Attached files
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EXCEL - IDEA: XBRL DOCUMENT - Feihe International Inc | Financial_Report.xls |
EX-32.1 - SOX 906 CERTIFICATION OF PEO - Feihe International Inc | v310183_ex32-1.htm |
EX-31.2 - SOX 302 CERTIFICATION OF PFO - Feihe International Inc | v310183_ex31-2.htm |
EX-32.2 - SOX 906 CERTIFICATION OF PFO - Feihe International Inc | v310183_ex32-2.htm |
EX-31.1 - SOX 302 CERTIFICATION OF PEO - Feihe International Inc | v310183_ex31-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2012
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 001-32473
FEIHE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Utah | 90-0208758 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Star City International Building, 10 Jiuxianqiao Road, C-16th Floor
Chaoyang District, Beijing, China, 100016
(Address of principal executive offices, including zip code)
+86 (10) 8457-4688
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ | Accelerated filer x |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the registrant’s common stock as of May 1, 2012 was 19,714,291.
FOR THE QUARTER ENDED MARCH 31, 2012
TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION | ||
Item 1. | Condensed Consolidated Financial Statements | 3 |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 31 |
Item 4. | Controls and Procedures | 32 |
PART II — OTHER INFORMATION | ||
Item 6. | Exhibits | 33 |
SIGNATURES | 34 | |
EXHIBIT INDEX |
Unless the context otherwise requires, the terms “we,” “us,” “our,” “Feihe International,” and “the Company” refer to Feihe International, Inc., a Utah corporation, and its consolidated subsidiaries. References to “dollars” and “$” are to United States dollars.
2 |
PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
FEIHE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, 2012 | December 31, 2011 | |||||||
US$ | US$ | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | 9,849,284 | 15,353,882 | ||||||
Restricted cash | 2,777,800 | 1,056,579 | ||||||
Notes and loans receivable, net of allowance for doubtful accounts of $3,350,056, as of March 31, 2012 and December 31, 2011 | - | - | ||||||
Trade receivables, net of allowance for doubtful accounts of $810,323 and $810,864, as of March 31, 2012 and December 31, 2011, respectively | 14,119,378 | 40,690,638 | ||||||
Due from related parties | 27,280 | 194,759 | ||||||
Advances to suppliers | 19,270,059 | 11,841,936 | ||||||
Inventories | 33,847,620 | 33,328,949 | ||||||
Prepayments and other current assets | 37,795 | 50,427 | ||||||
Income taxes receivable | 2,020,559 | 1,406,653 | ||||||
Input value-added taxes | 1,388,348 | 965,685 | ||||||
Other receivables | 13,537,187 | 13,742,625 | ||||||
Consideration receivable- current | 95,386,958 | 79,337,423 | ||||||
Investment in mutual funds – available-for-sale | 113,777 | 111,116 | ||||||
Assets held for sale | 2,382,801 | 2,384,391 | ||||||
Total current assets | 194,758,846 | 200,465,063 | ||||||
Investments: | 285,799 | 285,990 | ||||||
Investment at cost | 285,799 | 285,990 | ||||||
Property, plant and equipment: | ||||||||
Property, plant and equipment, net | 127,275,263 | 128,739,637 | ||||||
Construction in progress | 15,505,095 | 14,895,512 | ||||||
142,780,358 | 143,635,149 | |||||||
Other assets: | ||||||||
Advance to suppliers – non-current | 3,431,727 | 3,741,454 | ||||||
Long term deposits | 67,210,746 | 46,139,913 | ||||||
Consideration receivables, non-current | - | 19,450,201 | ||||||
Deferred tax assets – non-current | 9,805,701 | 9,805,701 | ||||||
Prepaid leases for land use rights | 18,165,232 | 18,280,745 | ||||||
Total assets | 436,438,409 | 441,804,216 | ||||||
Liabilities | ||||||||
Current liabilities: | ||||||||
Short term bank loans | 53,150,950 | 54,616,375 | ||||||
Accounts payable | 41,357,588 | 39,077,499 | ||||||
Accrued expenses | 4,144,269 | 6,943,370 | ||||||
Income tax payable | 2,515,408 | 734,389 | ||||||
Advances from customers | 11,626,363 | 17,899,560 | ||||||
Due to related parties | 104,111 | 86,213 | ||||||
Advances from employees | 362,538 | 415,253 | ||||||
Employee benefits and salary payable | 7,211,662 | 9,777,537 | ||||||
Other payable | 33,163,914 | 39,561,388 | ||||||
Current portion of long term bank loans | 5,941,474 | 5,945,439 | ||||||
Current portion of capital lease obligation | 181,296 | 288,066 | ||||||
Accrued interest | - | 395,783 | ||||||
Redeemable common stock (US$0.001 par value, 656,250 and 1,312,500 shares issued and outstanding as of March 31, 2012 and December 31, 2011) | 16,379,092 | 32,696,658 | ||||||
Total current liabilities | 176,138,665 | 208,437,530 | ||||||
Long term bank loans, net of current portion | 5,939,762 | 5,943,726 | ||||||
Capital lease obligation, net of current portion | 278,512 | 430,180 | ||||||
Other long term loans | 49,829,495 | 32,803,289 | ||||||
Accrued interest | - | 170,555 | ||||||
Unrecognized tax benefits – non-current | 14,608,179 | 14,806,768 | ||||||
Deferred income | 4,904,508 | 3,711,033 | ||||||
Total liabilities | 251,699,121 | 266,303,081 | ||||||
Commitments and contingencies (see Note 23) | ||||||||
Equity | ||||||||
Feihe International, Inc. shareholders’ equity: | ||||||||
Common stock (US$0.001 par value, 50,000,000 shares authorized; 19,714,291 shares issued and outstanding as of March 31, 2012 and December 31, 2011) | 19,714 | 19,714 | ||||||
Additional paid-in capital | 60,019,602 | 58,920,283 | ||||||
Common stock warrants | 1,774,151 | 1,774,151 | ||||||
Statutory reserves | 11,341,427 | 11,341,427 | ||||||
Accumulated other comprehensive income | 42,603,017 | 42,730,802 | ||||||
Retained earnings | 68,939,218 | 60,696,815 | ||||||
Total Feihe International, Inc. shareholders’ equity | 184,697,129 | 175,483,192 | ||||||
Noncontrolling interests | 42,159 | 17,943 | ||||||
Total equity | 184,739,288 | 175,501,135 | ||||||
Total liabilities and equity | 436,438,409 | 441,804,216 |
The accompanying notes are an integral part of these financial statements.
3 |
FEIHE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(unaudited)
Three months ended March 31, | ||||||||
2012 | 2011 | |||||||
US$ | US$ | |||||||
Sales | 62,936,077 | 67,678,513 | ||||||
Cost of goods sold | (28,957,473 | ) | (43,241,942 | ) | ||||
Gross profit | 33,978,604 | 24,436,571 | ||||||
Operating expenses: | ||||||||
Sales and marketing | (18,768,178 | ) | (15,944,336 | ) | ||||
General and administrative | (5,590,235 | ) | (5,720,233 | ) | ||||
Total operating expenses | (24,358,413 | ) | (21,664,569 | ) | ||||
Other operating income, net | 90,454 | 2,220,451 | ||||||
Income from operations | 9,710,645 | 4,992,453 | ||||||
Other income (expenses): | ||||||||
Interest income | 23,473 | 20,904 | ||||||
Interest and finance costs | (1,145,953 | ) | (1,017,725 | ) | ||||
Government subsidy | 1,561,348 | 1,520,150 | ||||||
Income from continuing operations before income tax expenses and noncontrolling interests | 10,149,513 | 5,515,782 | ||||||
Income tax expenses | (1,882,901 | ) | (1,341,683 | ) | ||||
Net income from continuing operations | 8,266,612 | 4,174,099 | ||||||
Income from discontinuing operations, net of tax | - | 565,444 | ||||||
Net income | 8,266,612 | 4,739,543 | ||||||
Net income attributable to noncontrolling interests | (24,209 | ) | (42,867 | ) | ||||
Net income attributable to common shareholders of Feihe International, Inc. | 8,242,403 | 4,696,676 | ||||||
Net income | 8,266,612 | 4,739,543 | ||||||
Other comprehensive income, net of tax | ||||||||
Foreign currency translation adjustments | (130,439 | ) | 2,299,451 | |||||
Change in fair value of available for sale investments | 2,661 | (1,350 | ) | |||||
Other comprehensive income | (127,778 | ) | 2,298,101 | |||||
Comprehensive income | 8,138,834 | 7,037,644 | ||||||
Less: comprehensive income attributable to the noncontrolling interest | (24,216 | ) | (24,432 | ) | ||||
Comprehensive income attributable to common shareholders of Feihe International, Inc. | 8,114,618 | 7,013,212 | ||||||
Net income from continuing operations per share of common stock | ||||||||
Basic | 0.40 | 0.23 | ||||||
Diluted | 0.40 | 0.23 | ||||||
Net income from continuing operations per share of redeemable common stock | ||||||||
Basic | 0.40 | 0.18 | ||||||
Diluted | 0.40 | 0.18 | ||||||
Net income from discontinued operations, net of tax per share of common stock | ||||||||
Basic | - | 0.03 | ||||||
Diluted | - | 0.03 | ||||||
Net income from discontinued operations, net of tax per share of redeemable common stock | ||||||||
Basic | - | 0.03 | ||||||
Diluted | - | 0.03 | ||||||
Weighted average shares used in calculating net income per share of common stock | ||||||||
Basic | 19,714,291 | 19,671,291 | ||||||
Diluted | 19,714,291 | 19,689,849 | ||||||
Weighted average shares used in calculating net income per share of redeemable common stock | ||||||||
Basic | 879,809 | 2,625,000 | ||||||
Diluted | 879,809 | 2,625,000 |
The accompanying notes are an integral part of these financial statements.
4 |
FEIHE INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(unaudited)
Feihe International, Inc. Shareholders | ||||||||||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||||||||||
(US$0.001 par value) | Accumulated | |||||||||||||||||||||||||||||||||||
Number | Additional | Common | Other | |||||||||||||||||||||||||||||||||
of | Par | Paid-in | Stock | Statutory | Comprehensive | Retained | Noncontrolling | Total | ||||||||||||||||||||||||||||
Shares | Value | Capital | Warrants | Reserves | Income | Earnings | Interest | Equity | ||||||||||||||||||||||||||||
US$ | US$ | US$ | US$ | US$ | US$ | US$ | US$ | |||||||||||||||||||||||||||||
Balance as of December 31, 2010 | 19,671,291 | 19,671 | 57,177,680 | 1,774,151 | 9,132,581 | 32,836,344 | 60,731,029 | 66,933 | 161,738,389 | |||||||||||||||||||||||||||
Share-based compensation | - | - | 402,154 | - | - | - | - | - | 402,154 | |||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | 4,696,676 | 42,867 | 4,739,543 | |||||||||||||||||||||||||||
Other comprehensive income (loss) | - | - | - | - | - | 2,316,536 | - | (18,435 | ) | 2,298,101 | ||||||||||||||||||||||||||
Settlement of redeemable common stock | - | - | - | - | - | - | 1,033,738 | - | 1,033,738 | |||||||||||||||||||||||||||
Balance as of March 31, 2011 | 19,671,291 | 19,671 | 57,579,834 | 1,774,151 | 9,132,581 | 35,152,880 | 66,461,443 | 91,365 | 170,211,925 |
Feihe International, Inc. Shareholders | ||||||||||||||||||||||||||||||||||||
Common Stock | ||||||||||||||||||||||||||||||||||||
(US$0.001 par value) | Accumulated | |||||||||||||||||||||||||||||||||||
Number | Additional | Common | Other | |||||||||||||||||||||||||||||||||
of | Par | Paid-in | Stock | Statutory | Comprehensive | Retained | Noncontrolling | Total | ||||||||||||||||||||||||||||
Shares | Value | Capital | Warrants | Reserves | Income | Earnings | Interest | Equity | ||||||||||||||||||||||||||||
US$ | US$ | US$ | US$ | US$ | US$ | US$ | US$ | |||||||||||||||||||||||||||||
Balance as of December 31, 2011 | 19,714,291 | 19,714 | 58,920,283 | 1,774,151 | 11,341,427 | 42,730,802 | 60,696,815 | 17,943 | 175,501,135 | |||||||||||||||||||||||||||
Share-based compensation | - | - | 1,099,319 | - | - | - | - | - | 1,099,319 | |||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | 8,242,403 | 24,209 | 8,266,612 | |||||||||||||||||||||||||||
Other comprehensive income (loss) | - | - | - | - | - | (127,785 | ) | - | 7 | (127,778 | ) | |||||||||||||||||||||||||
Balance as of March 31, 2012 | 19,714,291 | 19,714 | 60,019,602 | 1,774,151 | 11,341,427 | 42,603,017 | 68,939,218 | 42,159 | 184,739,288 |
The accompanying notes are an integral part of these financial statements.
