Unassociated Document
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 June 30, 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
|
|
87-0420774
|
(State
of Incorporation)
|
|
(I.R.S.
Employer Identification No.)
|
No.
9, Xin Yi Street, Ganjingzi District
Dalian
City, Liaoning Province, PRC 116039
|
|
N/A
|
(Address
of principal executive offices)
|
|
(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
As
of
June 30, 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
|
|
|
|
|
|
Consolidated
Balance Sheets as of June 30, 2008 and December 31, 2007
|
1 |
|
|
|
|
Consolidated
Statements of Income for the Three and Six Months Ended June 30,
2008 and
2007.
|
3 |
|
|
|
|
Consolidated
Statements of Shareholders' Equity for the Six Months Ended June
30, 2008
and the Year Ended December 31, 2007
|
4 |
|
|
|
|
Consolidated
Statements of Cash Flows for the Three months and Six Months Ended
June
30, 2008 and June 30, 2007
|
5 |
|
|
|
|
Notes
to Consolidated Financial Statements - June 30, 2008
|
6-26 |
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
27 |
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
43 |
|
|
|
Item
4.
|
Controls
and Procedures
|
43 |
|
|
|
PART
II. Other Information
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
45 |
|
|
|
Item
1A.
|
Risk
Factors
|
45 |
|
|
|
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
|
61 |
|
|
|
Item
6.
|
Exhibits
|
61 |
|
|
|
Signatures
|
|
64 |
PART
I. FINANCIAL INFORMATION
ITEM
1.
FINANCIAL
STATEMENTS
Energroup
Holdings Corporation
Consolidated
Balance Sheets
As
of June 30, 2008 and December 31, 2007
(Stated
in US Dollars)
|
|
Note
|
|
|
|
|
|
|
|
|
|
June 30, 2008
|
|
December 31, 2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
$
|
11,270,730
|
|
$
|
14,031,851
|
|
Restricted
Cash
|
|
|
3
|
|
|
2,230,667
|
|
|
4,250,000
|
|
Accounts
Receivable
|
|
|
4
|
|
|
19,120,753
|
|
|
622,433
|
|
Other
Receivable
|
|
|
|
|
|
3,953,573
|
|
|
1,068,939
|
|
Related
Party Receivable
|
|
|
|
|
|
-
|
|
|
3,964,357
|
|
Inventory
|
|
|
5
|
|
|
5,110,172
|
|
|
2,916,016
|
|
Purchase
Deposit
|
|
|
|
|
|
795,418
|
|
|
267,807
|
|
Prepaid
Expenses
|
|
|
|
|
|
141,767
|
|
|
46,401
|
|
Prepaid
Taxes
|
|
|
|
|
|
199,893
|
|
|
-
|
|
Deferred
Tax Asset
|
|
|
|
|
|
653,354
|
|
|
613,844
|
|
Total
current assets
|
|
|
|
|
|
43,476,326
|
|
|
27,781,648
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant & Equipment, net
|
|
|
6
|
|
|
25,934,159
|
|
|
24,836,496
|
|
Land
Use Rights, net
|
|
|
7
|
|
|
13,539,743
|
|
|
12,855,980
|
|
Construction
in Progress
|
|
|
|
|
|
1,016,693
|
|
|
927,866
|
|
Other
Assets
|
|
|
|
|
|
92,928
|
|
|
32,619
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
|
|
|
$
|
84,059,848
|
|
$
|
66,434,609
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
Loans & Notes
|
|
|
8
|
|
|
6,402,980
|
|
|
7,383,095
|
|
Accounts
Payable
|
|
|
|
|
|
5,142,723
|
|
|
3,779,274
|
|
Related
Party Payable
|
|
|
9
|
|
|
1,835,881
|
|
|
-
|
|
Accrued
Liabilities
|
|
|
|
|
|
3,500,487
|
|
|
3,347,013
|
|
Taxes
Payable
|
|
|
|
|
|
2,018,967
|
|
|
1,491,876
|
|
Other
Payable
|
|
|
|
|
|
3,208,336
|
|
|
1,471,381
|
|
Customer
Deposits
|
|
|
|
|
|
1,694,300
|
|
|
24,161
|
|
Total
current liabilities
|
|
|
|
|
|
23,803,675
|
|
|
17,496,800
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
|
|
$
|
23,803,675
|
|
$
|
17,496,800
|
|
See
Accompanying Notes to the Financial Statements
Energroup
Holdings Corporation
Consolidated
Balance Sheets
As
of June 30, 2008 and December 31, 2007
(Stated
in US Dollars)
|
|
Note
|
|
June 30, 2008
|
|
December 31, 2007
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock - $0.001 par value 10,000,000 shares authorized; 0 shares issued
& outstanding at June 30, 2008 and December 31, 2007,
respectively.
|
|
|
|
|
|
-
|
|
|
-
|
|
Common
Stock $0.001 par value 21,739,130 shares authorized; 21,136,392 shares
issued & outstanding at June 30, 2008 and December 31, 2007,
respectively.
