade
receivable
|
-
|
(59,965
|
)
|
|||||
Inventories
|
2,089,128
|
(3,749,191
|
)
|
|||||
Advances
to suppliers
|
1,216
|
2,271,800
|
||||||
Prepaid
VAT and other taxes
|
(1,158,519
|
)
|
(2,299,546
|
)
|
||||
Other
receivables
|
27,575
|
38,702
|
||||||
Accounts
payable
|
(10,827
|
)
|
(13,053
|
)
|
||||
Other
payables
|
6
|
4
|
||||||
Customers
deposits
|
484,142
|
229,812
|
||||||
Accrued
liabilities
|
52,281
|
61,440
|
||||||
Net
cash used in operating activities
|
(1,881,868
|
)
|
(8,784,541
|
)
|
||||
Cash
flows from investing activities
|
||||||||
Purchase
of property, plant and equipment
|
(824,688
|
)
|
(48,962
|
)
|
||||
Net
cash used in investing activities
|
(824,688
|
)
|
(48,962
|
)
|
||||
Cash
flows from financing activities
|
||||||||
Proceeds
from short-term bank loans
|
-
|
6,575,842
|
||||||
Cash
- restricted
|
(408,877
|
)
|
-
|
|||||
Principal
payments for short-term bank loans
|
(1,902,047
|
)
|
(2,630,337)
|
|||||
Principal
payments for loans from related parties
|
(39,643
|
)
|
(28,113
|
)
|
||||
Net
cash flows used in/provided by financing activities
|
(2,350,567
|
)
|
3,917,392
|
|||||
Net
decrease in cash
|
(5,057,123
|
)
|
(4,916,111
|
)
|
||||
Effect
of foreign currency translation on cash
|
126,690
|
42,813
|
||||||
Cash-
beginning of period
|
34,811,611
|
30,365,413
|
||||||
Cash-
end of period
|
$
|
29,881,178
|
$
|
25,492,115
|
||||
Supplementary
cash flow information:
|
||||||||
Interest
paid
|
$
|
576,668
|
$
|
245,517
|
The
accompanying notes are an integral part of these consolidated financial
statements
6
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
1.
|
ORGANIZATION, PRINCIPAL
ACTIVITIES AND BASIS OF
PRESENTATION
|
Yanglin
Soybean, Inc. (the “Company”) was incorporated in the State of Nevada on May 26,
1921. Prior to October 3, 2007, the Company had only nominal operations and
assets. On October 3, 2007, the Company executed a reverse-merger with Faith
Winner Investments Limited (“Faith Winner (BVI)”) by an exchange of shares
and the Company issued 18,500,000 common shares at $0.001 par value in exchange
for all Faith Winner (BVI) shares. As a result of the share exchange, Faith
Winner (BVI) became a wholly-owned subsidiary of the Company. The exchange
transaction was accounted for as a reverse acquisition in accordance with
Accounting Standards Codification 805 “Business Combinations”. The
reverse-merger also included an equity financing of $21,500,000 by the
issuance of 9,999,999 Series A Convertible Preferred Stock at $2.15 per share to
ten accredited investors.
The
Company is in the business of manufacturing, distributing and selling of
non-genetically modified soybean products, including soybean oil, salad oil,
soybean meal, etc., throughout the Province of Heilongjiang and other parts of
People's Republic of China ("PRC"). The Company conducts its
operations through the following subsidiaries: (a) a wholly-owned subsidiary in
the British Virgin Islands: Faith Winner (BVI), (b) a wholly-owned subsidiary of
Faith Winner (BVI) located in the PRC: Faith Winner (Jixian) Agriculture
Development Company (“WFOE”) and (c) an entity located in the PRC: Yanglin
Soybean Group Co., Ltd. (“Yanglin”), which is controlled by the Company through
contractual arrangements with WFOE, as if Yanglin were a wholly-owned
subsidiary of the Company.
The
Company, its subsidiaries and Yanglin are collectively referred to as “the
Group”.
Faith
Winner (BVI) and WFOE have entered into a series of agreements respectively with
Yanglin and as a result of such agreements WFOE gained control of all of
Yanglin’s assets, management and business as if Yanglin were a wholly-owned
subsidiary of WFOE. These agreements included a loan agreement, a consigned
management agreement, two consignment agreements of equity interests, an
exclusive purchase option agreement, a registered trademark transfer contract
and a trademark licensing agreement. The consignment agreements were entered
into on September 1, 2007, and the other agreements were all signed on September
24, 2007. The exclusive purchase option agreement and the consigned management
agreement were amended as of April 3, 2009. As described by the amendment, the
exercise price of the exclusive purchase option shall be $17,000,000, or such
greater amount as required by the then applicable Chinese law and regulations.
If WFOE elects to purchase the Equity Interests held by Shulin Liu and Huanqin
Ding (collectively “the Shareholders”), all of the consideration net tax (the “
Consideration of Equity Transfer ” ) obtained by the Shareholders shall be
used to repay Yanglin. If WFOE elects to purchase the assets of Yanglin, Yanglin
shall use all of the consideration net tax (the “ Consideration of Assets
Transfer ” ) to repay WFOE. To the extent that the Consideration of
Equity Transfer or Assets Transfer is greater than $17,000,000 as required
by the then applicable law or for any other reasons, the excess shall be paid by
Yanglin to WFOE as interest on the loan made under the Loan Agreement dated
September 24, 2007 between WFOE and Yanglin.
7
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
1.
|
ORGANIZATION, PRINCIPAL
ACTIVITIES AND BASIS OF PRESENTATION (Continued)
|
Pursuant
to the above-mentioned agreements, WFOE made a loan (“the Loan”) of $17 million
on October 10, 2007 and it was utilized by Yanglin for working capital needs. In
return, the Company obtained management control and an exclusive right to
acquire all of the equity of Yanglin. The rights of existing shareholders of
Yanglin were assigned by the consignment of equity interests to Faith Winner
(BVI). The exclusive purchase agreement and the loan agreement restrict both
Yanglin and its shareholders from significant decisions including but not
limited to any amendments of articles of association or rules of Yanglin, any
change in registered capital, any transfer, mortgage or disposal of Yanglin’s
assets or income in a way that would affect WFOE’s security interest,
entering any material contract (exceeding RMB5 million in value) and
distributing any dividends to the shareholders. Pursuant to the consigned
management agreement between WFOE and Yanglin, Yanglin agreed to entrust the
business operations of Yanglin and its management to WFOE until WFOE formally
acquires all equity or substantially all the assets of Yanglin. Under the
consigned management agreement as amended on April 3, 2009, WFOE will provide
financial, technical and human resources management services to Yanglin which
will enable WFOE to control Yanglin's operations, assets and cash flows. In
turn, WFOE will be entitled to a management fee equal to 5% of Yanglin’s annual
net sales on a yearly basis.
Under the
Registered Trademark Transfer Agreement, Yanglin agreed to transfer to WFOE all
of its rights in connection with the two trademarks, including without
limitation the title of the trademarks and right to license (the “Transferred
Trademark”) for a purchase price of $1,000,000, which is subject to a purchase
price adjustment based on the minimum appraised value on intellectual
property (“IP”) rights allowed under PRC laws and regulations for such transfer.
Under the Trademark Licensing Agreement, WFOE agreed to grant an exclusive
license to Yanglin, for a term of 10 years, to use the Transferred Trademark for
an annual licensing fee equal to 1% of Yanglin’s net sales of that year. The
license fee and the management fee aforesaid – a total of 6% of the annual
net sales of Yanglin – entitled by WFOE are designed to
approximate Yanglin’s annual net profit. If the licensing and management fees
entitled by WFOE exceed the net income after tax of Yanglin, Yanglin should
not be obligated to pay WFOE any shortfall. In the event that the net
income after tax is greater than the licensing and management fees entitled by
WFOE, Yanglin should maintain any excess on its books and should not distribute
any of such excess as a dividend in any manner to its shareholders until WFOE
exercises its exclusive purchase option pursuant to the Exclusive Purchase
Option Agreement dated September 24, 2007 between Yanglin and WFOE and as
amended on April 3, 2009.
8
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
1.
|
ORGANIZATION, PRINCIPAL
ACTIVITIES AND BASIS OF PRESENTATION
(Continued)
|
According
to the exclusive purchase option agreement, WFOE has the exclusive purchase
option to purchase all or part of Yanglin’s shareholders’ equity interest in
Yanglin when and as permitted under PRC laws and regulations and no other party
has the right to purchase any equity from the shareholders of Yanglin. The
agreement provides that, unless otherwise required under PRC laws and
regulations, the consideration for the equity transfer or the asset transfer
under the agreement will be $17 million or such greater amount as required by
the then applicable PRC law and regulations (the “Option Price”). Under the
loan agreement and the exclusive purchase option agreement, the money received
as the Option Price by the shareholders of Yanglin upon execution of the option
shall be used to satisfy the repayment of the Loan. Therefore, the actual
consideration of the investment in Yanglin is exactly the amount of the
Loan. Under such contractual arrangements, all of the assets and equity
including any residual profits of Yanglin are totally controlled by WFOE and
will be formally captured upon exercise of the exclusive purchase
option.
The loan
of $17 million to Yanglin is considered as an investment in Yanglin by the
Company through a series of contractual arrangements by way of the Loan. As a
result of entering into the aforementioned agreements, WFOE should be deemed to
control Yanglin as a Variable Interest Entity. The creditors of
Yanglin do not have recourse to the Company’s other assets.
The
accompanying unaudited consolidated financial statements were prepared in
accordance with U.S. generally accepted accounting principles (“GAAP”) for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they may not include all of the
information and footnotes required by GAAP for complete consolidated financial
statements. All adjustments that are, in the opinion of management, of a normal
recurring nature and are necessary for a fair presentation of the consolidated
financial statements have been included. Nevertheless, these financial
statements should be read in conjunction with the Company’s audited consolidated
financial statements contained in its Annual Report on Form 10-K for the year
ended December 31, 2009 as filed with the Securities and Exchange
Commission on April 15, 2010. The results of operations for the six months ended
June 30, 2010, are not necessarily indicative of the results that may be
expected for the entire fiscal year or any other interim period.
The
Company’s common stock is listed on the Over-the-counter Bulletin Board
(“OTCBB”) market and traded under the symbol “YSYB”.
9
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
2.
|
GENERAL
|
(a)
|
Restatement of the
2008 Annual
Consolidated Financial Statements and 2009 Quarterly Consolidated
Financial Statements
|
The
Company has restated its consolidated financial statements as of and for the
year ended December 31, 2008 to record the shares its major shareholder, Winner
State Investments Limited, committed to transfer to the Company’s Series A
Preferred stockholders as a result of failure to list on a National Stock
Exchange by December 31, 2008. The Company determined that in accordance with
ASC 450 Accounting for Contingencies, the expense should be recorded
during the year ended December 31, 2008 as the Company failed the listing
requirement and incurred the expense on December 31, 2008. The Company has
accounted for this as a contribution of capital and recorded an expense in
the amount of $4,480,000 due to the share payment being made by the majority
shareholder. Such shares were valued based on the closing market price on
December 31, 2008.
Accordingly,
changes have been made to the applicable line items associated with additional
paid in capital and retained earnings in the 2009 financial statements.
Opening retained earnings at January 1, 2009 was decreased by $4.48
million, while additional paid in capital was increased by $4.48
million.
Effective
January 1, 2009, we adopted the provisions of FASB ASC Topic 815,
"Derivatives and Hedging" ("ASC 815") (previously ElTF 07-5, "Determining
Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own
Stock"). As a result of adopting ASC 815, warrants to purchase the Company's
common stock previously treated as equity pursuant to the derivative treatment
exemption were no longer afforded equity treatment as there was a down-round
protection (full-ratchet down round protection). As a result, the warrants are
not considered indexed to the Company's own stock, and as such, all future
changes in the fair value of these warrants will be recognized currently in
earnings until such time as the warrants are exercised or
expire.
As such,
effective January 1, 2009, the Company reclassified the fair value of these
warrants from equity to liability, as if these warrants were treated as a
derivative liability since their issuance in October 2007.
On
January 1, 2009, the Company recorded as a cumulative effect adjustment by
decreasing additional paid-in capital by $15,003,941 and decreasing the
beginning balance of retained earnings by $72,047,158, and recording $87,051,099
as a warrant liability to recognize the fair value of such warrants on January
1, 2009. The fair value of the warrants was $27,573,698 on December
31, 2009 and $57,494,516 on June 30, 2009. The Company recognized
$2,441,628 and $29,556,583 as non-cash income from the change in fair value of
warrants for the three and six months ended June 30,
2009.
10
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
2.
|
GENERAL
(Continued)
|
The
effect of the restatement on specific amounts provided in the consolidated
financial statements is as follows:
As of June 30, 2009
|
|
|||||||
Consolidated Balance Sheet
|
|
As previously
reported
|
|
|
As restated
|
|||
Warrant
liability
|
$
|
-
|
$
|
57,494,516
|
||||
Additional
paid-in capital
|
38,389,635
|
27,876,986
|
||||||
Retained
earnings (accumulated deficit)
|
14,471,196
|
(32,510,671
|
)
|
For the Three Months Ended
June 30, 2009
|
For the Six Months Ended
June 30, 2009
|
|||||||||||||||
Consolidated Statement of Operations and Other
Comprehensive Income
|
As previously
reported
|
As restated
|
As previously
reported
|
As restated
|
||||||||||||
General
and administrative expenses
|
$ | (548,589 | ) | $ | (559,881 | ) | $ | (1,580,773 | ) | $ | (1,592,065 | ) | ||||
Total
operating expenses
|
(608,892 | ) | (620,184 | ) | (1,710,326 | ) | (1,721,618 | ) | ||||||||
(Loss)
income from operations
|
(4,828,334 | ) | (4,839,626 | ) | (7,066,092 | ) | (7,077,384 | ) | ||||||||
Changes
in fair value of warrants
|
- | 2,441,628 | - | 29,556,583 | ||||||||||||
(Loss)
income from operations before income taxes
|
(4,850,630 | ) | (2,420,294 | ) | (7,193,328 | ) | 22,351,963 | |||||||||
Net
(loss) income
|
(4,850,630 | ) | (2,420,294 | ) | (7,193,328 | ) | 22,351,963 | |||||||||
Other
comprehensive (loss) income
|
(4,867,077 | ) | (2,436,741 | ) | (7,092,270 | ) | 22,453,021 | |||||||||
(Loss)
earnings per share:
|
||||||||||||||||
Basic
|
$ | (0.24 | ) | $ | (0.12 | ) | $ | (0.36 | ) | $ | 1.12 | |||||
Diluted
|
$ | (0.15 | ) | $ | (0.12 | ) | $ | (0.23 | ) | $ | 0.68 |
For the Six Months Ended
June 30, 2009
|
|||||||||
Consolidated Statement of Cash Flows
|
As previously
reported
|
As restated
|
|||||||
Net
(loss)/income
|
$
|
(7,193,328 | ) |
$
|
22,351,963 | ||||
Change
in fair value of warrants
|
- | (29,556,583 | ) | ||||||
share-based
compensation expense
|
- | 11,292 |
11
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
2.
|
GENERAL
(Continued)
|
As of and For the Six Months
Ended June 30, 2009
|
||||||||
Consolidated Statement of Changes in Stockholders’
Equity
|
As previously
reported
|
As restated
|
||||||
Net (loss)
income
|
$ | (7,193,328 | ) | $ | 22,351,963 | |||
share-based
compensation expense
|
- | 11,292 | ||||||
Additional
paid-in capital
|
38,389,635 | 27,876,986 | ||||||
Retained
earnings (accumulated deficit)
|
14,471,196 | (32,510,671 | ) |
12
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
(b)
|
Accounting
hierarchy
|
On
September 30, 2009, the Company adopted changes issued by the Financial
Accounting Standards Board (“FASB”) to the authoritative hierarchy of
GAAP. These changes establish the FASB Accounting Standards Codification
(“ASC”) as the source of authoritative accounting principles recognized by the
FASB to be applied by nongovernmental entities in the preparation of financial
statements in conformity with GAAP. Rules and interpretive releases
of the SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. The FASB will no longer issue
new standards in the form of Statements, FASB Staff Positions (“FSP”), or
Emerging Issues Task Force Abstracts; instead the FASB will issue
Accounting Standards Updates (“ASUs”). ASUs will not be
authoritative in their own right as they will only serve to update the
ASC. These changes and the ASC itself do not change
GAAP. Other than the manner in which new accounting guidance is
referenced, the adoption of these changes had no impact on the Company’s
consolidated financial statements.
