Attached files
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EX-32.2 - YUHE INTERNATIONAL, INC. | v199020_ex32-2.htm |
EX-31.2 - YUHE INTERNATIONAL, INC. | v199020_ex31-2.htm |
EX-32.1 - YUHE INTERNATIONAL, INC. | v199020_ex32-1.htm |
EX-31.1 - YUHE INTERNATIONAL, INC. | v199020_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K/A
(Amendment
No. 1)
(Mark
One)
x
|
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
|
For
the fiscal year ended December 31,
2009 .
|
or
o
|
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
|
For the
transition period from __________ to __________.
Commission
File Number 001-34512
YUHE
INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
87-0569467
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
301
Hailong Street
Hanting
District, Weifang, Shandong Province
The
People’s Republic of China
|
(Address
including zip code of principal executive offices)
|
Registrant’s
telephone number, including area code (86) 536 736 3688
Securities
registered pursuant to Section 12(b) of the Act: Common stock,
$0.001 par value
Name
of each exchange on which registered: NASDAQ Capital Market
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No
x
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes x No
o
Indicate
by check mark 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 (§232.45 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes o No
x
The
aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2009, based upon the closing
price of the common stock as reported by the OTC Bulletin Board under the symbol
“YUII” on such date, was approximately $64,461,000.
There
were 15,722,180
shares of the registrant’s common stock issued and outstanding as of March 1,
2010.
EXPLANATORY
NOTE
This Form
10-K/A (Amendment No.1) is being filed by Yuhe International, Inc. (the
“Company”) to amend the Company’s Form 10-K for the year ended December 31, 2009
filed with the Securities and Exchange Commission (“SEC”) on March 31, 2010
(“Initial 10-K”). This Form 10-K/A (Amendment No.1) is filed to amend
the Initial 10-K by supplementing certain disclosures in Item 1 “Description of
Business - History and Background – Corporate Reorganization Transactions,”
adding Item 1A "Risk Factors,” supplementing certain disclosures in Item 9A
“Controls and Procedures – Disclosure Controls and
Procedures” and supplementing certain disclosures under subsection
“Section 16(a) Beneficial Ownership Reporting Compliance” in Item 10 “Directors
and Executive Officers and Corporate Governance” in the Initial
10-K.
Other
than as set forth in amended Item 1, Item 1A, Item 9A and Item 10, this Form
10−K/A (Amendment No.1) does not reflect events occurring after the filing of
the Initial 10-K on March 31, 2010, and no other information in the Initial 10-K
is amended hereby. Other events or circumstances occurring after the date of the
Initial 10-K or other disclosures necessary to reflect subsequent events have
not been updated subsequent to the date of the Initial 10-K. Accordingly, this
Form 10−K/A (Amendment No.1) should be read in conjunction with the Initial 10-K
and our filings with the SEC subsequent to the filing of the Initial
10−K.
i
YUHE
INTERNATIONAL, INC.
FORM 10-K
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009
INDEX
Table
of Contents
Page
|
||
PART
I
|
||
Item 1.
|
Description
of Business
|
1
|
Item 1A.
|
Risk
Factors
|
12
|
Item 9A.
|
Controls
and Procedures
|
26
|
Item 10
|
Directors
and Executive Officers and Corporate Governance
|
28
|
PART
IV
|
||
Item
15.
|
Exhibits
and Financial Statement Schedules
|
32
|
Signatures
|
33
|
|
Exhibit
31.1
|
||
Exhibit
31.2
|
||
Exhibit
32.1
|
||
Exhibit
32.2
|
ii
ITEM
1. DESCRIPTION OF BUSINESS.
Overview
Through
the Company’s operating subsidiaries, the Company is a supplier of day-old
chicken raised for meat production, or broilers, in the People’s Republic of
China, the “PRC” or “China”. The Company purchases parent breeding stock from
breeder farms, raises them to produce hatching eggs, and hatches the eggs to
day-old broilers. Currently, the Company has 28 breeder farms with 15 in
operation and two hatcheries with a total annual capacity of 1.2 million sets of
breeders and 120 hatchers through its wholly-owned subsidiary, Weifang Yuhe
Poultry Co. Ltd., “PRC Yuhe”. The remaining 13 breeder farms were purchased in
December 2009 and are undergoing renovations. They are expected to be in full
operation by the third quarter of 2010. The Company’s day-old broilers are
primarily purchased by broiler farms and integrated chicken companies for the
purpose of raising them to market-weight broilers. The Company’s customers are
located in the ten provinces and special municipalities centered around Shandong
Province, which are Jiangsu, Anhui, Henan, Hebei, Jilin, Liaoning, Heilongjiang,
Tianjin, Beijing, and Shanghai. In connection with the Company’s day-old broiler
business, the Company also operates a feed stock company named Weifang Taihong
Feed Co. Ltd., or “Taihong”, whose primary purpose is to supply feed stock to
the Company’s breeders. The Company’s operations are conducted exclusively by
its subsidiaries, PRC Yuhe and Taihong, in China.
The
Company’s principal executive office is located at 301 Hailong Street, Hanting
District, Weifang, Shandong Province, The People’s Republic of China. The
Company’s Internet address is http:// www.yuhepoultry.com .
Unless
otherwise noted, all historical information prior to March 12, 2008 refers to
PRC Yuhe and Taihong. Effective on April 4, 2008, the Company amended its
articles of incorporation to effect a 1-for-14.70596492 reverse stock split of
its common stock. For ease of reading, all references to shares will
be based on the post split basis.
History
and Background
First
Growth Investors, Inc.
First
Growth Investors, Inc., “First Growth”, was incorporated under the laws of the
State of Nevada on September 9, 1997. First Growth was formed to buy and sell
vintage wines. Since 2003 First Growth was not engaged in any substantive
business activities or operations prior to the acquisition of Bright Stand
described below.
The
Company entered into a Stock Purchase Agreement, the “Stock Purchase Agreement”,
with Halter Financial Investments, L.P., a Texas limited partnership, “Halter
Financial”, dated as of November 6, 2007, pursuant to which it agreed to sell to
Halter Financial 951,996 shares of its common stock for $425,000.
Halter
Financial and the then serving members of the Board of Directors of First Growth
entered into arm’s length negotiations regarding the acquisition of Halter
Financial’s ownership interest. The amount paid was based on the business
prospects of First Growth and the perceived value of a control position in
similarly situated publicly-traded shell corporations. The transaction closed on
November 16, 2007. As a result of the transaction, Halter Financial held 951,996
shares, or 87.5% of the Company’s 1,087,994 shares, of common stock then
outstanding following the completion. The 87.5% interest purchased by Halter
Financial was fairly valued at $425,000. Halter Financial advised First Growth
that its purchase price was based on the results of its research into the prices
paid by other groups to acquire control positions in publicly-traded
shell companies similarly situated as First Growth at the time Halter
Financial acquired its position in First Growth. The Stock Purchase Agreement
also required the Company’s Board of Directors to declare and pay a special cash
dividend of $3.088 per share to the Company’s shareholders on November 19, 2007.
Halter Financial did not participate in such dividend. The dividend was payable
to shareholders of record on November 15, 2007, which was prior to the date the
shares were issued to Halter Financial under the Stock Purchase Agreement. The
dividend payment date was November 19, 2007. The dividend was payable to the
Company’s shareholders who held 135,999 shares of the Company’s common stock and
resulted in a total dividend distribution of $420,000. The funds for the
dividend came from the $425,000 proceeds received from the sale of common stock
to Halter Financial. Mr. Richard Crimmins was appointed as an officer and
director of First Growth at the request of Halter Financial as a result of the
change in control transaction whereby Halter Financial became First Growth’s
principal shareholder. Richard Crimmins is neither an officer, director nor
shareholder of Halter Financial. Prior to November 2007, neither Halter
Financial nor its affiliates had a material relationship with any of First
Growth’s shareholders. After Halter Financial became a 87.5% shareholder of
First Growth pursuant to the Stock Purchase Agreement, there was a potential
conflict of interest associated with an affiliate of Halter Financial, HFG
International, Limited, advising Bright Stand about its purchase of a U.S. shell
company, First Growth. Despite this potential conflict of interest, HFG
International, Limited has informed the Company that its advice to Bright Stand
was based on its research results into the prices paid by other groups to
acquire control positions in publicly traded shell companies, which were
similarly situated as First Growth at the time Bright Stand acquired First
Growth.
1
Bright
Stand International Co., Ltd.
Bright
Stand International Co., Ltd., “Bright Stand”, was incorporated on August 3,
2007 and has a registered capital of $100. Bright Stand did not have any
operating activities from August 3, 2007 (inception) to March 12, 2008. Kunio
Yamamoto, a Japanese citizen, was the sole shareholder of Bright Stand through
March 12, 2008.
Weifang
Yuhe Poultry Co., Ltd.
PRC Yuhe
is the wholly-owned subsidiary of Bright Stand. PRC Yuhe was founded in March
1996 by Gao Zhentao and Sun Haoguo, with each of them owning, respectively, 60%
and 40% of its equity interest. From its formation through its acquisition by
Bright Stand, PRC Yuhe was effectively controlled by Gao Zhentao, the Company’s
chief executive officer. The principal business of PRC Yuhe is breeding poultry,
hatchlings and selling chicken.
Weifang
Taihong Feed Co., Ltd.
Taihong
was founded in May 2003 by Shandong Yuhe Food Group Co., Ltd., “Yuhe Group”, a
PRC company based in Shandong Province, and Gao Zhenbo, the brother of the
Company’s chief executive officer, Gao Zhentao, with Yuhe Group and Mr. Gao
owning, respectively, 56.25% and 43.75% of its equity interest. Yuhe Group is an
entity controlled by the Company’s chief executive officer, Gao Zhentao, and his
brother, Gao Zhenbo. The principal business of Taihong is the production and
sale of feed and feed additives, primarily to PRC Yuhe. On September 14, 2007
Yuhe Group transferred all of its interests in Taihong to PRC Yuhe in a
reorganization of equity interest under common control. The 43.75% equity stake
in Taihong owned by Gao Zhenbo was subsequently transferred to Bright Stand in
the course of the corporate reorganization transactions described
below.
Corporate
Reorganization Transactions
HFG
International, Limited, an affiliate of Halter Financial, was engaged by Bright
Stand to provide consulting services related to Bright Stand’s efforts to
complete a combination transaction with a US domiciled publicly-traded “shell
corporation” and other post transaction matters. HFG International, Limited
introduced Bright Stand to First Growth. There is no correlation between the
decision of Bright Stand to engage HFG International, Limited to provide
consulting services to Bright Stand and the decision of Halter Financial to
acquire a control position in First Growth. After Halter Financial became a
87.5% shareholder of First Growth pursuant to a Stock Purchase Agreement, there
was a potential conflict of interest associated with an affiliate of Halter
Financial, HFG International, Limited, advising Bright Stand about its purchase
of a U.S. shell company, First Growth. Despite this potential conflict of
interest, HFG International, Limited has informed the Company that its advice to
Bright Stand was based on its research results into the prices paid by other
groups to acquire control positions in publicly traded shell companies, which
were similarly situated as First Growth when Bright Stand acquired First Growth.
After a diligence review by counsel for Bright Stand, the sole shareholder of
Bright Stand elected to enter into the exchange transaction contemplated
by the equity transfer agreement filed as Exhibit 10.2 to the
Registration Statement on Form S-1/A filed on December 19, 2008.
Bright
Stand entered into a share transfer agreement with all the existing shareholders
of PRC Yuhe on October 18, 2007 to acquire all the equity of PRC Yuhe with
cash consideration equal to the appraised fair market value of PRC Yuhe in the
amount of RMB 81,450,000, or $11,306,522. The sellers of PRC Yuhe included Yuhe
Group, Mr. Gao Zhentao and Mr. Gao Zhenbo. At the time of execution of the share
transfer agreement, Mr. Kunio Yamamoto, a Japanese citizen, the sole shareholder
of Bright Stand, and Mr. Gao Zhentao had a general, verbal and informal
understanding pursuant to which all or part of the shares of our common stock
issued to Mr. Kunio Yamamoto would be transferred to Mr. Gao Zhentao in the
future in consideration of Mr. Gao Zhentao’s commitment to management of our
business operations and our future achievement of the financial targets set
forth in a Make Good Agreement dated March 12, 2008. Bright Stand
obtained a bridge loan to pay the purchase price for the acquisition of the
equity interests in PRC Yuhe and Taihong (the acquisition of Taihong is
described below), and arranged to repay the bridge loan promptly after the
acquisitions as part of the general, verbal and informal understanding.
