cswg10q20100331.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, 2010
[
]
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For the
transition period from
to
Commission
File Number: 0-12792
CHINA
SWINE GENETICS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction of
incorporation
or organization)
|
84-0916585
(I.R.S.
Employer Identification No.)
|
077
Ala Napunani Street, Honolulu, HI
|
96818
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number (including area code): 808-429-5954
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 Website, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ___ No
___
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer or a smaller reporting
company. See definition 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 [ ]
|
Non-accelerated
filer [ ]
|
|
Smaller
reporting company [X]
|
(Do
not check if a smaller reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes _____ No X
As of May
19, 2010, there were 20,291,112 shares of company common stock issued and
outstanding.
China
Swine Genetics, Inc.
Quarterly
Report on Form 10-Q
TABLE
OF CONTENTS
PART
I – FINANCIAL INFORMATION
|
|
|
|
Cautionary
Note on Forward Looking Statements
|
3 |
Item
1.
|
Financial
Statements
|
4 |
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
21 |
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
31 |
Item
4(T).
|
Controls
and Procedures
|
31 |
|
|
PART
II – OTHER INFORMATION
|
|
|
|
Item
1.
|
Legal
Proceedings
|
32 |
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
32 |
Item
3.
|
Defaults
Upon Senior Securities
|
32 |
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
32 |
Item
5.
|
Other
Information
|
32 |
Item
6.
|
Exhibits
|
32 |
|
|
SIGNATURES
|
33 |
CAUTIONARY
NOTE ON FORWARD LOOKING STATEMENTS
In
addition to historical information, this Quarterly Report on Form 10-Q contains
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The forward looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those reflected in such forward looking statements. In
some cases, you can identify forward looking statements by terminology such as
“may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “projects,” “potential,” “proposed,” “intended,” or
“continue” or the negative of these terms or other comparable
terminology. Readers are cautioned not to place undue reliance on
these forward looking statements, which reflect management’s opinions only as of
the date thereof. In evaluating such forward looking statements, readers
should carefully review the discussion of risks and uncertainties in this
Quarterly Report on Form 10-Q and in our most recent Annual Report on Form 10-K
as well as in other filings with the Securities and Exchange
Commission (“SEC”) including, without
limitation:
●
|
our
financial position, business strategy and other plans and objectives for
future operations;
|
●
|
the
ability of our management team to execute its plans to meet its
goals;
|
●
|
our
ability to attract and retain
management;
|
●
|
anticipated
trends in our business;
|
●
|
our
ability to consummate or integrate
acquisitions;
|
●
|
our
liquidity and ability to finance our operations and acquisition and
development activities;
|
●
|
the
timing, cost and procedure for proposed
acquisitions;
|
●
|
the
impact of government regulation in China and
elsewhere;
|
●
|
estimates
regarding future net revenues or
profits;
|
●
|
planned
capital expenditures (including the amount and nature
thereof);
|
●
|
estimates,
plans and projections relating to construction of facilities and the
acquisition of facilities or
businesses;
|
●
|
the
possibility that our acquisitions may involve unexpected
costs;
|
●
|
the
impact of competition;
|
●
|
general
economic conditions, whether internationally, nationally or in the
regional and local market areas in which we are doing business, that may
be less favorable than expected;
and
|
●
|
other
economic, competitive, governmental, legislative, regulatory, geopolitical
and technological factors that may negatively impact our businesses,
operations and pricing.
|
The
discussion of risks and uncertainties set forth in this Quarterly Report on Form
10-Q and in our most recent Annual Report on Form 10-K as well as in other
filings with the SEC, is not necessarily a complete or exhaustive list of all
risks facing the Company at any particular point in time. We operate
in the People’s Republic of China (“China” or “PRC”) in a highly
competitive and rapidly changing environment. Therefore, it is likely
that new risks will emerge, and that the nature and elements of existing risks
will change, over time. It is not possible for management to predict all such
risk factors or changes therein, or to assess either the impact of all such risk
factors on our business or the extent to which any individual risk factor,
combination of factors, or new or altered factors, may cause results to differ
materially from those contained in any forward looking
statement.
Although
we believe that the expectations reflected in the forward looking statements are
reasonable, we cannot guarantee future results, growth rates, and levels of
activity, performance or achievements. Given the uncertainties that surround
such statements, you are cautioned not to place undue reliance on such forward
looking statements. Except as expressly required by the federal securities laws,
there is no undertaking to publicly update or revise any forward looking
statements, whether as a result of new information, future events, changed
circumstances or any other reason.
PART
I – FINANCIAL INFORMATION
Item1. Financial
Statements
CHINA
SWINE GENETICS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
AS
OF MARCH 31, 2010
(UNAUDITED)
(Stated
in US Dollars)
|
|
March
31, 2010
|
|
|
June
30, 2009
|
|
Assets
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$ |
3,295,658 |
|
|
$ |
82,854 |
|
Accounts
receivable
|
|
|
- |
|
|
|
634,550 |
|
Inventories
|
|
|
1,711,719 |
|
|
|
998,600 |
|
Advanced
to suppliers, net
|
|
|
29,501,228 |
|
|
|
20,654,804 |
|
Prepayments
and other current assets
|
|
|
151,536 |
|
|
|
146,789 |
|
Total
Current Assets
|
|
|
34,660,141 |
|
|
|
22,517,597 |
|
Property,
Plant, Equipment and Breeding Stock, net
|
|
|
2,017,411 |
|
|
|
2,486,610 |
|
Total
Long-Term Assets
|
|
|
2,017,411 |
|
|
|
2,486,610 |
|
Total
Assets
|
|
|
36,677,552 |
|
|
|
25,004,207 |
|
Liabilities and
Equity
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
565,269 |
|
|
|
447,565 |
|
Customer
deposits
|
|
|
- |
|
|
|
4,270 |
|
Loans
payable, net
|
|
|
1,057,207 |
|
|
|
1,068,909 |
|
Convertible
note, net
|
|
|
552,605 |
|
|
|
- |
|
Loans
from shareholders/officers, net
|
|
|
- |
|
|
|
11,024,211 |
|
Deferred
interest income
|
|
|
41,552 |
|
|
|
29,077 |
|
Other
current liabilities
|
|
|
23,952 |
|
|
|
64,593 |
|
Total
Current Liabilities
|
|
|
2,240,585 |
|
|
|
12,638,625 |
|
Total
Liabilities Equity
|
|
|
2,240,585 |
|
|
|
12,638,625 |
|
|
|
|
|
|
|
|
|
|
China
Swine Genetics Inc. Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
Preferred
Stock, $0.001 par value, 9,995,200 shares authorized,
|
|
|
|
|
|
|
|
|
zero
shares issued and outstanding, respectively *
|
|
|
- |
|
|
|
- |
|
Series
A Convertible Preferred Stock ,$0.001 par value, 4,800 shares
authorized,
|
|
|
|
|
|
|
|
|
zero
and 4,646.05933 shares issued and outstanding, respectively
*
|
|
|
- |
|
|
|
5 |
|
Common
stock, $0.001 par value, 300,000,000 shares
authorized,
|
|
|
|
|
|
|
|
|
20,091,112
and 68,584 shares issued and outstanding, respectively *
|
|
|
20,091 |
|
|
|
69 |
|
Additional
paid-in capital *
|
|
|
15,215,399 |
|
|
|
4,043,180 |
|
Additional
paid-in capital-stock warrant
|
|
|
1,794,281 |
|
|
|
- |
|
Reserve
funds
|
|
|
3,405,859 |
|
|
|
1,874,970 |
|
Retained
earnings
|
|
|
12,974,020 |
|
|
|
5,295,496 |
|
Accumulated
other comprehensive income
|
|
|
741,039 |
|
|
|
720,415 |
|
Unearned
compensation
|
|
|
(13,680 |
) |
|
|
- |
|
Total
China Swine Genetics Inc. Shareholders’ Equity
|
|
|
34,137,009 |
|
|
|
11,934,135 |
|
Noncontrolling
Interest
|
|
|
299,958 |
|
|
|
431,447 |
|
Total
Equity
|
|
|
34,436,967 |
|
|
|
12,365,582 |
|
Total
Liabilities and Equity
|
|
$ |
36,677,552 |
|
|
$ |
25,004,207 |
|
|
|
|
|
|
|
|
|
|
*
As restated to show recapitalization and reverse split.
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CHINA
SWINE GENETICS, INC.
CONDENSED
CONSOLIDATED STATEMENT OF INCOME
FOR
THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2010 AND 2009
(UNAUDITED)
(Stated
in US Dollars)
|
|
For The Three Months Ended
March 31,
|
|
|
For The Nine Months Ended
March 31,
|
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
Revenues
|
|
$ |
14,921,687 |
|
|
$ |
7,740,915 |
|
|
$ |
59,814,100 |
|
|
$ |
34,139,865 |
|
Cost
of Goods Sold
|
|
|
12,243,434 |
|
|
|
6,346,768 |
|
|
|
47,081,844 |
|
|
|
28,117,885 |
|
Gross
Profit
|
|
|
2,678,253 |
|
|
|
1,394,147 |
|
|
|
12,732,256 |
|
|
|
6,021,980 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
523,272 |
|
|
|
238,140 |
|
|
|
1,880,582 |
|
|
|
1,143,009 |
|
Bad
debt for advanced to suppliers
|
|
|
80,893 |
|
|
|
8,011 |
|
|
|
464,877 |
|
|
|
14,724 |
|
General
and administrative expenses
|
|
|
441,349 |
|
|
|
82,784 |
|
|
|
740,927 |
|
|
|
368,720 |
|
Total
Operating Expenses
|
|
|
1,045,514 |
|
|
|
328,935 |
|
|
|
3,086,386 |
|
|
|
1,526,453 |
|
Income
From Operations
|
|
|
1,632,739 |
|
|
|
1,065,212 |
|
|
|
9,645,870 |
|
|
|
4,495,527 |
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses or Losses )
|
|
|
|
|
|
|
|
|
|
|
Interest income
(expenses), net
|
|
|
(203,317 |
) |
|
|
1,053 |
|
|
|
(201,497 |
) |
|
|
(25,126 |
) |
Other income
(expenses), net
|
|
|
- |
|
|
|
1 |
|
|
|
(6,451 |
) |
|
|
9,091 |
|
Losses
on disposal of fixed assets
|
|
|
(9 |
) |
|
|
(247,416 |
) |
|
|
(107,789 |
) |
|
|
(402,141 |
) |
Losses
on disposal of inventories
|
|
|
(6,324 |
) |
|
|
(74,787 |
) |
|
|
(252,209 |
) |
|
|
(216,239 |
) |
Total
Other Expenses or Losses
|
|
|
(209,650 |
) |
|
|
(321,149 |
) |
|
|
(567,946 |
) |
|
|
(634,415 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations Before Income Taxes
|
|
|
1,423,089 |
|
|
|
744,063 |
|
|
|
9,077,924 |
|
|
|
3,861,112 |
|
Income
Tax Provision
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Net
Income Before Noncontrolling Interest
|
|
|
1,423,089 |
|
|
|
744,063 |
|
|
|
9,077,924 |
|
|
|
3,861,112 |
|
Less:
Net loss attributable to the noncontrolling interest
|
|
|
(17,702 |
) |
|
|
(145,314 |
) |
|
|
(131,489 |
) |
|
|
(253,831 |
) |
Net
Income Attributable to China Swine Genetics Inc.
|
|
$ |
1,440,791 |
|
|
$ |
889,377 |
|
|
$ |
9,209,413 |
|
|
$ |
4,114,943 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share:
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
$ |
0.07 |
|
|
$ |
12.97 |
|
|
$ |
0.87 |
|
|
$ |
60.00 |
|
-
Diluted
|
|
$ |
0.08 |
|
|
$ |
0.04 |
|
|
$ |
0.86 |
|
|
$ |
0.21 |
|
Weighted
Common Shares Outstanding *
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
|
20,087,080 |
|
|
|
68,584 |
|
|
|
10,589,708 |
|
|
|
68,584 |
|
-
Diluted
|
|
|
21,150,961 |
|
|
|
20,027,167 |
|
|
|
10,944,335 |
|
|
|
20,027,167 |
|
*
As restated to show recapitalization and reverse
split.