5 |
FEIHE INTERNATIONAL, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the three months ended March 31, | ||||||||
2012 | 2011 | |||||||
US$ | US$ | |||||||
Cash flows from operating activities: | ||||||||
Net income | 8,266,612 | 4,739,543 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 1,977,367 | 1,384,413 | ||||||
Amortization of prepaid leases | 99,926 | 108,517 | ||||||
Amortization of other intangible assets | - | 48,674 | ||||||
Amortization of capital lease | 7,415 | 8,702 | ||||||
Loss on disposal of property, plant and equipment | 177,165 | 399 | ||||||
Provision for doubtful accounts | - | 503,431 | ||||||
Share-based compensation | 1,099,319 | 402,154 | ||||||
Changes in assets and liabilities: | ||||||||
Decrease in notes receivable | - | 128,516 | ||||||
Decrease (increase) in trade receivables | 26,571,260 | (712,514 | ) | |||||
Decrease in due from related parties | 167,479 | 10,998 | ||||||
Increase in advances to suppliers | (7,428,124 | ) | (2,848,855 | ) | ||||
Decrease (increase) in inventories | (518,671 | ) | 7,258,724 | |||||
Decrease in prepayments and other current assets | 12,632 | 95,244 | ||||||
Decrease (increase) in income taxes receivable | (613,905 | ) | 1,279,492 | |||||
Decrease (increase) in recoverable value-added taxes | (422,662 | ) | 3,542,834 | |||||
Decrease (increase) in other receivables | 205,438 | (3,300,178 | ) | |||||
Decrease in notes payable | - | (356,988 | ) | |||||
Increase in accounts payable | 5,612,458 | 612,015 | ||||||
Decrease in accrued expenses | (2,799,101 | ) | (4,609,091 | ) | ||||
Increase (decrease) in income tax payable | 1,781,019 | (1,021,463 | ) | |||||
Increase (decrease) in advances from customers | (6,273,197 | ) | 5,423,735 | |||||
Increase in due to related parties | 17,898 | - | ||||||
Decrease in advances from employees and employee benefits and salary payable | (2,618,590 | ) | (478,585 | ) | ||||
Decrease in other payables | (6,397,474 | ) | (3,655,149 | ) | ||||
Increase (decrease) in unrecognized tax benefits – non-current | (198,589 | ) | 181,261 | |||||
Increase in deferred income | 1,193,475 | - | ||||||
Net cash provided by continuing operations | 19,919,150 | 8,745,829 | ||||||
Net cash used in discontinued operations | - | (5,040,157 | ) | |||||
Net cash provided by operating activities | 19,919,150 | 3,705,672 | ||||||
Cash flows from investing activities: | ||||||||
Purchase of property, plant and equipment | (819,595 | ) | (1,195,282 | ) | ||||
Purchase of construction in progress | (309,789 | ) | - | |||||
Proceeds from sale of property, plant and equipment | 2,793 | - | ||||||
Change in restricted cash | (1,721,926 | ) | 2,831,001 | |||||
Net cash generated from (used in) continuing operations | (2,848,517 | ) | 1,635,719 | |||||
Net cash used in discontinued operations | - | (3,954,190 | ) | |||||
Net cash used in investing activities | (2,848,517 | ) | (2,318,471 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from short term bank loans | - | 1,367,490 | ||||||
Repayment of short term bank loans | (1,429,002 | ) | (1,362,728 | ) | ||||
Redemption of redeemable common stock | (16,317,566 | ) | - | |||||
Proceeds from other long term loans | 16,459,869 | - | ||||||
Payment for long term deposits | (21,101,602 | ) | - | |||||
Payment on capital lease obligations | (265,379 | ) | - | |||||
Net cash (used in) provided by continuing operations | (22,653,680 | ) | 4,762 | |||||
Net cash provided by discontinued operations | - | - | ||||||
Net cash (used in) provided by financing activities | (22,653,680 | ) | 4,762 | |||||
Effect of exchange rate changes on cash | 78,449 | 175,889 | ||||||
Net (decrease) increase in cash and cash equivalents | (5,504,598 | ) | 1,567,852 | |||||
Cash and cash equivalents, beginning of period | 15,353,882 | 17,529,582 | ||||||
Cash and cash equivalents, end of period | 9,849,284 | 19,097,434 | ||||||
Analysis of cash and cash equivalents | ||||||||
Included in cash and cash equivalents per consolidated balance sheets | 9,849,284 | 15,379,179 | ||||||
Included in assets of discontinued operations | - | 3,718,255 | ||||||
9,849,284 | 19,097,434 | |||||||
Supplemental disclosure of cash flow information: | ||||||||
Continuing operations | ||||||||
Cash paid during the period for income tax | (931,150 | ) | (854,550 | ) | ||||
Cash received during the period for tax refund | 1,488,030 | - | ||||||
Interest paid during the period | (1,105,586 | ) | (1,243,061 | ) | ||||
Discontinued operations | ||||||||
Cash paid during the period for income tax | - | - | ||||||
Cash received during the period for tax refund | - | - | ||||||
Interest paid during the period | - | (420,289 | ) | |||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Settlement of consideration receivable by raw milk supply | 3,332,369 | - | ||||||
Settlement of redeemable common stock | - | 1,033,736 |
The accompanying notes are an integral part of these financial statements.
6 |
FEIHE INTERNATIONAL, INC
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. | ORGANIZATION AND NATURE OF OPERATION |
The accompanying consolidated financial statements include the financial statements of Feihe International, Inc. (the “Company” or “Feihe International”) and its subsidiaries. The Company and its subsidiaries are collectively referred to as the “Group.” Substantially all of the Group’s operations are conducted in the People’s Republic of China.
The core activities of subsidiaries included in the condensed consolidated financial statements are as follows:
• | Feihe China Nutrition Company, formerly known as American Flying Crane Corporation – Investment holding |
• | Langfang Flying Crane Dairy Products Co., Limited (“Langfang Feihe”) – Packaging and distributing dairy products |
• | Gannan Flying Crane Dairy Products Co., Limited (“Gannan Feihe”) – Manufacturing dairy products |
• | Heilongjiang Feihe Dairy Co., Limited (“Feihe Dairy”) – Manufacturing and distributing dairy products |
• | Baiquan Feihe Dairy Co., Limited (“Baiquan Feihe“) – Used to produce dairy product until 2011 |
• | Beijing Feihe Biotechnology Scientific and Commercial Co., Limited – Marketing and distributing dairy products |
• | Shanxi Feihesantai Biotechnology Scientific and Commercial Co., Limited (“Shanxi Feihe”) – Manufacturing and distributing walnut and soybean products |
• | Qiqihaer Feihe Soybean Co., Limited (“Feihe Soybean”) – Manufacturing and distributing soybean products |
• | Heilongjiang Aiyingquan International Trading Co., Limited – Marketing and distributing water and cheese, specifically marketed for consumption by children |
• | Heilongjiang Flying Crane Trading Co., Limited (“Feihe Trading”) – Distributing milk and soybean related products. The subsidiary was registered in Heilongjiang Province, China on January 22, 2010. The Group holds an 85% equity interest of the total paid-in capital of RMB10,000,000 (or approximately $1.5 million) of Heilongjiang Flying Crane Trading Co., Limited |
2. | BASIS OF PREPARATION |
The accompanying unaudited condensed consolidated financial statements of the Group have been prepared by the Group in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and the accounting principles generally accepted in the United States of America (“US GAAP”) for interim reporting. In the opinion of the Group’s management, the accompanying condensed consolidated financial statements contain all material adjustments (consisting only of normal and recurring adjustments) necessary to present fairly its financial position and the results of its operations and cash flows. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto filed with the SEC on Form 10-K for the year ended December 31, 2011. The interim operating results are not necessarily indicative of the results to be expected for an entire year.
As of March 31, 2012, the Group had working capital of $18.6 million. The Group has significant cash commitments in the 12 months following March 31, 2012, including maturity of short term bank loans of $53.2 million, current portion of long-term bank loans of $5.9 million and redemption of redeemable common stock of $16.4 million (which was fully redeemed after March 31, 2012). The Group believes it will be able to refinance much of its short term bank loans when they become due and intends to do so. In addition, the Group has taken steps to reduce its operating expenses. If the Group is able to continue refinancing or finding replacement short term bank loans, it believes that its cash generated from operations, existing cash and ability to draw down on unutilized credit lines will be sufficient to fund its expected cash flow requirements for at least the next 12 months. The Group expects to realize its assets and satisfy its liabilities in the normal course of business. As a result, the accompanying condensed consolidated financial statements have been prepared assuming the Group will continue as a going concern. The accompanying condensed consolidated financial statements do not reflect any adjustments relating to the recoverability and reclassification of assets and liabilities as that might be necessary if the Group is unable to continue as a going concern.
For the period ended March 31, 2012, the Group has used the same significant accounting policies and estimates which are discussed in the Annual Report on Form 10-K for the year ended December 31, 2011 and mentioned in the “Critical Accounting Policies” section of Part I, Item II of this Form 10-Q.
7 |
3. | TAXATION |
The Company and Feihe China Nutrition Company are subject to U.S. federal and state income taxes, and the Company's subsidiaries incorporated in the People’s Republic of China (the “PRC”) are subject to enterprise income taxes in the PRC.
During the three months ended March 31, 2012, the Company recorded an income tax expense of approximately $1.9 million, which was primarily due to the increase in profits of Feihe Dairy when compared to the three months ended March 31, 2011.
The Company had cumulatively accrued approximately $1.4 million and $1.8 million for estimated interest and penalties related to uncertain tax positions as of March 31, 2012 and 2011, respectively. For the three months ended March 31, 2012 and 2011, the Company recorded a benefit of $0.5 million and provision of $0.2 million for estimated interest and penalties, respectively.
Aggregate undistributed earnings of approximately $144.5 million as of March 31, 2012 of the Group’s PRC subsidiaries that are available for distribution to the Company are considered to be permanently reinvested, and, accordingly, no provision has been made for the Chinese dividends withholding taxes that would be payable upon distribution to the Company. Additionally, the Chinese tax authorities have clarified that distributions made out of pre-January 1, 2008 retained earnings would not be subject to the withholding tax.
Years from 2007 to 2011 of the Company remain open for US federal and state income tax purposes, and tax years from 2006 to 2011 of the PRC subsidiaries remain open to examination by tax authorities in the PRC.