Bright Stand obtained the approval from the Shandong Province counterpart of the
Ministry of Commerce for this transaction on November 9, 2007, and the
acquisition closed on January 31, 2008. There is no longer any connection
between the Company and Yuhe Group, except that Mr. Gao Zhentao, the Company’s
chief executive officer, and his brother Mr. Gao Zhenbo are shareholders and
directors of Yuhe Group. Mr. Sun Haoguo no longer has any relationship with Yuhe
Group. Two of the three members of the Supervisory Board of PRC Yuhe, Zheng
Chaoyang and Zhang Lishun, are administrative department officers of Yuhe
Group.
Bright
Stand entered into a share transfer agreement with Gao Zhenbo, a former
shareholder of Taihong, on October 18, 2007 to acquire 43.75% of the
outstanding equity of Taihong for cash consideration equal to 43.75% of the net
asset value of Taihong in the amount of RMB 2,244,000, or $312,530. The
remaining 56.25% of Taihong is owned by PRC Yuhe. Bright Stand obtained the
approval from the Shandong provincial counterpart of the Ministry of Commerce
for this transaction on November 9, 2007, and the acquisition closed on January
31, 2008.
2
Effective
March 12, 2008, the Company closed an Equity Transfer Agreement with Bright
Stand and Kunio Yamamoto, the former sole shareholder of Bright Stand. Pursuant
to the terms of the Equity Transfer Agreement, the Company acquired all of the
outstanding capital stock of Bright Stand from Mr. Kunio Yamamoto in exchange
for 8,626,318 shares of the Company’s common stock. At the closing, Bright Stand
became the Company’s wholly-owned subsidiary. Immediately following the date of
the Equity Transfer Agreement, Mr. Kunio Yamamoto held 8,626,318 shares of the
Company’s common stock. Neither Halter Financial nor Mr. Yamamoto had any role
in identifying the accredited investors who purchased the Company’s unregistered
securities on March 12, 2008.
Except
for the general, verbal and informal understanding between Mr. Kunio Yamamoto
and Mr. Gao Zhentao as described above, there is no direct or indirect
connection between Mr. Kunio Yamamoto and the former shareholders of PRC Yuhe
and Taihong, including Mr. Gao Zhenbo and Mr. Sun Haoguo. The acquisitions of
PRC Yuhe and Taihong by Bright Stand closed on January 31, 2008 after obtaining
the relevant approval from the Shandong Province counterpart of the Ministry of
Commerce. There is no direct or indirect business connection between Mr. Kunio
Yamamoto and the former shareholders of First Growth. Mr. Yamamoto does not
currently have any roles with the Company, except as the Company’s shareholder.
Mr. Gao Zhenbo and Mr. Sun Haoguo do not currently have any roles with the
Company.
Equity
Investment by Private Placement Investors
On March
12, 2008, the Company consummated with 25 accredited investors, the “Investors”,
a private placement of 5,829,018 shares of its common stock for an aggregate
purchase price of approximately $18,000,000. The Investors were (i) Pinnacle
Fund, L.P., (ii) Pinnacle China Fund L.P., (iii) Black River Commodity Select
Fund Ltd., (iv) Black River Small Capitalization Fund Ltd., (v) Marion Lynton,
(vi) Ardsley Partners Fund II, LP, (vii) Ardsley Offshore Fund, Ltd, (viii)
Ardsley Partners Institutional Fund, LP; (ix) Investment Hunter, LLC, (x)
Guerrilla Partners LP, (xi) Hua-Mei 21st Century Partners, LP, (xii) Ruoling
Wang, (xiii) Guli Ping, (xiv) Wu Mijia, (xv) Dehua Qian, (xvi) Southwell
Partners, L.P, (xvii) Westpark Capital, L.P, (xviii) Straus Partners, LP, (xix)
Straus-GEPT Partners, LP, (xx) Atlas Allocation Fund, LP, (xxi) Chestnut Ridge
Partners, LP, (xxii) Ancora Greater China Fund, LP, (xxiii) Kevin B. Halter Jr,
(xxiv) Octagon Capital Partners, and (xxv) Howard H. Lu.
The
agreements the Company entered into with the Investors included a Securities
Purchase Agreement, a Registration Rights Agreement, Make Good Escrow Agreements
and various ancillary agreements and certificates, disclosure schedules and
exhibits in connection therewith. The following is a summary of their material
terms.
Securities
Purchase Agreement
Among
other things, under the Securities Purchase Agreement, Mr. Yamamoto has
delivered a certain number of shares of the Company’s common stock owned by him
to the investors pro-rata in accordance with their respective investment amount
for no additional consideration if: (i) the Company’s after tax net income for
the Company’s fiscal year ended on December 31, 2009 is less than 95% of
$13,000,000; and (ii) the Company’s earnings per share reported in the fiscal
year ending on December 31, 2009 is less than $0.74 on a fully diluted basis,
the “Low Performance Events”. Mr. Yamamoto has placed an aggregate of
3,359,889 shares of common stock, “Make Good Shares”, into an escrow account
pursuant to the terms of the Make Good Escrow Agreement by and among the
Company, Mr. Yamamoto, the Investors and the escrow agent named therein. If the
Company does not achieve the targets in 2009, 50% of the Make Good Shares will
be conveyed to all private placement Investors and Halter Financial pro-rata in
accordance with their respective investment amount for no additional
consideration. If the foregoing Low Performance Events do not occur, all the
Make Good Shares will be transferred to Mr. Yamamoto. As the Company has
achieved its 2008 earnings target, on July 31, 2009, Roth Capital executed a
Form of Release and instructed the Escrow Agent to release 1,679,992 shares of
common stock, the 2008 Make Good Shares, to Mr. Kunio Yamamoto, who received
such shares in or about August, 2009. HFG International Limited also
executed a Form of Release to release 235,196 shares of the Company’s common
stock to Mr. Kunio Yamamoto, who received such shares on or about April 27,
2009.
Covenants:
The Securities Purchase Agreement contains certain covenants on the Company’s
part, including the following:
(a)
Board
of Directors. Within 180 days following the closing, the Company is
required to nominate a minimum of five members to its Board of Directors, a
majority of which must be “independent,” as defined under the Nasdaq Marketplace
Rules, and to take all actions and obtain all authorizations, consents and
approvals as are required to be obtained in order to effect the election of
those nominees.
(b)
Chief
Financial Officer. Within 180 days following the closing, the Company is
required to hire a chief financial officer, “CFO”, who is a certified public
accountant, fluent in English and familiar with US GAAP and auditing procedures
and compliance for US public companies.
(c)
Investor
Relations Firm. Within 60 days following the closing, the Company is
required to hire one of the following investor relations firms: CCG Elite,
Hayden Communications or Integrated Corporate Relations.
3
In
connection with the above three post-closing covenants, the Company has
deposited an aggregate of $1,750,000, $750,000 as board holdback escrow amount,
$750,000 as CFO holdback escrow amount, and $250,000 as investor relations firm
holdback amount, from the gross proceeds of the private placement in the escrow
account pursuant to the Holdback Escrow Agreement by and among the Company, the
investors and the escrow agent named therein. If the Company fails to comply
with any of the above covenants in a timely fashion, it will incur liquidated
damages of 1% on a daily pro-rata basis for any portion of a month of the gross
proceeds of the private placement, or 2% if it suffers a holdback event relating
to Board of Directors or CFO in a 30-day period, to be subtracted from the
holdback escrow fund, until its compliance with such covenants.
The
Company filed a current report on form 8-K on June 13, 2008 with the SEC.
Pursuant to the relevant escrow agreement, the above mentioned $1,750,000 was
released to the Company on or about June 14, 2008.
Registration
Rights Agreement
With
respect to the 5,829,018 shares issued to the investors at closing on March 12,
2008, the Company is required to file a resale registration statement on Form
S-1 or any other appropriate form (i) within 60 days following the closing for
purposes of registering the resale of these shares, (ii) within 15 days with
respect to any additional registration statement, (iii) within 15 days with
respect to any additional registration statements required to be filed due to
SEC Restrictions, (iv) within 30 days following the date on which it becomes
eligible to utilize Form S-3 to register the resale of common stock, or (v)
within 45 days following the date the Make Good Shares are delivered by Mr.
Yamamoto to the investors. Among other things, the Company will be required to
pay the investors liquidated damages if it fails to file a registration
statement by the above filing deadlines or if it does not promptly respond to
comments received from the SEC. The liquidated damages accrue at a rate of 0.5%
per month of the aggregate investment proceeds received from the investors,
capped at 5% of the total investment proceeds. The Company filed a Registration
Statement on Form S-1 on May 12, 2008.
On December 29, 2008, the Company’s Registration Statement was declared
effective by the Securities and Exchange Commission, registering a total of
4,730,251 shares of the Company’s common stock for re-sale by certain selling
shareholders, instead of 5,829,018 shares as contemplated by the registration
rights agreement following the Company’s discussion with the Securities and
Exchange Commission.
Lockup
Agreement
The
Company and Mr. Yamamoto entered into a lockup agreement, pursuant to which Mr.
Yamamoto irrevocably agrees from and after the date of such agreement and
through and including March 12, 2010, that he will not offer, pledge, encumber,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of, directly or indirectly, or announce the
offering of, any of his shares, including any securities convertible into, or
exchangeable for, or representing the rights to receive, or engage in any short
sales with respect to any security issued by the Company. The Lockup Agreement
may not be waived or amended without the consent of a majority of the holders of
a majority of the shares issued in the private placement.
Name
Change to Yuhe International, Inc., Reverse Stock Split and Migration to
NASDAQ
Effective
April 4, 2008, the Company amended its articles of incorporation to (i) change
its name from “First Growth Investors, Inc.” to “Yuhe International, Inc.”, and
(ii) effect a 1-for-14.70596492 reverse stock split of its common stock. The
Company’s Board of Directors and shareholders approved the name change and the
reverse stock split pursuant to the Nevada Revised Statutes. The number of
authorized shares of common stock remains unchanged at 500 million.
The
change of the Company’s name and the reverse stock split were reflected in the
Amended and Restated Articles of Incorporation filed on April 4, 2008 with the
Secretary of State of Nevada, a copy of which was attached as Exhibit 3.1 to an
8K filed on April 10, 2008. The name change became effective with NASDAQ’s
Over-the-Counter Bulletin Board at the opening of trading on April 7, 2008,
under the new stock symbol of “YUII.OB”.
On
October 21, 2009, The NASDAQ Stock Market, the “Exchange”, informed the Company
that the Exchange had approved the listing of the Company’s common stock on the
Exchange. The Company’s common stock ceased trading on the
Over-the-Counter Bulletin Board and commenced trading on the Exchange on October
30, 2009 under the trading symbol “YUII”.
Appointment
of Investor Relations Firm
On April
20, 2008, the Company appointed CCG Elite Investor Relations as its investor
relations firm, which was effective on May 1, 2008.
Appointment
of Chief Executive Director
On June
13, 2008, the Company entered into an employment contract with Mr. Gao Zhentao,
the Company’s Chief Executive Officer, “CEO”. The employment agreement was
effective as of March 12, 2008, the date Mr. Gao was appointed CEO, and has an
initial term of three years.
4
Appointment
of Chief Financial Officer
On June
13, 2008, Mr. Hu Gang was appointed the Chief Financial Officer, “CFO”, of the
Company. The Company has entered into an employment agreement with Mr. Hu,
effective as of June 13, 2008, his appointment date, and has an initial term of
three years.
Appointment
of Directors
On June
13, 2008, the Company appointed the following directors:-
(i)
Mr. Peter Li, aged 44, was appointed Independent Director, chair of the Audit
Committee and member of the Compensation and Nominating Committees;
(ii)
Mr. Liu Yaojun, aged 32, was appointed Independent Director, chair of the
Compensation Committee and member of the Nominating and Audit
Committees;
(iii)
Mr. Greg Huett, aged 46, was appointed Independent Director , chair of the
Nominating Committee and member of the Audit and Compensation Committees;
and
(iv)
Mr. Han Chengxiang, aged 44, was appointed Director and member of the Nominating
Committee.
The
Company filed a current report on form 8-K on June 13, 2008 with the SEC.
Pursuant to the Holdback Escrow Agreement, an aggregate of $1,750,000, $750,000
as board holdback escrow amount, $750,000 as CFO holdback escrow amount, and
$250,000 as investor relations firm holdback amount, was released to the Company
on or about June 14, 2008.
The
Company has an offshore holding structure commonly used by foreign investors
with operations in China. The Company is a Nevada corporation which owns 100% of
the securities of Bright Stand, which in turn owns 100% of the securities of PRC
Yuhe and Taihong.
As of
December 31, 2009, Mr. Kunio Yamamoto was the Company’s significant shareholder:
Mr. Yamamoto owned 48.7%, of the total outstanding shares of the Company’s
common stock.
The
following chart depicts the Company’s organizational structure:
5
The
Company’s Business: Day-Old Broilers
The
Company’s business is part of the commercial broiler supply chain, which is
illustrated below.
