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EX-32.1 - Yanglin Soybean, Inc.v217739_ex32-1.htm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
 
(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, 2010
 
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
Commission file number: 000-52127

YANGLIN SOYBEAN, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
 
20-4136884
(State or other jurisdiction
 
(I.R.S. Employer
of incorporation or organization)
 
Identification No.)

NO. 99 FANRONG STREET, JIXIAN COUNTY
SHUANG YA SHAN CITY
HEILONGJIANG PROVINCE
People’s Republic of China, 155900
(Address of Principal Executive Offices)
 
86-469-4693000
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None
 
Securities registered pursuant to Section 12(g) of the Act:  Common Stock, par value $0.001Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 þ No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
(Do not check if a Smaller Reporting Company)
Smaller Reporting Company þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):
Yes ¨ No þ

As of April 5, 2011, there are 20,465,119 shares of common stock, par value $0.001 per share, outstanding.

Documents Incorporated By Reference: None.
 
 
 

 
 
YANGLIN SOYBEAN, INC.
(A Nevada Corporation)

TABLE OF CONTENTS
 
    
 
  
 
Page
   
PART I
   
Item 1
 
Business
 
3
Item 1A
 
Risk Factors
 
17
Item 1B
 
Unresolved Staff Comments
  31
Item 2
 
Properties
 
31
Item 3
 
Legal Proceedings
 
34
Item 4
 
(Removed and Reserved)
  34
         
   
PART II
   
Item 5
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
34
Item 6
 
Selected Financial Data
 
35
Item 7
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
35
Item 7A
 
Quantitative and Qualitative Disclosures About Market Risk
  50
Item 8
 
Financial Statements and Supplementary Data
 
50
Item 9
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
50
Item 9A(T)
 
Controls and Procedures
 
51
Item 9B
 
Other Information
 
52
         
   
PART III
   
Item 10
 
Directors, Executive Officers and Corporate Governance
 
53
Item 11
 
Executive Compensation
 
59
Item 12
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
62
Item 13
 
Certain Relationships and Related Transactions, and Director Independence
 
66
Item 14
 
Principal Accounting Fees and Services
 
66
         
   
PART IV
   
Item 15
 
Exhibits and Financial Statement Schedules
 
66
 
 
2

 
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report includes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including, but not limited to, statements regarding our future financial position, business strategy and plans and objectives of management for future operations. When used in this Annual Report on Form 10-K, the words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions are intended to identify forward-looking statements.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from those reflected in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to the risks discussed under the heading “Risk Factors”. Except as required by law, we assume no obligation to update these forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on such forward-looking statements.

PART I

Item 1. Business

Organizational History and Company Overview

Yanglin Soybean, Inc. (the “Company”) was incorporated in the State of Nevada on May 26, 1921. Prior to October 3, 2007, the Company had only nominal operations and assets.

On October 3, 2007, the Company executed a reverse-merger with Faith Winner Investments Limited (“Faith Winner (BVI)”) by an exchange of shares whereby the Company issued 18,500,000 common shares at $0.001 par value in exchange for all Faith Winner (BVI) shares.

Faith Winner (BVI) formed Faith Winner (Jixian) Agriculture Development Company (“Faith Winner (Jixian)” or “WFOE”), which entered into a series of agreements with Heilongjiang Yanglin Soybean Group Co., Ltd. (“Yanglin”). As a result of entering the agreements, WFOE gained control of all of Yanglin’s assets, management and business as if Yanglin were a wholly-owned subsidiary of WFOE. However, one of the shareholders of the Company is Winner State BVI, which is 100% owned by Mr. Shulin Liu and his wife, Mrs. Huanqin Ding, has effective control over Faith Winner (BVI) and WFOE as our subsidiaries, because it beneficially owns approximately 91% of our common stock. These contractual arrangements included a loan agreement, a consigned management agreement, two consignment agreements of equity interests, an exclusive purchase option agreement, a registered trademark transfer contract and a trademark licensing agreement. The Consignment Agreement was entered into on September 1, 2007, and the other agreements were all signed on September 24, 2007. The exclusive purchase option agreement and the consigned management agreement were amended as of April 3, 2009.
 
 
3

 
 
Pursuant to those agreements, WFOE made a loan of $17 million intended to satisfy Yanglin’s working capital needs in the future (the “Loan”). In return, WFOE obtained the management control of Yanglin and an exclusive right to acquire all of the equity of Yanglin. The rights of existing shareholders of Yanglin are assigned by the consignment of equity interests to WFOE. The exclusive purchase agreement and the loan agreement restrict both Yanglin and its shareholders from significant decisions including but not limited to any amendments of articles of association or rules of the Company, any change in registered capital, any transfer, mortgage or disposal of Yanglin’s assets or income in a way that would affect WFOE’s security interest, entering any material contract exceeding US$731,294 in value and distributing any dividends to the shareholders. Pursuant to the consigned management agreement between WFOE and Yanglin, Yanglin agreed to entrust the business operations of Yanglin and its management to WFOE until WFOE formally acquires all equity or substantially all the assets of Yanglin. Under the consigned management agreement as amended on April 3, 2009, WFOE will provide financial, technical and human resources management services to Yanglin which will enable WFOE to control Yanglin's operations, assets and cash flows. In turn, it will be entitled to an annual management fee equal to 5% of Yanglin’s annual net sales.
 
Under the Registered Trademark Transfer Agreement, Yanglin agreed to transfer to WFOE all of its rights in connection with the two trademarks, including without limitation the title of the trademarks and right to license (the “Transferred Trademark”) for a purchase price of $1,000,000, which is subject to a purchase price adjustment based on the minimum appraised value on intellectual property (“IP”) rights allowed under the laws and regulations of the People’s Republic of China (“PRC”) for such transfer. Under the Trademark Licensing Agreement, WFOE agreed to grant an exclusive license to Yanglin, for a term of 10 years, to use the Transferred Trademark for an annual licensing fee equal to 1% of Yanglin’s annual net sales. The licensing fee and the management fee aforesaid – total of 6% of annual net sales of Yanglin- entitled by WFOE are designed to approximate Yanglin’s annual net profit. If the licensing and management fees entitled by WFOE exceed the net income after tax of Yanglin, Yanglin should not be obligated to pay WFOE any shortfall. In the event that the net income after tax is greater than the licensing and management fees entitled by WFOE, Yanglin should maintain any excess on its books and should not distribute any of such excess as a dividend in any manner to its shareholders until WFOE exercises its exclusive purchase option pursuant to the Exclusive Purchase Option Agreement dated September 24, 2007 between Yanglin and WFOE and as amended on April 3, 2009.
 
According to the exclusive purchase option agreement, WFOE has the exclusive purchase option to purchase all or part of Yanglin’s shareholders’ equity interest in Yanglin when and as permitted under PRC laws and regulations, and no other party has the right to purchase any equity from the shareholders of Yanglin. The agreement provides that, unless otherwise required under PRC laws and regulations, the consideration for the equity transfer or the asset transfer under the agreement will be $17 million or such greater amount as required by the then applicable PRC law and regulations (the “Option Price”). Under the loan agreement and the exclusive purchase option agreement, the money received as the Option Price by the shareholders of Yanglin upon execution of the option shall be contributed to Yanglin and used to satisfy the repayment of the Loan, that is, any amount of money received by Yanglin’s shareholders shall be paid back to WFOE as the repayment of Loan on behalf of Yanglin. Therefore, the actual consideration of acquisition of the direct investment in Yanglin is exactly the amount of the Loan. Under such contractual arrangements, all assets and equity including any residual profits of Yanglin are totally controlled by WFOE and will be formally captured upon exercise of the exclusive purchase option.

The loan of $17 million to Yanglin is considered to be an investment in Yanglin by the Company through a series of contractual arrangements by way of the Loan. As a result of entering into the above mentioned agreements, WFOE is deemed to control Yanglin as a Variable Interest Entity as required by Accounting Standards Codification (“ASC”) 810 (revised December 2003) Consolidation of Variable Interest Entities. The reverse-merger also included an equity financing of $21,500,000 by the issuance of 9,999,999 Series A Convertible Preferred Stock at $2.15 per share to 10 accredited investors.
 
 
4

 
 
The Company, through its subsidiaries and Yanglin, (hereinafter, collectively referred to as the “Group”), is now in the business of manufacturing, distribution, and selling of non-genetically modified soybean products, including soybean oil, soybean salad oil, soybean meal, Low-temperature soy meal, squeezed oil, and concentrated soy protein,  throughout Heilongjiang Province and other parts of the PRC.

The contractual agreements were utilized instead of a direct acquisition of Yanglin’s assets because current PRC law, which took effect on September 8, 2006, does not specifically establish the approval procedures and detailed implementation regulations for a non-PRC entity’s equity to be used as consideration to acquire a PRC entity's equity or assets. This makes it highly uncertain, if not impossible, for a non-PRC entity to use its equity to acquire a PRC entity. If acquisition of a PRC entity using foreign equity were possible, we could have acquired 100% of the common stock of Yanglin by paying a price of $17 million with any excess treated as interest pursuant to amendment to exclusive purchase option agreement dated April 3, 2009. While PRC law does allow for the purchase of equity interests in (or assets of) a PRC entity by a non-PRC entity for cash, the purchase price must be based on the appraised value of such equity (or assets). Because we presently do not have sufficient cash to pay the estimated full value for Yanglin’s assets, we, through WFOE, purchased the maximum amount of assets possible with the net proceeds of the private placement on October 7, 2007 and leased from Yanglin the remainder of the assets used in Yanglin’s business.

Our Industry

We are a leading non-genetically modified (non-GM) soybean processor in the PRC. We currently manufacture soybean oil in bulk and soybean meal, which are sold throughout PRC to our customers directly or through distributors. Most of our customers (approximately 80%) are located in Northern PRC.

The manufacturing process includes sifting, crushing, heating and pressing soybeans, extracting and separating oil from crushed soybeans, cleansing, hydrating and packaging of oil as well as drying and packaging soybean meal. Our main products include Grade IV soybean oil, salad oil, squeezed oil, soybean meal, and concentrated soy protein. We broadened our product line to include value-added products such as squeezed oil, low temperature soybean meal and concentrated soy protein, and we plan to produce powdered soy oil, textured protein and defatted soybean powder.  Production of squeezed oil has already begun. We are producing concentrated soy protein in small quantities of commercial grade product to customers in order to solicit feedback, so we can adjust the specifications of the product to satisfy the specific needs of the customers. Powdered soybean oil is still in trial production phase and we are now adjusting the formula and techniques according to customer requirements and feedback. Defatted soy powder and textured protein may be launched at a later date, depending on trends in the market and the specific product economics.

The Soybean Processing Industry

Soybean processing is a traditional industry. Typically, soybeans are ground and refined into soybean oil and protein meal, which in turn are processed into refined oils, animal feed, proteins and more value-added products such as foods, pharmaceuticals and cosmetics. 

Soybean Oil and Soybean Salad Oil
  
Soybean oil is obtained by the extraction of oil from soybean seeds. Soybean oil contains various vitamins, minerals and unsaturated fatty acids which are essential to the well-being of the human body. It is an important ingredient in products such as salad dressings, margarine, paint and medicines. The price, adaptability and performance of soybean oil make it appropriate for a broad range of food, chemical and medical manufacturing applications. Soybean oil refers to Grade IV oil, as compared to the more refined salad oil. Both oils are for human consumption.
 
 
5

 
 
Soybean Meal
    
Soybean meal is manufactured by grinding soybean flakes which remain after removal of most of the oil from soybeans by a solvent or mechanical extraction process. Soybean meal is an important raw material used in the animal feed and farming industry due to its high protein content and edible characteristics. Given the PRC’s closer proximity to customers in Asia, there is a growing demand for PRC produced soybean meal from countries such as Korea and Japan. This in turn has led to an increase in demand for our soybean meal products.

Concentrated Soy protein
 
Soy protein, protein extracted from the soybean, has been used since 1959 in foods and for its functional properties. Concentrated soy protein, as one of the three kinds of proteins, contains 70% soy protein. It retains most of the fiber of the original soybean and is widely used as functional or nutritional ingredient in a wide variety of food products, mainly in baked foods, breakfast cereals, and in some meat products. Because soy protein concentrates are available in different forms and very digestible, they are well-suited for children, pregnant and lactating women, and the elderly. They are also used in pet foods, milk replacements for babies (human and livestock), and even used for some non-food applications. Recently, soy protein popularity has increased due to its use in health food products, and many countries allow health claims for foods that are rich in soy protein.
 
Growth in the Soybean Industry
  
Soybean is a major source of vegetable edible oil and protein. There has been continuous growth in the world’s production and consumption of soybean. As soybean oil consumption in the PRC has been rapidly increasing, the PRC has imported soybean oil from other countries, such as Argentina, Brazil and the USA.
 