8 |
4. | EARNINGS PER SHARE OF COMMON STOCK |
The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations:
For the three months ended | ||||||||
March 31, | ||||||||
2012 | 2011 | |||||||
Net income attributable to Feihe International, Inc. shareholders | ||||||||
Net income from continuing operations | 8,242,403 | 4,131,232 | ||||||
Net income from discontinued operations, net of tax | - | 565,444 | ||||||
Net income attributable to Feihe International, Inc. shareholders | 8,242,403 | 4,696,676 | ||||||
Settlement of redeemable common stock | - | 1,033,738 | ||||||
8,242,403 | 5,730,414 | |||||||
Net income attributable to Feihe International, Inc. for computing net income per common stock – Basic | ||||||||
Net income from continuing operations | 7,890,276 | 4,678,589 | ||||||
Net income from discontinued operations, net of tax | - | 498,873 | ||||||
Net income attributable to Feihe International, Inc. allocated for computing net income per share of common stock – Basic | 7,890,276 | 5,177,462 | ||||||
Net income attributable to Feihe International, Inc. for computing net income per redeemable common stock – Basic | ||||||||
Net income from continuing operations | 352,127 | 486,381 | ||||||
Net income from discontinued operations, net of tax | - | 66,571 | ||||||
Net income attributable to Feihe International, Inc. allocated for computing net income per share of redeemable common stock – Basic | 352,127 | 552,952 | ||||||
Net income attributable to Feihe International, Inc. for computing net income per common stock – Diluted | ||||||||
Net income from continuing operations | 7,890,276 | 4,678,994 | ||||||
Net income from discontinued operations, net of tax | - | 498,928 | ||||||
Net income attributable to Feihe International, Inc. for computing net income per common stock – Diluted | 7,890,276 | 5,177,922 | ||||||
Net income attributable to Feihe International, Inc. for computing net income per redeemable common stock – Diluted | ||||||||
Net income from continuing operations | 352,127 | 485,976 | ||||||
Net income from discontinued operations, net of tax | - | 66,516 | ||||||
Net income attributable to Feihe International, Inc. allocated for computing net income per share of common stock – Diluted | 352,127 | 552,492 | ||||||
Weighted-average common stock outstanding used in computing
net income per share of common stock – Basic (i) | 19,714,291 | 19,671,291 | ||||||
Weighted-average common stock outstanding used in computing net income per share of common stock – Diluted (i) | 19,714,291 | 19,689,849 | ||||||
Weighted-average shares of redeemable common stock outstanding used in computing net income per share of redeemable common stock – Basic | 879,809 | 2,625,000 | ||||||
Weighted-average shares of redeemable common stock outstanding used in computing net income per share of redeemable common stock – Diluted | 879,809 | 2,625,000 | ||||||
Net income per share of common stock – Basic | ||||||||
Income from continuing operations attributable to Feihe International, Inc | 0.40 | 0.23 | ||||||
Income from discontinued operations attributable to Feihe International, Inc., net of tax | - | 0.03 | ||||||
Net income attributable to Feihe International, Inc. | 0.40 | 0.26 | ||||||
Net income per share of common stock – Diluted | ||||||||
Income from continuing operations attributable to Feihe International, Inc | 0.40 | 0.23 | ||||||
Income from discontinued operations attributable to Feihe International, Inc., net of tax | - | 0.03 | ||||||
Net income attributable to Feihe International, Inc. | 0.40 | 0.26 | ||||||
Net income per share of redeemable common stock – Basic | ||||||||
Income from continuing operations attributable to Feihe International, Inc. | 0.40 | 0.18 | ||||||
Income from discontinued operations attributable to Feihe International, Inc., net of tax | - | 0.03 | ||||||
Net income attributable to Feihe International, Inc. | 0.40 | 0.21 | ||||||
Net income per share of redeemable common stock – Diluted | ||||||||
Income from continuing operations attributable to Feihe International, Inc. | 0.40 | 0.18 | ||||||
Income from discontinued operations attributable to Feihe International, Inc., net of tax | - | 0.03 | ||||||
Net income attributable to Feihe International, Inc. | 0.40 | 0.21 |
(i) | The following table sets forth the computation of weighted-average shares outstanding for calculating basic and diluted earnings per share for the three months ended March 31, 2012 and 2011: |
Three months ended | ||||||||
March 31, | ||||||||
2012 | 2011 | |||||||
Weighted-average shares – Basic | 19,714,291 | 19,671,291 | ||||||
Effect of dilutive securities | ||||||||
Stock option | - | 18,558 | ||||||
Weighted-average shares – Diluted | 19,714,291 | 19,689,849 |
For the three months ended March 31, 2012, 1,446,000 (2011: 650,245) shares of the Company’s common stock issuable upon exercise of options and 237,937 (2011: 237,937) shares of the Company’s common stock issuable upon exercise of warrants were excluded from the calculation of diluted income per share because they were anti-dilutive.
9 |
5. | DISCONTINUED OPERATIONS |
Kedong Farm and Gannan Farm (the “Dairy Farms”) were formed in July 2007 to operate the Dairy Farms of the Company. On August 1, 2011, the Company entered into an Equity Purchase Agreement (as amended, the “Agreement”) with Haerbin City Ruixinda Investment Company Ltd. (the “Purchaser”). Pursuant to the Agreement, the Company and Jinyan Ma (noncontrolling interest holder of the Dairy Farms) agreed to sell to the Purchaser all of the equity interests of Kedong Farm and Gannan Farm for an aggregate purchase price of RMB849 million (approximately $133.1 million), including RMB114.5 million (approximately $18.0 million) in cash and RMB734.5 million (approximately $115.2 million) as deferred payment. The Company has the right to call for raw milk at RMB122.4 million (approximately $19.2 million) each quarter in the 18 months following September 30, 2011 to settle the deferred payment. If the value of the raw milk provided by the Dairy Farms each quarter is less than RMB122 million, the shortfall of the amount will be settled in cash. During three months ended March 31, 2012, the Company received nil cash payment from the Purchaser and raw milk supply valued at $3.3 million.
The Company entered into an asset mortgage agreement with the Dairy Farms, pursuant to which the Dairy Farms granted to the Company a primary security interest in certain properties and assets of the Dairy Farms to secure the obligations of the Dairy Farms under the Agreement.
The following table presents the components of discontinued operations in relation to the Dairy Farms reported in the condensed consolidated statements of income and comprehensive income:
For the three months ended March 31, | ||||||||
2012 | 2011 | |||||||
Sales from external customers | - | 8,770,909 | ||||||
Intersegment sales | - | 3,945,268 | ||||||
Income from operations | - | 565,444 | ||||||
Income tax expenses | - | - | ||||||
Net income from discontinued operations | - | 565,444 |
6. | RESTRICTED CASH |
Restricted cash consists of bank demand deposits for letters of credit. These instruments are mainly used by the Group for the short term financing of whey powder (2011: imported dairy cows and whey powder).
7. | ADVANCES TO SUPPLIERS |
Advances to suppliers consist primarily of advances for inventories and equipment, not delivered at the balance sheets date. The Group utilizes advances to suppliers in an effort to keep future purchasing prices stable and consistent.
Advanced amounts are refundable if the transaction is not completed by the other party in accordance with the terms of the contract or agreement. During the three month periods ended March 31, 2012 and 2011, no advances to suppliers were refunded in cash.
8. | INVENTORIES, NET |
The inventory amounts included in the condensed consolidated balance sheets as of March 31, 2012 and December 31, 2011 consisted of the following:
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
US$ | US$ | |||||||
Raw materials | 9,861,387 | 15,461,871 | ||||||
Work-in-progress | 15,008,808 | 8,678,336 | ||||||
Finished goods | 8,977,425 | 9,188,742 | ||||||
Total inventories, net | 33,847,620 | 33,328,949 |
10 |
9. | OTHER RECEIVABLES AND CONSIDERATION RECEIVABLE |
Other receivables as of March 31, 2012 and December 31, 2011 consisted of the following:
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
US$ | US$ | |||||||
Advances to employees | 1,673,967 | 470,475 | ||||||
Advances to third parties (i) | 2,894,804 | 3,922,846 | ||||||
Due from Heilongjiang Feihe Yuanshengtai Co., Ltd. (ii) | 8,808,816 | 8,947,808 | ||||||
Others | 159,600 | 401,496 | ||||||
Other receivables | 13,537,187 | 13,742,625 |
(i) | These are funds lent to third parties, which are unsecured, non-interest bearing, and repayable within one year. |
(ii) | Heilongjiang Feihe Yuanshengtai Co., Ltd. (“Yuanshengtai”) was partially owned by two officers and directors of the Company, Mr. Leng You-Bin and Mr. Liu Sheng-Hui, before January 2010. Shares held by Mr. Leng You-Bin and Mr. Liu Sheng-Hui were transferred to unrelated third parties who held no ownership interests in Yuanshengtai in January 2010. The balances are payments made by the Group on behalf of Yuanshengtai to purchase biological assets and property, plant and equipment. The balances are unsecured, non-interest bearing and repayable on demand. |
Consideration receivable from disposal of the Dairy Farms as of March 31, 2012 and December 31, 2011 consisted of the following:
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
US$ | US$ | |||||||
Current | 95,386,958 | 79,337,423 | ||||||
Non-current | - | 19,450,201 | ||||||
Consideration receivable | 95,386,958 | 98,787,624 |
10. | ASSETS HELD FOR SALE |
On October 28, 2011, the Company entered into an asset purchase agreement with a PRC individual, Mao Haifeng, to sell all of the property, plant and equipment and the prepaid leases with a carrying value of $2.1 million and $154,000 at Baiquan Feihe, respectively. The asset sale was not yet completed as of March 31, 2012 as certain conditions precedent to the sale were not met. The buyer has the right to terminate the asset purchase agreement if the conditions precedent are not met by the end of May 2012. Management of the Company expects that the asset sale will be completed in May 2012. The assets underlying this agreement were recognized as assets held for sale. As of March 31, 2012, assets held for sale was $2,382,801.
11. | INVESTMENT IN MUTUAL FUNDS – AVAILABLE-FOR-SALE |
Various inputs are considered when determining the fair value of the Company’s financial instruments. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below.
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
11 |
Level 3
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
Investment in mutual funds is carried at fair value based on the quoted market prices of the underlying fund as of March 31, 2012 and December 31, 2011. Unrealized (loss) gain recorded for the three months ended March 31, 2012 and 2011 was $2,661, and $(1,350), respectively.
Fair value measurement | ||||||||||||||||
Quoted prices in active markets of identical assets | Significant other observable inputs | Significant unobservable inputs | ||||||||||||||
Description | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
US$ | US$ | US$ | US$ | |||||||||||||
Investment in mutual funds – March 31,2012 | 113,777 | 113,777 | - | - | ||||||||||||
Investment in mutual funds – December 31, 2011 | 111,116 | 111,116 | - | - |
12. | PROPERTY, PLANT AND EQUIPMENTS, NET |
Property, plant and equipment and related accumulated depreciation as of March 31, 2012 and December 31, 2011 were as follows:
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
US$ | US$ | |||||||
Buildings and plant | 71,713,563 | 71,761,419 | ||||||
Machinery and equipment | 79,302,565 | 79,153,189 | ||||||
Office equipment | 4,275,604 | 2,418,688 | ||||||
Motor vehicles | 2,488,317 | 4,236,268 | ||||||
157,780,049 | 157,569,564 | |||||||
Less: Accumulated depreciation | (30,504,786 | ) | (28,829,927 | ) | ||||
Property, plant and equipment, net | 127,275,263 | 128,739,637 |
(1) Depreciation expenses
Depreciation expense for the Group’s continuing operations for the three months ended March 31, 2012 and 2011 was $1,977,367 and $1,384,413, respectively, of which $1,499,429 and $689,589 were included as a component of cost of goods sold in the respective periods.
(2) Pledged property, plant and equipment
The net book value of buildings and plant, and machinery and equipment pledged for bank loans was $59,366,724 as of March 31, 2012.
(3) Capitalized interest
No interest expenses were capitalized in property, plant and equipment for the three months ended March 31, 2012 and 2011.
12 |
13. | CONSTRUCTION IN PROGRESS |
Construction in progress included in the condensed consolidated balance sheets as of March 31, 2012 and December 31, 2011 comprised the following:
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
Langfang Feihe production factory facilities | - | 1,514 | ||||||
Gannan Feihe production factory facilities | 15,028,932 | 14,417,518 | ||||||
Feihe soybean processing facilities | 454,305 | 454,608 | ||||||
Others | 21,858 | 21,872 | ||||||
Total | 15,505,095 | 14,895,512 |
Nil and $266,696 of interest expenses were capitalized in construction in progress for the three months ended March 31, 2012 and 2011, respectively.