The
Company purchases parent breeding chicken from grandparent breeder farms and
raises them to maturity. Once these parent breeding chicken have matured, they
produce hatching eggs that the Company incubates and then sells the resulting
day-old broiler chicks to its customers.
Under
normal circumstances, female parent breeder chicken become productive from the
26 th week,
and are no longer commercially productive after the 66th week. Typically a
breeder is capable of producing approximately 167 eggs which will be hatched to
137 broilers over its production lifetime and the breeders are maintained by the
Company for a period of 420 days. The Company sources its parent breeder chicken
from licensed suppliers located in Beijing, and Shandong and Jiangsu provinces
and these suppliers are required to have a vaccination certificate and a breeder
production certificate for the sale of the breeders. The Company’s hatching eggs
typically must be incubated for a period of 21 days.
6
The
following figure shows the production timeline in the broiler business. At least
28 weeks usually pass from the Company’s receipt of a day-old parent breeder to
the Company’s sale of the first day-old broilers.
The
Company operates in two elements of the broiler supply chain: day-old broiler
production and feed production. These activities are operated under two separate
subsidiaries, PRC Yuhe and Taihong, respectively.
In 2009,
PRC Yuhe generated 99.3% of the Company’s revenues. Taihong’s sale of
feed to unaffiliated third parties generated 0.7%. Taihong is also the primary
supplier of feed to PRC Yuhe. In addition to selling day-old broilers, the
Company also sells related chicken products, non-productive parent breeders, and
a small amount of feed for livestock and poultry. While the Company produces
substantially all of its inventory of hatching eggs through its own parent
breeders, it occasionally purchases additional hatching eggs from unaffiliated
third parties to meet market requirements.
The
Company provides a 98% guaranteed survival rate by delivering an additional 2%
of its day-old broilers. For example, the Company delivers two additional
day-old broilers to its customers for every order of 100 day-old broilers, the
cost for these two additional broilers has already been included in the
Company’s cost of sales and therefore no further liability needs to be accrued.
Any loss of broiler chicken solely caused by customers is excluded from the
guarantee. Guarantee expense for 2009 was $0. In 2008, the total guarantee
expense was $65,769.
According
to paragraph Accounting Standards Codification (“ASC”) Topic 310, a loss
contingency should be accrued for if it is probable that a liability had been
incurred at the date of the financial statements and the amount of loss can be
reasonably estimated. The Company determined that a product liability need not
be accrued for the reporting period because there is only a remote chance that
the survival rate will fall below 96% based on historical experience. In 2008,
$65,769 was recorded as guarantee expense to customers; guarantee expense for
2009 was $0.
The
Day-Old Broiler Industry in China; Competition
The
market for day-old broilers in China is highly fragmented. Shandong Province has
the highest number of day-old broilers in China. The Company’s market share was
approximately 3% in China in 2009 and the Company sold 110,000,000 day-old
broilers in 2009.
7
Day-old
broilers are very weak physically and need to be transported in closely
controlled temperature conditions during delivery. Therefore, producers of
broiler chicks usually only sell locally or to surrounding areas, which limits
the Company’s current effective sales market and competition to North
China.
Shandong
Minhe Animal Husbandry Co., Ltd., also located in Shandong Province, is one of
the Company’s major competitors for sales of day-old broilers. They are slightly
larger than the Company in terms of their annual day-old broiler production
volume. Another regional competitor of the Company’s is Jilin Deda, which is
located in Jilin Province in north-eastern China and is smaller than the Company
in terms of annual day-old broiler production volume. However, Jilin Deda is an
integrated chicken company, so it does not generally sell day-old broilers to
unaffiliated third parties.
The Company competes against its
competitors based on product quality and its after-sales services and extensive
marketing network. The Company’s “Yuhe” brand has been named by the Shandong
Province Administration of Industry and Commerce as a “Well Known Brand”. PRC
Yuhe was certified as ISO 9001:2000 compliant for quality management systems.
The
Company has sales representatives in every district of Shandong Province.
Although the Company’s prices are relatively higher than prices of many of its
competitors, the Company typically lowers its price by RMB 0.1 to 0.2 per
day-old broiler in order to attract new customers. The Company is able to sell
its products at a relatively higher price because its products have a good
survival rate and require a shorter period to raise to market size. The
Company’s experience and advance breeding technique contribute to the health and
quality of parent breeders. The Company has a high gross margin because it
focuses on the production of day-old broilers through maintaining the health and
quality of its parent breeders, which involves only a small maintenance cost, to
produce healthy day-old broilers that have a high survival rate and require a
shorter period to raise to market size. The higher the number of day-old
broilers is being produced, the lower the unit cost. As such, the Company is
able to maintain itself as a relative low cost producer while charging
relatively higher prices for its products.
PRC
Yuhe’s suppliers (including distributors of suppliers) in 2009 were as
follows:
|
|
2009
|
||||||||
Suppliers
|
Suppliers of
|
Amount
|
% of
|
|||||||
($
,000)
|
Total
|
|||||||||
Wang
Jianbo
|
Eggs
|
3,649 | 11.99 | % | ||||||
Tang
Xinming
|
Corn
|
2,745 | 9.02 | % | ||||||
Ma
Suping
|
Soybean
|
2,712 | 8.91 | % | ||||||
Gao
Ping
|
Eggs
|
2,589 | 8.51 | % | ||||||
Liu
Dianbao
|
Eggs
|
1,325 | 4.35 | % | ||||||
Xu
Zhenming
|
Eggs
|
1,182 | 3.88 | % | ||||||
Shanghai
Shen De Equipment Co., Ltd.
|
Equipment
|
834 | 2.74 | % | ||||||
Zhang
Chun Mao
|
Coal
|
833 | 2.74 | % | ||||||
Shandong
Yisheng Poultry Co., Ltd.
|
Chicken
breeders
|
704 | 2.31 | % | ||||||
Jiang
Zhaolin
|
Eggs
|
548 | 1.80 | % | ||||||
Total
|
|
17,121 | 56.25 | % |
Operations
The main
raw materials needed for the production of the Company’s day-old broilers are
parent breeders, feed, and medicines and vaccines. PRC Yuhe purchases parent
breeders from multiple suppliers. The Company has historically been able to
procure adequate stocks of parent breeders with a 5-8% discount from its
principal suppliers as a result of its eight- to ten-year relationship with them
and the Company’s large, stable orders. The Company purchases its parent
breeders from its long-term suppliers in Shandong Province, Jingsu Province and
Beijing.
Taihong
sells breeder feed to PRC Yuhe at cost, and these supplies have historically
accounted for all of PRC Yuhe’s feed requirements. The main raw materials for
Taihong’s feed are corn, soybean meal and nutritional elements for feed
production. Taihong purchases feed ingredients from numerous sources, but
primarily from wholesalers who collect the feed ingredients directly from
farmers. Taihong’s feed is produced in three separate phases. First, pre-mix
feed is produced from micro-nutritional elements, such as vitamins and minerals.
Second, concentrate feed is mixed by blending pre-mix feed and protein such as
soybean meals. Finally, whole feed is produced by mixing concentrate feed, corn
and soybean meal. Every raw material Taihong uses has more than three suppliers.
Taihong is not a large purchaser in the market for these materials, so to
strengthen its bargaining power, Taihong will sometimes cooperate with other
purchasers to place joint orders. The Company believes that its sources of
supply for these materials are adequate for its present needs and does not
anticipate any difficulty in acquiring these materials in the immediate
future.
8
In 2009,
the Company began to purchase feed from Shandong Purina Feed Company, a
subsidiary of Cargill. By the end of 2009, about 50% of the Company’s feed is
using Purina products. Based on the contract with Purina, the feed cost will not
be higher than the Taihong feed cost. In the Company’s on-going operation,
Purina will supply the majority of the Company feed, Taihong will supply the
residue part. Taihong will continue to operate as the back-up feed supply
source.
The
Company considers the health of its flocks to be its primary concern, and as
such, the Company undertakes vaccination programs for its birds. Every breeder
is vaccinated with at least ten types of vaccine, including those against avian
flu. The Company’s birds are raised in enclosed buildings, not in the open where
they would be more prone to exposure to potential disease carriers. The
Company’s breeder farms are also distributed among various locations at least
five kilometers from each other so as to minimize the risks of co-infection.
None of the Company’s birds has been infected with the H5N1 virus, and no cases
of H5N1 have been found in Shandong Province, where the Company’s farms are
located. The Company is also one of the few companies in China to immunize its
embryos using the Inovoject® system provided by Embrex, Inc. The Inovoject®
system would enhance the quality of the day-old broilers and increase their
viability. The system can also improve disease resistance and bird health at the
time when they are placed on the breeder farm. The Company conducted a test
internally and estimated that the survival rate would be 1-2 % lower without
using the Inovoject system. PRC Yuhe was certified as ISO 9001:2000 compliant
for quality management systems on May 8, 2003.
Customers
and Distribution
Through
PRC Yuhe, the Company’s customers are principally comprised of distributors and
end users such as integrated chicken companies, broiler raising companies
and individual broiler raisers. Approximately one hundred percent of the
Company’s total sales are made through third party distributors and thirty-two
percent of the Company’s sales are to five largest distributors. Forty-two
percent of the Company’s sales volume is to distributors with five to ten years
of relationship with us.
The
Company’s reference to “customers” includes both distributors and end users.
However, under the section “Customers and Distribution” in this Report, the
Company’s reference to “customers” includes the Company’s end users only as
the Company is constantly considering increasing and funding its sales network
into new geographic areas in an effort to expand its sales to end
users.
If any
distributor resells the Company’s product, such distributor will make profits
from the resale as well as be entitled to a year end bonus paid by the Company
at the rate of RMB 0.05-0.1 per day-old broiler. The Company sets the price to
third party distributors and end users according to the market price based
on supply and demand and the competitiveness of the market. The Company sets the
price according to its own policies and is not subject to any distributors’
control.
The
Company is constantly considering increasing and funding its sales network into
new geographic areas. The Company expects to purchase new facilities to
generate sufficient production capacity and expand roughly at the same rate
as it expects to increase its sales network. The Company shall fund the
cost of increasing its sales network internally as it recruits more sales
representatives. The Company considers that costs of acquiring new
production facilities and its ability to raise capital for expansion at a
particular time can affect its geographical expansion and sales. The Company
also considers that shortage of labor would also affect its geographical
expansion and sales. The impact of labor shortage can be immediate and
longer-term. The Company is monitoring the availability of professionals and
experienced workers to meet its production demand.
The
Company anticipates that it will use a penetration pricing strategy when first
entering a new geographic area. Historically, the Company’s penetration price
has been RMB 0.1 to RMB 0.2 per bird lower than its list price, which was still
higher than the prevailing market price in the market the Company was seeking to
enter.
For the
remaining feed produced by Taihong that is not sold to PRC Yuhe, Taihong retains
sales agents in various key locations to sell the feed. Because Taihong’s excess
feed production is not large, its feed is sold primarily in Shandong
Province.
As a part
of the Company’s after-sales service and customer relations initiative, the
Company regularly visits its customers to educate them on broiler-raising
techniques, conducts regular training courses and provides them with a 24-hour
help line. The Company also provides guarantees to its customers that the
survival rate of its day-old broilers will be not less than 98% within one week
of their delivery.
9
The table
below sets out the Company’s top ten major direct customers. Sales to PRC Yuhe’s
major end users in 2009 and 2008 were as follows:
|
2009
|
|||||||
Amount
|
% of
|
|||||||
|
($ ,000)
|
Total
|
||||||
Wei
Yunchao
|
5,067 | 10.71 | % | |||||
Wang
Jianbo
|
3,733 | 7.89 | % | |||||
Li
Chuanwang
|
3,096 | 6.55 | % | |||||
Jia
Deliang
|
1,926 | 4.07 | % | |||||
Tian
Liqiu
|
1,261 | 2.67 | % | |||||
Geng
Naiwei
|
983 | 2.08 | % | |||||
Chen
Shiwen
|
946 | 2.00 | % | |||||
Yang
Lunhao
|
939 | 1.99 | % | |||||
Wang
Yaocheng
|
902 | 1.91 | % | |||||
Song
Fuquan
|
892 | 1.89 | % | |||||
Total
|
19,744 | 41.75 | % |
Employees
As of
December 31, 2009, PRC Yuhe and Taihong had 1,230 full-time employees. Among
these full-time employees, 120 employees, who are key technical and operational
personnel, have directly signed employment contracts with the Company. The
remaining employees who are unskilled workers have signed their employment
contracts with Weifang Chuangfu Labor Co., Ltd., an outside labor contracting
company that provides employees to meet the Company’s staffing needs. The
Company compensates the employees of Weifang Chuangfu Labor Co., Ltd. directly
for the services that these employees render to it and pays Weifang Chuangfu
Labor Co., Ltd. a yearly service fee. Bright Stand has no
employees.