|
|
|
|
|
$
|
21,136
|
|
$
|
21,136
|
|
Additional
Paid in Capital
|
|
|
10
|
|
|
15,440,043
|
|
|
15,440,043
|
|
Statutory
Reserve
|
|
|
11
|
|
|
1,729,863
|
|
|
751,444
|
|
Retained
Earnings
|
|
|
|
|
|
38,642,002
|
|
|
29,764,236
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Other Comprehensive Income
|
|
|
|
|
|
4,423,129
|
|
|
2,960,951
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS' EQUITY
|
|
60,256,173
|
|
|
48,937,810
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
$
|
84,059,848
|
|
$
|
66,434,610
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to the Financial Statements
Energroup
Holdings Corporation
Consolidated
Statements of Income
for
the three and six months ended June 30, 2008 and 2007
(Stated
in US Dollars)
|
|
Note
|
|
3 months
|
|
3 months
|
|
6 months
|
|
6 months
|
|
|
|
|
|
ended
|
|
ended
|
|
ended
|
|
ended
|
|
|
|
|
|
June 30, 2008
|
|
June 30, 2007
|
|
June 30, 2008
|
|
June 30, 2007
|
|
Sales
|
|
|
|
|
$
|
43,076,524
|
|
$
|
31,370,321
|
|
$
|
86,583,622
|
|
$
|
54,558,315
|
|
Cost
of Sales
|
|
|
|
|
|
36,600,428
|
|
|
26,510,666
|
|
|
73,074,852
|
|
|
45,536,298
|
|
Gross
Profit
|
|
|
|
|
|
6,476,097
|
|
|
4,859,655
|
|
|
13,508,771
|
|
|
9,022,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
Expenses
|
|
|
12
|
|
|
759,778
|
|
|
1,570,001
|
|
|
2,585,055
|
|
|
1,799,420
|
|
General
& Administrative Expenses
|
|
|
|
|
|
653,187
|
|
|
382,377
|
|
|
1,146,161
|
|
|
687,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
|
|
|
5,063,132
|
|
|
2,907,277
|
|
|
9,777,555
|
|
|
6,535,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income
|
|
|
|
|
|
358,850
|
|
|
4,276
|
|
|
383,119
|
|
|
7,004
|
|
Interest
Income
|
|
|
|
|
|
631,707
|
|
|
-
|
|
|
635,692
|
|
|
-
|
|
Other
Expenses
|
|
|
|
|
|
(72,085
|
)
|
|
(9,657
|
)
|
|
(100,735
|
)
|
|
(37,830
|
)
|
Interest
Expense
|
|
|
|
|
|
(300,613
|
)
|
|
(117,663
|
)
|
|
(607,078
|
)
|
|
(710,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before Tax
|
|
|
|
|
|
5,680,991
|
|
|
2,784,233
|
|
|
10,088,553
|
|
|
5,793,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Tax
|
|
|
13
|
|
|
66,023
|
|
|
-
|
|
|
232,368
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
$
|
5,614,968
|
|
$
|
2,784,233
|
|
$
|
9,856,185
|
|
$
|
5,793,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
$
|
0.33
|
|
$
|
0.21
|
|
$
|
0.57
|
|
$
|
0.43
|
|
Diluted
|
|
|
|
|
$
|
0.27
|
|
$
|
0.16
|
|
$
|
0.47
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
17,272,756
|
|
|
13,409,120
|
|
|
17,272,756
|
|
|
13,409,120
|
|
Diluted
|
|
|
|
|
|
21,182,756
|
|
|
17,272,756
|
|
|
21,182,756
|
|
|
17,272,756
|
|
|
|
Note
|
|
3 months
|
|
3 months
|
|
6 months
|
|
6 months
|
|
|
|
|
|
ended
|
|
ended
|
|
ended
|
|
ended
|
|
|
|
|
|
June 30, 2008
|
|
June 30, 2007
|
|
June 30, 2008
|
|
June 30, 2007
|
|
Comprehensive
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
$
|
5,614,968
|
|
$
|
2,784,233
|
|
$
|
9,856,185
|
|
$
|
5,793,617
|
|
Other
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translation Adjustment
|
|
(2,220,130
|
)
|
|
16,252
|
|
|
1,462,155
|
|
|
247,509
|
|
Total
Comprehensive Income
|
|
|
|
|
$
|
3,394,838
|
|
$
|
2,800,485
|
|
$
|
11,318,340
|
|
$
|
6,041,126
|
|
See
Accompanying Notes to the Financial Statements
Energroup
Holdings Corporation
Consolidated
Statements of Changes in Stockholders’ Equity
for
the six months ended June 30, 2008 and the year ended 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
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
9,856,185
|
|
|
- |
|
|
9,856,185
|
|
Appropriations
of Retained Earnings
|
|
|
- |
|
|
- |
|
|
- |
|
|
978,419
|
|
|
(978,419
|
)
|
|
- |
|
|
-
|
|
Foreign
Currency Translation Adjustment
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
1,462,178
|
|
|
1,462,178
|
|
Balance,
June 30, 2008
|
|
|
21,136,392
|
|
|
21,136
|
|
|
15,440,043
|
|
|
1,729,863
|
|
|
38,642,002
|
|
|
4,423,129
|
|
|
60,256,173
|
|
See
Accompanying Notes to the Financial Statements
Energroup
Holdings Corporation
Consolidated
Statements of Cash Flows
for
the three and six months ended June 30, 2008 and 2007
(Stated
in US Dollars)
|
|
3 months
|
|
3 months
|
|
6 months
|
|
6 months
|
|
|
|
ended
|
|
ended
|
|
ended
|
|
ended
|
|
|
|
June 30, 2008
|
|
June 30, 2007
|
|
June 30, 2008
|
|
June 30, 2007
|
|
Cash Flow from
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
5,614,968
|
|
$
|
2,784,233
|
|
$
|
9,856,185
|
|
$
|
5,793,617
|
|
Amortization
|
|
|
92,630
|
|
|
21,101
|
|
|
185,260
|
|
|
64,530
|
|
Depreciation
|
|
|
739,953
|
|
|
485,594
|
|
|
1,407,774
|
|
|
920,223
|
|
(Increase)
in Accounts & Other Receivables
|
|
|
(2,925,264
|
)
|
|
(14,469,947
|
)
|
|
(17,418,597
|
)
|
|
(13,121,242
|
)
|
(Increase)
in Inventory & Purchase Deposits
|
|
|
6,384,900
|
|
|
(564,783
|
)
|
|
(2,721,767
|
)
|
|
941,313
|
|
(Increase)
in Prepaid Taxes & Expenses
|
|
|
(64,415
|
)
|
|
(27,236
|
)
|
|
(149,450
|
)
|
|
(79,079
|
)
|
Increase
Accounts, Taxes & Other Payables
|
|
|
4,989,385
|
|
|
9,649,369
|
|
|
5,278,059
|
|
|
9,848,676
|
|
Increase
in Accrued Liabilities
|
|
|
(105,365
|
) |
|
1,351,665
|
|
|
153,474
|
|
|
313,361
|
|
Increase
in Customer Deposits
|
|
|
1,612,260
|
|
|
(20,187
|
)
|
|
1,670,140
|
|
|
(20,187
|
)
|
Cash
Sourced/(Used) in Operating Activities
|
|
|
16,339,051
|
|
|
(790,191
|
)
|
|
(1,738,923
|
)
|
|
4,661,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
deposited/released from Escrow Account
|
|
|
(72,836
|
)
|
|
-
|
|
|
2,019,333
|
|
|
-
|
|
Purchases
of Plant & Equipment
|
|
|
(291,927
|
) |
|
(572,469
|
)
|
|
(646,814
|
)
|
|
(698,710
|
)
|
Purchase
of Land Use Rights
|
|
|
-
|
|
|
(3,976,894
|
)
|
|
-
|
|
|
(3,333,506
|
)
|
Payments
for Deposits
|
|
|
(58,952
|
)
|
|
-
|
|
|
(60,308
|
)
|
|
-
|
|
Cash
Sourced/(Used) in Investing Activities
|
|
|
(423,715
|
) |
|
(4,549,363
|
)
|
|
1,312,211
|
|
|
(4,032,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Bank Borrowings
|
|
|
- |
|
|
-
|
|
|
7,605,795
|
|
|
-
|
|
Repayment
of Bank Loans
|
|
|
(8,585,910
|
) |
|
-
|
|
|
(8,585,910
|
)
|
|
(1,293,663
|
)
|
Cash
Sourced/(Used) in Financing Activities
|
|
|
|
)
|
|
-
|
|
|
(980,115
|
)
|
|
(1,293,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase/(Decrease) in Cash & Cash
Equivalents
|
|
|
7,329,427
|
|
|
(5,339,554
|
)
|
|
(1,406,826
|
)
|
|
(664,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Currency Translation
|
|
|
(3,097,786
|
) |
|
1,307,671
|
|
|