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CHINA
SWINE GENETICS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH
FLOWS
FOR
THE NINE MONTHS ENDED MARCH 31, 2010
(UNAUDITED)
(Stated
in US Dollars)
|
|
For
The Nine Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Cash
Flows From Operating Activities:
|
|
Unaudited
|
|
|
Unaudited
|
|
Net
Income
|
|
$ |
9,209,413 |
|
|
$ |
4,114,943 |
|
Adjustments
to Reconcile Net Income to Net Cash
|
|
|
|
|
|
|
Provided
by Operating Activities:
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
378,429 |
|
|
|
653,668 |
|
Bad
debt expense
|
|
|
464,877 |
|
|
|
14,724 |
|
Welfare
fees adjustment
|
|
|
- |
|
|
|
10,128 |
|
Net
income attributable to noncontrolling interest
|
|
|
(131,489 |
) |
|
(253,831)
|
|
Losses
on disposal of fixed assets
|
|
|
107,789 |
|
|
|
402,141 |
|
Losses
on disposal of inventories
|
|
|
252,209 |
|
|
|
216,239 |
|
Consulting
fees adjusted from deferred
|
|
|
9,320 |
|
|
|
- |
|
Interest
expenses for discount on convertible note
|
|
|
181,886 |
|
|
|
- |
|
Changes
in Operating Assets and Liabilities:
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
634,550 |
|
|
|
(168,441 |
) |
Inventories
|
|
|
(968,925 |
) |
|
|
(994,567 |
) |
Advanced
to suppliers
|
|
|
(9,290,385 |
) |
|
|
(2,947,663 |
) |
Prepayments
and other current assets
|
|
|
(4,640 |
) |
|
|
45,665 |
|
Accounts
payable and accrued expenses
|
|
|
117,305 |
|
|
|
228,990 |
|
Customer
deposits
|
|
|
(4,270 |
) |
|
|
- |
|
Deferred
interest income
|
|
|
37,843 |
|
|
|
- |
|
Other
current liabilities
|
|
|
(40,659 |
) |
|
|
19,781 |
|
Net
Cash Provided by Operating Activities
|
|
|
953,253 |
|
|
|
1,341,777 |
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
Payment
for purchase of equipments
|
|
|
(34,574 |
) |
|
|
(4,296 |
) |
Payment
for construction in progress
|
|
|
- |
|
|
|
(3,573 |
) |
Proceeds
from sale of property and equipments
|
|
|
23,908 |
|
|
|
46,957 |
|
Payment
for loan to related parties
|
|
|
- |
|
|
|
(14,406 |
) |
Net
Cash (Used in) Provided by Investing Activities
|
|
|
(10,666 |
) |
|
|
24,682 |
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
Proceeds
from loans payable
|
|
|
- |
|
|
|
494,905 |
|
Proceeds
from Convertible Notes
|
|
|
2,165,000 |
|
|
|
- |
|
Proceeds
from discount on loans payable
|
|
|
(37,
843 |
) |
|
|
- |
|
Repayment
of loans payable
|
|
|
- |
|
|
|
(1,501,157 |
) |
Payments
for loans to shareholders/officers
|
|
|
(8,136 |
) |
|
|
(85,677 |
) |
Proceeds
the repayment of loans by shareholders/officers
|
|
|
151,262 |
|
|
|
84,571 |
|
Net
Cash Provided by (Used in) Financing Activities
|
|
|
2,270,283 |
|
|
|
(1,007,358 |
) |
Net
Increase in Cash and Equivalents
|
|
|
3,212,870 |
|
|
|
359,101 |
|
Effect
of Exchange Rate Changes on Cash
|
|
|
(66 |
) |
|
|
(15,781 |
) |
Cash
and Equivalents at Beginning of Period
|
|
|
82,854 |
|
|
|
140,270 |
|
Cash
and Equivalents at End of Period
|
|
$ |
3,295,658 |
|
|
$ |
483,590 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
- |
|
|
$ |
32,807 |
|
Income
taxes paid
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL SCHEDULE
OF NON-CASH INVESTING AND FINANING ACTIVITIES
|
|
|
|
|
|
|
|
|
Inventories
transferred out to be breeding stock in fixed assets
|
|
$ |
4,802 |
|
|
$ |
12,406 |
|
Construction
in progress transferred out to be fixed assets
|
|
$ |
- |
|
|
$ |
128,763 |
|
Majority
shareholder waive his right to the Company’s debt
|
|
$ |
11,169,236 |
|
|
$ |
- |
|
Issued
shares for consulting service
|
|
$ |
23,000 |
|
|
$ |
- |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CHINA
SWINE GENETICS, INC.
FOR
THE NINE MONTHS ENDED MARCH 31, 2010 AND 2009
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
1.
|
Interim
Financial Statements:
|
The
unaudited condensed consolidated financial statements of China Swine Genetics,
Inc. (f/k/a Apogee Robotics, Inc) (the “Company”) and subsidiaries have been
prepared in accordance with U.S. generally accepted accounting
principles (“U.S. GAAP”) for interim financial information and
pursuant to the requirements for reporting on Form 10-Q. Accordingly, they do
not include all the information and footnotes required by accounting principles
generally accepted in the United States of America for annual financial
statements. However, the information included in these interim financial
statements reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for the fair
presentation of the consolidated financial position and the consolidated results
of operations. Results shown for interim periods are not necessarily indicative
of the results to be obtained for a full year. The consolidated balance sheet
information as of June 30, 2009 was derived from the audited consolidated
financial statements included in the Company’s Annual Report on Form 10-K for
the fiscal year ended June 30, 2009. These interim financial statements should
be read in conjunction with that report.
The
condensed consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany balances and transactions have
been eliminated.
|
2.
|
Organization
and Nature of Operations
|
China
Swine Genetics, Inc. was founded as a Colorado corporation on June 29, 1983 and
was reinstated by the state of Colorado on March 15, 2007. The Company’s Board
of Directors and shareholders approved a change of domicile from the state of
Colorado to the state of Delaware on December 6, 2007. In connection with the
Company’s change of domicile, the Company increased its authorized capital stock
to 310,000,000 of which 300,000,000 are common stock, par value $0.001 per share
(the “Common Stock”), and 10,000,000 are preferred stock, par value $0.001 per
share, with the preferred stock issuable in series with such powers,
designations, preferences and relative, participating, optional or other
specific rights, and qualifications, limitations or restrictions thereof, as the
Board may fix from time to time by resolution or resolutions. For at least ten
years prior to August 13, 2009, the Company had not engaged in any business
operations.
On August
13, 2009, the Company acquired all of the outstanding capital stock of Advanced
Swine Genetics, Inc., a Nevada corporation (“Advanced Swine”). In exchange for
all the outstanding shares of Advanced Swine, the Company issued 4,646.05933
shares of its Series A Convertible Preferred Stock to the shareholders of
Advanced Swine (the “Share Exchange”). Each share of Series A
Preferred Stock is convertible into Four Thousand One Hundred Sixty-Six and ⅔
(4,166.66) shares of Common Stock.
As
permitted by Delaware General Corporation Law, in order to better represent the
Company’s business, the Company adopted a resolution to change its name from
“Apogee Robotics, Inc.” to “China Swine Genetics, Inc.” The Certificate of
Amendment to the Company’s Certificate of Incorporation was filed on
September 9, 2009, effective on September 30, 2009.
Concurrent
with the name change, a 1 for 24 reverse split of the Common Stock was effected
on September 30, 2009. Shareholders with 1 or more but fewer than 100
shares after the reverse split were issued shares to increase their holdings to
100 shares. All other fractional shares resulting from the reverse
split were repurchased by the Company for $5.28 per share.
Advanced
Swine was incorporated under the laws of Nevada on June 29, 2007. It is an
intermediate holding company without its own operations. On February 28, 2008,
Advanced Swine acquired 100% equity interests of Heilongjiang SenYu Animal
Husbandry Co., Ltd. (“SenYu”). SenYu was incorporated on September 3, 2004,
under the laws of the People’s Republic of China (“PRC”). On December 20, 2007,
Advanced Swine entered into a share transfer
agreement with SenYu through which Advance Swine acquired all the equity
interests of SenYu. The share transfer was approved on February 4, 2008 by the
Heilongjiang Provincial Government, and the updated business license of SenYu
with the new shareholder’s name was issued on February 28, 2008 by Jiamusi
Administration for Industry and Commerce. As a result, SenYu became a foreign
wholly owned enterprise on February 28, 2008.
SenYu was
originally founded with a registered capital of $1,208,211(equivalent to RMB10
million) on September 3, 2004 and increased its registered capital to $6,165,762
(equivalent to RMB50 million) and $9,933,896 (equivalent to RMB80 million) on
January 18 and August 29, 2006, respectively.
SenYu was
in the development stage and incurred minor selling expenses and significant
general and administrative expenses prior to September, 2005. In September 2005,
SenYu accepted its first sales order of merchandise hogs and genetic boars, and
started its business as a farmer enterprise for breeding, feeding, and marketing
the grandparent and parent generation boars, and merchandise hogs.
In December 2005, SenYu entered into a joint venture
agreement with Polar Genetics, Inc., a Canadian corporation (the “Polar
Genetics”). The registered capital of Sino-Canadian SenYu Polar Swine Genetics
Company Limited (“Sino-Canadian”) is
$2,068,368 (equivalent to RMB16.7 million). According to the joint
venture agreement, SenYu and the Polar Genetics are required to contribute
$1,238,543 (equivalent RMB10 million) and 600 primary genetic boars worth
$829,825 (equivalent RMB6.7 million), respectively, in order to own 60% and 40%
of the joint venture, respectively. This joint venture had been approved by the
Jiamusi Administration for Industry and Commerce on March 30, 2006, and the
actual capital $1,246,028 (equivalent RMB10 million) was contributed by SenYu on
May 22, 2006. Polar Genetics did not contribute 600 primary genetic boars worth
$891,788 (equivalent RMB6.7 million) until October 12, 2007. Since China
custom’s officers did not complete the full inspection, and release the primary
genetic boars to the Sino-Canadian until November 27, 2007. Accordingly, SenYu
fully owned this joint venture until November 27, 2007. This joint venture was
in development stage and did not commence principal operations until November,
27, 2007.
The
Company’s fiscal year ends on June 30. The accompanying condensed consolidated
financial statements of operations and cash flows include activities for the
nine months ended March 31, 2010 and 2009, respectively.
b.
|
Principle
of Consolidation
|
The
accompanying unaudited condensed consolidated financial statements present the
financial position, results of operations and cash flows of the Company and all
entities in which the Company has a controlling voting interest. These
consolidated financial statements include the financial statements of China
Swine Genetics, Inc. and its subsidiaries, namely, SenYu and Sino-Canadian. All
significant intercompany transactions and balances are eliminated in
consolidation.
The
accompanying unaudited condensed consolidated financial statements are prepared
in accordance with U.S. GAAP. This basis of accounting differs from that used in
the statutory accounts of some of the Company’s subsidiaries, which were
prepared in accordance with the accounting principles and relevant financial
regulations applicable to enterprises with foreign investment in the PRC (the
“PRC GAAP”). Necessary adjustments were made to the subsidiaries’ statutory
accounts to conform to U.S. GAAP to be included in these consolidated financial
statements.
|
4.
|
Summary
of Significant Accounting Policies
|
The
preparation of unaudited condensed consolidated financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the amount reported in the unaudited condensed consolidated
financial statements and the accompany notes. Significant estimates include the
estimated useful lives and fair values of the assets. Actual results could
differ from those estimates.
b.
|
Foreign
Currency Translation
|
The
accompanying unaudited condensed consolidated financial statements are presented
in U.S. dollars. The company’s functional currency is the Renminbi (“RMB”). In
general, for consolidation purposes, the Company translates its assets and
liabilities into U.S. dollars using the applicable exchange rates prevailing at
the balance sheet date, and the statement of income and cash flows are
translated at average exchange rates during the reporting period. As a
result, amounts related to assets and liabilities reported on the statement of
cash flows will not necessarily agree with changes in the corresponding balances
on the balance sheet. Equity accounts are translated at historical rates.
Adjustments resulting from the translation of the financial statements are
recorded as accumulated other comprehensive income.
The
following rates are used in translating the RMB to the U.S. dollar presentation
disclosed in these condensed consolidated financial statements for the nine
months ended March 31, 2010 and 2009, respectively.
|
|
|
For
The Nine Months Ended March 31,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Assets
and liabilities
|
the
nine months ended rate of US
|
|
$ |
0.14650 |
|
|
$ |
0.14634 |
|
/RMB
|
Revenue
and expenses
|
average
rate of US
|
|
$ |
0.14644 |
|
|
$ |
0.14624 |
|
/RMB
|
Revenues
from products sales are recorded when both title to the goods and risk of
ownership are transferred to the customer upon shipment, provided that no
significant obligations remain. Net sales reflect units shipped at selling
prices reduced by certain sales allowances.
The
Company and its subsidiary in the U.S., Advanced Swine, are subjected to U.S.
federal income taxes, and State of Delaware and State of Nevada annual franchise
taxes, respectively. Its PRC subsidiaries were exempt from the income taxes per
PRC tax laws and regulations that exempt companies engaged in the agricultural
breeding of livestock. In addition, the Company’s PRC subsidiaries expect to use
their retained earnings to support their PRC operations, and will not declare
any dividends within the predictable future. In addition, there was no net
income generated by the Company and its U.S. subsidiary, Advanced Swine, during
the nine months ended March 31, 2010 and 2009. Therefore, for the nine months
ended March 31, 2010 and 2009, the Company was not subject to any income taxes
in PRC and U.S.