13
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
2.
|
GENERAL
(Continued)
|
(c)
|
Principles of
consolidation
|
The share
exchange transaction as disclosed in Note 1 has been accounted for as a
recapitalization of Yanglin Soybean Inc. where the Company (the legal acquirer)
is considered the accounting acquiree and Faith Winner (BVI) (the legal
acquiree) is considered the accounting acquirer. As a result of this
transaction, the Company is deemed to be a continuation of the business of Faith
Winner (BVI). The historical stockholders’ equity of the accounting
acquirer prior to the share exchange has been retroactively restated as if
the share exchange transaction occurred as of the beginning of the first period
presented.
The
unaudited consolidated financial statements include the accounts of the Company
and the following subsidiaries, as well as Yanglin, a variable interest entity
of which WFOE is the primary beneficiary as defined by ASC 810 “Consolidation of
Variable Interest Entities” All intercompany transactions and accounts have been
eliminated in consolidation.
Name of Company
|
Place of
incorporation
|
Attributable
interest
|
||||
Faith
Winner Investments Ltd
|
British Virgin Islands
|
100
|
%
|
|||
Faith
Winner (Jixian) Agriculture Development Company
|
PRC
|
100
|
%
|
|||
Heilongjiang
Yanglin Soybean Group Co. Ltd*
|
PRC
|
100
|
%
|
*Deemed
variable interest entity
14
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
2.
|
GENERAL
(Continued)
|
(d)
|
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 consolidated financial statements and the reported amounts of revenues and
expenses during the reporting periods. Items subject to such
estimates and assumptions include the carrying value and estimated useful lives
of long-lived assets; valuation allowances for receivables; valuation of warrant
liabilities; inventory and deferred tax assets. Due to the inherent uncertainty
involved in making estimates, actual results reported in future periods may
differ from those estimates. Estimates and assumptions are reviewed
periodically, and the effects of revisions are reflected in the unaudited
consolidated financial statements in the period they are determined to be
necessary.
(e)
|
Economic and political
risks
|
The
Group’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy.
The
Group’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Group’s results may be adversely affected by changes in the political and social
conditions in the PRC, and by changes in governmental policies with respect to
laws and regulations, anti-inflationary measures, currency conversion,
remittances abroad, and rates and methods of taxation, among other
things.
15
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
2.
|
GENERAL
(Continued)
|
(f)
|
Intangible
assets
|
Intangible
assets include land use rights and railway use rights.
Land use
rights are stated at cost less accumulated amortization. Amortization
is provided over the respective useful lives, using the straight-line
method. Estimated useful lives range from 22 to 50
years.
Railway
use rights are stated at cost less accumulated amortization. Amortization is
provided over the respective useful lives, using the straight-line method.
Estimated useful life is 10 years.
(g)
|
Property, plant and
equipment
|
Property,
plant and equipment are carried at cost less accumulated
depreciation. Depreciation is provided over their estimated useful
lives, using the straight-line method. Estimated useful lives of the property,
plant and equipment are as follows:
Buildings
|
10
- 35 years
|
|
Machinery
and equipment
|
3.5
- 30 years
|
|
Office
equipment
|
4 -
20 years
|
|
Motor
vehicles
|
6 -
10 years
|
The costs
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the
consolidated statement of operations and other comprehensive income. The cost of
maintenance and repairs is charged to operations when incurred, whereas
significant renewals and betterments are capitalized.
(h)
|
Accounting for the impairment of
assets held for sale
|
The
assets held for sale by the Group are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of assets may not be
recoverable. It is reasonably possible that these assets could become impaired
as a result of changes in technologies or situation in the
industry. Determination of recoverability of assets to be held and
used is done by comparing the carrying amount of an asset to the future net
undiscounted cash flows to be generated by the asset.
16
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
2.
|
GENERAL
(Continued)
|
(i)
|
Inventories
|
Inventories
consist of finished goods and raw materials, and are stated at the lower of cost
or market value. The cost of inventories is measured using the weighted average
method. Finished goods are comprised of direct materials, direct labor and an
appropriate proportion of production overheads.
(j)
|
Trade
receivables
|
Trade
receivables are recognized and carried at the original invoice amount less an
allowance for any uncollectible amounts. An allowance for doubtful accounts is
maintained for all customers after considering a variety of factors, including
the length of time past due, significant one-time events and the company’s
historical experience.
The Group
writes off trade receivable against its allowance after reasonable collection
efforts have been made and the accounts are deemed uncollectible.
(k)
|
Customer
Deposits
|
Customer
deposits represent advance payments from customers prior to the delivery of
goods. The Company requires full payment from customers prior to
delivery. Customer deposits are recognized in revenue upon delivery of
goods.
17
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
2.
|
GENERAL
(Continued)
|
(l)
|
Foreign currency
translation
|
The
accompanying unaudited consolidated financial statements are presented in United
States dollars. The reporting currency of the Group is the U.S.
dollar (USD). WFOE and Yanglin use its local currency, Renminbi (RMB), as its
functional currency. Results of operations and cash flow are translated at
average exchange rates during the period, and assets and liabilities are
translated at the end of period exchange rates. Translation adjustments
resulting from this process are included in accumulated other comprehensive
income in stockholders’ equity. Transaction gains and losses that arise from
exchange rate fluctuations from transactions denominated in a currency other
than the functional currency are included in the results of operations as
incurred.
The PRC
government imposes significant exchange restrictions on fund transfers out of
the PRC that are not related to business operations. These restrictions have not
had a material impact on the Group because it has not engaged in any significant
transactions that are subject to the restrictions.
The
exchange rates used to translate amounts in RMB into USD for the purposes of
preparing the consolidated financial statements were as follows:
June 30, 2010
|
December 31, 2009
|
June 30, 2009
|
||||||||||
The
closing rate at RMB : USD exchange
rate
|
6.8086 | 6.8372 | 6.8448 | |||||||||
Average
six-months ended RMB : USD exchange rate
|
6.8347 | 6.8432 | ||||||||||
Average
three-months ended RMB : USD exchange rate
|
6.8335 | 6.8399 |
The RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. There
is no assurance that the RMB amounts could have been, or could be, converted
into USD at the rates used in translation.
18
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
2.
|
GENERAL
(Continued)
|
(m)
|
Revenue
recognition
|
Revenue
is recognized upon the delivery of goods to customers. Revenue is recognized
when all of the following criteria are met: Persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
seller’s price to the buyer is fixed or determinable, and collection is
reasonably assured.
(n)
|
Costs of
sales
|
Cost of
sales consists primarily of direct material costs, direct labor cost, and
applicable overhead costs attributable to the production of
products. Permanent write-down of inventory to the lower of cost or
market value is also reflected in the cost of revenues. For the six and
three months ended June 30, 2010 and 2009, there were no write-downs of
inventories.
(o)
|
Advertising
|
The Group
expenses all advertising expenses as incurred. Advertising expenses
included in selling expenses were $211 and $0 for the six months ended June
30, 2010 and 2009 respectively. Advertising expenses for the three months
ended June 30, 2010 and 2009 were $211 and $0, respectively.
(p)
|
Shipping and
handling
|
All
shipping and handling costs are expensed as incurred and included in selling
expense. Total shipping and handling expenses were $41,050 and
$42,730 for the six months ended June 30, 2010 and 2009 respectively. The
Shipping and handling costs for the three months ended June 30, 2010 and 2009
were $24,509 and $20,426 respectively.
(q)
|
Stock-Based
Compensation
|
The
Company awards stock options and other equity-based instruments to its
employees, directors and consultants (collectively “share-based
payments”). Compensation cost related to such awards is measured
based on the fair value of the instrument on the grant date and is recognized on
a straight-line basis over the requisite service period, which generally equals
the vesting period. All of the Company’s stock-based compensation is
based on grants of equity instruments and no liability awards have been
granted.
19
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
2.
|
GENERAL
(Continued)
|
(r)
|
Pension and Employee
Benefits
|
Full time
employees in PRC entities participate in a government mandated multi-employer
defined contribution plan pursuant to which certain pension benefits, medical
care, unemployment insurance, employee housing fund and other welfare benefits
are provided to employees. The PRC labor regulations require the Group to accrue
for these benefits based on certain percentages of the employees' salaries.
Management believes full time employees who have passed the probation period are
entitled to such benefits. The total provisions for employee pension
were $70,105 and $66,122 for the six months ended June 30, 2010 and
2009 respectively. The total
provisions for employee pension for the three months ended June 30, 2010, and
2009 were $37,010 and $40,239, respectively.
(s)
|
Income
taxes
|
The Group
accounts for income tax using an asset and liability approach and allows for
recognition of deferred tax benefits in future years. Under the asset
and liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. A valuation allowance is provided for deferred tax
assets if it is more likely than not these items will either expire before
the Group is able to realize their benefits, or the future realization is
uncertain.
The Group
applied the provisions of ASC 740.10, Accounting For Uncertainty In Income
Taxes, which provides clarification related to the process associated with
accounting for uncertain tax positions recognized in our consolidated financial
statements. ASC 740.10 prescribes a more-likely-than-not threshold for financial
statement recognition and measurement of a tax position taken, or expected to be
taken, in a tax return. ASC 740.10 also provides guidance related to, among
other things, classification, accounting for interest and penalties associated
with tax positions, and disclosure requirements
The Group
recognizes accrued interest and penalties related to unrecognized tax benefits
in the provision for income taxes in our consolidated statements of operation.
The Group’s policy for recording interest and penalties associated with audits
is to record such items as a component of income tax expense.
20
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
2.
|
GENERAL
(Continued)
|
(t)
|
Statutory
reserves
|
Pursuant
to the applicable laws in PRC, PRC entities are required to make appropriations
to three non-distributable reserve funds, namely the statutory surplus reserve,
statutory public welfare fund, and discretionary surplus reserve, based on
after-tax net earnings as determined in accordance with the PRC GAAP, after
offsetting any prior years’ losses. Appropriation to the statutory surplus
reserve should be at least 10% of the after-tax net earnings until the reserve
is equal to 50% of the Company's registered capital. Appropriation to
the statutory public welfare fund is 5% to 10% of the after-tax net
earnings. The statutory public welfare fund is established for the
purpose of providing employee facilities and other collective benefits to
the employees and is non-distributable other than in
liquidation. Beginning from January 1, 2006, enterprises have no
further requirements to make the appropriation to the statutory public welfare
fund. Discretionary surplus reserve is a prescribed percentage
approved by the shareholder. The Group does not make appropriations to the
discretionary surplus reserve fund.
As
provided in WFOE’s and Yanglin’s Articles of Association, WFOE’s and Yanglin’s
net income after taxation can only be distributed as dividends after
appropriation has been made for the following:
|
(i)
|
Making up cumulative prior
years’ losses, if
any;
|
|
(ii)
|
Allocations to the “Statutory surplus
reserve” of at least
10% of net income after taxation, as determined under PRC accounting
rules and
regulations, until the fund amounts to 50% of the Company's registered
capital, which is restricted for set off against losses, expansion of
production and operation or increase in registered
capital;
|
|
(iii)
|
Allocations to the discretionary
surplus reserve, if
any.
|
The
Company established a statutory surplus reserve as well as a
statutory public welfare fund and commenced to appropriate 10% and 5%,
respectively, of the PRC net income after taxation to these reserves. The
amounts included in the statutory reserves consisted of surplus reserve of
$3,752,424 and common welfare fund of $1,876,212 as of June 30, 2010 and
December 31, 2009, respectively.
21
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
2.
|
GENERAL
(Continued)
|
(u)
|
Other comprehensive
income
|
Other
comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to
owners. Among other disclosures, all items that are required to be
recognized under current accounting standards as components of comprehensive
income are required to be reported in a financial statement that is presented
with the same prominence as other financial statements. The Group’s current
component of other comprehensive income is the foreign currency translation
adjustment.
(v)
|
Earnings per
share
|
The
Company reports earnings per share in accordance with the provisions of FASB ASC
260.10, "Earnings Per Share” FASB ASC 260.10 requires presentation of basic and
diluted earnings per share in conjunction with the disclosure of the methodology
used in computing such earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common stockholders by
the weighted average common shares outstanding during the period. Diluted
earnings per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock using the treasury method.
(w)
|
Value-added tax (“VAT”)
|
All of
Yanglin’s products that are sold in PRC are subject to a Chinese VAT on the
gross sales price. VAT from sales may be offset by VAT paid on purchase of raw
materials included in the cost of producing the finished goods. Prepaid
VAT will only be offset against future VAT payable resulting from sales.
(x)
|
Warrant
Liability
|
Effective
January 1, 2009, we adopted the provisions of FASB ASC Topic 815,
"Derivatives and Hedging" ("ASC 815") (previously ElTF 07-5, "Determining
Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own
Stock"). As a result of adopting ASC 815, warrants to purchase the
Company's common stock previously treated as equity pursuant to the
derivative treatment exemption were no longer afforded equity treatment as there
was a down-round protection (full-ratchet down round protection). As a result,
the warrants are not considered indexed to the Company's own stock, and as such,
all future changes in the fair value of these warrants will be recognized
currently in earnings until such time as the warrants are exercised or
expire.
As such,
effective January 1, 2009, the Company reclassified the fair value of these
warrants from equity to liability, as if these warrants were treated as a
derivative liability since their issuance in October 2007.
22
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
2.
|
GENERAL
(Continued)
|
(y)
|
Recent
accounting pronouncements
|
In June
2009, the FASB issued ASC810.10, guidance to change financial reporting by
enterprises involved with variable interest entities (“VIEs”) which modifies how
a company determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. This
pronouncement clarifies that the determination of whether a company is required
to consolidate an entity is based on, among other things, an entity’s purpose
and design and a company’s ability to direct the activities of the entity that
most significantly impact the entity’s economic performance. The guidance
requires an ongoing reassessment of whether a company is the primary beneficiary
of a variable interest entity. This guidance also requires additional
disclosures about a company’s involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. This guidance is
effective for fiscal years beginning after November 15, 2009. This ASC was
adopted on January 1, 2010 and had no material impact on the Company’s
unaudited consolidated financial statements.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on our consolidated financial statements
upon adoption.
23
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
3.
|
FAIR
VALUE
|
The
Company has categorized its assets and liabilities, which are recorded at fair
value, based upon the fair value hierarchy specified by FASB ASC
820.
The
levels of fair value hierarchy are as follows:
|
l
|
Level 1 inputs utilize quoted
prices (unadjusted) in active markets for identical assets or
liabilities that we
have the ability to access.
|
|
l
|
Level 2 inputs utilize
other-than-quoted prices that are observable, either directly or
indirectly. Level 2 inputs include quoted prices for similar assets and
liabilities in active markets, and inputs such as interest rates and yield curves
that are observable at commonly quoted
intervals.
|
|
l
|
Level 3 inputs are unobservable
and are typically based on our own assumptions, including situations where
there is little, if any, market
activity.
|
The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties. As of June 30,
2010, the carrying amounts of financial assets and liabilities, such as cash and
cash equivalents, accounts receivable, other receivables, short-term bank
loans, accounts payable, and other payables, approximate their fair values
because of the short maturity of these instruments and market rates of interest
available to the Group.