 
6

 
 
Major Oilseeds: World Supply and Distribution (Commodity View)
Million Metric Tons
 
 
    2006/07       2007/08       2008/09       2009/10    
Feb
2010/11
   
Mar
2010/11
 
Production
                                           
Oilseed, Copra
    5.27       5.72       5.88       5.88       5.96       5.96  
Oilseed, Cottonseed
    46.03       45.89       41.08       39.22       43.55       43.33  
Oilseed, Palm Kernel
    10.08       11.03       11.74       12.22       12.73       12.73  
Oilseed, Peanut
    31.03       32.59       34.47       32.98       34.71       34.71  
Oilseed, Rapeseed
    45.12       48.56       57.91       60.62       58.39       58.39  
Oilseed, Soybean
    237.13       221.01       211.96       259.99       256.10       258.40  
Oilseed, Sunflower seed
    29.74       27.20       33.27       30.39       30.35       30.65  
                                                 
Total
    404.40       391.99       396.32       441.30       441.78       441.17  
                                                 
Imports
                                               
Oilseed, Copra
    0.09       0.11       0.10       0.10       0.10       0.10  
Oilseed, Cottonseed
    0.84       0.75       0.55       0.63       0.67       0.68  
Oilseed, Palm Kernel
    0.13       0.14       0.07       0.04       0.04       0.04  
Oilseed, Peanut
    1.94       2.03       1.86       1.85       1.84       1.84  
Oilseed, Rapeseed
    7.01       7.56       12.13       10.57       10.09       10.15  
Oilseed, Soybean
    69.07       78.13       77.18       87.44       95.87       95.79  
Oilseed, Sunflower seed
    1.76       1.25       1.81       1.49       1.33       1.35  
                                                 
Total
    80.83       89.97       93.69       102.11       109.93       109.94  
                                                 
Exports
                                               
Oilseed, Copra
    0.13       0.13       0.12       0.13       0.15       0.12  
Oilseed, Cottonseed
    0.84       0.84       0.59       0.60       0.72       0.65  
Oilseed, Palm Kernel
    0.11       0.04       0.02       0.02       0.02       0.02  
Oilseed, Peanut
    2.39       2.45       2.34       2.16       2.27       2.27  
Oilseed, Rapeseed
    6.62       8.15       12.02       10.91       9.67       10.28  
Oilseed, Soybean
    70.86       78.77       76.85       92.78       98.65       98.26  
Oilseed, Sunflower seed
    1.90       1.48       2.14       1.57       1.52       1.53  
                                                 
Total
    82.84       91.86       94.09       108.17       113.60       113.12  
                                                 
Crush
                                               
Oilseed, Copra
    5.16       5.66       5.65       5.81       5.90       5.91  
Oilseed, Cottonseed
    33.73       34.35       31.79       30.69       32.64       32.62  
Oilseed, Palm Kernel
    9.94       10.97       11.52       12.29       12.63       12.63  
Oilseed, Peanut
    14.13       15.10       15.42       14.39       15.32       15.32  
Oilseed, Rapeseed
    43.65       46.71       52.12       56.77       57.59       57.55  
Oilseed, Soybean
    196.08       202.75       192.91       209.51       225.16       226.48  
Oilseed, Sunflower seed
    26.05       24.27       29.01       28.17       27.18       27.35  
                                                 
Total
    328.72       328.31       338.85       357.64       376.42       377.86  
                                                 
Ending Stocks
                                               
Oilseed, Copra
    0.10       0.11       0.29       0.31       0.29       0.31  
Oilseed, Cottonseed
    1.33       1.22       0.80       0.69       1.43       1.35  
Oilseed, Palm Kernel
    0.17       0.19       0.36       0.19       0.21       0.20  
Oilseed, Peanut
    1.21       1.08       1.49       1.24       1.15       1.15  
Oilseed, Rapeseed
    4.66       3.51       6.67       7.54       5.36       5.50  
Oilseed, Soybean
    63.13       52.91       44.07       60.17       58.21       58.33  
Oilseed, Sunflower seed
    2.81       2.63       2.83       1.53       1.25       1.25  
                                                 
Total
    73.42       61.66       56.51       71.66       67.88       68.08  

Totals may not add due to rounding
 Source: USDA Foreign Agricultural Service
 
 
7

 
 
It can be seen from the above chart that the volumes of soybean import, and export  has seen a trend of sustained growth from 2006/2007 to 2008/2009. In 2009/2010, global soybean production was projected at 259.99 million tons, up 48.03million tons from 2008/09, and this growth has continued since  for February and March 2010/2011. The global soybean industry has been growing steadily. We believe that the soybean industry in the PRC has significant potential for further growth and Yanglin is well positioned to take advantage of such growth.

Non-Genetically Modified Soybean Products

Genetically modified soybean plants are widespread in the world’s leading soybean producing countries (such as Brazil, Argentina and the United States) and genetically modified soybeans comprise a very large proportion of the world’s soybean production. Conversely, most of the soybean food products exported from the PRC are primarily made from non-genetically modified soybeans that are cultivated and grown in the PRC. China is the world's largest non-genetically modified soybean-producing country.

Non-genetically modified soybean products are perceived to be “green” and hence more desirable to certain classes of consumers than genetically modified soybean products, especially with respect to soy protein and other value-added soybean products. We believe that as a result of the increasing affluence and sophistication of the consumers in the PRC, European Union and Japan, they have also become more aware of potential health issues arising from the consumption of genetically modified soybean products and are willing to pay a premium for non-genetically modified soybean products. As a producer of non-genetically modified soybean products, we believe we are well positioned to take advantage of such growth.

Government Support for the Soybean Industry

There has been strong government support for the development of our industry. In recent years, the PRC government has sought to differentiate soybean exports from the PRC from other international exporters of soybeans such as the United States and Brazil. Specifically, the PRC government has taken measures to promote industries and enterprises, including our business, that produce non-genetically modified soybean food products. In 2003, the PRC Ministry of Agriculture announced a plan to develop the PRC’s northeastern region (including Heilongjiang Province where Yanglin is located) into the world’s largest non-genetically modified soybean production center for export.

 In addition, the Heilongjiang provincial government has introduced a number of measures to develop its organic farming industry such as improving its local agriculture infrastructure and promoting the development of large industrial groups that produce green and organic food products. Over the past five years, Heilongjiang's green food industry has grown significantly and has become an important growth sector in Heilongjiang’s burgeoning economy. Furthermore, we believe that the proportion of “deep-processed” soybean food products produced by the PRC will increase significantly, particularly with the completion of the PRC’s largest non-genetically modified soybean deep-processing base by 2011. The deep-processed products are the sub-group of value-added products which are mostly soybean products based on soy protein such as concentrated soy protein, powdered soy oil, textured soy protein and defatted soy powder.
 
We believe that these various government initiatives at the national and local levels will have a positive impact on development of our business operations.
 
 
8

 
 
Competitive Advantages

We have several competitive advantages:
 
 
·
Our products have favorable brand-name recognition due to their superior quality and our proven track record in the industry;

 
·
We are strategically located, allowing for access to cheaper and more stable soybean supplies. Jixian County, where the company is headquartered, is in the heart of the Three Rivers Plains, a major soybean production area, and Yanglin has established long-term relationships with the local farmers and suppliers;

 
·
We have an extensive sales network covering most areas of the PRC and have negotiated better arrangements with distributors to save costs and promote higher efficiency. Most customers are corporations which have been with the company since it was established;

 
·
We believe that our business is better managed and our operations are more efficient compared to many larger state-owned soybean processors;

 
·
We believe that we do not face direct competition from international conglomerates such as Archer Daniels Midlands and Cargill as they produce predominantly genetically modified soybean products in coastal areas, whereas Yanglin produces non-genetically modified soybean products which appeal to more health-conscious customers and our sales are mostly in inland areas of Northern PRC; and

 
·
Both our management and workers are skilled and experienced in the soybean industry. Many of them have worked in the industry for more than 20 years.

Our Strategy

Increase Our Sources of Supply
 
Though negatively affected by the recent global economic crisis, due to the still increasing overall demand for soybean products, we expect our business to grow steadily in the next few years. We believe that, in the long term, our need for soybean supply may increase. In order to enlarge the supply base of our raw materials, we intend to expand our access to soybean cultivation areas through the development of further supply arrangements with other private and state-owned farms, farmers and vendors within Heilongjiang Province. Currently, we have access to soybeans produced in approximately 164,745 acres of farmland and we plan to increase our access in the next few years in other locations by adding more soybean farmers and through other arrangements.

Expand New Markets for Deep-processed Products

We intend to develop the markets for our current products and grabbing more market share. At the same time, we would especially focus on exploring new markets for deep-processed products, as they provide higher profit margin.

Expansion of our Sales Network
 
We currently sell a higher volume of products in Northern PRC than in other parts of PRC and currently do not have many sales offices in Southern PRC. We plan to expand our sales and marketing network by establishing more sales offices within the PRC. In addition, we plan to expand sales of our products, especially value-added products, through distributors internationally.
 
 
9

 
 
Expansion of our Product Line

We believe that value-added soybean products will yield higher profit margins. We have expanded our product lines to acquire the capability to produce the following value-added soybean products:

(i) Powdered Soybean Oil

Powdered soybean oil is manufactured by processing soybean oil and soybean salad oil together with corn syrup and other raw materials. Powdered soybean oil not only retains the nutritional value of liquid soybean oil, but also has a long shelf life and can be easily packaged and transported. In addition, powdered soybean oil can be used as a cheap substitute for milk or powdered milk because it can be easily dissolved or mixed with other ingredients in water to produce a mixture that has a strong fragrance similar to that of milk, as well as containing beneficial proteins and minerals.

(ii) Textured Protein

Textured protein products are manufactured from soy protein. Textured protein products are hydrated in the production process and accordingly have a symmetrical, consistent and smooth texture and specific structure. Textured protein can be added to food products to impart a taste that is similar to that of meat. Therefore, textured protein can be used as a food substitute for beef and pork. In addition, textured protein contains anti-oxygenation ingredients that could prolong the shelf-life of certain food products.

(iii) Defatted Soybean Powder

Defatted soybean powder is manufactured from specially-extracted soy meal and has  high protein content (higher than 50 percent). Defatted soybean powder can be added to fish, noodles, meat, dairy products and candy to improve the quality and taste of food. Further, defatted soybean powder can prolong shelf life and reduce cost.

(iv) Squeezed Oil

Squeezed oil is made by extracting crude soybean oil from selected soybeans through traditional methods of refining and hydration in order to remove the acids in the oil. Squeezed oil is readily absorbed by the human body and contains no cholesterol. It possesses vitamins such as A, D, and E, as well as other nutrients which have been shown to help growth, improve immunity and prevent hypertension and arteriosclerosis.

(v) Concentrated Soy Protein

Concentrated soy protein has a high protein content of up to 98% and contains no cholesterol. Concentrated soy protein can be used as an ingredient in food products to improve their texture and nutritional value. Concentrated soy protein is used as an ingredient in a wide range of food products, including nutritional supplements, seafood, processed meats, frozen food, nutritional beverages, cream soups, sauces and snacks.

Implement Strict Cost
  
We plan to implement strict cost saving in operations, setting limits on fees of both internal personnel and external parties, and lowering financing costs, while trying to borrow more both from banks and in capital markets.
 
 
10

 
 
Current Products

Our current products include the following:

Product
 
Use 
 
Major Customers
 
2010 Sales Volume (tons)
 
Soybean Oil
 
Cooking
 
Hou Xinglin, Yingkou Bohai Oil Industries Co. Ltd.
    47,011  
Salad Oil
 
Cooking
 
Yingkou Bohai Oil Industries Co. Ltd., Gu Changchun
    8,533  
Soybean Meal
 
Animal Feed
 
Jilin Zhuoyue Animal Feed Factory
    250,406  
Squeezed Oil
 
Cooking
 
Tongliao Hongzhan Animal Feed Factory
    1,097  
Concentrated Soy Protein
 
Food additive
 
Cui Yan
    1,889  
Low-temperature soy meal
 
Raw material for processing into food additive and others
 
Tian Zhuang
    15,332  
 
We sell our products under the “Yanglin” brand name to various geographic regions of the PRC through our various distribution channels (see “Sales and Marketing” below) and directly to our customers primarily within the PRC market. In the fiscal year ending 2010, we processed approximately 341,403 tons of soybeans and generated total revenues of approximately $165.8 million with a net operating loss of $8.5 million. A breakdown of our 2010 sales volume demonstrates that soybean meal accounted for about 77.22% of sales, soybean oil 14.5%, salad oil 2.63%, concentrated soy protein 0.58%, squeezed oil 0.34%, and low-temperature soy meal 4.73%.