14. | SHORT TERM BANK LOANS |
Short term bank loans included in the condensed consolidated balance sheets as of March 31, 2012 and December 31, 2011 consisted of the following:
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
US$ | US$ | |||||||
Loan payable to a bank in PRC, bearing interest at 5.81% per annum, secured by machinery and an undertaking from Feihe Dairy to maintain debt-to-equity ratio of not more than 70% and current ratio of at least 100%, payable with interest on maturity, due and repaid on January 25, 2012 | - | 1,429,956 | ||||||
Loan payable to a bank in PRC, bearing interest at 6.31% per annum, secured by machinery, payable with interest on maturity, due and repaid on April 6, 2012 | 5,993,871 | 5,997,871 | ||||||
Loan payable to a bank in PRC, bearing interest at 6.89% per annum, guaranteed by Feihe Dairy and an undertaking from Gannan Feihe to maintain debt-to-equity ratio of not more than 60% and current ratio of at least 120%, payable with interest on maturity, due on August 30, 2012 (i) | 3,175,561 | 3,177,680 | ||||||
Loan payable to a bank in PRC, bearing interest at 6.89% per annum, guaranteed by Feihe Dairy and an undertaking from Gannan Feihe to maintain debt-to-equity ratio of not more than 60% and current ratio of at least 120%, payable with interest on maturity, due on September 14, 2012 (i) | 1,587,780 | 1,588,840 | ||||||
Loan payable to a bank in PRC, bearing interest at 6.56% per annum, secured by plant and land, payable with interest on maturity, due on November 23, 2012 (ii) | 7,938,902 | 7,944,200 | ||||||
Loan payable to a bank in PRC, bearing interest at 6.56% per annum, payable with interest on maturity, due on November 23, 2012 (ii) | 23,816,706 | 23,832,600 | ||||||
Loan payable to a bank in PRC, bearing interest at 6.89% per annum, guaranteed by Feihe Dairy and an undertaking from Gannan Feihe to maintain debt-to-equity ratio of not more than 60% and current ratio of at least 100% and quick ratio of at least 50%, payable with interest on maturity, due on December 21, 2012 (i) | 3,175,561 | 3,177,680 | ||||||
Loan payable to a bank in PRC, bearing interest at a floating interest rate at RMB benchmark deposit interest rates per annum, unsecured and due on December 26, 2012 | 2,540,449 | 2,542,144 | ||||||
Loan payable to a bank in PRC, bearing interest at a floating interest rate at RMB benchmark deposit interest rates per annum, secured by the plant and land, due on December 26, 2012 | 2,540,449 | 2,542,144 | ||||||
Loan payable to a bank in PRC, bearing interest at a floating interest rate at 130% of RMB benchmark deposit interest rate per annum, secured by a property, payable with interest on maturity and an undertaking from Beijing Feihe to maintain current assets of not less than RMB8 million ($1,270,224), net assets of at least RMB2 million ($317,556) and current ratio of at least 100%, due on December, 31, 2012 (iii) | 2,381,671 | 2,383,260 | ||||||
Total | 53,150,950 | 54,616,375 |
13 |
(i) | Feihe Dairy guaranteed the loans payable to a bank in the PRC for a period, beginning on August 30, 2011 and ending on August 30, 2012. The maximum potential future payment amount under the terms of the guarantee was RMB50,000,000 (approximately $7,938,902) as of March 31, 2012. |
(ii) | These loans were granted pursuant to a loan facility letter and have made available to the Company up to RMB703 million (approximately $112 million) until October 8, 2012. These loans were also secured by a personal guarantee of Mr. Leng You-Bin, Chairman, Chief Executive Officer, President, and General Manager of the Group, for a period of one year from November 24, 2011 to November 23, 2012. |
(iii) | The loan was also secured by a personal guarantee of Mr. Leng for a period of one year. |
All of the short term bank loans are denominated in RMB and therefore subject to exchange rate fluctuations. As of March 31, 2012, the Company had met all of the financial covenants of the above loans, except for a loan of $2,381,671. Despite the non-compliance, the bank did not demand immediate repayment of this loan, which was secured by a personal guarantee of Mr. Leng.
15. | ACCRUED EXPENSES |
Accrued expenses as of March 31, 2012 and December 31, 2011 consisted of the following:
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
US$ | US$ | |||||||
Accrued sales and marketing expenses | 3,360,004 | 6,167,090 | ||||||
Other accrued expenses | 784,265 | 776,280 | ||||||
4,144,269 | 6,943,370 |
Accrued sales and marketing expenses include advertising, transportation costs and sales department salaries.
14 |
16. | OTHER PAYABLES |
Other payables as of March 31, 2012 and December 31, 2011 consisted of the following:
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
US$ | US$ | |||||||
Payable for property, plant and equipment | 16,931,143 | 18,865,860 | ||||||
Payable for land use rights | 139,410 | 137,933 | ||||||
Other tax payable | 6,082,289 | 9,578,354 | ||||||
Deposits from distributors | 3,779,181 | 2,475,810 | ||||||
Payable to local County Finance Bureaus (i) | 1,372,021 | 1,180,954 | ||||||
Payable to an unrelated party, due on demand | 442,600 | 442,600 | ||||||
Others (ii) | 4,417,270 | 6,879,877 | ||||||
33,163,914 | 39,561,388 |
(i) | The Group received funding from the local County Finance Department for construction of the production facilities in the region and working capital usage. Although, no repayment terms were attached with the funds, the Group considers them to be unsecured, non-interest bearing loans from the County Finance Department that are repayable on demand. |
(ii) | Other payables mainly include deposits received from logistics companies and milk collection stations, prepayment made by employees on behalf of the Group, advertising cost, and other miscellaneous payables. |
17. | LONG TERM BANK LOANS |
Long term bank loans consisted of the following as of March 31, 2012 and December 31, 2011:
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
US$ | US$ | |||||||
Loan payable to a bank in PRC, bearing interest at 5.76% per annum, guaranteed by Langfang Feihe and payable on maturity. The loan commenced on December 24, 2009 and was originally due on December 24, 2014. The maturity date was changed to December 23, 2013 pursuant to a supplemental agreement | 8,348,425 | 8,353,996 | ||||||
Loan payable to a bank in PRC, bearing interest at 5.96% per annum, secured by land use right of Gannan Feihe. The loan commenced on December 24, 2010 and was originally due on December 24, 2015. The maturity date was changed to December 23, 2013 pursuant to a supplemental agreement | 3,532,811 | 3,535,169 | ||||||
11,881,236 | 11,889,165 | |||||||
Less: current portion of long term bank loans | (5,941,474 | ) | (5,945,439 | ) | ||||
5,939,762 | 5,943,726 |
18. | CAPITAL LEASE OBLIGATION |
In November 2009, the Group entered into a six-year capital lease agreement for certain equipment under construction. The terms of the lease required an initial payment of RMB5 million (or approximately $784,000) and require a RMB1 million (or approximately $159,000) payment on January 30th of each year after successful completion of production quality tests. The installment and trial run of the equipment was completed by December 31, 2010, and the equipment under the capital lease is depreciated over an estimated productive life of 14 years when placed into service after passing production quality tests. As of March 31, 2012 and December 31, 2011, the Group had $1,452,549 and $1,453,518, respectively, of equipment subject to the capital lease obligation.
15 |
Minimum future lease payments under capital leases as of March 31, 2012 were as follows:
Future payments | ||||
US$ | ||||
2012 | 52,177 | |||
2013 | 158,778 | |||
2014 | 158,778 | |||
2015 | 158,778 | |||
Total minimum lease payments at March 31, 2012 | 528,511 | |||
Less amount representing interest | (68,703 | ) | ||
Net present value of minimum lease payments | 459,808 | |||
Current portion of capital lease obligation | (181,296 | ) | ||
Non-current portion of capital lease obligation | 278,512 |
The interest rate on the capital lease is 5.31%. There was $7,415 and $8,702 amortization of interest recorded for the three months ended March 31, 2012 and 2011, respectively. Accumulated amortization was $82,051 and $74,636 as of March 31, 2012 and December 31, 2011, respectively.
19. | LONG TERM DEPOSIT AND OTHER LONG TERM LOAN |
Other long term loan reflects a loan the Company obtained to make the payment of the first three installment of redeemable common stock to Sequoia Capital China Growth Fund I, LP and certain of its affiliates and designees (collectively, “Sequoia”) (Note 21) during 2011 and the first quarter of 2012. As the Company did not have enough US dollars to redeem the redeemable common stock, the Company entered into an agreement with a group of overseas third party companies to borrow a total amount of $49.8 million. The loan is interest free with a period of two years starting from the date the Company received the loan.
As security for the loan, the Company deposited a total amount of RMB423 million (equivalent to $67.2 million) with six domestic companies designated by the overseas third party companies. The deposit will not be returned to the Company until the Company pays the loan of $49.8 million in full.
20. | RELATED PARTY TRANSACTIONS |
Due from/to related parties included in the condensed consolidated balance sheets as of March 31, 2012 and December 31, 2011 comprised the following:
March 31, 2012 | December 31, 2011 | |||||||
US$ | US$ | |||||||
Due from related parties | ||||||||
Due from directors of the Group | 19,974 | 194,759 | ||||||
Due from related companies | 7,306 | - | ||||||
Total | 27,280 | 194,759 |
March 31, 2012 | December 31, 2011 | |||||||
US$ | US$ | |||||||
Due to related parties | ||||||||
Due to directors of the Group | 53,302 | 31,777 | ||||||
Due to related companies | - | 3,593 | ||||||
Loan payable to a related party | 50,809 | 50,843 | ||||||
Total | 104,111 | 86,213 |
16 |
Due from/to directors of the Group
As part of normal business operations, directors of the Group will from time to time incur routine expenses on behalf of the Group, or receive general advances from the Group for settlement of Group expenses, such as travel, meals and other business expenses. The amounts advanced are settled periodically throughout the period and amounts outstanding at period end are short term in nature and due on demand. During the three month period ended March 31, 2012, advances to directors aggregated to $523,560 and repayments from directors aggregated to $698,080. During the three month period ended March 31, 2011, advances to directors aggregated to $1,250 and repayments from directors aggregated to $35,539.
As of March 31, 2012 and December 31, 2011, the Group had the following balances due from its directors:
March 31, 2012 | December 31, 2011 | |||||||
US$ | US$ | |||||||
Leng You-Bin | - | 79,442 | ||||||
Liu Sheng-Hui | - | 95,330 | ||||||
Liu Hua | 19,974 | 19,987 | ||||||
Total | 19,974 | 194,759 |
As of March 31, 2012 and December 31, 2011, the Group had the following balances due to its directors:
March 31, 2012 | December 31, 2011 | |||||||
US$ | US$ | |||||||
Leng You-Bin | 53,302 | 31,777 | ||||||
Total | 53,302 | 31,777 |
Due from/to related companies
Mr. Leng You-Bin is the Chairman, Chief Executive Officer, President, and General Manager of the Group. During the three months ended March 31, 2012 and 2011, the Group had certain transactions with companies owned by close family members of Mr. Leng, including Yuanshengtai, which was partially owned by Mr. Leng and Liu Sheng-Hui, on an arm’s length basis. Those shares held by Mr. Leng and Liu Sheng-Hui were transferred to unrelated third parties who held no ownership interests in Yuanshengtai in January 2011. Subsequent to such date, Yuanshengtai ceased being a related party of the Group and, accordingly, the balance due from Yuanshengtai was classified as other receivables, as disclosed in Note 9.
Tangshan Feihe Trading Company and Qinhuangdao Feihe Trading Company are owned by relatives of Mr. Leng, and are therefore regarded as related parties.