R&D
and Intellectual Property
PRC Yuhe
and Taihong have not made any R&D expenditure in the last two fiscal
years.
PRC Yuhe
is the registered owner of two PRC trademarks consisting of the stylized Chinese
characters “Yu He” and accompanying logo in live agricultural products. The
registration period is ten years and the expiry dates for the two trademarks are
October 27, 2015 and April 6, 2010, respectively. In the PRC, trademark
registrations can be indefinitely renewed for ten-year periods. As the
registrant of these two trademarks, PRC Yuhe has the exclusive legal right to
use each trademark within the PRC on the goods for which it is registered. PRC
Yuhe has the right to prevent others from using a confusingly similar mark on
any good which is similar to any of those for which these two trademarks are
registered. Through a license agreement with PRC Yuhe, Taihong has the license
to use the same trademarks. PRC Yuhe and Taihong have no other patents,
trademarks, other licenses, franchises, concessions or royalty agreements. The
Company does not consider “Yu He” to be a consumer brand because it is not well
recognized by customers who purchase chickens in retail food markets, although
this brand is recognized by end users who raise broilers to market size for sale
to customers, retail food markets and restaurants.
Environmental
Laws
The
Company’s breeders farms are located in rural areas where there are no specific
requirements imposed on the Company by relevant environmental protection
agencies. Fecal wastes are treated and converted by the Company to fertilizers
and sold to farmers. PRC Yuhe and Taihong have never been penalized by any
environmental protection agencies. The Company therefore does not incur any
significant environmental law compliance costs.
Governmental
Approvals
The
production activities of PRC Yuhe and Taihong are primarily regulated by the
Farming Bureau of Shandong Province. Under relevant laws and regulations, both
PRC Yuhe and Taihong must obtain relevant production permits from the Farming
Bureau of Shandong Province to carry out their respective businesses. In
addition, PRC Yuhe, as a company engaging in the breeder business, must obtain
an immunization certificate from the local Farming Bureau in Weifang City. PRC
Yuhe’s breeder production permit from the Animal Husbandry Bureau of Shandong
Province is valid from August 5, 2008 to August 4, 2011. The immunization
certificate from the local farming bureau in Weifang City was issued on November
10, 2005 and does not have an expiry date. Taihong’s feed production permit was
issued on December 12, 2007 and is valid for a period of three
years.
Generally,
the primary breeder stock is imported and the import volume is closely
controlled by the PRC government. The Company has not seen an increasing trend
of the import volume.
10
PRC Yuhe
is currently entitled to an exemption from Chinese enterprises income tax, or
“EIT”, because it has been recognized as “a national leading agricultural
enterprise”. In accordance with the relevant regulations regarding the tax
exemption, PRC Yuhe is tax-exempt as long as it continues to be recognized as
“the national leading agricultural enterprise”. On January 31, 2008, the Chinese
operating subsidiaries PRC Yuhe and Taihong were acquired by Bright
Stand.
On March
16, 2007, the National People’s Congress of China enacted a new tax law, or “the
New Tax Law”, whereby both FIEs and domestic companies will be subject to a
uniform income tax rate of 25%. On November 28, 2007, the State Council of China
promulgated the Implementation Rules. Both the New Tax Law and the
Implementation Rules have become effective on January 1, 2008 and provide tax
exemption treatment for enterprises engaged in agricultural industries, such as
farming, foresting, fishing and animal husbandry. As
an enterprise engaged in the farming industry, the Company is eligible
for relevant exemption treatment and does not need to pay company income tax. In
2008, the local tax authorities informed the Company that it is eligible for
relevant preferential tax treatment. However, any decision by relevant tax
authorities in the future that the Company is not eligible for tax exemption
treatment may materially and adversely affect its profits, business and
financial performance.
Seasonality
The
Company’s operating results and operating cash flows historically have been
subject to seasonal variations. Demand for the Company’s day-old broilers
generally decreases in May and June. Since the Company’s ultimate clients are
mostly farmers and the second quarter is their busy season for reaping, farmers
have little idle time to raise broilers during these months.
Another
low season for the Company’s products is from the second half of December to the
first half of January, which the Company believes is caused by a Chinese
cultural taboo on animal slaughter during the Chinese New Year holiday, which
occurs between late January and early February. Because it usually takes
approximately 45 days for a day-old broiler to reach market weight, the Company
experiences reduced demand for its day-old broilers during the period from 30 to
60 days prior to the Chinese New Year holiday period. In addition, since most
farmers are likely to rest during the Chinese New Year holiday, rather than
work, February would be another low season for the Company’s
products.
11
ITEM
1A. RISK FACTORS.
An
investment in the Company’s common stock involves a high degree of risk. In
addition to the following risk factors, you should carefully consider the risks,
uncertainties and assumptions discussed herein, and in other documents that the
Company subsequently files with the SEC that update, supplement or supersede
such information for which documents are incorporated by reference into this
Annual Report on Form 10-K. Additional risks not presently known to the Company
or which the Company considers immaterial based on information currently
available to it may also materially adversely affect the Company. If any of the
events anticipated by the risks described herein occur, the Company’s business,
cash flow, results of operations and financial condition could be adversely
affected, which could result in a decline in the market price of the Company’s
common stock, causing you to lose all or part of your investment.
RISKS
RELATED TO OUR BUSINESS AND INDUSTRY
Outbreaks
of poultry disease, such as avian influenza, or the perception that outbreaks
may occur, can significantly restrict our ability to conduct our
operations.
Events
beyond our control, such as the outbreak of avian influenza in 2006, may
restrict our ability to conduct our operations and sales. An outbreak of disease
may result in governmental restrictions on the import and export of products
from our customers, or require us to destroy one or more of our flocks. This may
result in the cancellation of orders by our customers and create adverse
publicity that may have a material adverse effect on our business, reputation
and prospects. In 2006, PRC Yuhe suffered an operating loss of $2,597,285 after
the general decline in consumer demand for poultry products in late 2005 and
early 2006 following the outbreak of avian
influenza.
12
Worldwide
fears about avian diseases, such as avian influenza, have depressed and may
continue to adversely impact our sales. Avian influenza is a respiratory disease
of birds. The milder forms occur occasionally around the world. A highly
pathogenic strain of avian influenza, known as H5N1, has affected Asia since
2002. It is widely believed that H5N1 is spread by migratory birds, such as
ducks and geese. There have also been some cases where H5N1 is believed to have
passed from birds to humans as humans came into contact with live birds that
were infected with the disease. Our flocks have never been infected with the
H5N1 virus. Although there are vaccines available for H5N1 and other forms of
avian influenza, and we vaccinate our breeding stock against avian influenza in
accordance with PRC government mandates, there is no guarantee that the disease
can be completely prevented as the virus continues to mutate.
We
do not typically have long-term purchase contracts with our customers and our
customers have in the past, and may at any time in the future, reduce or cease
purchasing products from us, which may adversely affect our business and results
of operations.
We
typically do not have long-term volume purchase contracts with our customers,
and they are not obligated to purchase products from us. Accordingly, our
customers may at any time reduce their purchases from us or cease purchasing our
products altogether. In addition, any decline in demand for our products and any
other negative development affecting our major customers or the poultry industry
in general may adversely affect our results of operations. For example, if any
of our customers experience serious financial difficulties, it may lead to a
decline in sales of our products to such customers and our operating results may
be adversely affected through, among other things, decreased sales volumes and
write-offs of accounts receivable related to sales to such
customers.
Our
failure to compete with other poultry companies, especially companies with
greater resources, may adversely affect our business, financial condition and
results of operations.
The
Chinese poultry industry is highly competitive. In general, competitive factors
in the Chinese broiler, or chicken, industry include price, product quality,
brand identification, breadth of product line and customer service. Our success
depends in part on our ability to manage costs and be efficient in the highly
competitive poultry industry. Some of our competitors have greater financial and
marketing resources. As a result, we may not be able to successfully increase
our market penetration or our overall share in the poultry market.
Increased
competition may result in price reductions, increased sales incentive offerings,
lower gross margins, sales expenses, marketing programs and expenditures to
expand channels to market. Our competitors may offer products with better market
acceptance, better price or better quality. Our business may be adversely
affected if we are unable to maintain current product cost reductions, or
achieve future product cost reductions.
If we
fail to address these competitive challenges, there may be a material adverse
effect upon our business, consolidated results of operations and financial
condition.
13
As
a public company, we are required to comply with the requirements of the
Sarbanes-Oxley Act of 2002 with respect to our internal control over financial
reporting. If we fail to comply with the requirements of the
Sarbanes-Oxley Act or if we fail to maintain adequate internal control over
financial reporting, our business, results of operations and financial condition
and the market price of our common stock may be adversely
affected.
As a
public company, we are required under applicable law and regulations to design
and implement internal controls over financial reporting, and evaluate our
existing internal controls with respect to the standards adopted by the Public
Company Accounting Oversight Board. Our management concluded that a material
weakness existed as of December 31, 2009 with respect to our compliance with
Section 402 of the Sarbanes-Oxley Act of 2002, as certain related party loans
between us and Shandong Yuhe Food Group Co., Ltd. constituted prohibited
transactions under Section 402 of the Sarbanes-Oxley Act. All such related party
loans were repaid by the end of February 2010. In addition, there were certain
audit adjustments identified by our former independent auditors related to our
financial statements for the year ended December 31, 2009 indicating a material
weakness in our internal control over financial reporting. The adjustments
were mainly related to transferring amounts from work-in-progress to fixed
assets, separating the current portion of long-term debt from long-term debt,
and verifying the nature of capital leases and operating leases.
Although we have implemented measures to address the material weaknesses, we
cannot assure you that we will not identify control deficiencies that may
constitute significant deficiencies or material weaknesses in our internal
controls in the future. As a result, we may be required to implement further
remedial measures and to design enhanced processes and controls to address
issues identified through future reviews. This could result in significant
delays and costs to us and require us to divert substantial resources, including
management time, from other activities.
If we do
not fully remediate the material weaknesses identified by management or fail to
maintain the adequacy of our internal controls in the future, we may not be able
to ensure that we can conclude on an ongoing basis that we have effective
internal control over financial reporting in accordance with the Sarbanes-Oxley
Act. Moreover, effective internal controls are necessary for us to produce
reliable financial reports and are important to help prevent fraud. As a result,
any failure to satisfy the requirements of the Sarbanes-Oxley Act with respect
to internal control over financial reporting on a timely basis could result in
the loss of investor confidence in the reliability of our financial statements,
which in turn could harm our business and negatively impact the trading price of
our common stock.
We
use company-controlled personal bank accounts of certain of our employees for
transit purposes to transact a substantial amount of our business and we
transact a significant amount of our business in cash without using bank
accounts.
We use
company-controlled personal bank accounts of certain of our employees for
transit purposes to transact a substantial portion of our business instead of
our own bank accounts. As an industry practice in the rural areas of
northern China, where our operations are primarily conducted, personal bank
accounts of employees are commonly used for transit purposes for a company’s
business. Individual suppliers and customers in the rural areas of China prefer
these transactions as a more secure replacement for physical cash transactions
due to the underdevelopment of the banking system in such areas. In
addition, since banks in China do not accept corporate transactions on weekends,
we cannot use corporate bank accounts to process transactions on weekends. We
believe that the use of company-controlled personal bank accounts of our
employees provides us with greater convenience and stronger control of asset
management safety compared to physical cash transactions in these areas and
under these circumstances.
We have
established certain systematic controls over these personal bank accounts and
have implemented a set of management procedures to monitor the use of these
accounts. The procedures we have established for monitoring these accounts
include the mandatory use of physical cards for access control, our management
of the passcodes to these accounts and our requirement that the holders of these
accounts enter into agreements with us with respect to the use of these
accounts. However, since we do not own these personal bank accounts,
potential disputes may arise with respect to the control of such accounts. In
addition, if we fail to properly manage and control the personal bank accounts,
we could be subject to compliance risks and potential loss of our
assets.