The
Company follows ASC 740 – “Accounting for Income Taxes”, which requires
recognition of deferred taxes, assets and liabilities for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred tax assets and liabilities are based
on the differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes”, (“FIN 48”), codified in FASB ASC Topic 740, on
January 1, 2007. As a result of the implementation of FIN 48, the Company made a
comprehensive review of its portfolio of tax positions in accordance with
recognition standards established by FIN 48, and the Company recognized no
material adjustments to liabilities or stockholders’ equity. When tax returns
are filed, it is highly certain that some positions taken would be sustained
upon examination by the taxing authorities, while others are subject to
uncertainty about the merits of the position taken or the amount of the position
that would be ultimately sustained. The benefit of a tax position is recognized
in the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will
be sustained upon examination, including the resolution of appeals or litigation
processes,
if any. Tax positions taken are not offset or aggregated with other positions.
Tax positions that meet the more-likely-than-not recognition threshold are
measured as the largest amount of tax benefit that is more than 50 percent
likely of being realized upon settlement with the applicable taxing authority.
The portion of the benefits associated with tax positions taken that exceeds the
amount measured as described above is reflected as a liability for unrecognized
tax benefits in the accompanying balance sheets along with any associated
interest and penalties that would be payable to the taxing authorities upon
examination. Interest associated with unrecognized tax benefits is
classified as interest expense and penalties are classified in selling, general
and administrative expenses in the statements of income. The adoption of FIN 48
did not have a material impact on the Company’s financial
statements. At March 31, 2010 and June 30, 2009, the Company
did not take any uncertain positions that would necessitate recording of tax
related liability.
e.
|
Stock-Based
Compensation
|
The
Company measures compensation expense for its non-employee stock-based
compensation under the FASB ASC 505-50, “Accounting for Equity Instruments that
are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services”. The fair value of the option issued is used to
measure the transaction, as this is more reliable than the fair value of the
services received. Fair value is measured as the value of the Common Stock on
the date that the commitment for performance by the counterparty has been
reached or the counterparty’s performance is complete. The fair value of
the equity instrument is charged directly to compensation expense and additional
paid-in capital.
f.
|
Basic
and diluted net income per share
|
The
Company accounts for net income per common share in accordance with the FASB
issued ASC 260, “Earnings per Share” (“EPS”). ASC 260 requires the
disclosure of the potential dilution effect of exercising or converting
securities or other contracts involving the issuance of Common Stock. Basic net
income per share is determined based on the weighted average number of common
shares outstanding for the period. Diluted net income per share is
determined based on the assumption that all dilutive convertible shares and
stock options were converted or exercised into Common Stock.
g.
|
Cash
and Cash Equivalents
|
The
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The carrying value of cash
equivalents approximates market value.
Accounts
receivable are recognized and carried at original invoice amount less allowance
for any uncollectible amounts. The Company provides an allowance for doubtful
accounts equal to the estimated losses that will be incurred in the collection
of all receivables. The estimated losses are based on a review of the current
status of the existing receivables. Per historical records, the Company had no
uncollectible amount occurred. Therefore, the Company had not recorded the
allowance for doubtful accounts as of March 31, 2010 and 2009.
Inventories
are stated at the lower of cost or market. Cost of raw materials is determined
on a first-in, first-out basis (“FIFO”). Finished goods are determined on a
weighted average basis and are comprised of direct materials, direct labor and
an appropriate proportion of overhead.
In order
to acquire significant amounts of commercial hogs, the Company advanced
additional money to Heilongjiang WangDa Feedstuff Co., Ltd. (“WangDa”). Since
the advances to WangDa were a significant part of total assets, the
Company’s subsidiary, SenYu, adopts a bad debt allowance at 0.5% of the amount
of money advanced to WangDa. Commencing April 2009, our allowance rate was
increased from 0.5% to 5%.
k. Plant,
Property, Equipment and Breeding Stock
Depreciation
of property, plant, equipment, and breeding stock is computed using the
straight-line method over the estimated useful lives of assets as
follows:
|
Years
|
Land
improvements
|
10
years
|
Leasehold
improvements
|
Lower
of term of lease or 5 years
|
Buildings
|
10
years
|
Machinery
and equipment
|
2
years to 10 years
|
Breeding
stock
|
3
years to 5 years
|
Repairs
and maintenance expenditures which do not extend the useful lives of the related
assets are expensed as incurred, whereas significant renewals and betterments
are capitalized. The cost and related accumulated depreciation of assets sold or
otherwise retired are eliminated from the accounts and any gain or loss is
included in our statements of operations.
Cost of
sales consists primarily of purchase cost of fodder, direct labor, depreciation
and manufacturing overheads, which are directly attributable to the production
of processed breeding hogs.
m.
|
Selling,
General and administrative Costs
|
Selling
costs consist primarily of salaries, freight costs, advertising fee, which
incurred in the course of the sale of goods. General and administrative costs
consist of salaries, entertainment expenses, professional expenses and other
expenses, which resulted from organization and management for the operating
activities.
n.
|
Fair
value of financial instruments
|
The
carrying amounts of cash and equivalents, accounts receivable, advance to
suppliers, prepayments and other current assets, accounts payable and accrued
expenses, customer deposits, and other current liabilities approximate their
fair value because of the immediate or short-term maturity of these financial
instruments.
ASC Topic
820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair
value of financial instruments held by the Company. ASC Topic 825, “Financial
Instruments,” defines fair value, and establishes a three-level valuation
hierarchy for disclosures of fair value measurement that enhances disclosure
requirements for fair value measures. The carrying amounts reported in the
consolidated balance sheets for receivables and current liabilities qualify as
financial instruments and are a reasonable estimate of their fair values because
of the short period of time between the origination of such instruments and
their expected realization and their current market rate of interest. The three
levels of valuation hierarchy are defined as follows:
●
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
|
●
|
Level
2 inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
●
|
Level
3 inputs to the valuation methodology are unobservable and significant to
the fair value measurement.
|
The
Company analyzes all financial instruments with features of both liabilities and
equity under ASC 480, “Distinguishing Liabilities from Equity,” and ASC
815.
As of
March 31, 2010, the Company did not identify any assets and liabilities that are
required to be presented on the balance sheet at fair value.
o. Recent
Accounting Pronouncements
On
February 25, 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-09
Subsequent Events Topic 855, “Amendments to Certain Recognition and Disclosure
Requirements,” effective immediately. The amendments in the ASU remove the
requirement for an SEC filer to disclose a date through which subsequent events
have been evaluated in both issued and revised financial statements. Revised
financial statements include financial statements revised as a result of either
correction of an error or retrospective application of US GAAP. The FASB
believes these amendments remove potential conflicts with the SEC’s literature.
Subsequent events have been evaluated through the date the financial statements
were issued.
In
January 2010, FASB amended ASC 820, "Disclosures about Fair Value Measurements."
The new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009, except
for the disclosures about purchases, sales, issuances, and settlements in the
roll forward of activity in Level 3 fair value measurements. Those disclosures
are effective for fiscal years beginning after December 15, 2010, and for
interim periods within those fiscal years. The Company has determined the
adoption of this disclosure does not have a material impact on its financial
statements.
In
December 2009, FASB issued an Accounting Standards Update (“ASU”) No. 2009-16,
“Accounting for Transfers of Financial Assets”. This Accounting Standards Update
amends the FASB Accounting Standards Codification for the issuance of FASB
Statement No. 166, Accounting for Transfers of Financial Assets—an amendment of
FASB Statement No. 140. The amendments in this Accounting Standards Update
improve financial reporting by eliminating the exceptions for qualifying
special-purpose entities from the consolidation guidance and the exception that
permitted sale accounting for certain mortgage securitizations when a transferor
has not surrendered control over the transferred financial assets. In addition,
the amendments require enhanced disclosures about the risks that a transferor
continues to be exposed to because of its continuing involvement in transferred
financial assets. Comparability and consistency in accounting for transferred
financial assets will also be improved through clarifications of the
requirements for isolation and limitations on portions of financial assets that
are eligible for sale accounting. The Company does not expect the adoption of
this ASU to have a material impact on its financial statements.
In
October 2009, the FASB issued ASU regarding accounting for own-share lending
arrangements in contemplation of convertible debt issuance or other
financing. This ASU requires that at the date of issuance of the
shares in a share-lending arrangement entered into in contemplation of a
convertible debt offering or other financing, the shares issued shall be
measured at fair value and be recognized as an issuance cost, with an offset to
additional paid-in capital. Further, loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs, at which time the loaned shares would be included in the basic and
diluted earnings-per-share calculation. This ASU is effective for
fiscal years beginning on or after December 15, 2009, and interim periods within
those fiscal years for arrangements outstanding as of the beginning
of those fiscal years. The
Company does not expect this ASU to have a material impact on its financial
statements.
In August
2009, the FASB issued ASU regarding measuring liabilities at fair value. This
ASU provides additional guidance clarifying the measurement of liabilities at
fair value in circumstances in which a quoted price in an active market for the
identical liability is not available; under those circumstances, a reporting
entity is required to measure fair value using one or more of valuation
techniques, as defined. This ASU is effective for the first reporting period,
including interim periods, beginning after the issuance of this ASU. The
adoption of this ASU did not have a material impact on the Company’s
consolidated financial statements.
Inventories
on March 31, 2010 and June 30, 2009 consisted of the following:
|
|
March
31, 2010
|
|
|
June
30, 2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Raw
materials
|
|
$ |
48,820 |
|
|
$ |
57,106 |
|
Work
in progress
|
|
|
697,371 |
|
|
|
615,487 |
|
Finished
goods
|
|
|
965,528 |
|
|
|
326,007 |
|
Total
|
|
$ |
1,711,719 |
|
|
$ |
998,600 |
|
Inventory
turnover for the nine months ended March 31, 2010 and 2009 consisted of the
following:
|
|
For
The Nine Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Inventory
turnover
|
|
|
34.74 |
|
|
|
19.54 |
|
Since
there was significantly increased cost of goods sold resulted from the fact that
we continued to successfully expand our sales quantities of merchandise hogs for
the nine months ended March 31, 2010 as compared to the same period in 2009,
whereas, the average inventories were decreased in the nine
months ended March 31, 2010 as compared to the same period in 2009. As a result,
the inventories turnover figure for the nine months ended March 31, 2010 was
more than the amount in the same period in 2009.
|
6.
|
Advanced
to Suppliers, Net
|
In order
to raise good quality commercial hogs, and control the quality of feeding
materials and procedures, SenYu has a cooperation agreement with WangDa, a
professional feeding materials provider and a collector for good quality
commercial hogs, on October 11, 2007. Pursuant to the terms of the agreement,
SenYu agreed to loan money to WangDa to support WangDa’s farmers’ use of good
quality feedstuffs to raise their commercial hogs, and then sell those hogs to
SenYu once they mature. WangDa can offset the loan amount from SenYu once it
delivers the farmers’ commercial hogs to SenYu. In order to extend farmer-base
production model and acquire significant amounts of hogs in the near future from
WangDa, SenYu loaned an aggregate amount of $31,050,190 (equivalent to RMB
211,944,870) to WangDa as of March 31, 2010. SenYu adopted a bad debt allowance
at 5% of the principal amount advanced for the nine months ended March 31, 2010
and for the fiscal year ended June 30, 2009. Accordingly, the bad debt
allowances were $1,552,509 (equivalent to RMB 10,597,244) and $1,086,681
(equivalent to RMB7, 422,782) as of March 31, 2010 and June 30, 2009,
respectively. Including the amount of advances to suppliers by the joint
venture, Sino-Canadian, the Company had a total net amount advanced to suppliers
as of March 31, 2010 and June 30, 2009 as follows:
|
|
March
31, 2010
|
|
|
June
30, 2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Advanced
to suppliers
|
|
$ |
31,053,737 |
|
|
$ |
21,741,485 |
|
Less:
Accumulated bad debt allowance
|
|
|
1,552,509 |
|
|
|
1,086,681 |
|
Advanced
to suppliers, net
|
|
$ |
29,501,228 |
|
|
$ |
20,654,804 |
|
SenYu
entered into a supplementary agreement with WangDa on December 12, 2008 to
secure SenYu’s loan to WangDa. Pursuant to the supplementary agreement, once
WangDa has breached the terms of the cooperation agreement, SenYu can exercise
the following rights to secure its loans to WangDa: (1) step into WangDa’s shoes
without any condition, and have all creditor’s rights of WangDa with its
contracted farmers, (2) if such rights still do not satisfy the loss of SenYu,
then SenYu will have a secured interest in all of WangDa’s assets, which include
but not limited to the building, equipment, and working capital of
WangDa.