(1,354,295
|
)
|
|
119,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
& Cash Equivalents at Beginning of Period
|
|
|
7,039,089
|
|
|
6,511,568
|
|
|
14,031,851
|
|
|
3,025,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
& Cash Equivalents at End of Period
|
|
$
|
11,270,730
|
|
$
|
2,479,685
|
|
$
|
11,270,730
|
|
$
|
2,479,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Received
|
|
|
631,707
|
|
|
317
|
|
|
635,692
|
|
|
655
|
|
Interest
Paid
|
|
|
86,435
|
|
|
76,419
|
|
|
557,582
|
|
|
76,419
|
|
Income
Tax Paid
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
See
Accompanying Notes to the Financial Statements
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
1. |
The
Company and Principal Business
Activities
|
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 are 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”), which are 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 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 also production of processed meat products for distribution and sale
to
clients throughout the PRC and Russia.
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
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 that transaction, PSI became our wholly
owned subsidiary and we acquired the business and operations of the three
operation 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
|
(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 owned the three operating subsidiaries since its inception. The Company
also owns two intermediary holdings companies. As of June 30, 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
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.
Purchase
deposit represents the cash paid in advance for purchasing raw materials. The
purchase deposit is 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
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
Statutory
reserve refer 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 the 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, 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
|
(R)
|
Shipping
and handling
|
All
shipping and handling are expensed as incurred and are 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
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
|
|
6/30/2008
|
|
12/31/2007
|
|
6/30/2007
|
|
Period
end RMB : US$ exchange rate
|
|
|
6.871800
|
|
|
7.314100
|
|
|
7.624800
|
|
Average
period RMB : US$ exchange rate
|
|
|
7.072630
|
|
|
7.617200
|
|
|
7.729990
|
|
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.
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., contingent shares, 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.
|
(Y)
|
Recent
Accounting Pronouncements
|
In
March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
("SFAS 161"). SFAS 161 applies to all derivative instruments and
related hedged items accounted for under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 161
requires entities to provide greater transparency about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under SFAS 133 and its related
interpretations, and (c) how derivative instruments and related hedged
items affect an entity's financial position, results of operations and cash
flows. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
In
May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources
of accounting principles and the framework for selecting the principles used
in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the
GAAP hierarchy). Statement 162 will become effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles."
In
May
2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1
requires the issuer of certain convertible debt instruments that may be settled
in cash (or other assets) on conversion to separately account for the liability
(debt) and equity (conversion option) components of the instrument in a manner
that reflects the issuer's non-convertible debt borrowing rate. FSP
APB 14-1 is effective for fiscal years beginning after December 15,
2008 on a retroactive basis.
The
Company is currently evaluating the potential impact, if any, of the adoption
of
the above recent accounting pronouncements on its consolidated results of
operations and financial condition.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
3.
Restricted
Cash
The
restricted cash reflects funds received from the financing transaction described
in Note 16 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 (“CFO”) that meets the approval of the
investors, at such point the Company will release $1.5 million from restriction,
the Company must satisfy this requirement 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 such 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.
At
June
30, 2008, the Company has yet to fulfill requirement (1) and (3). The Company
is
still in the process of recruitment of a CFO in order to meet requirement (1).
The Company has also requested bids for consideration from auditing firms that
were on an approved list submitted by, Pinnacle Fund, whom was the lead investor
in the Company’s financing transaction in December 2007, detailed in Note
18.
4.
Accounts
Receivable
Accounts
Receivable at June 30, 2008 and December 31, 2007 consisted of the following:
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Accounts
Receivable – Trade
|
|
$
|
19,210,929
|
|
$
|
707,156
|
|
Less:
Allowance for Doubtful Accounts
|
|
|
(90,176
|
)
|
|
(84,723
|
)
|
Net
Accounts Receivable
|
|
$
|
19,120,753
|
|
$
|
622,433
|
|
Allowance
for Bad Debts
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Beginning
Balance
|
|
$
|
84,723
|
|
$
|
79,267
|
|
Allowance
Provided
|
|
|
5,453
|
|
|
5,456
|
|
Charged
Against Allowance
|
|
|
|
|
|
-
|
|
Ending
Balance
|
|
$
|
90,176
|
|
$
|
84,723
|
|
During
the second quarter, management revised the Company’s credit policy. Based on
management’s review, the Company began extending more favorable credit terms to
its top tier customers. Those customers that qualified as top tier
were extended approximately one month of credit. The Company previously extended
one to two days of credit.
5.
Inventory
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Raw
Materials
|
|
$
|
1,090,498
|
|
$
|
1,039,440
|
|
Work
in Progress
|
|
|
515,763
|
|
|
547,889
|
|
Finished
Goods
|
|
|
3,503,911
|
|
|
1,328,688
|
|
|
|
$
|
5,110,172
|
|
$
|
2,916,016
|
|
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
6.