Our Major Suppliers of Soybeans

Maintaining a stable supply of raw materials (soybeans) is one of the key components for our success. We purchase all of our soybean supplies from various farmers in the Heilongjiang province. We have established and maintained good relationships with these farmers. 

The following is a list of our top ten major suppliers of soybeans for the year ended December 31, 2010:

Supplier
 
Amount
Purchased
(in US$)
   
% of
Total
Purchases
(%)
 
Chi Cuie
    4,002,759       2.43 %
Duan Xufeng
    3,946,719       2.40 %
Lin Baosen
    3,571,749       2.17 %
Ma Zhanjun
    3,509,704       2.13 %
Bai Wenlong
    3,318,009       2.02 %
Jiang Minhui
    3,316,236       2.01 %
The North Grain Depot in Baoqin County
    3,136,532       1.91 %
Yan Wei
    3,013,554       1.83 %
Zhang Zhongbao
    2,996,711       1.82 %
Bai Liping
    2,901,391       1.76 %
 
Note: the amounts are converted from RMB value using the yearly average rate of 2010, 1USD = 6.77875RMB.
 
 
11

 
 
Our top ten suppliers together made up an aggregate of 20.51% of our total supply of soybeans, but our biggest supplier only supplied about 2.43%. We believe this diversification of supply is beneficial to us as it increases our purchasing power and prevents us from being over-reliant on any single supplier.

We have implemented unique arrangements with soybean suppliers. Through our affiliate company, Heilongjiang Yanglin Group Seed Co. Ltd., (“Yanglin Seed Co.”) which is wholly owned and managed by Mr. Shulin Liu, our chief executive officer.
 
Yanglin Seeds Co. supplies the farmers with “Yanglin” brand soybean seeds which provide higher oil yield. Pursuant to annual intentional supply agreements with the Company, the farmers sell the harvested soybeans to Yanglin. Yanglin Seeds Co. extends favorable commercial terms to these farmers, such as competitive price, for them to purchase “Yanglin” soybean seeds. Meanwhile, Yanglin offers cash-upon-delivery payment terms to the farmers for purchases of the harvested soybeans grown from “Yanglin” soybean seeds. These arrangements ensure that we maintain good relations with our suppliers, enjoy a stable supply of soybeans that meet our high quality standards.
     
To further ensure a consistent supply of soybeans and to increase its volume, we intend to enter into similar supply agreements with other soybean farmers in the PRC.

Major Customers

Our customers are primarily distributors of soybean oil and soybean meal, with some being soybean food processors and animal feed manufacturers. The following is a list of our top ten major customers for fiscal year 2010. All of our major customers are located in the PRC.

Customers
 
Type of Product
 
Fiscal 2010 Sales
(USD)
   
% of Total Sales
(%)
 
Huang Zujian
 
Soybean Oil
    4,248,741       2.56 %
Tian Zhuang
 
Soybean Meal
    4,073,102       2.46 %
Chi Feng
 
Soybean Meal
    3,861, 654       2.33 %
Gu Changchun
 
Soybean Meal
    3,513,608       2.12 %
Lv Changfu
 
Soybean Meal & Soybean Oil
    3,492,909       2.11 %
Cao Zhengang
 
Soybean Meal & Soybean Oil
    3,363,670       2.03 %
Cui Yan
 
Soybean Meal
    3,321,917       2.00 %
Chu Jiaqing
 
Soybean Meal & Soybean Oil & Concentrated Soy Protein
    3,298,357       1.99 %
Hou Xinglin
 
Soybean Oil & Salad Oil
    3,289,144       1.98 %
Zhang Guochen
 
Soybean Meal & Soybean Oil
    2,863,112       1.73 %

Note: the amounts are converted from RMB value using the yearly average rate of 2010, 1USD = 6.77875 RMB
 
 
12

 
 
Our sales are widely diversified among our customers. Our largest customer accounts for only 2.56% of our total sales in 2010 while our top ten customers accounted for about 21.30% of our net sales in 2010. As such, we are not dependent on any single customer and have accordingly maintained our bargaining power in relation to our customers. Holding such a diversified customer base, we have mitigated the commercial risk and associated impact of the loss of sales from any single customer. As we begin to expand our product offering to include value-added soybean products, our customer base will change to include more industrial users and some retail consumers.

Sales of Products by Type and Locations

The following table shows the breakdown of sales volume of main products by customer type for the year 2010.
    
Salad Oil
   
Grade IV
Soybean Oil
   
Soybean Meal
   
Low Temperature
Soybean Meal
   
Squeezed Oil
   
Concentrated
Soy Protein
 
Type 
 
Volume
(Tons)
   
%
   
Volume
(Tons)
   
%
   
Volume
(Tons)
   
%
   
Volume
(Tons)
   
%
   
Volume
(Tons)
   
%
   
Volume
(Tons)
   
%
 
Distributor 
    8,362       98       45,601       97       240,390       96       14,872       97       1,097       100       1,889       100  
Animal Feed Manufacturer 
    171       2       1,410       3       10,016       4       460       3       -       -       -       -  
Total 
    8,533       100       47,011       100       250,406       100       15,332       100       1,097       100       1,889       100  
 
Our sales are primarily made to customers within the PRC, although some of our products may be exported by distributors to countries such as Japan, Korea, and Russia. The geographical distribution of the sales volume and revenue of our main products in the PRC for the year 2010 is shown below.
 
    
Salad Oil
   
Grade IV 
Soybean Oil
   
Soybean Meal
   
Low Temperature
Soybean Meal
   
Squeezed Oil
   
Concentrated Soy
Protein
 
Province
 
Volume 
(Tons)
   
Revenue
(USD)
   
Volume
(Tons)
   
Revenue
(USD)
   
Volume
(Tons)
   
Revenue
(USD)
   
Volume
(Tons)
   
Revenue
(USD)
   
Volume
(Tons)
   
Revenue
(USD)
   
Volume
(Tons)
   
Revenue
(USD)
 
Heilongjiang
    5,120       6,848,490       28,206       28,229,778       37,560       14,593,768       1,535       902,354       549       656,366              
Jilin
    2,560       805,705       14,103       14,114,889       25,040       9,729,178                       165       196,910              
Liaoning
    853       402,852       4,701       4,704,963       75,126       29,187,535       766       451,177       384       459,456              
Inner Mongolia
                                    20,032       7,783,343                                              
Beijing
                                    37,560       14,593,768                                              
Tianjin
                                                                                           
Shandong
                                    5,008       1,945,836       10,732       6,316,475                       1,512       1,798,504  
Shanxi
                                                                                               
Henan
                                    7,512       2,918,754       1,533       902,354                       377       449,626  
Sha’anxi
                                    10,016       3,891,671                                                  
Gansu
                                    15,024       5,837,507                                                  
Guangxi
                                    5,008       1,945,836                                                  
Sichuan
                                    12,520       4,864,589                                                  
Hebei
                                                    766       451,177                                  
 
Note: the amounts are converted from RMB value using the yearly average rate of 2010, 1USD = 6.77875 RMB.

 
 
13

 
 
Our Competitors

Our competitors are the non-genetically modified soybean processors operating in the PRC. Our main competitor is Heilongjiang 93 Oil and Fat Co., Ltd., an integrated state-owned enterprise which is located in the provinces of Heilongjiang, Dalian and Tianjin. The rest of our competitors are smaller state-owned enterprises.
 
Position
Company
 
Estimated Annual 
Non-GM
Production Capacity
(in Tons)
   
Estimated
Market Share
 
1
Heilongjiang Jiushan 93 Group (SOE)
    600,000       6.7 %
2
Yanglin Soybean Group, Ltd.
    520,000       5.0 %
3
Shandong Gaotang Lanshan Group (SOE)
    200,000       2.2 %
4
Henan Xuchang Vegetable Oil Company (SOE)
    100,000       1.1 %
5
Qitaihe City Nature Oil Company
    100,000       1.1 %
6
Shandong Guanxian Vegetable Oil Company
    100,000       1.1 %
7
Jiamusi Zhenda Company
    90,000       1.0 %

Source: Information from respective companies' websites and Yanglin estimates

Generally, we do not compete with companies that are engaged primarily in the manufacturing of genetically modified soybean products, especially international agriculture conglomerates. Currently, most major producers of genetically modified soybean products are state-owned enterprises and joint ventures of global agriculture companies. Their operations are mostly located in the coastal cities in Southern PRC, which enables them to conveniently import genetically modified soybean from the U.S., Brazil, Argentina and other countries in bulk volume at reasonable prices. The market for their products is also mainly in the southern parts of PRC. Meanwhile our supply sources, production facilities and customers are mostly in Northern PRC, where there is an abundant supply of non-genetically modified soybean. Generally speaking, there is a geographical division between the market for genetically modified soybean products and that for non-genetically modified soybean products. As a result, we generally do not have direct competition with our genetically modified counterparts.
 
Sales and Marketing

Apart from our high product quality, our marketing efforts have also contributed to our success in the PRC markets. Currently, our main method of selling our products is direct marketing, supplemented with indirect marketing. Given that we are located in the Heilongjiang province, we are in close proximity to our suppliers and customers and thus are able to communicate with them directly (as opposed to going through the Dalian Commodities Exchange).
 
 
14

 
 
We have sales offices in cooperation with distributors in many cities in the PRC with approximately 40 independent general distributors spread over approximately 24 provinces. These provinces include locations in the northeastern, northwestern and southern regions of the PRC. Furthermore, we have a dedicated in-house sales team with 10 salespersons. Their duties include monitoring the soybean industry, collecting market and price information, developing and managing distributors, providing recommendations for our marketing and sales strategy, pricing policies, and filling sales orders.
 
In addition to our direct marketing efforts in the PRC, and as part of our international expansion plans, we plan to appoint sales agents in North America, Europe, Russia, Japan, Korea and other countries in Southeast Asia in the future.

Advertising
 
We advertise our products through various forms of media, including billboards alongside highways. We now have our own business website at the domain name www.yanglin.com.cn.

In addition, our marketing team develops and maintains a unified and distinctive image throughout all of our corporate publicity materials, including our corporate billboard advertisements, media publicity and corporate branding.

Publicity

We hold an annual conference with distributors and potential customers to promote our products. We regularly attend exhibitions in different regions to market our products. We plan to maintain and strengthen our existing customer relations through symposiums, guided tours of the company and direct correspondences that provide further information of our product offering. We will also strengthen communications with the relevant government departments in order to keep abreast of new policies and guidelines. This will enable us to adapt quickly to any changes, better seize business opportunities and develop new markets.

Delivery of Products
 
Approximately 70% of our products are transported to our customers by railways due to our easy access to the PRC railroad network (see “Our Competitive Advantages”). The costs of transportation are borne by our customers and are pre-paid in advance of delivery of the products. The remainder of our products are collected by our customers at our facilities.

 Pricing and Terms
 
Prices of our products are determined based on the daily spot market price, which is determined by the average of ex-works prices of local producers and the quotation on commodities exchanges. Usually our customers are required to pay full retail price in cash in advance of delivery of their ordered products. Credit terms will only be granted to long-term customers, usually large distributors. Long-term customers constitute almost 90% of our customers in total, and we offer certain favorable treatments, if permitted, including priority in fulfilling orders, guarantee of railway delivery capacity. Since we are paid with cash in advance most of the time, there are almost no accounts receivables.
 
 
15

 
 
The current prices for our products, as of December 31, 2010 are (including value-added tax “VAT”):
 
Products
 
Price
(USD/ton)
 
Soybean oil (Grade IV)
  $ 1,160  
Salad oil
  $ 1,217  
Soybean meal
  $ 404  
Low temperature soybean meal
  $ 622  
Squeezed soybean oil
  $ 1,295  
Concentrated soybean protein
  $ 1,251  

Note: the amounts are converted from RMB value using the year end rate of 2010, 1USD = 6.6118RMB
 
The price of soybean meal was $404 per ton at the end of 2010, a decrease of $70 per ton from $474 for the year ended December 31 2009. For the past few years, the price of soybean meal has been in the higher range, up to $680 per ton. The prices of our products are determined by taking into account the costs of labor as well as the seasonality of demand in the soybean market. Traditionally, the prices of our raw materials are  lowest during the soybean harvest period between October and December, as the supply is most abundant then. Our prices then usually peak from January to February due to the large demand during the Chinese New Year and Spring Festival holidays. 
 