SenYu
renewed the cooperation agreement with WangDa effective January 1, 2009. SenYu
still finances WangDa, with fixed profit margins set by SenYu, and WangDa in
turn finances the farmers by providing fodder on credit at discount rates
obtained through volume purchasing. WangDa also guarantees the repurchase of
mature hogs that meet SenYu’s quality standards. In case WangDa breaches the
terms of the cooperation agreement, SenYu can still exercise the above rights to
secure its loans to WangDa.
Advances
to suppliers aging as of March 31, 2010 and June 30, 2009 consisted of the
following:
|
|
March
31, 2010
|
|
|
June
30, 2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Less
than 90 days
|
|
$ |
13,629,086 |
|
|
$ |
7,042 |
|
91days-180days
|
|
|
17,421,474 |
|
|
|
21,734,443 |
|
181days-365days
|
|
|
3,177 |
|
|
|
- |
|
Total
|
|
$ |
31,053,737 |
|
|
$ |
21,741,485 |
|
The
Company’s advances to suppliers with ages of less than 91 days represented
approximately 43.89% and 0.03% of the total advanced to suppliers as of March
31, 2010 and June 30, 2009, respectively.
Advances
to WangDa’ turnover for the nine months ended March 31, 2010 and 2009 consisted
of the following:
|
|
For
The Nine Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Advanced
to WangDa’ turnover
|
|
|
1.79 |
|
|
|
1.56 |
|
There was
significantly increased purchases of commercial hogs from WangDa resulting from
the Company’s increase in sales of commercial hogs for the nine months ended
March 31, 2010 as compared to the same period in 2009, and the amount of
increased purchases were significantly greater than the amount of increased
average advances to WangDa in the nine months ended March 31, 2010 as compared
to the same period in 2009. As a result, the turnover rate of advances to WangDa
for the nine months ended March 31, 2010 was more than the amount in the same
period in 2009.
|
7.
|
Prepayments
and Other Current Assets
|
As of
March 31, 2010 and June 30, 2009, prepayments and other current assets consisted
of the following:
|
|
March
31, 2010
|
|
|
June
30, 2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Prepaid
rents
|
|
$ |
45,181 |
|
|
$ |
46,263 |
|
Advance
to employees
|
|
|
9,904 |
|
|
|
39,313 |
|
Other
receivable
|
|
|
96,451 |
|
|
|
61,213 |
|
Total
|
|
$ |
151,536 |
|
|
$ |
146,789 |
|
|
8.
|
Property,
Plant, Equipment, and Breeding Stock,
Net
|
Property,
Plant, Equipment, and Breeding Stock, less accumulated depreciation, consisted
of the following:
|
|
March
31, 2010
|
|
|
June
30, 2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Land
improvements
|
|
$ |
278,369 |
|
|
$ |
278,173 |
|
Leasehold
improvements
|
|
|
100,153 |
|
|
|
65,533 |
|
Buildings
and improvements
|
|
|
1,764,393 |
|
|
|
1,763,151 |
|
Machinery
and equipments
|
|
|
687,550 |
|
|
|
687,065 |
|
Breeding
stock
|
|
|
491,196 |
|
|
|
866,821 |
|
Sub-Total
|
|
|
3,321,661 |
|
|
|
3,660,743 |
|
Less:
Accumulated depreciation
|
|
|
1,304,250 |
|
|
|
1,174,133 |
|
Total
|
|
$ |
2,017,411 |
|
|
$ |
2,486,610 |
|
Depreciation
expenses for the nine months ended March 31, 2010 and 2009 were $378,429 and
$653, 668 respectively. Loss on disposal of fixed assets for the nine months
ended March 31, 2010 and 2009 was $107,789 and $402, 141
respectively.
Loans
payable as of March 31, 2010 and June 30, 2009 consisted of the
following:
Loans
payable, net
|
|
|
|
|
|
|
|
|
March
31, 2010
|
|
|
June
30, 2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
On
December 1 and 16, 2005, the Company obtained loans in an aggregate amount
of RMB2.8 million (equivalent to $410,203 and $409,915 as of March 31,
2010 and June 30, 2009, respectively) and RMB0.7 million (equivalent to
$102,550 and $102,479 as of March 31, 2010 and June 30, 2009,
respectively) from Jiamusi Government Financial Bureau (“JGFB”) by pledging some
buildings in Huanan, which have a carrying value of approximately RMB2.6
million (equivalent to $380,840 ). The term of the debt was originally
from October 31, 2005 to 2007. Since the Company is an agricultural
enterprise and its business is supported by the Chinese government, these
loans do not bear interest, and the original due date was extended to
December 31, 2008, and has since been extended to December 31,
2010
|
|
$ |
512,753 |
|
|
$ |
512,394 |
|
|
|
|
|
|
|
|
|
|
On
April 20 and September 25, 2007, Sino-Canadian, obtained loans in an
aggregate amount of RMB1.5 million (equivalent to $219,751 and $219,597 as
of March 31, 2010 and June 30, 2009, respectively) and RMB0.5 million
(equivalent to $73,252 and $73,199 as of March 31, 2010 and June 30, 2009,
respectively) from TangYuan Government Financial Bureau (“TGFB”) by
pledging some buildings in Heijinhe, which have a carrying value of
approximately RMB5.1 million (equivalent to $747,032 ). The term of the
debt was originally from January 1, 2007 to December 31, 2008. Since the
Chinese government supports the Company’s business, these loans do not
bear interest and all of their due dates have been extended to December
31, 2010
|
|
|
293,003 |
|
|
|
292,796 |
|
|
|
|
|
|
|
|
|
|
On
May 9, 2007, the Company obtained a loan in an aggregate amount of RMB2
million (equivalent to $292,954 and $293,003 as of March 31, 2010 and June
30, 2009, respectively) from JGFB by pledging some buildings in Huanan,
which have a carrying value of approximately RMB1.5 million (equivalent to
$219,715). The term of the debt was originally from January 1, 2007 to
December 31, 2008. Since the government supports the Company’s business,
this loan does not bear interest and the due date had been extended to
December 31, 2009 by JGFB on June 16, 2008. Whereas, on
December 16, 2009, the due dates of these loans have been extended to
December 31, 2010
|
|
|
293,003 |
|
|
|
292,796 |
|
|
|
|
|
|
|
|
|
|
Total
loans payable
|
|
$ |
1,098,759 |
|
|
$ |
1,097,986 |
|
Less:
discount on loans payable
|
|
|
41,552
|
|
|
|
29,077
|
|
Total
loans payable, net
|
|
$ |
1,057,207
|
|
|
$ |
1,068,909
|
|
|
10.
|
Convertible
Note, Net
|
On
February 22, 2010 the Company consummated an offering of 10% Secured Convertible
Notes (the “Notes”) in
the principal amount of $2,165,000. The Notes were sold at par to twelve
investors. The maturity date of the Notes is February 22, 2011. Interest on the
Notes at 10% per annum is payable quarterly. Payment of interest and principal
is secured by a pledge of the Company’s shares owned by Ligang Shang, the
majority shareholder of the Company. In the event that the Company completes an
equity financing of $5 million or more (a “Qualified Financing”), the
Notes will automatically convert into securities of like kind to the securities
sold in the Qualified Financing at a 50% discount to the purchase price of the
securities in the Qualified Financing. If the Company does not
complete such a Qualified Financing prior to the maturity date of the Notes, the
Company will be required to issue to the Note-holders warrants to purchase
shares of the Common Stock at $1.50 per share, up to the principal amount of the
Notes .Upon conversion of the Notes into Common Stock, the Company shall issue
to Primary Capital, LLC warrants to purchase 8% of the securities issuable to
the investors upon conversion.
The
Company assumes it will not complete a Qualified Financing prior to the maturity
date of the Notes listed above, and records the difference between the market
price of Common Stock on February 22, 2010 and the warrant conversion price of
$1.50 per share as a “discount on convertible note”, and the sum is carried on
the balance sheet as an “additional paid-in capital-stock warrant” in the amount
of $1,794,281 as of March 31, 2010.
If the
investors exercise the warrants in the future, the Company will debit the total
proceeds received as “Additional Paid-in Capital – Stock Warrant”, and credit
the “Common Stock” and “Additional Paid-in Capital in Excess of Par”. However,
if the investors fail to exercise the warrants in the future, the Company will
write them off by debit “Additional Paid-in Capital –Stock Warrant” for
$1,794,281, and credits “Additional Paid-In Capital from Expired Warrants” for a
like amount.
Net of
convertible notes as of March 31, 2010 and June 30, 2009 consisted of the
following:
|
|
March
31, 2010
|
|
|
June
30, 2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Convertible
note
|
|
$ |
2,165,000 |
|
|
$ |
- |
|
Less:
Discount on convertible note
|
|
|
1,612,395 |
|
|
|
- |
|
Convertible
note, net
|
|
$ |
552,605 |
|
|
$ |
- |
|
|
11.
|
Loans
from Shareholders/Officers, Net
|
Loans
from shareholders/officers are unsecured, non-interest bearing, and have not set
repayment date. At the quarter ended September 30, 2009, in order to increase
the working capital of the Company, the majority shareholder, Mr. Ligang Shang,
waived his right to collect the Company’s debt to him in an aggregate amount of
$11,169,236. That sum was added to paid-in capital as of September
30, 2009. In addition, there were no loans from shareholders/officers during the
period from October 1, 2009 to March 31, 2010. As a result, the total net amount
of loans from the shareholders/officers was zero as of March 31,
2010.
The
Company enters into forward commercial hog sales contracts with its major
customers to decrease its market risk in the ordinary course of business. The
Company utilizes forward contracts to establish adequate sales to minimize the
risk of market fluctuations. The Company continually monitors its overall market
position and fair value. The contracts information listed as
follows:
Contract
#
|
|
Sales
Contracts
|
|
Client’s
Name
|
|
Contract
Term
|
|
Sales
Quantities
|
1
|
|
Merchandise
hogs sales
|
|
Beijing
Da Hongmen
|
|
from
September 28, 2009 to
September
28, 2010
|
|
120
thousand hogs
per
year
|
|
|
|
|
|
|
|
|
|
2
|
|
Merchandise
hogs sales
|
|
Beijing
Fifth Meat Processing Factory
|
|
from
August 29, 2009 to
August
28, 2010
|
|
180
thousand hogs
per
year
|
|
|
|
|
|
|
|
|
|
|
|
Sales
Price
|
|
Hog
Average Weight
|
|
Hogs
Quality
|
|
Penalty
|
1
|
|
Market
value in Beijing area
|
|
From
75 to 90kg
|
|
second
or/and third generation
of
merchandise hogs
|
|
1%
penalty if the merchandise hogs
delivered late
|
|
|
|
|
|
|
|
|
|
2
|
|
Market
value in Beijing area
|
|
From
75 to 90kg
|
|
second
or/and third generation
of
merchandise hogs
|
|
1%
penalty if the merchandise hogs
delivered late
|
The
Company leases office space, employee living space, and certain pigsties under
non-cancelable operating leases. The rental expenses under operating leases were
$140,791 and $140,047 in the nine months ended March 31, 2010 and 2009,
respectively. Future minimum rental commitments on March 31, 2010, are as
follows:
For
The Nine Months Ending March 31,
|
|
Amount
|
|
2011
|
|
$ |
142,258 |
|
2012
|
|
|
6,064 |
|
2013
|
|
|
1,464 |
|
2014
|
|
|
1,464 |
|
2015
|
|
|
1,464 |
|
Thereafter
|
|
|
28,434 |
|
Total
minimum payments required
|
|
$ |
181,148 |
|
a. Series
A Convertible Preferred Stock
In
exchange for the outstanding shares of Advanced Swine, the Company issued
4,646.05933 shares of its Series A Convertible Preferred Stock to the
shareholders of Advanced Swine. Each share of Series A Preferred
Stock is convertible into Four Thousand One Hundred Sixty-Six and ⅔ (4,166.66)
shares of Common Stock. There were 4,800 shares of Series A Preferred Shares
authorized, with par value $0.001 per share, as of June 30, 2009.
There
were 4,646.05933 outstanding shares of Series A Convertible Preferred Stock that
were convertible into 19,958,583 shares of Common Stock following the effect of
the reverse stock split. The Series A Preferred Shares have voting
rights equal to the number of common shares into which they are
convertible.