As of March 31, 2012 and December 31, 2011, the Group had the following balances due from its related companies:
March 31, 2012 | December 31, 2011 | |||||||
US$ | US$ | |||||||
Tangshan Feihe Trading Company | 1,813,774 | 1,814,985 | ||||||
Qinhuangdao Feihe Trading Company | 27,752 | 27,770 | ||||||
Dalian Hewang Trading Company (i) | 7,306 | - | ||||||
Total | 1,848,832 | 1,842,755 | ||||||
Less: Allowance for doubtful debts | (1,841,526 | ) | (1,842,755 | ) | ||||
7,306 | - |
(i) | A company managed by the management of the Company’s subsidiary |
17 |
As of March 31, 2012 and December 31, 2011, the Group had the following balances due to its related companies:
March 31, 2012 | December 31, 2011 | |||||||
US$ | US$ | |||||||
Dalian Hewang Trading Company (i) | - | 3,593 | ||||||
Total | - | 3,593 |
(i) | A company managed by the management of the Company’s subsidiary |
For the three months ended March 31, 2012 and 2011, the Group made sales of goods to the following related companies:
For the three months ended March 31, | ||||||||
2012 | 2011 | |||||||
US$ | US$ | |||||||
Dalian Hewang Trading Company (i) | - | 56,273 | ||||||
Total | - | 56,273 |
(i) | A company managed by the management of the Company’s subsidiary |
Loan payable to related parties
The Group has an outstanding loan payable to a charitable organization established by Leng You-Bin for underprivileged children in the Heilongjiang Province of the PRC of $50,809 and $50,843 as of March 31, 2012 and December 31, 2011, respectively. The loan is unsecured and bears interest at 5.85% per annum and is payable on demand.
21. | REDEEMABLE COMMON STOCK |
In August 2009, pursuant to a subscription agreement (the “Subscription Agreement”) with Sequoia the Company issued to Sequoia 2,100,000 shares of its common stock for an aggregate purchase price of $63 million. The Company issued 525,000 shares of redeemable common stock to Sequoia in March 2010 pursuant to a performance adjustment clause in the Subscription Agreement.
On February 1, 2011, the Company entered into a redemption agreement (the “Redemption Agreement”) with Sequoia, pursuant to which the Company agreed to redeem and purchase from Sequoia an aggregate of 2,625,000 shares (the “Shares”) of the Company’s common stock in four equal installments within thirty days of March 31, 2011, September 30, 2011, December 31, 2011 and March 31, 2012 (each, a “Closing Date”), for an aggregate payment of $65,079,979. As a result of the Redemption Agreement, the redeemable common stock became mandatorily redeemable and was reclassified into current liabilities in the settlement amount of $65,079,979. The difference between the settlement amount and carrying amount of $1,033,736 was included in retained earnings.
On April 27, 2011, the Company paid $16.1 million to Sequoia including $15.8 million together with interest accruing thereon at the rate of 1.5% per annum, compounded annually from August 27, 2009 until April 27, 2011, as the first installment payment to redeem 656,250 shares of common stock.
On October 27, 2011, the Company paid $16.3 million to Sequoia, including $15.8 million together with interest accruing thereon at the rate of 1.5% per annum, compounded annually from August 27, 2009 until October 27, 2011, as the second installment payment to redeem 656,250 shares of common stock. The outstanding liability of redeemable common stock was $32,696,658 as of December 31, 2011.
On January 31, 2012, the Company paid $16.3 million to Sequoia, including $15.8 million together with interest accruing thereon at the rate of 1.5% per annum, compounded annually from August 27, 2009 until January 31, 2012, as the third installment payment to redeem 656,250 shares of common stock. The outstanding liability of redeemable common stock was $16,379,092 as of March 31, 2012.
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22. | SHARE-BASED COMPENSATION |
Stock Options
The Company has two stock option plans: the 2009 Stock Incentive Plan (the “2009 Plan”) and the 2003 Stock Incentive Plan (the “2003 Plan”). The Company applies authoritative guidance issued by the Financial Accounting Standards Board regarding share-based payments in accounting for the 2009 Plan and the 2003 Plan, which requires that compensation for services that a corporation receives through share-based compensation plans be measured based on the fair value of options on the date of grant.
(1) | 2009 Stock Incentive Plan |
On May 7, 2009, the Company’s Board of Directors approved the 2009 Plan, which was approved by the Company’s shareholders at the Company’s 2009 Annual Meeting of Shareholders. The 2009 Plan permits grants of certain equity incentives, including incentive stock options, nonqualified stock options, restricted stock awards, performance stock awards and other equity-based compensation, to certain employees, directors, officers, consultants, agents, advisors and independent contractors of the Company and its subsidiaries. The total number of shares of the Company’s common stock initially authorized for issuance under the 2009 Plan is 2,000,000 plus any authorized shares that, as of May 7, 2009, were available for issuance under the Company’s 2003 Stock Incentive Plan.
On May 7, 2009, the Compensation Committee of the Board of Directors (the “Compensation Committee”) granted an aggregate of 2,073,190 performance stock options to certain officers and employees of the Company under the 2009 Plan. The performance stock options each have an exercise price of $16.86 and a contractual life of 6 years. The performance stock options will vest in two equal tranches on the fourth and fifth anniversaries of the date such options were granted, provided that the recipient has met the performance criteria established in accordance with the 2009 Plan, including performance targets that must be met in each of the Company’s 2009, 2010 and 2011 fiscal years, and the recipient continues to be an employee of, or service provider to, the Company or its subsidiaries at the time of the relevant vesting dates. If the performance criteria are not met, the shares that would otherwise vest on vesting dates are forfeited and cancelled.
The performance targets for the year ended December 31, 2009 were not met for any option recipient. Accordingly, the options granted were to be forfeited and cancelled. In December 2009, the performance targets were amended in order to limit the amount of options that would otherwise be forfeited and cancelled due to the failure to satisfy the annual performance goals to one-third of stock options granted for each of fiscal year 2009, 2010, and 2011. The incremental cost or benefit resulting from the modification is measured as the excess of the fair value of the modified award over the fair value of the original award immediately before its terms were modified and the effect on the number of instruments expected to vest. 421 employees were affected by this modification. In 2010 and 2011, the amended performance targets were not met for any option recipient.
The fair value of the option awards was estimated on the date of grant using the Black-Scholes option valuation model to be $22,106,218. The valuation was based on the assumption noted in the following table.
Expected volatility | 74.94 | % | ||
Expected dividends | 0 | % | ||
Expected term (in years) | 5.25 | |||
Risk-free rate | 2.27 | % |
On October 15, 2009, an option to purchase 50,000 shares was granted to an employee that vests on the 12-month anniversary of the date of grant, conditioned upon continued employment on such date, and has an exercise price of $16 and contractual life of 4 years.
On October 23, 2009, the Compensation Committee granted an aggregate of 30,000 new performance stock options to an employee of the Company under the 2009 Plan. The performance stock options have an exercise price of $27.69 and a contractual life of 6 years and vest in two equal tranches on the fourth and fifth anniversaries of the date such options were granted, provided that the recipient has met the performance criteria established in accordance with the 2009 Plan, including performance targets that must be met in each of the Company’s 2009, 2010 and 2011 fiscal years, and the recipient continues to be an employee of, or service provider to, the Company or its subsidiaries at the time of the relevant vesting dates. If the performance criteria are not met, the options that would otherwise vest on the vesting dates are forfeited and cancelled.
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The fair value of the option awards are estimated on the date of grant using the Black-Scholes option valuation model to be $565,900. The valuation was based on the assumptions noted in the following table.
Expected volatility | 83 | % | ||
Expected dividends | 0 | % | ||
Expected term (in years) | 5.25 | |||
Risk-free rate | 2.59 | % |
On August 27, 2010, options to purchase 84,000 shares were granted to directors of the Company for their services provided for the period from August 1, 2010 through July 31, 2011, that vests in four equal amounts on each three-month anniversary of the grant date until all such shares are fully vested. The options have an exercise price of $7.25 and a contract life of 2 years. The fair value of the option award is estimated on the date of grant using the Black-Scholes option valuation model to be $164,516. The valuation was based on the assumptions noted in the following table.
Expected volatility | 54 | % | ||
Expected dividends | 0 | % | ||
Expected term (in years) | 0.81 | |||
Risk-free rate | 0.22 | % |
On July 29, 2011, the Compensation Committee granted performance options to acquire up to an aggregate of 1,332,000 shares of the Company’s common stock to certain officers and employees of the Company pursuant to the 2009 Plan. The performance stock options each have an exercise price of $8.32 per share, a contractual life of 6 years, and vest in three tranches of 25%, 35% and 40% on each of the three years ended December 31, 2012, 2013 and 2014, provided that the recipient has met certain performance criteria, and the recipient continues to be an employee of, or service provider to, the Company or its subsidiaries at the time of the relevant vesting dates.
The fair value of the option award was estimated on the date of grant using the Black-Scholes option valuation model to be $6,643,504. The valuation was based on the assumptions noted in the following table.
Expected volatility | 77 | % | ||
Expected dividends | 0 | % | ||
Expected term (in years) | 5.15 | |||
Risk-free rate | 2.60 | % |
During the three months ended March 31, 2012 and 2011, there was $1,099,319 and $402,154 compensation cost related to 2009 Plan recognized in general and administrative expenses.
(2) 2003 Stock Incentive Plan
Effective May 7, 2003, the Company adopted and approved its 2003 Plan, which reserved 3,000,000 shares of common stock for issuance under the Plan. The Plan allows the Company to issue awards of incentive non-qualified stock options, stock appreciation rights, and stock bonuses to directors, officers, employees and consultants of the Company which may be subject to restrictions.
No stock appreciation rights have been issued under the 2003 Plan.
On October 15, 2008, an option to purchase 80,000 shares was granted to an employee that vests on the 12-month anniversary of the date of grant, conditioned upon continued employment on such date, and have an exercise price of $12.00 and a contractual life of 4 years.
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A summary of option activity under the 2009 and 2003 Plans as of March 31, 2012 and December 31, 2011 and movement during the three months ended March 31, 2012 were as follows:
Options | Weighted average grant date fair value per share | Weighted average exercise price per share | Aggregate intrinsic value (1) | Weighted average remaining contractual term (years) | ||||||||||||||||
US$ | US$ | US$ | ||||||||||||||||||
Outstanding as of January 1, 2012 | 1,446,000 | 5.31 | 8.66 | - | 5.25 | |||||||||||||||
Granted | - | |||||||||||||||||||
Exercised | - | |||||||||||||||||||
Forfeited or expired | - | |||||||||||||||||||
Outstanding as of March 31, 2012 | 1,446,000 | 5.31 | 8.66 | - | 5.00 | |||||||||||||||
Exercisable as of March 31, 2012 | 84,000 | 1.96 | 7.25 | - | 0.39 |
(1) The intrinsic values of options at January 1, 2012 and March 31, 2012 were zero since the per share market values of the Company’s common stock of $2.51 and $3.16, respectively, were lower than the exercise price per share of the options.
A summary of the status of the Company’s non-vested options as of March 31, 2012 and December 31, 2011 and movement during the three months ended March 31, 2012 were as follows:
Options | Weighted average grant date fair value per share | |||||||
US$ | ||||||||
Non-vested as of January 1, 2012 | 1,362,000 | 5.52 | ||||||
Granted | - | |||||||
Vested | - | |||||||
Forfeited or expired | - | |||||||
Non-vested as of March 31, 2012 | 1,362,000 | 5.52 |
As of March 31, 2012, there was a total of $4,636,554 of unrecognized compensation cost related to non-vested share-based compensation granted under the 2003 Plan and 2009 Plan. The cost is expected to be recognized over various periods ranging from 31 months to 33 months. To the extent the actual forfeiture rate is different from the original estimate, actual share-based compensation cost related to these awards may be different from the expectation.
Warrants
As of March 31, 2012, the Company had 237,937 warrants outstanding with a weighted average remaining contractual life of 0.55 years and a weighted average exercise price of $14.50 per warrant. The warrants will expire on October 4, 2012. These warrants had no intrinsic value at March 31, 2012 since the per share market value of the Company’s common stock of $3.16 as of March 31, 2012 was lower than the exercise price per share of the warrants.
During the three months ended March 31, 2012 and 2011, no warrants were exercised.
