Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the quarterly period ended March 31, 2008
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the transition period from ______________ to
_______________
Commission
File Number 0-28806
ENERGROUP
HOLDINGS CORPORATION
(Exact
name of registrant as specified in its charter)
Nevada
(State
of Incorporation)
|
|
87-0420774
(I.R.S.
Employer Identification No.)
|
|
|
|
No.
9, Xin Yi Street, Ganjingzi District
Dalian
City, Liaoning Province, PRC 116039
(Address
of principal executive offices)
|
|
N/A
(Zip
Code)
|
+86
411 867 166 96
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
Accelerated filer o
Accelerated Filer o
Non-Accelerated Filer o
Smaller Reporting Company x
Indicate
by check mark whether the registrant is a shell company (as determined in Rule
12b-2 of the Exchange Act). Yes ¨
No x
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange
Act
of 1934 subsequent to the distribution of securities under a plan confirmed
by a
court. Yes o No o
APPLICABLE
ONLY TO CORPORATE ISSUERS:
As
of
March 31, 2008, the Registrant had 21,136,391 shares of Common Stock
outstanding.
ENERGROUP
HOLDINGS CORPORATION
INDEX
|
|
Page Number
|
PART
I. Financial Statements
|
|
|
|
|
Item
1.
|
Financial
Information
|
3 |
|
|
|
|
Consolidated
Balance Sheets as of March 31, 2008 (Unaudited) and December 31,
2007
|
3 |
|
|
|
|
Consolidated
Statements of Operations for the Three Months Ended March 31, 2008
and
March 31, 2007 (Unaudited)
|
5 |
|
|
|
|
Consolidated
Statements of Shareholders' Equity
|
6 |
|
|
|
|
Consolidated
Statements of Cash Flows for the Three Months Ended March 31, 2008
and
March 31, 2007 (Unaudited)
|
7 |
|
|
|
|
Notes
to Consolidated Financial Statements - March 31, 2008
(Unaudited)
|
8 |
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
29 |
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
41 |
|
|
|
Item
4.
|
Controls
and Procedures
|
42 |
|
|
|
PART
II. Other Information
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
43 |
|
|
|
Item
1A.
|
Risk
Factors
|
43 |
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
60 |
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
60 |
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
60 |
|
|
|
Item
5.
|
Other
Information
|
60 |
|
|
|
Item
6.
|
Exhibits
|
60 |
|
|
|
Signatures
|
|
62 |
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL
STATEMENTS
Energroup
Holdings Corporation
Consolidated
Balance Sheets
As
of March 31, 2008 and December 31, 2007
(Stated
in US Dollars)
|
|
Note
|
|
|
|
|
|
|
|
|
|
3/31/2008
|
|
12/31/07
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
$
|
7,039,089
|
|
$
|
14,031,851
|
|
Restricted
Cash
|
|
|
3
|
|
|
2,157,831
|
|
|
4,250,000
|
|
Accounts
Receivable
|
|
|
4
|
|
|
3,004,163
|
|
|
622,433
|
|
Other
Receivable
|
|
|
|
|
|
1,638,132
|
|
|
1,068,939
|
|
Related
Party Receivable
|
|
|
6
|
|
|
15,506,766
|
|
|
3,964,357
|
|
Inventory
|
|
|
5
|
|
|
4,466,012
|
|
|
2,916,016
|
|
Purchase
Deposit
|
|
|
|
|
|
7,824,478
|
|
|
267,807
|
|
Prepaid
Expenses
|
|
|
|
|
|
134,450
|
|
|
46,401
|
|
Prepaid
Taxes
|
|
|
|
|
|
156,787
|
|
|
-
|
|
Deferred
Tax Asset
|
|
|
|
|
|
639,360
|
|
|
613,844
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
|
|
|
42,567,071
|
|
|
27,781,648
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant & Equipment, net
|
|
|
7
|
|
|
25,724,989
|
|
|
24,836,496
|
|
Land
Use Rights, net
|
|
|
8
|
|
|
13,326,162
|
|
|
12,855,980
|
|
Construction
in Progress
|
|
|
|
|
|
994,917
|
|
|
927,866
|
|
Other
Assets
|
|
|
|
|
|
33,975
|
|
|
32,619
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
|
|
|
$
|
82,647,114
|
|
$
|
66,434,609
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
Loans & Notes
|
|
|
9
|
|
$
|
14,881,376
|
|
$
|
7,383,095
|
|
Accounts
Payable
|
|
|
|
|
|
3,659,840
|
|
|
3,779,274
|
|
Accrued
Liabilities
|
|
|
|
|
|
3,605,852
|
|
|
3,347,013
|
|
Taxes
Payable
|
|
|
|
|
|
2,097,757
|
|
|
1,491,876
|
|
Other
Payable
|
|
|
|
|
|
1,458,926
|
|
|
1,471,381
|
|
Customer
Deposits
|
|
|
|
|
|
82,042
|
|
|
24,161
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
|
|
|
25,785,792
|
|
|
17,496,800
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
|
|
$
|
25,785,792
|
|
$
|
17,496,800
|
|
See
Accompanying Notes to the Financial Statements and Accountant’s
Report
Energroup
Holdings Corporation
Consolidated
Balance Sheets
As
of March 31, 2008 and December 31, 2007
(Stated
in US Dollars)
|
|
Note
|
|
3/31/2008
|
|
12/31/07
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock - $0.001 par value 10,000,000 shares authorized; 0 shares
issued
& outstanding at March 31, 2008 and December 31, 2007,
respectively.
Common
Stock $0.001 par value 21,739,130 shares authorized; 21,136,392
shares
issued & outstanding at March 31, 2008 and December 31, 2007,
respectively.
|
|
|
|
|
$
|
21,136
|
|
$
|
21,136
|
|
Additional
Paid in Capital
|
|
|
10
|
|
|
15,440,043
|
|
|
15,440,043
|
|
Statutory
Reserve
|
|
|
|
|
|
1,692,660
|
|
|
751,444
|
|
Retained
Earnings
|
|
|
|
|
|
33,064,237
|
|
|
29,764,236
|
|
Accumulated
Other Comprehensive Income
|
|
6,643,246
|
|
|
2,960,951
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
56,861,322
|
|
|
48,937,810
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
$
|
82,647,114
|
|
$
|
66,434,610
|
|
See
Accompanying Notes to the Financial Statements and Accountant’s
Report
Energroup
Holdings Corporation
Consolidated
Statements of Operations
For
the three-month period ended March 31, 2008 and 2007
(Stated
in US Dollars)
|
|
Note
|
|
|
|
|
|
|
|
|
|
|
|
3/31/2008
|
|
|
3/31/2007
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
$
|
43,507,098
|
|
$
|
23,187,994
|
|
Cost
of Sales
|
|
|
|
|
|
(36,474,424
|
)
|
|
(19,025,632
|
)
|
Gross
Profit
|
|
|
|
|
|
7,032,674
|
|
|
4,162,362
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
Expenses
|
|
|
|
|
|
1,825,277
|
|
|
229,419
|
|
General
& Administrative Expenses
|
|
|
|
|
|
492,973
|
|
|
305,136
|
|
Total
Operating Expense
|
|
|
|
|
|
2,318,250
|
|
|
534,555
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income/(Loss)
|
|
|
|
|
|
4,714,423
|
|
|
3,627,807
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income
|
|
|
|
|
|
24,269
|
|
|
2,728
|
|
Interest
Income
|
|
|
|
|
|
3,985
|
|
|
-
|
|
Other
Expenses
|
|
|
|
|
|
(28,650
|
)
|
|
(28,173
|
)
|
Interest
Expense
|
|
|
|
|
|
(306,465
|
)
|
|
(592,978
|
)
|
Total
Other Income (Loss) and Expense
|
|
|
|
|
|
(306,861
|
)
|
|
(618,423
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before Tax
|
|
|
|
|
|
4,407,562
|
|
|
3,009,384
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Tax/Deferred Tax Benefit
|
|
|
|
|
|
(166,345
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
$
|
4,241,217
|
|
$
|
3,009,384
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
$
|
0.25
|
|
$
|
0.22
|
|
Diluted
|
|
|
|
|
|
0.20
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
17,272,756
|
|
|
13,409,120
|
|
Diluted
|
|
|
|
|
|
21,182,756
|
|
|
17,272,756
|
|
See
Accompanying Notes to the Financial Statements and Accountant’s
Report
Energroup
Holdings Corporation
Consolidated
Statements of Changes in Stockholders’ Equity
As
of March 31, 2008 and December 31, 2007
(Stated
in US Dollars)
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Common Stock
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Shares
|
|
|
|
Paid in
|
|
Statutory
|
|
Retained
|
|
Comprehensive
|
|
|
|
|
|
Outstanding
|
|
Amount
|
|
Capital
|
|
Reserve
|
|
Earnings
|
|
Income
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2007
|
|
|
17,272,756
|
|
|
17,273
|
|
|
2,396,079
|
|
|
751,444
|
|
|
18,112,089
|
|
|
896,679
|
|
|
22,173,563
|
|
Issuance
of Common Stock & Warrants
|
|
|
3,863,636
|
|
|
3,863
|
|
|
13,043,964
|
|
|
|
|
|
|
|
|
|
|
|
13,047,828
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,652,147
|
|
|
|
|
|
11,652,147
|
|
Appropriations
of Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
Foreign
Currency Translation Adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,064,272
|
|
|
2,064,272
|
|
Balance,
December 31, 2007
|
|
|
21,136,392
|
|
|
21,136
|
|
|
15,440,043
|
|
|
751,444
|
|
|
29,764,236
|
|
|
2,960,951
|
|
|
48,937,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2008
|
|
|
21,136,392
|
|
|
21,136
|
|
|
15,440,043
|
|
|
751,444
|
|
|
29,764,236
|
|
|
2,960,951
|
|
|
48,937,810
|
|
Issuance
of Common Stock & Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,241,217
|
|
|
|
|
|
4,241,217
|
|
Appropriations
of Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
941,216
|
|
|
(941,216
|
)
|
|
|
|
|
-
|
|
Foreign
Currency Translation Adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,682,295
|
|
|
3,682,285
|
|
Balance,
March 31, 2008
|
|
|
21,136,392
|
|
|
21,136
|
|
|
15,440,043
|
|
|
1,692,660
|
|
|
33,064,237
|
|
|
6,643,246
|
|
|
56,861,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2007
|
|
|
|
|
3/31/2008
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
11,652,147
|
|
|
|
|
|
4,241,217
|
|
|
|
|
|
15,893,364
|
|
|
|
|
|
|
|
Comprehensive
Other Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translation Adjustment
|
|
|
2,064,272
|
|
|
|
|
|
3,682,295
|
|
|
|
|
|
5,746,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,716,419
|
|
|
|
|
|
7,923,512
|
|
|
|
|
|
21,639,921
|
|
|
|
|
|
|
|
See
Accompanying Notes to the Financial Statements and Accountant’s
Report
Energroup
Holdings Corporation
Consolidated
Statements of Cash Flows
For
the three-month periods ended March 31, 2008 and 2007
(Stated
in US Dollars)
|
|
3/31/2008
|
|
3/31/2007
|
|
Cash
Flow from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Received from Customers
|
|
$
|
29,072,645
|
|
$
|
23,498,395
|
|
Cash
Paid to Suppliers & Employees
|
|
|
(47,912,070
|
)
|
|
(17,639,438
|
)
|
Interest
Received
|
|
|
3,985
|
|
|
-
|
|
Interest
Paid (net of amount capitalized)
|
|
|
(1,075,461
|
)
|
|
413,282
|
|
Income
Tax Paid
|
|
|
(191,861
|
)
|
|
-
|
|
Miscellaneous
Receipts
|
|
|
24,269
|
|
|
2,728
|
|
Cash
Sourced/(Used) in Operating Activities
|
|
|
(20,079,493
|
)
|
|
5,448,403
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Escrowed
Funds from Private Placement Placed in Restricted Cash
|
|
|
2,092,169
|
|
|
-
|
|
Payments
for Purchases of Plant & Equipment
|
|
|
(1,623,365
|
)
|
|
(126,241
|
)
|
Payments
for Purchases of Land Use Rights
|
|
|
(261,294
|
)
|
|
643,388
|
|
Payments
for Deposits
|
|
|
(1,356
|
)
|
|
-
|
|
Cash
Used/(Sourced) in Investing Activities
|
|
|
206,155
|
|
|
(769,629
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
Allocated to Accrued Liabilities for Liquidated Damages from Issuance
of
Stock & Warrants
|
|
|
1,700,000
|
|
|
-
|
|
Proceeds
from Bank Borrowings
|
|
|
14,881,376
|
|
|
-
|
|
Repayment
of Bank Loans
|
|
|
(7,383,095
|
)
|
|
(1,286,776
|
)
|
Cash
Sourced/(Used) in Financing Activities
|
|
|
9,198,281
|
|
|
(1,286,776
|
)
|
|
|
|
|
|
|
|
|
Net
Increase/(Decrease) in Cash & Cash Equivalents for the
Year
|
|
|
(10,675,047
|
)
|
|
3,391,998
|
|
|
|
|
|
|
|
|
|
Effect
of Currency Translation
|
|
|
3,682,285
|
|
|
43,783
|
|
|
|
|
|
|
|
|
|
Cash
& Cash Equivalents at Beginning of Year
|
|
|
14,031,851
|
|
|
3,075,787
|
|
|
|
|
|
|
|
|
|
Cash
& Cash Equivalents at End of Year
|
|
$
|
7,039,089
|
|
$
|
6,511,568
|
|
See
Accompanying Notes to the Financial Statements and Accountant’s
Report
Energroup
Holdings Corporation
Reconciliation
of Net Income to Cash Provided / (Used) in Operating
Activities
For
the three-month periods ended March 31, 2008 and 2007
(Stated
in US Dollars)
|
|
3/31/2008
|
|
3/31/2007
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
4,241,217
|
|
$
|
3,009,384
|
|
|
|
|
|
|
|
|
|
Adjustments
to Reconcile Net Income to
|
|
|
|
|
|
|
|
Net
Cash Provided by Cash Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidated
Damages Included in Accrued Liabilities
|
|
|
(1,700,000
|
)
|
|
-
|
|
Amortization
|
|
|
(208,889
|
)
|
|
43,429
|
|
Depreciation
|
|
|
667,821
|
|
|
434,629
|
|
Provision
for Bad Debt
|
|
|
3,522
|
|
|
-
|
|
Decrease/(Increase)
in Accounts Receivable
|
|
|
(2,385,252
|
)
|
|
1,307,287
|
|
Decrease/(Increase)
in Other Receivable
|
|
|
(569,194
|
)
|
|
(220,811
|
)
|
Decrease/(Increase)
in Related Party Receivable
|
|
|
(11,542,409
|
)
|
|
262,229
|
|
Decrease/(Increase)
in Inventory
|
|
|
(1,549,996
|
)
|
|
589,689
|
|
Decrease/(Increase)
in Advance to Suppliers
|
|
|
(7,556,671
|
)
|
|
916,407
|
|
Decrease/(Increase)
in Prepaid Taxes
|
|
|
28,530
|
|
|
-
|
|
Decrease/(Increase)
in Prepaid Expenses
|
|
|
(88,049
|
)
|
|
(51,843
|
)
|
Decrease/(Increase)
in Deferred Tax Benefit
|
|
|
(25,516
|
)
|
|
-
|
|
Increase/(Decrease)
in Accounts Payable
|
|
|
(119,434
|
)
|
|
(709,758
|
)
|
Increase/(Decrease)
in Taxes Payable
|
|
|
420,563
|
|
|
509,418
|
|
Increase/(Decrease)
in Other Payable
|
|
|
(12,455
|
)
|
|
(294,428
|
)
|
Increase/(Decrease)
in Related Party Payable
|
|
|
-
|
|
|
694,075
|
|
Increase/(Decrease)
in Accrued Liabilities
|
|
|
258,839
|
|
|
(1,038,304
|
)
|
Increase/(Decrease)
in Customer Advances
|
|
|
57,880
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
of all adjustments
|
|
|
(24,320,710
|
)
|
|
2,439,019
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by/(Used in) Operating Activities
|
|
$
|
(20,079,493
|
)
|
$
|
5,448,403
|
|
See
Accompanying Notes to the Financial Statements and Accountant’s
Report
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
Energroup
Holdings Corporation (the “Company”) (OTCBB: ENHD)
is a
holding company incorporated in the state of Nevada in the United States
of
America whose primary business operations is conducted through its three
operating subsidiaries: (1) Dalian Chuming Processed Foods Company Ltd.,
(the
“Foods Company”) (2) Dalian Chuming Slaughter and Packaging Pork Company Ltd.
(the “Meat Company”), and (3) Dalian Chuming Sales Company Ltd. (the “Sales
Company”), each incorporated in the People’s Republic of China (the “PRC”). The
Company
is
headquartered in the City of Dalian, Liaoning Province of China.
The
three
operating subsidiaries were spun-off constituents of their former parent
company, Dalian Chuming Group Co. Ltd. The Company indirectly holds the three
operating subsidiary companies through its wholly owned intermediary
subsidiaries: (A) Precious Sheen Investments Limited (“PSI”), a British Virgin
Islands corporation, and (B) Dalian Chuming Precious Sheen Investments
Consulting Co., Ltd., (“Chuming”), a wholly foreign owned enterprise
incorporated in the PRC.
Dalian
Precious Sheen Investments Consulting Co., Ltd. (“Chuming”) is an intermediary
holding company established in the People’s Republic of China (the “PRC” or
“China”) formed for the purpose of providing a group structure to enhance the
viable capacity of its three PRC operating subsidiaries.
The
Company’s primary business activities are the production and packing of fresh
pork and production of processed meat products for distribution and sale
to
clients throughout the PRC.
Corporate
Reorganization
PRC
law
currently has limits on foreign ownership of certain companies. To enable
Chuming to raise equity capital from investors outside of China, it established
an offshore holding company by incorporating Precious Sheen Investments Limited
in the British Virgin Islands (“PSI”) in May 2007. On September 26, 2007,
Chuming entered into share transfer agreements with Dalian Chuming Group
Co.,
Ltd., under which Dalian Chuming Group Co., Ltd. agreed to transfer ownership
of
three operating subsidiaries (collectively known as “Chuming Operating
Subsidiaries”) to Chuming. On October 23, 2007, Chuming completed all required
registrations to complete the share transfer, and became the 100% owner of
the
Chuming Operating Subsidiaries. On November 14, 2007 the Dalian Commerce
Bureau
approved the transfer of Dalian Chuming Group Co., Ltd.’s 68% interest in
Chuming to PSI, and upon this transfer, Chuming became a wholly foreign owned
enterprise, with PSI as the 100% owner of Chuming (including its subsidiaries).
On December 13, 2007, the PRC government authorities issued Chuming a business
license formally recognizing it as a wholly foreign owned enterprise, of
which
PSI is the sole shareholder.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
The
following is a description of the Chuming Operating Subsidiaries: -
A.
Dalian
Chuming Slaughter and Packaging Pork Company Ltd., whose primary business
activity is acquiring, slaughtering, and packaging of pork and
cattle;
B.