24
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
4.
|
CREDIT RISK AND CUSTOMERS AND
SUPPLIERS CONCENTRATIONS
|
Financial
instruments which potentially expose the Group to concentrations of credit risk,
is cash and accounts receivable as of June 30, 2010 and December 31, 2009. The
Group performs ongoing evaluations of its cash position and credit evaluations
of customers to ensure sound collections and minimize credit losses
exposure.
CASH- U.S.
ACCOUNTS–
(RESTRICTED)
As of
June 30, 2010 and December 31, 2009, respectively, the Group’s restricted
cash of $247,961 and $278,018 was kept in bank accounts in the U.S.
Cash accounts at financial institutions in the U.S. may exceed the federal
depository insurance coverage limits. In October 2008, the FDIC increased its
insurance from $100,000 per depositor to $250,000 and to an unlimited amount for
non-interest bearing accounts. The coverage increase, which is temporary,
extends through December 31, 2013 and June 30, 2010, respectively. All of the
cash held in the U.S. is fully insured. Lastly, there is no unrestricted cash in
U.S. accounts.
CASH- PRC
ACCOUNTS– (RESTRICTED AND
UN-RESTRICTED)
As of
June 30, 2010 and December 31, 2009, respectively, the Group’s cash
was with banks in the PRC where there is currently no rule or regulation
mandated on obligatory insurance of bank accounts.
SALES AND
VENDOR CONCENTRATIONS
For the
three and six months ended June 30, 2010 and 2009 respectively, all of the
Group’s sales were generated within the PRC. In addition, all accounts
receivable as of June 30, 2010 and December 31, 2009 are from entities within
the PRC.
For the
three months ended June 30, 2010 and 2009 respectively, no customer accounted
for 10% or more of the Group’s revenue.
For the
three months ended June 30, 2010 and 2009 respectively, no vendor accounted for
10% or more of the Group’s purchases.
25
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
5.
|
CASH-RESTRICTED
|
Cash-restricted
consists of the following at:
June 30, 2010
|
December 31, 2009
|
|||||||
(unaudited)
|
||||||||
Bank
deposits held as collateral for bank loan – PRC
|
$
|
1,909,350
|
$
|
1,462,587
|
||||
Bank
deposits held in trust account – U.S.
|
247,961
|
278,018
|
||||||
Balance
at the end of period
|
$
|
2,157,311
|
$
|
1,740,605
|
Cash-restricted
maintained in a trust account in the United States is held for the purpose of
payment for investor and public relations costs. Bank deposits held as
collateral for bank loan was requested by Agricultural Development Bank of China
as collateral to guarantee the repayment of the loan
of $11,749,846 (RMB80,000,000) from Yanglin.
26
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
6.
|
INVENTORIES
|
Inventories
consist of the following:
June 30, 2010
|
December 31, 2009
|
|||||||
(unaudited)
|
||||||||
Finished
goods
|
$
|
5,434,690
|
$
|
2,560,585
|
||||
Raw
materials
|
859,608
|
5,795,760
|
||||||
Balance
at the end of period
|
$
|
6,294,298
|
$
|
8,356,345
|
7.
|
OTHER
RECEIVABLES AND PREPAID
EXPENSES
|
Details
of other receivables and prepaid expenses consist of the following:
June 30, 2010
|
December 31, 2009
|
|||||||
(unaudited)
|
||||||||
Advances
for materials
|
$
|
11,926
|
$
|
3,101
|
||||
Prepayment
for customers’ transportation costs
|
21,471
|
56,229
|
||||||
Advances
for travel
|
27,285
|
28,152
|
||||||
Prepaid
service fee
|
14,687
|
14,626
|
||||||
Other
|
3,984
|
6,092
|
||||||
Balance
at the end of period
|
$
|
79,353
|
$
|
108,200
|
27
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
PROPERTY, PLANT AND
EQUIPMENT
|
Property,
plant and equipment consist of the following:
June 30,
2010
|
December 31,
2009
|
|||||||
(unaudited)
|
||||||||
Building
|
$
|
9,207,595
|
$
|
9,169,080
|
||||
Machinery
and equipment
|
25,818,891
|
25,710,890
|
||||||
Office
equipment
|
128,730
|
128,192
|
||||||
Motor
vehicles
|
1,173,216
|
1,168,308
|
||||||
36,328,432
|
36,176,470
|
|||||||
Less:
accumulated depreciation
|
(10,350,357
|
)
|
(8,879,105
|
)
|
||||
Balance
at the end of period
|
$
|
25,978,075
|
$
|
27,297,365
|
As of
June 30, 2010, building with net book value of $1,494,360 and machinery and
equipment with net book value of $9,291,594 were pledged as collateral under
certain loan arrangements. These loans were primarily obtained for general
working capital.
Temporarily Idle
Assets
Included
in the above balances of property, plant and equipment are assets deemed as
temporarily idle by the management comprising of the following:
June 30, 2010
|
December 31,
2009
|
|||||||
(unaudited)
|
||||||||
Buildings
|
$
|
886,480
|
$
|
882,772
|
||||
Machinery
and equipment
|
3,848,074
|
3,831,978
|
||||||
4,734,554
|
4,714,750
|
|||||||
Less:
accumulated depreciation
|
(596,202
|
)
|
(393,173
|
)
|
||||
Net
book value
|
$
|
4,138,352
|
$
|
4,321,577
|
These
assets belong to the powdered oil production line. They are temporarily idle
because there was certain technical issues in the formula. We are now adjusting
the formula and techniques used for powdered oil and we expect to start the
formal production of this product within a few months. If the production
can’t be started as we now expect, we will consider disposal of these
assets.
28
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
8.
|
PROPERTY, PLANT AND EQUIPMENT
(Continued)
|
Depreciation
expense is included in the consolidated statement of operations and
comprehensive income as follows (unaudited):
Three months ended
June 30,
|
Six months ended
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(as restated)
|
(as restated)
|
|||||||||||||||
Cost
of sales and inventory
|
$ | 381,555 | $ | 524,178 | $ | 669,800 | $ | 1,118,175 | ||||||||
General
and administrative expenses
|
329,069 | 83,424 | 758,667 | 472,873 | ||||||||||||
Total
depreciation expenses
|
$ | 710,624 | $ | 607,602 | $ | 1,428,467 | $ | 1,591,048 |
29
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
9.
|
ASSETS HELD FOR
SALE
|
Yanglin
has classified certain manufacturing facilities as held for
sale. Assets held for sale consists of the following:
June 30, 2010
|
December 31,
2009
|
|||||||
(unaudited)
|
||||||||
Building
|
$
|
515
|
$
|
1,339
|
||||
Machinery
and equipment
|
218,972
|
569,070
|
||||||
Balance
|
$
|
219,487
|
$
|
570,409
|
Management
plans to seek a buyer of these assets on the open market. The assets are
expected to be sold in 2010.
Impairment Loss
of Assets held for
sale
The Group
analyzes the assets for impairment when events or circumstances occur that
indicate the carrying value may not be recoverable. The Group considers a
property to be impaired when the sum of future undiscounted cash flows during
its remaining estimated holding period is less than the carrying value of the
asset. For impaired assets, the Group records an impairment charge equal to the
excess of the property’s carrying value over its estimated fair
value.
During
the quarter ended June 30, 2010, the Group reviewed the idle production
facility, which had been identified as being impaired and reclassified to assets
held for sale in the third quarter of 2009, and found that these assets had been
further impaired, because the fair value determined using the fair value
hierarchy using primary level 2 inputs in a market approach utilizing quoted
market price for similar building and equipment adjusted for the condition and
location of the assets.
There
were $352,032 and $351,967 additional impairment charges recorded during the
three and six months ended June 30, 2010, respectively. There were no impairment
charges recorded during the three and six months ended June 30,
2009.
30
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
10.
|
INTANGIBLE
ASSETS
|
Intangible
assets consist of the following:
Amortized intangible assets
|
January 1, 2010
|
Accumulated
amortization
|
Foreign
currency
translation
difference
|
June 30, 2010
(unaudited)
|
||||||||||||
Land
use rights
|
$
|
4,004,529
|
(536,788
|
)
|
16,821
|
$
|
3,484,562
|
|||||||||
Railway
use rights
|
1,199,321
|
(362,563
|
)
|
5,038
|
841,796
|
|||||||||||
Total
amortized intangible assets
|
$
|
5,203,850
|
(899,351
|
)
|
21,859
|
$
|
4,326,358
|
As of
June 30, 2010, land use rights with net book value of $1,255,596 were
pledged as collateral for certain loans.
There were no additions or
disposals during the six months ended June 30, 2010.
Amortization
expenses are included in the consolidated statement of operations and
comprehensive income as follows (unaudited):
Three months ended
June 30,
|
Six months ended
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(as restated)
|
(as restated)
|
|||||||||||||||
Selling
expenses
|
$ | 32,678 | $ | 32,647 | $ | 65,343 | $ | 65,262 | ||||||||
General
and administrative expenses
|
21,175 | 20,485 | 42,342 | 42,290 | ||||||||||||
Total
amortization expense
|
$ | 53,853 | $ | 53,132 | $ | 107,685 | $ | 107,552 |
31
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
10.
|
INTANGIBLE
ASSETS
(Continued)
|
The
estimated aggregate amortization expenses for intangible assets for the five
succeeding years are as follows:
June 30,
|
||||
2011
|
$
|
216,198
|
||
2012
|
216,198
|
|||
2013
|
216,198
|
|||
2014
|
216,198
|
|||
2015
|
216,198
|
|||
thereafter
|
3,245,368
|
|||
$
|
4,326,358
|
32
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
11.
|
SHORT-TERM BANK
LOANS
|
(A)
|
Short-term bank loans consist of the
following:
|
June 30, 2010
|
December 31,
2009
|
Collateral
|
|||||||
(unaudited)
|
|||||||||
Loans
from Agricultural Development Bank of China, interest rates at 5.31% per
annum, due August 30, 2010 (Such amount had been partially repaid, and the
remaining balance on August 16, 2010 was $1,174,985. The ramaining balance
will be paid by August 30, 2010, its due date.)
|
$
|
7,343,654
|
$
|
7,312,935
|
|||||
Loans
from Agricultural Development Bank of China, interest rates at 5.31% per
annum, due November 5, 2010
|
1,028,112
|
5,850,348
|
Building,
machinery and equipment and land use rights
|
||||||
Loans
from Agricultural Development Bank of China, interest rates at 5.31% per
annum, due July 30, 2010 (Such amount had been fully repaid by July 30,
2010)
|
5,874,923
|
7,312,935
|
Restricted
cash
|
||||||
Loans
from Agricultural Development Bank of China, interest rates at 5.31% per
annum, due November 1, 2010
|
4,406,191
|
–
|
Restricted
cash
|
||||||
Balance
at the end of period
|
$
|
18,652,880
|
$
|
20,476,218
|
These
loans were obtained and used by Yanglin for working capital. Interest expense
for the six months ended June 30, 2010 and 2009 were $563,507 and $228,165,
respectively. Interest expense for the three months ended June 30, 2010 and 2009
were $291,634 and $143,506, respectively.
(B)
|
Credit
lines
|
The Group
had a credit line facility with the availability to borrow up to $105
million (equivalent to RMB 718 million), with Agricultural Development Bank of
China (the “Bank”). On April 25, 2010, the Bank cancelled this credit line,
since it was only to be used to purchase soybeans in the season of bulk purchase
of agricultural products, and the season was complete. Currently, the Group
has no available credit line. The Bank will review the status of the Group and
determine if a new credit line will be granted.
33
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
12.
|
OTHER
PAYABLES
|
Other
payables consist of the following:
June 30, 2010
|
December 31,
2009
|
|||||||
(unaudited)
|
||||||||
Due
for construction
|
$ | - | $ | 824,424 | ||||
Others
|
39 | - | ||||||
Balance
at the end of period
|
$ | 39 | $ | 824,424 |
13.
|
RELATED PARTIES
TRANSACTIONS
|
(A)
|
Loans from related parties
consist of the following:
|
June 30, 2010
|
December 31, 2009
|
|||||||
(unaudited)
|
||||||||
Loans
from certain employees, interest rates at 7.722% and 9.405% per annum
respectively, with various installments, due October 28,
2016
|
$
|
329,616
|
$
|
367,867
|
||||
Current
portion due within one year
|
(54,132
|
)
|
(53,676
|
)
|
||||
$
|
275,484
|
$
|
314,191
|
These
loans were obtained and used by Yanglin for working capital. Interest expense
for the six months ended June 30, 2010 and 2009 were $13,161 and $17,352,
respectively,
and interest paid for the three months ended June 30, 2010 and 2009 were
$6,424 and $8,507, respectively.
34
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
13.
|
RELATED PARTIES TRANSACTIONS
(Continued)
|
These
loans are between Yanglin, Mr. Shulin Liu, the CEO of Yanglin, and certain
employees and officers of Yanglin. Mr. Shulin Liu gifted 12 houses to these
employees and officers for their long-term services, and these employees and
officers personally obtained mortgage loans from the Industrial and
Commercial Bank of The PRC, using these houses as collateral. The
employees simultaneously loaned the proceeds to Yanglin to be used as working
capital. These employees and officers have been making principal and interest
payments on the loans directly to the bank and Yanglin will reimburse them
for the full amount at a later date.
The
future principal payments under the bank loans are as follows:
For the twelve months ended June 30,
|
||||
2011
|
$
|
54,132
|
||
2012
|
47,861
|
|||
2013
|
46,169
|
|||
2014
|
49,809
|
|||
2015
|
53,736
|
|||
Thereafter
|
77,909
|
|||
Total
|
$
|
329,616
|
(B)
|
Heilongjiang Yanglin Group Seed
Co. Ltd.
|
Heilongjiang
Yanglin Group Seed Co. Ltd. “Yanglin Seed Co.”, which is wholly owned and
managed by Mr. Shulin Liu, the Company’s chief executive officer, is an
affiliate of the Company. Yanglin Seeds Co. supplies the farmers with “Yanglin”
brand soybean seeds which provide higher oil yield. Pursuant to annual
intentional supply agreements with the Company, the farmers sell the
harvested soybeans to Yanglin. Yanglin Seeds Co. extends favorable
commercial terms to these farmers, such as competitive price, for them to
purchase “Yanglin” soybean seeds. Meanwhile, Yanglin offers cash-upon-delivery
payment terms to the farmers for purchases of the harvested soybeans grown from
“Yanglin” soybean seeds. These arrangements ensure that we maintain good
relations with our suppliers, and enjoy a stable supply of soybeans that meet
our high quality standards. There was no related party transaction or commitment
between Yanglin Seed Co. and the Group as of June 30, 2010 and for the six
months ended June 30, 2010 and 2009, respectively.
35
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
13.
|
RELATED PARTIES TRANSACTIONS
(Continued)
|
(C)
|
Stock exchange listing shares
contributed by majority
shareholder
|
In
connection with the sale of the Series A Convertible Preferred Stock during
October 2007, the Company committed to apply to list and have its shares of
common stock traded on the Nasdaq Capital Market, the Nasdaq Global Select
Market or the Nasdaq Global Market or any successor market thereto
(collectively, “Nasdaq”), or the New York Stock Exchange or any successor market
thereto (together with Nasdaq, each a “National Stock Exchange”), no later than
December 31, 2008. As a result of failing to achieve such listing, the Company’s
majority shareholder, Winner State Investments Limited, committed to transfer
1,000,000 shares of common stock in the Company to the purchasers of shares of
Series A Convertible Preferred Stock. The Company has accounted for this as a
contribution of capital by its majority stockholder and recorded a charge
to operations in the amount of $4,480,000 for the year ended December 31, 2008
based on the closing market price of $4.48 per share on December 31, 2008. This
charge was the same as the restatement of beginning retained earnings as of
January 1, 2009. These shares have not been transferred as of June 30,
2010, as the Company is now negotiating with the Series A Preferred
Investors as to whether the transfer of these shares will be made or
waived.