23. | COMMITMENTS AND CONTINGENCIES |
(1) Operating lease arrangements
The Group has entered into leasing arrangements relating to office premises and computer equipment that are classified as operating leases. There were no minimum future rental payments under non-cancellable operating leases having remaining terms in excess of one year.
Rent expenses incurred and expensed to the condensed consolidated statements of income and comprehensive income during the three months ended March 31, 2012 and 2011 amounted to $126,242 and $85,792, respectively.
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(2) Capital commitments
Capital commitments for the purchase of property, plant and equipment were $3,810,682 and $3,808,141 as of March 31, 2012 and December 31, 2011, respectively.
(3) Purchase commitments
The Group has certain purchase commitments of $7,190,199 over four years relating to packaging materials.
(4) Land use rights
All lands in the PRC are state-owned and no individual land ownership rights exist. The Group has obtained land use right certificates for the land on which its facilities are located, except that Langfang Feihe is in the process of obtaining such a certificate.
Feihe Dairy entered into a land use right contract on January 13, 2006 with the Bureau of Land and Real Estate of Langfang Economic and Technology Development Zone in Hebei Province, the PRC, as amended by a supplementary contract dated January 13, 2006, which sets forth rights to use the land on which Langfang Feihe's facilities are located. Feihe Dairy is applying to assign its rights under the contract to Langfang Feihe. Management believes that this contract adequately evidences Langfang Feihe's right to use the land, and that there should be no legal obstacle to Langfang Feihe's use of the land or obtaining a certificate of land use right. However, in the event that Langfang Feihe fails to obtain such a certificate, there is a risk that the PRC government may deem Langfang Feihe's operations illegitimate or impose penalties and fines. While present, however, management believes that this possibility is remote.
(5) Other assets
Substantially all of the Group’s assets and operations are located in the PRC. The Company is self-insured for all risks.
24. | SEGMENTS |
Until October 31, 2011, the Company had two reportable segments: dairy products and dairy farms. The dairy products segment produces and sells dairy products, such as wholesale and retail milk powders as well as soybean powder, rice cereal, walnut powder and walnut oil. In October 2011, the Company sold the Dairy Farms (see Note 5). As of March 31, 2012, the Company’s operations comprised a single segment – dairy products. As the Group primarily generates its revenues from customers in the PRC, no geographical segments are presented.
25. | SUBSEQUENT EVENTS |
In April 2012, the Company paid the final installment of approximately $16.3 million to Sequoia pursuant to the Redemption Agreement (Note 21). All 2,625,000 of the Company’s redeemable shares of common stock have been redeemed.
As the Company did not have enough US dollars to redeem the redeemable common stock, the Company entered into an agreement with a group of overseas third party companies to borrow a total amount of $16.2 million on April 11, 2012.
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FORWARD-LOOKING STATEMENTS
The statements included in this report that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and Section 27A of the Securities Act of 1933, as amended. These statements include, but are not limited to, statements about our plans, objectives, expectations, strategies, intentions or other characterizations of future events or circumstances and are generally identified by the words “may,” “expects,” “anticipates,” “intends,” “plans,” “targets,” “believes,” “seeks,” “estimates,” “could,” “would,” and similar expressions. Because these forward-looking statements are subject to a number of risks and uncertainties, our actual results could differ materially from those expressed or implied by these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the heading “Risk Factors” in our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2011, and in other documents we file from time to time with the U.S. Securities and Exchange Commission, or the SEC. All forward-looking statements included in this report are based on information available to us on the date hereof. Our business and the associated risks may have changed since the date this report was originally filed with the SEC. We assume no obligation to update any such forward-looking statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes appearing elsewhere in this report. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report.
Overview
We are a leading producer and distributor of milk powder, soybean milk powder, and related dairy products in the People’s Republic of China, or the PRC. Using proprietary processing techniques, we make products that are specially formulated for particular ages, dietary needs and health concerns. We have over 200 company-owned milk collection stations, six production and distribution facilities with an aggregate milk powder processing capacity of approximately 2,020 tons per day, and an extensive distribution network that reaches over 80,000 retail outlets throughout China.
Factors Affecting our Results of Operations
Our operating results are primarily affected by the following factors:
• | Dairy Industry Growth. We believe the market for dairy products in China for the long term will be growing rapidly, driven by China’s economic growth, increased penetration of infant formula, and a growing female working population. Despite the damage to the industry as a result of the melamine crisis in 2008, we expect these factors to continue to drive industry growth. We believe that economic growth in our primary markets has become an increasingly important driver of growth. | |
• | Production Capacity. We believe much of the dairy market in China is still underserved, particularly with respect to infant formula. In addition, since the melamine crisis in 2008, which did not involve any of our products, we have at times operated our milk production facilities at maximum capacity. Accordingly, we believe that the ability to increase production of high quality dairy products will allow well positioned companies to significantly increase revenues and market share. | |
• | Perceptions of Product Quality and Safety. We believe that rising consumer wealth in China has contributed to a greater demand for higher-priced products with perceived quality advantages. We believe our reputation for quality and safety allows us to command higher average selling prices and generate higher gross margins than competitors who do not possess the same reputation, and we have recently launched premium and super-premium product lines. In addition, we believe many consumers in China tend to regard higher prices as indicative of higher quality and higher nutritional value, particularly in the areas of infant formula and nutritional products. Conversely, any decrease in consumer perceptions of quality and safety could adversely impact us. |
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• | Seasonality. The dairy industry remains seasonal, with higher production in the summer season and greater demand in winter months. This seasonality is offset by production of powder products with longer shelf lives. | ||
• | Raw Material Supply and Prices. The per unit costs of producing our infant formula are subject to the supply and price volatility of raw milk and other raw materials, which are affected by the PRC and global markets. For example, our raw milk prices decreased by approximately 20% in 2009, increased by approximately 24% in 2010 and increased by approximately 17% in 2011. We expect raw milk prices will continue to be affected by factors such as geographic location, rising feed prices, general economic conditions such as inflation and fuel prices, and fluctuations in production, rising production costs and competition, as well as increased competition abroad and currency fluctuations. In 2011, we sold the Dairy Farms, although we have milk supply arrangements with them described under “—Recent Developments—Discontinued Operations.” | ||
• | Expenses Associated with Expansion and Competition. In implementing our plan to expand our business, we face corresponding increases in expenses, especially for sales and marketing expenses, in order to attract and retain qualified talent, monitor our sales by region and address potential cross-territory selling activities by distributors, implement strategic advertising campaigns, and finance our expansion. |
Recent Developments
Discontinued Operations
In September 2011, we sold two of our former subsidiaries that operated our dairy farms, which we refer to collectively as the “Dairy Farms,” for a total purchase price of approximately $133.1 million. This aggregate purchase price included approximately $18 million in cash. The remaining purchase price is to be satisfied by the purchaser’s delivery to us, in six quarterly installments, of raw milk with an aggregate value of approximately $115.1 million from the Dairy Farms, or the Supply Obligations. Concurrently, we entered into a raw milk exclusive supply agreement with the Dairy Farms and the purchaser, pursuant to which the Dairy Farms must satisfy the Supply Obligations by supplying raw milk to us valued at approximately $19.2 million during each quarter for a period of 18 months after the closing date. During this period, the Dairy Farms have agreed to supply raw milk to us exclusively until the quarterly quota amounts are delivered and for so long as we require additional supply. In the event the raw milk production of the Dairy Farms is insufficient to fulfill such quarterly amounts, the shortfall will be immediately payable to us in cash by the Dairy Farms. The quality of the milk must meet governmental and our standards, and we have the right to return any milk which does not meet such standards. In addition, we entered into an asset mortgage agreement with the Dairy Farms, pursuant to which the Dairy Farms granted us a primary security interest in certain properties and assets of the Dairy Farms to secure their obligations to us.
Redemption Obligations
In August 2009, pursuant to a subscription agreement, we issued 2,100,000 shares of our common stock to Sequoia Capital China Growth Fund I, LP and certain of its affiliates and designees, or collectively Sequoia, for an aggregate purchase price of $63.0 million. Because we did not meet certain earnings per share targets for 2009, we issued 525,000 additional shares to Sequoia pursuant to the subscription agreement. In February 2011, we entered into a redemption agreement with Sequoia to redeem and repurchase the 2,625,000 shares issued pursuant to the subscription agreement in four equal installments within 30 days of March 31, 2011, September 30, 2011, December 31, 2011 and March 31, 2012, for an aggregate payment on each such date of $15,750,000, together with interest accruing at the rate of 1.5% per annum, compounded annually from August 27, 2009 until such date. In April 2012, we paid the final installment of approximately $16.3 million to Sequoia, and all of the 2,625,000 shares have been redeemed.
24 |
Results of Operations
The following table sets forth certain information regarding our results of operations.
Three months ended March 31, | ||||||||
2012 | 2011 | |||||||
($ in thousands) | ||||||||
Sales | 62,936 | 67,679 | ||||||
Cost of goods sold | (28,957 | ) | (43,242 | ) | ||||
Gross profit | 33,979 | 24,437 | ||||||
Operating expenses: | ||||||||
Sales and marketing expenses | (18,768 | ) | (15,945 | ) | ||||
General and administrative expenses | (5,590 | ) | (5,720 | ) | ||||
Other operating income, net | 90 | 2,220 | ||||||
Income from operations | 9,711 | 4,992 | ||||||
Other income, net | 439 | 523 | ||||||
Income tax expenses | (1,883 | ) | (1,341 | ) | ||||
Income from continuing operations | 8,267 | 4,174 | ||||||
Income from discontinued operations, net of tax | - | 565 | ||||||
Net income | 8,267 | 4,739 | ||||||
Net loss attributable to noncontrolling interests | (24 | ) | (43 | ) | ||||
Net income attributable to common shareholders of Feihe International, Inc. | 8,243 | 4,696 |
Comparison of Three Month Periods Ended March 31, 2012 and 2011
Sales
Our sales consist primarily of revenues generated from sales of milk powder, raw milk powder, soybean powder, rice cereal, and walnut products. Sales decreased by approximately $4.7 million, or 7.0%, from approximately $67.7 million for the three month period ended March 31, 2011 to approximately $62.9 million for the three month period ended March 31, 2012. This decrease was primarily attributable to a decrease in sales of raw milk powder of approximately $15.2 million and a decrease in sales of soybean powder of approximately $1.5 million, offset by an increase in sales of milk powder of approximately $11.5 million. This reflects our strategy to boost sales of high end milk powder products.
The following table sets forth information regarding the sales of our principal products during the three-month periods ended March 31, 2012 and 2011:
Three months ended March 31, 2012 | Three months ended March 31, 2011 | Three months ended March 31, 2012 over 2011 | ||||||||||||||||||||||||||||||||||
Product name | Quantity (Kg'000) | Amount ($'000) | % of Sales | Quantity (Kg'000) | Amount ($'000) | % of Sales | Quantity (Kg'000) | Amount ($'000) | % of Sales | |||||||||||||||||||||||||||
Milk powder | 4,682 | 59,406 | 94.4 | 5,007 | 47,902 | 70.8 | (325 | ) | 11,504 | 24.0 | ||||||||||||||||||||||||||
Raw milk powder | 242 | 916 | 1.5 | 3,968 | 16,129 | 23.8 | (3,726 | ) | (15,213 | ) | (94.3 | ) | ||||||||||||||||||||||||
Soybean powder | 163 | 456 | 0.7 | 1,217 | 1,940 | 2.9 | (1,054 | ) | (1,484 | ) | (76.5 | ) | ||||||||||||||||||||||||
Rice cereal | 136 | 984 | 1.6 | 173 | 1,152 | 1.7 | (37 | ) | (168 | ) | (14.6 | ) | ||||||||||||||||||||||||
Walnut products | 7 | 42 | 0.1 | 50 | 307 | 0.5 | (43 | ) | (265 | ) | (86.3 | ) | ||||||||||||||||||||||||
Other | 460 | 1,132 | 1.7 | 70 | 249 | 0.3 | 390 | 883 | 354.6 | |||||||||||||||||||||||||||
Total | 5,690 | 62,936 | 100 | 10,485 | 67,679 | 100 | (4,795 | ) | (4,743 | ) | (7.0 | ) |
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In the three month period ended March 31, 2012, we also experienced an increase in the average sales price per kilogram of our products, as demonstrated in the table below:
Three months ended March 31, | ||||||||
2012 | 2011 | |||||||
Sales revenues ($ in thousands) | 62,936 | 67,679 | ||||||
Total sales volume (kilograms in thousands) | 5,690 | 10,485 | ||||||
Average selling prices ($/kilogram) | 11.06 | 6.45 |
The increase in average sales price per kilogram, as reflected in the table, is primarily attributable to an increase in sales prices of milk powder, a higher margin product, and soybean powder. The following table reflects the average sales price per kilogram by product for the three month periods ended March 31, 2012 and 2011, and the percentage change in the sales price per kilogram.