Intellectual Property

Yanglin has registered the following trademarks in the PRC, which are currently used for all of our products:
 
Trademark
 
Country of
Registration
 
Class
   
Registration
Number
 
Date of
Registration
 
Validity Period
“Yanglin”logo
 
PRC
    29       1587278  
June 14, 2001
 
From June 14, 2001 to June 13, 2011
“Yanglin”logo
 
PRC
    31       1586742  
June 14, 2001
 
From June 14, 2001 to June 13, 2011
 
Class 29 is for meat, fish, poultry and game; meat extracts, preserved, dried and cooked fruits and vegetables; jellies, jams, fruit sauces; eggs, milk and milk products; edible oils and fats. Class 31 is for agricultural, horticultural and forestry products and grains not included in other classes; live animals, fresh fruits and vegetables; seeds, natural plants and flowers; foodstuffs for animals, malt.

Employees

As of December 31, 2010, we currently had 472 employees, most of whom are involved in production and operations.

The functional breakdown of our full-time employees as of December 31, 2009 and 2010 was:

  
 
FY2009
   
FY2010
 
Production and operations
    291       330  
Sales
    10       10  
Management
    171       132  
Total number of employees
    472       472  
 
Full time employees in PRC entities participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRC labor regulations require the Group to accrue for these benefits based on certain percentages of the employees' salaries. Management believes that full time employees who have passed the probation period are entitled to such benefits. We have paid all social security fees as required by PRC laws and regulations.
 
 
16

 
 
We have a system of periodic performance reviews that are conducted annually.

 Insurance

We have the following major insurance policies:

Description of Policy
 
Term
 
Coverage ($)
   
Premium ($)
 
Insured
China Pacific People’s
 
November 3,
    463,497       1.615  
Machinery Equipment
Insurance(Group) Co. Ltd.,
 
2009 to
                 
AHAE70002909Q000046S
 
November 2,
                 
   
2010
                 

Note: the amounts in the column Coverage are converted from RMB value using the yearly average rate of 2010, 1USD = 6.77875RMB.

Government Regulations

We are subject to various government regulations, such as Food Sanitation Law, Environment Protection Law and Fire Prevention Law, and to national standards for food issued by the national Food and Drug Administration. We have obtained the Sanitation Admission certificate from the local Sanitation Bureau as well as the industrial production permit, and our facilities are regularly inspected by local authorities.
 
In addition, we have been issued an ISO 9001-2000 Certificate by the Beijing Zhongjing Kehuan Quality Authorization Co. Ltd. and a Certificate of Class A Green Food by the PRC Center of Development of Green Food.

Environmental Compliance

We are subject to the PRC environmental laws, rules and regulations governing our type of manufacturing facility. We have complied with the prescribed standard of environmental protection as evidenced by a certificate issued by the Jixian Environment Protection Bureau dated February, 2007.

The treatment of our waste water is subject to the PRC Environment Protection Law. Our process of treating waste water meets the strict requirement of this law.

Item 1A. Risk Factors

An investment in our common stock is very risky. You should carefully consider the risk factors described below, together with all other information in this Annual Report on Form 10-K, before making an investment decision. If any of the following risks actually occurs, our business, financial condition or operating results could be materially and adversely affected. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not currently foreseeable to us may also impair our business operations.
 
 
17

 
 
Risks Related To Our Business

Our raw material supply is vulnerable to natural disasters, which could severely disrupt the normal operation of our business and therefore adversely affect our operations.

As soybeans are our main raw materials and most of our soybeans are grown in and obtained from farmers in the Heilongjiang Province, natural disasters such as drought, earthquakes, floods, and heavy rains in Heilongjiang may lead to a shortage in our supply of soybeans and result in soybean price increases, and consequently adversely affect our operations.

Our efforts to manufacture value-added products may not be successful.

In order to grow our business and achieve higher profit margins, we have begun to construct new plants and add new equipment to manufacture value-added products such as squeezed oil, and concentrated soy protein. If the consumers do not accept our new products, the market for such products has not fully developed, or we do not have experienced sales personnel to market such products, we may not achieve the result as we expect and our business operation and financial conditions may be adversely affected.

Soybean prices fluctuate greatly. This may adversely affect our operations.

As a commodity, soybeans are subject to the price fluctuation of the commodity market in the PRC and indirectly to the international commodity market. For example, the soybean price went up from RMB 2.16 per 500 grams at the beginning of 2008 to RMB2.75 per 500 grams at the beginning of March 2008, then to RMB 2.70 per 500 grams in early July 2008 and went down to RMB 1.65 per 500 grams at the end of 2008, due to both the shortage in soybean supply caused by a severe drought in 2007 and farmers’ cutting growing areas of soybeans brought by the continuously low price level by the end of 2006.  In 2009, the soybean price fluctuated from RMB 1.67 per 500 grams at the beginning of the year, to RMB 1.87 per 500 grams at the end of the year. In 2010, the highest soybean price was REB 1.68 per 500 grams. If the soybean price increases significantly, we may have a problem caused by increased demand on working capital to satisfy the raw materials needs of our operations.

Our full capacity may be reached soon. Our growth may be impacted if we are not able to expand our capacity in the near future.

The designed capacity of our facilities is 520,000 tons per year and the maximum utilization rate for our industry is approximately 90%. We processed 357,400 tons of soybean in 2009 and we processed about 341,403 tons in 2010.We will soon need additional capacity to grow our business. If we are not able to build or acquire new facilities in near future, the growth of our business maybe adversely affected.
  
We may not be able to increase our sources for soybean supply. As a result, we may not be able to support our plan to increase production.

In order to increase our raw material supplies, we intend to expand our soybean supply area through development of additional farmland soybean agreements, which in turn will be accomplished through contract negotiations with private farmers and cooperation with state-owned farms. However, it is difficult to obtain access to farmlands from private farmers or state-owned farms. If we cannot expand the soybean supply area, we may not be able to increase the supplies of the soybean and our plan to increase soybean production.
 
 
18

 
 
We do not have long-term soybean supply contracts, which could have a material adverse effect on us.

Currently, we source about 70% of our raw materials from farmers with whom we have a long term relationship and about 30% from intermediaries who purchase directly from other farmers. However, we do not have long term contracts with the farmers or the intermediaries. All current supply contracts with the soybean farmers are one-year contracts without fixed prices. Therefore, we may not be able to control supply risks. Any significant fluctuation in price of our raw materials could have a material adverse effect on the manufacturing cost of our products.

We have tried to mitigate the risks by paying attractive premiums to those farmers who will purchase “Yanglin” soybean seeds, cultivate and plant them and then sell the soybeans to us in order to guarantee our soybean supplies. However, if our competitors also pay premiums or even pay higher premiums to attract the suppliers, we may lose our advantage in purchasing price and lose some of our soybean supplies.

The soybean price is largely beyond our control and may be affected by natural disasters, supply competition and other factors.

The soybean price may also be affected by other factors in addition to natural disasters or supply competition, such as global commodity price increase, government control or suppliers’ financial difficulties. We may have limited options in the short-term for alternative supply if our suppliers fail for any reason, including suppliers’ business failure or financial difficulties to continue the supply of raw materials. Moreover, identifying and accessing alternative sources may increase our costs. Although raw materials are generally available and we have not experienced any raw material shortage in the past, we cannot assure that the necessary materials will continue to be available to us at prices currently in effect or acceptable to us.

Some of our land may be reclaimed by the government and this may materially impact our operations.

Most land in the PRC is state-owned and land use rights may be granted, transferred, leased or allocated. Allocated land use rights are generally provided by the government for an indefinite period (usually to state-owned entities) and cannot be pledged, mortgaged, leased, or transferred by the user. , Allocated land can be reclaimed by the government at any time. The land occupied by our Factory No. 1 and No. 2 are allocated land and accordingly subject to the risk of being reclaimed. We are in the process of applying to change the type of the land use rights over Factory No. 2 to “transferred”. Although we believe that the risk of being reclaimed is very small because the government is encouraging the growth of our industry and the market economy system in general, and because the government has continued to support our business, we cannot guarantee that certain of our allocated  land will not be reclaimed in the future.

We may lose our advantages if there is emergence of new production technologies for other competitors.

Our business is dependent on our ability to utilize current technologies to produce high quality products with low cost. Currently, we employ advanced technologies available in our manufacturing process. However, newer and better manufacturing technologies may emerge. If we are unable to adapt the production processes to newer and more efficient manufacturing technologies that may be used by our competitors to manufacture products that are of higher quality or at a lower cost, we may lose market share and our financial performance may be adversely affected because we do not have the financial resources to build new facilities using such new technologies.
 
Our manufacturing process is highly dangerous, which could cause adverse effects on our operation.
 
In our manufacturing process, we use highly inflammable and explosive chemical solutions. Therefore, fires and explosions could occur, which could cause delay in our production, damages to our facilities and injuries to our workers.
 
 
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We receive a significant portion of our revenues from a limited number of customers. Our business will be harmed if our main customers reduce their orders from us.

Our customers are mainly comprised of approximately 40 distributors of soybean oil and other soybean products, as well as soybean food product and animal feed manufacturers. Although our sales are widely diversified among our customers and our largest customer accounts for only 2.56% of our total sales, our top ten customers accounted for about 21.3% of our net sales in the year 2010. Dependence on a few customers could make it difficult to negotiate attractive prices for our products and could expose us to the risk of substantial losses if a single dominant customer ceases to purchase our products. If we lose any customers and are unable to replace them with other customers that would purchase a similar amount of our products, our revenues and net income would decline significantly.
 
Our product delivery is dependent upon the efficiency of the rail system and any disruption in the services or increase in transportation costs will have a material adverse impact on our operations.

Approximately 70% of our products are transported to our customers by rail. We are largely dependent upon the efficiency of the PRC’s rail system and network to deliver our products. Any disruption of their service will largely impact our ability to fulfill our orders on a timely basis and recognize revenue. In addition, any increase in transportation costs may deter our customers and lead them to source products from other nearby suppliers, thus negatively affecting our sales.

Potential environmental liability could have a material adverse effect on our operations and financial condition.

To the best knowledge of our management, we have complied with the prescribed standard of environment protection as evidenced by a certificate issued by the government. Although it has not been alleged by the government  that we have violated any current environmental regulations, we cannot assure you that the government will not amend the current environmental protection laws and regulations. Our business and operating results may be materially and adversely affected if we were to be held liable for violating existing environmental regulations or if we were to increase expenditures to comply with environmental regulations affecting our operations.

Inadequate funding for our capital expenditure may affect our growth strategy and profitability.
 
Our continued growth depends upon our ability to raise capital from outside sources. To maintain our profitability, we should increase the efficiency and achieve economies of scale in production of those low-margin products, and at the same time to develop those high-margin profit products. Adequate funding is needed to expand the production scale or develop new products. However, adequate funding is dependent upon a number of factors, including but without limitation, the nation’s or the world’s economy, our business condition, the financial environment as well as the relevant legal environment. If we are unable to obtain sufficient financing, our growth and profitability may be adversely effected.

The sales price fluctuation for our products is periodic, which could affect our financial results.

The prices of our products vary seasonably, among others, by the change of soybean supply and demand. Usually, our prices are lowest during the soybean harvest time between October and December and on the peak from January to February because of the Chinese New Year and Spring Festival. However, our prices are also subject to other conditions. As a result, we believe that period-to-period comparisons of our historical results of businesses are not necessarily meaningful and that you should not rely on them as an indication for future performance. It is also possible that our quarterly results of operations may be below the expectations of public market analysts and investors.
 
 
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Risks Related To Our Management and Internal Control
 
Our internal control over financial reporting and our disclosure controls and procedures have been ineffective, and failure to improve them could lead to future errors in our financial statements that could require a restatement or untimely filings, which could cause investors to lose confidence in our reported financial information, and a decline in our stock price.
 
We are constantly striving to establish and improve our business management and internal control over financial reporting to forecast, budget and allocate our funds. However, as a PRC company that has recently become a US public company, we face difficulties  in hiring and retaining a sufficient number of qualified employees to achieve and maintain an effective system of internal control over financial reporting in a short period of time.
 
Due to the foregoing deficiencies and weaknesses in our disclosure controls and procedures and internal control over financial reporting, we may be unable to comply with the Sarbanes-Oxley Act’s internal controls requirements, and therefore may not be able to obtain the independent auditor certifications that the Sarbanes-Oxley Act requires publicly-traded companies to obtain.  As a result of any deficiencies and weaknesses, we may experience difficulty in collecting financial data and preparing financial statements, books of account and corporate records, and instituting business practices that meet international standards, failure of which may prevent us from accurately reporting our financial results or detecting and preventing fraud.

We depend on key personnel for our business operations, whose discontinuance could incur our high replacement cost.

Our future success depends substantially on the continued services of our executive officers, especially Mr. Shulin Liu, our chairman and chief executive officer, Mr. Zongtai Guo, our chief operating officer, and Ms. Molan Shangguan, our chief financial officer. If one or more of our key executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Therefore, our business may be severely disrupted, and we may incur additional expenses and take additional time to recruit and retain new officers.
 