If
a dividend is declared, the holders of Series A Convertible Preferred Stock will
be entitled to participate in the dividend as if such shares had been converted
to Common Stock. In the event of liquidation, the holder of each
share of Series A Convertible Preferred Stock will receive $.01 per share, then
participate in the liquidation as if the Series A Convertible Preferred Stock
had been converted to Common Stock. The holder of Series A
Convertible Preferred
Stock has voting rights equal to the number of common shares into which the
Series A shares are convertible. The Company may redeem the Series A
Convertible Preferred Stock for a price of $.01 per share at any time when there
is sufficient authorized Common Stock for conversion of the Series A Convertible
Preferred Stock.
b. Preferred
Stock
The Board
of Directors of the Company is authorized to designate the preferred stock
in classes, and to determine the rights, privileges and limitations of the
shares in each class. There were 9,995,200 share of Preferred Stock authorized,
par value $0.001 per share, and zero share of Preferred Stock outstanding and
issued as of March 31, 2010 and June 30, 2009, respectively.
After the
change of domicile from Colorado to Delaware on December 6, 2007, the Company
had 300,000,000 authorized shares Common Stock, par value $0.001 per share. On
November 9, 2009, 4,646.05933 outstanding shares of Series A Convertible
Preferred Stock were converted into 19,958,583 shares of Common Stock. On
January 29, 2010, the board of directors of the Company authorized, and on
February 2, 2010, the Company issued 5,000 shares of Common Stock to its
consultant for services rendered for the term from January 29, 2010 to June 30,
2010. As a result, the Company had 20,091,112 and 68,584 shares of Common Stock
outstanding and issued as of March 31, 2010 and June 30, 2009,
respectively.
Holders
of the Common Stock are entitled to one vote for each share held on all matters
to be voted on by the stockholders. There is no cumulative voting in
the election of directors. Holders of Common Stock are entitled to
receive such dividends as may be declared from time to time by the Board of
Directors with respect to the Common Stock out of funds legally available
therefor and, in the event of liquidation, dissolution or winding up of the
Company, to share proportionally in all assets remaining after payment of
liabilities. The holders of Common Stock have no pre-emptive or
conversion rights and are not subject to further calls or
assessments. There are no redemption or sinking fund provisions
applicable to the Common Stock.
Effective
on September 30, 2009, the Company implemented a reverse split of its Common
Stock. No fractional shares or scrip were issued; rather, in the case of each
shareholder who held less than one whole share or held 100 or more shares after
the Reverse Split, the Company purchased all fractional shares resulting from
the Reverse Split for $5.28 per share. In the case of each
shareholder who would otherwise hold at least one but fewer than 100 shares as a
result of the Reverse Split, the Company issued a number of shares equal to the
difference between the shares held by the shareholder and 100, so that each such
shareholder owns 100 whole shares.
All
presentations regarding outstanding Common Stock in these financial statements
have been adjusted to reflect the Reverse Stock Split as if it had occurred on
July 1, 2007.
e.
|
Additional
Paid-In Capital
|
The
additional paid-in capital represents the excess of the aggregate fair value of
the capital contributed over the par value of the stock issued. There was
$15,215,399 and $4,043,180 recorded as additional paid-in capital as of the
quarter ended March 31, 2010 and the year ended June 30, 2009,
respectively.
f.
|
Additional
Paid-in Capital Stock Warrant
|
On February 22, 2010 the Company consummated an offering of
10% Secured Convertible Notes (the “Notes”) in the principal
amount of $2,165,000. The Notes were sold at par to twelve investors. The
maturity date of the Notes is February 22, 2011. Interest on the Notes at 10%
per annum is payable quarterly. Payment of interest and principal is secured by
a pledge of the Company’s shares owned by Ligang Shang, the majority shareholder
of the Company. In the event that the Company completes an equity financing of
$5 million or more (a “Qualified Financing”), the
Notes will automatically convert into securities of like kind to the securities
sold in the Qualified Financing at a 50% discount to the purchase price of the
securities in the Qualified Financing. If the Company does not
complete such a Qualified
Financing prior to the maturity date of the Notes, the Company will be required
to issue to the Note-holders warrants to purchase shares of the Common Stock at
$1.50 per share, up to the principal amount of the Notes .Upon conversion of the
Notes into Common Stock, the Company shall issue to Primary Capital, LLC
warrants to purchase 8% of the securities issueable to the investors upon
conversion.
The
Company assumes it will not complete a Qualified Financing prior to the maturity
date of the Notes listed above, and records the difference between the market
price of Common Stock on February 22, 2010 and the warrant conversion price of
$1.50 per share as a “discount on convertible note”, and the sum is carried on
the balance sheet as an “additional paid-in capital-stock warrant” in the amount
of $1,794,281 as of March 31, 2010.
g.
|
Shares
Base Compensation and Unearned
Compensation
|
On
January 29, 2010, the board of directors of the Company authorized, and on
February 2, 2010 the Company issued, 5,000 shares of Common Stock to its
consultant for services rendered for the term from January 29, 2010 to June 30,
2010. The Company debited unearned compensation on the grant date, January 29,
2010, and will recognize total compensation expenses over the period ended June
30, 2010. Unearned compensation represents the cost of services yet to be
performed, and the Company reports unearned compensation in shareholders’ equity
in the balance sheets, as a contra-equity account.
|
14.
|
Basic
and Diluted Earnings Per Share
|
The
following table sets forth the computation of basic and diluted net income per
share:
|
|
For
The Three Months Ended
March
31,
|
|
|
For
The Nine Months Ended
March
31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
Unaudited
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for basic calculation
|
|
$ |
1,440,791 |
|
|
$ |
889,377 |
|
|
$ |
9,209,413 |
|
|
$ |
4,114,943 |
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
20,087,080 |
|
|
|
68,584 |
|
|
|
10,589,708 |
|
|
|
68,584 |
|
Net
income per share — basic
|
|
$ |
0.07 |
|
|
$ |
12.97 |
|
|
$ |
0.87 |
|
|
$ |
60.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for basic calculation
|
|
$ |
1,440,791 |
|
|
$ |
889,377 |
|
|
$ |
9,209,413 |
|
|
$ |
4,114,943 |
|
Effect
of dilutive securities issued
|
|
|
204,739 |
|
|
|
- |
|
|
|
204,739 |
|
|
|
- |
|
Net income for diluted calculation
|
|
$ |
1,645,530 |
|
|
$ |
889,377 |
|
|
$ |
9,414,152 |
|
|
$ |
4,114,943 |
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic calculation
|
|
|
20,087,080 |
|
|
|
68,584 |
|
|
|
10,589,708 |
|
|
|
68,584 |
|
Weighted
average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debt
|
|
|
1,063,881 |
|
|
|
- |
|
|
|
354,627 |
|
|
|
- |
|
Series
A convertible preferred stock
|
|
|
- |
|
|
|
19,958,583 |
|
|
|
- |
|
|
|
19,958,583 |
|
Denominator
for diluted calculation
|
|
|
21,150,961 |
|
|
|
20,027,167 |
|
|
|
10,944,335 |
|
|
|
20,027,167 |
|
Net income per share — diluted
|
|
$ |
0.08 |
|
|
$ |
0.04 |
|
|
$ |
0.86 |
|
|
$ |
0.21 |
|
|
15.
|
Concentration
of Business
|
a. Financial
Risks
The
Company provides credit in the ordinary course of business. The Company performs
ongoing credit evaluations of its customers and maintains allowances for
doubtful accounts based on factors surrounding the credit risk of specific
customers, historical trends, and other information. The Company advances
significant funds to its major supplier, WangDa. The Company also performs
ongoing credit evaluations of its advances and maintains allowances for doubtful
amounts based on factors surrounding the credit risk of its
suppliers.
b. Major
Customers
The
following summarizes sales to major customers (each represented 10% or more of
the Company’s total sales revenues):
|
|
Sold
to
|
|
Number
of
|
|
Percentage
of
|
For
The Nine Months Ended March 31,
|
|
Major
Customers
|
|
Customers
|
|
Total
Sales Revenue
|
2010
|
|
$ 59,020,984
|
|
2
|
|
98.67
%
|
2009
|
|
$ 32,583,314
|
|
2
|
|
95.44%
|
The
following summarizes purchases from major suppliers (each representing10% or
more of purchased):
|
|
Purchased
from
|
|
Number
of
|
|
Percentage
of
|
For
The Nine Months Ended March 31,
|
|
Major
Suppliers
|
|
Suppliers
|
|
Total
Purchased
|
2010
|
|
$ 47,410,096
|
|
1
|
|
99.88%
|
2009
|
|
$ 28,040,578
|
|
1
|
|
99.66%
|
Substantially
all of the Company’s operations are carried out in the PRC. Accordingly, the
Company’s business is subject to considerations and risks different from those
in the United States, including changes in the political, economic, social,
legal, and tax environments in PRC, as well as changes in inflation and interest
rates. Changes in laws and regulations concerning PRC’s purchases and sales of
hogs and genetic boars, and feedstuffs business, could significantly affect the
Company’s future operating results and financial position.
Pursuant
to the consulting agreements with Mr. Liangchun Cong and Mr. Frank T. Hau on
April 16, 2010, the Company issued an aggregate of 200,000 shares of Common
Stock to Mr. Cong and Mr. Hau as consultancy fees for the services that Mr. Gong
and Mr. Hau provide to the Company for three years starting April 16, 2010. As a
result, the Company had 20,291,112 shares of Common Stock, par value $.001 per
share, outstanding and issued as of May 10, 2010.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The
following discussion and analysis of financial condition and results of
operations relates to the operations and financial condition reported in the
unaudited condensed consolidated financial statements of the Company for the
nine months and three months ended March 31, 2010 and 2009, respectively, and
should be read in conjunction with such financial statements and related notes
included in this report. Those statements in the following discussion
that are not historical in nature should be considered to be forward looking
statements that are inherently uncertain. Actual results and the timing of the
events may differ materially from those contained in these forward looking
statements due to a number of factors, including those discussed in the
“Cautionary Note on Forward Looking Statements” set forth elsewhere in this
Report.
Overview
China
Swine Genetics, Inc. was founded as a Colorado corporation on June 29, 1983 and
was re-domiciled to the State of Delaware on December 6, 2007. In connection
with the Company’s change of domicile, the Company increased its authorized
capital stock to 310,000,000 of which 300,000,000 are Common Stock, and
10,000,000 are Preferred Stock, each with a par value of $0.001 per share, with
the preferred stock issuable in series with such powers, designations,
preferences and relative, participating, optional or other specific rights, and
qualifications, limitations or restrictions thereof, as the Board may fix from
time to time by resolution or resolutions. Prior to August 13, 2009, the Company
had not engaged in any business operations.
On August
13, 2009, the Company acquired all of the outstanding capital stock of Advanced
Swine by issuing 4,646.05933 shares of its Series A Convertible Preferred
Stock to the shareholders of Advanced Swine. Each share of Series A
Preferred Stock is convertible into Four Thousand One Hundred Sixty-Six and ⅔
(4,166.66) shares of Common Stock.
A
Certificate of Amendment to the Company’s Certificate of Incorporation was filed
on September 9, 2009 to change the Company’s name from Apogee Robotics, Inc. to
“China Swine Genetics, Inc.” Concurrent with the name change, a 1 for 24 reverse
split was effected on September 30, 2009. Shareholders with 1 or more
but fewer than 100 shares after the reverse split were issued shares to increase
their holdings to 100 shares. All other fractional shares resulting
from the reverse split were repurchased by the Company for $5.28 per
share.
Advanced
Swine was incorporated under the laws of Nevada on June 29, 2007. It is an
intermediate holding company that conducts its business through its subsidiaries
in the PRC. On December 20, 2007, Advanced Swine entered into a share transfer
agreement with SenYu through which Advance Swine acquired all the equity
interests in SenYu. SenYu was incorporated on September 3, 2004, under the laws
of PRC. SenYu was originally founded with a registered capital of
$1,208,211(equivalent to RMB10 million) on August 27, 2004 and increased its
registered capital to $6,165,762 (equivalent to RMB50 million) and $9,933,896
(equivalent to RMB80 million) on January 18 and August 29, 2006, respectively.
SenYu was in the development stage and incurred minor selling expenses and
significant general and administrative expenses until September, 2005, when it
accepted its first sales order of merchandise hogs and genetic boars, and
started its business as a farmer enterprise for breeding, feeding, and marketing
the grandparent and parent generation boars, and merchandise hogs.
In
December 2005, SenYu established a joint venture named Sino-Canadian SenYu Polar
Swine Genetics Company Limited (“Sino-Canadian”) with Polar
Genetics Inc., a Canadian corporation (the “Polar Genetics”). This joint venture
was in the development stage and did not commence principal operations until
November 27, 2007.
Both
SenYu and Sino-Canadian JV engage in the business of breeding and raising hogs
and piglets, then distributing them to slaughter facilities and pork
distributors in the PRC. Our objective is to establish ourselves as a leading
producer and distributor of commercial hogs and piglets in the
PRC.