Average Price Per Kilogram | ||||||||||||
Three months ended March 31, | Percentage | |||||||||||
Product name | 2012 | 2011 | Change | |||||||||
Milk powder | $ | 12.69 | $ | 9.57 | 32.6 | |||||||
Raw milk powder | 3.79 | 4.06 | (6.7 | ) | ||||||||
Soybean powder | 2.80 | 1.59 | 76.1 | |||||||||
Rice cereal | 7.24 | 6.66 | 8.7 | |||||||||
Walnut products | 6.00 | 6.14 | (2.3 | ) | ||||||||
Other | 2.46 | 3.56 | (30.9 | ) | ||||||||
Average selling price s/kilogram | $ | 11.06 | $ | 6.45 | 71.5 |
The average selling price per kilogram of milk powder increased by 32.6% from $9.57 in the three month period ended March 31, 2011 to $12.69 in the three month period ended March 31, 2012. This increase was primarily attributable to increase in sales of high end milk powder.
Cost of Goods Sold
Our cost of goods sold consist primarily of direct and indirect manufacturing costs, including production overhead costs and shipping and handling costs for the products sold. Cost of goods sold decreased approximately $14.3 million, or 33%, from approximately $43.2 million for the three month period ended March 31, 2011 to approximately $29.0 million for the three month period ended March 31, 2012. This decrease was primarily attributable to decreases in the cost of goods sold of raw milk powder from $17.1 million for the three month period ended March 31, 2011 to $1.2 million for the three month period ended March 31, 2012. This decrease also reflects our decision to decrease production of raw milk powder, which generated a negative margin for the three month period ended March 31, 2012.
Gross Profit Margin
Our gross profit margin increased from 36.1% for the three month period ended March 31, 2011 to 54.0% for the three month period ended March 31, 2012. This increase was primarily attributable to general increases in the sales of high end milk powder and a decrease in sales of raw milk powder. We plan to continue our efforts to expand our sales of higher margin products and strengthen our premium quality brand awareness, enhance market recognition of our secured raw milk sources, and improve the efficiency of our distribution network.
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Operating Expenses
Our total operating expenses consist primarily of sales and marketing expenses, and general and administrative expenses. Our total operating expenses increased by approximately $2.7 million, or 12.4%, from approximately $21.7 million in the three month period ended March 31, 2011 to approximately $24.4 million in the three month period ended March 31, 2012. This increase was primarily attributable to an increase of approximately $2.8 million, or 17.7%, in sales and marketing expenses from approximately $15.9 million for the three month period ended March 31, 2011 to approximately $18.8 million for the three month period ended March 31, 2012. The increased sales and marketing expenses primarily related to a increase in advertisement fees and transportation cost of our sales personnel, which was offset in part by an decrease in other sales and marketing expenses.
Income from Operations
As a result of the foregoing, we had income from operations of approximately $9.7 million in the three month period ended March 31, 2012, representing an increase of approximately $4.7 million, or 94.5%, from approximately $5.0 million in the three month period ended March 31, 2011.
Income Tax Expenses
We are subject to U.S. federal and state income taxes, and our subsidiaries incorporated in the PRC are subject to enterprise income taxes in the PRC. We recorded an income tax expense of approximately $1.9 million and $1.3 million for the three months ended March 31, 2012 and 2011, respectively. The increase in income tax expense was primarily due to the increase in profits of Feihe Dairy, which is one of our major operations.
Liquidity and Capital Resources
In general, our primary uses of cash are providing for working capital purposes, which principally include the purchase of inventory, servicing debt and financing construction related to our expansion plans. Our largest source of operating cash flows is cash collections from our customers. We have been able to meet our cash needs principally by using cash on hand, cash flows from operations, bank loans and borrowings under our line of credit.
The accompanying unaudited condensed consolidated financial statements have been prepared assuming we will continue as a going concern. We had working capital of approximately $18.6 million as of March 31, 2012, compared to a working capital deficiency of approximately $8.0 million as of December 31, 2011. We have significant cash commitments in the 12 months following March 31, 2012, including maturity of short term bank loans of $53.2 million, the current portion of long term bank loans of $5.9 million and redemption of redeemable common stock of $16.4 million plus interest (which was fully redeemed after March 31, 2012). We believe we will be able to refinance much of our short term bank loans when they become due and intend to do so. We have also taken steps to reduce our operating expenses, including our sale in the third quarter of 2011 of the Dairy Farms we previously operated, with commitments from the Purchaser to supply milk to us. Accordingly, we believe that our cash generated from operations, existing cash and ability to draw down on unutilized credit lines will be sufficient to fund our expected cash flow requirements for at least next 12 months.
Cash Flows
As of March 31, 2012, we had retained earnings of approximately $68.9 million, cash and cash equivalents of approximately $9.8 million, total current assets of approximately $194.7 million and working capital of approximately $18.6 million.
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Our summary cash flow information is as follows:
Three months ended March 31, | ||||||||
2012 | 2011 | |||||||
($ in thousands) | ||||||||
Operating activities | 19,919 | 3,706 | ||||||
Investing activities | (2,848 | ) | (2,318 | ) | ||||
Financing activities | (22,654 | ) | 5 |
Net Cash Provided by Operating Activities
Net cash provided by operating activities increased approximately $16.2 million, from approximately $3.7 million for the three month period ended March 31, 2011 to approximately $19.9 million for the three month period ended March 31, 2012. This increase primarily reflected the following changes in working capital items:
· | Increase in net income of approximately $3.5 million, reflecting our strengthened profitability as discussed above; | |
· | Decrease in trade receivables of approximately $26.6 million, reflecting our decreased sales and our efforts to collect from customers in a shorter period, compared to higher trade receivables and higher sales in the three month period ended March 31, 2011; | |
· | Increase in account payable of approximately $5.6 million, reflecting our efforts to improve our working capital; | |
· | Increase in advances to suppliers of $7.4 million, primarily due to increased prices of raw material and increased number of suppliers; | |
· | Decrease in advances from customers of approximately $6.3 million, reflecting our more efficient completion of sales of milk powder; and | |
· | Decrease in other payables of approximately $6.4 million, primarily due to our paying more other taxes. |
Net Cash Used in Investing Activities
Net cash used in investing activities primarily relates to our expenditures associated with property, plant and equipment and construction of our new facilities. Net cash used in investing activities increased approximately $0.5 million, from approximately $2.3 million for the three month period ended March 31, 2011 to approximately $2.8 million for the three month period ended March 31, 2012. This increase was primarily attributable to a decrease of approximately $4.0 million in cash used in discontinued operations relating to the purchase of property, plant and equipment and biological assets, offset by an increase of approximately $4.5 million in restricted cash.
Net Cash Used in Financing Activities
Net cash used in financing activities increased approximately $22.7 million, from net cash provided by financing activities of approximately $5,000 for the three month period ended March 31, 2011 to net cash used in financing activities of approximately $22.7 million for the three month period ended March 31, 2012. This increase in financing cash outflow was primarily attributable to an increase of approximately $21.1 million in payment for long term deposit associated with our financing of the redemption of Sequoia’s shares and our redemption payment for Sequoia’s shares of approximately $16.3 million, offset by proceeds from other long term loans of approximately $16.5 million.
Outstanding Indebtedness
Redemption Obligation
In August 2009, pursuant to a subscription agreement, we issued 2,100,000 shares of our common stock to Sequoia for an aggregate purchase price of $63.0 million. Because we did not meet certain earnings per share targets for 2009, we issued 525,000 additional shares to Sequoia pursuant to the subscription agreement. In February 2011, we entered into a redemption agreement with Sequoia to redeem and repurchase the 2,625,000 shares issued pursuant to the subscription agreement in four equal installments within 30 days of March 31, 2011, September 30, 2011, December 31, 2011 and March 31, 2012, for an aggregate payment on each such date of $15,750,000, together with interest accruing at the rate of 1.5% per annum, compounded annually from August 27, 2009 until such date. In April 2011, October 2011 and January 2012, we paid Sequoia approximately $16.1 million, $16.3 million and $16.3 million, respectively, to redeem an aggregate of 1,968,750 shares of common stock. The outstanding liability of redeemable common stock was $16,379,092 as of March 31, 2012. In April 2012, we paid the final installment of approximately $16.3 million to Sequoia, and all of the 2,625,000 shares have been redeemed. All shares of our common stock we redeem constitute authorized but unissued shares.
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Short and Long Term Loans Payable
As of March 31, 2012, we had short term bank loans of approximately $53.2 million and long term bank loans of approximately $11.9 million from PRC banks. As of March 31, 2012, approximately $10.3 million of our short term bank loans contained various financial covenants. These covenants include requiring certain of our subsidiaries to maintain debt-to-equity ratios of not more than 60%, current ratios of at least 100% to 120%, quick ratios of at least 50%, or current assets of at least RMB8 million, depending on the loan. If our subsidiaries are unable to comply with these covenants or service our debt, we may lose control of parts of our business and be forced to reduce or delay planned capital expenditures, sell assets, restructure our indebtedness or submit to foreclosure proceedings, all of which could adversely effect our business, results of operations and financial condition. We may also need to secure additional future debt financing directly or through subsidiaries, which may contain various restrictive covenants and agreements, including cross-acceleration or cross-default provisions that could result in the default or acceleration under debt agreements based upon default or acceleration of any other debt agreement. As of March 31, 2012, we had met all of the financial covenants of the bank loans, except for a loan of $2,381,671. Despite the non-compliance, the bank did not demand immediate repayment of this loan, which was secured by a personal guarantee of Mr. Leng.
During the three month period ended March 31, 2012, the largest aggregate amount of short term bank loans was approximately $23.8 million. The maturity dates of the short term bank loans outstanding from PRC banks as of March 31, 2012 ranged from April 6, 2012 to December 31, 2012. All short term bank loans that have become due have been refinanced or repaid. During the three month period ended March 31, 2012, the largest aggregate amount of long term bank loans was approximately $8.3 million. Long term bank loans outstanding from PRC banks as of March 31, 2012 will fall due on December 23, 2013. The weighted average annual interest rate on short term bank loans and long term bank loans from PRC banks outstanding as of March 31, 2012 was 6.7% and 5.9%, respectively. The loans were secured by pledges of certain property, plant and equipment held by our subsidiaries, guarantees of certain of our subsidiaries and personal guarantees of one of our directors. Our ability to incur additional secured indebtedness depends in part on the value of our assets, which depends, in turn, on the strength of our cash flows, results of operations, economic and market conditions and other factors.
Line of Credit
We have a one year, unsecured line of credit with a bank of approximately $111.6 million (RMB703 million) scheduled to expire in the last quarter of 2012. The line of credit entitles us to draw demand loans for general corporate purposes. If we were to draw on the line of credit, interest would be a base rate established by the People’s Bank of China on the unpaid principal amount. As of March 31, 2012, there were borrowings of approximately $31.8 million at a weighted average interest rate of 6.56% under the line of credit. The net availability of the line of credit was approximately $79.8 million as of March 31, 2012. During the three month periods ended March 31, 2012, the largest aggregate amount of borrowing under the line of credit was approximately $23.8 million.