We may not be able to effectively protect our proprietary rights, which could harm our business and competitive position.
 
Our success depends, in part, on our ability to protect our proprietary rights. At present, we have registered the trademarks for “Yanglin” logo in the PRC which are currently used for all of our products. We cannot assure you that we will be able to effectively protect our trademarks in the future. Currently, implementation of PRC intellectual property-related laws has historically been lacking, primarily due to ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in the PRC may not be as effective as in the United States or other developed countries. Policing unauthorized use of proprietary technology is difficult and expensive, and we might need to resort to litigation to enforce our rights or defend us, or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation may require significant expenditure of cash and management efforts and could harm our business, financial condition and results of operations. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, competitive position, business prospects and reputation.
 
We may be exposed to intellectual property infringement and other claims by third parties, which, if successful, could cause us to pay significant damage awards and incur other costs.

While we believe that the technology we use is not protected by any patent or intellectual property rights, we face the risk of being the subject of intellectual property infringement claims. The validity and scope of claims relating to the manufacturing of soybean products may involve complex technical, legal and factual questions and analysis and, therefore, may be highly uncertain. The defense and prosecution of intellectual property suits, patent opposition proceedings and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability, including damage awards to third parties, require us to seek licenses from third parties, to pay ongoing royalties, or to redesign our products or subject us to injunctions preventing the manufacture and sale of our products. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase or use of our products until resolution of such litigation. Further, we do not have adequate product liability insurance coverage against defective products as our products are manufactured according to fairly basic formulas. Any disputes so far have been resolved through friendly negotiations. There can be no assurance that we will be able to resolve any future claims in such a manner.
 
 
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Risks Related to Our Expansion

There can be no assurance that any plans for future expansion will be implemented or that they will be successful.

While we have expansion plans, which include manufacturing “deep-processed” and refined soybean products, expanding our production lines and expanding our sales, there is no guarantee that such plans will be implemented or that they will be successful. These plans are subject to, among other things, the feasibility to meet the challenges we face, our ability to arrange for sufficient funding for more manufacturing facilities and the increasing working capital and the ability to hire qualified and capable employees to carry out these expansion plans.

Our personnel may not effectively support our growth and therefore impeding the expansion plan.

We currently have sufficient experienced and skilled employees for our business operations. But if our business and markets grow and develop, it will be necessary for us to expand our operation in an orderly fashion, which will put added pressure on our management and operational infrastructure. We may not have the requisite experience to manage and operate a larger, more modern manufacturing plant and bigger production lines. In addition, we may face challenges in product offerings and in integrating acquired businesses. These events would increase demands on our existing management, workforce and facilities. Failure to satisfy these increased demands could interrupt or adversely affect our operations and cause production backlogs, longer product development time frames and administrative inefficiencies.

We may have difficulty expanding our sales network in domestic market or to explore new overseas market.
 
We intend to intensify our marketing efforts in the PRC by expanding existing sales and marketing network coverage to reach more areas by establishing more sales offices within the PRC and maybe in other countries such as Singapore, Malaysia, Canada and the United States. However, overseas consumers may not accept the value of non-generically modified soybean products and may not like to pay the premium for it. It also may be difficult to expand the sales channels in the PRC’s markets if we are unable to advertise our products through various forms of media. But the advertising in commercial magazines, popular newspapers or over the internet will enhance our sales costs.

Risks Related To Our Industry

The PRC’s commitments to the World Trade Organization may intensify competition. 

In connection with its accession to the World Trade Organization, the PRC made many commitments including opening its markets to foreign products, allowing foreign companies to conduct distribution business and reducing customs duties. Foreign manufacturers may begin to manufacture non-genetically modified soybean products and ship their products or establish manufacturing facilities in the PRC. Competition from foreign companies may reduce profit margins and hence our business results would suffer.
 
 
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If the substitute products for soybean oil increase, we may lose our market share of soybean oil market.

Substitute products for soybean oil, such as vegetable oil of peanut and palm oil could increase the intensity of competition faced by us. With the appearance of substitute products for soybean oil, consumers have more choices. Part of consumers may prefer vegetable oil. As a result, we may lose our market share of soybean oil market.

If we are not able to be competitive in the non-genetically modified soybean product business, we may not achieve sufficient product revenues.

At present, we are the largest and most integrated private non-genetically modified soybean producer in the PRC. Our products compete with a multitude of products developed, manufactured and marketed by others and we expect competition from new market entrants in the future. Our current competitors are the other domestic non-genetically modified soybean companies and global manufacturers who may enter the non-genetically modified soybean business. Although currently we view ourselves in a favorable position, we may not remain competitive if existing or future competing products may provide better quality, greater utility, lower cost or other benefits from their intended uses than our products, or may offer comparable performance at lower cost. If our products fail to capture and maintain market share, we may not achieve sufficient product revenues, and our business would suffer.

The inability of the PRC government to keep the PRC a genetically modified-free soybean zone may eliminate our competitive edge and negatively impact our operations.

We distinguish ourselves from our competitors in that we manufacture and sell non-genetically modified soybean products. Because the PRC is a non-genetically modified soybean growing zone, our competitors are not the large, better capitalized producers of genetically modified soybean products. The PRC has one of the strictest bio-safety regulations in the world, requiring safety certificates and labeling of genetically modified products. However, with so much genetically modified soybeans imported into the country, there is a question as to whether the PRC is able to keep it a genetically modified-free soybean zone. If the PRC is unsuccessful in keeping the PRC a genetically modified-free soybean zone and our soybeans are tainted through pollination, we will lose our competition edge and this would adversely affect our operations.

Our failure to comply with ongoing governmental regulations could hurt our operations and reduce our market share.

In the PRC, the food industry is undergoing increasing regulations as environmental awareness increases. The trend is that the PRC government toughens its regulations and penalties for violations of environmental regulations. New regulatory actions are constantly changing our industry. Although we believe we have complied with applicable government regulations, there is no assurance that we will be able to do so in the future.
 
Risks Related To Doing Business In The PRC

We face the risk that changes in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and the profitability of such business.

All of our business operations are conducted in the PRC. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in the PRC. The PRC economy differs from the economies of most developed countries in many respects, including level of government involvement in economic activities, stage of national development, and control of foreign exchange.
 
 
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While the PRC economy has grown significantly in the past 20 years, the growth has been uneven, both geographically and among various sectors of the economy. Policies of the PRC government can have significant effects on the economic conditions of the PRC. The PRC government has confirmed that economic development will follow the model of a market economy. Under this direction, we believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries and business development in the PRC will follow market forces. While we believe that this trend will continue, we cannot assure you that this will be the case. A change in policies by the PRC government could adversely affect our interests by, among other factors: changes in laws, regulations or the interpretation of laws and regulations, confiscatory taxation, restrictions on currency conversion, imports or sources of supplies, or the expropriation or nationalization of private enterprises. Although the PRC government has been pursuing economic reform policies for more than two decades, we cannot assure you that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting the PRC’s political, economic and social life.

Recent PRC regulations relating to the establishment of offshore companies by PRC residents may subject our PRC resident shareholders to personal liability and limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries’ ability to distribute profits to us or otherwise adversely affect us.

The PRC’s State Administration of Foreign Exchange, or the SAFE, issued a public circular on October 21, 2005 concerning the acquisition by an offshore company controlled by PRC residents of onshore assets in the PRC. This circular requires that (1) a PRC resident shall register with a local branch of the SAFE before he or she establishes or controls an overseas special purpose vehicle, or SPV, for the purpose of overseas equity financing (including convertible debt financing); (2) when a PRC resident contributes the assets of or his or her equity interests in a domestic enterprise to an SPV, or engages in overseas financing after contributing assets or equity interests to an SPV, such PRC resident must register his or her interest in the SPV and any changes in such interest with a local branch of the SAFE; and (3) when the SPV undergoes a material change outside of the PRC, such as a change in share capital or merger or acquisition, the PRC resident shall, within 30 days from the occurrence of the event that triggers the change, register such change with a local branch of the SAFE. Furthermore, PRC residents who are shareholders of SPVs established before November 1, 2005 are required to register with a local branch of the SAFE before March 31, 2006.

The beneficial owners of our company who are PRC residents are required to update their respective registrations with the local branch of the SAFE. However, we cannot assure you that these beneficial owners will update their registrations with the local branch of the SAFE in full compliance with the October 2005 SAFE circular. The failure or inability of beneficial owners of our company who are resident in the PRC to comply with the registration procedures set forth in the October 2005 SAFE circular may subject these beneficial owners to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute dividends to us or otherwise adversely affect our business.

Contractual arrangements through which we have established control of Yanglin may not be as effective in providing operational control as direct ownership. If Yanglin fails to perform its obligations under these contractual arrangements, we may have to legally enforce such arrangements and our business, financial condition and results of operations may be materially and adversely affected if these arrangements cannot be enforced.

We rely on contractual arrangements with Yanglin and its shareholders for operating our business. These contractual arrangements may not be as effective in providing us with control over Yanglin as direct ownership.
 
 
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Under the current contractual arrangements, as a legal matter, if Yanglin fails to perform its obligations under these contractual arrangements, we may have to (i) incur substantial costs and resources to enforce such arrangements, and (ii) rely on legal remedies under PRC law, which we cannot be sure would be effective.

These contractual arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. If Yanglin fails to perform its obligations under these contractual arrangements, we may have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot be sure would be effective. In addition, the legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event that we are unable to enforce these contractual arrangements, our business, financial condition and results of operations could be materially and adversely affected.

Winner State (BVI), which is 100% owned by our Chief Executive Officer, Mr. Shulin Liu and his wife Mrs. Huanqin Ding, beneficially owns approximately 91% of our common stock. Our loan in the amount of approximately $17 million to the domestic Yanglin Soybean Group Co. Ltd. is callable should Mr. Shulin Liu decide to sell his and/or his wife’s majority interest in Yanglin. This could cause disruption in our operations and as a consequence may adversely affect our financial condition and results of operation.

According to the Exclusive Purchase Option Agreement, the WFOE has the exclusive purchase option to the equity and assets of Yanglin, any other party has no right to purchase any equity from Mr. Shulin Liu and his wife. If Mr. Shulin Liu and his wife breach the Exclusive Purchase Option Agreement to sell the equity, under the Loan Agreement, repayment should be made in its entirety or in part, at the WFOE’s option and upon 10 days written notice. Yanglin may choose two ways to repay the debt, either (i) in cash, or (ii) by a transfer of equity interests of Yanglin or all its assets (at the price of $17 million with excess treated as interests on the loan). If Yanglin chooses to repay the debt in cash, it may cause disruption in its operations due to lack of the working capital.

A conflict of interest exists as a result of Mr. Liu’s role as our chief executive officer and our majority shareholder, and his role as a majority shareholder of Yanglin and therefore Yanglin may not repay the loan to us which would cause disruption in our business and adversely affect our financial condition and result of operations.

Mr. Shulin Liu with his wife, Mrs. Huanqin Ding, beneficially own approximately 91% of our common stock through their 100% holding in Winner State (BVI). Mr. Liu is also our chief executive officer.  Mr. Liu with his wife beneficially own approximately 90% of Yanglin’s equity interest.  Thus, there is a conflict of interest as a result of Mr. Liu’s role as our chief executive officer and our majority shareholder, and his role as a majority shareholder of Yanglin.  As a consequence, Yanglin may not repay the loan made on September 24, 2007.  Even though we may choose to foreclose on the equity interests of Yanglin or all its assets and become the owner of Yanglin  under Article 1 of the Exclusive Purchase Option Agreement, there is the risk that the equity interests of Yanglin or all its assets will not be sufficient to repay the loan or that we may not be able to foreclose on the equity interests of Yanglin or all its assets at all, which would cause disruption in our business and adversely affect our financial condition and result of operations.
 
 
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Recent PRC regulations relating to mergers and acquisitions of domestic enterprises by foreign investors may increase the administrative burden we face and create regulatory uncertainties.

On August 8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce, the State-Owned Assets Supervision and Administration Commission, or SASAC, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, or CSRC and SAFE, jointly promulgated the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule, which became effective on September 8, 2006, and was amended on June 22, 2009. The New M&A Rule purports to require, among other things, offshore special purpose vehicles, or SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies at a consideration of the SPVs’ shares and directly or indirectly controlled by PRC companies or individuals to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange.
 
On September 21, 2006, pursuant to the New M&A Rule and other PRC laws and regulations, the CSRC, in its official website, promulgated relevant guidance with respect to the issues of listing and trading of domestic enterprises’ securities on overseas stock exchanges (the “Related Clarifications”), including a list of application materials with respect to the listing on overseas stock exchanges by SPVs.