Cash
transactions account for less than one-third of our revenue and
expenditures. We receive 20% to 30% of our revenue in the form of
cash, and approximately 30% of expenditures are made through cash payments, the
majority of which are directly drawn from the cash income
received. Cash income is mainly received from livestock farmers for
their purchases of our products, and cash expenditures are primarily made to the
farmers for their provision of corn, our feed ingredient. These farmers do
not accept payments in the form of bank transfers, but use cash transactions
instead. It is a standard industry practice in China to conduct business
with local farming communities on cash basis, and currently it is also the only
viable means of payment to local farmers. We are not aware of any Chinese
companies within our industry that have completely eliminated cash transactions
when dealing with local farmers. We reserve an adequate amount of
cash on hand to meet our payment obligations and do not deposit all cash income
into banks, as may be the practice in other industries, because Chinese
banks place restrictions on the number and size of cash withdrawals. The
nature of our business requires a large amount of cash for transaction
purposes, and we have implemented a series of management measures on cash
control, including a cap on the amount of cash transactions and requirements
relating to the maintenance of daily inventory, daily updates to the cash
account record and the submission of supporting documents along with each
receipt. To date, we have not experienced any cash losses, and we are
gradually reducing the cash portion of our income and expenditures. However, if
we fail to properly manage and control such cash transactions in the future, we
may be exposed to potential compliance risks and loss of our cash, which may
have an adverse effect on our business, financial condition and results of
operations.
14
We
conduct substantially all of our operations through our subsidiaries, and our
performance will depend upon the performance of our subsidiaries.
We have
no operations independent of those of Bright Stand International Limited, or
Bright Stand, and its PRC subsidiaries, PRC Yuhe and Taihong. As a result, we
are dependent upon the performance of Bright Stand and its subsidiaries and our
performance will be subject to the financial, business and other factors
affecting such subsidiaries as well as general economic and financial
conditions. In addition, we are dependent on the cash flow of our subsidiaries
to meet our obligations.
Because
virtually all of our assets are held by our operating subsidiaries, the claims
of our shareholders will be structurally subordinate to all existing and future
liabilities and obligations, as well as trade payables of such subsidiaries. In
the event of bankruptcy, liquidation or reorganization of us, our assets and
those of our subsidiaries will be available to satisfy the rights of our
shareholders only after all of Bright Stand and its subsidiaries’ liabilities
and obligations have been paid in full.
Our
sales revenue may be adversely affected by various factors, including demand for
our products, sales price and general market conditions.
Demand
for our products is affected by a number of factors, including the general
demand for the products in the end markets that we serve and the sales prices of
our products. A vast majority of our sales is derived directly or indirectly
from customers who are broiler raisers and large integrated chicken companies
whose day-old broiler production is not sufficient for their own use. Any
significant decrease in the demand for day-old broilers may result in a decrease
in our revenues and earnings. A variety of factors, including economic, health
and regulatory factors and political and social instability, may contribute to a
slowdown in the demand for day-old broilers.
15
Industry
cyclicality, especially fluctuations in commodity prices of feed ingredients and
breeding stock, may affect our earnings.
Currently,
all our raw materials are procured in China. Profitability in the poultry
industry is materially affected by the supply of parent breeding stocks and the
commodity prices of feed ingredients, including corn, soybean cake, and other
nutrition ingredients from numerous sources, mainly from wholesalers who collect
the feed ingredients directly from farmers. As a result, the poultry industry is
subject to wide fluctuations and cycles. These commodity prices are determined
by supply and demand. We cannot eliminate the risk of increased operating costs
from commodity price increases, and it is very difficult to predict when the
feed price spiral cycles will occur.
Various
factors can affect the supply of corn and soybean meal, which are the primary
ingredients of the feed we use for parent breeding stocks. In particular,
weather patterns, the level of supply inventories and demand for feed
ingredients, and the agricultural policies of the Chinese government affect the
supply of feed ingredients. Weather patterns often change agricultural
conditions in an unpredictable manner. A sudden and significant change in
weather patterns may affect supplies of feed ingredients, as well as both the
industry’s and our ability to obtain feed ingredients, grow chickens or deliver
products. Increases in the prices of feed ingredients may result in increases in
raw material costs and operating costs.
The
supply of parent breeding stocks is also cyclical. We purchase parent breeding
stocks from multiple suppliers. If we fail to maintain adequate breeding stock,
our business, financial condition and results of operations may be adversely
affected.
The
cessation of tax exemptions by the Chinese government may affect our
profitability.
As a
leading agricultural enterprise jointly recognized by eight national authorities
in China, we enjoyed income tax exemption status from January 2004 until
November 2007. In connection with our restructuring in 2008, we were converted
into a foreign investment enterprise, or FIE, wholly owned by Bright Stand and
became subject to PRC income tax. Under the current PRC tax laws, FIEs such as
ours are subject to income tax at a rate of 25%, while in practice tax
reductions or exemptions in various forms are granted by local governments to
FIEs.
On March
16, 2007, the National People’s Congress of China enacted a new enterprise
income tax law, or the New Tax Law, whereby both FIEs and domestic companies
will be subject to a uniform income tax rate of 25%. On December 6, 2007, the
State Council of China promulgated the Implementation Rules of the New Tax Law,
or the Implementation Rules. Effective on January 1, 2008, both the New Tax Law
and the Implementation Rules provide tax exemption or reduction treatment for
enterprises engaged in agricultural industries, such as farming, foresting,
fishing and animal husbandry. As an enterprise engaged in the farming industry,
we are eligible for exemption and are not required to pay company income tax. If
we lose the tax exemption treatment as of result of any future changes to the
New Tax Law and Implementation Rules, our business, results of operations and
financial condition may be materially and adversely
affected.
16
Our
business may be adversely affected due to inaccuracy in our sales
forecasts.
We
procure raw materials and produce our day-old broilers based on our sales
forecasts. If we fail to accurately forecast demand for our products, we may
produce excessive breeding stock, which may result in lower prices in order to
sell our inventory and adversely affect our business, financial condition and
results of operations.
Our
products may contain undetected defects that are not discovered until after
shipping.
Our
products may contain undetected defects, which may result in a loss or delay in
market acceptance of our products and thus harm our reputation and results of
operations.
We
have sustained losses in the past and cannot guarantee profitability in the
future.
We
sustained losses in 2006 and there is no assurance that we will continue to be
profitable in the future. In addition, our business was impacted in 2006 due to
the outbreak of avian influenza. A variety of factors may cause our operating
results to decline and our financial condition to worsen,
including:
·
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competitors
offering comparable products at lower
prices;
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continuing
downward pressure on the average selling prices of our products caused by
intense competition in our industry and general market
conditions;
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superior
product innovations by
competitors;
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rising
raw material costs;
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changes
to management and key personnel;
and
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·
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increased
operating expenses relating to research and development, sales and
marketing efforts and general and administrative expenses as we seek to
grow our business.
|
As a
result, we may fail to achieve our revenue expectation or experience
higher-than-expected operating expenses, which may materially and adversely
affect our business, results of operations and financial condition.
Our
limited operating history may not serve as an adequate basis to judge our future
prospects and operating results.
We have a
limited operating history with respect to our current business, which may not
provide a sufficient basis on which to evaluate our business or future
prospects. Although our sales have grown rapidly in recent years, we cannot
assure you that we will maintain profitability or that we will not incur net
losses in the future. We expect that our operating expenses will increase as we
expand, a failure to realize anticipated sales growth may result in significant
operating losses. We will continue to encounter risks and difficulties
frequently experienced by companies at a similar stage of development, including
our potential failure to:
·
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implement
our business model and strategy and adapt and modify them as
needed;
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maintain
our current, and develop new, relationships with
customers;
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manage
our expanding operations and product offerings, including the integration
of any future acquisitions;
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17
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maintain
adequate control of expenses;
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attract,
retain and motivate qualified
personnel;
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protect
our reputation and enhance customer loyalty;
and
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anticipate
and adapt to changing conditions in the poultry industry as well as the
impact of any changes in government regulation, mergers and acquisitions
involving our competitors, technological developments and other
significant competitive and market
factors.
|
If we are
not successful in addressing any or all of these risks, our business may be
materially and adversely affected.
The
loss of key personnel or the failure to attract or retain specialized technical
and management personnel may impair our ability to grow our
business.
We rely
heavily on the services of our key employees, including Gao Zhentao, our Chief
Executive Officer, Han Chengxiang, our Chief Production Officer, and Gang Hu,
our Chief Financial Officer. In addition, our engineers and other key technical
personnel constitute our significant assets and are the source of our
technological and product innovations. We depend substantially on the leadership
of a small number of farm directors and technicians who are devoted to research
and development. However, we do not maintain “key person” life insurance for any
of our senior management or other key employees. Additionally, approximately 90%
of our products are sold through third-party distributors. Most of them are
exclusive distributors and we expect them to be our future main sales force. We
believe our future success will depend upon our ability to retain these key
employees, engineers and technical personnel, and sales distributors. If we fail
to attract and retain sufficient numbers of technical personnel to support our
anticipated growth, if our current key employees and distributors decide not to
continue to work with us, or if we are not able to obtain the services of
additional personnel necessary for our growth, it may have an adverse effect on
our ability to sell our products, as well as on our overall growth.
In
addition, if any members of our senior management or any of our other key
personnel join a competitor or form a competing company, we may lose customers,
business partners, key professionals and staff members, which may materially and
adversely affect our business, financial condition and results of
operations.
We
do not have any registered patents or other registered intellectual property on
our production processes and we may not be able to maintain the confidentiality
of our processes.
We have
no patents or registered intellectual property covering our production processes
and we rely on the confidentiality of our processes in producing a competitive
product. The confidentiality of our know-how may not be maintained and we may
lose any meaningful competitive advantage that might arise from our proprietary
processes.
18
We
may not be able to collect receivables incurred by
customers.
Although
we currently sell our products on a cash-payment basis, our ability to receive
payment for our products depends on the continued creditworthiness of our
customers. In order to pay our expansion costs, we may be required to make sales
to customers who are less creditworthy than our historical customers. Our
customer base may change if our sales increase because of our expanded capacity.
If we are not able to collect our receivables, our revenues and profitability
will be adversely affected.
We
do not have insurance coverage for our properties or assets.
We and
our subsidiaries are not covered by any insurance. As a result, any material
loss or damage to our properties or other assets, or personal injuries arising
from our operations, may have a material adverse effect on our financial
condition and operations.
Increased
water, energy and gas costs would increase our expenses and reduce our
profitability.
We
require a substantial amount, and as we expand our business we will require
additional amounts, of water, electricity and natural gas to produce and process
our broiler products. The prices of water, electricity and natural gas fluctuate
significantly over time. We may not be able to pass on increased costs of
production to our customers. As a result, increases in the cost of water,
electricity or natural gas may substantially affect our business and results of
operations.
Increased
costs of transportation would negatively affect our profitability.
Our
transportation costs are a material portion of the cost of our products. We
primarily ship our products and receive our inputs via truck and rely on
third-party transportation companies for the delivery of most of our products
and inputs. The costs associated with the transportation of our products and
inputs fluctuate with the price of fuel, the costs to our transportation
providers of labor and the capacity of our transportation sources. Increases in
costs of transportation have adversely affected, and may in the future adversely
affect, our profitability.
RISKS
RELATED TO DOING BUSINESS IN CHINA
Changes
in China’s political or economic situation may adversely affect our operational
results.
Economic
reforms adopted by the Chinese government have had a positive effect on the
economic development of the country, but the Chinese government may change these
economic reforms or the Chinese legal system at any time. This could have
an adverse effect on our operations and profitability. Some of the
factors that may have such an effect are:
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•
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Level
of the government involvement in the
economy;
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Control
of foreign exchange;
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•
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Methods
of allocating resources;
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•
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Balance
of payments position;
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•
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International
trade restrictions; and
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19
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•
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International
conflict.
|
The
Chinese economy differs from the economies of most countries belonging to the
Organization for Economic Cooperation and Development, or OECD, in many
ways. As a result of these differences, we may not develop in the
same way or at the same rate as might be expected if the Chinese economy were
similar to those of the OECD member countries.
Our
business is largely subject to the uncertain legal environment in China and your
ability to legally protect your investment may be limited.
The
Chinese legal system is a civil law system based on written
statutes. Unlike common law systems, precedents set in earlier legal cases
are not generally used in the Chinese legal system. The overall effect of
legislation enacted over the past 20 years has been to enhance the protections
afforded to foreign invested enterprises in China. However, these laws,
regulations and legal requirements are relatively recent and are evolving
rapidly, and their interpretation and enforcement involve
uncertainties. These uncertainties may limit the legal protections
available to foreign investors, such as the right of foreign invested
enterprises to hold licenses and permits such as requisite business
licenses. In addition, most of our executive officers and directors are
residents of China and not of the United States, and substantially all the
assets of these persons are located outside the United States. As a result,
it may be difficult, if not impossible, for investors to effect service of
process in the United States, or to enforce a judgment obtained in the United
States against us or any of these persons.
The
Chinese government exerts substantial influence over the manner in which we must
conduct our business activities.