Equipment Financing
We have a six-year capital lease agreement for certain equipment under construction. The terms of the lease required an initial payment of approximately $784,000 and require a payment of approximately $159,000 on January 30th of each year after successful completion of production quality tests. The equipment is depreciated over its estimated productive life of 14 years. As of each of March 31, 2012 and December 31, 2011, we had approximately $1.5 million of equipment under construction subject to the capital lease obligation.
Off-Balance Sheet Arrangements
We have not entered into any transactions, agreements or other contractual arrangements to which an entity unconsolidated with us is a party and under which we have (i) any obligation under a guarantee, (ii) any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity, (iii) any obligation under derivative instruments that are indexed to our shares and classified as shareholders’ equity in our consolidated balance sheets, or (iv) any obligation arising out of a variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
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Critical Accounting Policies
The consolidated financial statements include the financial statements of us and our subsidiaries. All transactions and balances among us and our subsidiaries have been eliminated upon consolidation. Certain amounts included in or affecting our consolidated financial statements and related disclosures must be estimated, requiring us to make certain assumptions with respect to values or conditions that cannot be known with certainty at the time the financial statements are prepared. These estimates and assumptions affect the amounts we report for assets and liabilities, our disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenues and expenses during the reported periods. We routinely evaluate these estimates, utilizing historical experience, consulting with experts and utilizing other methods we consider reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates. Any effects on our business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.
Estimates of allowances for bad debts – We periodically review our trade and other receivables to determine if all are collectible or whether an allowance is required for possible uncollectible balances. We perform this review quarterly, and in determining the allowances, a number of factors are considered, including the length of time the receivable is past due, past loss history, the counter party’s current ability to pay and the general condition of the economy and industry. As a result of this review and collection of older receivables, no extra allowance for bad debts was recognized for the three months ended March 31, 2012 and we have increased our estimated allowance for bad debts by approximately $503,000 for the three months ended March 31, 2011. Although our write-offs of bad debts have been minimal in recent years and we had no write-offs in the three months ended March 31, 2012, events and circumstances could occur that would require that we increase our allowance in the future.
Estimate of the useful lives of property, plant and equipment – We estimate the useful lives and residual values of our property, plant and equipment. We also review property, plant and equipment for possible impairment whenever events and circumstances indicate that the carrying value of those assets may not be recovered from the estimated future cash flows expected to result from their use and eventual disposition. We recognized no impairments in the periods ended March 31, 2012 and 2011.
Inventory – We value inventories at the lower of cost or market value. We determine the cost of inventories using the weighted average cost method and include any related production overhead costs incurred in bringing the inventories to their present location and condition. We determine whether we have any excessive, slow moving, obsolete or impaired inventory. We perform this review quarterly, which requires management to estimate the future demand of our products and market conditions. We make provisions on the value of inventories at period end equal to the difference between the cost and the estimated market value. If actual market conditions change, additional provisions may be required.
Revenue recognition – Revenue from the sale of goods is recognized on the transfer of risks and rewards of ownership, which generally coincides with the time when the goods are shipped to customers and the title has passed. Revenue is shown net of sales returns, which amounted to less than 0.8% of total sales for the three months ended March 31, 2012 and 2011, respectively, and net of sales discounts, which is determined based on our distributors’ sales volumes.
Product display fees – We have entered into a number of agreements with our resellers, whereby we pay the reseller an agreed upon amount to display our products. We have reduced sales by the amount paid under these agreements. For the three month periods ended March 31, 2012 and 2011, product display fees from continuing operations were approximately $6.4 million and $3.7 million, respectively. There were no product display fees in relation to our discontinued operations for the three month periods ended March 31, 2012 and 2011.
Share-based compensation – Share-based compensation to employees is measured by reference to the fair value of the equity instrument as at the date of grant using the Black-Scholes model, which requires assumptions for dividend yield, expected volatility and expected life of stock options. The expected life of stock options is estimated by observing general option holder behavior. The assumption of the expected volatility has been set by reference to the implied volatility of our shares in the open market and historical patterns of volatility. Performance and service vesting conditions attached to the options are included in assumptions about the number of shares that the option holder will ultimately receive. On a regular basis we review the assumptions made and revise the estimates of the number of options expected to be settled, where necessary. Significant factors affecting the fair value of option awards include the estimated future volatility of our stock price and the estimated expected term until the option award is exercised or cancelled.
We recognize the compensation costs net of a forfeiture rate for those shares expected to vest on a graded vesting basis over the requisite service period of the award, which is generally the vesting period of the award. The estimate of forfeitures will be adjusted over the requisite service period to the extent that the actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation expense to be recognized in future period.
The fair value of awards is amortized over the requisite service period, except for 2,073,190 options granted in May 2009 and 1,332,000 options granted in July 2011 that vest upon performance conditions. For such performance based awards, we assess the probability of meeting such conditions in order to determine the compensation cost to be recognized. Total compensation expense recognized in general and administrative expenses for the three months ended March 31, 2012 and 2011 were approximately $1.1 million and $0.4 million, respectively.
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Taxation – Current income taxes are provided for in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. Net operating loss carry forwards and credits are applied using enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics.
We adopted ASC 740-10, “Income Taxes” (previously Financial Accounting Standards Board, or FASB, Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109,” or FIN 48) effective April 1, 2007. In accordance with ASC 740-10, we recognize a tax benefit associated with an uncertain tax position when, in our judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, we initially and subsequently measure the tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. Our liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. Our effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. We classify interest and penalties recognized on the liability for unrecognized tax benefits as income tax expense.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We invest in fixed and variable income investments classified as cash and cash equivalents and short term investments. Our cash and cash equivalents are placed primarily in demand deposits, with maturities of three months or less and short term investments are mutual funds. Except for borrowing of approximately $7.5 million that bears interest at floating interest rates tied to the RMB benchmark deposit interest rate, our borrowings bear fixed interest rates. As of March 31, 2012, we had short term loans of approximately $53.2 million and long term loans of approximately $11.9 million from PRC banks, the weighted average interest rates on our outstanding short term bank loans and long term loans was 6.7% and 5.9%, respectively, and we paid interest expenses of approximately $0.9 million and $0.2 million on our short and long term loans during the three months ended March 31, 2012, respectively. If interest rates on our short and long term loans were to increase by 10% to 7.37% and 6.49%, respectively, our interest expenses would potentially increase by approximately $90,000 and $20,000, respectively. If interest rates on our short and long term loans were to decrease by 10% to 6.03% and 5.31%, respectively, our interest expenses would potentially decrease by approximately $90,000 and $20,000, respectively. In addition, if we were to draw on our line of credit, interest would be a base rate established by the People’s Bank of China on the unpaid principal amount. We have not used derivative financial instruments to manage our interest rate risk exposure.
Foreign Currency Risk
We conduct substantially all of our operations in the PRC, and the Renminbi is the national currency in which our operations are conducted. We have not utilized any derivative financial instruments or any other financial instruments, nor do we utilize any derivative commodity instruments in our operations, nor any similar market sensitive instruments.
The exchange rate between the Renminbi and the U.S. dollar is subject to the PRC government’s foreign currency conversion policies, which may change at any time. The exchange rates at each of March 31, 2012 and December 31, 2011 were approximately 6.3 Renminbi to 1 U.S. dollar. The exchange rate is currently permitted to float within a very limited range. However, there remains significant international pressure on the PRC government to adopt a substantial liberalization of its currency policy, which could result in a further and more significant appreciation in the value of the Renminbi against the U.S. dollar. Any devaluation of the Renminbi against the U.S. dollar would consequently have an adverse effect on our financial performance and asset values when measured in terms of U.S. dollars. We recognized a foreign currency translation loss of approximately $128,000 for the three month period ended March 31, 2012 and a foreign currency translation gain of approximately $2.3 million for the three month period ended March 31, 2011. If the exchange rate were to increase by 10% to $1.00 = RMB6.9, our foreign currency translation gain for the three month period ended March 31, 2012 would potentially decrease by approximately $6.5 million. If the exchange rate were to decrease by 10% to $1.00 = RMB5.7, our foreign currency translation gain would potentially increase by approximately $6.9 million.
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Inflation
In recent years, China has not experienced significant inflation, and thus inflation has not had a material impact on our results of operations. According to the National Bureau of Statistics of China, the change in Consumer Price Index in China was 4.9%, 4.6% and -0.7% in 2011, 2010 and 2009, respectively.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective.
Management evaluated the effectiveness of our disclosure controls and procedures for the year ended December 31, 2011, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, and identified a material weakness in our internal control over financial reporting, which we view as an integral part of our disclosure controls and procedures. Consequently, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was not effective at December 31, 2011, because we had insufficient accounting personnel with appropriate knowledge of US GAAP. We are still in the process of remediating this material weakness, which substantially influenced the conclusion of our Chief Executive Officer and Chief Financial Officer that our disclosure controls and procedures were not effective as of March 31, 2012.
Remediation Plan
The material weakness we identified as of December 31, 2011 was also identified by us as of December 31, 2010. We have undertaken or are in the process of undertaking a number of measures to improve our internal controls over financial reporting to address the material weakness. We have launched a recruitment program to hire additional qualified accounting personnel. We plan to hire additional qualified accounting personnel, as necessary to fulfill our reporting obligations and to reinforce our internal audit function. We have also implemented regular and continuous U.S. GAAP accounting and financial reporting training programs for our existing accounting and reporting personnel, including senior financial officers. The costs for such remediation plan cannot yet be quantified but are not likely to be significant. However, we do not expect that our plan will fully remediate the material weakness identified above until at least June 30, 2012, and it may not ensure the adequacy of our internal controls over our financial reporting and processes in the future. If we experience additional material weaknesses or significant deficiencies in our internal controls over financial reporting in the future, investors may lose confidence in our reported financial information, with could lead to a decline in our stock price, limit our ability to access the capital markets in the future, and require us to incur additional costs to further improve our internal control systems and procedures.
Changes in Internal Controls
As discussed above in connection with our remediation plans, we have undertaken or are in the process of undertaking a number of measures to improve our internal controls over financial reporting to address the material weakness identified as of December 31, 2011. Except for such measures, there have not been any changes in our internal control over financial reporting for the three months ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 6. Exhibits
Incorporated by Reference | |||||||||||||
Exhibit No. |
Exhibit Title | Filed Herewith |
Form | Exhibit No. |
File No. | Filing Date |
|||||||
31.1 | Certification of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||
31.2 | Certification of Principal Financial Officer pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||
32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||
32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||
101 | Interactive data files of the following materials from the Company’s quarterly report on Form 10-Q: (i) Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2010; (ii) Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2012 and 2011; (iii) Condensed Consolidated Statements of Changes in Equity for the three months ended March 31, 2012 and 2011; (iv) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011; and (v) Notes to Condensed Consolidated Financial Statements * | X |
* | The interactive data files in Exhibit No. 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FEIHE INTERNATIONAL, INC. | |||
Date: May 11, 2012 | By: | /s/ Leng You-Bin | |
Leng You-Bin | |||
Chief Executive Officer and President | |||
(Principal Executive Officer) | |||
By: | /s/ Liu Hua | ||
Liu Hua | |||
Chief Financial Officer | |||
(Principal Accounting and Financial Officer) |
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EXHIBIT INDEX
Incorporated by Reference | |||||||||||||
Exhibit No. |
Exhibit Title | Filed Herewith |
Form | Exhibit No. |
File No. | Filing Date |
|||||||
31.1 | Certification of Principal Executive Officer pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||
31.2 | Certification of Principal Financial Officer pursuant to Rules 13a-14 and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||
32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||
32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | |||||||||||
101 | Interactive data files of the following materials from the Company’s quarterly report on Form 10-Q: (i) Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2010; (ii) Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2012 and 2011; (iii) Condensed Consolidated Statements of Changes in Equity for the three months ended March 31, 2012 and 2011; (iv) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011; and (v) Notes to Condensed Consolidated Financial Statements * | X |
* | The interactive data files in Exhibit No. 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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