Dalian
Chuming Processed Foods Company Ltd., whose primary business activity is
the
processing of raw and cooked meat products; and
C.
Dalian
Chuming Sales Company Ltd., which is responsible for Chuming’s sales, marketing,
and distribution operations.
Share
Exchange Transaction
On
December 31, 2007, the Company acquired all of the outstanding shares of
PSI in
exchange for the issuance of 16,850,000 restricted shares of our common stock
to
the shareholders of PSI, which represented approximately 97.55% of the
then-issued and outstanding common stock of the Company (excluding the shares
issued in the Financing). As a result of this transaction, PSI became our
wholly
owned subsidiary, and we acquired the business and operations of the three
operating subsidiaries.
The
share
exchange transaction has been accounted for as a recapitalization of PSI
where
the Company (the legal acquirer) is considered the accounting acquiree and
PSI
(the legal acquiree) is considered the accounting acquirer. As a result of
this
transaction, the Company is deemed to be a continuation of the business of
PSI.
Accordingly,
the financial data included in the accompanying consolidated financial
statements for all periods prior to December 31, 2007 is that of the accounting
acquirer (PSI). The historical stockholders’ equity of the accounting acquirer
prior to the share exchange has been retroactively restated as if the share
exchange transaction occurred as of the beginning of the first period
presented.
2. |
Summary
of Significant Accounting
Policies
|
The
Company maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes. The financial statements and
notes
are representations of management. Accounting policies adopted by the Company
conform to generally accepted accounting principles in the United States
of
America and have been consistently applied in the presentation of financial
statements, which are compiled on the accrual basis of accounting.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
|
(B)
|
Principles
of Consolidation
|
The
consolidated financial statements, which include the Company and its
subsidiaries, are compiled in accordance with generally accepted accounting
principles in the United States of America. All significant inter-company
accounts and transactions have been eliminated. The consolidated financial
statements include 100% of assets, liabilities, and net income or loss of
those
wholly owned subsidiaries.
The
Company has owned the three operating subsidiaries since its inception. The
Company also owns two intermediary holdings companies. As of March 31,
2008, the detailed identities of the consolidating subsidiaries are as follows:
-
Name of Company
|
|
Place of
Incorporation
|
|
Attributable
Equity
Interest
|
|
Registered
Capital
|
|
Precious
Sheen Investments Limited
|
|
|
BVI
|
|
|
100
|
%
|
USD
|
10,000
|
|
Dalian
Chuming Precious Sheen Investment Consulting Co., Ltd.
|
|
|
PRC
|
|
|
100
|
%
|
RMB
|
29,400,682
|
|
Dalian
Chuming Slaughtering & Pork Packaging Co. Ltd.
|
|
|
PRC
|
|
|
100
|
%
|
RMB
|
10,000,000
|
|
Dalian
Chuming Processed Foods Co. Ltd.
|
|
|
PRC
|
|
|
100
|
%
|
RMB
|
5,000,000
|
|
Dalian
Chuming Sales Co. Ltd.
|
|
|
PRC
|
|
|
100
|
%
|
RMB
|
5,000,000
|
|
The
consolidation of these operating subsidiaries into a newly formed holding
company (i.e. the Company) is permitted by United States GAAP: ARB51 paragraph
22 and 23.
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management makes these estimates using the best information
available at the time the estimates are made; however, actual results could
differ materially from these estimates.
For
purposes of the statement of cash flows, the Company considers all highly
liquid
equity or debt instruments purchased with a maturity of three months or less
to
be cash equivalents.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
The
Company extends unsecured, non-interest bearing credit to its customers;
accordingly, the Company carries an allowance for doubtful accounts, which
is an
estimate, made by management. Management makes its estimate based on prior
experience rates and assessment of specific outstanding customer balances.
Management may extend credit to new customers who have met the criteria of
the
Company’s credit policy.
|
(F)
|
Inventory
Carrying Value
|
Inventory,
consisting of raw materials in the form of livestock, work in progress, and
finished products, is stated at the lower of cost or market value. Finished
products are comprised of direct materials, direct labor and an appropriate
proportion of overhead. Periodic
evaluation is made by management to identify if inventory needs to be written
down because of damage or spoilage. Cost is computed using the weighted average
method.
|
(G)
|
Advances
to Suppliers
|
Advances
to suppliers represent the cash paid in advance for purchasing raw materials.
The advances to suppliers are interest free and unsecured.
|
(H)
|
Property,
Plant, and Equipment
|
Property,
plant, and equipment are stated at cost. Repairs and maintenance to these
assets
are charged to expense as incurred; major improvements enhancing the function
and/or useful life are capitalized. When items are sold or retired, the related
cost and accumulated depreciation are removed from the accounts and any gains
or
losses arising from such transactions are recognized.
Construction
in progress represents the direct costs of design, acquisition, and construction
of buildings, building improvements and land improvements. Capitalization
of
these costs ceases when substantially all activities necessary to prepare
the
assets for their intended use are completed. At such point, construction
in
progress is transferred to its respective asset classification. No depreciation
is provided until it is completed and ready for intended use.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
Property
and equipment are depreciated using the straight-line method over their
estimated useful life with a 5% salvage value. Their useful lives are as
follows: -
Fixed
Asset Classification
|
|
Useful Life
|
Land
Improvements
|
|
10
years
|
Buildings
|
|
20
years
|
Building
Improvements
|
|
10
years
|
Manufacturing
Machinery & Equipment
|
|
10
years
|
Office
Equipment
|
|
5
years
|
Furniture
& Fixtures
|
|
5
years
|
Vehicles
|
|
5
years
|
Land
use
rights are stated at cost less accumulated amortization. Amortization is
provided over its useful life, using the straight-line method. The useful
life
of the land use right is 50 years.
|
(J)
|
Construction
in Progress
|
Construction
in progress represents the direct costs of design, acquisition, and construction
of buildings, building improvements, and land improvements. These costs are
capitalized in the Construction-in-Progress account until substantially all
activities necessary to prepare the assets for their intended use are completed.
At such point, the Construction-in-Progress account is closed, and the
capitalized costs are transferred to their appropriate asset classification.
No
depreciation is provided until the assets are completed and ready for their
intended use.
|
(J) |
Accounting
for Impairment
of Assets
|
|
|
The
Company reviews the recoverability of its long-lived assets, such
as
property and equipment, when events or changes in circumstances
occur that
indicate the carrying value of the asset group may not be recoverable.
The
assessment of possible impairment is based on the Company’s ability to
recover the carrying value of the asset from the expected future
cash
flows, undiscounted and without interest charges, of the related
operations. If these cash flows are less than the carrying value
of such
assets, an impairment loss is recognized for the difference between
estimated fair value and carrying value. The measurement of impairment
requires management to estimate future cash flows and the fair
value of
long-lived assets.
|
Customer
deposits represents money the Company has received in advance for purchases
of
pork and pork products. The Company considers customer deposits as a liability
until products have been shipped and revenue is earned.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
Statutory
reserve refers to the amount appropriated from the net income in accordance
with
laws or regulations, which can be used to recover losses and increase capital,
as approved, and, are to be used to expand production or operations. PRC
laws
prescribe that an enterprise operating at a profit, must appropriate, on
an
annual basis, from its earnings, an amount to the statutory reserve to be
used
for future company development. Such an appropriation is made until the reserve
reaches a maximum equalling 50% of the enterprise’s capital.
|
(M) |
Other
Comprehensive Income
|
Comprehensive
income is defined to include all changes in equity except those resulting
from
investments by owners and distributions to owners. Among other disclosures,
all
items that are required to be recognized under current accounting standards
as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other financial
statements. The Company’s current component of other comprehensive income is the
foreign currency translation adjustment.
|
(N)
|
Recognition
of Revenue
|
Revenue
from the sale of pork products, etc., is recognized on the transfer of risks
and
rewards of ownership, which generally coincides with the time when the goods
are
delivered to customers and title has passed.
The
Company’s cost of sales is comprised of raw materials, factory
worker salaries and related benefits, machinery supplies, maintenance supplies,
depreciation, utilities, inbound
freight, purchasing and receiving costs, and inspection and warehousing
costs.
Selling
expenses are comprised of outbound freight, salary for the sales force, client
entertainment, commissions, depreciation, advertising, and travel and lodging
expenses.
|
(Q)
|
General
& Administrative
|
General
and administrative costs include executive compensation, quality control,
and
general overhead such as the finance department, administrative staff, and
depreciation and amortization expense.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
|
(R)
|
Shipping
and handling
|
All
shipping and handling are expensed as incurred and included as a component
of
cost of sales.
Costs
related to advertising and promotion expenditures are expensed as incurred
during the year. Advertising costs are charged to selling expense.
Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statement of operations
as
incurred.
The
Company accounts for income tax using an asset and liability approach and
allows
for recognition of deferred tax benefits in future years. Under the asset
and
liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for
financial reporting purposes and the amounts used for income tax purposes.
A
valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to realize
their benefits, or that future realization is uncertain.
|
(V) |
Economic
and Political Risks
|
The
Company’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced
by the
political, economic and legal environment in the PRC, and by the general
state
of the PRC economy.
|
(W)
|
Foreign
Currency Translation
|
The
Company maintains its financial statements in the functional currency. The
functional currency of the Company is the Renminbi (RMB). Monetary assets
and
liabilities denominated in currencies other than the functional currency
are
translated into the functional currency at rates of exchange prevailing at
the
balance sheet dates. Transactions denominated in currencies other than the
functional currency are translated into the functional currency at the exchanges
rates prevailing at the dates of the transaction. Exchange gains or losses
arising from foreign currency transactions are included in the determination
of
net income for the respective periods.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
For
financial reporting purposes, the financial statements of the Company, which
are
prepared using the functional currency, have been translated into United
States
dollars. Assets and liabilities are translated at the exchange rates at the
balance sheet dates and revenue and expenses are translated at the average
exchange rates and stockholders’ equity is translated at historical exchange
rates. Any translation adjustments resulting are not included in determining
net
income but are included in foreign exchange adjustment to other comprehensive
income, a component of stockholders’ equity.
Exchange
Rates
|
|
Quarter
Ending
3/31/2008
|
|
|
|
|
|
RMB
: US$ exchange rate (at period ending)
|
|
|
7.0222
|
|
|
7.3141
|
|
7.7409
|
|
Average
RMB : US$ exchange rate
|
|
|
7.1757
|
|
|
7.6172
|
|
7.8753
|
|
RMB
is
not freely convertible into foreign currency, and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into
US$ at
the rates used in translation.
Basic
earnings per share is computed by dividing net income by the weighted average
number of ordinary shares outstanding during the period. Diluted earnings
per
share is computed by dividing net income by the sum of the weighted average
number of ordinary shares outstanding and dilutive potential ordinary shares
during the years. During the years ended 2004, 2005, and 2006, no dilutive
potential ordinary shares were issued.
The
Company computes earnings per share (“EPS”) in accordance with Statement of
Financial Accounting Standards No. 128, “Earnings per share” (“SFAS No. 128”),
and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires
companies with complex capital structures to present basic and diluted EPS.
Basic EPS is measured as the income or loss available to common shareholders
divided by the weighted average common shares outstanding for the period.
Diluted EPS is similar to basic EPS but presents the dilutive effect on a
per
share basis of potential common shares (e.g., convertible securities, options,
and warrants) as if they had been converted at the beginning of the periods
presented, or issuance date, if later. Potential common shares that have
an
anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
(Y)
Recent
Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board issued FASB Statement
No. 141 (Revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R
provides additional guidance on improving the relevance, representational
faithfulness, and comparability of the financial information that a reporting
entity provides in its financial reports about a business combination and
its
effects. This Statement applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. The Company
believes there will be no material impact on its financial statements upon
adoption of this standard.
In
December 2007, the Financial Accounting Standards Board issued FASB Statement
No. 160, Noncontrolling
Interests in Consolidated Financial Statements—an amendment of ARB No. 51
(“SFAS
160”). SFAS 160 amends ARB No. 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. This Statement is effective for fiscal
years and interim periods within those fiscal years, beginning on or after
December 15, 2008. The Company believes there will be no material impact on
its financial statements upon adoption of this standard.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
The
restricted cash reflects funds received from the financing transaction described
in Note 18 that is held in an escrow with US Bank in the United States. These
funds are restricted until the Company has fulfilled the following criteria:
(1)
the hiring of a Chief Financial Officer that meets the approval of the
investors, at which point the Company will release $1.5 million from
restriction, and which criterion must be satisfied within 90 days of the
closing
of the financing transaction, (2) the Company appoints a Board of Directors
that
has majority of independent members, at which point $2.0 million will be
released from restriction, and (3) appoint a successor auditor, at which
point
$500,000 will be released from restriction. There is $250,000 in the escrow
account that has already been earmarked for investor relations
purposes.
Accounts
Receivable at December 31, consisted of the following: -
|
|
3/31/2008
|
|
12/31/2007
|
|
Accounts
Receivable – Trade
|
|
$
|
3,092,407
|
|
$
|
707,156
|
|
Less:
Allowance for Doubtful Accounts
|
|
|
(88,244
|
)
|
|
(84,723
|
)
|
Net
Accounts Receivable
|
|
$
|
3,004,163
|
|
$
|
622,433
|
|
Allowance
for Bad Debts
|
|
3/31/2008
|
|
12/31/2007
|
|
Beginning
Balance
|
|
$
|
84,723
|
|
$
|
79,267
|
|
Allowance
Provided
|
|
|
3,521
|
|
|
5,456
|
|
Charged
Against Allowance
|
|
|
|
|
|
-
|
|
Ending
Balance
|
|
$
|
88,244
|
|
$
|
84,723
|
|
|
|
3/31/2008
|
|
12/31/2007
|
|
Raw
Materials
|
|
$
|
1,591,950
|
|
$
|
1,039,440
|
|
Work
in Progress
|
|
|
839,117
|
|
|
547,889
|
|
Finished
Goods
|
|
|
2,034,946
|
|
|
1,328,688
|
|
|
|
$
|
4,466,012
|
|
$
|
2,916,016
|
|
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
6. |
Related
Party Receivable
|
In
the
normal course of business, the Company conducts transactions with the following
related parties: Dalian Chuming Group Co., Ltd (“Group) and the Group
subsidiaries that are not consolidated into Energroup Holdings or Energroup’s
subsidiary, Dalian Chuming Precious Sheen Investments Consulting Co. Ltd.
(Chuming): (1) Dalian Chuming Industrial Development Co., Ltd., (2) Dalian
Chuming Trading Co., Ltd, (3) Dalian Mingxing Livestock Product Co. Ltd.,
(4)
Dalian Chuming Stockbreeding Combo Development Co., Ltd., (5) Dalian Chuming
Fodder Co., Ltd., and (6) Dalian Chuming Biological Technology Co., Ltd.,
and
(7) Dalian Huayu Seafood Food Co., Ltd. The Company and the aforementioned
related parties share common ownership. All related party transactions are
consummated between Chuming and through the Group. All transactions with
related
parties were performed at arm’s length.
In
the
event that the Company has both receivables from, and payables to the Group
it
will, in accordance with FIN 39, set off the balances in order to arrive
at a
single balance that is either due from, or due to the Group.
At
March
31, the Company had both a balance of $61,863,588 receivable from the Group
and
a balance of $46,356,821 payable to the Group. Accordingly, the Comany
setoff
the two balances which resulted in a net balance of $15,506,766
receivable.
Related
party transactions at March 31, 2008 consist of the following:
|
|
3/31/2008
|
|
Related
Party Receivable
|
|
$
|
61,863,588
|
|
Related
Party Payable
|
|
|
(46,356,821
|
)
|
Related
Party Receivable, net
|
|
$
|
15,506,766
|
|
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
7. |
Property,
Plant & Equipment
|
March
31, 2008
|
|
|
|
Accumulated
|
|
|
|
|
|
Cost
|
|
Depreciation
|
|
Net
|
|
Land
Improvements
|
|
$
|
516,717
|
|
$
|
93,066
|
|
$
|
423,651
|
|
Building
Improvements
|
|
|
80,873
|
|
|
17,938
|
|
|
62,935
|
|
Buildings
|
|
|
20,352,594
|
|
|
2,750,551
|
|
|
17,602,044
|
|
Manufacturing
Equipment
|
|
|
9,540,457
|
|
|
2,316,345
|
|
|
7,224,111
|
|
Office
Equipment
|
|
|
128,502
|
|
|
68,409
|
|
|
60,092
|
|
Vehicles
|
|
|
686,293
|
|
|
364,338
|
|
|
321,955
|
|
Furniture
& Fixture
|
|
|
51,774
|
|
|
21,573
|
|
|
30,201
|
|
|
|
$
|
31,357,209
|
|
$
|
5,632,220
|
|
$
|
25,724,989
|
|
December
31, 2007
|
|
|
|
Accumulated
|
|
|
|
|
|
Cost
|
|
Depreciation
|
|
Net
|
|
Land
Improvements
|
|
$
|
491,071
|
|
$
|
82,031
|
|
$
|
409,040
|
|
Building
Improvements
|
|
|
76,859
|
|
|
15,811
|
|
|
61,048
|
|
Buildings
|
|
|
19,342,461
|
|
|
2,424,415
|
|
|
16,918,046
|
|
Manufacturing
Equipment
|
|
|
9,066,948
|
|
|
2,041,694
|
|
|
7,025,254
|
|
Office
Equipment
|
|
|
122,124
|
|
|
60,298
|
|
|
61,826
|
|
Vehicles
|
|
|
652,231
|
|
|
321,138
|
|
|
331,093
|
|
Furniture
& Fixture
|
|
|
49,204
|
|
|
19,015
|
|
|
30,189
|
|
|
|
$
|
29,800,898
|
|
$
|
4,964,402
|
|
$
|
24,836,496
|
|
The
Company had the following intangible assets outstanding at March 31, 2008
and
December 31, 2007:
|
|
3/31/2008
|
|
12/31/2007
|
|
|
|
|
|
|
|
Land
Use Rights, at Cost
|
|
$
|
13,762,873
|
|
$
|
13,501,580
|
|
less:
Accumulated Amortization
|
|
|
(
436,711
|
)
|
|
(645,600
|
)
|
|
|
$
|
13,326,162
|
|
$
|
12,855,980
|
|
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
|
(A) |
Short
Term Bank Loans
|
At
March
31, 2008 the Company had the following short term loans
outstanding:
Bank
|
|
|
Interest
Rate
|
|
|
Due
Date
|
|
|
Amount
|
|
Bank
of China
|
|
|
8.217
|
%
|
|
12/11/2008
|
|
$
|
2,919,313
|
|
Bank
of China
|
|
|
8.217
|
%
|
|
11/27/2008
|
|
$
|
4,272,165
|
|
Bank
of China
|
|
|
8.019
|
%
|
|
1/18/2009
|
|
$
|
1,993,677
|
|
Shanghai
Pudong Development Bank
|
|
|
7.182
|
%
|
|
7/23/2008
|
|
$
|
5,696,220
|
|
|
|
|
|
|
|
|
|
$
|
14,881,376
|
|
The
loans
provided by the Bank of China and the Shanghai Pudong Development Bank
have been
secured by the Company’s land use rights and guaranteed by the Dalian Chuming
Group Co., Ltd.
|
(B) |
Bank
Loan through Group
|
The
Company obtained a loan of $20,466,901 (RMB 160,000,000) from Dalian Chuming
Group Co., Ltd, which in turn obtained these funds in a joint loan commitment
from both China Development Bank and Shenzhen Development Bank (“Banks”) via a
collateralized loan. Dalian Chuming Group Co., Ltd. (“Group”) collateralized the
loan by purchasing a bond from China Export and Credit Insurance Corporation
(“Bond Issuer”). The bond guarantees to the Banks the entire principal and
accrued interest of the loan. The cost of the bond is RMB 1,000,000 annually,
or
in USD: $120,668, 121,902, and 125,284 for the years 2004, 2005, and 2006,
respectively, which was paid by the Company. The loan carries a fixed interest
of 5.76% per annum. The Company pledged both land use rights and buildings
to
the Bond Issuer. The Company pursued a loan from Dalian Chuming Group Co.,
Ltd
as the financing solution of choice because the Company’s tangible assets, at
the time of origination, were insufficient to collateralize the loan.