Property,
Plant & Equipment
At
June 30, 2008
|
|
|
|
Accumulated
|
|
|
|
|
|
Cost
|
|
Depreciation
|
|
Net
|
|
Buildings
|
|
$
|
20,699,601
|
|
$
|
3,100,214
|
|
$
|
17,599,386
|
|
Manufacturing
Equipment
|
|
|
9,981,336
|
|
|
2,634,788
|
|
|
7,346,548
|
|
Office
Equipment
|
|
|
191,241
|
|
|
116,939
|
|
|
74,302
|
|
Vehicles
|
|
|
911,476
|
|
|
408,094
|
|
|
503,382
|
|
Furniture
& Fixture
|
|
|
522,678
|
|
|
112,138
|
|
|
410,540
|
|
|
|
$
|
32,306,332
|
|
$
|
6,372,173
|
|
$
|
25,934,159
|
|
At
December 31, 2007
|
|
|
|
Accumulated
|
|
|
|
|
|
Cost
|
|
Depreciation
|
|
Net
|
|
Buildings
|
|
$
|
19,910,391
|
|
$
|
2,522,257
|
|
$
|
17,388,134
|
|
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
|
|
7.
Land
Use Right
The
Company had the following intangible assets outstanding at June 30, 2008 and
December 31, 2007:
|
|
June 30, 2008
|
|
December 31, 2007
|
|
|
|
|
|
|
|
Land
Use Rights, at Cost
|
|
$
|
14,370,602
|
|
$
|
13,501,580
|
|
less:
Accumulated Amortization
|
|
|
(830,859
|
)
|
|
(645,600
|
)
|
|
|
$
|
13,539,743
|
|
$
|
12,855,980
|
|
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
8.
Bank
Loans
|
(A)
|
Short
Term Bank Loans
|
At
June
30, 2008, the Company had the following short term loans
outstanding:
Borrower: Operating
Subsidiary
|
|
Bank
|
|
Interest
Rate
|
|
Due Date
|
|
Amount
|
|
Meat Company
|
|
Bank
of China |
|
|
8.217
|
%
|
|
12/18/2008
|
|
$
|
4,365,668
|
|
Food Company
|
|
Bank
of China |
|
|
8.217
|
%
|
|
11/17/2008
|
|
|
2,037,312
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,402,980
|
|
The
loans
provided by the Bank of have been secured by the Company’s land use rights and
guaranteed by the Dalian Chuming Group Co., Ltd.
9.
Related
Party Payable
In
the
normal course of business which includes the purchases of hogs and other raw
materials, sale of pork and pork products, 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 beneficial ownership. All
related party transactions are conducted between Chuming, the WOFE, and the
Group. All transactions with related parties are generally performed at arm’s
length, and in 2008, all such transactions were conducted 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, setoff the balances in order to arrive at
a
single balance that is either due from, or due to the Group. The following
table
shows how the Company arrived at a setoff balance that can be found on the
Company’s Balance Sheet at June 30, 2008.
Operating
Subsidiary
|
|
Type
of
Balance
|
|
Description
|
|
Amount
|
Meat
Company
|
|
Receivable
|
|
Meet
paid for feed on behalf of Group
|
|
5,434,331
|
Food
Company
|
|
Receivable
|
|
Food
sold products to Huayu
|
|
13,780
|
Food
Company
|
|
Receivable
|
|
Food
Sold products to Group upon receipt of Bank Drafts
|
|
8,440,292
|
|
|
|
|
|
|
13,888,403
|
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
Operating
Subsidiary
|
|
Type
of
Balance
|
|
Description
|
|
Amount
|
Meat
Company
|
|
Payable
|
|
Industrial
paid for Equipment on behalf of Meat Company
|
|
6,461
|
Meat
Company
|
|
Payable
|
|
Combo
paid for Equipment on behalf of Meat Company
|
|
116,326
|
Food
Company
|
|
Payable
|
|
Mingxing
paid for Equipment on behalf of Food Company
|
|
4,366
|
Food
Company
|
|
Payable
|
|
Packaging
paid on Behalf of Food Company by Group
|
|
106,955
|
Food
Company
|
|
Payable
|
|
Advance
from Huayu for the purchases of products from Food Company
|
|
3,634,962
|
WOFE
|
|
Payable
|
|
Group
loaned funds to Chuming WOFE
|
|
11,855,213
|
|
|
|
|
|
|
15,724,283
|
|
|
|
|
|
|
|
|
|
|
|
Net
Related Party Payable
|
|
1,835,880
|
The
related party payable balance detailed above, and the related transactions
that
comprise that balance are integral and material to the Company’s operations. The
Company is reliant on transactions with the above related parties in order
to
conduct its business normally. The Company acknowledges that it has the
responsibility to comply with paragraph c of SFAS 57 which calls for the
dollar
amounts of transactions for each of the periods for which income statements
are
presented and the effects of any change in the method of establishing the terms
from that used in the preceding period. The Company’s accounting system in the
past was manual and accordingly is not able to, from a cost benefit perspective,
summarize and provide further detail on the related party transactions. Also,
the Company’s current accounting department does not have enough staff in order
to perform an exercise to further detail the Related Party Receivable beyond
what has been provided above; however the Company is taking remedial action
to
rectify this deficiency for future financial reports. The Company does represent
that the balances disclosed above are both accurate and reliable within
acceptable thresholds of materiality.
The
Company believes that related party transactions have a significant bearing
on
the Company’s financial statements. The procurement of hogs is almost entirely
transacted through related parties. The Company’s cost of sales is significantly
correlated with the transactions with related parties. The
hogs
that were purchased from the Group comprised 51.56%
and 41.89% of the Company’s total cost of sales for the years 2007, and 2006,
respectively. The remaining portions of hogs were purchased directly from
breeders whom the Group has trained and indirectly oversees to insure quality.
The current related party receivable from the Group represents the fact that
Group significantly needed the aid of the Company in the form of working capital
in order to meet the hog requirement by the Company for future sales and growth.
The Company and the Group acknowledge the recoverability of the receivable
and
points out that this balance plays a role in the Company’s plans; however, the
Company and the Group have stated that the receivable will be
repaid.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
10.
Capitalization
As
a
result of the reverse-takeover 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 June 30, 2008 is showed 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
|
%
|
Shareholders
Prior to reverse takeover
|
|
|
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.
|
|
June 30, 2008
|
|
December 31, 2007
|
|
|
|
|
|
|
|
PRC
Registered Capital
|
|
$
|
3,642,866
|
|
$
|
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
|
|
|
1,729,863
|
|
|
751,444
|
|
|
|
|
|
|
|
|
|
Reserve
Commitment
|
|
|
|
|
|
|
|
Outstanding
|
|
|
91,570
|
|
$
|
1,069,989
|
|
12.
Advertising
Costs
Advertising
expenses were $1,413,901 and $50,313 for the six months ended June 30, 2008
and
2007 respectively.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
The
Company’s different operating subsidiaries are subject to different income tax
regulations under PRC law.