There are substantial uncertainties regarding the interpretation and application of the above rules, and CSRC has yet to promulgate any written provisions or formally to declare or state whether the overseas listing of PRC related company similar to the case of us shall be subject to the approval of CSRC.  If CSRC approval is required in connection with our listing, our failure to obtain or delay in obtaining such approval could result in penalties imposed by CSRC and other PRC regulatory agencies.  These penalties could include fines and penalties on our operations in China, restriction or limitation on remitting dividends outside of China, and other forms of sanctions that may cause a material and adverse effect to our business, operations and financial conditions.

Our business is largely subject to the uncertain legal environment in the PRC and your legal protection could be limited.

The PRC legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which precedents set in earlier legal cases are not generally used. The overall effect of legislation enacted over the past 20 years has been to enhance the protections afforded to foreign invested enterprises in the PRC. However, these laws, regulations and legal requirements are relatively recent and are evolving rapidly, and their interpretation and enforcement involves uncertainties. These uncertainties could 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, all of our executive officers and our directors are residents of the PRC, and substantially all the assets of these persons are located outside the U.S. As a result, it could be difficult for investors to affect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons.

You may experience difficulties in effecting service of legal process and enforcing judgments against us and our management in the PRC.

Substantially all of our assets and our subsidiaries are located in the PRC. In addition, almost all of our directors and officers reside within the PRC, it may not be possible to affect service of process within the United States or elsewhere outside of the PRC upon most of our directors and officers, including with respect to matters arising under the U.S. federal securities laws or applicable state securities laws. Moreover, the PRC is not a party to any treaties providing for reciprocal enforcement of judgments of courts with the United States or most other western jurisdictions. As a result, recognition and enforcement in the PRC of judgments of a court in the United States or any other jurisdictions mentioned above in relation to any matter may be difficult or impossible. In addition, you will have difficulties in bring an original action in a PRC court to enforce liabilities against our directors and officers based upon the U.S. federal securities laws.
 
 
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We may lose control over the seed company if the PRC government tightens its restriction on foreign entities to control Chinese seeds developers.

Heilongjiang Yanglin Group Seed Co. Ltd. (“Yanglin Seeds”) is currently wholly owned by Mr. Shulin Liu, our Chief Executive Officer, and as a result is an affiliate of the Group. It develops high quality soybean seeds and provides them to farmers at a competitive price, and in return the farmers sell their soybeans grown from Yanglin’s seeds to Yanglin. The PRC government has been restricting foreign entities from owning Chinese seeds developers, for the reason of national economic security. If the PRC government further tightens its restriction to prevent foreign entities from effectively controlling, regardless of the actual legal form, Chinese seeds developers, then Yanglin, as an entity effectively controlled by a foreign enterprise, may have to dispose of Yanglin Seeds. This may harm our ability to maintain high level of loyalty among the farmers and secure the supply of our raw materials.

The PRC government may impose material influence on the market price of our raw materials and force our costs to increase.

Though usually the prices of our raw materials, especially soybeans, are determined by market mechanism, the PRC government may exercise significant influence over the prices through its policies. For example, from late 2008 to June 2009, the PRC government launched a national strategic reserve purchase of soybeans at a price that was over 10% higher than normal market price, to support Chinese soybean farmers and protect their interests, which were negatively affected by large imports of soybeans at a cheaper price. This measure effectively raised the market price and our costs of sales subsequently, and was a major reason for our material operational loss in 2009 and 2010. The PRC government may implement such or similar policies in the future, and as a result, our profitability could be adversely affected.

The PRC government exerts substantial influence over the manner in which we conduct our business activities.

The PRC only recently has permitted provincial and local economic autonomy and private economic activities. The PRC government has exercised and continues to exercise substantial control over virtually every sector of the PRC economy through regulation and state ownership. Our ability to operate in the PRC may be harmed by changes in its laws 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 the PRC are in 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 our 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, could have a significant effect on economic conditions in the PRC or particular regions thereof, and could require us to divest ourselves of any interest we hold in PRC properties.

Inflation in the PRC may inhibit our activity to conduct business in the PRC.

In recent years, the PRC economy has experienced periods of rapid expansion and high rates of inflation. During the past ten years, the rate of inflation in the PRC has been as high as 20.7% and as low as -2.2%. These factors have led to the adoption by the PRC government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. While inflation has been more moderate since 1995, high inflation may in the future cause the PRC government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in the PRC, and thereby harm the market for our products.
 
 
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Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.

The majority of our revenues will be settled in Renminbi, and any future restrictions on currency exchanges may limit our ability to use revenue generated in Renminbi to distribute dividend or make other payments in U.S. dollars. Normally the revenue will be reinvested in the PRC. If we distribute dividend or make other payments in U.S. dollars to the shareholders, PRC Foreign Investment Companies Laws require us to provide relevant documents such as tax payment evidence and resolutions of the board of the directors.  Although the PRC 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 the PRC 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 the PRC, and companies are required to open and maintain separate foreign exchange accounts for capital account items. We cannot be certain that the PRC regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi.

The fluctuation of the Renminbi may materially and adversely affect your investment.

The value of our common stock will be affected by the foreign exchange rate between U.S. dollars and Renminbi, and between those currencies and other currencies in which our sales may be denominated. 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, the business of the company, and the price of our common stock may be harmed. 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 the PRC would be reduced.

We may not be able to distribute our assets upon liquidation and dividend payment will be subject to restrictions under the PRC foreign exchange rule.

Our assets are predominately located inside the PRC. Under the laws governing foreign investment enterprises in the PRC, dividend distribution and liquidation are allowed but subject to special procedures under the relevant laws and rules. Any dividend payment will be subject to the decision of the board of directors and subject to foreign exchange rules governing such repatriation. Any liquidation is subject to both the relevant government agency’s approval and supervision as well the foreign exchange control. The foreign exchange control authority may or may not approve the repatriation of funds out of the PRC if any funds left after liquidation.  This may generate additional risk for our investors in case of liquidation.

We may be treated as a resident enterprise for PRC tax purposes as the Enterprise Income Tax Law became effective on January 1, 2008, which may subject us to PRC income tax for any dividends we receive from our subsidiaries and PRC income tax withholding for any dividends we pay to our non-PRC shareholders.

The Enterprise Income Tax Law provides that enterprises established outside of the PRC whose “de facto management bodies” are located in the PRC are considered “resident enterprises” and will generally be subject to the uniform 25.0% enterprise income tax rate as to their global income, including income we receive from our subsidiaries. The term “de facto management bodies” is not defined under the Enterprise Income Tax Law and it is currently unclear in which situations a non-PRC enterprise’s “de facto management body” is located in the PRC. All of our management is currently based in the PRC, and if a majority of the members of our management team continue to be located in the PRC after the effective date of the Enterprise Income Tax Law, we may be considered a PRC resident enterprise and therefore subject to PRC enterprise income tax at the rate of 25% on our worldwide income, which will include any dividend income we receive from our subsidiaries. If we are required under the Enterprise Income Tax Law to pay income tax for any dividends we receive from our subsidiaries, our revenues could decrease significantly.
 
 
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We have limited business insurance coverage in the PRC, which could harm our business.

We are exposed to many risks, including equipment failures, natural disasters, industrial accidents, power outages, and other business interruptions. We do not carry business interruption insurance and as a result, we may be required to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our business, financial condition and results of operations.

Our property and equipment insurance does not cover the full value of our property and equipment, which leaves us with exposure in the event of loss or damage to our properties or claims filed against us. We currently do not carry any product liability or other similar insurance. We cannot assure you that we would not face liability in the event of the failure of any of our products. This is particularly true given our plan to significantly expand our sales into international markets, like the United States, where product liability claims are more prevalent.

Except for property and automobile insurance, we do not have other insurance such as business liability or disruption insurance coverage for our operations in the PRC. We do not maintain a reserve fund for warranty or defective products claims. Our costs could substantially increase if we experience a significant number of warranty claims. We have not established any reserve funds for potential warranty claims since historically we have experienced few warranty claims for our products so that the costs associated with our warranty claims have been low. If we experience an increase in warranty claims significantly, it would have a material adverse effect on our financial condition and results of operations.

Any future outbreak of severe acute respiratory syndrome or avian influenza in the PRC, or similar adverse public health developments, may severely disrupt our business and operations.

A renewed outbreak of severe acute respiratory syndrome, the Avian Flu or another widespread public health problem in the PRC, where all of our manufacturing facilities are located and where all of our revenues are derived from, could have a negative effect on our operations. In addition, there have been confirmed human cases of avian influenza in PRC, Vietnam, Iraq, Thailand, Indonesia, Turkey, Cambodia and other countries which have proven fatal in some instances. If such an outbreak or any other similar epidemic were to spread in the PRC, where our operations are located, it may adversely affect our business and operating results. Such an outbreak could have an impact on our operations as a result of quarantines or closures of our manufacturing facilities or the retail outlets, which would severely disrupt our operations, the sickness or death of our key officers and employees, and a general slowdown in the PRC economy.

Risks Related To The Market For Our Stock

Our common stock is subject to price volatility and may result in losses for investors.

The stock market has experienced significant price and volume fluctuations that have particularly affected the trading prices of equity securities of many companies that have business operations exclusively in the PRC. These fluctuations have often been unrelated or disproportionate to the operating performance of many of these companies. Any negative change in the public’s perception of these companies could decrease our stock price regardless of our operating results. The market price of our common stock has been and may continue to be volatile. We expect our stock price to be subject to fluctuations as a result of a variety of factors, including factors beyond our control.

These factors include without limitation actual or anticipated variations in our quarterly operating results, announcements of technological innovations or new products or services by us or our competitors, announcements relating to strategic relationships or acquisitions, additions or terminations of coverage of our common stock by securities analysts, statements by securities analysts regarding us or our industry, conditions or trends in the our industry, and changes in the economic performance and/or market valuations of other soybean product companies.
 
 
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The prices at which our common stock trades will affect our ability to raise capital, which may have an adverse affect on our ability to fund our operations.

Our common stock may be considered to be a “penny stock” and, as such, the market for our common stock may be further limited by certain SEC rules applicable to penny stocks.

To the extent the price of our common stock remains below $5.00 per share or we have net tangible assets of $2,000,000 or less, our common shares will be subject to certain “penny stock” rules promulgated by the SEC. Those rules impose certain sales practice requirements on brokers who sell penny stock to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000). For transactions covered by the penny stock rules, the broker must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to the sale. Furthermore, the penny stock rules generally require, among other things, that brokers engaged in secondary trading of penny stocks provide customers with written disclosure documents, monthly statements of the market value of penny stocks, disclosure of the bid and asked prices, disclosure of the compensation to the brokerage firm, and disclosure of the sales person working for the brokerage firm. These rules and regulations adversely affect the ability of brokers to sell our common shares and limit the liquidity of our securities.

We do not intend to pay cash dividends in the foreseeable future.

We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business. In addition, the terms of any future debt or credit facility may preclude us from paying any dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of potential gain in your investment for the foreseeable future.

Our chief executive officer could exert significant influence over our significant corporate decisions and may act in a manner that advances his best interests and not necessarily those of other stockholders.

Our Chief Executive Officer, Mr. Shulin Liu and his wife Mrs. Huanqin Ding, beneficially own approximately 91% of our common stock through their 100% holding in Winner State (BVI). As a result, Mr. Liu may be able to influence significantly the outcome of all matters requiring stockholder approval, including the election and removal of directors and any merger, consolidation, or sale of all or substantially all of our assets and he may act in a manner that advances his best interests and not necessarily those of other stockholders, including investors in this offering, by, among other things: delaying, deferring or preventing a change in control of us; entrenching our management and/or our board of directors; impeding a merger, consolidation, takeover or other business combination involving us; discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us; or causing us to enter into transactions or agreements that are not in the best interests of all stockholders.

There is currently a very limited trading market for our common stock.

Our common stock is quoted on the over-the-counter Bulletin Board (“OTCBB”). However, our bid and asked quotations have not regularly appeared on the OTCBB for any consistent period of time. There is no established trading market for our common stock and our common stock may never be included for trading on any stock exchange or through any other quotation system (including, without limitation, the NASDAQ Stock Market). You may not be able to sell your shares due to the absence of a trading market.
 
 
30

 
 
We will incur increased costs as a result of changes in laws and regulations relating to corporate governance matters.

As a public reporting company, we will need to comply with the Sarbanes-Oxley Act of 2002 and the related rules and regulations adopted by the SEC, including expanded disclosures, accelerated reporting requirements and more complex accounting rules. Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and other requirements will increase our costs and require additional management resources. Additionally, these laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We are presently evaluating and monitoring developments with respect to these laws and regulations and cannot predict or estimate the amount or timing of additional costs we may incur to respond to their requirements.
 