THREE
MONTHS ENDED MARCH 31, 2010 COMPARED TO THREE MONTHS ENDED MARCH 31,
2009
|
|
For
The Three Months
|
|
|
|
|
|
For
The Three Months
|
|
|
|
|
|
2010
Vs 2009
|
|
|
|
|
|
|
Ended
March 31, 2010
|
|
|
|
|
|
Ended
March 31, 2009
|
|
|
|
|
|
Increase/
(decrease)
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
14,921,687 |
|
|
|
|
|
$ |
7,740,915 |
|
|
|
|
|
$ |
7,180,772 |
|
|
|
93 |
% |
Cost
of Goods Sold
|
|
|
12,243,434 |
|
|
|
82.1 |
% |
|
|
6,346,768 |
|
|
|
82.0 |
% |
|
|
5,896,666 |
|
|
|
93 |
% |
Gross
Profit
|
|
|
2,678,253 |
|
|
|
17.9 |
% |
|
|
1,394,147 |
|
|
|
18.0 |
% |
|
|
1,284,106 |
|
|
|
92 |
% |
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
523,272 |
|
|
|
|
|
|
|
238,140 |
|
|
|
|
|
|
|
285,132 |
|
|
|
120 |
% |
Bad
debt for advanced to suppliers
|
|
|
80,893 |
|
|
|
|
|
|
|
8,011 |
|
|
|
|
|
|
|
72,882 |
|
|
|
910 |
% |
General
and administrative expenses
|
|
|
441,349 |
|
|
|
|
|
|
|
82,784 |
|
|
|
|
|
|
|
358,565 |
|
|
|
433 |
% |
Total
Operating Expenses
|
|
|
1,045,514 |
|
|
|
7.0 |
% |
|
|
328,935 |
|
|
|
4.2 |
% |
|
|
716,579 |
|
|
|
218 |
% |
Income
From Operations
|
|
|
1,632,739 |
|
|
|
10.9 |
% |
|
|
1,065,212 |
|
|
|
13.8 |
% |
|
|
567,527 |
|
|
|
53 |
% |
Other
Income (Expenses or Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(expenses) income, net
|
|
|
(203,317 |
) |
|
|
|
|
|
|
1,053 |
|
|
|
|
|
|
|
(204,370 |
) |
|
|
-19408 |
% |
Other
income (expenses), net
|
|
|
- |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
(1 |
) |
|
|
-100 |
% |
Losses
on disposal of fixed assets
|
|
|
(9 |
) |
|
|
|
|
|
|
(247,416 |
) |
|
|
|
|
|
|
247,407 |
|
|
|
-100 |
% |
Losses
on disposal of inventories
|
|
|
(6,324 |
) |
|
|
|
|
|
|
(74,787 |
) |
|
|
|
|
|
|
68,463 |
|
|
|
-92 |
% |
Total
Other Expenses or Losses
|
|
|
(209,650 |
) |
|
|
|
|
|
|
(321,149 |
) |
|
|
|
|
|
|
111,499 |
|
|
|
-35 |
% |
Income
from Continuing Operations Before Income Taxes
|
|
|
1,423,089 |
|
|
|
9.5 |
% |
|
|
744,063 |
|
|
|
9.6 |
% |
|
|
679,026 |
|
|
|
91 |
% |
Income
Tax Provision
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Net
Income Before Noncontrolling Interest
|
|
|
1,423,089 |
|
|
|
9.5 |
% |
|
|
744,063 |
|
|
|
9.6 |
% |
|
|
679,026 |
|
|
|
91 |
% |
Less:
Net loss attributable to the noncontrolling interest
|
|
|
(17,702 |
) |
|
|
|
|
|
|
(145,314 |
) |
|
|
|
|
|
|
127,612 |
|
|
|
-88 |
% |
Net
Income Attributable to China Swine Genetics Inc.
|
|
$ |
1,440,791 |
|
|
|
|
|
|
$ |
889,377 |
|
|
|
|
|
|
$ |
551,414 |
|
|
|
62 |
% |
Revenues
Total
revenues were $14,921,687 for the three months ended March 31, 2010, an increase
of $7,180,772 or 93%, compared to $7,740,915 for the three months ended March
31, 2009. The increase in revenues mainly resulted from increased orders from
our major customers. We increased sales volume of commercial hogs from 38,169
for the three months ended March 31, 2009 to 85,294 during the three months
ended March 31, 2010.
The
following table sets forth information regarding the sales of our principal
products during the three months ended March 31, 2010 and 2009:
|
|
For
The Three Months Ended March 31
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
Less 2009
|
|
|
|
Quantities
(Capita)
|
|
|
Amount
|
|
|
Sale
%
|
|
|
Quantities
(Capita)
|
|
|
Amount
|
|
|
Sale
%
|
|
|
Quantities
(Capita)
|
|
|
Amount
|
|
|
Sale
%
|
|
Commercial
Hogs Purchased From WangDa
|
|
|
85,294 |
|
|
$ |
14,452,503 |
|
|
|
97 |
% |
|
|
38,169 |
|
|
$ |
6,993,419 |
|
|
|
90 |
% |
|
|
47,125 |
|
|
$ |
7,459,084 |
|
|
|
107 |
% |
Others
Hogs Raised By Us
|
|
|
2,227 |
|
|
|
469,184 |
|
|
|
3 |
% |
|
|
4,666 |
|
|
|
747,497 |
|
|
|
10 |
% |
|
|
(2,439 |
) |
|
|
(278,312 |
) |
|
|
-37 |
% |
Total
|
|
|
87,521 |
|
|
$ |
14,921,687 |
|
|
|
100 |
% |
|
|
42,835 |
|
|
$ |
7,740,915 |
|
|
|
100 |
% |
|
|
44,686 |
|
|
$ |
7,180,772 |
|
|
|
93 |
% |
Commercial
hogs refers to those hogs purchased from WangDa and sold to our major
customers.
Other
hogs refers to hogs raised in our own breeding facilities.
The
increase in quantities sold, as reflected in the table, is primarily
attributable to our policy of committing all of our available cash resources to
the expansion of the herds under our control.
The
following table sets forth information regarding the average price per capita of
our principal products during the three months ended March 31, 2010 and
2009.
|
|
Average
Unit Sales Price Per Capita
|
|
|
Basic
Change
|
|
|
|
2010
|
|
|
2009
|
|
|
Per
Capita
|
|
Commercial
Hogs Purchased From WangDa
|
|
$ |
169.44 |
|
|
$ |
183.22 |
|
|
$ |
(13.78 |
) |
Others
Hogs Raised By Us
|
|
|
210.68 |
|
|
|
160.20 |
|
|
|
50.489 |
|
Overall
Average Products
|
|
|
170.49 |
|
|
|
180.71 |
|
|
|
(10.22 |
) |
The
decrease in average unit sales price (per capita), as reflected in the table, is
primarily attributable to the facts that market price of hogs per kilogram
declined in the three months ended March 31, 2010 as compared to the same period
in 2009. The average unit sales price of others hogs increased for the three
months ended March 31, 2010 as compared to the same period in 2009. The increase
resulted from the fact that we sold more hogs whose weights for the three months
ended March 31, 2010 were higher than the weights in the same period in
2009. Assuming we measure the average unit sales price of other hogs
by kilogram, the average unit sales of other hogs per kilogram in the third
quarter of 2010 was less than the amount in the same period in
2009.
Cost
of Goods Sold
Our cost
of goods sold consists primarily of direct and indirect manufacturing costs,
including production overhead costs, and purchase costs for the hogs purchased
from WangDa. Cost of goods sold for the three months ended March 31, 2010 was
$12,243,434, as compared to $6,346,768 for the three months ended March 31,
2009, an increase of $5,896,666 or 93%. This increase was primarily attributable
to increased sales volume for the three months ended March 31, 2010, as compared
to the same period in 2009.
Gross
margin was 17.9% for the three months ended March 31, 2010 and 18% for the three
months ended March 31, 2009. The slight decline in gross profit percentage was
due to the fact that we reduced number of hogs in our breeding facilities
starting in July 2009 because the market price of hogs significantly declined.
As a result, more manufacturing costs were allocated to unit cost of breeding
hogs per capita for the three months ended March 31, 2010 as compared to the
same period in 2009. Higher gross margin of commercial hogs was
offset by reduction in market price of hogs per kilogram and the increased costs
of “other hogs”. Therefore, gross margin was reduced slightly for the three
months ended March 31, 2010, compared to the same period in 2009.
The
following table sets forth information regarding the average cost per capita of
our principal products during the three months ended March 31, 2010 and
2009.
|
|
Average
Unit Costs Price Per Capita
|
|
|
Basic
Change
|
|
|
|
2010
|
|
|
2009
|
|
|
Per
Capita
|
|
Commercial
Hogs Purchased From WangDa
|
|
$ |
136.43 |
|
|
$ |
148.99 |
|
|
$ |
(12.56 |
) |
Others
Hogs Raised By Us
|
|
|
188.56 |
|
|
|
123.63 |
|
|
|
64.93 |
|
Overall
Average Hogs
|
|
|
142.92 |
|
|
|
148.17 |
|
|
|
(5.25 |
) |
The
decrease in average cost per capita, as reflected in the table, is primarily
attributable to the fact that we sold more commercial hogs in the third quarter
of 2010 as compare to the same period in 2009.
Costs of
commercial hogs consist of fodder costs and payment of partial profits to
WangDa’s franchise farmers. The average unit costs for commercial hogs per
capita decreased for the three months ended March 31, 2010 as compared to the
same period in 2009. The decrease resulted from the fact that fodder costs
declined for the three months ended March 31, 2010 as compared to the same
period in 2009. Furthermore, the market price of hogs per kilogram declined in
the three months ended March 31, 2010 as compare to the same period in 2009, and
payment of partial profits to WangDa’s franchise farmers were reduced
significantly for the three months ended March 31, 2010 as compared to the same
period in 2009. Accordingly, the average unit cost of commercial hogs decreased
in the quarter ended March 31, 2010.
The
average unit costs for other hogs increased significantly for the three months
ended March 31, 2010, as compared to the same period in 2009. The increase
resulted from the fact that we reduced the number of hogs in our breeding
facilities beginning in July 2009 because the market price of hogs significantly
declined. As a result, more manufacturing costs were allocated to unit cost of
other hogs for the three months ended March 31, 2010. Consequently,
the average unit cost of other hogs rose significantly in the third quarter of
2010.
Selling
Expenses
Selling
expense rose at a greater pace than our revenues, from $238,140 for the three
months ended March 31, 2009 to $523,272 for the three months ended March 31,
2010, which represented an increase of $285,132 or 120%. This was mainly due to
an increase in employee compensation associated with expansion of our internal
sales team, and our development of a shipping program between Jiamusi and
Beijing using the services provided by Jiamusi Shunlida Transporting Co., Ltd
effective from October 2007 through December 31, 2009, and Jiamusi Hongqi
Transporting Agency Co., Ltd. commencing in January 2010.
Bad
debt for advanced to suppliers
The
provision for bad debt expense was $80,893 for the three months ended March 31,
2010, as compared to $8,011 for the three months ended March 31, 2009, an
increase of $72,882 or 910%. The increase is primarily attributable to increased
bad debt allowance from 0.5% to 5% with respect to the significant advances to
suppliers commencing in April 2009. In order to acquire significant amounts of
hogs WangDa, the advances to WangDa continued to increase rapidly. For the
higher risk of default, we determined that it was appropriate to increase our
allowance rate from 0.5% to 5% starting April 2009. This led to an expense of
$80,893 for the three months ended March 31, 2010.
General
and Administrative Expenses
General
and administrative expenses were $441,349 for the three months ended March 31,
2010, as compared to $82,784 for the three months ended March 31, 2009, an
increase of $358,565 or 433%. The increase was primarily attributable to
increased consulting fees in connection with fund raising in the U.S., public
relationship advisory charges and professional fees during the three months
ended March 31, 2010 as compared to the same period in 2009.
Total
Operating Expenses
During
the three months ended March 31, 2010, total operating expenses were
$1,045,514 as compared to $328,935 for the three months ended March 31,
2009, an increase of $716,579 or 218%. This increase was attributable to the
increases described above in selling expenses, increase in bad debt allowance
for funds advanced to suppliers and general administrative expenses during the
three months ended March 31, 2010, compared to the same period in 2009. We
expect that our selling, general and administrative expenses will increase in
the future in proportion to the growth of our
business.
Other
Income (Expense or Losses)
During
the three months ended March 31, 2010, other expense or losses, net,
amounted to $209,650 as compared to other expenses or losses, net of $321,149
during the three months ended March 31, 2009, a decrease of $111,499 or
35%.