The
operating subsidiary, Meat, 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 six months
ended June 30, 2008 and 2007.
The
Company’s operating subsidiary, Food, has provided provisions for income taxes
for the six months ended June 30, 2008 and 2007 of $232,368 and $967,539
respectively.
The
Company’s operating subsidiary, Sale, has not provided provisions for income
taxes for the six months ended June 30, 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:
-
|
|
June 30, 2008 |
|
Tax expense |
|
$
|
232,368
|
|
ii.
|
|
June 30, 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, and
Sales are subject to the 25%
income
tax rate beginning January 1, 2008. Based on current PRC legislation, Meat
should be expected to continue benefiting from a tax holiday.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
(A) Hog
Purchase Agreement
It
is
company policy to develop plant facilities based on availability of cash
resources without incurring capital commitments. Therefore, the Company did
not
have any capital commitments existing at June 30, 2008.
There
were no severance packages to any key management personnel that have resigned
their positions. The Company has the right to terminate employment for cause
at
any time.
On
December 19, 2007, the Company entered into a hog purchase agreement whereby
the
Dalian Chuming Group Co., Ltd will provide at fair market price a minimum number
of hogs to the Company. At June 30, 2008, the Company expects minimum quantities
of hogs detailed in the following table:
Year
|
|
Hogs
|
|
Price
Per Hog
|
|
Amount
|
|
2008
|
|
|
270,000
|
|
$
|
211.01
|
|
|
56,972,700
|
|
2009
|
|
|
800,000
|
|
$
|
232.21
|
|
|
185,768,000
|
|
2010
|
|
|
800,000
|
|
$
|
255.44
|
|
|
204,352,000
|
|
|
|
|
|
|
|
|
|
$
|
447,092,700
|
|
The
Company believes 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.
(B) Pledged
Assets
Prior
to
the financing transaction described in Note 18 undertaken by the Company at
December 31, 2007, the Company owed Dalian Chuming Group Co. Ltd (“Group”)
approximately $20,000,000 (RMB 160,000,000). The Group, in turn, borrowed these
funds from the China National Development Bank. These funds were guaranteed
by a
bond issued by China Export and Credit Insurance Corporation (“Bond Issuer”).
The Company pledged land use rights and real property to the Bond Issuer in
order to secure the bond.
As
per
the terms of the agreement under the financing transaction detailed in Note
18,
the funds owed to the Group by the Company were set off against receivables
owed
by the Group to the Company. Although the Company no longer owes funds to the
Group regarding this loan, the Group still has an outstanding balance with
the
China National Development Bank. Accordingly, the pledged collateral of land
use
rights and buildings made to the Bond Issuer still underlie 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
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 Company and Meat Company.
Below
is
a presentation of the Company’s Statement of Income and Balance Sheet for its
operating subsidiaries at, and for the six months ended June 30, 2008. The
Company has also provided reconciling adjustments with the Company and its
intermediate holding companies Dalian Chuming Precious Sheen Investments
Consulting Ltd. (“Chuming”) and Precious Sheen Investments Ltd
(PSI).
Results of Operations
for the six months
ended June 30, 2008
|
|
Meat
Company
|
|
Food
Company
|
|
Sales
Company
|
|
Chuming
WOFE,
PSI, &
Eliminations
|
|
Total
|
|
Sales
|
|
$
|
86,094,320
|
|
$
|
10,710,188
|
|
$
|
32,809,947
|
|
$
|
(43,030,832
|
)
|
$
|
86,583,622
|
|
Cost
of Sales
|
|
|
75,193,539
|
|
|
8,612,897
|
|
|
32,299,248
|
|
|
(43,030,832
|
)
|
|
73,074,852
|
|
Gross
Profit
|
|
|
10,900,781
|
|
|
2,097,291
|
|
|
510,699
|
|
|
-
|
|
|
13,508,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expense
|
|
|
1,561,818
|
|
|
809,103
|
|
|
1,243,301
|
|
|
116,994
|
|
|
3,731,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(Loss)/Profit
|
|
|
9,338,963
|
|
|
1,288,188
|
|
|
(732,602
|
)
|
|
(116,994
|
)
|
|
9,777,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
601,323
|
|
|
(494,618
|
)
|
|
124,143
|
|
|
80,150
|
|
|
310,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before Tax
|
|
|
9,940,286
|
|
|
793,570
|
|
|
-608,460
|
|
|
-36,843
|
|
|
10,088,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
|
|
-
|
|
|
232,368
|
|
|
-
|
|
|
-
|
|
|
232,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
9,940,286
|
|
$
|
561,202
|
|
$
|
(608,460
|
)
|
$
|
(36,843
|
)
|
$
|
9,856,185
|
|
Eliminated Intercompany Sales of Products Sold
|
|
Sold From:
|
|
Sold To:
|
|
Amount
|
|
Food
Company
|
|
Sales
Company |
|
$
|
7,133,567
|
|
Meat
Company
|
|
Sales
Company |
|
|
28,633,827
|
|
Meat
Company
|
|
Food
Company |
|
|
7,263,438
|
|
|
|
|
|
|
$
|
43,030,832
|
|
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
Balance
Sheet Data
at June 30, 2008
|
|
Meat
Company
|
|
Food
Company
|
|
Sales
Company
|
|
Chuming
WOFE,
PSI, &
Eliminations
|
|
Total
|
|
Current Assets
|
|
$
|
51,509,695
|
|
$
|
22,594,172
|
|
$
|
13,613,137
|
|
$
|
(44,240,677
|
)
|
$
|
43,476,326
|
|
Non
Current Assets
|
|
|
23,201,799
|
|
|
16,949,116
|
|
|
374,398
|
|
|
58,209
|
|
|
40,583,522
|
|
Total
Assets
|
|
|
74,711,494
|
|
|
39,543,288
|
|
|
13,987,535
|
|
|
(44,182,469
|
)
|
|
84,059,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
27,931,964
|
|
|
34,533,349
|
|
|
15,673,719
|
|
|
(54,335,357
|
)
|
|
23,803,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
27,931,964
|
|
|
34,533,349
|
|
|
15,673,719
|
|
|
(54,335,357
|
)
|
|
23,803,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Assets
|
|
|
46,779,530
|
|
|
5,009,939
|
|
|
(1,686,185
|
)
|
|
10,152,888
|
|
|
60,256,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
&
Net Assets
|
|
$
|
74,711,494
|
|
$
|
39,543,288
|
|
$
|
13,987,535
|
|
$
|
(44,182,469
|
)
|
$
|
84,059,848
|
|
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
16.