Additionally, the Company lacked the favorable credit history to directly
establish credit facility with the bank.
At
December 31, 2007, the debt had been repaid in its entirety to Dalian Chuming
Group Co. Ltd. The Company repaid the balance by extinguishing receivables
owed
by the Group to the Company. The Company repaid the loan in order to meet
the
requirements of the equity financing transaction detailed in Note 18. The
balances are now owed by Dalian Chuming Group Co. Ltd to the Banks, and
liability for paying the bonding insurance annually lies with the Group.
The
pledged collateral of land use rights and buildings made to the Bond Issuer
still underly the loan currently owed by the Group, and as such, the Company’s
assets, namely the buildings and land use rights, are at risk if the Group
were
to default on this loan.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
As
a
result of the reverse take-over on December 31, 2007 including an exchange
of shares and issuance of common stock to private investors pursuant to the
equity financing plan, the total capitalization as of March 31, 2008 is shown
in
the following table.
Name
of Shareholder
|
|
Number of
Shares
|
|
Common
Stock
Capital
|
|
Additional
Paid in
Capital
|
|
Equity
%
|
|
Operating
Companies Founders
|
|
|
14,688,948
|
|
$
|
14,689
|
|
$
|
2,396,079
|
|
|
69.50
|
%
|
PRE-RTO
Shell Shareholders
|
|
|
422,756
|
|
|
423
|
|
|
-
|
|
|
2.00
|
%
|
Advisors
& Consultants
|
|
|
2,161,052
|
|
|
2,161
|
|
|
-
|
|
|
10.22
|
%
|
Private
Investors
|
|
|
3,863,636
|
|
|
3,863
|
|
|
13,043,964
|
|
|
18.28
|
%
|
|
|
|
21,136,392
|
|
$
|
21,136
|
|
$
|
15,440,043
|
|
|
100.00
|
%
|
11 |
Commitments
of Statutory Reserve
|
In
compliance with PRC laws, the Company is required to appropriate a portion
of
its net income to its statutory reserve up to a maximum of 50% of an
enterprise’s registered capital in the PRC. The Company had future unfunded
commitments, as provided below.
|
|
3/31/2008
|
|
12/31/2007
|
|
|
|
|
|
|
|
PRC
Registered Capital
|
|
$
|
3,643,866
|
|
$
|
3,642,866
|
|
|
|
|
|
|
|
|
|
-
Statutory Reserve Ceiling
|
|
|
|
|
|
|
|
based on 50% of
|
|
|
|
|
|
|
|
Registered Capital
|
|
|
1,821,433
|
|
|
1,821,433
|
|
|
|
|
|
|
|
|
|
Less:
- Retained Earnings
|
|
|
|
|
|
|
|
appropriated
to
|
|
|
|
|
|
|
|
Statutory
Reserve
|
|
|
1,692,660
|
|
|
751,444
|
|
|
|
|
|
|
|
|
|
Reserve
Commitment
|
|
|
|
|
|
|
|
Outstanding
|
|
$
|
128,773
|
|
$
|
1,069,989
|
|
Advertising
expenses were $542,233 and $50,313 for the three months ended March 31, 2008
and
2007, respectively.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
The
Company’s different operating subsidiaries are subject to different income tax
regulations under PRC law.
Meat
Company has been given special tax-free status by the PRC government because
of
the Company standing as leader in its industry in Dalian; therefore, no
provision for income tax in the PRC was made for the three months ended March
31, 2008 and 2007.
Food
Company has provided provisions for income taxes for the three months ended
March 31, 2008 and 2007 of $166,344 and $0, respectively.
Sales
Company has not provided provisions for income taxes for the three months
ended
March 31, 2008 and 2007.
After
adjusting for special tax-free status and net operating loss, the consolidated
taxable earnings were determined, and the results were as follows:
-
|
|
|
March
31, 2008
|
|
|
Tax
expense
|
|
$
|
166,344
|
|
ii.
|
|
|
March
31, 2007
|
|
|
Tax
expense
|
|
$
|
0
|
|
Beginning
December 31, 2007, the Company’s foreign subsidiaries became subject to U.S.
income tax liability; however, the tax is deferred until foreign source income
is repatriated to the Company. Accordingly, the Company has not made any
provisions for U.S. income tax liability.
On
March
16, 2007, the PRC government passed new tax legislation that repealed
preferential tax treatment for foreign investment enterprises in the PRC
and
enacted new tax regulations. Under such regulations, with certain exceptions,
both domestic and foreign enterprises will be taxed at a standard enterprise
income tax rate of 25%. The Company’s two operating subsidiaries, Food Company
and Sales Company, are subject to the 25%
income
tax rate beginning January 1, 2008. Based on current PRC legislation, Meat
Company should be expected to continue benefiting from a tax
holiday.
It
is
Company policy to develop plant facilities based on availability of cash
resources without incurring capital commitments. The Company did not have
any
capital commitments existing at March 31, 2008.
There
were no severance packages to any key management personnel that have resigned
their positions. The Company has the right to terminate employment at any
time.
On
December 19, 2007, the Company entered into a hog procurement agreement
whereby
the Dalian Chuming Group Co., Ltd will provide at fair market price a minimum
number of hogs to the Company. At March 31, 2008, the Company expects to
purchase minimum quantities of hogs detailed in the following
table:
Year
|
|
|
Hogs
|
|
|
Price
Per Hog
|
|
|
Amount
|
|
2008
|
|
|
630,000
|
|
$
|
162.81
|
|
$
|
102,572,116
|
|
2009
|
|
|
800,000
|
|
$
|
187.13
|
|
$
|
149,704,306
|
|
2010
|
|
|
800,000
|
|
$
|
205.84
|
|
$
|
164,674,737
|
|
|
|
|
|
|
|
|
|
$
|
416,951,159
|
|
The
Company projects that the fair market price of the hogs will increase by
10%
each year. The assumption of 10% reflects that Company expectations in
regards
to inflation, and the rising costs of inputs in breeding
livestock.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
The
Company individually tracks the performance of its three operating subsidiaries,
Meat Company, Food Company, Sales Company, and the ultimately holding parent
company. Meat Company is primarily engaged in the slaughter and processing
of
pork livestock for wholesale and retail distribution. Food Company is primarily
engaged in the production of pork-based food products, such as sausages and
cured meats, for retail distribution. Sales Company is primarily engaged
in the
sale and distribution of products produced by Food Co. and Meat Co.
Below
is
a presentation of the Company’s Statement of Income and Balance Sheet for its
operating subsidiaries at, and for the three months ended March 31, 2008.
The
Company has also provided reconciling adjustments with the Company and its
intermediate holding companies Dalian Chuming Precious Sheen Investments
Consulting Ltd. (“Chuming WFOE”) and Precious Sheen Investments Ltd
(PSI).
|
|
|
Meat
Company
|
|
|
Food
Company
|
|
|
Sales
Company
|
|
|
PSI
& Eliminations
|
|
|
Total
|
|
Sales
|
|
$
|
41,207,696
|
|
$
|
4,744,501
|
|
$
|
8,259,335
|
|
|
($10,704,434
|
)
|
$
|
43,507,098
|
|
Cost
of Sales
|
|
|
(35,775,600
|
)
|
|
(3,311,045
|
)
|
|
(8,092,214
|
)
|
|
10,704,434
|
|
|
(36,474,424
|
)
|
Gross
Profit
|
|
|
5,432,096
|
|
|
1,433,456
|
|
|
167,121
|
|
|
-
|
|
|
7,032,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expense
|
|
|
(1,239,863
|
)
|
|
(588,696
|
)
|
|
(434,210
|
)
|
|
(55,481
|
)
|
|
(2,318,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(Loss)/Profit
|
|
|
4,192,233
|
|
|
844,760
|
|
|
(267,089
|
)
|
|
(55,481
|
)
|
|
4,714,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
(112,149
|
)
|
|
(179,382
|
)
|
|
(17,845
|
)
|
|
2,515
|
|
|
(306,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before Tax
|
|
|
4,080,084
|
|
|
665,378
|
|
|
(284,934
|
)
|
|
(52,966
|
)
|
|
4,407,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
|
-
|
|
|
(166,345
|
)
|
|
-
|
|
|
-
|
|
|
(166,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
4,080,084
|
|
$
|
499,033
|
|
|
($284,934
|
)
|
|
($52,966
|
)
|
$
|
4,241,217
|
|
Eliminated
Intercompany Sales of Products Sold
|
|
Sold
From:
|
|
|
Sold
To:
|
|
|
Amount
|
|
Food
Company
|
|
|
Sales
Company
|
|
$
|
1,330,545
|
|
Meat
Company
|
|
|
Sales
Company
|
|
$
|
6,663,303
|
|
Meat
Company
|
|
|
Food
Company
|
|
$
|
2,710,586
|
|
|
|
|
|
|
$
|
10,704,434
|
|
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
|
|
|
Meat
Company
|
|
|
Food
Company
|
|
|
Sales
Company
|
|
|
Chuming
WOFE, PSI,
&
Eliminations
|
|
|
Total
|
|
Current
Assets
|
|
$
|
44,418,357
|
|
$
|
25,858,080
|
|
$
|
33,619,195
|
|
$
|
(61,328,561
|
)
|
$
|
42,567,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
Current Assets
|
|
|
23,094,927
|
|
|
16,824,494
|
|
|
160,622
|
|
|
-
|
|
|
40,080,043
|
|
Total
Assets
|
|
$
|
67,513,284
|
|
$
|
42,682,574
|
|
$
|
33,779,817
|
|
$
|
(61,328,561
|
)
|
$
|
82,647,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
27,144,022
|
|
|
37,812,880
|
|
|
34,965,778
|
|
|
(74,136,888
|
)
|
|
25,785,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
$
|
27,144,022
|
|
$
|
37,812,880
|
|
$
|
34,965,778
|
|
$
|
(74,136,888
|
)
|
$
|
25,785,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Assets
|
|
|
40,369,262
|
|
|
4,869,694
|
|
|
(1,185,961
|
)
|
|
12,808,327
|
|
|
56,861,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities &
Net Assets
|
|
$
|
67,513,284
|
|
$
|
42,682,574
|
|
$
|
33,779,817
|
|
$
|
(61,328,561
|
)
|
$
|
82,647,114
|
|
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
Components
of basic and diluted earnings per share were as follows: -
|
|
|
Three
Months
Ended
|
|
|
|
|
3/31/2008
|
|
|
3/31/2007
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
4,241,217
|
|
$
|
3,009,384
|
|
|
|
|
|
|
|
|
|
Original
Shares
|
|
|
13,409,120
|
|
|
13,409,120
|
|
Addition
to Common Stock from Offering on December 31, 2007
|
|
|
3,863,636
|
|
|
-
|
|
Basic
Weighted Average Shares Outstanding
|
|
|
17,272,756
|
|
|
13,409,120
|
|
|
|
|
|
|
|
|
|
Addition
to Common Stock if Contingent Shares Held in Escrow Were
Released
|
|
|
3,863,636
|
|
|
3,863,636
|
|
Addition
to Common Stock if Warrants Were Exercised
|
|
|
46,364
|
|
|
-
|
|
Diluted
Weighted Average Shares Outstanding
|
|
|
21,182,756
|
|
|
17,272,756
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.25
|
|
$
|
0.22
|
|
Diluted
|
|
$
|
0.20
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
Basic
|
|
|
17,272,756
|
|
|
13,409,120
|
|
Diluted
|
|
|
21,182,756
|
|
|
17,272,756
|
|
The
Company had concentrations of risk in demand for its products because its
sales
were made to a small number of customers.
The
Company is subject to concentration of supply shortage risk because it purchases
its materials for resale from a few select vendors. The Company’s availability
of supply is correlated with the few select vendors’ ability to meet the market
demand. In 2007, the entire industry in the PRC faced a shortage in the supply
of hogs.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
18. |
Financing
Transaction
|
On
December 31, 2007, the Company, a Nevada corporation (“Energroup” or the
“Company”), acquired Precious Sheen Investments Ltd. (“PSI”) in a reverse
take-over transaction, by executing a Share Exchange Agreement (“Exchange
Agreement”) by and among Energroup, PSI, and all of the shareholders of PSI’s
issued and outstanding share capital (the “PSI Shareholders”). PSI owned 100% of
the equity in Dalian Precious Sheen Investments Consulting Co., Ltd., a wholly
foreign owned enterprise in the People’s Republic of China (“Chuming WFOE”).
Chuming is a holding company for the following three operating subsidiaries:
(i)
Dalian Chuming Slaughter and Packaging Pork Company Ltd., (ii) Dalian Chuming
Processed Foods Company Ltd., and (iii) Dalian Chuming Sales Company Ltd.,
each
of which is a limited liability company headquartered in, and organized under
the laws of, China (collectively, the “Chuming Operating
Subsidiaries”).
As
a
result of the reverse take-over transaction, PSI’s Shareholders became
Energroup’s controlling shareholders and PSI became Energroup’s wholly owned
subsidiary. As a result of PSI becoming Energroup’s wholly owned subsidiary,
Energroup acquired the business and operations of Chuming and the Chuming
Operating Subsidiaries.
Under
the
Exchange Agreement, Energroup completed the acquisition of all of the issued
and
outstanding shares of PSI through the issuance of 16,850,000 restricted shares
of common stock of Energroup to PSI’s Shareholders. Immediately prior to the
Exchange Agreement transaction, the Company had 422,756 shares of common
stock
issued and outstanding. Immediately after the issuance of the shares to PSI’s
Shareholders, the Company had 17,272,756 shares of common stock issued and
outstanding. The 422,756 shares of PSI were cancelled and 17,272,756 shares
of
Energroup were issued to reflect this reverse take-over
transaction.
Concurrently
with the Exchange Agreement, Energroup also entered into a Securities Purchase
Agreement (the “Purchase Agreement”) pursuant to which Energroup agreed to issue
and sell 3,863,635 shares of its common stock to ten accredited investors
for an
aggregate purchase price of $17,000,000
or
$4.40
per share (the “Financing”). The closing of the Financing coincided with the
Closing of the reverse take-over transaction.
In
connection with the sales of securities to accredited investors under the
securities purchase agreement, Hunter Wise Financial Group, LLC (the “Placement
Agent”), was compensated with a commission of $1,190,000 which is equal to 7.00%
of the aggregate purchase price and a warrant to purchase the 386,364
shares
of
the Company’s common stock at an exercise price of $4.40 per share. At
December 31, 2007, the Company had adequate authorized capital to issue common
shares upon the exercise of the warrant.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
For
the three-month
periods ended March 31, 2008 and 2007
At
December 31, 2007, the total number of shares outstanding, on a fully diluted
basis, is shown in the following table:
i.
|
|
|
Common
shares outstanding prior to offering of securities
|
|
|
17,272,756
|
|
ii.
|
|
|
Common
shares issued under securities purchase agreement
|
|
|
3,863,635
|
|
iii.
|
|
|
Common
shares issuable upon exercise of placement agent warrants
|
|
|
386,364
|
|
|
|
|
|
|
|
21,522,755
|
|
Concurrent
with the Company’s financing transaction, the Company agreed to register for
resale the common shares that were sold under the securities purchase agreement.
Pursuant to filing a Form S-1 registration statement with the U.S. Securities
and Exchange Commission, the Company entered into a Registration Rights
Agreement with the Investors. The agreement calls for liquidated damages
to be
paid by the Company, if in the event the registration statement is not declared
effective within 135 days of the closing of the financing transaction. The
liquidated damages will be 1% of the total financing amount in cash per month
for each month after the 135 period. The agreement states a maximum penalty
of
$1.70 million or 10% of the financing amount. At December 31, 2007, the Company
accounted for the liability under the registration rights agreement in
accordance with FASB Staff Position No. EITF 00-19-2 Accounting
for Registration Payment Arrangements.
Under
such accounting treatment, the liquidated damages are accounted for as a
reduction of the proceeds. In asserting the most conservative position, the
Company has accrued the maximum liability of $1.7 million and is carrying
that
balance in the accrued liabilities account. In the event that the registration
becomes effective in a timeframe that is earlier than February 15, 2009,
the
portion that is not legally owed, or in the event that investors waive any
liquidating damages, the accrual will be reversed and the funds will be added
to
the Company’s additional paid in capital.
In
connection with a make good agreement related to the financing transaction
on
December 31, 2007, the Company’s Chairman and CEO, Mr. Shi Huashan placed in
escrow 3,863,636
shares,
which
were beneficially
owned by him,. These shares are to be released back to him if the Company
meets
the following earnings targets of $15.9 million, and $20.9 million in after-tax
net income for the years ended December 31, 2008, and 2009 respectively.
In the
event that the Company does not meet the aforementioned financial targets,
the
escrowed shares will be released, on a pro-rata basis, to the investors
in the
financing transaction. In
accordance with SFAS 128, Earnings
per Share,
for
the
sake of calculating the Company’s earnings per share,
the
Company has accounted for the 3,863,636
escrowed shares as contingently issuable shares as such they are not included
in
the weighted average basic shares outstanding but are included in the weighted
average diluted shares outstanding. Please refer to Note 16.
In
accordance with Topic 5:T of the Staff Accounting Bulletins (SAB 79), the
Company expects to record a compensatory expense for the shares upon their
release from escrow. Whether the shares are released to the accredited
investors
or released to Mr. Shi the Company will record an expense with a corresponding
credit to the Company’s contributed paid in capital.
The
Company has paid purchase deposits to ensure adequate supply of hogs for
processing and production of pork products. These deposits will be credited
against purchase invoices upon delivery of inventory. The majority of the
purchase deposits is attributable to payments made to Dalian Chuming Group
Co.,
Ltd., which is the primary supplier of hogs.