36
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
14.
|
CONVERTIBLE PREFERRED STOCK AND
WARRANTS
|
SERIES A
On
October 3, 2007, the Company sold 9,999,999 shares of Series A Preferred Stock
and various stock purchase warrants for cash consideration totaling $21.5
million dollars. In addition, in connection with the sale of the Preferred
Stock, certain advisors were provided warrants. The number of shares,
exercise price and contractual terms eligible to be purchased with the
warrants are summarized in the following table:
Number of warrants
|
||||||||||||||||||||
Series of warrant
|
6/30/2010
|
12/31/2009
|
6/30/2009
|
Exercise
price
|
Contractual
term
|
Expiration Date
|
||||||||||||||
Series A
|
10,000,000
|
10,000,000
|
10,000,000
|
$
|
2.75
|
5 years
|
October 2, 2012
|
|||||||||||||
Series
B
|
5,000,000
|
5,000,000
|
5,000,000
|
$
|
3.50
|
5
years
|
October
2, 2012
|
|||||||||||||
Series
E
|
1,000,000
|
1,000,000
|
1,000,000
|
$
|
2.58
|
5
years
|
October
2, 2012
|
|||||||||||||
Series
F
|
500,000
|
500,000
|
500,000
|
$
|
3.01
|
5
years
|
October
2, 2012
|
|||||||||||||
Total
|
16,500,000
|
16,500,000
|
16,500,000
|
37
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
14.
|
CONVERTIBLE PREFERRED STOCK AND
WARRANTS (Continued)
|
Series A
Convertible Preferred Stock has liquidation rights senior to common stock and to
any other class or series of stock issued by the Company not designated as
ranking senior to or pari passu with Series A Convertible Preferred
Stock. In the event of a liquidation of the Company, holders of Series A
Convertible Preferred Stock are entitled to receive a distribution equal to
$2.15 per share prior to any distribution to the holders of common stock or any
other stock that ranks junior to the Series A Convertible Preferred Shares.
Series A Convertible Preferred Stock is entitled to non-cumulative dividends
only upon declaration of dividends by the Company. To date, no dividends
have been declared or accrued. Series A Convertible Preferred Stock will
participate based on their respective “as-if” conversion rates if the Company
declares any dividends. Holders of Series A Convertible Preferred Stock
also have voting rights required by applicable law and the relevant number of
votes shall be equal to the number of shares of Common Stock issuable upon
conversion of Series A Convertible Preferred Stock.
The gross proceeds of the sale were
$21.5 million. The proceeds from the sale were allocated to Series A Convertible
Preferred Stock, warrants and beneficial conversion features based on the
relative fair value of the
securities. The value of Series A Convertible Preferred Stock was
determined by reference to the market price of the common stock into which it
converts, and the fair value of the warrants was calculated using the
Black-Scholes model with the following
assumptions: expected life of 5 year, expected dividend rate of 0%,
volatility of 27% and an interest rate of 4.24%.
The
Company recognized a beneficial conversion feature discount on Series A
Convertible Preferred Stock at its intrinsic value, which was the fair value of
the common stock at the commitment date for Series A Convertible Preferred Stock
investment, less the effective conversion price but limited to the $21.5 million
of proceeds received from the sale. The Company recognized the $8.0 million
beneficial conversion feature as an increase in paid in capital in the
accompanying consolidated balance sheet on the date of issuance of Series A
Convertible Preferred Stocks since these shares were convertible at the issuance
date.
38
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
15.
|
CONVERTIBLE PREFERRED STOCK AND
WARRANTS (Continued)
|
Each
share of Series A Convertible Preferred Shares is convertible into one share of
Common Stock, subject to standard adjustment provisions as set forth in the
Certificate of Designations for our Series A Convertible Preferred
Shares.
During
the year ended December 31, 2009, 465,116 shares of Series A Convertible
Preferred Stock were converted into 465,116 shares of common stock.
In
connection to the Series A Convertible Preferred Stock as described above, on
October 10, 2007, the Company also issued 1,000,000 Series E warrants at an
exercise price of $2.58 per share and 500,000 Series F warrants at an exercise
price of $3.01 per share to an investment banker and financial advisor,
respectively. These warrants each have a five year term. The fair
value of Series E warrants was $532,800 and Series F warrants was $205,452, and
was recorded as offering cost of Series A Convertible Preferred
Stock transaction.
The fair
value of the Series E and F warrants was calculated using the Black-Scholes
model with the following assumptions: expected life of 5 year, expected
dividend rate of 0%, volatility of 27% and an interest rate of
4.24%.
39
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
15.
|
CONVERTIBLE PREFERRED STOCK AND
WARRANTS (Continued)
|
The
agreement also provides that if the Company does not file, or if the
registration statements aren’t declared effective throughout the required
period, or if the Company ceases to trade on certain exchanges as defined, the
Company shall pay damages equal to 1.5% of the amount invested for each calendar
month capped at a cumulative damage payment amount of 15%. In connection
with the sale of the Series A Convertible Preferred Stock during October 2007,
the Company committed to apply to list and have its shares of common stock
traded on the Nasdaq Capital Market, the Nasdaq Global Select Market or the
Nasdaq Global Market or any successor market thereto (collectively, “Nasdaq”),
or the New York Stock Exchange or any successor market thereto (together
with Nasdaq, each a “National Stock Exchange”), no later than December 31, 2008.
As a result of failing to achieve such listing, the Company’s majority
shareholder, Winner State Investments Limited, committed to transfer 1,000,000
shares of common stock in the Company to the purchasers of shares of Series
A Convertible Preferred Stock of the Company. The Company has accounted for this
as a contribution of capital by its majority stockholder and recorded a charge
to operations in the amount of $4,480,000 for the year ended December 31, 2008.
Such shares were valued based on the closing market price of $4.48 per share on
December 31, 2008.
Pursuant
to the Registration Rights Agreement dated as of October 3, 2007 by and among
the Company and certain holders (the Holders), the Company agreed to have a
registration statement registering certain of the securities of the Holders
declared effective with the Securities and Exchange Commission (“SEC”) on or
prior to the Effectiveness Date defined in the Registration Rights
Agreement, which was December 31, 2008, or pay the liquidated
damages.
Although
the registration statement was not declared effective as of December 31,
2008, pursuant to a Waiver and Release dated December 31, 2008, the Holders
have waived their right to the liquidated damages for the Company’s failure to
have the registration statement declared effective on or prior to the
Effectiveness date under Registration Rights Agreement.
40
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
15.
|
CONVERTIBLE PREFERRED STOCK AND
WARRANTS (Continued)
|
In
exchange for the waiver and release of the liquidated damages, the Company
entered into an Agreement dated December 31, 2008 (the Agreement). Under the
Agreement, the Company agreed to hire and engage, by February 28, 2009, three
(3) independent directors as defined by NASDAQ Rule 4200(a)(15) and who are
acceptable to the Holders. Further, the Company shall comply with all of
the provisions of NASDAQ Rule 4350 by February 28, 2009. If these requirements
are not met, the Company shall pay to each Holder five percent (5%) of its
initial investment under the Securities Purchase Agreement by and among the
Company and the Holders dated October 3, 2007. On February 27, 2009, the Company
signed an addendum to the Agreement with the Holders, which extended the
deadline for hiring and engaging three (3) independent directors to March 13,
2009. On March 9, 2009, the Company adopted a form of new Bylaws, appointed
three (3) independent directors, established three (3) standing committees under
the Board of Directors (audit committee, compensation committee and
governance and nominating committee), and approved the articles of the three (3)
above mentioned standing committees and the Code of Conduct and Ethics, and
thus has been compliant with the provisions of NASDAQ Rule 4350. In
addition, the Company agreed to effect and announce, no later than June 30,
2009, a change to the Company’s current independent audit firm and engage a new
independent audit firm listed as a Top 10 audit firm according to Public
Accounting Report’s 2008 Annual Audit Rankings to audit the 2009 financial
statements and review the interim financial statements. The Company has
engaged UHY LLP, Inc. as its independent audit firm starting with the quarter
ended June 30, 2009.
If these
requirements were not met, the Company had to pay to each Holder ten percent
(10%) of its initial investment under the Securities Purchase Agreement.
Furthermore, the Company and the Holders agreed to extend the required
Effectiveness Date of the Company’s Registration Statement filed with the
Securities and Exchange Commission to September 30, 2009. The Company has
complied with these requirements as of September 30, 2009 and the
Registration Statement was declared effective by the SEC on June 29,
2009.
41
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
15.
|
CONVERTIBLE PREFERRED STOCK AND
WARRANTS (Continued)
|
As such,
effective January 1, 2009, the Company reclassified the fair value of these
warrants from equity to liability, as if these warrants were treated as a
derivative liability since their issuance in October 2007. On January 1, 2009,
the Company recorded as a cumulative effect adjustment by decreasing additional
paid-in capital by the amount of $15,003,941 and decreasing the beginning
balance of retained earnings by the amount of $72,047,158, and recording
$87,051,099 as a warrant liability to recognize the fair value of such warrants
on January 1, 2009. The fair value of the warrants was $57,494,516, $15,753,325
and $27,573,698 on June 30, 2009 and 2010 and December 31, 2009, respectively.
The Company recognized $11,820,373 and $29,556,583 as income from the change in
fair value of warrants for the six months ended June 30, 2010, and 2009,
respectively. The Company recognized $6,698,802 and $2,441,628 as income from
the change in fair value of warrants for the three months ended June 30, 2010,
and 2009, respectively.
The fair
value was calculated using the Black-Scholes option pricing model. The
assumptions that were used to calculate fair value of the warrants were as
follows:
Investor Warrants:
|
June 30, 2010
|
June 30, 2009
|
December 31,
2009
|
|||||||||
Expected
volatility
|
92.7
|
%
|
116.8
|
%
|
105
|
%
|
||||||
Risk
free rate
|
1.00
|
%
|
1.64
|
%
|
1.7
|
%
|
||||||
Expected
terms
|
2.26
|
3.26
|
2.76
|
|||||||||
Expected
dividend yield
|
-
|
-
|
-
|
Expected
volatility is based on average volatility of historical share trade
information. The Company believes this method produces an estimate that is
representative of the Company's expectations of future volatility over the
expected term of these warrants. The Company has no reason to believe future
volatility over the expected remaining life of these warrants is likely to
differ materially from historical volatility. The expected life is based on the
remaining term of the warrants. The risk-free interest rate is based on U.S.
Treasury securities according to the remaining term of the
warrants.
SERIES B
Series B
Convertible Preferred Stock has par value of $0.001 per share and each share of
the Series B Convertible Preferred Shares is convertible into one share of the
Common Stock, subject to standard adjustment provisions in the Certificate of
Designations for Series B Convertible Preferred Shares.
42
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
15.
|
CONVERTIBLE PREFERRED STOCK AND
WARRANTS (Continued)
|
After the
expiration of the Series J Warrants on April 3, 2009, all of the unissued Series
B convertible Preferred Shares were cancelled and reverted to the status of
authorized but unissued preferred stock, undesignated as to series and subject
to reissuance as shares of preferred stock of any one or more series as
permitted by the Articles of Incorporation. There were no issued and outstanding
shares of Series B Convertible Preferred Shares as of June 30, 2010 and December
31, 2009.
The
following table summarizes warrant activity for the six months ended June 30,
2010 and the year ended December 31, 2009:
Warrants
|
Weighted-average
exercise price
|
Aggregate Intrinsic
Value
|
||||||||||
Outstanding
at December 31, 2009
|
16,500,000
|
2.97
|
2,370,000
|
|||||||||
Issued
|
-
|
-
|
||||||||||
Exercised
|
-
|
-
|
||||||||||
Expired
|
-
|
-
|
||||||||||
Outstanding
at June 30, 2010
|
16,500,000
|
$
|
2.97
|
$
|
2,370,000
|
The terms
of outstanding warrants as of June 30, 2010 are as follows:
Warrants outstanding
|
Warrants exercisable
|
|||||||||||||||||||
Range of
exercise prices
|
Number
outstanding
|
Weighted
average
remaining
contractual life
(years)
|
Weighted
average
exercise price
|
Number
exercisable
|
Weighted
average
exercise price
|
|||||||||||||||
$2.58-$3.50
|
16,500,000
|
2.26
|
$
|
2.97
|
16,500,000
|
$
|
2.97
|
43
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
16.
|
STOCK
OPTIONS
|
At the
time the Company appointed an independent director, the Company agreed to grant
the director, as part of his compensation, 20,000 stock options annually. The
stock options will be granted at the end of each quarter with the exercise price
being the stock price at the last trading day of the quarter. During the three
months ended June 30, 2010, the Company granted 5,000 options to the independent
director in connection with his service in the second quarter of 2010. The
options have an exercise price of $2.30 per share and are fully vested on the
date of grant.
The
Company valued the stock options by the Black Scholes model with the following
assumptions:
Number of
Options Issued
|
Expected
Term
|
Expected
Volatility
|
Dividend
Yield
|
Risk Free
Interest Rate
|
Grant Date
Fair Value
|
|||||||||||||||
5,000
|
5
|
99.65
|
%
|
0
|
%
|
1.79
|
%
|
$
|
8,602
|
The
following is a summary of the option activity:
Options
|
Weighted-average
exercise price
|
Aggregate
Intrinsic Value
|
||||||||||
Outstanding
at December 31, 2009
|
15,000
|
3.02
|
-
|
|||||||||
Issued
|
10,000
|
2.50
|
-
|
|||||||||
Exercised
|
-
|
-
|
-
|
|||||||||
Expired
|
-
|
-
|
-
|
|||||||||
Outstanding
at June 30, 2010
|
25,000
|
$
|
2.81
|
$
|
-
|
44
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
16.
|
STOCK OPTIONS
(Continued)
|
Following
is a summary of the status of options outstanding at June 30, 2010:
Options outstanding
|
Options exercisable
|
|||||||||||||||||||
Range of
exercise
prices
|
Number
outstanding
|
Weighted
average
remaining
contractual life
(years)
|
Weighted
average
exercise price
|
Number
exercisable
|
Weighted
average exercise
price
|
|||||||||||||||
$2.30-$3.10
|
25,000
|
4.50
|
$
|
2.81
|
25,000
|
$
|
2.81
|
For the
six months ended June 30, 2010 and 2009, the Company recognized
$18,728 and $11,292 as compensation expense for the stock options granted
to the independent director, respectively. For the three months ended June
30, 2010 and 2009, the Company recognized $8,602 and $11,292 as
compensation expense for the stock options granted to the independent director,
respectively.
45
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
17.
|
EARNINGS PER
SHARE
|
The
calculation of the basic and diluted earnings per share attributable to the
common stockholders is based on the following data for the three and
six months ended June 30 (unaudited):
Three months ended June 30
|
Six months ended June 30
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(as restated)
|
(as restated)
|
|||||||||||||||
Numerator
|
||||||||||||||||
Earnings:
|
||||||||||||||||
Earnings
(loss) for the purpose of basic earnings per share
|
$ | 2,575,037 | $ | (2,420,294 | ) | $ | 6,546,254 | $ | 22,351,963 | |||||||
Effect
of dilutive potential common stock
|
- | - | - | - | ||||||||||||
Earnings
(loss) for the purpose of dilutive earnings per share
|
$ | 2,575,037 | $ | (2,420,294 | ) | $ | 6,546,254 | $ | 22,351,963 | |||||||
Denominator
|
||||||||||||||||
Number
of shares:
|
||||||||||||||||
Weighted
average number of common stock for the purpose of basic earnings per
share
|
20,465,119 | 20,000,003 | 20,465,119 | 20,000,003 | ||||||||||||
Effect
of dilutive potential common stock - conversion of convertible preferred
stock
|
9,534,883 | - | 9,534,883 | 9,999,999 | ||||||||||||
Effect
of dilutive potential common stock - conversion of warrants and stock
options
|
- | - | 3,864 | 2,903,047 | ||||||||||||
Weighted
average number of common stock for the purpose of dilutive earnings per
share
|
30,000,002 | 20,000,003 | 30,003,867 | 32,903,049 |
Because the Company reported a net
loss for the three months ended June 30, 2009, common stock equivalents were
anti-dilutive; therefore, the amounts reported for basic and diluted loss per
share were the same.