For the
three months ended March 31, 2010, net interest expense was $203,317 as
compared to net interest income of $1,053 during the three months ended
March 31, 2009, a decrease of $204,370 or 19,408%. This decrease was
primarily attributable to the fact that the Company issued secured convertible
notes to certain investors in the aggregate amount of $2,165,000 on February 22,
2010 with an accrued interest rate of 10% per year. Accordingly, the Company
incurred more interest expense for the three months ended March 31, 2010 as
compared to the same period in 2009.
In order
to maximize the return on our investment in swine, we routinely cull breeding
sows that have lost their productivity. In addition, our herds are subject to
ordinary risks of mortality. If a hog dies before sale and before we have fully
depreciated our investment in the hog, we incur an expense equal to the
unamortized cost of the hog. Such incidences of swine mortality
caused us an expense of $6,333 in the three months ended March 31, 2010,
recorded as “losses on disposal of fixed assets” or “losses on disposal of
inventories” depending on the category of the deceased hog. In the three months
ended March 31, 2009, our mortality losses were $322,203. This category of
expense will vary from quarter to quarter, depending on factors such as weather,
disease, and other seasonal factor. The Company culled more breeding swine as a
result of their lower productivity in the third quarter of 2009. Accordingly,
losses on “disposal of fixed assets” or “losses on disposal of inventories” for
the three months ended March 31, 2010 was less than the amounts in the same
period in 2009.
Income
Taxes
Our
provisions for income taxes for the three months ended March 31, 2010 and 2009
were zero and zero, respectively. Our PRC subsidiaries were exempt from the
income taxes per PRC tax laws and regulations that exempt companies engaged in
the agricultural breeding of livestock. But for that exemption, our income under
Chinese accounting principles would be taxed at a rate of 25%. The Company and
its subsidiary in the U.S., Advanced Swine, are subjected to U.S. federal income
taxes, and State of Delaware and State of Nevada annual franchise taxes,
respectively. The Company’s PRC subsidiaries expect to use their retained
earnings to support their PRC operations, and will not declare any dividends
within the predictable future. In addition, there was no net income generated by
the Company and its U.S. subsidiary, Advanced Swine, during the nine months
ended March 31, 2010 and 2009. Therefore, for the three months ended March 31,
2010 and 2009, the Company was not subject to any income taxes in PRC and
U.S.
Net
Income and Comprehensive Income
During
the three months ended March 31, 2010, Sino-Canadian, the joint venture in which
we hold 60% of the equity, incurred a net loss of approximately
$44,255. In our Statements of Operations, the 40% of that loss
allocable to our joint venture partner was attributed to “Noncontrolling
Interest” and added to our net income. In the future, if
Sino-Canadian realizes a net profit, the 40% of that gain allocable to our joint
venture partner will likewise be deducted from our net income. Our
net income for the quarter ended March 31, 2010, after that deduction, totaled
$1,440,791.
Our
business operates primarily in Chinese Renminbi (“RMB”), but we report our
results in our SEC filings in U.S. dollars. The conversion of our accounts
from RMB to U.S. dollars results in translation adjustments. While our net
income will be added to the retained earnings on our balance sheets; the
translation adjustments will be added to a line item on our balance sheet
labeled “accumulated other comprehensive income,” since they will be more
reflective of changes in the relative values of U.S. and Chinese currencies than
of the success of our business. During the three months ended March 31, 2010,
the effect of converting our financial results to U.S. dollars was to add $5,497
to our accumulated other comprehensive income. During the third
quarter of fiscal 2009, when the exchange rate between the RMB and the U.S.
dollar was much more volatile, there was a decrease of $41,226 to our
accumulated other comprehensive income.
NINE
MONTHS ENDED MARCH 31, 2010 COMPARED TO NINE MONTHS ENDED MARCH 31,
2009
|
|
For
The Nine Months
|
|
|
|
|
|
For
The Nine Months
|
|
|
|
|
|
2010
Vs 2009
|
|
|
|
|
|
|
Ended
March 31, 2010
|
|
|
|
|
|
Ended
March 31, 2009
|
|
|
|
|
|
Increase/
(decrease)
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
59,814,100 |
|
|
|
|
|
$ |
34,139,865 |
|
|
|
|
|
$ |
25,674,235 |
|
|
|
75.2 |
% |
Cost
of Goods Sold
|
|
|
47,081,844 |
|
|
|
78.7 |
% |
|
|
28,117,885 |
|
|
|
82.4 |
% |
|
|
18,963,959 |
|
|
|
67.4 |
% |
Gross
Profit
|
|
|
12,732,256 |
|
|
|
21.3 |
% |
|
|
6,021,980 |
|
|
|
17.6 |
% |
|
|
6,710,276 |
|
|
|
111.4 |
% |
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
1,880,582 |
|
|
|
|
|
|
|
1,143,009 |
|
|
|
|
|
|
|
737,573 |
|
|
|
64.5 |
% |
Bad
debt for advanced to suppliers
|
|
|
464,877 |
|
|
|
|
|
|
|
14,724 |
|
|
|
|
|
|
|
450,153 |
|
|
|
3057.3 |
% |
General
and administrative expenses
|
|
|
740,927 |
|
|
|
|
|
|
|
368,720 |
|
|
|
|
|
|
|
372,207 |
|
|
|
101.0 |
% |
Total
Operating Expenses
|
|
|
3,086,386 |
|
|
|
5.2 |
% |
|
|
1,526,453 |
|
|
|
4.5 |
% |
|
|
1,559,933 |
|
|
|
102.2 |
% |
Income
From Operations
|
|
|
9,645,870 |
|
|
|
16.1 |
% |
|
|
4,495,527 |
|
|
|
13.2 |
% |
|
|
5,150,343 |
|
|
|
114.6 |
% |
Other
Income (Expenses or Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
(expenses) income, net
|
|
|
(201,497 |
) |
|
|
|
|
|
|
(25,126 |
) |
|
|
|
|
|
|
(176,371 |
) |
|
|
702.0 |
% |
Other
income (expenses), net
|
|
|
(6,451 |
) |
|
|
|
|
|
|
9,091 |
|
|
|
|
|
|
|
(15,542 |
) |
|
|
-171.0 |
% |
Losses
on disposal of fixed assets
|
|
|
(107,789 |
) |
|
|
|
|
|
|
(402,141 |
) |
|
|
|
|
|
|
294,352 |
|
|
|
-73.2 |
% |
Losses
on disposal of inventories
|
|
|
(252,209 |
) |
|
|
|
|
|
|
(216,239 |
) |
|
|
|
|
|
|
(35,970 |
) |
|
|
16.6 |
% |
Total
Other Expenses or Losses
|
|
|
(567,946 |
) |
|
|
|
|
|
|
(634,415 |
) |
|
|
|
|
|
|
66,469 |
|
|
|
-10.5 |
% |
Income
from Continuing Operations Before Income Taxes
|
|
|
9,077,924 |
|
|
|
15.2 |
% |
|
|
3,861,112 |
|
|
|
11.3 |
% |
|
|
5,216,812 |
|
|
|
135.1 |
% |
Income
Tax Provision
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Net
Income Before Noncontrolling Interest
|
|
|
9,077,924 |
|
|
|
15.2 |
% |
|
|
3,861,112 |
|
|
|
11.3 |
% |
|
$ |
5,216,812 |
|
|
|
135.1 |
% |
Less:
Net loss attributable to the noncontrolling interest
|
|
|
(131,489 |
) |
|
|
|
|
|
|
(253,831 |
) |
|
|
|
|
|
$ |
122,342 |
|
|
|
-48.2 |
% |
Net
Income Attributable to China Swine Genetics Inc.
|
|
$ |
9,209,413 |
|
|
|
|
|
|
$ |
4,114,943 |
|
|
|
|
|
|
$ |
5,094,470 |
|
|
|
123.8 |
% |
Revenues
Total
revenues were $59,814,100 for the nine months ended March 31, 2010 compared to
$34,139,865 for the nine months ended March 31, 2009, an increase of $25,674,235
or 75%. The increase in revenues resulted from increased orders from our major
customers. During the nine months ended March 31, 2009, we increased sales
volume of commercial hogs and other hogs from 190,481 to 329,434 for the nine
months ended March 31, 2010.
The
following table sets forth information regarding the sales of our principal
products during the nine months ended March 31, 2010 and 2009.
|
|
For
the Nine Months Ended March 31
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
Less 2009
|
|
|
|
Quantities
(Capita)
|
|
|
Amount
|
|
|
Sale
%
|
|
|
Quantities
(Capita)
|
|
|
Amount
|
|
|
Sale
%
|
|
|
Quantities
(Capita)
|
|
|
Amount
|
|
|
Sale
%
|
|
Commercial
Hogs Purchased From WangDa
|
|
|
323,514 |
|
|
$ |
59,020,984 |
|
|
|
99 |
% |
|
|
180,168 |
|
|
$ |
32,583,314 |
|
|
|
95 |
% |
|
|
143,346 |
|
|
$ |
26,437,670 |
|
|
|
81 |
% |
Others
Hogs Raised By Us
|
|
|
5,920 |
|
|
|
793,117 |
|
|
|
1 |
% |
|
|
10,313 |
|
|
|
1,556,551 |
|
|
|
5 |
% |
|
|
(4,393 |
) |
|
|
(763,435 |
) |
|
|
-49 |
% |
Total
|
|
|
329,434 |
|
|
$ |
59,814,100 |
|
|
|
100 |
% |
|
|
190,481 |
|
|
$ |
34,139,865 |
|
|
|
100 |
% |
|
|
138,953 |
|
|
$ |
25,674,235 |
|
|
|
32 |
% |
The
increase in quantities sold, as reflected in the table, is primarily
attributable to our policy of committing all of our available cash resources to
the expansion of the herds under our control.
The
following table sets forth information regarding the average price per capita of
our principal products during the nine months ended March 31, 2010 and 2009.
|
|
Average
Unit Sales Price Per Capita
|
|
|
Basic
Change
|
|
|
|
2010
|
|
|
2009
|
|
|
Per
Capita
|
|
Commercial
Hogs Purchased From WangDa
|
|
$ |
182.44 |
|
|
$ |
180.85 |
|
|
$ |
1.59 |
|
Others
Hogs Raised By Us
|
|
|
133.97 |
|
|
|
150.93 |
|
|
|
(16.96 |
) |
Overall
Average Hogs
|
|
|
181.57 |
|
|
|
179.23 |
|
|
|
2.34 |
|
The
increase in average unit sales price per capita, as reflected in the table, is
primarily attributable to the fact that the sales price of commercial hogs rose
slightly in the nine months ended March 31, 2010, as compared to the same period
in 2009. The average unit sales price of others hogs per capita decreased
significantly for the nine months ended March 31, 2010 as compared to the same
period in 2009. The decrease resulted from the fact that we sold more swine with
a higher unit sales price which was a part of other hogs in the nine months
ended March 31, 2009, as compared to the same period in 2010.
Cost
of Sales and Gross Profit
Our costs
of goods sold consisted primarily of direct and indirect manufacturing costs,
including production overhead costs and costs of our purchases of hogs from
WangDa. Cost of goods sold for the nine months ended March 31, 2010, was
$47,081,844, as compared to $28,117,885 for the nine months ended March 31,
2009, an increase of $18,963,959 or 67.4%. This increase was primarily
attributable to increased sales volume.
Gross
margin was 21.3% for the nine months ended March 31, 2010 and 17.6% for the nine
months ended March 31, 2009. The increase in gross margin was due to the fact
that we reduced the number of hogs in our breeding facilities because the market
price of hogs significantly declined. As a result, more manufacturing costs were
allocated to unit cost of breeding hogs per capita for the nine months ended
March 31, 2010 as compared to the ame
period in 2009. For the commercial hogs purchased from WangDa, since
we reduced fodders costs, commercial hogs brought higher gross margin in the
nine months ended March 31, 2010 as compared to the same period in 2009. Higher
gross margin of commercial hogs was offset slightly by the increase in costs of
other hogs.
The
following table sets forth information regarding the average cost per capita of
our principal products during the nine months ended March 31, 2010 and
2009.
|
|
Average
Unit Costs Price Per Capita
|
|
|
Basic
Change
|
|
|
|
2010
|
|
|
2009
|
|
|
Per
Capita
|
|
Commercial
Hogs Purchased From WangDa
|
|
$ |
142.08 |
|
|
$ |
148.99 |
|
|
$ |
(6.91 |
) |
Others
Hogs Raised By Us
|
|
|
188.56 |
|
|
|
123.63 |
|
|
|
64.93 |
|
Overall
Average Hogs
|
|
|
142.92 |
|
|
|
147.62 |
|
|
|
(4.70 |
) |
The
decrease in average cost per capita, as reflected in the table, is primarily
attributable to the fact that we sold more commercial hogs with a lower unit
cost in the nine months ended March 31, 2010 as compared to the same period in
2009.