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
Note
Regarding Forward-Looking Statements
This
quarterly report on Form 10-Q and other reports filed by Registrant from time
to
time with the Securities and Exchange Commission (collectively the “Filings”)
contain or may contain forward-looking statements and information that are
based
upon beliefs of, and information currently available to, Registrant’s management
as well as estimates and assumptions made by Registrant’s management. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which are only predictions and speak only as of the date hereof. When used
in
the filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”,
“intend”, “plan”, or the negative of these terms and similar expressions as they
relate to Registrant or Registrant’s management identify forward-looking
statements. Such statements reflect the current view of Registrant with respect
to future events and are subject to risks, uncertainties, assumptions, and
other
factors (including the risks contained in the section of this report entitled
“Risk Factors”) relating to Registrant’s industry, Registrant’s operations and
results of operations, and any businesses that Registrant may acquire. Should
one or more of these risks or uncertainties materialize, or should the
underlying assumptions prove incorrect, actual results may differ significantly
from those anticipated, believed, estimated, expected, intended, or
planned.
Although
Registrant believes that the expectations reflected in the forward-looking
statements are reasonable, Registrant cannot guarantee future results, levels
of
activity, performance, or achievements. Except as required by applicable law,
including the securities laws of the United States, the Registrant does not
intend to update any of the forward-looking statements to conform these
statements to actual results. Readers are urged to carefully review and consider
the various disclosures made throughout the entirety of this quarterly report,
which attempt to advise interested parties of the risks and factors that may
affect our business, financial condition, results of operations, and
prospects.
In
this Form 10-Q, references to “we”, “our”, “us”, “our company”, “Energroup” or
the “Registrant” refer to Energroup Holdings Corporation, a Nevada
corporation.
OVERVIEW
We
are a
meat processing company specializing in pork and pork products. We have a unique
wholesale and retail distribution model and sell directly to over 7,600 retail
outlets, including supermarkets and hypermarkets, across Northeast
China.
Dalian
Precious Sheen Investments Consulting Co., Ltd., or Chuming WFOE, is our holding
company established in the People’s Republic of China (the “PRC” or “China”) for
our three PRC operating subsidiaries, collectively referred to elsewhere in
this
report as the “Chuming Operating Subsidiaries”:
|
1.
|
Dalian
Chuming Slaughter and Packaging Pork Company Ltd. (also referred
to in
this report as “Meat Company”), whose primary business activity is
acquiring, slaughtering and packaging of pork and
cattle;
|
|
|
|
|
2.
|
Dalian
Chuming Processed Foods Company Ltd. (also referred to in this report
as
“Food Company”), whose primary business activity is the processing of raw
and cooked meat products; and
|
|
|
|
|
3.
|
Dalian
Chuming Sales Company Ltd. (also referred to in this report as “Sales
Company”), which is responsible for our sales, marketing and distribution
operations.
|
The
Chuming Operating Subsidiaries are spin-off constituents of a former parent
company, Dalian Chuming Group Co., Ltd., or the “Group.” Our primary business
activities is the production and packing of fresh pork and production of
processed meat products for distribution and sale to clients throughout the
PRC. Chuming WFOE was incorporated in China as wholly foreign owned
enterprise on in December 2007. Chuming WFOE’s parent company is Precious Sheen
Investments Limited (“PSI”), a holding company established in the British Virgin
Islands in May 2007. We are headquartered in the City of Dalian, Liaoning
Province of China.
Recent
Events in 2007 – Reverse Acquisition and Financing
Transaction
On
December 31, 2007, Energroup acquired all of the outstanding shares of PSI
in exchange for the issuance by Energroup of 16,850,000 restricted shares
of our common stock to the shareholders of PSI, which represented approximately
97.55% of the then-issued and outstanding common stock of Energroup (excluding
the shares issued in a concurrent financing transaction). As a result of this
share exchange transaction, PSI became Energroup’s wholly owned subsidiary,
and Energroup acquired the business and operations of Chuming
WFOE.
Concurrently
with the closing of the share exchange transaction, on December 31, 2007, we
raised $17,000,000 in a private placement by issuing 3,863,635 shares of our
common stock to fifteen accredited investors at $4.40 per share.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
While
our
significant accounting policies are more fully described in Note 2 to our
combined financial statements included in this report, we believe that the
following accounting policies are the most critical to aid you in fully
understanding and evaluating this management discussion and
analysis:
Method
of Accounting
We
maintain our general ledger and journals with the accrual method accounting
for
financial reporting purposes. The financial statements and notes are
representations of management. Accounting policies adopted by us conform to
generally accepted accounting principles in the United States of America and
have been consistently applied in the presentation of financial statements,
which are compiled on the accrual basis of accounting.
Principles
of Consolidation
The
consolidated financial statements, which include the Company and its
subsidiaries, are compiled in accordance with generally accepted accounting
principles in the United States of America. All significant inter-company
accounts and transactions have been eliminated. The consolidated financial
statements include 100% of assets, liabilities, and net income or loss of those
wholly owned subsidiaries.
Our
three
operating subsidiaries, the Meat Company, Food Company and Sales Company, were
incorporated and have been in existence since December 2004. The Company also
owns two intermediary holding companies. As of December 31, 2006, the detailed
identities of the consolidating subsidiaries are as follows:
Name of Company
|
|
Place of
Incorporation
|
|
Attributable
Equity
Interest
|
|
Registered Capital
|
|
|
|
|
|
|
|
|
|
Precious
Sheen Investments Limited
|
|
|
BVI
|
|
|
100
|
%
|
|
USD
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Dalian
Chuming Precious Sheen Investment Consulting Co., Ltd.
|
|
|
PRC
|
|
|
100
|
%
|
|
RMB
29,400,682
|
|
|
|
|
|
|
|
|
|
|
|
|
Dalian
Chuming Slaughtering & Pork Packaging Co. Ltd.
|
|
|
PRC
|
|
|
100
|
%
|
|
RMB
10,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Dalian
Chuming Processed Foods Co. Ltd.
|
|
|
PRC
|
|
|
100
|
%
|
|
RMB
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Dalian
Chuming Sales Co. Ltd.
|
|
|
PRC
|
|
|
100
|
%
|
|
RMB
5,000,000
|
|
The
consolidation of these operating subsidiaries into a newly formed holding
company (i.e.
the
Company) is permitted by United States GAAP: ARB51 paragraph 22 and
23.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management makes these estimates using the best information
available at the time the estimates are made; however, actual results could
differ materially from these estimates.
Accounts
Receivable
We extend
unsecured, non interest bearing credit to our customers;
accordingly, we carry an allowance for doubtful accounts, which is an
estimate, made by management. Management makes its estimate based on prior
experience rates and assessment of specific outstanding customer balances.
Management must approve credit extended to new customers who have met the
criteria of our credit policy. It is typically the case that new customers
must make payments in advance before we sell our products to them. For our
premier customers such as supermarkets, we do typically extend 30-45 days of
terms to them.
In
order
for us to minimize bad debt, we exercise control over both the length of the
receivables, and the quantity of products shipped to our customers to whom
we
have extended credit, such as those who pay on a monthly basis. In exercising
control over order quantities, on a product by product basis, we set maximum
limits that will be shipped to those customers. If in the event, the customer
is
near their maximum and has an outstanding balance, we will request payment
even
if it is outside of the normal payment cycles of our customers.
Inventory
Carrying Value
Inventory,
consisting of raw materials in the form of livestock, work in progress, and
finished products, is stated at the lower of cost or market value. Finished
products are comprised of direct materials, direct labor and an appropriate
proportion of overhead. Periodic evaluation is made by management to identify
if
inventory needs to be written down because of damage, or spoilage. Cost is
computed using the weighted average method.
We
observe and evaluate the value of inventory on a product by product basis.
For
our fresh meat products which are typically sold as carcasses (hogs sliced
in
half), we typically carry zero inventory as these products are sold immediately.
We use a just in time model for fresh meat products. Our customers require
fresh
meat so we do not carry any excess inventory beyond the hogs that we slaughter
each day. Current market conditions have also influenced our inventory across
the board. For our products that we require additional processing such as hams
and sausages we typically, carry two days’ worth of inventory. For meat that has
been separated into smaller packaged portion, we typically carry one weeks’
worth of inventory. The PRC is currently facing a pork shortage, so as a result,
presently we are able to sell all the fresh pork that we slaughter. Accordingly,
we have not been required to write down inventory for spoilage. Also, if the
hogs do not meet our requirements for quality they are disposed of, and charged
off immediately to our cost of sales, and they will not enter our
inventory.
Property,
Plant, and Equipment
Property,
plant, and equipment are stated at cost. Repairs and maintenance to these assets
are charged to expense as incurred; major improvements enhancing the function
and/or useful life are capitalized. When items are sold or retired, the related
cost and accumulated depreciation are removed from the accounts and any gains
or
losses arising from such transactions are recognized.
Construction
in progress represents the direct costs of design, acquisition, and construction
of buildings, building improvements and land improvements. Capitalization of
these costs ceases when substantially all activities necessary to prepare the
assets for their intended use are completed. At such point, construction in
progress is transferred to its respective asset classification. No depreciation
is provided until it is completed and ready for intended use.
Property
and equipment are depreciated using the straight-line method over their
estimated useful life with a 5% salvage value. Their useful lives are as
follows:
Fixed
Asset Classification
|
|
Useful Life
|
|
Land Improvements
|
|
|
10
years
|
|
Buildings
|
|
|
20
years
|
|
Building
Improvements
|
|
|
10
years
|
|
Manufacturing
Machinery & Equipment
|
|
|
10
years
|
|
Office
Equipment
|
|
|
5
years
|
|
Furniture
& Fixtures
|
|
|
5
years
|
|
Vehicles
|
|
|
5
years
|
|
Land
Use
Rights
We
believe our estimation of useful life of our fixed assets has significant
bearing on our cost of sales. The related depreciation is a factor of cost
that
cannot be ignored in assessing our profits. We believe we have used a
conservative approach to assessing their useful lives. In our determination
of
useful life and depreciation methodology we coincidentally adhere to PRC
GAAP
standards in addition to U.S. GAAP. PRC GAAP standards provide a valuable
and
reasonable basis for determining useful life because the PRC government
documents and records all forms of manufacturing equipment and provides guidance
on what is considerable acceptable in terms of depreciation expense. We do
also
believe based on the quality and nature of the maintenance we regularly perform
on our equipment, it is possible that our equipment could significantly outlive
their stated estimated useful lives.
Customer
Deposits
Customer
deposits represents money we have received in advance for purchases of pork
and
pork products. We consider customer deposits as a liability until products
have
been shipped and sales revenue is earned.
Statutory
Reserve
Statutory
reserve refers to the amount appropriated from the net income in accordance
with
laws or regulations, which can be used to recover losses and increase capital,
as approved, and, are to be used to expand production or operations. PRC laws
prescribe that an enterprise operating at a profit, must appropriate, on an
annual basis, from its earnings, an amount to the statutory reserve to be used
for future company development. Such an appropriation is made until the reserve
reaches a maximum equaling 50% of the enterprise’s capital.
Earnings
Per Share
Basic
earnings per share is computed by dividing net income by the weighted average
number of ordinary shares outstanding during the period. Diluted earnings per
share is computed by dividing net income by the sum of the weighted average
number of ordinary shares outstanding and dilutive potential ordinary shares
during the years. During the years ended 2004, 2005, and 2006, no dilutive
potential ordinary shares were issued.
We
compute earnings per share (“EPS”) in accordance with Statement of Financial
Accounting Standards No. 128, “Earnings per share” (“SFAS No. 128”), and SEC
Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires companies
with complex capital structures to present basic and diluted EPS. Basic EPS
is
measured as the income or loss available to common shareholders divided by
the
weighted average common shares outstanding for the period. Diluted EPS is
similar to basic EPS but presents the dilutive effect on a per share basis
of
potential common shares (e.g., convertible securities, options, and warrants)
as
if they had been converted at the beginning of the periods presented, or
issuance date, if later. Potential common shares that have an anti-dilutive
effect (i.e., those that increase income per share or decrease loss per share)
are excluded from the calculation of diluted EPS.
In
connection with our reverse acquisition completed on December 31, 2007, a total
of 3,863,636 shares of our common stock held by a trust, the beneficiaries
of
which include our CEO Mr. Shi Huashan and his family, were deposited into a
make
good escrow account. See “Strategic Financing” beginning on page 4. We accounted
for this deposit of escrow shares as “contingent shares,” and accordingly
reduced the number of shares deemed outstanding for accounting purposes from
21,136,392 to 17,272,756 . Accordingly, our “basic” weighted average shares
outstanding is
17,272,756 and our “diluted” weighted average shares outstanding
after giving effect for potential dilution from warrants outstanding is
21,182,756. If and when the make good escrow shares are released to their
original owners or to investors, our “basic” weighted average shares outstanding
will be increased accordingly. The effect of this accounting treatment of the
make good escrow shares, is that our reported basic net income per share will
be
higher than our diluted net income per share, during the period in which the
make-good shares are held in escrow.
Recent
Accounting Pronouncements
In
July
2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an
Interpretation of FASB Statement No. 109, which clarifies the accounting for
uncertainty in tax positions. This Interpretation requires that the Company
recognizes in its consolidated financial statements the impact of a tax position
if that position is more likely than not of being sustained on audit, based
on
the technical merits of the position. The provisions of FIN 48 are effective
for
the Company on January 1, 2007, with the cumulative effect of the change in
accounting principle, if any, recorded as an adjustment to opening retained
earnings.
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements, where fair value is the relevant
measurement attribute. The standard does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
year beginning after November 15, 2007, and interim periods within those fiscal
years.
In
September 2006, the SEC issued SAB No. 108, which provides guidance on the
process of quantifying financial statement misstatements. In SAB No. 108,
the
SEC staff establishes an approach that requires quantification of financial
statement errors, under both the iron-curtain and the roll-over methods,
based
on the effects of the error on each of the Company’s financial statements and
the related financial statement disclosures. SAB No.108 is generally effective
for annual financial statements in the first fiscal year ending after November
15, 2006. The transition provisions of SAB No. 108 permits existing public
companies to record the cumulative effect in the first year ending after
November 15, 2006 by recording correcting adjustments to the carrying values
of
assets and liabilities as of the beginning of that year with the offsetting
adjustment recorded to the opening balance of retained earnings.
In
February 2007, the Financial Accounting Standards Board issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial Liabilities—Including an
Amendment of SFAS 115 (SFAS No. 159), which allows for the option to measure
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected are
reported in earnings. The objective of SFAS 159 is to provide opportunities
to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply hedge accounting provisions.
SFAS 159 also establishes presentation and disclosure requirements designed
to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the impact of SFAS
No.
159 on our consolidated financial statements.
In
December 2007, the FASB issued SFAS 141 (revised 2007), Business
Combinations,
(‘‘SFAS
141(R)’’). SFAS 141(R) retains the fundamental requirements of the original
pronouncement requiring that the purchase method be used for all business
combinations, but also provides revised guidance for recognizing and measuring
identifiable assets and goodwill acquired and liabilities assumed arising
from
contingencies, the capitalization of in-process research and development
at fair
value, and the expensing of acquisition-related costs as incurred. SFAS 141(R)
is effective for fiscal years beginning after December 15, 2008. In the event
that the Company completes acquisitions subsequent to its adoption of SFAS
141
(R), the application of its provisions will likely have a material impact
on the
Company’s results of operations, although the Company is not currently able to
estimate that impact.
We
do not
anticipate that the adoption of the above standards will have a material
impact
on our consolidated financial statements.
RESULTS
OF OPERATIONS
Comparison
of Three Months Ended March 31, 2008 and March 31, 2007.
The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
|
|
Quarter Ending
|
|
|
|
Quarter Ending
|
|
|
|
|
|
March 31,
|
|
% of
|
|
March 31,
|
|
% of
|
|
|
|
2008
|
|
Sales
|
|
2007
|
|
Sales
|
|
Sales
|
|
$
|
43,507,098
|
|
|
100.00
|
%
|
$
|
23,187,994
|
|
|
100.00
|
%
|
Cost
of Sales
|
|
|
(36,474,424
|
)
|
|
83.84
|
%
|
|
(19,025,632
|
)
|
|
82.05
|
%
|
Gross
Profit
|
|
|
7,032,674
|
|
|
16.16
|
%
|
|
4,162,362
|
|
|
17.95
|
%
|
Selling
Expenses
|
|
|
1,825,277
|
|
|
4.20
|
%
|
|
229,419
|
|
|
0.99
|
%
|
General
& Administrative Expenses
|
|
|
492,973
|
|
|
1.13
|
%
|
|
305,136
|
|
|
1.32
|
%
|
Total
Operating Expense
|
|
|
2,318,250
|
|
|
5.33
|
%
|
|
534,555
|
|
|
2.31
|
%
|
Operating
Income / (Loss)
|
|
|
4,714,423
|
|
|
10.84
|
%
|
|
3,627,807
|
|
|
15.65
|
%
|
Other
Income (Expense)
|
|
|
(306,465
|
)
|
|
0.70
|
%
|
|
(618,423
|
)
|
|
2.67
|
%
|
Earnings
Before Tax
|
|
|
4,407,562
|
|
|
10.13
|
%
|
|
3,009,384
|
|
|
12.98
|
%
|
(Income
Tax Expense) / Deferred Tax Benefit
|
|
|
(166,345
|
)
|
|
0.38
|
%
|
|
-
|
|
|
0.72
|
%
|
Net
Income
|
|
$
|
4,241,217
|
|
|
9.75
|
%
|
$
|
3,009,384
|
|
|
12.98
|
%
|
Earnings
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.25 |
|
|
|
|
|
0.22 |
|
|
|
|
Diluted
|
|
|
0.20 |
|
|
|
|
|
0.17 |
|
|
|
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,272,756
|
|
|
|
|
|
13,409,120 |
|
|
|
|
Diluted
|
|
|
21,182,756 |
|
|
|
|
|
17,272,756
|
|
|
|
|
Sales.
Our
sales include revenues from sales of our fresh pork, frozen pork, and processed
food products. During the quarter ended March 31, 2008, we had sales of
$43,507,098 as compared to sales of $23,187,994 for the quarter ended March
31,
2007, an increase of approximately 88%. Our sales for our various product
categories in the first quarter of 2008 are summarized as follows:
Sales
by product category, in
dollars:
|
|
First Quarter
2008 (amount)
|
|
% of
Total
Sales
|
|
|
First Quarter
2007
|
|
% of
Total
Sales
|
|
% of increase
from
2007 to 2008
|
|
Fresh Pork
|
|
$
|
36,384,986
|
|
|
83.63
|
%
|
|
$
|
17,653,019
|
|
|
76.13
|
%
|
|
106.11
|
%
|
Frozen
Pork
|
|
|
2,358,085
|
|
|
5.42
|
%
|
|
|
1,595,334
|
|
|
6.88
|
%
|
|
47.81
|
%
|
Processed
Food Products
|
|
|
4,764,027
|
|
|
10.95
|
%
|
|
|
3,939,640
|
|
|
16.99
|
%
|
|
20.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Sales
|
|
$
|
43,507,098
|
|
|
100
|
%
|
|
$
|
23,187,994
|
|
|
100
|
%
|
|
87.63
|
%
|
Sales
by product category, by weight of
product (metric tons):
|
|
First Quarter
2008
|
|
% of
Total
Sales
|
|
|
First Quarter
2007
|
|
% of
Total
Sales
|
|
% of change
from
|
|
Fresh Pork
|
|
|
13,997 |
|
|
79.92 |
% |
|
|
10,306 |
|
|
73.75
|
% |
|
35.81
|
% |
Frozen
Pork
|
|
|
1,086 |
|
|
6.20 |
% |
|
|
878 |
|
|
6.28
|
% |
|
23.69
|
% |
Processed
Food Products
|
|
|
2,430 |
|
|
13.88 |
% |
|
|
2,791 |
|
|
19.97
|
% |
|
-12.93
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Sales
|
|
|
17,513 |
|
|
100 |
% |
|
$
|
13,975
|
|
|
100
|
% |
|
25.32
|
% |
In
the
first quarter of 2008, we raised our average per-kilogram sale prices to our
customers, as we did during 2007, which coincided with an increase in the cost
of live pigs and other production costs. In addition, despite these consumer
price increases, in the first quarter of 2008 our sales volume of fresh pork
and
frozen pork (by weight) increased, with the fresh pork category experiencing
the
highest growth in sales volume both by weight and in terms of sales revenue.