46
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
18.
|
INCOME
TAXES
|
As of
June 30, 2010, the Group had net operating tax losses carried forward of
$18,818,130, which includes $518,033 and $18,300,097 in the US and PRC,
respectively. Those losses carried forward in the US and PRC will expire between
years 2013 and 2029. The Group has established a full valuation allowance
against its net deferred tax assets due to the Group’s history of pre-tax losses
and the resulting likelihood that the deferred tax assets are not
realizable.
The Group
has not recorded any income tax provision for the three and six months ended
June 30, 2010, since the Group has estimated that its estimated annual effective
income tax rate will be zero.
The Group
is not aware of any unrecorded tax liabilities which would impact the Group’s
financial position or its results of operations as of June 30, 2010 and December
31, 2009.
47
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
19
|
VARIABLE INTEREST
ENTITY
|
The
Company, as a primary beneficiary of Yanglin, consolidates Yanglin, as a
Variable Interest Entity (“VIE”), of which we are the primary beneficiary. The
liabilities recognized as a result of consolidating a VIE do not represent
additional claims on our general assets; rather, they represent claims against
the specific assets of the consolidated VIE. Conversely, assets recognized
as a result of consolidating a VIE do not represent additional assets that could
be used to satisfy claims against our general assets. Reflected in the June 30,
2010 and December 31, 2009 balance sheets are consolidated VIE assets of $74.7
and $81.9 million, respectively, which are comprised mainly of cash, inventory
and property and equipment. VIE liabilities mainly consist of short term
bank loans and payables for working capital.
20
|
PARENT-ONLY FINANCIAL
STATEMENTS
|
As
mentioned in note 1 to the consolidated financial statements, as a result of
entering into the contractual agreements, WFOE is deemed to control Yanglin as a
Variable Interest Entity. These agreements may have restrictions on the ability
of Yanglin to transfer funds to the Company through inter-company loans,
advances and cash dividends which consist of additional paid in capital,
statutory reserves and retained earnings of $46,429,938 and $51,548,050
respectively as at June 30, 2010 and December 31, 2009.
The
following tables present unconsolidated financial information of the Company
only:
Balance
Sheets as of June 30, 2010 and December 31, 2009
2010
|
2009
|
|||||||
(unaudited)
|
||||||||
Cash
– restricted
|
$
|
247,961
|
$
|
278,018
|
||||
Other
prepayment
|
-
|
1,216
|
||||||
Investments
in subsidiaries
|
53,370,539
|
58,363,646
|
||||||
Total
assets
|
$
|
53,618,500
|
$
|
58,642,880
|
||||
Other
current liabilities
|
$
|
138,783
|
$
|
132,777
|
||||
Warrant
liabilities
|
15,753,325
|
27,573,698
|
||||||
Total
liabilities
|
15,892,108
|
27,706,475
|
||||||
Total
shareholders’ equity
|
37,726,392
|
30,936,405
|
||||||
Total
liabilities and shareholders’ equity
|
$
|
53,618,500
|
$
|
58,642,880
|
48
YANGLIN
SOYBEAN, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (AS RESTATED)
(UNAUDITED)
(Stated
in US Dollars)
20
|
PARENT-ONLY FINANCIAL
STATEMENTS (Continued)
|
Statements
of Operations and Other Comprehensive Income for the six months ended June 30,
2010 and 2009 (unaudited)
2010
|
2009
|
|||||||
(as restated)
|
||||||||
Investment
loss - equity method
|
$
|
(4,893,107
|
)
|
$
|
(6,946,429
|
)
|
||
General
and administrative expenses
|
(156,007
|
)
|
(157,133
|
)
|
||||
Loss
from operations before income taxes
|
(5,049,114
|
)
|
(7,103,562
|
)
|
||||
Change
in fair value of warrants
|
11,820,373
|
29,556,583
|
||||||
Income
before income taxes
|
6,771,259
|
22,453,021
|
||||||
Income
taxes
|
-
|
-
|
||||||
Net
income
|
$
|
6,771,259
|
$
|
22,453,021
|
49
ITEM
2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
You
should read the following discussion and analysis of our financial condition and
results of operations in conjunction with our unaudited consolidated
financial statements, and the related footnotes thereto, appearing elsewhere in
this report, and in conjunction with management’s discussion and analysis and
the audited consolidated financial statements included in our annual report on
Form 10-K for the year ended December 31, 2009.
CAUTIONARY
STATEMENT REGARDING FUTURE RESULTS,
FORWARD-LOOKING
INFORMATION AND CERTAIN IMPORTANT FACTORS
In this
report we make, and from time to time we otherwise make, written and oral
statements regarding our business and prospects, such as projections of future
performance, statements of management’s plans and objectives, forecasts of
market trends, and other matters that are forward-looking statements. Statements
containing the words or phrases “will likely result,” “are expected to,” “will
continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,”
“anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or
similar expressions identify forward-looking statements. Our actual results may
differ materially from the results anticipated in these forward-looking
statements due to a variety of factors, including, without limitation, as
discussed under the caption “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and elsewhere in this report, as well as
other factors, which may appear in documents, reports, filings with the
Securities and Exchange Commission, news releases, written or oral presentations
made by officers or other representatives made by us to analysts, stockholders,
investors, news organizations and others, and discussions with management and
other of our representatives.
Our
future results, including results related to forward-looking statements, involve
a number of risks and uncertainties. No assurance can be given that the results
reflected in any forward-looking statements will be achieved. Any
forward-looking statement speaks only as of the date on which such statement is
made. Our forward-looking statements are based upon assumptions that are
sometimes based upon estimates, data, communications and other information from
suppliers, government agencies and other sources that may be subject to
revision. There are other factors that could cause our future results to differ
materially from historical results or trends, results anticipated or planned by
us, or which are reflected from time to time in any forward-looking
statement.
We
qualify all of our forward-looking statements by these cautionary statements. In
addition, with respect to all of our forward-looking statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
Company
Overview
We are a
leading, comprehensive non-genetically modified (non-GM) soybean processor in
People’s Republic of China (“PRC”). We currently manufacture ordinary soybean
oil, salad oil and soybean meal in bulk package, along with other products in
smaller quantities, which are sold throughout the PRC directly to our customers
or through distributors. Approximately 80% of our customers are located in
Northern PRC.
50
Our
operating facilities are located in Jixian County, a major soybean production
area in Heilongjiang Province, which is the main soybean growing region in the
PRC. We maintain healthy, long-term relationships with local farmers and soybean
vendors which help to ensure the stability of our supply of raw materials.
Farmers deliver soybeans directly to our factories, thus we enjoy savings in
transportation and purchasing costs. Our relationship with customers (mostly
distributors) are also well established so we are able to require them to pay
the full amount in advance, minimizing accounts receivable and supplementing our
working capital.
The
manufacturing process includes sifting, crushing, heating and pressing soybeans,
extracting and separating oil from crushed soybeans, cleansing, hydrating and
packaging of oil as well as drying and packaging soybean meal. Our main products
include Grade IV soybean oil, salad oil and soybean meal. We broadened our
product line to include value-added products such as squeezed oil, low
temperature soybean meal and concentrated soy protein, and we plan to produce
powdered oil, textured protein and defatted soybean powder in the
future. Formal production of squeezed oil has already begun. We
are now adjusting the formula and techniques used for powdered oil and we expect
to start the formal production of this product within a few months. We are
producing concentrated soy protein in small quantities of commercial grade
product and making efforts to develop the market for this product. Defatted soy
powder and textured protein may be launched at a later date, depending on trends
in the market and the specific product economics.
We sell
our products under the “Yanglin” brand name to various regions of the PRC
through our many distribution channels. In the three months ended June 30,
2010, we generated total revenue of approximately $49.9 million with a net
loss of $4.1 million, exclusive of a non-cash income of approximately $6.7
million resulting from the change in fair value of warrants, which was not
related to our operations.
Our goal
is to become the market leader in the PRC’s non-GM soybean industry, and believe
that we can accomplish this objective in the near future. We are considering
future expansion and acquisition opportunities, with the goal of significantly
increasing our processing capacity, but we will only make a definite decision
after the market and industrial environments improve materially.
We are
also working to improve and strengthen our management and internal control over
financial reporting. The management has been conducting self assessment of the
effectiveness of our internal control systems since 2008, and continuously
rectifying the weakness and deficiencies found in the process. We also hired
outside financial consultants since 2009 to enhance our
financial reporting capability.
Current Business Environment
and 2010 Outlook
The
global economy has recovered gradually from recession since the second half of
2009. The improvement in general economic environment usually will help increase
the demand for consumer goods.
We
believe that the PRC government still supports the development of the domestic
non-GM soybean industry. The government has announced that it will grant
domestic soybean processors a subsidy of approximately $23 per ton for
soybeans purchased from farmers before April 30, 2010 at a government guided
price. The subsidy may help to reduce the effective cost of sales of soybean
processors.
However,
it should be noted that there are uncertainties in government policies. And
though usually the price of soybean is determined by market mechanisms,
government policy may have a significant impact on it. For example, the PRC
government conducted a national strategic purchase from late 2008 to June
2009 and effectively raised the purchase price of soybeans in the market by
offering a price that was about 10% higher than normal market prices to
farmers. At the end of November 2009, the government decided to grant
domestic soybean processors a subsidy of approximately $23 per
ton if they purchase soybeans from farmers at a government guided price before a
certain date. We have filed our application for the subsidy, and it is currently
being reviewed by several government agencies before the subsidy is actually
granted. Currently no decision has been made on our application. As of June 30,
2010, we have not accrued any such subsidy income since the approval and
amount remains uncertain.
51
However,
there are several factors that may have adverse impact on our future
operations, including:
|
●
|
The
expected good harvest of genetically modified soybeans in US and South
America in 2010 may cause an increase in the volume of soybeans imported
to the PRC at lower prices.
|
|
●
|
Possible
further appreciation of Renminbi against USD in the future may also reduce
the import price of genetically modified
soybeans.
|
|
●
|
The
uncertainties in the subsidy and supporting policies of the PRC government
regarding the domestic soybean
industry.
|
However,
we will continue to lobby the PRC government to grant us subsidies and issue new
supporting policies. Meanwhile, we will continue to take strict cost saving
measures and maintain our production at a suitable level. By actively observing
the trends in our industry and in the general economy, we may capitalize any
opportunity for our products. Over the long-term, we believe that we are well
positioned to benefit from the growth opportunities in the PRC and throughout
the world.
Major Performance
Factors
Revenue
We derive most of our revenue from the
sales of the main products: soybean oil (4th grade), salad oil and soybean meal,
and a small portion of our revenue is created by the sales of other products,
including concentrated soybean protein, squeezed oil and low temperature
soybean meal. The revenue may be affected by the following
factors:
|
●
|
Processing
capacity of soybean;
|
|
●
|
Pricing
of the products; and
|
|
●
|
Market
demand.
|
Processing capacity of
soybean. Our current annual processing capacity of soybean is 520,000
metric tons. We processed approximately 357,400 metric tons in the year 2009,
66,022 metric tons in the first quarter of 2010 and 107,275 metric tons in the
second quarter of 2010 respectively. Based on these figures, it can be estimated
that the current production capacity is sufficient for current demand. Since
October 2009, Factory No. 2 has stopped the production of low temperature
soybean meal due to the low protein content of the soybeans purchased; this
was caused by unfavorable weather in 2009. Factory No. 2 has 120,000 out of
the 520,000 tons of the Company’s total annual processing capacity. The
production volume of low temperature soybean meal occupied about a 4% share of
the total annual production volume in 2009, and in the second quarter of 2010,
we reinitiated the production of low temperature soybean meal, so it is expected
that there will be no significant impact on our total processing and production
capacity.
Pricing of the products. In
general, our products are priced consistently with market prices, with
consideration for cost of sales. However, prices are affected by several
factors, including but not limited to: the pricing trends for domestic soybeans,
the cost and volume of imported soybeans, temporary sudden changes in
supply-demand relationship, and general economic factors and income level of
consumers.
52
Market demand. Revenue growth
potential depends on market demand for our products. We believe that high growth
potential for our sales revenue exists due to several factors: 1) total market
demand for our products exceeds current production levels; 2) our products are
recognized as high quality; 3) we maintain excellent relationships with our
customers; and, 4) we generally sell almost all of our production
volume.
Cost
of Sales
Cost of
sales generally consists of four major parts: raw materials, labor, production
overhead and manufacturing related depreciation. Raw materials refer mainly to
soybeans and accounts for over 90% of the cost of sales (COS). Labor cost are
relatively low and comprise a very small portion of COS. Production overhead
includes auxiliary materials, utility expenses, machinery maintenance costs,
inspection costs and other related expenses. Depreciation costs are applied to
manufacturing facilities and equipment, such as production lines, steam
generators, factory buildings, etc.
Cost of
sales is determined primarily by the following factors, either directly or
indirectly:
|
¨
|
Availability
and price of raw materials, especially
soybeans;
|
|
¨
|
Operating
efficiency of production facilities;
and
|
|
¨
|
Government
policy or direct purchase.
|
Availability and price of raw
materials, especially soybeans. Raw materials costs account for over 90%
of cost of sales. Soybean is the only major raw material, so its price
fluctuation will have a material impact on our cost. The price of soybeans may
be affected by a series of factors, including the production volume of soybeans
on national and international scale, weather, government policies and
soybean transactions on commodity markets. Meanwhile, if there is a shortage in
the supply of raw materials, our production facilities will have to operate at
less than maximum efficiency. Our processing volume represents a relatively
small portion of the total soybean supply of Heilongjiang Province; generally
speaking the availability of raw materials is always high. Soybean price has a
significant impact on our cost of sales.
Output ratio and operating efficiency of production
facilities. Output ratio is the ratio between the input of raw materials
(mostly soybeans) and the output of finished products. The more units of
finished products we can produce using a single unit of raw material, the higher
the output ratio. As labor, production overhead and manufacturing related
depreciation expenses are mostly fixed, generally speaking, the more we produce,
the lower the unit cost. Our output ratio and operating efficiency are
continuously improving, due to the recent purchase and renovation of
facilities and equipment, the enhanced competence and proficiency of our staff
and the improvement of our management skills.
Government policy or direct
purchase. Usually the price of soybean is determined by market
mechanisms; however, government policy may have a significant impact on it. For
example, the PRC government conducted a national strategic purchase from late
2008 to June 2009 and effectively raised the purchase price of soybeans in
the market by offering a price that was about 10% higher than normal market
prices to farmers. At the end of November 2009, the government decided to grant
domestic soybean processors a subsidy of approximately $23 per
ton if they purchase soybeans from farmers at a government guided price before a
certain date. We have filed our application for the subsidy, and it's currently
being reviewed by several government agencies before the subsidy is actually
granted. As of June 30, 2010, we have not accrued any such subsidy income since
the actual
approval and amount remains uncertain.
53
Gross
Profit (Loss)
Gross
profit (loss) is the result of the combined effects of the following
factors: (a) the selling price of our products, (b) the sales volume and the
individual profit margin of each product, and (c) the cost of sales. We are a
middle stream processor, and the profit margin of middle stream processing is
usually relatively stable. Under normal circumstances our gross profit
margin has been in the range of 7% to 9%, based on previous experience
until 2008.
If
exceptional circumstances exist, gross margin may be seriously affected. Due to
unfavorable environmental factors, such as the decrease in demand for animal
feed, caused by foot-mouth disease among animals, and the low cost imports of
soybean at large volumes, we suffered a gross loss in the second quarter of
2010.