China has
only recently permitted provincial and local economic autonomy and private
economic activities. The Chinese government has exercised and continues to
exercise substantial control over virtually every sector of the Chinese economy
through regulation and state ownership. Our ability to operate in China may
be harmed by changes in its economic policies and regulations, including those
relating to taxation, import and export tariffs, environmental regulations, land
use rights, property and other matters. We believe that our operations in
China are in material compliance with all applicable legal and regulatory
requirements. However, the central or local governments of these
jurisdictions may impose new, stricter regulations or interpretations of
existing regulations that would require additional expenditures and efforts on
our part to ensure compliance with such regulations or
interpretations.
Accordingly,
government actions in the future, including any decision not to continue to
support recent economic reforms and to return to a more centrally planned
economy or regional or local variations in the implementation of economic
policies, may have a significant effect on economic conditions in China or
particular regions thereof.
Future
inflation in China may inhibit our activity to conduct business in
China.
In recent
years, the Chinese economy has experienced periods of rapid expansion and widely
fluctuating rates of inflation. These factors have led to the
adoption by Chinese government, from time to time, of various austerity measures
designed to restrict the availability of credit or regulate growth and constrain
inflation. High inflation may in the future cause the Chinese
government to impose controls on credit and/or prices, or to take other action,
which may inhibit economic activity in China, and thereby harm the market for
our products.
20
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
The
majority of our revenues is denominated in Renminbi, and any future restrictions
on currency exchange may limit our ability to use revenue generated in Renminbi
to fund any future business activities outside China or to make other payments
in U.S. dollars. Although the Chinese government introduced regulations in
1996 to allow greater convertibility of the Renminbi for current account
transactions, significant restrictions still remain, including primarily the
restriction that foreign invested enterprises may only buy, sell or remit
foreign currencies after providing valid commercial documents at those banks in
China authorized to conduct foreign exchange business. In addition,
conversion of Renminbi for capital account items, including direct investment
and loans, is subject to governmental approval in China, and companies are
required to open and maintain separate foreign exchange accounts for
capital account items. We cannot be certain that the Chinese
regulatory authorities will not impose more stringent restrictions on the
convertibility of the Renminbi.
The
value of our
common stock may be affected by the foreign exchange rates between other
currencies and Renminbi.
The value
of our common stock may be affected by the foreign exchange rate between U.S.
dollars and Renminbi. For example, to the extent that we need to convert
U.S. dollars into Renminbi for our operational needs and should the Renminbi
appreciate against the U.S. dollar at that time, our financial position, our
business and the price of our common stock may be harmed. Conversely,
if we decide to convert our Renminbi into U.S. dollars for the purpose of
declaring dividends on our common stock or for other business purposes and the
U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of our
earnings from our subsidiaries in China would be reduced.
Our
business is regulated by the PRC farming authorities and we need production
permits and immunization certificates from the farming authorities to carry out
our business. Any suspension, discontinuation or revocation of our current
production permits or immunization certificates may materially and adversely
impact our business.
The
Farming Bureau of Shandong Province and its local counterpart in Weifang City
are the primary governmental regulators and supervisors of both PRC Yuhe and
Taihong’s current businesses. Under relevant laws and regulations, both PRC Yuhe
and Taihong must obtain production permits from the Farming Bureau of Shandong
Province and the Ministry of Agriculture to carry out their current businesses.
In addition, PRC Yuhe, as a company engaging in the breeder business, must
obtain an immunization certificate from the local Farming Bureau in Weifang
City.
Although
relevant PRC laws require the Additive Premix Feed Production License to be
inspected by the local government authority on an annual basis, the local
government authority has not set up the procedures for us to proceed with such
annual inspection for Taihong. The local government authority has no
requirement for Taihong to operate with such annual inspection
records. However, we cannot assure you that such practice will not
change or that we will pass future annual inspections, if required by the
relevant local government authority.
The
Farming Bureau authorities have been strengthening their supervision over the
breeder and feed businesses in the past years, and new PRC laws, rules and
regulations may be introduced to impose additional requirements for relevant
production permits or immunization certificates. We cannot assure you that our
current production permits and immunization certificates will remain in effect
in the future. Any suspension, discontinuation or revocation of our current
production permits or immunization certificates may result in a material and
adverse impact on our business, financial performance and
prospects.
21
We
may in the future be subject to claims and liabilities under environmental,
health, safety and other laws and regulations, which could be
significant.
Our
operations are subject to various laws and regulations, including those
governing wastewater discharges and the use, storage, treatment and disposal of
hazardous materials. The applicable requirements under these laws are subject to
amendment, the imposition of new or additional requirements and changing
interpretations by governmental agencies or courts. In addition, we anticipate
increased regulation by various governmental agencies concerning food safety,
use of medication in feed formulations, the disposal of animal by-products and
wastewater discharges. Furthermore, business operations currently conducted by
us or previously conducted by others at real property owned or operated by us,
business operations of others at real property formerly owned or operated by us
and the disposal of waste at third-party sites expose us to the risk of claims
under environmental, health and safety laws and regulations. We may incur
material costs or liabilities in connection with claims related to any of the
foregoing. The discovery of presently unknown environmental conditions, changes
in environmental, health, safety and other laws and regulations, enforcement of
existing or new laws and regulations and other unanticipated events may give
rise to expenditures and liabilities, including fines or penalties, that may
have a material adverse effect on our business, operating results and financial
condition.
Failure
to comply with PRC regulations relating to corporate restructurings by PRC
residents may have adverse effects on our business, results of operations and
financial condition.
Six
Chinese ministries jointly promulgated the Rules on Mergers with and
Acquisitions of PRC Domestic Companies by Foreign Investors, or the M&A
Rules, on August 8, 2006. The M&A Rules became effective on September 8,
2006 and were amended on June 22, 2009. The M&A Rules subject acquisitions
of domestic companies by offshore SPVs controlled by PRC residents, who at the
same time are controlling shareholders of the domestic companies, or an
Affiliated Acquisition, to the approval of Ministry of Commerce. There are also
various stringent requirements applicable to foreign acquisition of domestic
companies through SPVs under the M&A Rules.
We
undertook a corporate restructuring in 2007 under which Bright Stand, a company
owned by Mr. Kunio Yamamoto, acquired control of PRC Yuhe and Taihong from
certain PRC resident shareholders, including Mr. Gao Zhentao. At that
time Mr. Yamamoto, the sole shareholder of Bright Stand, and Mr. Gao
Zhentao, our chief executive officer, had a general, verbal and informal
understanding pursuant to which all or part of our shares of common stock issued
to Mr. Kunio Yamamoto would be transferred to Mr. Gao Zhentao in the future in
consideration of Mr. Gao Zhentao’s commitment to management of our business
operations and future achievement of the financial targets as set forth in the
Make Good Agreement dated March 12, 2008.
The
general, verbal and informal understanding, together with our corporate
restructuring in 2007, may be deemed to have been an acquisition of domestic
companies by an offshore SPV controlled by a PRC resident depending on the
interpretation and implementation by the relevant Chinese regulatory agencies.
If so interpreted, the general, verbal and informal understanding, together
with our corporate restructuring in 2007, may be considered to have been a
failure to comply fully with the M&A Rules, as it could be deemed to be an
Affiliated Acquisition without approval under the M&A Rules. In such
case, the Chinese regulatory authorities could invalidate our corporate
restructuring conducted in 2007, impose fines and sanctions on our
operations in China, limit our operating privileges in China, delay or restrict
the repatriation of the proceeds from any public offerings into China, restrict
or prohibit payment or remittance of dividends by our PRC subsidiaries to us or
take other actions that could have a material and adverse effect on our
business, financial condition or results of operations, as well as
on the trading price of our common stock.
Failure
to comply with the recent PRC foreign exchange regulations relating to the
establishment of offshore special purpose companies by PRC residents, mergers
with and acquisitions of PRC domestic companies by foreign investors, and
relevant approval and registration requirements may subject our PRC resident
beneficial owners to personal liability, limit our ability to inject capital
into our PRC subsidiaries, limit our subsidiaries’ ability to increase their
registered capital or distribute profits to us, or otherwise adversely affect
us.
The PRC
State Administration of Foreign Exchange, or SAFE, issued a public notice in
October 2005, generally referred to as Circular 75, requiring PRC residents to
register with the local SAFE branch before establishing or acquiring control
over any offshore special purpose company, or SPV, for the purpose of capital
financing with assets or equities of PRC companies originally owned or
controlled by such PRC residents. PRC residents who are shareholders of offshore
SPVs and have completed such round-trip investments but did not carry out
foreign exchange registrations for overseas investments before November 1, 2005
were retroactively required to register with the local SAFE branch before March
31, 2006. PRC resident shareholders are also required to amend their
registrations with the local SAFE branch in connection with any increase or
decrease of capital, transfer of shares, merger, division, equity investment or
creation of any security interest.
We have
requested that our current shareholders and/or beneficial owners disclose
whether they or their shareholders or beneficial owners fall within the
ambit of the SAFE notice and urge those who are PRC residents to register
with the local SAFE branch as required under the SAFE notice. However, we
cannot assure you that all of our shareholders and beneficial owners who are PRC
residents will comply with our request to make, obtain or update any
applicable registrations or comply with other requirements required by the
SAFE notice or other related rules. In case of any
non-compliance by any of our PRC resident shareholders or
beneficial owners, our PRC subsidiaries and such shareholders and
beneficial owners may be subject to fines and other legal sanctions,
including restrictions on our ability to contribute additional capital to our
PRC subsidiaries and our PRC subsidiaries’ ability to distribute dividends
to our offshore holding companies, which would adversely affect our
business,
financial condition and results of operations.
22
Our
construction projects may be challenged by the relevant government
agencies.
We have
not obtained relevant government approvals and permits, including the planning
permit, construction permit and the environmental permit, with respect to two of
our projects involving the construction of breeder farm and feed stock
production. The constructions of these two projects may be challenged
by relevant governmental authorities and our business operations may be
interrupted or suspended.
Further
approvals are required for the land that we lease from village
committees.
We have
entered into several land lease agreements respectively with certain local
village committees in Weifang city for use of certain land owned by such
villages. According to relevant PRC law, prior to entering into the lease
agreements with us, the village committees must obtain the consent of at least
two-thirds of the members of the respective village as well as the approval of
the relevant people’s government. However, these village committees have not
completed the required consent and approval procedures. Although we have not
received any notice from any governmental authorities challenging the validity
of these lease agreements, we cannot assure you that our use of the leased land
will not be challenged in the future, which may adversely affect our business,
results of operations and financial condition.
23
We
may have to make up the unpaid social insurance and housing funds for our
employees.
We have made the required pension payments
for our employees who have employment contracts with PRC Yuhe or
Taihong. However, we have not made the other compulsory social
welfare payments for our employees, including payments with respect to housing
funds and other social insurance. We may be required to make up the unpaid
compulsory social insurance and housing fund payments, and we may also be
subject to administrative penalties with respect to these amounts, as may be
determined by the government authorities. If we are required to pay such
amounts, our business, results of operations and financial condition may be
adversely affected.
RISKS
RELATED TO OUR COMMON STOCK
Our
quarterly results may be volatile.
Our
operating results have varied on a quarterly basis during our operating history
and are likely to fluctuate significantly in the future. Many factors could
cause our revenues and operating results to vary significantly in the future,
including factors that are outside of our control. Accordingly, we believe that
quarter-to-quarter comparisons of our operating results are not necessarily
meaningful. Investors should not rely on the results of one quarter as an
indication of our future performance. If our results of operations in any
quarter do not meet analysts’ expectations, our stock price may materially
decrease.
Past
incomplete disclosures may cause certain investors to rescind their past
investment in us.
We are
filing this Form 10-K/A (Amendment No.1) to amend our previous SEC filings to
supplement certain disclosures with respect to a general, verbal and
informal understanding between Mr. Gao Zhentao and Mr. Kunio Yamamoto at the
time of a share transfer agreement dated October 18, 2007. Pursuant to such
understanding, all or part of the shares of our common stock issued to Mr. Kunio
Yamamoto would be transferred to Mr. Gao Zhentao in the future in consideration
of Mr. Gao Zhentao’s commitment to management of our business operations and
future achievement of the financial targets set forth in a Make Good Agreement
on March 12, 2008. The general, verbal and informal understanding may result in
invalidation of our corporate restructuring in 2007 as described in more details
in the risk factor entitled “Failure to comply with PRC regulations relating to
the establishment of offshore special purpose companies and corporate
restructuring by PRC residents may have adverse effects on our business, results
of operations and financial conditions.” Such past incomplete disclosure may
cause investors who purchased our shares pursuant to the Registration
Statement on Form S-1 filed with the SEC on May 12, 2008, as amended, to rescind
their purchase of our shares based on the Registration Statement on Form S-1, in
which case we may be required to purchase from such investors their shares at
their initial purchase price. This may have an adverse effect on our business,
financial condition or results of operations, as well as on the trading price of
our common stock.
We
may issue additional shares of our capital stock to raise capital or complete
acquisitions, which would reduce the equity interest of our
stockholders.