We
also increased our sales of frozen pork, both by weight and by sales revenue,
in
the first quarter of 2008 as compared with the same period in the prior year.
For processed food products, our sales by weight decreased by 12.93%, but
because of higher per-kilogram prices, our sales revenue for this product
category increased by 20.92%. Management attributes the increases in sales
revenue in all our product categories to the continuing strength in consumer
demand for our products in the periods presented.
The
following table shows the change in the average
price per kilogram for our product to consumers in the quarter ending March
31,
2008, as compared to the same quarter last year:
|
|
Average
Per-Kilogram Price to Customers (in $US)
|
|
|
|
First
Quarter of 2008
|
|
First
Quarter of
2007
|
|
%
change
|
|
Change
in
Price
|
|
Fresh
Pork
|
|
$
|
2.59
|
|
$
|
1.68
|
|
|
54
|
%
|
$
|
0.91
|
|
Frozen
Pork
|
|
$
|
2.17
|
|
$
|
1.82
|
|
|
19
|
%
|
$
|
0.35
|
|
Processed
Food Products
|
|
$
|
1.96
|
|
$
|
1.41
|
|
|
39
|
%
|
$
|
0.55
|
|
In
the
first quarter of 2008, we raised our prices for fresh pork significantly,
while
we made more modest increases in the prices of our processed food products
and
frozen pork. We raised our prices for frozen pork by only 19% because we
use
grade-3 and grade-4 pigs for such products, which are lower in price than
the
grade-1 and grade-2 pigs, which we use to produce fresh pork
products.
Although
we also sell our products through sales agents, our principal sales channels
consist of Chuming-branded franchise stores, supermarkets and restaurants
and
canteens. The following table summarizes the changes in the number of
participants within these sales channels:
|
|
Sales
Channels
|
|
As
of March 31,
|
|
Franchise
Stores
|
|
Supermarkets
|
|
Restaurants and
Canteens
|
|
2007
|
|
|
436
|
|
|
93
|
|
|
2,482
|
|
2008
|
|
|
635
|
|
|
122
|
|
|
3,191
|
|
As
shown
in the table above, as of March 31, 2008, as compared to March 31, 2007, we
significantly increased the number of participants in all three of these sales
channels. The increase in the number of these participants has resulted in
increased sales.
The
following table shows the total increase in our sales, from the first quarter
of
2008 as compared to the first quarter of 2007, by product category and by
sales
channel.
|
Increase
in Sales from First Quarter of 2007 to First Quarter of
2008
|
By
Product Group and Sales Channel ($)
|
Franchise
Operators
|
Sales
Agents
|
Super
Markets
|
Restaurants
and
Canteens
|
Total
Increase ($)
|
Fresh
Pork
|
5,449,458
|
4,791,484
|
7,939,765
|
562,512
|
18,743,219
|
Frozen
Pork
|
n/a1
|
70,271
|
n/a1
|
687,895
|
758,166
|
Processed
Food Products
|
63,020
|
368,571
|
185,508
|
200,619
|
817,718
|
|
|
|
|
|
|
Total
Increase in Sales
|
5,512,478
|
5,230,326
|
8,125,273
|
1,451,026
|
20,319,103
|
1
In the periods presented, we did not sell frozen pork through franchise
operators and supermarkets.
In
the
first quarter of 2008, as compared to the same quarter in 2007, we achieved
significantly higher sales revenue from the sale of fresh pork, which
was a
result of higher sales volume of this product category by weight, combined
with
increases in our per-kilogram prices to our customers. Management believes
this
is due to continued strong consumer demand for fresh pork.
In
the
first quarter of 2008, as compared to the same quarter in 2007, the majority
of
our increase in sales came through supermarkets, sales agent and franchise
operators, respectively. The
$8.1
million sales increase through supermarkets is due to the company's efforts
in expanding the sales channel of supermarkets, which provides the Company
with
the largest profit margins, combined
with increases in our per-kilogram prices of fresh
pork.
Overall,
management believes that our increase in sales, despite higher consumer prices,
resulted from increased consumer demand, the expansion of our sales channels
and
sales network, and increased consumer awareness of our brand and availability
of
our products.
Cost
of Sales.
Cost of
sales for the first quarter of 2008 increased by $17,448,792 or approximately
91.71%, from $19,025,632 for the three months ended March 31, 2007 to
$36,474,424 for the three months ended March 31, 2008. The increase was
attributable to the increase in sales for the first quarter of 2008 as compared
to the same period in the prior year. Our cost of sales for our various product
categories in the first quarter of 2008 is summarized as
follows:
|
|
First Quarter
|
|
% of
Overall
Cost of
|
|
|
First Quarter
|
|
% of
Overall
Cost
of
|
|
% of increase
from
|
|
Cost of Sales:
|
|
2008
|
|
Sales
|
|
|
2007
|
|
Sales
|
|
2007 to 2008
|
|
Fresh Pork
|
|
$
|
31,371,652
|
|
|
86.01
|
%
|
|
$
|
15,079,715
|
|
|
79.26
|
%
|
|
108.03
|
%
|
Frozen
Pork
|
|
|
1,794,542
|
|
|
4.92
|
%
|
|
|
1,253,789
|
|
|
6.59
|
%
|
|
43.13
|
%
|
Processed
Food Products
|
|
|
3,308,230
|
|
|
9.07
|
%
|
|
|
2,692,127
|
|
|
14.15
|
%
|
|
22.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Cost of Sales
|
|
$
|
36,474,424
|
|
|
100
|
%
|
|
$
|
19,025,632
|
|
|
100
|
%
|
|
91.71
|
%
|
Beginning
in the second quarter of 2007, and throughout 2007 and continuing into the
first
quarter of 2008, we experienced a sharp increase in the cost of live pigs.
Management estimates that the average cost of live pigs increased by
approximately 98.7% between March 31, 2007 and March 31, 2008, which was
the
most significant factor causing an increase in our cost of sales. Secondly,
we
experienced continued modest price increases in electricity, water and coal,
all
of which we use in our production process. Thirdly, wages increased in the
first
quarter of 2008 by an estimated 40% as compared to the same period in 2007.
Lastly, we experienced slight increases in transportation and delivery costs
in
the first quarter of 2008. Management estimates that we were able to recoup
approximately 90% of these cost increases through increased consumer prices
for
our products. In pricing our products, management believed that attempting
to
offset all of the cost increases through higher prices to the consumer would
not have been in the best interest of the Company. Management believes that
productivity remained steady, with no significant changes in the first quarter
of 2008 versus the same period in 2007.
The
following table shows the estimated average per-kilogram price we paid
for live
pigs in 2006 and 2007:
|
|
Average
Unit
Price Per Kilogram in
2007
(in
$US)
|
|
Average
Unit
Price Per Kilogram in 2006
(in
$US)
|
|
Price
Increase
(in
$US)
|
|
%
Increase
|
|
First
Quarter
|
|
|
1.0579
|
|
|
0.9165
|
|
|
0.1414
|
|
|
15.43
|
%
|
Second
Quarter
|
|
|
1.3535
|
|
|
0.8367
|
|
|
0.5168
|
|
|
61.77
|
%
|
Third
Quarter
|
|
|
1.8104
|
|
|
0.8989
|
|
|
0.9115
|
|
|
101.40
|
%
|
Fourth
Quarter
|
|
|
1.8656
|
|
|
0.9288
|
|
|
0.9368
|
|
|
100.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
for Year
|
|
|
1.5219
|
|
|
0.8952
|
|
|
0.6267
|
|
|
70.01
|
%
|
The
most rapid increase in live pig
prices occurred in the first half of 2007, for the highest grades of live
pigs.
Management believes that while higher live pig prices may persist, management
does not expect further rapid escalation in live pig prices of the scale
seen in
2007. Management currently projects a 10% per year increase in the average
price
per kilogram for live pigs during the next several years.
The
following table shows our cost of sales in the first quarter of 2008 as
compared
with the same period in 2007, and also indicates cost of sales by product
group,
as a percentage of sales within each product group.
|
|
First
Quarter
|
|
% of
Product
|
|
First
Quarter
|
|
% of
Product
|
|
|
|
of
2008
|
|
Group
Sales
|
|
of
2007
|
|
Group
Sales
|
|
Fresh
Pork
|
|
|
31,371,652
|
|
|
86.22
|
%
|
|
|
|
$
|
15,079,715
|
|
|
|
|
|
85.42
|
%
|
Frozen
Pork
|
|
|
1,794,542
|
|
|
76.10
|
%
|
|
|
|
|
1,253,789
|
|
|
|
|
|
78.59
|
%
|
Processed
Food Products
|
|
|
3,308,230
|
|
|
69.44
|
%
|
|
|
|
|
2,692,127
|
|
|
|
|
|
68.33
|
%
|
Total
Sales
|
|
$
|
36,474,424
|
|
|
83.84
|
%
|
|
|
|
$
|
19,025,632
|
|
|
|
|
|
82.05
|
%
|
Our
cost
of sales as a percentage of sales of fresh pork increased slightly in the
first
quarter of 2008, as compared to the same period in 2007, primarily because
of
the increase in the cost of inputs, which were not completely offset by
higher
prices to our customers. The cost of sales as a percentage of sales of
frozen
pork fell slightly, however, which was due to the use of grade-3 and grade-4
pigs for such products, which are lower in price than the grade-1 and grade-2
pigs, which we use to produce fresh pork products. Most of the cost increase
in
live pigs occurred in the grade-1 and grade-2 categories.
Gross
Profit.
Gross
profit was $7,032,674 for the three months ended March 31, 2008 as compared
to
$4,162,362 for the same period in 2007, representing an increase of $2,870,312,
or approximately 69%. Management attributes the increase in gross profit
to
strong increases in sales, driven by strong demand for our products. In
addition, we were able to achieve price increases for our products sold to
our
consumers in order to largely mitigate the impact of higher commodity and
input
prices that we had to pay in the first quarter of 2008. Our gross profit
as a
percentage of sales was 16.16% in the first quarter of 2008 as compared to
17.95% for the same period in 2007. The slight decrease in gross profit as
a
percentage of sales was attributable to these commodity and input price
increases, not all of which we passed on to our customers in the form of
higher
product prices.
The
following table presents our gross profit for the three months ended March
31,
2008 and 2007. The table below also shows the percentage of gross profit
for
each of our product groups, as a percentage of sales for that product
group.
Gross Profit |
|
|
|
|
|
% of
Product
Group
Sales
|
|
|
|
|
|
|
|
|
|
% of
increase from First Quarter of 2007 to First
Quarter
of 2008
|
|
Fresh
Pork
|
|
|
5,036,292
|
|
|
13.84
|
%
|
|
$
|
2,582,018
|
|
|
14.63
|
%
|
|
95.05
|
%
|
Frozen
Pork
|
|
|
556,052
|
|
|
23.58
|
%
|
|
|
339,350
|
|
|
21.27
|
%
|
|
63.86
|
%
|
Processed
Food Products
|
|
|
1,440,330
|
|
|
30.23
|
%
|
|
|
1,240,994
|
|
|
31.50
|
%
|
|
16.06
|
%
|
Total
Sales
|
|
$
|
7,032,674
|
|
|
16.16
|
%
|
|
$
|
4,162,362
|
|
|
17.95
|
%
|
|
68.96
|
%
|
As
shown
in the table above, the fresh pork as a product category delivered the
highest
increase in gross profit from the first quarter of 2008 as compared with
the
same period in 2007. However, in both periods, our processed food product
category yielded the highest gross profit as a percentage of sales within
the
product category. Management attributes this to the use of grade-3 and
grade-4
pigs and unsold portions of grade-1 and grade-2 pigs in producing our processed
food products. Grade-3 and grade-4 pigs are generally lower in price than
grade-1 and grade-2 pigs. Because of our superior processing and storage
techniques and the strength of our brand-name, however, we are able to sell
our processed food products at prices comparable to other processed
products that use higher quality pork.
Selling
Expenses.
Selling
expenses totaled $1,825,277 for the three months ended March 31, 2008,
as
compared to $229,419 for the same period in 2007, an increase of $1,595,858
or
696%. This increase is due to two major reasons. Firstl, in the first quarter
of
2008, we expanded our advertising and marketing expenditures from approximately
$54,000 in the first quarter of 2007 to approximately $1,410,000 for the
same
period of 2008 in our efforts to increase brand awareness and encourage
sales.
These activities included television commercials, radio, magazine and newspaper
advertisements, and exhibitions. In the first quarter of 2008, we spent
approximately $209,000 on newspaper advertisements; approximately $167,000
on
radio advertisements; approximately $293,000 on television commercials
advertisements; approximately $140,000 on mobile television commercials;
approximately $223,000 on exhibitions and outdoor signs; approximately
$195,000
on printing promotion materials; and approximately $167,000 on image design
services and other related expenses. Secondly, in the first quarter of
2008, our
vehicle-related expenses increased by approximately $46,000. This was due
to the expansion of the size of our operations and recent increases in
fuel
prices.
General
and Administrative Expenses.
General
and administrative expenses totaled $492,973 for the three months ended March
31, 2008 as compared to $305,136 for the same period in 2007, an increase
of
$187,837 or 62%. This increase is primarily attributable to the increased
salary
expense. We continued to hire new staff to meet the needs of our expending
operations. Also, consistent with the recent escalation in the rate of
inflation in China, the salaries and cost of benefits for our staff were
increased overall by approximately 40% in the first quarter of 2008 as compared
to the same period in 2007. These increases in salaries and benefits were
made
in order to maintain compensation levels that were sufficient to attract
and retain qualified employees.
Other
Income (Expense).
Our
other income (expense) consisted of interest income, other expenses, and
interest expense. We had total other expenses of $306,861 for the three months
ended March 31, 2008 as compared to $618,423 for the same period in 2007,
a
decrease of $311,562 or 50%. The decrease in other expenses in the first
quarter
of 2008 is primarily attributable to a decrease in interest expenses as we
reduced our bank loan principal by repaying $10 million on December 25, 2007,
and we did not receive the additional $18 million in new bank loans until
January 26, 2008 resulting in no interest expenses from December 25,
2007 to January 25, 2008. Thus, although the interest expense we paid for
the new loans were higher in the last two months of the first quarter of
2008,
our total interest expense decreased.
Net
Income.
Our net
income for the three months ended March 31, 2008 was $4,241,217 as compared
to
$3,009,384 for the same period in 2007, an increase of $1,231,833 or 41%.
This
increase in net income is attributable to the factors described above, but
primarily from the increase in sales, and our efforts to manage our costs
in order to achieve a gross profit margin of 16.16%, which is only slightly
less
than the gross profit margin achieved in the first quarter of 2007 of 17.95%.
Gross profit margin decreased in the first quarter of 2008 as compared to
the
same period in 2007 primarily because of commodity and input price increases,
not all of which we passed on to our customers in the form of higher product
prices. Net income as a percentage of sales decreased from 12.98% in the
first
quarter of 2007 to 9.75% in the first quarter of 2008, and management attributes
this to the same reasons for the decrease in gross profit margin, and also
due to higher selling expenses as we increased our sales and marketing efforts
in the first quarter of 2008 and had significantly more of such activities
as
compared to the first quarter of 2007. For instance, in our efforts to expand
our market share, we increased our advertising expenditures by $1,356,000
or
2611% in the first quarter of 2008 as compared to the same period last year.
In
the first quarter of 2008, we increased our selling expenses by $1,595,858
as
compared to the first quarter of 2007, or 696%.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flows
Three
Months Ended March 31, 2008
Net
cash
used in operating activities was $20,079,493 in the first quarter of 2008,
while
net cash flow sourced from operating activities was $5,448,403 in the same
period in 2007. This is primarily attributable to several reasons as follows.
First, in order to expand our sales, we began offering payment terms to
accommodate our best customers - beginning in the first quarter of 2008,
we
offered extended payment terms to some of our quality long term clients with
good credit (up to one month), where previously we required payment within
1-2
days of delivery of goods. This practice caused a decrease in, and some
delay in collection of, our incoming cash. Second, in the first quarter of
2008,
due to the persistent shortage of live pigs in the marketplace and in order
to
maintain a steady supply of live pigs, we decided to pay our suppliers,
including the farmers and the Group, cash immediately upon delivery of live
pigs
to us. This practice caused an
increase in our outgoing cash and a decrease our cash balances.
Third,
as an incentive to the live pig suppliers, in January 2008, we paid all
remaining outstanding balances at the end of 2007 on accounts payable to
our
suppliers in cash. This practice increased our outgoing cash and decreased
our
cash balance. Because these adjustments in our approach to accounts receivable
and accounts payable are “one-time” adjustments, management believes that the
resulting effect on our cash position will be relatively short-lived, and
it is
estimated this may affect the first several quarters of 2008, but
management does not expect the effect of these adjustments to recur after
this
adjustment period.
Net
cash
sourced from investing activities was $206,155 in the first quarter of 2008,
compared to cash used in investing activities of $769,629 in the first quarter
of 2007. This is related to our December 2007 private placement financing,
pursuant to which $2,092,169 in funds from the private placement (out of
the
$4.25 million initially deposited into escrow) remained in escrow as restricted
cash. The $1,497,124 increase in net cash used for plant and
equipment purchases in the first quarter of 2008 is largely due to equipment
purchases and remodeling expenses as we remodeled our slaughtering facilities
in
the first quarter of 2008 to meet expanding production needs.
Net
cash
sourced from financing activities was $9,198,281 in the first quarter of
2008 as
compared to net cash used in financing activities of $1,286,776 in the first
quarter of 2007. This is related to the $7.5 million in net proceeds from
new
bank loans that we received in the first quarter of 2008 from the Bank of
China,
Liaoning Branch and Shanghai Pudong Development Bank.
Contractual
Obligations and Off-Balance Sheet Arrangements
Contractual
Obligations
We
have
certain fixed contractual obligations and commitments that include future
estimated payments. Changes in our business needs, cancellation provisions,
changing interest rates, and other factors may result in actual payments
differing from the estimates. We cannot provide certainty regarding the timing
and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in
the
tables in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash
flows.