Earnings
Per Share
Components
of basic and diluted earnings per share were as follows:
|
|
3 months
|
|
3 months
|
|
6 months
|
|
6 months
|
|
|
|
ended
|
|
ended
|
|
ended
|
|
ended
|
|
|
|
June 30, 2008
|
|
June 30, 2007
|
|
June 30, 2008
|
|
June 30, 2007
|
|
Net
Income
|
|
$
|
5,614,968
|
|
$
|
2,784,233
|
|
$
|
9,856,185
|
|
$
|
5,793,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original
Shares
|
|
|
13,409,120
|
|
|
13,409,120
|
|
|
13,409,120
|
|
|
13,409,120
|
|
Addition
to Common Stock from Offering on December 31, 2007
|
|
|
3,863,636
|
|
|
-
|
|
|
3,863,636
|
|
|
-
|
|
Basic
Weighted Average Shares Outstanding
|
|
|
17,272,756
|
|
|
13,409,120
|
|
|
17,272,756
|
|
|
13,409,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Addition
to Common Stock if Contingent Shares Held in Escrow Were
Released
|
|
|
3,863,636
|
|
|
3,863,636
|
|
|
3,863,636
|
|
|
3,863,636
|
|
Addition
to Common Stock if Warrants Were Exercised
|
|
|
46,364
|
|
|
-
|
|
|
46,364
|
|
|
-
|
|
Diluted
Weighted Average Shares Outstanding
|
|
|
21,182,756
|
|
|
17,272,756
|
|
|
21,182,756
|
|
|
17,272,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.33
|
|
$
|
0.21
|
|
$
|
0.57
|
|
$
|
0.43
|
|
Diluted
|
|
$
|
0.27
|
|
$
|
0.16
|
|
$
|
0.47
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
17,272,756
|
|
|
13,409,120
|
|
|
17,272,756
|
|
|
13,409,120
|
|
Diluted
|
|
|
21,182,756
|
|
|
17,272,756
|
|
|
21,182,756
|
|
|
17,272,756
|
|
(A) Demand
Risk
The
Company had concentrations of risk in demand for its products because its sales
were made to a small number of customers.
(B)
Supply
risk
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
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”). 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.
At
June
30, 2007, the total number of shares outstanding, on a fully diluted basis,
is
shown in the following table:
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
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.
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 with a primary focus on 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. ( “Meat Company”), whose
primary business activity is acquiring, slaughtering and packaging
of pork
and cattle;
|
|
|
|
|
2.
|
Dalian
Chuming Processed Foods Company Ltd. ( “Food Company”), whose primary
business activity is the processing of raw and cooked meat products;
and
|
|
|
|
|
3.
|
Dalian
Chuming Sales Company Ltd. (“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.
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
Our
founders have directly or indirectly owned the three operating subsidiaries
since their inception. We also own two intermediary holding companies. As of
June 30, 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.
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. In
the
second quarter of 2008, we revised our customer credit policy and began offering
extended payment terms to some of our quality long term customers. In accordance
with this revised policy, qualified customers were offered up to a two-month
grace period for payment, whereas previously payment was required within 1-2
days of delivery of goods. See “Liquidity and Capital Resources – Cash
Flows – Six Months Ended June 30, 2008”.
Management may extend credit to new customers who have met the criteria
of our revised credit policy.
Inventory
Carrying Value
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
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.
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 revenue is earned.
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.
Earnings
Per Share
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., contingent shares, 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.
Recent
Accounting Pronouncements
In
March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
("SFAS 161"). SFAS 161 applies to all derivative instruments and
related hedged items accounted for under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 161
requires entities to provide greater transparency about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under SFAS 133 and its related
interpretations, and (c) how derivative instruments and related hedged
items affect an entity's financial position, results of operations and cash
flows. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008.
In
May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources
of accounting principles and the framework for selecting the principles used
in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the
GAAP hierarchy). Statement 162 will become effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles."
In
May
2008, the FASB issued FSP Accounting Principles Board ("APB") 14-1 "Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1
requires the issuer of certain convertible debt instruments that may be settled
in cash (or other assets) on conversion to separately account for the liability
(debt) and equity (conversion option) components of the instrument in a manner
that reflects the issuer's non-convertible debt borrowing rate. FSP
APB 14-1 is effective for fiscal years beginning after December 15,
2008 on a retroactive basis.
We
are
currently evaluating the potential impact, if any, of the adoption of the above
recent accounting pronouncements on our consolidated results of operations
and
financial condition.
RESULTS
OF OPERATIONS
Comparison
of Three Months Ended June 30, 2008 and June 30, 2007.