Over the
past few years, especially in 2009, the profitability of our products have been
greatly influenced by the combination of the following factors: the large and
cheaper imports of genetically-modified (GM) soybeans offered a low cost
alternative to soybean processors and suppressed the prices of soybean products
in China’s market, while the cost of our major raw material, domestic soybeans,
was usually higher than that of imported ones; the unfavorable weather
conditions, especially excessive rain, caused the production volume of soybean
to decrease and its price to increase; the Chinese government conducted national
purchase and issued other policies to support the price of domestic
soybeans at a relatively high level. In the near future, we expect our
profitability to be significantly influenced by, in addition to the
above-mentioned factors, the following factors, including but not limited
to: the expected increase in soybean output of the United States and South
America in 2010 which may create additional imports of soybeans to the
PRC; the possible appreciation of the RMB against the USD, which may cause
imported soybean to be cheaper; and uncertainties in the policies of the
Chinese government.
Operating
Expenses
Operating
expenses consist of selling expenses and general & administrative expenses.
Operating expenses represent only a small portion of total costs and
expenses.
Selling
expenses generally include business development expenses, sales meeting
expenses, loading and handling, advertising, sales-related staff salaries and
welfare expenses, and travel expenses. They are usually relative to sales
volume.
General
and administrative expenses include the depreciation of office buildings and
equipment, office expenses and supplies, and management and administrative
salaries, etc. These expenses are typically fixed. General and administrative
expenses may increase, as we revise our organizational structure and improve our
management systems and internal control system and processes.
54
Income
Tax
We are
incorporated in the State of Nevada and Faith Winner (BVI) is incorporated under
the laws of the British Virgin Islands. We conduct all our operations
under certain contractual arrangements with Yanglin, a PRC company.
Although
we are subject to United States taxation, we do not anticipate incurring
significant United States income tax liability for the foreseeable future
because:
|
¨
|
We
do not conduct any material business or maintain any branch office in the
United States;
|
|
¨
|
The
earnings generated from our non-U.S. operating companies are generally
eligible for a deferral from United States taxation until such earnings
are repatriated to the United States;
and
|
|
¨
|
We
believe that we will not generate a significant amount of income
inclusions under the income imputation rules applicable to a United States
company that owns "controlled foreign corporations" for United States
federal income tax purposes.
|
Therefore,
we have made no provision for U.S. federal income taxes or tax benefits on the
undistributed earnings and/or losses.
Yanglin,
a PRC company, has income tax liabilities in the PRC. PRC enterprise income tax
is calculated based on taxable income determined under PRC tax regulations. In
accordance with Income Tax Law applicable to domestic companies, we are
generally subject to an enterprise income tax rate of 25%.
However,
as Yanglin has been recognized as a Key Leading Enterprise in the
Industrialization of Agriculture Industry by the PRC’s central government,
Yanglin had enjoyed a complete exemption from income taxes until 2009. Our
status is reviewed every two years. The latest review of Yanglin’s status of
National Key Leading Enterprise in Agriculture was finished by the government in
March 2010, and the status was granted to the Company for the period from
January 2010 to June 2012. The Company received this government approval on May
7, 2010. Other than the PRC's central government's award, a review by the local
tax authority is also required in order to enjoy a 2010 tax
exemption.
Warrant
Liability
Effective
January 1, 2009, we adopted the provisions of FASB ASC Topic 815,
"Derivatives and Hedging" ("ASC 815") (previously ElTF 07-5, "Determining
Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own
Stock"). As a result of adopting ASC 815, warrants to purchase the Company's
common stock previously treated as equity pursuant to the derivative treatment
exemption were no longer afforded equity treatment as there was a down-round
protection (full-ratchet down round protection). As a result, the warrants are
not considered indexed to the Company's own stock, and as such, all future
changes in the fair value of these warrants will be recognized currently in
earnings until such time as the warrants are exercised or
expire.
55
Results of
Operations
The
Three Months Ended June 30, 2010 Compared with the Three Months Ended June 30,
2009
|
The three months
|
The three months
|
||||||
Consolidated Statement of Operations and
|
Ended June 30, 2010
|
Ended June
30, 2009
|
||||||
Comprehensive (Loss) Income
|
($)
|
($)
|
||||||
|
(as restated)
|
|||||||
Net
Sales
|
$ | 49,916,626 | $ | 39,753,637 | ||||
Cost
of sales
|
(52,540,598 | ) | (43,973,079 | ) | ||||
Gross
loss
|
(2,623,972 | ) | (4,219,442 | ) | ||||
Selling
expenses
|
(67,110 | ) | (60,303 | ) | ||||
General
and administrative expenses
|
(807,741 | ) | (559,881 | ) | ||||
Impairment
loss of assets held for sale
|
(352,032 | ) | - | |||||
Loss
from operations
|
(3,850,855 | ) | (4,839,626 | ) | ||||
Interest
income
|
(298,107 | ) | (94,091 | ) | ||||
Interest
expense
|
25,197 | 71,795 | ||||||
Changes
in fair value of warrants
|
6,698,802 | 2,441,628 | ||||||
Income
from operations before income tax
|
2,575,037 | (2,420,294 | ) | |||||
Income
tax
|
- | - | ||||||
Net
income
|
2,575,037 | (2,420,294 | ) | |||||
Foreign
currency translation adjustment
|
215,605 | (16,447 | ) | |||||
Comprehensive
income (loss)
|
$ | 2,790,642 | $ | (2,436,741 | ) |
Net
Sales
For The Three Months Ended June 30,
|
Period to Period Change
|
|||||||||||||||
|
2010
|
2009
|
|
|
||||||||||||
(as restated)
|
||||||||||||||||
Item
|
Amount ($)
|
Amount ($)
|
Amount ($)
|
%
|
||||||||||||
Soybean meal
|
$ | 30,858,408 | $ | 24,255,224 | $ | 6,603,184 | 27.2 | % | ||||||||
Soybean
oil
|
14,739,126 | 10,327,314 | 4,411,812 | 42.7 | % | |||||||||||
Salad
Oil
|
2,365,569 | 1,882,974 | 482,595 | 25.6 | % | |||||||||||
Squeezed
oil
|
333,332 | 358,026 | (24,694 | ) | -6.9 | % | ||||||||||
Soy
protein concentrates
|
415,229 | 355,116 | 60,113 | 16.9 | % | |||||||||||
Low
temperature soy meal
|
1,204,961 | 2,574,983 | (1,370,022 | ) | -53.2 | % | ||||||||||
Total
Net Sales
|
$ | 49,916,626 | $ | 39,753,637 | $ | 10,162,989 | 25.6 | % |
Our net
sales for the three months ended June 30, 2010 increased by $10,162,989 or
25.6% over the three months ended June 30, 2009. The increase in sales revenue
was mainly the result of improvements in economic and industrial environments
from the exceptionally severe situations caused by global economic crisis in
2009.
China’s
economy has experienced considerable improvements since the beginning of 2010.
The growth rate of GDP of the first and second quarter of 2010 over the same
period of 2009 was 11.9% and 11.1% respectively, higher than the same index of
the first and second quarter of 2009, which was 6.5% and 7.4% respectively.
Generally speaking, the rebound of the economy generated more demand for
consumer products, including soybean products.
56
Though
the sales of soybean meal, one of our major products, was negatively affected by
the outbreak of foot-and-mouth disease among animals, in general the sales
volume of our products increased materially over the same period of
2009. In the three months ended June 30, 2010, we sold 81,316 tons of
soybean meal, 15,466 tons of soybean oil, 2,386 tons of salad oil and 361
tons of soy protein concentrates, representing increases of 25.1%, 25.2%, 14.2%
and 3.1%, respectively over the quarter ended June 30, 2009, when we sold 65,025
tons of soybean meal, 12,352 tons of soybean oil, 2,089 tons of salad oil
and 350 tons of soy protein concentrates. The sales volume of squeezed oil and
low temperature soy meal decreased by 12.3% and 59.0% over the period,
respectively. It should be noted that the material reduction in the sales volume
of low temperature soy meal was mainly the result of the low protein content of
the soybeans purchased; this was caused by unfavorable weather in
2009.
Also
because of the rebound of the economy, the average selling prices of soybean
meal, soybean oil, salad oil, squeezed oil, soy protein concentrates and low
temperature soy meal in the three months ended June 30, 2010 rose by 1.7%,
14.0%, 10.0%, 6.4%, 13.5% and 14.0%, respectively, over the prices in
the same period a year ago. Consequently, there was an increase in sales revenue
over the same quarter in 2009. It should be noted that the growth rate of some
products, mainly soybean meal, was quite low, due to the negative effects of the
foot-and-mouth outbreak.
Cost
of Sales and Gross (Loss) Profit
For The Three Months Ended June 30,
|
Period to Period Change
|
|||||||||||||||||||||||
|
2009
|
%
|
||||||||||||||||||||||
|
2010
|
% of Sales
|
(as restated)
|
of Sales
|
||||||||||||||||||||
Cost of Sales:
|
Amount ($)
|
Revenue
|
Amount ($)
|
Revenue
|
Amount ($)
|
%
|
||||||||||||||||||
Soybean meal
|
$ | (32,959,526 | ) | 106.8 | % | $ | (27,108,821 | ) | 111.8 | % | $ | (5,850,705 | ) | 21.6 | % | |||||||||
Soybean
oil
|
(15,203,889 | ) | 103.2 | % | (11,128,107 | ) | 107.8 | % | (4,075,782 | ) | 36.6 | % | ||||||||||||
Salad
oil
|
(2,442,008 | ) | 103.2 | % | (2,025,787 | ) | 107.6 | % | (416,221 | ) | 20.5 | % | ||||||||||||
Squeezed
oil
|
(346,833 | ) | 104.1 | % | (400,381 | ) | 111.8 | % | 53,548 | -13.4 | % | |||||||||||||
Soy
protein concentrates
|
(418,453 | ) | 100.8 | % | (420,258 | ) | 118.3 | % | 1,805 | -0.4 | % | |||||||||||||
Low-temp
soy meal
|
(1,169,889 | ) | 97.1 | % | (2,889,725 | ) | 112.2 | % | 1,719,836 | -59.5 | % | |||||||||||||
Total
Cost of Sales
|
$ | (52,540,598 | ) | 105.3 | % | $ | (43,973,079 | ) | 110.6 | % | $ | (8,567,519 | ) | 19.5 | % | |||||||||
Gross
(Loss) Profit:
|
||||||||||||||||||||||||
Soybean
meal
|
$ | (2,101,118 | ) | -6.8 | % | $ | (2,853,597 | ) | -11.8 | % | $ | 752,479 | 26.4 | % | ||||||||||
Soybean
oil
|
(464,763 | ) | -3.2 | % | (800,793 | ) | -7.8 | % | 336,030 | 42.0 | % | |||||||||||||
Salad
Oil
|
(76,439 | ) | -3.2 | % | (142,813 | ) | -7.6 | % | 66,374 | 46.5 | % | |||||||||||||
Squeezed
oil
|
(13,500 | ) | -4.1 | % | (42,355 | ) | -11.8 | % | 28,855 | 68.1 | % | |||||||||||||
Soy
protein concentrates
|
(3,224 | ) | -0.8 | % | (65,142 | ) | -18.3 | % | 61,918 | 95.1 | % | |||||||||||||
Low-temp
soy meal
|
35,072 | 2.9 | % | (314,742 | ) | -12.2 | % | 349,814 | 111.1 | % | ||||||||||||||
Total
Gross Profit (Loss)
|
$ | (2,623,972 | ) | -5.3 | % | $ | (4,219,442 | ) | -10.6 | % | $ | 1,595,470 | 37.8 | % |
Our cost
of sales for the three months ended June 30, 2010 increased by $8,567,519
or 19.5% over the three months ended June 30, 2009, as restated, while the ratio
of cost as a percentage to net sales value decreased from 110.6% to 105.3%
over the period. The increase in cost of sales was mainly caused by the increase
in processing and sales volume. We recorded a gross loss of $2,623,972 in the
three months ended June 30, 2010, in comparison to a gross loss of $4,219,442 in
the three months ended June 30, 2009. Our gross profit margin improved
from negative 10.6% to negative 5.3% over the same period. The main reasons for
the gross loss of the second quarter of 2010 were the impact of the still large
imports of soybeans and the negative influence of foot-and-mouth
disease.
57
In the
second quarter of 2010, we processed 107,275 tons of soybean, an increase of
17.6% from 91,233 tons in the same period a year ago. Meanwhile, the sales
volume of our major products increased materially over the period (please
refer to the section “Net Sales” above for details). Thus the cost of sales,
mostly variable costs such as the costs of soybeans, rose
accordingly.
The
PRC has long imported large volumes of genetically-modified (GM) soybeans
from the U.S. and South America. The aggregate import volume reached 42.55
million tons in 2009, an increase of 13.7% over that of 2008, while the average
monthly volume was 3.55 million tons. It’s estimated that China’s import volume
in 2010 may reach 47 million tons. The imported soybeans were usually sold at
prices lower than that of domestically produced soybeans, representing a low
cost alternative for domestic processors, which previously used domestic
soybeans as raw materials. Importation of GM soybeans significantly influenced
price levels in the PRC’s domestic market for soybean products, and hence
their profitability.
The
PRC suffered from the recent outbreak of foot-and-mouth disease. At the end
of May 2010, the Ministry of Agriculture of China formally announced that Type
Asian I Foot-and-mouth Disease had broken out in Jiangsu, Shandong, Hebei,
Beijing and Xinjiang. This outbreak was initially found at the end of April
2010, causing the demand for animal feed to decline. As soybean meal is one of
the major raw materials for animal feed, the demand for soybean meal and its
market price decreased accordingly. This decline also affected our gross profit,
as traditionally the sales volume of soybean meal has been the highest among
those of our products.
Operating
Expenses
For The Three Months Ended June 30,
|
|
|||||||||||||||||||||||
|
2009
|
Period to Period
|
||||||||||||||||||||||
|
2010
|
% of Sales
|
(as restated)
|
% of Sales
|
Change
|
|||||||||||||||||||
|
Amount ($)
|
Revenue
|
Amount ($)
|
Revenue
|
Amount ($)
|
%
|
||||||||||||||||||
Selling
Expenses
|
$ | (67,110 | ) | 0.1 | % | $ | (60,303 | ) | 0.2 | % | $ | (6,807 | ) | 11.3 | % | |||||||||
General
& Administrative Expenses
|
(807,741 | ) | 1.6 | % | (559,881 | ) | 1.4 | % | (247,860 | ) | 44.3 | % | ||||||||||||
Impairment
loss of long-lived assets
|
(352,032 | ) | 0.7 | % | - | - | (352,032 | ) | - | |||||||||||||||
Total
Operating Expenses
|
$ | (1,226,883 | ) | 2.4 | % | $ | (620,184 | ) | 1.6 | % | $ | (606,699 | ) | 97.8 | % |
Selling
expenses for the three months ended June 30, 2010 increased by 11.3% as
compared to the three months ended June 30, 2009, as restated. This increase was
mainly due to the increase in loading and unloading expenses, which are usually
directly related to sales volume. As a percentage of net sales, selling expenses
decreased from 0.2% to 0.1% over the period.
58
General
and administrative expenses for the three months ended June 30,
2010 increased by 44.3% over the three months ended June 30, 2009, as
restated. This was caused by the material increase in depreciation charges,
including those of the temporarily idle assets. As a percentage of net sales,
general and administrative expenses increased from 1.4% for the second quarter
of 2009 to 1.6% for the second quarter of 2010.
During
the quarter ended June 30, 2010, the Group reviewed the idle production
facility, which had been identified as impaired and was reclassified to assets
held for sale in the third quarter of 2009. The Group found that these
assets had been further impaired, because the market value for such assets
decreased. Therefore we took an impairment charge on these assets.