The
following tables summarize our contractual obligations as of March 31, 2008,
and
the effect these obligations are expected to have on our liquidity and cash
flows in future periods.
|
|
Payments
Due by Period
|
|
|
|
Total
|
|
Less than 1
year
|
|
1-3 Years
|
|
3-5 Years
|
|
5 Years +
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
Obligations :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
Indebtedness
|
|
$
|
14,881,376
|
|
$
|
14,881,376
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Other
Indebtedness
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Capital
Lease Obligations
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Operating
Leases
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Purchase
Obligations
|
|
$
|
416,951,159
|
|
$
|
102,572,116
|
|
$
|
314,379,043
|
|
$
|
-
|
|
$
|
-
|
|
Total
Contractual Obligations:
|
|
$
|
431,832,535
|
|
$
|
117,453,492
|
|
$
|
314,379,043
|
|
$
|
-
|
|
|
-
|
|
Off-balance
Sheet Arrangements
We
have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered
into
any derivative contracts that are indexed to our shares and classified as
shareholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest
in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest
in
any unconsolidated entity that provides financing, liquidity, market risk
or
credit support to us or engages in leasing, hedging or research and development
services with us.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We
do not
use derivative financial instruments in our investment portfolio and have
no
foreign exchange contracts. Our financial instruments consist of cash and
cash
equivalents, trade accounts receivable, accounts payable and long-term
obligations. We consider investments in highly liquid instruments purchased
with
a remaining maturity of 90 days or less at the date of purchase to be cash
equivalents. However, in order to manage the foreign exchange risks, we may
engage in hedging activities to manage our financial exposure related to
currency exchange fluctuation. In these hedging activities, we might use
fixed-price, forward, futures, financial swaps and option contracts traded
in
the over-the-counter markets or on exchanges, as well as long-term structured
transactions when feasible.
Interest
Rates.
Our
exposure to market risk for changes in interest rates relates primarily to
our
short-term investments and short-term obligations; thus, fluctuations in
interest rates would not have a material impact on the fair value of these
securities. At March 31, 2008, we had approximately $7,039,089 in cash and
cash
equivalents. A hypothetical 10% increase or decrease in interest rates would
not
have a material impact on our earnings or loss, or the fair market value
or cash
flows of these instruments.
Foreign
Exchange Rates.
All of
our sales and inputs are transacted in Renminbi (“RMB”). As a result, changes in
the relative values of U.S. dollars and RMB affect our reported levels of
revenues and profitability as the results are translated into U.S. dollars
for
reporting purposes. However, since we conduct our sales and purchase inputs
in
RMB, fluctuations in exchange rates are not expected to significantly affect
our
financial stability or gross and net profit margins. We do not currently
expect
to incur significant foreign exchange gains or losses, or gains or losses
associated with any foreign operations.
Our
exposure to foreign exchange risk primarily relates to currency gains or
losses
resulting from timing differences between the signing of sales contracts
and the
settling of these contracts. Furthermore, we translate monetary assets and
liabilities denominated in other currencies into RMB, the functional currency
of
our operating business. Our results of operations and cash flow are translated
at average exchange rates during the period, and assets and liabilities are
translated at the unified exchange rate as quoted by the People’s Bank of China
at the end of the period. Translation adjustments resulting from this process
are included in accumulated other comprehensive income in our statement of
shareholders’ equity. We recorded net foreign currency gains of $43,783 and
$3,682,295 in the first quarter of 2007 and 2008, respectively. We have not
used
any forward contracts, currency options or borrowings to hedge our exposure
to
foreign currency exchange risk. We cannot predict the impact of future exchange
rate fluctuations on our results of operations and may incur net foreign
currency losses in the future. As our sales denominated in foreign currencies,
such as RMB, continue to grow, we may consider using arrangements to hedge
our
exposure to foreign currency exchange risk.
Our
financial statements are expressed in U.S. dollars, but the functional
currency of our operating subsidiaries is RMB. The value of your investment
in
our stock will be affected by the foreign exchange rate between
U.S. dollars and RMB. A decline in the value of RMB against the
U.S. dollar could reduce the U.S. dollar equivalent amounts of our
financial results, the value of your investment in our company and the dividends
we may pay in the future, if any, all of which may have a material adverse
effect on the price of our stock.
ITEM
4. CONTROLS
AND PROCEDURES
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act 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 its chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving
the
desired control objectives, and management necessarily is required to apply
its
judgment in evaluating the cost-benefit relationship of possible controls
and
procedures.
As
of
March 31, 2008, we carried out an evaluation, under the supervision and with
the
participation of our management, including our chief executive officer and
our
chief financial officer, of the effectiveness of the design and operation
of our
disclosure controls and procedures. Based on the foregoing, our chief executive
officer and chief financial officer concluded that our disclosure controls
and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) were effective at the reasonable assurance
level.
There
were no changes in our internal control over financial reporting (as defined
in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934,
as
amended) during the quarter ended March 31, 2008 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART
II. OTHER INFORMATION
We
are
not aware of any material existing or pending legal proceedings against us,
nor
are we involved as a plaintiff in any material proceeding or pending litigation.
There are no proceedings in which any of our current directors, officers
or
affiliates, or any registered or beneficial shareholder, is an adverse party
or
has a material interest adverse to us.
You
should carefully consider the risks described below together with all of
the
other information included in this prospectus before making an investment
decision with regard to our securities. The statements contained in or
incorporated into this report that are not historic facts are forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those set forth in or implied by
forward-looking statements. If any of the following risks actually occurs,
our
business, financial condition or results of operations could be harmed. In
that
case, the trading price of our common stock could decline, and you may lose
all
or part of your investment.
Risks
Relating to Our Business
Our
limited operating history makes it difficult to evaluate our future prospects
and results of operations.
We
have a
limited operating history. Our holding company in China, Chuming WFOE, and
the
companies that form its present subsidiaries were incorporated in 2004.
Accordingly, you should consider our future prospects in light of the risks
and
uncertainties experienced by early stage companies in evolving industries
such
as the meat industry in China. Some of these risks and uncertainties relate
to
our ability to:
|
·
|
maintain
our market position in the meat business in
China;
|
|
·
|
offer
new and innovative products to attract and retain a larger customer
base;
|
|
·
|
attract
additional customers and increase spending per
customer;
|
|
·
|
increase
awareness of our brand and continue to develop user and customer
loyalty;
|
|
·
|
respond
to competitive market conditions;
|
|
·
|
respond
to changes in our regulatory
environment;
|
|
·
|
manage
risks associated with intellectual property
rights;
|
|
·
|
maintain
effective control of our costs and
expenses;
|
|
·
|
raise
sufficient capital to sustain and expand our
business;
|
|
·
|
attract,
retain and motivate qualified personnel;
and
|
|
·
|
upgrade
our technology to support additional research and
development.
|
If
we are
unsuccessful in addressing any of these risks and uncertainties, our business
may be materially and adversely affected.
If
there are any interruptions to or decline in the amount or quality of our
live
pigs, raw pork or other major raw material supply, our business could be
materially and adversely affected.
Live
pigs
and raw pork are the principal raw materials used in our production. We procure
approximately 60% of our live pigs from Group, and the remainder from various
third party suppliers who are independent farmers. Our third party suppliers
may
not continue to be able to supply an adequate number of live pigs to satisfy
our
present and future production needs. The supply of pigs is dependent on the
output of pig farms, which may be affected by outbreaks of diseases or
epidemics. Our current suppliers may not be able to provide live pigs of
sufficient quality to meet our stringent quality control requirements. Any
interruptions to or decline in the amount or quality of our live pig supply
could materially disrupt our production and adversely affect our business.
In
addition to live pigs, we also use additives and packaging in our production,
which we source from third party suppliers. Any interruptions to or decline
in
the amount or quality of our additives or packaging supply, could also disrupt
our production or sales and adversely affect our business.
We
are vulnerable to increases in the price of live pigs and other operating
costs,
and we may not be able to entirely offset these increasing costs by increasing
the prices of our products, particularly our processed meat
products.
We
purchase agricultural products, such as live pigs, for use in our production
process and for resale. The price of such commodities is subject to fluctuations
that are attributable to a number of factors, such as the price of animal
feed,
diseases and infections, and weather conditions. If for example, worldwide
and
local grain prices should increase, this would affect the price of animal
feed,
which may increase the price of live pigs. Higher pig prices may force us
to
raise the prices we charge our customers for our products, however we may
not
always be able to pass on the entire amount of price increases to our customers,
and/or consumers might cut back on consumption of meat products.
During
2007, prices of live pigs rose sharply. If the costs of raw materials or
other
costs of production and distribution of our products increase further, and
we
are unable to entirely offset these increases by raising prices of our products,
our profit margins and financial condition could be adversely affected.
According to China Livestock and Products Annual Report 2007 dated on September
25, 2007 by the USDA Foreign Agricultural Service, the severe supply shortage
of
hogs in 2007 was because of a series of outbreaks of Porcine
Reproductive and Respiratory Syndrome (PRRS),
also
known as Blue Ear Disease, in China from May 2006. Blue Ear Disease is an
infectious disease that affects swine, characterized by reproductive disorders,
premature delivery, miscarriage, and stillbirth—as well as abnormal breathing in
piglets. According to the report, shortages and a sharp pork price increase
occurred as a result of Blue Ear Disease. The average pork price increased
by 48
percent from January to August 2007 over the same period in 2006, while prices
in July and August 2007 increased by 86 and 87 percent, respectively, from
the
same months in 2006.
We
may be unable to anticipate changes in consumer preferences for processed
meat
products, which may result in decreased demand for our
products.
Our
continued success in the processed meat products market is in large part
dependent on our ability to anticipate and develop products that appeal to
the
changing tastes, dietary habits and preferences of customers. If we are not
able
to anticipate and identify new consumer trends and develop new products
accordingly, demand for our products may decline and our operating results
may
be adversely affected. In addition, we may incur significant costs relating
to
developing and marketing new products or expanding our existing product
offerings in reaction to what we perceive to be a consumer preference or
demand.
Such development or marketing may not result in the level of market acceptance,
volume of sales or profitability anticipated.
If
the chilled and frozen pork market in China does not grow as we expect, our
results of operations and financial conditions may be adversely
affected.
If
the
chilled and frozen pork market in China does not grow as we expect, our business
may be harmed, we may need to adjust our growth strategy and our results
of
operation may be adversely affected.
We
require various licenses and permits to operate our business, and the loss
of or
failure to renew any or all of these licenses and permits could materially
adversely affect our business.
In
accordance with PRC laws and regulations, we are required to maintain various
licenses and permits in order to operate our business, including, without
limitation, a slaughtering permit in respect of each of our chilled and frozen
pork production facilities and a permit for production of industrial products
in
respect of each of our processed meat production facilities. We are required
to
comply with applicable hygiene and food safety standards in relation to our
production processes. Our premises and transportation vehicles are subject
to
regular inspections by the regulatory authorities for compliance with applicable
regulations. Failure to pass these inspections, or the loss of or failure
to
renew our licenses and permits, could require us to temporarily or permanently
suspend some or all of our production or distribution operations, which could
disrupt our operations and adversely affect our business.
We
are highly dependent on senior management and key research and development
personnel.
We
are
highly dependent on our senior management to manage our business and operations
and our key research and development personnel for the development of new
processing methods and technologies, food products and the enhancement of
our
existing products. In particular, we rely substantially on our chairman and
chief executive officer, Mr. Shi Huashan, to manage our operations. We also
depend on our key research personnel. In addition, we also rely on information
technology and logistics personnel for the production, storage and shipment
of
our products and on marketing and sales personnel, engineers and other personnel
with technical and industry knowledge to transport, market and sell our
products. We do not maintain key man life insurance on any of our senior
management or key personnel. The departure of any one of them, in particular
Mr.
Shi, would have a material adverse effect on our business and operations.
Competition for senior management and research and development personnel
is
intense and the pool of suitable candidates is limited. We may be unable
to
locate a suitable replacement for any senior management or key research and
development personnel that we lose. In addition, if any member of our senior
management or key research and development personnel joins a competitor or
forms
a competing company, they may compete with us for customers, business partners
and other key professionals and staff members of our company.
We
note
that Mr. Shi Huashan, who is our Chief Executive Officer, is also the Chief
Executive Officer of Dalian Chuming Group Co., Ltd., our former parent company.
See also, “Certain Relationships and Related Party Transactions” elsewhere in
this report. Due to the non-exclusive roles of Mr. Shi as our CEO and the
principal executive officer of Dalian Chuming Group Co., Ltd., with whom
we
conduct business from time to time, potential conflicts of interest may arise.
In particular, situations might arise in which we transact business with
Dalian
Chuming Group Co., Ltd., and certain terms of agreements might be favorable
to
us, but conversely unfavorable to Dalian Chuming Group Co., Ltd., and vice
versa. In order to effectively handle such conflict of interest scenarios,
our
management intends to submit all related party transactions to our independent
board of directors, or appropriate committee of the board, for review and
approval. If through these mechanisms we are not able to effectively handle
such
conflicts of interest to serve the Company’s best interest, our business could
be harmed or adversely affected.
We
compete for qualified personnel with other food processing companies, food
retailers, logistics companies and research institutions. Intense competition
for these personnel could cause our compensation costs to increase
significantly, which could have a material adverse effect on our results
of
operations. Our future success and ability to grow our business will depend
in
part on the continued service of these individuals and our ability to identify,
hire and retain additional qualified personnel. If we are unable to attract
and
retain qualified employees, we may be unable to meet our business and financial
goals.
Our
growth strategy may prove to be disruptive and divert management
resources.
Our
growth strategy may involve large transactions and present financial, managerial
and operational challenges, including diversion of management attention from
existing businesses, difficulty with integrating personnel and financial
and
other systems, increased expenses, including compensation expenses resulting
from newly hired employees, assumption of unknown liabilities and potential
disputes. We could also experience financial or other setbacks if any of
our
growth strategies incur problems of which we are not presently aware. We
may
require additional financing in the future.
We
may
need to obtain additional debt or equity to fund future capital expenditures.
Additional equity may result in dilution to the holders of our outstanding
shares of capital stock. Additional debt financing may include conditions
that
would restrict our freedom to operate our business, such as conditions
that:
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limit
our ability to pay dividends or require us to seek consent for
the payment
of dividends;
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increase
our vulnerability to general adverse economic and industry
conditions;
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require
us to dedicate a portion of our cash flow from operations to payments
on
our debt, thereby reducing the availability of our cash flow to
fund
capital expenditures, working capital and other general corporate
purposes; and
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limit
our flexibility in planning for, or reacting to, changes in our
business
and our industry.
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We
cannot
guarantee that we will be able to obtain any additional financing on terms
that
are acceptable to us, or at all.
Our
operations are cash intensive and our business could be adversely affected
if we
fail to maintain sufficient levels of working capital.
We
expend
a significant amount of cash in our operations, principally to fund our raw
material procurement. Our suppliers, in particular, third party suppliers
of
pigs, typically require payment in full within seven days after delivery,
although some of our suppliers provide us with credit. In turn, we typically
require our customers of chilled and frozen pork to make payment in full
on
delivery, although we offer some of our long-standing customers credit terms.
We
generally fund most of our working capital requirements out of cash flow
generated from operations. If we fail to generate sufficient revenues from
our
sales, or if we experience difficulties collecting our accounts receivables,
we
may not have sufficient cash flow to fund our operating costs and our business
could be adversely affected.
We
may be unable to maintain our profitability in the face of a consolidating
retail environment in China.
We
sell
substantial amounts of our products to supermarkets and large retailers.
The
supermarket and food retail industry in China has been, and is expected to
continue, undergoing a trend of development and consolidation. As the food
retail trade continues to consolidate and our retail customers grow larger
and
become more sophisticated, they may demand lower pricing and increased
promotional programs. Furthermore, larger customers may be better able to
operate on reduced inventories and potentially develop or increase their
focus
on private label products. If we fail to maintain a good relationship with
our
large retail customers, or fail to maintain a wide offering of quality products,
or if we lower our prices or increase promotional support of our products
in
response to pressure from our customers and are unable to increase the volume
of
our products sold, our profitability could decline.
Our
operating results may fluctuate from period to period and if we fail to meet
market expectations for a particular period, our share price may
decline.
Our
operating results have fluctuated from period to period and are likely to
continue to fluctuate as a result of a wide range of factors, including seasonal
variations in live pig supply and processed meat products consumption. Our
production and sales of chilled and frozen pork are generally lower in the
summer, due to lower supply of live pigs. Interim reports may not be indicative
of our performance for the year or our future performance, and period-to-period
comparisons may not be meaningful due to a number of reasons beyond our control.
We cannot assure you that our operating results will meet the expectations
of
market analysts or our investors. If we fail to meet their expectations,
there
may be a decline in our share price.
We
derive all of our revenues from sales in China and any downturn in the Chinese
economy could have a material adverse effect on our business and financial
condition.
All
of
our current revenues are generated from sales in China. We anticipate that
revenues from sales of our products in China will continue to represent a
substantial proportion of our total revenues in the near future. Any significant
decline in the condition of the PRC economy could, among other things, adversely
affect consumer buying power and discourage consumption of our products,
which
in turn would have a material adverse effect on our business and financial
condition.
We
rely on our exclusive network of showcase stores, network stores and supermarket
brand counters for the success of our sales and our brand image, and should
they
perform poorly, our business and brand image could be materially and adversely
affected.
In
addition to our sales to wholesale customers, we sell our products through
showcase stores, network stores and supermarket brand counters. All of these
retail based stores exclusively sell our pork products and display the Chuming
logo on our store facades. For the first half of 2007, these retail outlets
accounted for approximately 43% of our total revenue. If the sales performance
of our retail based stores deteriorates, this could adversely affect the
financial results of the company. In addition, any sanitation, hygiene, or
food
quality problems that might arise from the retail based stores could adversely
affect our brand image and lead to a loss of sales. Chuming does not own
any of
the retail based stores.
We
rely on the performance of our wholesaler, retailer and mass merchant customers
for the success of our sales, and should they perform poorly or give priority
to
our competitors’ products, our business could be materially and adversely
affected.
In
addition to our retail sales channel, we sell our products to supermarkets
and
large retailers, which in turn sell the products to end consumers. If the
sales
performance of our wholesale customers deteriorates, this could adversely
affect
our sales. Furthermore, our wholesale customers also carry products which
directly compete with our products for retail space and consumer purchases.
There is a risk that our wholesale customers may give higher priority to
products of, or form alliances with, our competitors. If our wholesale customers
do not continue to purchase our products, or provide our products with similar
levels of promotional support, our sales performance and brand imaging could
be
adversely affected.
The
loss of any of our significant customers could have an adverse effect on
our
business.
Our
key
customers are principally supermarkets and large retailers in the PRC. We
have
not entered into long-term supply contracts with any of these major customers.
There can be no assurance that we will maintain or improve the relationships
with these customers, or that we will be able to continue to supply these
customers at current levels or at all. If we cannot maintain long-term
relationships with our major customers, the loss of a significant portion
of our
sales to them could have an adverse effect on our business,
financial condition and results of operations. Further, the loss of any one
of
our top five customers could cause us to suffer a temporary setback in our
sales, which could have a short term negative effect on our financial results.