The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
|
|
Quarter Ended
|
|
|
|
Quarter Ended
|
|
|
|
|
|
June 30,
|
|
% of
|
|
June 30,
|
|
% of
|
|
|
|
2008
|
|
Sales
|
|
2007
|
|
Sales
|
|
Sales
|
|
$
|
43,076,524
|
|
|
100.00
|
%
|
$
|
31,370,321
|
|
|
100.00
|
%
|
Cost
of Sales
|
|
|
36,600,428
|
|
|
84.97
|
%
|
|
26,510,666
|
|
|
84.51
|
%
|
Gross
Profit
|
|
|
6,476,097
|
|
|
15.03
|
%
|
|
4,859,655
|
|
|
15.49
|
%
|
Selling
Expenses
|
|
|
759,778
|
|
|
1.76
|
%
|
|
1,570,001
|
|
|
5.00
|
%
|
General
& Administrative Expenses
|
|
|
653,187
|
|
|
1.52
|
%
|
|
382,377
|
|
|
1.22
|
%
|
Total
Operating Expense
|
|
|
1,412,965
|
|
|
3.28
|
%
|
|
1,952,378
|
|
|
6.22
|
%
|
Operating
Income / (Loss)
|
|
|
5,063,132
|
|
|
11.75
|
%
|
|
2,907,277
|
|
|
9.27
|
%
|
Other
Income (Expense)
|
|
|
617,859
|
|
|
1.43
|
%
|
|
(123,044
|
)
|
|
0.39
|
%
|
Earnings
Before Tax
|
|
|
5,680,991
|
|
|
13.19
|
%
|
|
2,784,233
|
|
|
8.88
|
%
|
(Income
Tax Expense) / Deferred Tax Benefit
|
|
|
(66,023
|
)
|
|
0.15
|
%
|
|
-
|
|
|
0.00
|
%
|
Net
Income
|
|
$
|
5,614,968
|
|
|
13.03
|
%
|
$
|
2,784,233
|
|
|
8.88
|
%
|
Earnings
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.33
|
|
|
|
|
|
0.21
|
|
|
|
|
Diluted
|
|
|
0.27
|
|
|
|
|
|
0.16
|
|
|
|
|
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 June 30, 2008, we had sales of
$43,076,524 as compared to sales of $31,370,321 for the quarter ended June
30,
2007, an increase of approximately 37%. Our sales for our various product
categories in the second quarter of 2008 are summarized as
follows:
Sales
by product category
|
|
Second Quarter
2008 (amount
in dollars)
|
|
% of
Total
Sales
|
|
Second Quarter
2007 (amount
in dollars)
|
|
% of
Total
Sales
|
|
% of increase
from
2007 to 2008
|
|
Fresh Pork
|
|
$
|
35,361,296
|
|
|
82.09
|
%
|
$
|
24,139,141
|
|
|
76.95
|
%
|
|
46.49
|
%
|
Frozen
Pork
|
|
|
2,334,238
|
|
|
5.42
|
%
|
|
1,939,900
|
|
|
6.18
|
%
|
|
20.33
|
%
|
Processed
Food Products
|
|
|
5,380,990
|
|
|
12.49
|
%
|
|
5,291,280
|
|
|
16.87
|
%
|
|
1.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Sales
|
|
$
|
43,076,524
|
|
|
100
|
%
|
$
|
31,370,321
|
|
|
100
|
%
|
|
37.32
|
%
|
Sales
by product category, by
weight
of product
|
|
Second Quarter
2008
(Weight in tons)
|
|
% of
Total
Sales
|
|
Second Quarter
2007
(Weight in tons)
|
|
% of
Total
Sales
|
|
% of change
from
2007 to 2008
|
|
Fresh Pork
|
|
|
15,445
|
|
|
81.10
|
%
|
|
12,368
|
|
|
74.15
|
%
|
|
24.88
|
%
|
Frozen
Pork
|
|
|
1,173
|
|
|
6.20
|
%
|
|
1,054
|
|
|
6.32
|
%
|
|
11.29
|
%
|
Processed
Food Products
|
|
|
2,426
|
|
|
12.70
|
%
|
|
3,257
|
|
|
19.53
|
%
|
|
-25.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Sales
|
|
|
19,044
|
|
|
100.00
|
%
|
$
|
16,679
|
|
|
100.00
|
%
|
|
14.18
|
%
|
In
the
second 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 second quarter of 2008 our sales volume of fresh pork
and frozen pork (by weight) increased by 24.9% and 11.29% respectively, 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 second quarter of 2008 as
compared with the same period in the prior year. For processed food products,
our sales by weight decreased by 25.51%, but because of higher per-kilogram
prices, our sales revenue for this product category increased by 1.70%.
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 June 30, 2008, as compared to the
same quarter last year:
|
|
Average Per-Kilogram Price to Customers (in $US)
|
|
|
|
Second
Quarter of
2008
|
|
Second
Quarter of
2007
|
|
% change
|
|
Change in
Price
|
|
Fresh
Pork
|
|
$
|
2.29
|
|
$
|
1.95
|
|
|
17.44
|
%
|
$
|
0.34
|
|
Frozen
Pork
|
|
$
|
1.99
|
|
$
|
1.84
|
|
|
8.15
|
%
|
$
|
0.15
|
|
Processed
Food Products
|
|
$
|
2.22
|
|
$
|
1.62
|
|
|
37.04
|
%
|
$
|
0.60
|
|
In
the
second 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 8.15% 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. We raised
our prices for processed food products by 37.04% because the price of live
pigs
increased rapidly starting from the third quarter of 2007. The price increase
for processed food products was also partially due to rapid price increases
for
packaging material and food additives during the second quarter of
2008.
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 June 30,
|
|
Franchise Stores
|
|
Supermarkets
|
|
Restaurants and
Canteens
|
|
2007
|
|
|
501
|
|
|
95
|
|
|
2,608
|
|
2008
|
|
|
682
|
|
|
140
|
|
|
3,172
|
|
As
shown
in the table above, as of June 30, 2008, as compared to June 30, 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 second quarter
of 2008 as compared to the second quarter of 2007, by product category and
by
sales channel.
|
|
Increase in Sales from Second Quarter of 2007 to Second Quarter of 2008
|
|
|
|
By Product Group and Sales Channel ($)
|
|
Product
Category
|
|
Franchise
Operators
|
|
Sales
Agents
|
|
Super
Markets
|
|
Restaurants and
Canteens
|
|
Total Increase ($)
|
|
Fresh Pork
|
|
|
2,562,492
|
|
|
1,213,684
|
|
|
4,271,990
|
|
|
N/A
|
2 |
|
8,048,166
|
|
Frozen
Pork
|
|
|
N/A
|
1 |
|
61,707
|
|
|
N/A
|
1 |
|
924,997
|
|
|
986,704
|
|
Processed
Food Products
|
|
|
1,426,844
|
|
|
110,899
|
|
|
1,042,511
|
|
|
91,098
|
|
|
2,671,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Increase in Sales
|
|
|
3,989,336
|
|
|
1,386,290
|
|
|
5,314,501
|
|
|
1,016,075
|
|
|
11,706,203
|
|
_____________________________
1
In the
periods presented, we did not sell frozen pork through franchise operators
and
supermarkets.
2
In
the
periods presented, we did not sell fresh pork through restaurants and
canteens.