We may require additional capital, which may not be available on commercially reasonable terms, or at all.

A capital raise through the sale of equity securities may result in dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. Financing may be unavailable in amounts or on terms acceptable to us, or at all. Failure to obtain such additional capital could have an adverse impact on our business strategies and growth prospects.

Our future capital raising and the conversion of our outstanding shares of preferred stock and warrants may dilute our shareholders’ equities.

If we need to obtain external financing, our capital raise could require us to sell additional equity or debt securities or obtain credit facilities. The sale of additional equity or equity-linked securities could result in additional dilution to our then existing shareholders. In addition the conversion of outstanding shares of preferred stock and exercise of warrants into common stock may dilute our then existing shareholders’ equities. Certain registration rights have been granted to holders of the preferred stock and warrants. Pursuant to the registration rights agreement, certain holders of the preferred stock and warrants have the demand rights to require us to register the shares common stock held by these holders. Therefore, as our existing shareholders, your share equities may be diluted upon the conversion of outstanding shares of preferred stock, exercise of warrants and sale of common stock pursuant to the registration rights agreement.

ITEM 1B. Unresolved Staff Comments.

None.

ITEM 2. Properties

We own and operate three soybean production factories in Jixian County in Heilongjiang Province. Our factories have a combined annual soybean processing capacity of 520,000 tons.

Factory No.1 manufactures squeezed soybean oil, Grade IV soybean oil and soybean meal. Factory No. 2 manufactures concentrated soy protein and low-temperature soybean meal. Our newest facility, Factory No.3, which was built in 2005, manufactures Grade IV soybean oil, soybean meal and salad oil. Our new, high end products, including defatted soy powder, and textured protein, may be manufactured in Factory No. 2, depending on market situation. Powdered soy oil will be produced in Factory No. 3.
 
 
31

 
 
The following tables indicate the land area and annual production capacity of our production facilities:
 
Production
           
Facility
 
Area
   
Capacity
 
Factory No. 1
    27,000 m 2     100,000  
Factory No. 2
    43,572 m 2     120,000  
Factory No. 3
    45,596 m 2     300,000  
 
Annual
             
Annual
             
Production
 
Actual
         
Production
   
Actual
       
Capacity for
 
Output for
         
Capacity for
   
Output for
       
2009
 
2009
   
Utilization
   
2010
   
2010
   
Utilization
 
(Tons)
 
(Tons)
   
Rate for 2009
   
(Tons)
   
(Tons)
   
Rate for 2010
 
520,000   357,400     69%     520,000     341,403     66%  

Note: The annual production capacity is based on 3 shifts (8 hours per shift) a day for 300 days a year.

We purchased the land use rights for the 45,596 m2 of land of Factory No. 3. The land use rights for Factory No. 1 and No. 2 are allocated by the local government at minimal cost.

Our machinery and equipment for soybean processing includes conveyor belt, sifting machines, dyers; steamer, crushers; flaking machines, extractors; distillers; packaging machines; and containers. Our machinery has been kept in good condition and is covered by property insurance.

All land in the PRC is owned by the government and cannot be sold to any individual or entity. Instead, the government grants or allocates landholders a “land use right.” There are four methods to acquire land use rights:
l
Grant of the right to use land;
l
Assignment of the right to use land;
l
Lease of the right to use land; and
l
Allocated land use rights.

In comparison with Western common law concepts, granted land use rights are similar to life estates and allocated land use rights are in some ways similar to leaseholds.

Granted land use rights are provided by the PRC government in exchange for a grant fee, and carry the rights to pledge, mortgage, lease, and transfer within the term of the grant. Land is granted for a fixed term - generally 70 years for residential use, 50 years for industrial use, and 40 years for commercial and other use. The term is renewable in theory. Unlike in Western nations, granted land must be used for the specific purpose for which it was granted.

Allocated land use rights are generally provided by the PRC government for an indefinite period (usually to state-owned entities) and cannot be pledged, mortgaged, leased, or transferred by the user. Furthermore, allocated land can be reclaimed by the government at any time. Allocated land use rights may be converted into granted land use rights upon the payment of a grant fee to the government.
 
 
32

 
 
In addition to the above mentioned land use rights, Yanglin has the following leased land use rights:

        
Area (square
   
Total
Rental Fee
 
Construction
 
 
Term and
Lessor
 
Location
 
meters)
   
(USD)
 
on Land
 
Expiration
Jixian Industrial Company
 
Jixian County Hedong  District
    27,000       1,346,164  
Workshop, warehouse
 
December 4, 2001 - December 3, 2051
                           
Hongtai Oil Factory
 
Jixian County, Shuangfu Road East
    43,572.1       1,179,114  
Workshop, warehouse
 
November 1, 2006 – October 30, 2056
                           
Jixian County
Government
 
Jixian County
    45,596       1,419,170  
Workshop, warehouse
 
September 6, 2005 – September 5, 2055
                           
Wansheng Village
Commission
 
Wansheng Village Oil Pump Station West, Daoban Dong Qiang
    3,844.6       15,124  
Farmland
 
October 19, 2003 - October 18, 2053
                           
Wansheng Village
Commission
 
Hatong Expressway North, Wansheng Village
    16,643.7       15,104  
Farmland
 
April 1, 2004 – December 31, 2028
                           
Mr.Liu Fengyu,
Ms. Tian Shubai
 
Jian San Jiang Administration Daxing Farm 24 Group Nan.
    1,000,000       166,369  
Farmland
 
January 1, 2005 - December 31, 2026

We have embarked on the process to convert the allotted land use rights for Factory No. 1, Factory No. 2, Wansheng Village and Jiansan Farm into granted land use rights. The conversion will involve a payment of a “transfer fee” to the Jixian County Land Bureau.
 
 
33

 
 
Yanglin also owns the following buildings, comprising Factory No. 3:

   
Area (square
           
Location
 
meters)
 
Nature of building
 
Function
 
Certificate
                 
Bei No.4, Nongfeng
Village (Factory No. 3)
    1658.46  
Private Asset
 
Office, garage
 
Ji Fang Quan Zheng Fanrong Zi No. 00033652
                   
Bei No.4, Nongfeng
Village ( Factory No. 3)
    9224.93  
Private Asset
 
Workshop
 
Ji Fang Quan Zheng Fanrong Zi No. 00036015
                   
Factory No. 3
    1401.47  
Private Asset
 
Boiler room
 
Ji Fang Quan Zheng Fanrong Zi No. 00033653

During 2009, the Group reviewed the idle production facility of Factory No. 1 for impairment and identified certain assets to be technologically outdated and thereby indicating a reduction in value. We expected to dispose of these assets during 2010 and believe the assets are carried at the net realizable value. In 2011, we plan to continue to seek a buyer and sell these assets to the highest bidder.

Item 3. Legal Proceedings

To our knowledge, there are no pending materials legal proceedings to which we or our properties are subject to. From time to time, we may be also involved in litigation arising in the normal course of our business.
 
Item 4. (Removed and Reserved)
PART II

Item 5. Market For Registrant’s Common Equity, Related Shareholder Matters, And Issuer Purchases Of Equity Securities

Our stock is currently quoted on the Over the Counter (OTC) Bulletin Board and our trading symbol is "YSYB.OB”. There has never been any established public market for shares of our Common Stock.

The following table sets forth for the period indicated the prices of the Common Stock in the over-the-counter market, as reported and summarized by the OTC Bulletin Board. Such prices are based on inter-dealer bid and asked prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions.
 
  
 
HIGH
   
LOW
 
2011
           
Second Quarter *
    0.95       0.95  
First Quarter
  $ 1.00     $ 0.30  
                 
2010
               
Fourth Quarter
  $ 1.00     $ 0.26  
Third Quarter
  $ 2.40     $ 1.01  
Second Quarter
  $ 2.65     $ 2.00  
First Quarter
  $ 3.00     $ 2.69  
                 
2009
               
Fourth Quarter
  $ 3.25     $ 1.50  
Third Quarter
  $ 3.50     $ 2.75  
Second Quarter
  $ 4.90     $ 3.00  
First Quarter
  $ 5.00     $ 3.00  
  
*Through April 8, 2011.
 
 
34

 
 
Shareholders

As of April 5, 2011, we have 20,465,119 shares of Common Stock issued and outstanding held by 304 holders of record (not including beneficial owners who hold shares at broker/dealers in “street name”) and 9,534,883 shares of Series A Preferred Stock issued and outstanding held by approximately 8 shareholders. We have authorized and issued 9,999,999 Series A Preferred Stock and authorized 10,000,000 Series B Preferred Stock, but have not issued any Series B Preferred Stock.

Dividend Policy

Our board of directors has not declared a dividend on our Common Stock during the last three fiscal years and we do not anticipate the payments of dividends in the near future, as we intend to reinvest our profits to grow operations. We rely on dividends from Yanglin for our funds and PRC regulations may limit the amount of funds distributed to us from Yanglin, which will affect our ability to declare any dividends.

Repurchases of Equity Securities

No repurchases of our common stock were made during the fourth quarter of the fiscal year covered by this report.
 
Recent Sales of Unregistered Securities

None.

Performance Graph

Not applicable to smaller reporting companies.
 
Item 6.   Selected Financial Data

As a smaller reporting company, we are not required to provide the information called for by Item 6 of Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth under "Forward Looking Statements" and "Item 1A. Risk Factors" and elsewhere in this Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements.
 
 
35

 
 
Current Business Environment and 2011 Outlook

With respect to the overall business trends in 2011 and forward, statistics showed that the global economy has recovered gradually from recession since the second half of 2009. The growth rate of PRC’s GDP in the fourth quarter of 2010 was 9.8% (published on 20th January 2011 by the National Bureau of Statistics of China). As predicted by some economists, China’s economic development will stabilize in the future.

However, there are some factors that may impose unfavorable effects on our future operations, including:
 
The expected good harvest of genetically modified soybeans in US and South America in 2011, which may cause even larger import volume to the PRC, at lower prices.
 
Possible further appreciation of Renminbi against USD in the future, which may also reduce the import price of genetically modified soybeans.
 
The uncertainties in the subsidy and supporting policies of the PRC government regarding the domestic soybean industry.

In response, we will continue to lobby the PRC government to grant new supporting policies. Meanwhile, we will continue to take strict cost saving measures and maintain our production at a suitable level. We will actively observe the trends in our industry and in the general economy in order to capitalize any opportunity for our products. Over the long-term, we believe that we are well positioned to benefit from the growth opportunities in the PRC and throughout the world.

Major Performance Factors

Revenue

We derive most of our revenue from the sales of 3 main products: soybean oil (4th grade), salad oil and soybean meal, and a small portion of our revenue is created by the sales of other products, including concentrated soybean protein, squeezed oil and low temperature soybean meal. The revenue may be affected by the following factors:
·
Processing capacity of soybean;
·
Pricing of the products; and
·
Market demand.

Processing capacity of soybean. Our current annual processing capacity for soybean is 520,000 metric tons. We processed approximately 341,403 metric tons in 2010. Production capacity is sufficient for current demand.

Pricing of the products. In general, our products are priced consistently with market prices, with consideration for cost of sales. However, prices are affected by several factors, including but not limited to: the pricing trends for domestic soybeans, the cost and volume of imported soybeans, temporary sudden changes in supply-demand relationship, and general economic factors and income level of consumers.

Market demand. Revenue growth potential depends on market demand for our products. We believe that high growth potential for our sales revenue exists due to several factors: 1) total market demand for our products exceeds current production levels; 2) our products are recognized as high quality; 3) we maintain excellent relationships with our customers; and 4) we generally sell almost all of our production volume.
 
 
36

 
 
Cost of Sales

Cost of sales generally consists of four parts: raw materials, labor, production overhead and manufacturing related depreciation. Raw materials refer mainly to soybeans and account for over 90% of the cost of sales. Labor costs are relatively low and comprise a very small portion of cost of sales. Production overhead includes auxiliary materials, utility expenses, machinery maintenance costs, inspection costs and other related expenses. Depreciation costs are applied to manufacturing facilities and equipment, such as production lines, steam generators, and factory buildings.

Cost of sales is determined primarily by the following factors, either directly or indirectly:
 
·
Availability and price of raw materials, especially soybeans;
·
Operating efficiency of production facilities; and
·
Government policy or direct purchase.