Recent
regulatory enforcement crackdowns on food processing companies in the PRC
could
adversely affect our businesses.
Recently,
the PRC government authorities have taken certain measures to maintain the
PRC
food market in good order and to improve the integrity of the PRC food industry,
such as enforcing full compliance with industry standards and closing certain
food processing companies in the PRC that did not meet regulatory standards.
We
cannot assure you that our businesses and operations will not be affected
as a
result of the deteriorating reputation of the food industry in the PRC due
to
recent scandals regarding food products.
Environmental
regulations and related litigation could have a material adverse effect on
our
business and results of operations.
Our
operations and properties are subject to extensive and increasingly stringent
laws and regulations pertaining to, among other things, the discharge of
materials into the environment and the handling and disposition of wastes
(including solid and hazardous wastes) or otherwise relating to protection
of
the environment. Failure to comply with any laws and regulations and future
changes to them may result in significant consequences to us, including civil
and criminal penalties, liability for damages and negative
publicity.
We
have
incurred, and will continue to incur, significant capital and operating
expenditures to comply with these laws and regulations. W e cannot assure
you
that additional environmental issues will not require currently unanticipated
investigations, assessments or expenditures, or that requirements applicable
to
us will not be altered in ways that will require us to incur significant
additional costs.
Deterioration
of our perishable products may occur due to delivery delays, malfunctioning
of
freezer facilities or poor handling during transportation, which could adversely
affect our business, results of operations and financial
condition.
The
condition of our food products (being perishable goods) may deteriorate due
to
shipment or delivery delays, malfunctioning of freezer facilities or poor
handling during delivery by shippers or intermediaries. We are not aware
of any
instances whereby we were made to compensate for delivery delays, malfunctioning
of freezer facilities or poor handling during transportation. However, there
is
no assurance that such incidents will not occur in the future. In the event
of
any delivery delays, malfunctioning of freezer facilities or poor handling
during transportation, we may have to make compensation payments and our
reputation, business goodwill and revenue will be adversely
affected.
Unexpected
business interruptions could adversely affect our
business.
Our
operations are vulnerable to interruption by fire, power failure and power
shortages, floods, computer viruses and other events beyond our control.
In
particular, China, especially eastern and southern China, is experiencing
frequent electricity shortages. In addition, we do not carry business
interruption insurance to compensate us for losses that may occur as a result
of
these kinds of events and any such losses or damages incurred by us could
disrupt our production and other operations.
If
we fail to develop and maintain an effective system of internal controls,
we may
not be able to accurately report our financial results or prevent fraud;
as a
result, current and potential shareholders
could lose confidence in our financial reports, which could harm our business
and the trading price of our common stock.
Effective
internal controls are necessary for us to provide reliable financial reports
and
effectively prevent fraud. Section 404 of the Sarbanes-Oxley Act of 2002
requires us to evaluate and report on our internal controls over financial
reporting and have our independent registered public accounting firm annually
attest to our evaluation, as well as issue their own opinion on our internal
controls over financial reporting, beginning with our Annual Report on Form
10-K
for the fiscal year ended December 31, 2007. We plan to prepare for compliance
with Section 404 by strengthening, assessing and testing our system of internal
controls to provide the basis for our report. The process of strengthening
our
internal controls and complying with Section 404 is expensive and time
consuming, and requires significant management attention, especially given
that
we have not yet undertaken any efforts to comply with the requirements of
Section 404. We cannot be certain that the measures we will undertake will
ensure that we will maintain adequate controls over our financial processes
and
reporting in the future. Furthermore, if we are able to rapidly grow our
business, the internal controls that we will need will become more complex,
and
significantly more resources will be required to ensure our internal controls
remain effective. Failure to implement required controls, or difficulties
encountered in their implementation, could harm our operating results or
cause
us to fail to meet our reporting obligations. If we or our auditors discover
a
material weakness in our internal controls, the disclosure of that fact,
even if
the weakness is quickly remedied, could diminish investors’ confidence in our
financial statements and harm our stock price. In addition, non-compliance
with
Section 404 could subject us to a variety of administrative sanctions, including
the suspension of trading, ineligibility for listing on one of the Nasdaq
Stock
Markets or national securities exchanges, and the inability of registered
broker-dealers to make a market in our common stock, which would further
reduce
our stock price.
We
will incur increased costs as a public company which may affect our
profitability.
As
a
public company, Chuming will incur significant legal, accounting and other
expenses that it did not incur as a private company. We are now subject to
the
SEC’s rules and regulations relating to public disclosure. SEC disclosures
generally involve a substantial expenditure of financial resources. In addition,
the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented
by
the SEC, have required changes in corporate governance practices of public
companies. We expect that full compliance with these new rules and regulations
will significantly increase our legal and financial compliance costs and
make
some activities more time-consuming and costly. For example, we will be required
to create additional board committees and adopt policies regarding internal
controls and disclosure controls and procedures. In addition, on December
31,
2007, we increased compensation to our senior executive officers, allocated
$250,000 of the proceeds from our recent financing to our investor and public
relations program (and shortly thereafter hired an investor relations firm)
and
expect to increase our financial and accounting staff in order to meet the
demands and requirements of being a public reporting company. Such additional
personnel, public relations, reporting and compliance costs may negatively
impact our financial results.
We
have limited business insurance coverage.
The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. We do not have
any
business liability or disruption insurance coverage for our operations in
China.
Any business disruption, litigation or natural disaster may result in our
incurring substantial costs and the diversion of our resources. In addition,
since our business operations are based outside of the U.S. (although we
are a Nevada corporation quoted on the OTC Bulletin Board in the U.S.),
directors and officers insurance may not be readily available to us at the
prices and on terms acceptable to us. If we are not able to secure satisfactory
D & O insurance coverage, we
may
not be able to attract the most qualified directors and officers, and our
business could be indirectly adversely affected.
Risks
Relating To Our Industry
The
pig slaughtering and processed meat industries in China are subject to extensive
government regulation, which is in the process of change and
development.
The
pig
slaughtering and processed meat industries in China are heavily regulated
by a
number of governmental agencies, including primarily the Ministry of
Agriculture, the Ministry of Commerce, the Ministry of Health, the General
Administration of Quality Supervision, Inspection and Quarantine and the
State
Environmental Protection Administration. These regulatory bodies have broad
discretion and authority to regulate many aspects of the pig slaughtering
and
processed meat industries in China, including, without limitation, setting
hygiene standards for production and quality standards for processed meat
products. In addition, the pig slaughtering and processed meat products
regulatory framework in China is still in the process of being developed.
If the
relevant regulatory authorities set standards with which we are unable to
comply
or which increase our production costs and hence our prices so as to render
our
products non-competitive, our ability to sell products in China may be
limited.
The
pig slaughtering and processed meat industries in China may face increasing
competition from both domestic and foreign companies, as well as increasing
industry consolidation, which may affect our market share and profit
margin.
The
pig
slaughtering and processed meat industries in China are highly competitive.
Our
processed meat products are targeted at mid- to high-end consumers, a market
in
which we face increasing competition, particularly from foreign suppliers.
In
addition, the evolving government regulations in relation to the pig
slaughtering industry have driven a trend of consolidation through the industry,
with smaller operators unable to meet the increasing costs of regulatory
compliance and therefore are at a competitive disadvantage. We believe that
our
ability to maintain our market share and grow our operations within this
landscape of changing and increasing competition is largely dependent upon
our
ability to distinguish our products and services.
In
addition, prior to China’s entry into the World Trade Organization (“WTO”), high
barriers to entry existed for many potential competitors in our business
through
the use of tariffs and restrictive import licensing and distribution practices.
China’s admission to WTO has lowered some of the tariffs and other barriers to
entry so we can expect that competition will increase.
We
cannot
assure you that our current or potential competitors will not develop products
of a comparable or superior quality to ours, or adapt more quickly than we
do to
evolving consumer preferences or market trends. In addition, our competitors
in
the raw meat market may merge or form alliances to achieve a scale of operations
or sales network which would make it difficult for us to compete. Increased
competition may also lead to price wars, counterfeit products or negative
brand
advertising, all of which may adversely affect our market share and profit
margin. We cannot assure you that we will be able to compete effectively
with
our current or potential competitors.
The
outbreak of animal diseases or other epidemics could adversely affect our
operations.
An
occurrence of serious animal diseases, such as foot-and-mouth disease, or
any
outbreak of other epidemics in China affecting animals or humans might result
in
material disruptions to our operations, material disruptions to the operations
of our customers or suppliers, a decline in the supermarket or food retail
industry or slowdown in economic growth in China and surrounding regions,
any
of
which could have a material adverse effect on our operations and turnover.
There
can be no assurance that our facilities or products will not be affected
by an
outbreak of any disease or outbreak in the future, or that the market for
pork
products in the PRC will not decline as a result of fear of disease. In either
case, our business, results of operations and financial condition would be
adversely and materially affected.
Consumer
concerns regarding the safety and quality of food products or health concerns
could adversely affect sales of our products.
Our
sales
performance could be adversely affected if consumers lose confidence in the
safety and quality of our products. Consumers in the PRC are increasingly
conscious of food safety and nutrition. Consumer concerns about, for example,
the safety of pork products, or about the safety of food additives used in
processed meat products, could discourage them from buying certain of our
products and cause our results of operations to suffer.
We
may be subject to substantial liability should the consumption of any of
our
products cause personal injury or illness.
The
sale
of food products for human consumption involves an inherent risk of injury
to
consumers. Such injuries may result from tampering by unauthorized third
parties
or product contamination or degeneration, including the presence of foreign
contaminants, chemical substances or other agents or residues during the
various
stages of the procurement and production process. While we are subject to
governmental inspections and regulations, we cannot assure you that consumption
of our products will not cause a health-related illness in the future, or
that
we will not be subject to claims or lawsuits relating to such
matters.
Even
if a
product liability claim is unsuccessful or is not fully pursued, the negative
publicity surrounding any assertions that our products caused personal injury
or
illness could adversely affect our reputation with customers and our corporate
and brand image. Consistent with industry practice in China, we do not maintain
product liability insurance. Furthermore, our products could potentially
suffer
from product tampering, contamination or degeneration or be mislabeled or
otherwise damaged. Under certain circumstances, we may be required to recall
products. Even if a situation does not necessitate a product recall, we cannot
assure you that government sanctions or product liability claims will not
be
asserted against us as a result. A product liability judgment against us
or a
product recall could have a material adverse effect on our business, financial
condition or results of operations.
Our
product and company name may be subject to counterfeiting and/or imitation,
which could impact upon our reputation and brand image as well as lead to
higher
administrative costs.
We
regard
brand positioning as the core of our competitive strategy, and intend to
position our brand, “Chuming™” to create the perception and image of health,
nutrition, freshness and quality in the minds of our customers. There have
been
frequent occurrences of counterfeiting and imitation of products in the PRC
in
the past. We cannot guarantee that counterfeiting or imitation of our products
will not occur in the future or that we will be able to detect it and deal
with
it effectively. Any occurrence of counterfeiting or imitation could impact
negatively upon our corporate and brand image, particularly if the counterfeit
or imitation products cause sickness, injury or death to consumers. In addition,
counterfeit or imitation products could result in a reduction in our market
share, a loss of revenues or an increase in our administrative expenses in
respect of detection or prosecution.
Risks
Relating To Conducting Business in the PRC
Substantially
all of our assets and projects are located in the PRC, and substantially
all of
our revenue is sourced from the PRC. Accordingly, our results of operations
and
financial position are subject to a significant degree to economic, political
and legal developments in the PRC, including the following risks:
Economic,
political and social conditions and government policies in China could have
a
material adverse effect on our business, financial condition and results
of
operations.
Economic,
political and social conditions and government policies in China differ in
many
respects from other more fully industrialized nations, and below are examples
of
such differences.
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Structure.
Agriculture still plays an important role in Chinese economy and
employment. Agriculture still represents around 50% of the employment,
which is substantially higher than most developed countries.
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Capital
re-investment.
Compared with more highly developed nations, there may be less
availability to Chinese firms of all types of investment capital
within
China.
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Government
involvement.
China is still transitioning from a centrally planned economic
model to
that of a free market. As a result, the Chinese government has
traditionally had a greater degree of regulatory involvement in
the
economic affairs and conduct of firms in China, as compared with
firms in
more advanced market-based economies.
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Allocation
of resources.
Related to the above point, the Chinese government may have greater
ability to influence the allocation of capital, labor, materials,
and
other resources than governments of other advanced market-based
economies.
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Level
of development.
Although China’s economy has been rapidly growing in recent years, certain
aspects such as public infrastructure, poverty rate, and other
measurements of development still lag behind highly developed nations,
and
this affects how companies must conduct business in China.
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Control
of foreign exchange.
China still maintains strict foreign exchange controls which has
been in
place since 1979, although steps have been taken to increase the
exchangeability of the Chinese Renminbi with other currencies.
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Growth
rate.
For several years, China’s economy has achieved consistent double digit
growth rates, and this may put strain on infrastructure, availability
on
raw materials, and ability of firms to manage growth.
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Rate
of inflation.
According to the Consumer Price Index (CPI) compiled by the National
Statistics Bureau of China, the overall rate of inflation (CPI)
in August
2007 is 6.5% and the rate of inflation for food in August 2007
was 18.2%,
which are substantially higher than most of the developed countries,
and
these factors affect the local market environment in which Chinese
firms
must operate.
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The
economy of China has been transitioning from a centrally planned economy
to a
more market-oriented economy. Although in recent years the PRC government
has
implemented measures emphasizing the utilization of market forces for economic
reform, a substantial portion of productive assets in China is still owned
by
the PRC government. In addition, the PRC government continues to play a
significant role in regulating industries by imposing industrial policies.
It
also exercises significant control over China’s economic growth through
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment
to
particular industries or companies.
Policies
and other measures taken by the PRC government to regulate the economy could
have a significant negative impact on economic conditions in China, with
a
resulting negative impact on our business. For example, our financial condition
and results of operations may be materially and adversely affected
by:
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new
laws and regulations and the interpretation of those laws and
regulations;
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the
introduction of measures to control inflation or stimulate
growth;
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changes
in the rate or method of taxation;
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the
imposition of additional restrictions on currency conversion and
remittances abroad; or
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any
actions which limit our ability to develop, produce, import or
sell our
products in China, or to finance and operate our business in
China.
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Uncertainties
with respect to the PRC legal system could adversely affect
us.
We
conduct our business primarily through our Chuming Operating Subsidiaries
which
are located in China, which are governed by PRC laws and regulations. In
addition, because the parent companies that hold these entities, namely PSI
and
Energroup Holdings Corporation, are outside of China, we are generally subject
to laws and regulations applicable to foreign investments in China and, in
particular, laws applicable to wholly foreign-owned enterprises. The PRC
legal
system is based on written statutes. Prior court decisions may be cited for
reference but have limited precedential value.
Since
1979, PRC legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions
and
their nonbinding nature, the interpretation and enforcement of these laws
and
regulations involve uncertainties. In addition, the PRC legal system is based
in
part on government policies and internal rules (some of which are not published
on a timely basis or at all) that may have a retroactive effect. As a result,
we
may not be aware of our violation of these policies and rules until some
time
after the violation. In addition, any litigation in China may be protracted
and
result in substantial costs and diversion of resources and management
attention.
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us, our management or the experts named in
this
prospectus.
We
conduct substantially all of our operations in China and substantially all
of
our assets are located in China. In addition, while we are incorporated in
the
State of Nevada, all of our senior executive officers reside within China.
As a
result, it may not be possible to effect service of process within the United
States or elsewhere outside China upon our senior executive officers, including
with respect to matters arising under U.S. federal securities laws or applicable
state securities laws. Moreover, our PRC counsel has advised us that the
PRC
does not have treaties with the United States or many other countries providing
for the reciprocal recognition and enforcement of judgment of
courts.
Governmental
control of currency conversion may affect the value of your
investment.
The
PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of China. We receive
substantially all of our revenues in RMB. Under our current structure, our
income is primarily derived from payments from Dalian Precious Sheen
Investments Consulting Co., Ltd. Shortages in the availability of foreign
currency may restrict the ability of our PRC subsidiaries and our affiliated
entity to remit sufficient foreign currency to pay dividends or other payments
to us, or otherwise satisfy their foreign currency denominated obligations.
Under existing PRC foreign exchange regulations, payments of current account
items, including profit distributions, interest payments and expenditures
from
trade-related transactions, can be made in foreign currencies without prior
approval from the PRC State Administration of Foreign Exchange by complying
with
certain procedural requirements. However, approval from appropriate government
authorities is required where RMB is to be converted into foreign currency
and
remitted out of China to pay capital expenses such as the repayment of bank
loans denominated in foreign currencies. The PRC government may also at its
discretion restrict access in the future to foreign currencies for current
account transactions. If the foreign exchange control system prevents us
from
obtaining sufficient foreign currency to satisfy our currency demands, we
may
not be able to pay dividends in foreign currencies to our
shareholders.
Fluctuation
in the value of RMB may have a material adverse effect on your
investment.
The
value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
Our revenues and costs are mostly denominated in RMB, while we report our
financial results and position in U.S. dollars. Any significant fluctuation
in
value of RMB may materially and adversely affect our reported cash flows,
revenues, earnings and financial position, and the value of, and any dividends
payable on, our stock in U.S. dollars. For example, an appreciation of RMB
against the U.S. dollar would make any new RMB denominated investments or
expenditures more costly to us, to the extent that we need to convert U.S.
dollars into RMB for such purposes. An appreciation of RMB against the U.S.
dollar would also result in foreign currency translation losses for financial
reporting purposes when we translate our U.S. dollar denominated financial
assets into RMB, as RMB is our reporting currency.
We
face risks related to health epidemics and other
outbreaks.
Our
business could be adversely affected by the effects of SARS or another epidemic
or outbreak. China reported a number of cases of SARS in April 2004. Any
prolonged recurrence of SARS or other adverse public health developments
in
China may have a material adverse effect on our business operations. For
instance, health or other government regulations adopted in response may
require
temporary closure of our production facilities or of our offices. Such closures
would severely disrupt our business operations and adversely affect our results
of operations. We have not adopted any written preventive measures or
contingency plans to combat any future outbreak of SARS or any other
epidemic.
Risks
Related to Our Corporate Structure
In
order to comply with PRC laws limiting foreign ownership of Chinese companies,
we conduct our business in the PRC through Chuming by means of certain
ownership arrangements. If the PRC government determines that these ownership
arrangements do not comply with applicable regulations, our business could
be
adversely affected and we could be subject to sanctions.
As
a
result of the share exchange transaction disclosed elsewhere in this report,
we
own 100% of the equity interest in Precious Sheen Investments Limited, a
British
Virgin Islands company (“PSI “). PSI owns 100% of the equity in Dalian Precious
Sheen Investments Consulting Co., Ltd., a wholly foreign owned enterprise
in the
PRC (“Chuming”). Chuming is a holding company for the following three operating
subsidiaries: (i) Dalian Chuming Slaughter and Packaging Pork Company Ltd.,
(ii)
Dalian Chuming
Processed Foods Company Ltd., and (iii) Dalian Chuming Sales Company Ltd.,
each
of which is a limited liability company headquartered in, and organized under
the laws of, China (collectively, the “Chuming Operating
Subsidiaries”).