Our
articles of incorporation authorize the issuance of up to 500,000,000 shares of
common stock and 1,000,000 shares of preferred stock, par value $0.001 per
share. As of March 1, 2010, there were approximately 484,277,820 authorized and
unissued shares of our common stock that have not been reserved and are
available for future issuance. We have no commitments as of December 31, 2009 to
issue any of our securities in connection with an acquisition. However, we may
issue a substantial number of additional shares of our common stock in the
future to complete a business combination or to raise capital. The issuance of
additional shares of our common stock:
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·
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may
significantly reduce the equity interest of our existing stockholders;
and
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may
adversely affect prevailing market prices for our common
stock.
|
We
have not paid dividends in the past and do not expect to pay dividends in the
future. Any return on investment may be limited to the value of our common
stock.
Other
than the dividend of $3.088 per share that we paid to our shareholders in
November 2007 as required by a stock purchase agreement between us and Halter
Financial Investments, L.P., we have not declared dividends or paid cash
dividends on our common stock and do not anticipate doing so in the foreseeable
future. The payment of dividends on our common stock will depend on our
earnings, financial condition and other business and economic factors affecting
us at such time as the board of directors may consider relevant. If we do not
pay dividends, our common stock may be less valuable because a return on your
investment will only occur when our stock price appreciates.
24
Capital
outflow policies in China may hamper our ability to declare and pay dividends to
our stockholders.
China has
adopted currency and capital transfer regulations. These regulations may require
us to comply with complex regulations for the movement of capital. Although our
management believes that we will be in compliance with these regulations, should
these regulations or the interpretation of them by courts or regulatory agencies
change, we may not be able to pay dividends to our stockholders outside of
China. In addition, under current Chinese law, we must retain a reserve equal to
10% of net income after taxes, not to exceed 50% of registered capital.
Accordingly, this reserve will not be available to be distributed as dividends
to our stockholders. We presently do not intend to pay dividends for the
foreseeable future. Our board of directors intends to follow a policy of
retaining all of our earnings to finance the development and execution of our
strategy and the expansion of our business.
Our
management may have broad discretion as to the use of the net proceeds
from any offering of our common stock and may allocate the net proceeds
of an offering in ways that you or other stockholders may not
approve.
We have
not determined the specific uses of the proceeds of any offering of our
common stock or the amounts or timing of these expenditures. Failure by our
management to apply these funds effectively may adversely affect our ability to
maintain and expand our business. In the event that management does not apply
these funds effectively, your investment in our common stock may not result in a
favorable return.
One
stockholder controls approximately 48.7% of the voting power of our common
stock and, as a result, he may exercise voting control and be able to take
actions that may be adverse to your interests.
Mr. Kunio
Yamamoto beneficially controlled approximately 48.7% of the voting power of our
issued and outstanding common stock as of March 1, 2010. This concentration of
share ownership may adversely affect the trading price of our common stock
because investors often perceive a disadvantage in owning shares in a company
with one significant stockholder. Mr. Kunio Yamamoto has the ability to
significantly influence the outcome of all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions, such as mergers, consolidations or the sale of
substantially all of our assets. This concentration of ownership may have the
effect of delaying or preventing a change of control, including a merger,
consolidation or other business combination involving us, or discouraging a
potential acquirer from making a tender offer or otherwise attempting to obtain
control.
Our
common stock may be affected by limited trading volume and may fluctuate
significantly.
Our
common stock is traded on the Nasdaq Capital Market. Although an active trading
market has developed for our common stock, there can be no assurance that an
active trading market for our common stock will be sustained. Failure to
maintain an active trading market for our common stock may adversely affect our
stockholders’ ability to sell our common stock in short time periods, or at all.
In addition, sales of substantial amounts of our common stock in the public
market could harm the market price of our common stock. Our common stock has
experienced, and may experience in the future, significant price and volume
fluctuations, which could adversely affect the market price of our common
stock.
25
ITEM
9A. CONTROLS AND PROCEDURES
(a)
|
Disclosure
Controls and
Procedures
|
The
Company’s management, under the supervision and with the participation of its
chief executive officer and chief financial officer, Messrs. Gao Zhentao and Hu
Gang, respectively, evaluated the effectiveness of the Company’s disclosure
controls and procedures as of December 31, 2009, the end of the period covered
by this Report. The term “disclosure controls and procedures,” as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended, or the Exchange Act, means controls and other procedures of a
company that are designed to ensure that information required to be disclosed by
a company in the reports, such as this Form 10-K, that it files or submits under
the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure. Based on that evaluation, other than the incomplete disclosure as
described below, Messrs. Gao and Hu concluded that the Company’s disclosure
controls and procedures were effective as of December 31, 2009.
Our
disclosure controls and procedures are designed to provide reasonable, not
absolute, assurance that the objectives of our disclosure control system are
met. Because of inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues,
if any, within a company have been detected.
Subsequent
to the filing of the Initial 10-K, the Company’s management determined that the
disclosure under Item 1 “Description of Business – History and Background –
Corporate Reorganization Transactions” was incomplete because it did not
describe the general, verbal and informal understanding that Mr. Kunio Yamamoto
and Mr. Gao Zhentao reached at the time of the Company’s corporate restructuring
in 2007 pursuant to which all or part of the shares of the Company’s common
stock issued to Mr. Kunio Yamamoto would be transferred to Mr. Gao Zhentao in
the future in consideration of Mr. Gao Zhentao’s commitment to management of the
Company’s business operations and future achievement of the financial targets as
set forth in the Make Good Agreement dated March 12,
2008. Accordingly, the Company has filed this Form 10-K/A (Amendment
No. 1) in order to, among other things, amend the Initial 10-K by supplementing
certain disclosures in Item 1 “Description of Business - History and Background
– Corporate Reorganization Transactions.”
(b)
|
Management’s
report on internal control over financial
reporting
|
Management
of the Company, under the supervision of the chief executive officer and chief
financial officer, is responsible for establishing and maintaining adequate
internal control over financial reporting.
Internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f)
promulgated under the Exchange Act, is a process designed by, or under the
supervision of, the chief executive officer and chief financial officer and
effected by the board of directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external reporting purposes in
accordance with U.S. GAAP. Internal control over financial reporting
includes those policies and procedures that:
(i)
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the Company’s
assets;
|
(ii)
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. GAAP, and that
the Company’s receipts and expenditures are being made only in accordance
with appropriate authorization of the Company’s management and board of
directors; and
|
(iii)
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial
statements.
|
In making
its assessment of internal control over financial reporting, management, under
the supervision and with the participation of the chief executive officer and
chief financial officer, used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control—Integrated Framework.
Pursuant
to Rule 15d-15 of the Exchange Act, the Company’s management, under the
supervision and with the participation of its chief executive officer and chief
financial officer, Messrs. Gao Zhentao and Hu Gang, respectively, evaluated the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2009. Based on this evaluation, the Company’s chief
executive officer and chief financial officer concluded that the Company did not
maintain effective internal control over financial reporting as of December 31,
2009.
26
A
material weakness in internal control over financial reporting is defined as 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 the Company’s annual or interim financial statements will not be
prevented or detected on a timely basis.
Management
concluded that a material weakness existed as of December 31, 2009 with respect
to compliance with Section 402 of the Sarbanes-Oxley Act of 2002. As reported in
the Company’s Annual Report on Form 10-K/A filed on June 3, 2009, the Company
concluded that certain related party loans between the Company and Shandong Yuhe
Food Group Co., Ltd., “Yuhe Food”, constituted prohibited transactions under
Section 402 of the Sarbanes-Oxley Act of 2002. Although all such
related party loans had been repaid as of the end of 2009, because the Company
continued to make payments under certain arrangements to Yuhe Food, such
payments resulted in related party loans in January and February
2010. As of December 31, 2009, the Company had caused loans
previously made to related parties to be fully repaid. However,
because of the Company’s inability to eliminate the occurrence of other related
party loans in January and February 2010, which were subsequently repaid in full
in February 2010, the Company concluded that a material weakness continued to
exist with respect to its compliance with Section 402 of the Sarbanes-Oxley Act
of 2002. In addition, there were certain audit adjustments identified by Grant
Thornton related to the Company’s financial statements for the year ended
December 31, 2009 indicating a material weakness of the Company’s internal
control over financial reporting. The adjustments mainly related to transferring
amounts from work-in-progress to fixed assets, separating the current portion of
long term debt from long term debt, and verifying the nature of capital leases
and operating leases.
In order
to address the foregoing material weaknesses, the Company has taken or is taking
the following remedial measures:
●
|
The Company will no longer make
payments to any related parties that would be classified as a loan;
and
|
●
|
Hiring an independent forensic
accountant to review prior related party payments and to suggest ways to
eliminate their recurrence, and based on the result of this review,
discussing the hiring of a new controller who will report directly to the
board of directors with responsibility for reviewing payments to eliminate
any related party loan or related party transaction or any other
impermissible activity.
|
The
Company believes that the foregoing steps will remediate the material weaknesses
identified above, and the Company will continue to monitor the effectiveness of
these steps and make any changes that the Company’s board of directors deems
appropriate.
Separately,
the Company has determined to adopt the measures set forth below to generally
improve its corporate governance and oversight:
●
|
The Company is in the process of
arranging additional training for its accounting
staff;
|
●
|
The Company is engaging external
professional accounting or consultancy firms to assist it in the
preparation of the US GAAP
accounts;
|
●
|
Due to the scarcity of qualified
candidates with extensive experience in U.S. GAAP reporting and accounting
in the region, the Company has not yet been able to hire sufficient
internal audit resources. The Company intends to enhance its internal
audit function by increasing its search for qualified candidates with
assistance from recruiters and through referrals;
and
|
●
|
The Company has allocated
significant financial and human resources to strengthen its internal
control structure and has been actively working with external consultants
to assess its data collection, financial reporting and control procedures
and to strengthen its internal control over financial
reporting.
|
Other
than as described above, there were no changes in the Company’s internal control
over financial reporting identified in connection with the evaluation performed
that occurred during the period covered by this Report that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.
27
Inherent
Limitations on Effectiveness of Controls
The
Company’s management, including the chief executive officer and chief financial
officer, does not expect that the Company’s disclosure controls and procedures
or its internal control over financial reporting will prevent or detect all
error and all fraud. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control system’s objectives will be met. The design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their
costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people or by
management override of the controls. The design of any system of
controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Projections
of any evaluation of controls effectiveness to future periods are subject to
risks. Over time, controls may become inadequate because of changes
in conditions or deterioration in the degree of compliance with policies or
procedures.
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive
Officers, Directors and Key Employees
The
following table sets forth information about the Company’s executive officers,
directors and key employees as of December 31, 2009. Unless expressly
disclosed, all officers above are employed full time by us:-
Name
|
Age
|
Position
|
||
Executive
Officers
|
||||
Gao
Zhentao**
|
48
|
Chief
Executive Officer and Chairman of the Board of
Directors
|
||
Han
Chengxiang
|
45
|
Chief
Production Officer
|
||
Hu
Gang
|
34
|
Chief
Financial Officer
|
||
Directors
|
||||
Peter
Li
|
45
|
Director
*
|
||
Liu
Yaojun
|
33
|
Director
*
|
||
Greg
Huett
|
47
|
Director
*
|
||
Han
Chengxiang
|
48
|
Director
|
||
Key
Employees
|
||||
Tan
Yi
|
53
|
Marketing
Director of PRC Yuhe
|
||
Ding
Wengui
|
46
|
Chief
Technology Officer of PRC Yuhe
|
* Not
full time
**Other
than spending approximately 4 hours per week, or approximately 10% of his
professional time, as executive director of Yuhe Group, Mr. Gao Zhentao is
employed full time by the Company as the Chief Executive Officer and
Chairman.
Executive
Officers
Gao
Zhentao. Mr. Gao has been the Company’s Chief Executive Officer and
Chairman of its Board of Directors since March 12, 2008. Prior to joining us,
Mr. Gao served as the Chief Executive Officer and Chairman of the Board of
Directors of PRC Yuhe from 1996 to 2009. He was one of the co-founders of PRC
Yuhe and Taihong. Mr. Gao is a member of the Agricultural Work Committee of the
Weifang City People’s Congress and a member of the Standing Committee of the
Hanting District People’s Congress. Mr. Gao has also served as the vice-chairman
of the Shandong Province Farming Association since 2006, and as vice-chairman of
the Poultry Subcommittee of the National Farming Association of China since
2007. Mr. Gao is the controlling shareholder, legal representative and
executive director of Shandong Yuhe Food Group Co., Ltd., “Yuhe Group,” and
holds 80% of Yuhe Group’s shares.