Availability and price of raw materials, especially soybeans. Raw materials costs account for more than 90% of cost of sales. Soybean is the only major raw material, so its price fluctuation will have a material impact on our cost. The price of soybeans may be affected by a series of factors, including the production volume of soybeans on national and international scale, weather, government policies and soybean transactions on commodity markets. Meanwhile, if there is a shortage in the supply of raw materials, our production facilities will have to operate at less than maximum efficiency. Our processing volume represents a relatively small portion of the total soybean supply of Heilongjiang Province; generally speaking the availability of raw materials is always high. Soybean price has a significant impact on our cost of sales.

Output ratio and operating efficiency of production facilities. Output ratio is the ratio between the input of raw materials (mostly soybeans) and the output of finished products. The more units of finished products we can produce using a single unit of raw material, the higher the output ratio. As labor, production overhead and manufacturing related depreciation expenses are mostly fixed, generally speaking, the more we produce, the lower the unit cost. Our output ratio and operating efficiency are continuously improving due to the recent purchase and renovation of facilities and equipment, the enhanced competence and proficiency of our staff and the improvement of our management skills.

Government policy or direct purchase. Usually the price of soybean is determined by market mechanisms; however, government policy may have a significant impact. For example, the PRC government conducted a national strategic purchase two times from late 2008 to 2010 and effectively raised the purchase price of soybeans in the market by offering a price about 10% higher than normal market prices, to farmers. Such and similar actions of the government, granting various forms of subsidies to farmers, may materially increase our cost of sales.
 
Gross Loss
   
Gross Loss is the result of the combined effects of the following factors: (a) the selling price of our products, (b) the sales volume and the individual profit margin of each product, and (c) the cost of sales. As we are a middle stream processor, and the profit margin of middle stream processing is usually relatively stable, under normal circumstances our gross profit margin has ranged from 7% to 9%, based on previous experience through 2008. However, if exceptional circumstances exist, gross margin may be seriously affected. Due to extremely unfavorable environmental factors, such as the national purchase of soybean by the PRC government at higher than market price, and the low cost imports of soybean at large volumes, we suffered a gross losses in the years ended December 31, 2010 and 2009 (please refer to the discussion on results of operations below for details).
 
 
37

 
 
Operating Expenses

Operating expenses consist of selling expenses and general & administrative expenses. Generally speaking, operating expenses occupy only a small portion of total costs and expenses.

Selling expenses generally include business development expenses, sales meeting expenses, loading and handling, advertising, sales-related staff salaries and welfare expenses, and travel expenses. They are usually relative to sales volume.

General and administrative expenses cover the depreciation of office buildings and equipment, office expenses and supplies, and management and administrative salaries. These expenses are typically fixed. General and administrative expenses may increase, as we revise our organizational structure and improve our management systems and internal control system and processes.

Income Tax

We are incorporated in the State of Nevada and Faith Winner (BVI) is incorporated under the laws of the British Virgin Islands.  We conduct all our operations under certain contractual arrangements with Yanglin, a PRC company.

Although we are subject to United States taxation, we do not anticipate incurring significant United States income tax liability for the foreseeable future because:
 
 
·
We do not conduct any material business or maintain any branch office in the United States;

 
·
The earnings generated from our non-U.S. operating companies are generally eligible for a deferral from United States taxation until such earnings are repatriated to the United States; and

 
·
We believe that we will not generate a significant amount of income inclusions under the income imputation rules applicable to a United States company that owns "controlled foreign corporations" for United States federal income tax purposes.
 
Therefore, we have made no provision for U.S. federal income taxes or tax benefits on the undistributed earnings and/or losses.

Yanglin, a PRC company, has income tax liabilities in the PRC. PRC enterprise income tax is calculated based on taxable income determined under PRC tax regulations. In accordance with Income Tax Law applicable to domestic companies, we are generally subject to an enterprise income tax rate of 25%.

However, as Yanglin has been recognized as a Key Leading Enterprise in the Industrialization of Agriculture Industry by the PRC’s central government, Yanglin is entitled to a complete exemption from income taxes until June 2012. Our status is reviewed every two years, and the next review will be postponed by the government until the end of 2011, at which time it will evaluate our tax status for 2012 and 2013.

The Group is in a taxable loss position for 2010.  Therefore, even if Yanglin does not obtain tax exemption benefits, the group has no income tax expense for 2010.
 
 
38

 
 
Warrant Liability
 
Effective January 1, 2009, we adopted the provisions of FASB ASC Topic 815, "Derivatives and Hedging" ("ASC 815") (previously ElTF 07-5, "Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock"). As a result of adopting ASC 815, warrants to purchase the Company's common stock previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment as there was a down-round protection (full-ratchet down round protection). As a result, the warrants are not considered indexed to the Company's own stock, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire.
 
Results of Operations
 
Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
  
Our results of operations give effect to the restatement of previously issued consolidated financial statements as previously disclosed.
 
The following table shows the operating results for the years ended December 31, 2010 and December 31, 2009.

  
 
The year ended
   
The year ended
 
  
 
December 31,
   
December 31,
 
  
 
2010
   
2009
 
Consolidated Statement of Operations
 
($)
   
($)
 
   
(audited)
   
(audited)
 
Sales revenue, net
    165,843,118       161,633,950  
Cost of sales
    (170,851,407 )     (171,588,089 )
Gross (loss) profit
    (4,738,289 )     (9,954,139 )
Selling expenses
    (262,016 )     (247,301 )
General and administrative expenses
    (2,861,831 )     (3,314,592 )
Impairment loss of long-lived assets
    (575,327 )     (584,718 )
(Loss) on disposal of property, plant and equipment
    -       (230,104 )
(Loss) income from operations
    (8,437, 463 )     (14,330,854 )
Interest expense
    (982,519 )     (481,626 )
Interest income
    88,780       233,110  
Stock exchange listing expense
    -       -  
Change in fair value of warrants
    26,523,698       59,477,401  
Other income, net
    616       11,557  
Income before income taxes
    17,193,112       44,909,588  
Income tax
    -       -  
Net income
    17,193,112       44,909,588  
Foreign currency translation adjustment
    1,753,847       172,382  
Comprehensive income
    18,946,959       45,081,970  
 
 
39

 
 
Net Sales

  
 
For The Year Ended December 31,
   
Period to Period Change
 
Item
 
2010 ($)
   
2009 ($)
   
($)
   
%
 
Soybean meal
    97,291,784       101,609,014       (4,317,230 )     -4.25 %
Soybean oil
    47,049,631       43,008,806       4,040,825       9.40 %
Salad Oil
    8,917,306       8,057,047       860,259       10.68 %
Squeezed oil
    1,312,731       1,077,066       235, 665       21.88   %
Soy protein concentrates
    2,248,130       1,552,650       695,480       44.79  %
Low-temp soy meal
    9,023,536       6,329,367       2,694,169       42.57   %
Total Net Sales
    165,843,118       161,633,950       4,209,168       2.6  0 %

Net sales were $165,843,118 for the year ended December 31, 2010, an increase of $4,209,168 or 2.6% from $161,633,950 for the year ended December 31, 2009. Although the revenue of soybean meal dropped period over period at rate of 4.25%, the soy protein concentrates and low-temp soy meal increased at rates of 44.79% and 42.57%. This was mainly due to the company’s focus on developing the markets for deep-processed products.

In 2010, after the global economic crisis, the index of commodity selling prices suffered a rise for most of the categories of commodities, including food. According to data provided by the PRC State Statistics Agency, from January 2010 to December 2010, the index of retail prices of food, as compared to the same month a year before, was well over 100, the lowest being 104.2 in January 2010, and over 105 the rest of the year. This trend had a positive effect on the selling prices of our products. However, the average selling price of soybean meal decreased by 1.13% in 2010, and 250,406 tons of soybean meal were sold (approximate 77% of total output), resulting in negative growth rates of -4.28%. The average selling price of soybean oil and salad oil increased by 15.22% and 12.32% in 2010.

The PRC has long been importing large volumes of genetically-modified (GM) soybeans from US and South America, and such imports reached new peaks from the end of 2009 through 2010. The Chinese Ministry of Commerce estimated that the aggregate import volume would reach over 50 million tons in 2010, an increase of 17.6% over that of 2009, while the United States Department of Agriculture estimated in September 2010 that the import volume of GM soybeans of China would reach 55 million tons by the end of 2010. During the year the imported beans were usually sold at prices lower than that of domestically produced soybeans, representing a low cost alternative for domestic processors which previously used domestic beans as raw materials. Importation of GM soybeans significantly influenced price levels in the PRC’s domestic market for soybean products.

 
40

 

Cost of Sales and Gross Loss

   
For The Year Ended December 31,
   
Period to Period
 
   
2010
   
% of Sales
   
2009
   
%of Sales
   
Change
 
   
($)
   
Revenue
   
($)
   
Revenue
   
($)
   
%
 
Soybean meal
    (101,732,283 )     104.56 %     (107,526,472 )     105.8 %     5,794,189       -5.39 %
Soybean oil
    (47,354,676 )     100.65 %     (45,624,063 )     106.1 %     (1,730,613 )     3.79 %
Salad Oil
    (9,064,719 )     101.65 %     (8,445,044 )     104.8 %     (619,675 )     7.34 %
Squeezed oil
    (1,353,716 )     103.12 %     (1,177,013 )     109.3 %     (176,703 )     15.01 %
Soy protein concentrates
    (2,231,248 )     99.25 %     (1,760,367 )     113.4 %     (470,881 )     26.75 %
Low-temp soy meal
    (8,844,765 )     98.02 %     (7,055,130 )     111.5 %     (1,789,635 )     25.37 %
Cost of Sales
    (170,581,407 )     102.9 %     (171,588,089 )     106.2 %     1,006,682       -0.59 %
                                                 
Soybean meal
    (4,440,499 )     -4.56 %     (5,917,458 )     -5.8 %     1,476,959       -24.96 %
Soybean oil
    (305,045 )     -0.65 %     (2,615,257 )     -6.1 %     2,310,212       -88.34 %
Salad Oil
    (147,413 )     -1.65 %     (387,997 )     -4.8 %     240,584       -62.01 %
Squeezed oil
    (40,895 )     -3.12 %     (99,947 )     -9.3 %     58,962       -58.99 %
Soy protein concentrates
    16,882       0.75 %     (207,717 )     -13.4 %     224,599       -108.13 %
Low-temp soy meal
    178,771       1.98 %     (725,763 )     -11.5 %     904,534       -124.63 %
Gross Loss
    (4,738,289 )     -2.9 %     (9,954,139 )     -6.2 %     5,215,850       -52.40 %

Our cost of sales for the year ended December 31, 2010 decreased by $1,006,682 or 0.59% as compared to the year ended December 31, 2009, from $171,588,089 to $170,581,407; while the ratio of cost as a percentage to net sales decreased from 106.2% to 102.9% over the same period. We recorded a gross loss of $4,738,289 in the year ended December 2010. Compared to a gross loss of $9,954,139 in the year ended December 31, 2009, the gross loss decreased by $5,215,850, and our gross profit margin increased from -6.2% to -2.9% over the period.

The importation of soybeans from the US and South America has effectively kept prices in the PRC’s domestic market for soybean products at low levels, as the products made from GM imported beans can be sold at much lower prices than their domestic equivalents (please refer to the section “Net Sales” above for details).

In response to the negative effect on PRC soybean farmers of large levels of imports at low prices, the PRC government launched a national strategic reserve purchase from late 2008 to 2010, especially in Heilongjiang, in order to maintain prices of domestic non-GM soybeans and to protect the interests of domestic farmers. The highest price offered by the government was over 10% higher than the normal market price in our local area, thus forcing our cost of raw materials to rise significantly.

The above environmental factors negatively affected our gross profit margin from both cost and sales price perspectives, creating a gross loss. To counter the current difficulties, we have undertaken a series of measures, including purchasing soybeans with higher water content (which may be cheaper), implementing strict cost-saving policies, lowering production capacity utilization ratio, granting many employees temporary non-paid vacations.

Based on our current knowledge, we expect the situation to improve in the following months, as we believe it’s highly unlikely that the PRC government will implement the kind of national purchase as mentioned above in 2011 and beyond. Because the government has failed to sell, through a series of auctions, the soybean inventories it built up during the national purchase launched in late 2008 it’s reasonable to say there are great restraints on the government’s intention, ability and resources to conduct further purchases. However, the effects of these factors may be offset by the following factors, including but not limited to: the reduction in production volume of the PRC domestic soybean due to unfavorable weather, the increase in soybean output of United States and South America, which may mean more imports to the PRC, the change in the exchange rate between RMB and USD.

 
41

 
 
Operating Expenses
 
   
For The Year Ended December 31,
   
Period to Period
 
   
2010
   
% of Sales
   
2009
   
% of Sales
   
Change
 
   
($)
   
Revenue
   
($)
   
Revenue
   
($)
   
%
 
Selling Expenses
    (262, 016 )     0.16 %