The
PRC
government restricts foreign investment in businesses in China. Accordingly,
we
operate our business in China through Chuming and the Chuming Operating
Subsidiaries, each of which holds the licenses and approvals necessary to
operate our business in China.
Although
we believe we comply with current PRC regulations, we cannot assure you that
the
PRC government would agree that these operating arrangements comply with
PRC
licensing, registration or other regulatory requirements, with existing policies
or with requirements or policies that may be adopted in the future. If in
the
future the PRC government determines that we do not comply with applicable
PRC
law, it could impose fines on our PRC shareholders, and in extreme cases,
the
PRC government could take steps to revoke our business and operating licenses,
require us to discontinue or restrict our operations, restrict our right
to
collect revenues, require us to restructure our operations, impose additional
conditions or requirements with which we may not be able to comply, impose
restrictions on our business operations or on our customers, or take other
regulatory or enforcement actions against us that could be harmful to our
business. Any of these or similar actions could significantly disrupt our
business operations or restrict us from conducting a substantial portion
of our
business operations, which could materially and adversely affect our business,
financial condition and results of operations.
Recent
PRC regulations relating to acquisitions of PRC companies by foreign entities
may limit our ability to acquire PRC companies and adversely affect the
implementation of our strategy as well as our business and
prospects.
The
PRC
State Administration of Foreign Exchange, or SAFE, issued a public notice
in
January 2005 concerning foreign exchange regulations on mergers and acquisitions
in China. The public notice states that if an offshore company controlled
by PRC
residents intends to acquire a PRC company, such acquisition will be subject
to
strict examination by the relevant foreign exchange authorities. The public
notice also states that the approval of the relevant foreign exchange
authorities is required for any sale or transfer by the PRC residents of
a PRC
company’s assets or equity interests to foreign entities, such as us, for equity
interests or assets of the foreign entities.
In
April
2005, SAFE issued another public notice further explaining the January notice.
In accordance with the April notice, if an acquisition of a PRC company by
an
offshore company controlled by PRC residents has been confirmed by a Foreign
Investment Enterprise Certificate prior to the promulgation of the January
notice, the PRC residents must each submit a registration form to the local
SAFE
branch with respect to their respective ownership interests in the offshore
company, and must also file an amendment to such registration if the offshore
company experiences material events, such as changes in the share capital,
share
transfer, mergers and acquisitions, spin-off transactions or use of assets
in
China to guarantee offshore obligations.
On
May
31, 2007, SAFE issued another official notice known as “Circular 106,” which
requires the owners of any Chinese company to obtain SAFE’s approval before
establishing any offshore holding company structure for foreign financing
as
well as subsequent acquisition matters in China.
If
we
decide to acquire a PRC company, we cannot assure you that we or the owners
of
such company, as the case may be, will be able to complete the necessary
approvals, filings and registrations for the acquisition. This may restrict
our
ability to implement our acquisition strategy and adversely affect our business
and prospects. In addition, if such registration cannot be obtained, our
company
will not be able
to
receive dividends declared and paid by our subsidiaries in the PRC and may
be
forbidden from paying dividends for profit distribution or capital reduction
purposes.
Chuming
is subject to restrictions on making payments to our parent
company.
We
are a
holding company incorporated in the State of Nevada and do not have any assets
or conduct any business operations other than our investment in Chuming and
their operating subsidiaries in China. As a result of our holding company
structure, we rely entirely on payments or dividends from Chuming for our
cash
flow to fund our corporate overhead and regulatory obligations. The PRC
government also imposes controls on the conversion of Renminbi into foreign
currencies and the remittance of currencies out of China. We may experience
difficulties in completing the administrative procedures necessary to obtain
and
remit foreign currency. Further, if our subsidiaries in China incur debt
on
their own in the future, the instruments governing the debt may restrict
their
ability to make payments. If we are unable to receive all of the revenues
from
our operations through these dividend arrangements, we may be unable to pay
dividends on our shares of common stock.
Risk
Relating to an Investment in Our Securities
Generally,
we have not paid any cash dividends to our shareholders and no cash dividends
will be paid in the foreseeable future.
We
do not
anticipate paying cash dividends on our common stock in the foreseeable future
and we may not have sufficient funds legally available to pay dividends.
Even if
the funds are legally available for distribution, we may nevertheless decide
or
may be unable due to pay any dividends. We intend to retain all earnings
for our
company’s operations.
The
application of the “penny stock” rules could adversely affect the market price
of our common stock and increase your transaction costs to sell those
shares.
As
long
as the trading price of our common shares is below $5 per share, the open-market
trading of our common shares will be subject to the “penny stock” rules. The
“penny stock” rules impose additional sales practice requirements on
broker-dealers who sell securities to persons other than established customers
and accredited investors (generally those with assets in excess of US$1,000,000
or annual income exceeding US$200,000 or US$300,000 together with their spouse).
For transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of securities and have received
the
purchaser’s written consent to the transaction before the purchase.
Additionally, for any transaction involving a penny stock, unless exempt,
the
broker-dealer must deliver, before the transaction, a disclosure schedule
prescribed by the Securities and Exchange Commission relating to the penny
stock
market. The broker-dealer also must disclose the commissions payable to both
the
broker-dealer and the registered representative and current quotations for
the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability or decrease the willingness
of broker-dealers to sell our common stock, and may result in decreased
liquidity for our common stock and increased transaction costs for sales
and
purchases of our common stock as compared to other securities.
Our
common stock is thinly traded and, you may be unable to sell at or near “ask”
prices or at all if you need to sell your shares to raise money or otherwise
desire to liquidate your shares.
We
cannot
predict the extent to which an active public market for our common stock
will
develop or be sustained. However, we do not rule out the possibility of applying
for listing on the Nasdaq Global Select
Market, Nasdaq Global Market, Nasdaq Capital Market (the “Nasdaq Markets”), or
other exchanges. Our common stock has historically been sporadically or “thinly
traded” on the “Over-the-Counter Bulletin Board,” meaning that the number of
persons interested in purchasing our common stock at or near bid prices at
any
given time may be relatively small or nonexistent. This situation is
attributable to a number of factors, including the fact that we are a small
company which is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate
or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-adverse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we become more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our
shares
is minimal or non-existent, as compared to a seasoned issuer that has a large
and steady volume of trading activity that will generally support continuous
sales without an adverse effect on share price. We cannot give you any assurance
that a broader or more active public trading market for our common stock
will
develop or be sustained, or that current trading levels will be
sustained.
The
market price of our common stock is particularly volatile given our status
as a
relatively small company with a small and thinly traded “float” that could lead
to wide fluctuations in our share price. The price at which you purchase
our
common stock may not be indicative of the price that will prevail in the
trading
market. You may be unable to sell your common stock at or above your purchase
price if at all, which may result in substantial losses to you.
The
market for our common stock is characterized by significant price volatility
when compared to seasoned issuers, and we expect that our share price will
continue to be more volatile than a seasoned issuer for the indefinite future.
The volatility in our share price is attributable to a number of factors.
As
noted above, our common stock is sporadically and/or thinly traded. As a
consequence of this lack of liquidity, the trading of relatively small
quantities of shares by our shareholders may disproportionately influence
the
price of those shares in either direction. The price for our shares could,
for
example, decline precipitously in the event a large number of our common
shares
are sold on the market without commensurate demand, as compared to a seasoned
issuer which could better absorb those sales without adverse impact on its
share
price. The following factors also may add to the volatility in the price
of our
common stock: actual or anticipated variations in our quarterly or annual
operating results; adverse outcomes; additions to or departures of our key
personnel, as well as other items discussed under this “Risk Factors” section,
as well as elsewhere in this Report. Many of these factors are beyond our
control and may decrease the market price of our common stock, regardless
of our
operating performance. We cannot make any predictions or projections as to
what
the prevailing market price for our common stock will be at any time, including
as to whether our common stock will sustain its current market prices, or
as to
what effect the sale of shares or the availability of common shares for sale
at
any time will have on the prevailing market price. However, we do not rule
out
the possibility of applying for listing on the Nasdaq Markets or another
exchange.
Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
penny stocks has suffered in recent years from patterns of fraud and abuse.
Such
patterns include (1) control of the market for the security by one or a few
broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through pre-arranged matching of purchases and sales
and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups
by
selling broker-dealers; and (5) the wholesale dumping of the same securities
by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect
to be
in a position to dictate the behavior of the market or of broker-dealers
who
participate in the market, management
will strive within the confines of practical limitations to prevent the
described patterns from being established with respect to our securities.
The
occurrence of these patterns or practices could increase the volatility of
our
share price.
Volatility
in our common stock price may subject us to securities
litigation.
The
market for our common stock may be characterized by significant price volatility
when compared to seasoned issuers, and we expect our share price will be
more
volatile than a seasoned issuer for the indefinite future. In the past,
plaintiffs have often initiated securities class action litigation against
a
company following periods of volatility in the market price of its securities.
We may, in the future, be the target of similar litigation. Securities
litigation could result in substantial costs and liabilities and could divert
management’s attention and resources.
Legislative
actions, higher insurance costs and potential new accounting pronouncements
may
impact our future financial position and results of
operations.
There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results
of
operations. The Sarbanes-Oxley Act of 2002 and other rule changes, as well
as
proposed legislative initiatives following the Enron bankruptcy, are likely
to
increase general and administrative costs and expenses. In addition, insurers
are likely to increase premiums as a result of high claims rates over the
past
several years, which we expect will increase our premiums for insurance
policies. Further, there could be changes in certain accounting rules. These
and
other potential changes could materially increase the expenses we report
under
generally accepted accounting principles, and adversely affect our operating
results.
Past
activities of our company and its affiliates may lead to future liability
for
our company.
Prior
to
our acquisition of Chuming in December 2007, we engaged in businesses unrelated
to our current operations. Although certain previously controlling shareholders
of our company are providing certain indemnifications against any loss,
liability, claim, damage or expense arising out of or based on any breach
of or
inaccuracy in any of their representations and warranties made regarding
such
acquisition, any liabilities relating to such prior business against which
we
are not completely indemnified may have a material adverse effect on our
company.
Future
sales of shares of our common stock may decrease the price for such
shares.
Actual
sales, or the prospect of sales by our shareholders, may have a negative
effect
on the market price of the shares of our common stock. We may also register
certain shares of our common stock that are subject to outstanding convertible
securities, if any, or reserved for issuance under our stock option plans,
if
any. Once such shares are registered, they can be freely sold in the public
market upon exercise of the options. If any of our shareholders either
individually or in the aggregate cause a large number of securities to be
sold
in the public market, or if the market perceives that these holders intend
to
sell a large number of securities, such sales or anticipated sales could
result
in a substantial reduction in the trading price of shares of our common stock
and could also impede our ability to raise future capital.
Mergers
of the type we just completed with Chuming are often heavily scrutinized
by the
SEC and we may encounter difficulties or delays in obtaining future regulatory
approvals.
Historically,
the SEC and Nasdaq have not generally favored transactions in which a privately
held company merges into a largely inactive company with publicly traded
stock,
and there is a significant
risk that we may encounter difficulties in obtaining the regulatory approvals
necessary to conduct future financing or acquisition transactions, or to
eventually achieve a listing of shares on one of the Nasdaq stock markets
or on
a national securities exchange. On June 29, 2005, the SEC adopted rules dealing
with private company mergers into dormant or inactive public companies. As
a
result, it is likely that we will be scrutinized carefully by the SEC and
possibly by the Financial Industry Regulatory Authority, which could result
in
difficulties or delays in achieving SEC clearance of any future registration
statements or other SEC filings that we may pursue, in attracting FINRA-member
broker-dealers to serve as market-makers in our common stock, or in achieving
admission to one of the Nasdaq stock markets or any other national securities
market. As a consequence, our financial condition and the value and liquidity
of
your shares of our common stock may be negatively impacted.
Our
corporate actions are substantially controlled by our principal shareholders
and
affiliated entities.
Our
principal shareholders and their affiliated entities own approximately 69.5%
of
our outstanding ordinary shares, representing approximately 69.5% of our
voting
power. These shareholders, acting individually or as a group, could exert
substantial influence over matters such as electing directors and approving
mergers or other business combination transactions. In addition, because
of the
percentage of ownership and voting concentration in these principal shareholders
and their affiliated entities, elections of our board of directors will
generally be within the control of these shareholders and their affiliated
entities. While all of our shareholders are entitled to vote on matters
submitted to our shareholders for approval, the concentration of shares and
voting control presently lies with these principal shareholders and their
affiliated entities. As such, it would be difficult for shareholders to propose
and have approved proposals not supported by management. There can be no
assurances that matters voted upon by our officers and directors in their
capacity as shareholders will be viewed favorably by all shareholders of
our
company.
The
elimination of monetary liability against our directors, officers and employees
under Nevada law and the existence of indemnification rights to our directors,
officers and employees may result in substantial expenditures by us and may
discourage lawsuits against our directors, officers and
employees.
Our
articles of incorporation contain specific provisions that eliminate the
liability of our directors for monetary damages to our company and shareholders,
and we are prepared to give such indemnification to our directors and officers
to the extent provided by Nevada law. We may also have contractual
indemnification obligations under our employment agreements with our officers.
The foregoing indemnification obligations could result in our company incurring
substantial expenditures to cover the cost of settlement or damage awards
against directors and officers, which we may be unable to recoup. These
provisions and resultant costs may also discourage our company from bringing
a
lawsuit against directors and officers for breaches of their fiduciary duties,
and may similarly discourage the filing of derivative litigation by our
shareholders against our directors and officers even though such actions,
if
successful, might otherwise benefit our company and shareholders.
The
market price for our stock may be volatile.
The
market price for our stock may be volatile and subject to wide fluctuations
in
response to factors including the following:
|
·
|
actual
or anticipated fluctuations in our quarterly operating
results;
|
|
·
|
changes
in financial estimates by securities research analysts;
|
|
·
|
conditions
in agricultural markets;
|
|
·
|
changes
in the economic performance or market valuations of other meat
processing
companies;
|
|
·
|
announcements
by us or our competitors of new products, acquisitions, strategic
partnerships, joint ventures or capital commitments;
|
|
·
|
addition
or departure of key personnel;
|
|
·
|
fluctuations
of exchange rates between RMB and the U.S. dollar;
|
|
·
|
intellectual
property litigation; and
|
|
·
|
general
economic or political conditions in
China.
|
In
addition, the securities market has from time to time experienced significant
price and volume fluctuations that are not related to the operating performance
of particular companies. These market fluctuations may also materially and
adversely affect the market price of our stock.
We
may need additional capital, and the sale of additional shares or other equity
securities could result in additional dilution to our
shareholders.
We
believe that our current cash and cash equivalents, anticipated cash flow
from
operations and the net proceeds from a recent offering will be sufficient
to
meet our anticipated cash needs for the near future. We may, however, require
additional cash resources due to changed business conditions or other future
developments, including any investments or acquisitions we may decide to
pursue.
If our resources are insufficient to satisfy our cash requirements, we may
seek
to sell additional equity or debt securities or obtain a credit facility.
The
sale of additional equity securities could result in additional dilution
to our
shareholders. The incurrence of indebtedness would result in increased debt
service obligations and could result in operating and financing covenants
that
would restrict our operations. We cannot assure you that financing will be
available in amounts or on terms acceptable to us, if at all.
ITEM
2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
None.
None.
None.
ITEM
6. EXHIBITS
The
following exhibits are included in this report or incorporated by reference
into
this report:
Exhibit
Number
|
|
Description
|
|
|
|
2.1
|
|
Share
Exchange Agreement by and among the Energroup Holdings Corporation,
PSI and PSI and Energroup Shareholders dated December 31, 2007
(1)
|
|
|
|
2.2
|
|
Articles
and Plan of Merger (change in domicile from Utah to Nevada)
(2)
|
|
|
|
3.1
|
|
Articles
of Incorporation of Great Lakes Funding, Inc. (Utah)
(1)
|
|
|
|
3.2
|
|
Bylaws
of Great Lakes Funding, Inc. (1)
|
|
|
|
3.3
|
|
Articles
of Amendment to Articles of Incorporation of Great Lakes Funding,
Inc.
(Name Change) (1)
|
|
|
|
3.4
|
|
Articles
of Amendment to Articles of Incorporation of Energroup Technologies,
Inc.
(Reverse Split) (2)
|
|
|
|
3.5
|
|
Articles
of Incorporation of Energroup Holdings Corporation (Nevada)
(2)
|
|
|
|
3.6
|
|
Bylaws
of Energroup Holdings Corporation (2)
|
|
|
|
3.7
|
|
Certificate
of Amendment to Articles of Incorporation of Energroup Holdings
Corporation (3)
|
|
|
|
4.1
|
|
Registration
Rights Agreement dated December 2007 among Energroup and the investors
signatory thereto (1)
|
|
|
|
4.2
|
|
Common
Stock Purchase Warrant issued to Placement Agent (December 2007)
(2)
|
|
|
|
10.11
|
|
Short-term
Loan Agreement between Shanghai Pu Dong Development Bank Dalian
Branch and
Dalian Chuming Meat Co. * (English summary
translation)
|
|
|
|
10.12
|
|
Short-term
Loan Agreement between Bank of China Liao Ning Branch and Dalian
Chuming
Food Co. * (English summary translation)
|
|
|
|
10.13
|
|
Short-term
Loan Agreement between Bank of China Liao Ning Branch and Dalian
Chuming
Meat Co. * (English summary translation)
|
|
|
|
10.14
|
|
Guarantee
Agreement between Dalian Chuming Food Co. and Bank of China Liaoning
Branch.* (English summary translation) |
|
|
|
31.1
|
|
Rule 13a-14(a)
/ 15d-14(a)(4) Certification by the Company’s Chief Executive
Officer.*
|
|
|
|
31.2
|
|
Rule
13a-14(a) / 15d-14(a)(4) Certification by the Company’s Chief Financial
Officer.*
|
|
|
|
32.1
|
|
Section
1350 Certification by the Company’s Chief Executive
Officer.*
|
|
|
|
32.2
|
|
Section
1350 Certification by the Company’s Chief Financial
Officer.*
|
(2)
|
Previously
filed with our Current Report on Form 8-K on August 22, 2007 and
incorporated herein by reference.
|
(3)
|
Previously
filed with our Current Report on Form 8-K on December 14, 2007
and
incorporated herein by
reference.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
ENERGROUP
HOLDINGS CORPORATION
|
|
|
|
Dated: May
20, 2008
|
By:
|
/s/
Shi Huashan
|
|
|
Shi
Huashan
|
|
|
President and Chief Executive Officer
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
Dated: May
20, 2008
|
By:
|
/s/
Wang Shu
|
|
|
Wang
Shu
|
|
|
Chief Financial Officer
|
|
|
(Principal Financial and Accounting Officer)
|