As
compared to the second quarter of 2009, total operating expenses increased by
97.8% in the second quarter of 2010, and the percentage of net sales increased
from 1.6% to 2.4%.
Net
Income
For The Three Months Ended June 30,
|
|
|||||||||||||||||||||||
|
2009
|
|
Period to Period
|
|||||||||||||||||||||
|
2010
|
% of Sales
|
(as restated)
|
%of Sales
|
Change
|
|||||||||||||||||||
|
Amount ($)
|
Revenue
|
Amount ($)
|
Revenue
|
Amount ($)
|
%
|
||||||||||||||||||
Loss from operations
|
$ | (3,850,855 | ) | -7.7 | % | $ | (4,839,626 | ) | -12.2 | % | $ | 988,771 | -20.4 | % | ||||||||||
Interest
expenses
|
(298,107 | ) | -0.6 | % | (94,091 | ) | -0.2 | % | (204,016 | ) | 216.8 | % | ||||||||||||
Interest
income
|
25,197 | 0.1 | % | 71,795 | 0.2 | % | (46,598 | ) | -64.9 | % | ||||||||||||||
Other
(expense) income
|
- | - | - | - | - | - | ||||||||||||||||||
Changes
in fair value of warrants
|
6,698,802 | 13.4 | % | 2,441,628 | 6.1 | % | 4,257,174 | 174.4 | % | |||||||||||||||
Income
tax
|
- | - | - | - | - | - | ||||||||||||||||||
Net
income
|
$ | 2,575,037 | 5.2 | % | $ | (2,420,294 | ) | -6.1 | % | $ | 4,995,331 | 206.4 | % |
Loss from
operations was primarily due to aforementioned reasons in the sections “Net
Sales” and “Cost of Sales and Gross Profit” above. For the second quarter of
2010, we generated a gross loss, and a loss after deducting selling and general
and administrative expenses. Operating margin improved from negative 12.2% to
negative 7.7% from the second of 2009 to the second quarter of
2010.
Interest
expenses increased by 216.8% from the three months ended June 30, 2009, as
restated, to the three months ended June 30, 2010. As a percentage of net
sales, interest expense was 0.6% for the second quarter of 2010, as compared to
0.2% for the same period in 2009. The changes were mainly caused by a
material increase in bank borrowings. The balance of short-term bank loans at
June 30, 2010 was approximately $18.7 million, as compared to approximately
$10.7 million at June 30, 2009. This was used to satisfy increased working
capital needs. Interest income fell by 64.9% over the same period.
Effective
January 1, 2009, we adopted the provisions of FASB ASC Topic 815,
"Derivatives and Hedging" ("ASC 815"). As a result of adopting ASC 815, we
recorded non-cash income of $2,441,628 for the second quarter of 2009, as
restated, and $6,698,802 for the second quarter of 2010, resulting from the
change in fair value of warrants issued to investors in conjunction with the
Company’s Series A Convertible Preferred Stock in October 2007. The
accounting treatment of the warrants resulted from an anti-dilution provision to
the warrant holders.
59
Since
Yanglin has been recognized as a “Key Leading Enterprise” in the
industrialization of the agriculture industry by the Chinese government, Yanglin
has qualified for a complete exemption from income taxes through 2009. This
status is usually reviewed every two years, according to a government
order. The latest review of Yanglin’s status of National Key Leading
Enterprise in Agriculture has been finished by the government in March 2010, and
the status was granted to the Company for the period from January 2010 to June
2012. The Company received this government approval on May 7, 2010. Other than
the PRC's central government's award, a review by the local tax authority is
also required in order to enjoy a 2010 tax exemption.
Net
income, after including the abovementioned non-cash income from the change in
fair value of warrants, increased by 206.4% from a net loss of $2,420,294 in the
three months ended June 30, 2009, as restated, to a net income of $2,575,037 in
the three months ended June 30, 2010. During the same period, net profit margin
improved from a negative 6.1% to a positive 5.2%.
Earnings
Per Share
|
For The Three Months Ended June
30,
|
|||||||
|
2010
|
2009
|
||||||
|
Unaudited
|
Unaudited
As restated
|
||||||
Net Income
(Loss) for Basic Earnings Per Share
|
$ | 2,575,037 | $ | (2,420,294 | ) | |||
Basic
Weighted Average Number of Shares
|
20,465,119 | 20,000,003 | ||||||
Net
Income (Loss) per Share – Basic
|
$ | 0.13 | $ | (0.12 | ) | |||
Net
Income (Loss) for Diluted Earnings Per Share
|
$ | 2,575,037 | $ | (2,420,294 | ) | |||
Diluted
Weighted Average Number of Shares
|
30,000,002 | 20,000,003 | ||||||
Net
Income (Loss) per Share – Diluted
|
$ | 0.09 | $ | (0.12 | ) |
Basic and
diluted earnings per share (EPS) for the quarter ended June 30, 2010, were $0.13
and $0.09, compared to $(0.12) and $(0.12) for the same quarter last year, as
restated.
The
Six Months Ended June 30, 2010 Compared with the Six Months Ended June 30,
2009
|
The six months
|
The six months
|
||||||
Consolidated Statement of Operations and
|
Ended June 30, 2010
|
Ended June 30, 2009
|
||||||
Comprehensive (Loss) Income
|
($)
|
($)
|
||||||
|
(as restated)
|
|||||||
Net
Sales
|
$ | 83,996,598 | $ | 82,787,863 | ||||
Cost
of sales
|
(86,603,456 | ) | (88,143,629 | ) | ||||
Gross
profit (loss)
|
(2,606,858 | ) | (5,355,766 | ) | ||||
Selling
expenses
|
(131,885 | ) | (129,553 | ) | ||||
General
and administrative expenses
|
(1,657,793 | ) | (1,592,065 | ) | ||||
Impairment
loss of assets held for sale
|
(351,967 | ) | - | |||||
Loss
from operations
|
(4,748,503 | ) | (7,077,384 | ) | ||||
Interest
income
|
(576,716 | ) | (245,517 | ) | ||||
Interest
expense
|
51,450 | 119,312 | ||||||
Other
(expenses) income
|
(350 | ) | (1,031 | ) | ||||
Changes
in fair value of warrants
|
11,820,373 | 29,556,583 | ||||||
Income
from operations before income tax
|
6,546,254 | 22,351,963 | ||||||
Income
tax
|
- | - | ||||||
Net
income
|
6,546,254 | 22,351,963 | ||||||
Foreign
currency translation adjustment
|
225,005 | 101,058 | ||||||
Comprehensive
income
|
$ | 6,771,259 | $ | 22,453,021 |
60
Net
Sales
For The Six Months Ended June
30,
|
Period to Period Change
|
|||||||||||||||
|
2009
|
|
|
|||||||||||||
2010
|
(as restated)
|
|||||||||||||||
Item
|
Amount ($)
|
Amount ($)
|
Amount ($)
|
%
|
||||||||||||
Soybean meal
|
$ | 54,306,785 | 53,773,137 | 533,649 | 1.0 | % | ||||||||||
Soybean
oil
|
23,547,884 | 21,922,595 | 1,625,289 | 7.4 | % | |||||||||||
Salad
Oil
|
3,947,521 | 3,719,970 | 227,552 | 6.1 | % | |||||||||||
Squeezed
oil
|
574,518 | 443,479 | 131,039 | 29.5 | % | |||||||||||
Soy
protein concentrates
|
415,152 | 354,944 | 60,207 | 17.0 | % | |||||||||||
Low
temperature soy meal
|
1,204,738 | 2,573,738 | (1,369,000 | ) | -53.2 | % | ||||||||||
Total
Net Sales
|
$ | 83,996,598 | 82,787,863 | 1,208,735 | 1.5 | % |
Our net
sales for the six months ended June 30, 2010 increased by $1,208,735 or 1.5% over the six months ended
June 30, 2009. The increase in sales revenue was mainly the result of
improvements in economic and industrial environments from the exceptionally
severe situations caused by global economic crisis in 2009.
China’s
economy has experienced considerable improvements since the beginning of 2010.
The growth rate of GDP of the first and second quarter of 2010 over the same
period of 2009 was 11.9% and 11.1% respectively, higher than the same index of
the first and second quarter of 2009, which was 6.5% and 7.4% respectively.
Generally speaking, the rebound of the economy generated more demand for
consumer products, including soybean products.
In
general, the sales volume of our products in the six months ended June 30, 2010
decreased over those in the same period of 2009, mainly because the sales volume
in the first quarter of 2010 was materially lower than that in the same period
of 2009, when the unfavorable influences of global economic crisis were just
about to materialize, and also because the sales of soybean meal, one of
our major products, was negatively affected by the outbreak of foot-and-mouth
disease among animals. In the six months ended June 30, 2010, we sold 137,860
tons of soybean meal, 24,687 tons of soybean oil, 3,970 tons of salad oil and
2,070 tons of low temperature soy meal, representing decreases of 2.5%, 7.2%,
6.2% and 59.0%, respectively over the six months ended June 30, 2009, when we
sold 141,378 tons of soybean meal, 26,598 tons of soybean oil, 4,234 tons of
salad oil and 5,043 tons of low temperature soy meal. It should be noted that
the material reduction in the sales volume of low temperature soy meal was
mainly the result of the low protein content of the soybeans
purchased; this was caused by unfavorable weather in 2009. Meanwhile,
the sales volume of squeezed oil and soy protein concentrates increased by
21.0% and 3.1% over the period, respectively.
61
Because
of the rebound of the economy, the average selling prices of soybean meal,
soybean oil, salad oil, squeezed oil, soy protein concentrates and low
temperature soy meal in the six months ended June 30, 2010 rose by 3.6%,
15.7%, 13.2%, 7.0%, 13.4% and 14.0%, respectively, over the prices in the
same period a year ago. These increases compensated for decreases in sales
volumes. Consequently, there has been an increase in sales revenue over the same
period in 2009. It should be noted that the growth rates of some products,
mainly soybean meal, were quite low, due to the negative effects of the
foot-and-mouth outbreak.
Cost
of Sales and Gross (Loss) Profit
For The Six Months Ended June 30,
|
Period to Period Change
|
|||||||||||||||||||||||
|
2009
|
%
|
||||||||||||||||||||||
|
2010
|
% of Sales
|
(as restated)
|
of Sales
|
||||||||||||||||||||
Cost of Sales:
|
Amount ($)
|
Revenue
|
Amount ($)
|
Revenue
|
Amount ($)
|
%
|
||||||||||||||||||
Soybean meal
|
$ | (56,526,109 | ) | 104.1 | % | $ | (57,222,038 | ) | 106.4 | % | $ | 695,929 | -1.2 | % | ||||||||||
Soybean
oil
|
(23,894,766 | ) | 101.5 | % | (23,216,668 | ) | 105.9 | % | (678,098 | ) | 2.9 | % | ||||||||||||
Salad
oil
|
(4,009,586 | ) | 101.6 | % | (3,903,058 | ) | 104.9 | % | (106,528 | ) | 2.7 | % | ||||||||||||
Squeezed
oil
|
(584,977 | ) | 101.8 | % | (493,482 | ) | 111.3 | % | (91,495 | ) | 18.5 | % | ||||||||||||
Soy
protein concentrates
|
(418,368 | ) | 100.8 | % | (420,055 | ) | 118.3 | % | 1,687 | -0.4 | % | |||||||||||||
Low-temp
soy meal
|
(1,169,652 | ) | 97.1 | % | (2,888,328 | ) | 112.2 | % | 1,718,676 | -59.5 | % | |||||||||||||
Total
Cost of Sales
|
(86,603,456 | ) | 103.1 | % | (88,143,629 | ) | 106.5 | % | 1,540,173 | -1.7 | % | |||||||||||||
Gross
(Loss) Profit:
|
||||||||||||||||||||||||
Soybean
meal
|
$ | (2,219,323 | ) | -4.1 | % | $ | (3,448,901 | ) | -6.4 | % | $ | 1,229,578 | 35.7 | % | ||||||||||
Soybean
oil
|
(346,882 | ) | -1.5 | % | (1,294,073 | ) | -5.9 | % | 947,191 | 73.2 | % | |||||||||||||
Salad
Oil
|
(62,064 | ) | -1.6 | % | (183,088 | ) | -4.9 | % | 121,024 | 66.1 | % | |||||||||||||
Squeezed
oil
|
(10,458 | ) | -1.8 | % | (50,003 | ) | -11.3 | % | 39,544 | 79.1 | % | |||||||||||||
Soy
protein concentrates
|
(3,216 | ) | -0.8 | % | (65,111 | ) | -18.3 | % | 61,894 | 95.1 | % | |||||||||||||
Low-temp
soy meal
|
35,086 | 2.9 | % | (314,590 | ) | -12.2 | % | 349,676 | 111.2 | % | ||||||||||||||
Total
Gross Profit (Loss)
|
$ | (2,606,858 | ) | -3.1 | % | $ | (5,355,766 | ) | -6.5 | % | $ | 2,748,908 | 51.3 | % |
Our cost
of sales for the six months ended June 30, 2010 decreased by $1,540,173 or
1.7% over the six months
ended June 30, 2009, as restated, while the ratio of cost as a percentage to net
sales value decreased from 106.5% to 103.1% over the period. The
decrease in cost of sales in the six months was mainly caused by the material
decrease in processing and sales volume in the first quarter of 2010 from the
first quarter of 2009. We recorded a gross loss of $2,606,858 in the six months
ended June 30, 2010, in comparison to a gross loss of $5,355,766 in the six months
ended June 30, 2009. Our gross profit margin improved from a negative
6.5% to a negative 3.1% over the same period. The
main reasons for the gross loss of the six months ended June 30, 2010 were the
impact of the still large imports of soybeans and the negative influence of
foot-and-mouth disease.
In the
six months ended June 30, 2010, we processed 173,297 tons of soybean, a decrease
of 7.1% from 186,576 tons in the same period a year ago. Meanwhile, the sales
volume of most of our products decreased over the period (please refer to the
section “Net Sales” above for details). Thus the cost of sales, mostly variable
costs such as the costs of soybeans, decreased accordingly.
62
The
PRC has long imported large volumes of genetically-modified (GM) soybeans
from the U.S. and South America. The aggregate import volume reached 42.55
million tons in 2009, an increase of 13.7% over that of 2008, while the average
monthly volume was 3.55 million tons. It’s estimated that China’s import volume
of 2010 may reach 47 million tons. The imported soybeans were usually sold at
prices lower than that of domestically produced soybeans, representing a low
cost alternative for domestic processors, which previously used domestic
soybeans as raw materials. Importation of GM soybeans significantly
influenced price levels in the PRC’s domestic market for soybean products,
and hence the profitability of them.
The
PRC suffered from the recent outbreak of foot-and-mouth disease. At the end
of May 2010, the Ministry of Agriculture of China formally announced that Type
Asian I Foot-and-mouth Disease had broken out in Jiangsu, Shandong, Hebei,
Beijing and Xinjiang. This outbreak was initially found at the end of April
2010, causing the demand for animal feed to decline. As soybean meal is one of
the major raw materials for animal feed, the demand for soybean meal and its
market price decreased accordingly. This decline also affected our gross profit,
as traditionally the sales volume soybean meal has been the highest among those
of our products.
Operating
Expenses
For The Six Months Ended June 30,
|
||||||||||||||||||||||||
|
2009
|
Period to Period
|
||||||||||||||||||||||
|
2010
|
% of Sales
|
(as restated)
|
% of Sales
|
Change
|
|||||||||||||||||||
|
Amount ($)
|
Revenue
|
Amount ($)
|
Revenue
|
Amount ($)
|
%
|
||||||||||||||||||
Selling
Expenses
|
$ | (131,885 | ) | 0.2 | % | $ | (129,553 | ) | 0.2 | % | $ | (2,332 | ) | 1.8 | % | |||||||||
General
& Administrative Expenses
|
(1,657,793 | ) | 2.0 | % | (1,592,065 | ) | 1.9 | % | (65,728 | ) | 4.1 | % | ||||||||||||
Impairment
loss of long-lived assets
|
(351,967 | ) | 0.4 | % | - | - | 351,967 | - | ||||||||||||||||
Total
Operating Expenses
|
$ | (2,141,645 | ) | 2.6 | % | $ | (1,721,618 | ) | 2.1 | % | $ | (420,027 | ) | 24.4 | % |
Selling
expenses for the six months ended June 30, 2010 increased by 1.8% as compared to the six
months ended June 30, 2009, as restated. This increase was mainly due to the
increase in the expenses related to market development. As a percentage of net
sales, selling expenses remained at 0.2% over the period.