Han
Chengxiang has been the Company’s Chief Production Officer since March
12, 2008. Prior to joining us, Mr. Han served as the Chief Production Officer of
PRC Yuhe from 1998 to 2009. Prior to joining PRC Yuhe in 1998, Mr. Han served as
the vice factory manager and then the factory manager of Weifang
Zhonglianghuawei Food Co., Ltd. from 1996 to 1998. Prior to that, Mr. Han served
as the chief production officer and then the vice factory manager of Weifang
Broiler Group Co., Ltd. from 1990 to 1996. Mr. Han Chengxiang was
appointed Director of the Company and member of the Nominating Committee of the
Company on June 13, 2008. Pursuant to an employment agreement entered into by
the Company with Mr. Han, dated June 13, 2008. Mr. Han is receiving an annual
salary of $17,142 and is entitled to PRC statutory holidays, and leave for
maternity, marriage and mourning with pay in accordance with relevant
government laws and regulations.
28
Hu
Gang has been the Company’s Chief Financial Officer since June 13, 2008.
. Prior to joining the Company, Mr. Hu was the Chief Financial Officer of
Sino-Gas International Holding Inc from December 2007 to March 2008. Prior to
that, between August 2004 and October 2007, Mr. Hu served as the Finance
Director of FedEx Office Greater China operations. Between August 2002 and July
2004, Mr. Hu served as the accounting supervisor and group leader of DuPont
China Holding Ltd. Mr. Hu graduated from Shanghai Finance and Economics
University, PRC, with a B.A. in International
Accounting.
Directors
On June
13, 2008, Mr. Peter
Li was appointed Independent Director of the Company, chair of the Audit
Committee and member of the Compensation and Nominating Committees of the
Company. Mr. Li is currently CFO of Holly System Limited, a Nasdaq listed
company. Prior to that, between 2004 and 2008, he served as the Chief Financial
Officer of Yucheng Technologies Limited, a Nasdaq-Listed Leading IT service
company in China.
On June
13, 2008, Mr. Liu
Yaojun was appointed Independent Director of the Company, chair of the
Compensation Committee and member of the Nominating and Audit Committees of the
Company. Mr. Liu is currently a partner at Global Law Office, a law firm based
in Beijing, the PRC. Prior to that, between 2003 and 2006, Mr. Liu served as an
attorney at Jingtian Gongcheng Law Firm, a law firm based in Beijing, the
PRC.
On June
13, 2008, Mr. Greg
Huett was appointed Independent Director of the Company, chair of the
Nominating Committee and member of the Audit and Compensation Committees of the
Company. Mr. Huett is currently the Chief Executive Officer of Great Creations
LLC, a consumer packaged goods company. Prior to that, from 1981 to 2007 Mr.
Huett worked at Tyson Foods, where he last served as the Group Vice President of
Tyson’s International division.
On June
13, 2008, Mr. Han
Chengxiang was appointed Director of the Company and member of the
Nominating Committee of the Company. Mr. Han is currently the Chief Production
Officer of the Company. Prior to joining the Company, Mr. Han served as the
Chief Production Officer of PRC Yuhe from 1998 to 2008.
Key
Employees
Tan
Yi has served as Marketing Director of PRC Yuhe since 1995. Prior to
joining PRC Yuhe in 1995, Mr. Tan served in various marketing roles with a gas
company located in Harbin Province from 1990 to 1994.
Ding
Wengui has been the chief technology officer of the Company’s subsidiary
PRC Yuhe since 2006. Prior to this he served as the general manager of PRC
Yuhe’s production division. Prior to joining PRC Yuhe in 2005, Mr. Ding worked
at Qingdao Zhengda Co., Ltd., a broiler chicken company located in Shandong
Province from 1993 to 2005, where he ultimately served as the vice general
manager of its production division. Prior to joining Qingdao Zhengda Co., Ltd.
in 1993, Mr. Ding worked at Heilongjiang Tieli Agricultural Co., Ltd., a company
located in Heilongjiang Province from 1983 to 1993. Mr. Ding holds a degree in
agriculture from the Heilongjiang Bayi Agricultural
University.
Involvement
in Certain Legal Proceedings
To the
Company’s knowledge, during the past five years, none of the Company’s directors
or executive officers was involved in any of the following: (1) any bankruptcy
petition filed by or against any business of which such person was a general
partner or executive officer either at the time of the bankruptcy or within two
years prior to that time; (2) any conviction in a criminal proceeding or being
subject to a pending criminal proceeding, excluding traffic violations and other
minor offenses; (3) being subject to any order, judgment, or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring, suspending or
otherwise limiting his/her involvement in any type of business, securities or
banking activities; and (4) being found by a court of competent jurisdiction in
a civil action, the Securities and Exchange Commission, or SEC, or the
Commodities Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed,
suspended or vacated.
Board
Composition and Committees
The
Company’s board of directors currently consists of five members: Gao Zhentao,
Han Chengxiang, Peter Li, Liu Yaojun and Greg Huett.
29
The
Company’s board of directors has appointed a compensation committee on June 13,
2008. The Company’s compensation committee comprises three members and is
responsible for the administration of all salary, bonus and incentive
compensation plans for the Company’s officers and key employees. The
compensation committee will also determine the discretionary annual bonus to be
paid to Mr. Gao. The factors that the compensation committee will consider in
determining Mr. Gao’s bonus will be revenue increase as well as the survival
rate, productivity and hatching rate of the broilers. The members of the
Company’s compensation committee are Liu Yaojun, Peter Li and Greg
Huett. No bonus was paid to any senior officer including Mr. Gao in
2009.
The
Company’s board of directors appointed an audit committee on June 13, 2008. The
Company’s audit committee members are Peter Li, Liu Yaojun, and Greg Huett. Mr.
Li qualifies as an “audit committee financial expert” as defined in Item 401(h)
of Regulation S-K, and is “independent” as the term is used in Item 7(d)(3)(iv)
of Schedule 14A under the Exchange Act.
The
Company’s board of directors appointed a nominating committee on June 13, 2008.
The Company’s nominating committee members are Greg Huett, Liu Yaojun, Peter Li
and Han Chengxiang.
Supervisory
Board and Shareholder’s Congress
As
required by PRC Company Law (2005), each of PRC Yuhe and Taihong, as PRC
companies, must establish a "Supervisory Board" and a "Shareholder Congress" as
its internal corporate organs.
(i)
Shareholder Congress.
Shareholder
Congress comprises all the shareholder(s) of a PRC company and is the organ with
the highest authority. Its authority is higher than that of both the Board of
Directors and the Supervisory Board.
As
stipulated by PRC Company Law (2005), the Shareholder Congress has, among
others, the following powers or functions:
1.
to elect and replace directors and supervisors of the company;
2.
to pass resolutions on matters such as the merger, division, dissolution,
liquidation or change of the corporate form of the company; and
3.
to amend the articles of association of the company.
The
Shareholder Congress of PRC Yuhe consists of Bright Stand, and the Shareholder
Congress of Taihong consists of Bright Stand and PRC Yuhe.
(ii)
Supervisory Board.
All the
members of the Supervisory Board serve for a term of three years. At the
Shareholder Congress, the shareholders of PRC Yuhe were obligated to
approve the appointment of one Supervisory Board member who was elected by
the workers of PRC Yuhe as required by current Chinese laws and regulations
and also appointed two other members. There are no other nominations or
arrangements for nomination of Supervisory Board member. The current
members of the Supervisory Board of PRC Yuhe are Zhang Jinhua, Zheng Chaoyang
and Zhang Lishun, and their business background and relationships with Yuhe are
as follows:
(a)
Zhang Jinhua
Mr. Zhang
graduated from Shandong Light Industrial University with a professional
degree in economics and business administration in July 1999. Mr. Zhang has
been the Chairman of the Supervisory Board of PRC Yuhe since November
2007 and secretary to the Company’s board of directors since March 2008.
Mr. Zhang is receiving a monthly salary of RMB 8,000, or approximately
$1,169, for his services as secretary to the Company's board of
directors. Mr. Zhang does not receive any salary for being a member of the
Supervisory Board.
Prior to
joining the Company, Mr. Zhang was a factory supervisor and branch factory
general manager of Shandong Lorain Foodstuff (Group) Co., Ltd. from March 2003
to June 2007 and was a Development Planning Department manager of Yuhe Group
from July 2007 to March 2008. Mr. Zhang was receiving a monthly salary of RMB
1,800, or approximately $263, for his services as a Development Planning
Department manager.
(b)
Zheng Chaoyang
Mr. Zheng
is currently an Administrative Department officer of Yuhe Group and has held
those positions since July 1997. Prior to joining Yuhe Group in July 1997, Mr.
Zheng was a sole proprietor engaging in the retail business from 1985 to 1997.
Mr. Zheng is receiving a monthly salary of RMB 1,700, or approximately $248, for
his services as an Administrative Department Officer. Mr. Zheng does not receive
any salary for being a member of the Supervisory Board.
30
(c)
Zhang Lishun
Mr. Zhang
is a university graduate and a senior political worker. Mr. Zhang is currently
an Administrative Department officer of Yuhe Group and has held these positions
since February 2004. Prior to joining Yuhe Group in February 2004, Mr. Zhang was
the chief officer at the security section of Shandong Hailong Holdings Limited
from July 1985 to February 2004. Mr. Zhang is receiving a monthly salary of
RMB 1,500, or approximately $219, for his services as an Administrative
Department Officer. Mr. Zhang does not receive any salary for being a member of
the Supervisory Board.
The
Supervisory Board has, among others, the following powers:
1.
to examine the company's financial affairs;
2.
to propose the convening of extraordinary shareholders’ meetings;
and
3.
to institute proceedings against the directors and senior management personnel
on behalf of the company.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires our executive officers and directors, and
persons who beneficially own more than ten percent of our common stock,
collectively Reporting Persons and individually a Reporting Person, to file
with the SEC initial reports of beneficial ownership and reports of changes in
beneficial ownership of our common stock on Forms 3 (Initial Statement of
Beneficial Ownership), 4 (Statement of Changes of Beneficial Ownership of
Securities) and 5 (Annual Statement of Beneficial Ownership of Securities). The
Reporting Persons are required by SEC regulations to furnish us with copies of
all Section 16(a) forms that they file.
To our
knowledge, the following required Section 16(a) forms during the fiscal years
ended December 31, 2008 and 2009, were not filed:
|
·
|
Mr.
Kunio Yamamoto failed to file a Form 3 upon his acquisition of beneficial
ownership of greater than ten percent of our common
stock;
|
|
·
|
Mr.
Gao Zhentao failed to file a Form 3 upon his appointment as our chairman
and chief executive officer;
|
|
·
|
Mr.
Hu Gang failed to file a Form 3 upon his appointment as our chief
financial officer;
|
|
·
|
Mr.
Han Chengxiang failed to file a Form 3 upon his appointment as our
director and chief production
officer;
|
|
·
|
Mr.
Jiang Yingjun failed to file a Form 3 upon his appointment as our chief
accounting officer; and
|
|
·
|
Each
of Mr. Peter Li, Mr. Liu Yaojun and Mr. Greg Huett failed to file a Form 3
upon their respective appointment to our
board.
|
Mr. Kunio
Yamamoto filed his Form 3 on July 28, 2010. Each of Mr. Gao Zhentao, Mr. Hu
Gang, Mr. Han Chengxiang and Mr. Jiang Yingjun filed his respective Form 3
on October 14, 2010. As of the date of this Form 10-K/A (Amendment No.1), each
of Mr. Peter Li, Mr. Liu Yaojun and Mr. Greg Huett has not yet filed his
respective Form 3.
Code
of Ethics
The Board
of Directors has adopted a Code of Ethics which is applicable to all officers,
directors and employees. The Code of Ethics was filed as Exhibit 14.1 to
the Report on Form 10-K for fiscal year ended December 31, 2008 filed on March
31, 2009. The Code of Ethics will also be posted on the corporate
governance page of the Company’s website at http: //www.yuhepoultry.com
31
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The
following documents are filed as part of this report:
*31.1
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
*31.2
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
*32.1
|
Certification
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
*32.2
|
Certification
of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
*
|
Filed
herewith
|
32
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the Company caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date:
October 15, 2010
Yuhe International, Inc.
|
||
By:
|
/s/
Gao Zhentao
|
|
Gao Zhentao
|
||
Chief Executive Officer
|
||
(On behalf of the Registrant and as
Principal Executive Officer)
|
||
By:
|
/s/
Hu Gang
|
|
Hu Gang
|
||
Chief Financial Officer
|
||
(On behalf of the Registrant and as
Principal Financial Officer)
|
||
By:
|
/s/
Jiang Yingjun
|
|
Jiang Yingjun
|
||
Chief Accounting Officer
|
||
(On behalf of the Registrant and as
Principal Accounting Officer)
|
33