The
average unit cost for other hogs increased significantly for the nine months
ended March 31, 2010 as compared to the same period in 2009. The increase
resulted from the fact that we reduced the number of hogs in our breeding
facilities because the market price of hogs significantly declined. As a result,
more manufacturing costs were allocated to unit cost of other hogs per capita
for the nine months ended March 31, 2010. Consequently, the average
unit cost of other hogs per capital rose significantly in the quarter ended
March 31, 2010.
Selling
Expenses
Selling
expense rose at a pace slightly less than our revenues, from $1,143,009 for the
nine months ended March 31, 2009 to $1,880,582 for the nine months ended March
31, 2010, which represented an increase of $737,573 or 64.5%. The increase was
mainly due to our development of a shipping program between Jiamusi and Beijing
using the services of Jiamusi Shunlida Transporting Co., Ltd through December
31, 2009 and Jiamusi Hongqi Transporting Agency Co., Ltd beginning in January
2010.
Bad
debt for advanced to suppliers
Provision
for bad debt expense was $464,877 for the nine months ended March 31, 2010, as
compared to $14,724 for the nine months ended March 31, 2009, an increase of
$450,153 or 3,057.3%. The increase was primarily attributable to increased bad
debt allowance from 0.5% to 5% with respect to the significant advances to
suppliers commencing in April 2009. In order to acquire significant amounts of
hogs WangDa, we increased our advances to WangDa. For the risk of default, we
determined that it was appropriate to increase our allowance rate from 0.5% to
5% beginning in April 2009. This led to an expense of $464,877 for the nine
months ended March 31, 2010.
General
and Administrative Expenses
General
and administrative expenses were $740,927 for the nine months ended March 31,
2010, as compared to $368,720 for the nine months ended March 31, 2009, an
increase of $372,207 or 101%. The increase was primarily attributable to
increased consulting fees associated with fund raising in the U.S., public
relationship advisory charges and professional fees during the nine months ended
March 31, 2010 as compared to the same period in 2009.
Total
Operating Expenses
During
the nine months ended March 31, 2010, total operating expenses were
$3,086,386 as compared to $1,526,453 for the nine months ended March 31,
2009, an increase of $1,559,933 or 102.2%. This increase was attributable
to the increases described above in selling expenses, the increase in bad debt
allowance for funds advanced to suppliers and general administrative expenses
during the nine months ended March 31, 2010 compared to the same period in 2009.
Moreover, we expect that our selling, general and administrative expenses will
increase in the future in proportion to the growth of our
business.
Other
Income (Expense or Losses)
During
the nine months ended March 31, 2010, other expense or losses , net,
amounted to $567,946 as compared to other expenses or losses, net of $634,415
during the nine months ended March 31, 2009, a decrease of $66,469 or
10.5%.
For the
nine months ended March 31, 2010, net interest expenses was $201,497 as
compared to net interest expense of $25,126 during the nine months ended
March 31, 2009, an increase of $176,371 or 702%. This increase was
primarily attributable to the fact that the Company issued secured convertible
notes to certain investors in an aggregate amount of $2,165,000 on February 22,
2010, with an accrued interest rate of 10% per year. Accordingly, the Company
incurred more interest expense for the nine months ended March 31, 2010 as
compared to the same period in 2009.
In order
to maximize the return on our investment in swine, we routinely cull breeding
sows that have lost their productivity. In addition, our herds are subject to
ordinary risks of mortality. If a hog dies before sale and before we have fully
depreciated our investment in the hog, we incur an expense equal to the
unamortized cost of the hog. Such incidences of swine mortality
caused us an expense of $359,998 in the nine months ended March 31, 2010,
recorded as “losses on disposal of fixed assets” or “losses on disposal of
inventories” depending on the category of the deceased hog. For the nine months
ended March 31, 2009, our mortality losses were $618,380. This category of
expense will vary from quarter to quarter, depending on factors such as weather,
disease, and other seasonal factors.
Income
Taxes
Our
provisions for income taxes for the nine months ended March 31, 2010 and 2009
were zero and zero, respectively. Our PRC subsidiaries were exempt from the
income taxes per PRC tax laws and regulation that exempt companies engaged in
the agricultural breeding of livestock. But for that exemption, our income under
Chinese accounting principles would be taxed at a rate of 25%. The Company and
its subsidiary in the U.S., Advanced Swine, are subjected to U.S. federal income
taxes, and State of Delaware and State of Nevada annual franchise taxes,
respectively. The Company’s PRC subsidiaries expect to use their retained
earnings to support their PRC operations, and will not declare any dividends
within the predictable future. In addition, there was no net income generated by
the Company and its U.S. subsidiary, Advanced Swine, during the nine months
ended March 31, 2010 and 2009. Therefore, for the nine months ended March 31,
2010 and 2009, the Company was not subject to any income taxes in PRC and
U.S.
Net
Income and Comprehensive Income
During
the nine months ended March 31, 2010, Sino-Canadian J.V., the joint venture in
which we hold 60% of the equity, incurred a net loss of approximately
$328,723. In our Statements of Operations, the 40% of that loss
allocable to our joint venture partner was attributed to “Noncontrolling
Interest” and added to our net income. In the future, if
Sino-Canadian realizes a net profit, the 40% of that gain allocable to our joint
venture partner will likewise be deducted from our net income. Our
net income for the quarter ended March 31, 2010, after that deduction, totaled
$9,209,413.
Our
business operates primarily in Chinese Renminbi (“RMB”), but we report our
results in our SEC filings in U.S. dollars. The conversion of our accounts
from RMB to U.S. dollars results in translation adjustments. While our net
income will be added to the retained earnings on our balance sheets; the
translation adjustments will be added to a line item on our balance sheets
labeled “accumulated other comprehensive income,” since they will be more
reflective of changes in the relative values of U.S. dollars and RMB than of the
success of our business During the nine months ended March 31, 2010, the effects
of converting our financial results to U.S. dollars was to add $20,624 to our
accumulated other comprehensive income. During the first third
quarter ended March 31, 2009, when the exchange
rate between the Renminbi and the U.S. dollar was much more volatile, there was
an increase of $70,124 in our accumulated other comprehensive
income.
Liquidity
and Capital Resources
After our
founders made the initial contribution of our registered capital, the growth of
our business has been funded, primarily, by the revenues resulting from our
business operations, by loans from the Chinese Government’s Financial Bureau and
by loans from our shareholders. We did, however, owe $11,167,236 to our majority
shareholder, Ligang Shang, representing funds he loaned to Advanced Swine during
our development period. At the end of the first quarter of fiscal
year 2010, however, Mr. Shang agreed to waive his right to collect that sum, and
contributed it to the capital of the Company. Accordingly, our
working capital increased by the amount of the cancelled loan, as did our
paid-in capital.
Our
working capital at March 31, 2010 totaled $32,419,558, an increase of
$22,540,586 from our $9,878,972 in working capital as of June 30, 2009. The
increase was approximately equal to sum of the debt cancelled by Ligang Shang
and our net income of $9,209,373 for the first third quarters ended March 31,
2010. In general, since we carry only a small amount of accounts
receivable, and an inventory suitable only for sale in the current season, our
working capital will tend to ebb and flow in proportion to our net
income.
Net
Cash Provided by Operating Activities
Included
in our March 31, 2010 working capital was $29,501,228 recorded as advanced to
our suppliers. In order to raise quality commercial hogs, and control the
quality of feeding materials and procedures, we entered into a cooperation
agreement with WangDa, our major feedstuff supplier, to provide our farmers
fodder to raise their commercial hogs. The supplier can offset the loan amount
from us once it delivers the farmers’ commercial hogs to
us. Primarily as a result of our use of cash for this purpose, our
operations provided us only $953,252 in cash, despite $9,209,413 in net income
during the nine months ended March 31, 2010.
Net
Cash Used in Investments Activities
Investment
activities for the nine months ended March 31, 2010 was ($10,666) as compared to
$24,682 for the nine months ended March 31, 2009. This change was primarily
attributable to proceeds from the sale of property and equipment during the
third quarter of 2009, and the payment for the purchase of equipment during the
third quarter of 2010.
Net
Cash Provided By Financing Activities Financing
We
currently have $1,057,207 in loans payable to non-affiliates, including $805,756
due to an agency of the government of Jiamusi and $293,003 due to an agency of
the government of TangYuan, with a total discount on loans payable of
$41,552. All of the loans are interest-free and all of them are
payable on December 31, 2010. The payment date for each of these
loans has been extended in the past, as these agencies have made the loans for
the purpose of supporting our operations. We expect the loans will be extended
in the future.
On
February 22, 2010 the Company consummated an offering of 10% Secured Convertible
Notes (the “Notes”) in
the principal amount of $2,165,000. The Notes were sold at par to twelve
investors. The maturity date of the Notes is February 22, 2011. Interest on the
Notes at 10% per annum is payable quarterly. Payment of interest and principal
is secured by a pledge of the Company’s shares owned by Ligang Shang, the
majority shareholder of the Company. In the event that the Company completes an
equity financing of $5 million or more (a “Qualified Financing”), the
Notes will automatically convert into securities of like kind to the securities
sold in the Qualified Financing at a 50% discount to the purchase price of the
securities in the Qualified Financing. If the Company does not
complete such a Qualified Financing prior to the maturity date of the Notes, the
Company will be required to issue to the Note-holders warrants to purchase
shares of the Common Stock at $1.50 per share, up to the principal amount of the
Notes .Upon conversion of the Notes into Common Stock, the Company shall issue
to Primary Capital, LLC warrants to purchase 8% of the securities issueable to
the investors upon conversion.
We
believe that we have sufficient funds to operate our existing business for the
next twelve months. However, in addition to funds available from operating and
loans from shareholders, we may need external sources of capital for our
expansion of our facilities and to increase the roster of our franchisee
farmers, in order to reach our goal of producing one million commercial hogs in
2011. There can be no assurance that we will be able to obtain such additional
financing at acceptable terms to us, or at all.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition or results of
operations.
Application
of Critical Accounting Policies
While our
significant accounting policies are more fully described in Note 4 to our
consolidated financial statements, we believe that those policies are the most
critical to aid you in fully understanding and evaluating “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
In
preparation of our financial statements, we are required to formulate working
policies regarding valuation of our assets and liabilities and to develop
estimates of those values. In our preparation of the financial statements
for the nine months ended March 31, 2010, there was no estimate made which was
(a) subject to a high degree of uncertainty, and (b) material to our results.
We made
no material changes to our critical accounting policies in connection with the
preparation of our financial statements for the nine months ended March 31,
2010.
Impact
of Accounting Pronouncements
There
were certain recent accounting pronouncements that may have a material effect on
our Company’s financial position or results of operations. All of them described
under the caption “Recent Accounting Pronouncements” of Note 4 “Summary of
Significant Accounting Policies” in the “Notes of Condensed Consolidated
Financial Statement” listed under the Financial Statements Section which is
included in Item “o” hereof.
Item
3. Quantitative and Qualitative Disclosures About
Market Risk
Not
applicable.
Item
4(T). Controls and Procedures
Disclosure
Controls and Procedures
We
maintain a system of disclosure controls and procedures designed for the purpose
of ensuring that information required to be disclosed in our SEC reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and our
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosures.
As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of the Company’s management,
including its Chief Executive Officer and Chief Financial Officer, the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of March 31, 2010.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal controls over financial reporting subject to the
above corrective actions with regard to significant deficiencies or material
weaknesses that occurred during the fiscal quarter ended March 30, 2010 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II – OTHER
INFORMATION
Item
1. Legal Proceedings
From time
to time, we may become involved in various lawsuits and legal proceedings, which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm business. We are currently not aware of
any such legal proceedings or claims that will have, individually or in the
aggregate, a material adverse affect on our business, financial condition or
operating results.
Item
2. Unregistered Sales of Equity Securities and Use
of Proceeds
None.
Item
3. Defaults Upon Senior Securities
Item
4. Submission of Matters to a Vote of Security
Holders
None.
Item
5. Other Information
None.
Item
6. Exhibits
(a) Exhibits
Exhibit
Number
|
Description
of Exhibit
|
31.1*
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
promulgated under the Securities and Exchange Act of 1934, as
amended.
|
31.2*
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a),
promulgated under the Securities and Exchange Act of 1934, as
amended.
|
32.1*
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer).
|
32.2*
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Chief Financial
Officer).
|
_________________
* Filed
herewith
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
China
Swine Genetics, Inc.
|
|
|
|
May
20, 2010
|
By:
|
/s/
Zhenyu Shang
|
|
Zhenyu
Shang
Chief
Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
May
20, 2010
|
By:
|
/s/ Tongyu
Zhang
|
|
Tongyu
Shang
Chief
Financial Officer
(Principal
Financial and
Accounting
Officer)
|