General
and administrative expenses for the six months ended June 30,
2010 increased by 4.1% over the six months
ended June 30, 2009, as restated. This was the combined effect of the material
increase in depreciation charges, including those of the temporarily idle
assets, and the material savings on professional service fees related to public
company affairs. As a percentage of net sales, general and administrative
expenses rose from 1.9% for the six months ended June 30, 2009 to 2.0% for the
six months ended June 30, 2010.
During
the six months ended June 30, 2010, the Group reviewed the idle production
facility, which had been identified as impaired and was reclassified to assets
held for sale in the third quarter of 2009. The Group found that these
assets had been further impaired, because the market value for such assets
decreased. Therefore we took an impairment charge on these
assets.
63
As
compared to the six months ended June 30, 2009, total operating expenses
increased by 24.4% in the
six months ended June 30, 2010, and the percentage of net sales increased from
2.1% to 2.6% over the period.
Net
Income
For The Six Months Ended June
30,
|
|
|||||||||||||||||||||||
|
2009
|
|
Period to Period
|
|||||||||||||||||||||
|
2010
|
% of Sales
|
(as restated)
|
%of Sales
|
Change
|
|||||||||||||||||||
|
Amount ($)
|
Revenue
|
Amount ($)
|
Revenue
|
Amount ($)
|
%
|
||||||||||||||||||
Loss from operations
|
$ | (4,748,503 | ) | -5.7 | % | $ | (7,077,384 | ) | -8.5 | % | $ | 2,328,881 | -32.9 | % | ||||||||||
Interest
expenses
|
(576,716 | ) | -0.7 | % | (245,517 | ) | -0.3 | % | (331,199 | ) | 134.9 | % | ||||||||||||
Interest
income
|
51,450 | 0.1 | % | 119,312 | 0.1 | % | (67,862 | ) | -56.9 | % | ||||||||||||||
Other
(expense) income
|
(350 | ) | 0.0 | % | (1,031 | ) | 0.0 | % | 681 | -66.1 | % | |||||||||||||
Changes
in fair value of warrants
|
11,820,373 | 14.1 | % | 29,556,583 | 35.7 | % | (17,736,210 | ) | -60.0 | % | ||||||||||||||
Income
tax
|
- | - | - | - | - | - | ||||||||||||||||||
Net
income
|
$ | 6,546,254 | 7.8 | % | $ | 22,351,963 | 27.0 | % | $ | (15,805,709 | ) | -70.7 | % |
Loss from
operations was primarily due to aforementioned reasons in the sections “Net
Sales” and “Cost of Sales and Gross Profit” above. For the six months ended June
30, 2010, we generated a gross loss, and a loss after deducting selling and
general and administrative expenses. Operating margin improved from negative
8.5% to negative 5.7%.
Interest
expenses increased by 134.9% from the six months ended
June 30, 2009, as restated, to the six months ended June 30, 2010. As a
percentage of net sales, interest expense was 0.7% for the six months ended June
30, 2010, as compared to 0.3% for the same period in 2009. The changes
were mainly caused by a material increase in bank borrowings. The balance
of short-term bank loans at June 30, 2010 was approximately $18.7 million, as
compared to approximately $10.7 million at June 30, 2009. This was used to
satisfy increased working capital needs. Interest income fell by 56.9% over the same
period.
Effective
January 1, 2009, we adopted the provisions of FASB ASC Topic 815,
"Derivatives and Hedging" ("ASC 815"). As a result of adopting ASC 815, we
recorded non-cash income of $29,556,583 for the six months
ended June 30, 2009, as restated, and $11,820,373 for the six months
ended June 30, 2010, resulting from the change in fair value of warrants issued
to investors in conjunction with the Company’s Series A Convertible Preferred
Stock in October 2007. The accounting treatment of the warrants resulted
from an anti-dilution provision to the warrant holders.
Since
Yanglin has been recognized as a “Key Leading Enterprise” in the
industrialization of the agriculture industry by the Chinese government, Yanglin
has qualified for a complete exemption from income taxes through 2009. This
status is usually reviewed every two years, according to a government
order. The latest review of Yanglin’s status of National Key Leading
Enterprise in Agriculture was finished by the government in March 2010, and the
status was granted to the Company for the period from January 2010 to June 2012.
The Company received this government approval on May 7, 2010. Other than the
PRC's central government's award, a review by the local tax authority is also
required in order to enjoy a 2010 tax exemption.
64
Net
income, after including the abovementioned non-cash income from the change in
fair value of warrants, decreased by 70.7% from a net income of 22,351,963 in the six months
ended June 30, 2009, as restated, to a net income of $6,546,254 in the six months
ended June 30, 2010. During the same period, net profit margin decreased from
27.0% to 7.8%.
Earnings
Per Share
|
For The Six Months Ended June 30,
|
|||||||
|
2010
|
2009
|
||||||
|
Unaudited
|
Unaudited
As restated
|
||||||
Net Income
for Basic Earnings Per Share
|
$
|
6,546,254
|
$
|
22,351,963
|
||||
Basic
Weighted Average Number of Shares
|
20,465,119
|
20,000,003
|
||||||
Net
Income per Share – Basic
|
$
|
0.32
|
$
|
1.12
|
||||
Net
Income for Diluted Earnings Per Share
|
$
|
6,546,254
|
$
|
22,351,963
|
||||
Diluted
Weighted Average Number of Shares
|
30,003,863
|
32,903,049
|
||||||
Net
Income per Share – Diluted
|
$
|
0.22
|
$
|
0.68
|
Basic and
diluted earnings per share (EPS) for the six months ended June 30, 2010, were
$0.32 and $0.22, compared to $1.12 and $0.68 for the same period last year, as
restated.
Liquidity and Capital
Resources
Generally,
we finance our business with cash flow from operations and short-term bank
loans. Working capital is current assets less current liabilities, and our
operational cash demand consists mainly of raw materials purchases, salaries,
production overhead (auxiliary materials, utilities, etc.) and financing
expenses, of which raw materials (soybean) purchases comprise the
majority.
Because
we usually pay cash to our suppliers upon purchase of soybeans, there is a
higher than normal need for cash around harvest season. Under normal
circumstances, our pattern of operations is as follows: (i) we will keep a large
cash reserve until early October, the harvest time, and take short-term loans
from banks at that time, (ii) we will build up a substantial inventory of
soybeans so that for the period through the end of the year and for the
following quarter or even the following half year, we will have sufficient raw
materials to maintain operations and convert finished products to cash,
and (iii) we will repay the short-term loans by the end of June or July the
following year.
The Group
had a credit line facility with the ability to borrow up to $105 million
(equivalent to RMB 718 million), with Agricultural Development Bank of China
(the “Bank”). On April 25, 2010, the Bank cancelled this credit line, since
it was only to be used to purchase soybeans in the season of bulk purchase of
agricultural products, and the season was complete. Currently, the Group
has no available credit line. The Bank will review the status of the Group and
determine if a new credit line will be granted.
65
Our
operational cash requirements may be influenced by many factors, including the
fluctuation of raw material prices, cash flow, competition, relationships with
suppliers or customers, availability of credit facilities and financing
alternatives. Under the current operational level, we can satisfy this
demand with short-term loans from the Bank and our own cash reserve,
within the next twelve months.
Cash
Flows for the Six Months Ended June 30, 2010 Compared with the Six Months Ended
June 30, 2009
Operating
Activities
Cash used
in operating activities for the six months ended June 30, 2010 was
$1,881,868, while cash used in operating activities for the six months
ended June 30, 2009, as restated, was $8,784,541. The difference was primarily
due to the reduction in the balance of our inventories by $2,089,128 in the six
months ended June 30, 2010, while in comparison we increased the balance of our
inventories by $3,749,191 in the same period of 2009.
Our cash
flows are stable, as we sell primarily on a cash basis, with negligible trade
receivables. We usually sell our products a few days after they are
produced.
Investing
Activities
Net cash
used in investing activities for the six months ended June 30, 2010 was
824,688, compared to $48,962 for the six months ended June 30, 2009. The net
cash used was repayment for construction deposits made by constructors for the
non-current assets we purchased or built prior to the six months ended
June 30, 2010.
Financing
Activities
Net cash
used in financing activities was $2,350,567 for the six months ended June 30,
2010, compared to net cash provided by financing activities of $3,917,392 for
the six months ended June 30, 2009, as restated. Net cash used in the six
months ended June 30, 2010 included the payment using cash restricted and
the repayment of the principals of the long-term loans from related parties, and
no new borrowings were made during this period. During the six months ended June
30, 2010, we made principal payments for short-term bank loans of $1,902,047,
and principal payments for loans from related parties amounted to $39,643. In
the six months ended June 30, 2009, we received cash of $6,575,842 from new bank
loans and paid $2,630,337 and $28,113 of the principals of the short-term loans
and the long-term loans from related parties, respectively.
Loans
We had short-term bank loans of
$18,652,880 on June
30, 2010, as compared to $20,476,218 on December 31, 2009. These loans are used
to satisfy working capital needs. By July 30, 2010, we have fully repaid
the loan with a balance of $5,874,923 as of June 30, 2010, which was due on July
30, 2010. By August 16,
2010, we also made a partial payment of $6,168,669 for the loan with a balance of
$7,343,654 as of June 30, 2010, and the remaining
balance of $1,174,985
will be fully repaid by August 30, 2010, which was the due date
of the loan.
The
balance of our long-term bank loan from related parties, including the portion
payable within one year, was approximately $329,616 on June 30, 2010, compared
to $367,867 on December 31, 2009. The change was caused by repayment of the
principal, and we did not borrow any additional funds during the six months
ended June 30, 2010.
66
Commitments
and Contingencies
We have
no future cash commitments or contingent liabilities as of June 30,
2010.
Critical Accounting Policies
and Estimates
There
have been no material changes to the Company’s Critical Accounting Policies and
Assumption filed in the Company’s 2009 Annual Report on Form 10-K.
Economic
and Political Risks
The
Group’s operations are conducted in the PRC. Accordingly, the Group’s business,
financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy, so the Group’s operations are subject to special
considerations and significant risks not typically associated with companies in
North America and Western Europe. These include risks associated with, among
others, the political, economic and legal environment and foreign currency
exchange. The Group’s results may be adversely affected by changes in the
political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion, remittances abroad, and rates and methods of taxation,
among other things.
Recent
Accounting Pronouncements
In June
2009, the FASB issued ASC810.10, guidance to change financial reporting by
enterprises involved with variable interest entities (“VIEs”) which
modifies how a company determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should
be consolidated. This pronouncement clarifies that the determination of whether
a company is required to consolidate an entity is based on, among other
things, an entity’s purpose and design and a company’s ability to direct the
activities of the entity that most significantly impact the entity’s
economic performance. The guidance requires an ongoing reassessment of whether a
company is the primary beneficiary of a variable interest entity. This
guidance also requires additional disclosures about a company’s
involvement in variable interest entities and any significant changes
in risk exposure due to that involvement. This guidance is effective for fiscal
years beginning after November 15, 2009. This ASC was adopted on January 1, 2010
and had no material impact on the Company’s unaudited consolidated
financial statements.
Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on our consolidated financial statements
upon adoption.
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.
67
The
following tables summarize our contractual obligations as of June 30, 2010, and
the effect these obligations are expected to have on our liquidity and cash
flows in future periods.
|
|
Payments due by period
|
|
|||||||||||||||||
Contractual
obligations
|
|
Total
|
|
|
Less
than 1
year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More
than 5
years
|
|
|||||
Long-Term Debt Obligations
|
|
$
|
329,616
|
$
|
54,132
|
$
|
94,030
|
$
|
103,545
|
$
|
77,909
|
|||||||||
Capital
Lease Obligations
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
Operating
Lease Obligations
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
Purchase
Obligations
|
-
|
-
|
-
|
-
|
-
|
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements.
ITEM
3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
required.
ITEM
4—CONTROLS AND PROCEDURES
a.
Evaluation of Disclosure Controls and Procedures
As
required by Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act, our
management has carried out an evaluation, with the participation and under the
supervision of our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of June 30, 2010.
Disclosure
controls and procedures refer to controls and other procedures designed to
ensure that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC and
that such information is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating our disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating and
implementing possible controls and procedures.
Management
conducted its evaluation of disclosure controls and procedures under the
supervision of our chief executive officer and our chief financial officer.
Based upon, and as of the date of this evaluation, our chief executive officer
and chief financial officer concluded that, as of June 30, 2010, our
disclosure controls and procedures were not effective due to the material
weaknesses and significant deficiencies in our internal control over financial
reporting described below.
68
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act. The Company’s internal control system over
financial reporting is a process designed under the supervision of
the Company's Chief Executive Officer and Chief Financial Officer to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of the consolidated financial statements in accordance with
United States generally accepted accounting principles (“U.S. GAAP”).
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will
not be prevented or detected on a timely basis. A significant deficiency is a
deficiency, or a combination of deficiencies, in internal control over financial
reporting that is less severe than a material weakness, yet important enough to
merit attention by those responsible for oversight of our financial
reporting.
Our
internal control over financial reporting was not effective as a result of the
following identified material weaknesses:
|
A)
|
The Company does not maintain
personnel with a sufficient level of accounting knowledge, experience and
training in the selection and application of US GAAP and related SEC
accounting and
disclosure
requirements.
|
|
B)
|
The Company does not have an
accounting policy
manual based on US GAAP.
|
Both
control deficiencies could result in material misstatements of significant
accounts and disclosures that would result in a material misstatement to our
interim or annual consolidated financial statements that would not be prevented
or detected. Accordingly, the management has determined that these control
deficiencies constitute material weaknesses.
Remediation Initiative and
Progress
We have
engaged an accounting consulting firm to help with the preparation of the
Company’s consolidated financial statements and deliver training to our own
accounting staff on the selection and application of US GAAP and related SEC
disclosure requirements. In addition, we have engaged a consulting firm to
draft the accounting manual based on US GAAP. The draft has been prepared and is
currently being reviewed by the management, and it will be released upon
approval of the management and the audit committee.
b.
Changes in Internal Controls over Financial Reporting
During the
quarter ended June 30, 2010, there was no other change in our internal controls
over financial reporting, except as described above, that has materially
affected, or that is reasonably likely to materially affect, our internal
control over financial reporting.
69
PART
II—OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
None
ITEM
1A—RISK FACTORS
As
a smaller reporting company, we are not required to provide the information
required by this item.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. (REMOVED AND RESERVED)
None.
ITEM
5. OTHER INFORMATION.
None.
ITEM
6. EXHIBITS
31.1
|
Certification Pursuant to Section
302 of the Sarbanes-Oxley Act of
2002.
|
31.2
|
Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32
|
Certification Pursuant to 18
U.S.C. Section 1350, as Adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
70
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Yanglin Soybean, Inc.
|
||
Date: August 16,
2010
|
By:
|
/s/ SHULIN LIU
|
Shulin Liu
|
||
Chief Executive Officer
|
||
(Principal Executive Officer)
|
|
Yanglin Soybean, Inc.
|
|
|
|
|
Date: August
16, 2010
|
By:
|
/s/ SHAOCHENG XU
|
|
|
Shaocheng Xu
|
Chief Financial Officer
|
||
(Principal Financial and Accounting Officer)
|
71