In
the
second 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
second 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 $5.3 million sales increase through supermarkets
is
due to our efforts in expanding the supermarket sales channel, which
provides us 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 second quarter of 2008 increased by $10,089,762 or approximately
38%, from $26,510,666 for the three months ended June 30, 2007 to $36,600,428
for the three months ended June 30, 2008. The increase was attributable to
the
increase in sales for the second quarter of 2008 as compared to the same period
in the prior year. Our cost of sales for our various product categories in
the
second quarter of 2008 is summarized as follows:
Cost of Sales
by
Product
Category
|
|
Second Quarter
2008
(in $ US)
|
|
% of
Overall
Cost of
Sales
|
|
Second Quarter
2007 (in $ US)
|
|
% of
Overall
Cost of
Sales
|
|
% increase
from
2007 to 2008
|
|
Fresh Pork
|
|
$
|
30,442,496
|
|
|
83.18
|
%
|
$
|
21,078,486
|
|
|
79.51
|
%
|
|
44.42
|
%
|
Frozen
Pork
|
|
|
1,960,760
|
|
|
5.36
|
%
|
|
1,648,915
|
|
|
6.22
|
%
|
|
18.91
|
%
|
Processed
Food Products
|
|
|
4,197,172
|
|
|
11.47
|
%
|
|
3,783,265
|
|
|
14.27
|
%
|
|
10.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Cost of Sales
|
|
$
|
36,600,428
|
|
|
100.00
|
%
|
$
|
26,510,666
|
|
|
100.0
|
%
|
|
38.06
|
%
|
The
following table shows the estimated average per-kilogram price we paid for
live
pigs in 2007 and 2008:
|
|
Average
Unit Price Per
Kilogram in
2008
(in $US)
|
|
Average
Unit Price Per
Kilogram in
2007
(in $US)
|
|
Price
Increase
(in $US)
|
|
% Increase
from 2007
to
2008
|
|
First
Quarter
|
|
|
2.2936
|
|
|
1.0579
|
|
|
1.1357
|
|
|
107.35
|
%
|
Second
Quarter
|
|
|
2.2578
|
|
|
1.3535
|
|
|
0.9043
|
|
|
66.81
|
%
|
Third
Quarter
|
|
|
N/A
|
|
|
1.8104
|
|
|
N/A
|
|
|
N/A
|
%
|
Fourth
Quarter
|
|
|
N/A
|
|
|
1.8656
|
|
|
N/A
|
|
|
N/A
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
for Year to Date
|
|
|
2.2757
|
|
|
1.5219
|
|
|
0.7538
|
|
|
49.53
|
%
|
The
most
rapid increase in live pig prices occurred in the third and fourth quarters
of
2007, for the highest grades of live pigs. However, the live pig prices slightly
dropped during the second quarter of 2008. 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 during 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 second 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.
Cost
of Sales by
Product
Category
|
|
Second
Quarter
of
2008
|
|
% of
Product
Group
Sales
|
|
Second Quarter
of 2007
|
|
% of Product
Group Sales
in the Second
Quarter 2008
|
|
Fresh
Pork
|
|
$
|
30,442,496
|
|
|
86.09
|
%
|
$
|
21,078,486
|
|
|
87.32
|
%
|
Frozen
Pork
|
|
|
1,960,760
|
|
|
84.00
|
%
|
|
1,648,915
|
|
|
85.00
|
%
|
Processed
Food Products
|
|
|
4,197,172
|
|
|
78.00
|
%
|
|
3,783,265
|
|
|
71.50
|
%
|
Total
Cost of Sales
|
|
$
|
36,600,428
|
|
|
84.97
|
%
|
$
|
26,510,666
|
|
|
84.51
|
%
|
Our
cost
of sales as a percentage of sales of fresh pork decreased slightly in the second
quarter of 2008, as compared to the same period in 2007, primarily because
of a
deceleration of the price increases for live pigs during the second quarter
of
2008. The cost of sales as a percentage of sales of frozen pork also fell
slightly, 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. The cost increases in live pigs primarily
affected the grade-1 and grade-2 categories. The cost of sales as a percentage
of sales of processed food products, however, increased by approximately 6.50%
due to a rapid price increase in packaging material and food additives during
the second quarter of 2008.
Gross
Profit.
Gross
profit was $6,476,097 for the three months ended June 30, 2008 as compared
to
$4,859,655 for the same period in 2007, representing an increase of $1,616,442,
or approximately 33.26%. Management attributes the increase in gross profit
to
strong
increases in sales, driven by strong demand for our products, especially our
fresh pork products. Our gross profit as a percentage of sales was 15.03% in
the
second quarter of 2008 as compared to 15.49% 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 June 30,
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 by
Product Category
|
|
Second
Quarter
of 2008
|
|
% of
Product
Group
Sales
|
|
Second
Quarter
of 2007
|
|
% of
Product
Group
Sales
|
|
% of
increase
from
Second
Quarter of
2007 to
Second
Quarter of
2008
|
|
Fresh Pork
|
|
$
|
4,918,800
|
|
|
16.15
|
%
|
$
|
3,060,655
|
|
|
14.52
|
%
|
|
60.71
|
%
|
Frozen
Pork
|
|
|
373,478
|
|
|
19.04
|
%
|
|
290,985
|
|
|
17.64
|
%
|
|
28.35
|
%
|
Processed
Food Products
|
|
|
1,183,818
|
|
|
28.21
|
%
|
|
1,508,015
|
|
|
39.86
|
%
|
|
-21.50
|
%
|
Total
Gross Profit
|
|
$
|
6,476,097
|
|
|
15.03
|
%
|
$
|
4,859,655
|
|
|
15.49
|
%
|
|
33.26
|
%
|
As
shown
in the table above, the fresh pork as a product category delivered the highest
increase in gross profit from the second quarter of 2008 as compared with the
same period in 2007. This is due to the strong demand of our fresh pork
products.
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, we were able to sell our processed food products at the highest
going market price for this category of products. However, because the price
of
the packaging material and food additives increased substantially during the
second quarter of 2008, the gross profit of our processed food products declined
from 39.86% to 28.21%.
Selling
Expenses.
Selling
expenses totaled $759,778 for the three months ended June 30, 2008, as compared
to $1,570,001 for the same period in 2007, a decrease of $810,223 or 52%. This
decrease is due to a decrease in advertising expense. During the three months
ended June 30, 2007, we spent $800,000 in advertising in a special marketing
campaign in an effort to promote our brand.
General
and Administrative Expenses.
General
and administrative expenses totaled $653,187 for the three months ended June
30,
2008 as compared to $382,377 for the same period in 2007, an increase of
$270,810 or 71%. This increase is primarily attributable to an increase in
salary expense. We continued to hire new staff to meet the needs of our
expanding operations. Also, consistent with the recent escalation in
the rate of inflation in China, the salaries and the cost of benefits for
our staff increased by approximately 40% in the second quarter of 2008 as
compared to the same period in 2007. These increases in salaries 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 income of $617,859 for the three months
ended June 30, 2008 as compared to total expense of $123,044 for the same period
in 2007, a decrease of $740,903 or 602%. The decrease in other expenses in
the
second quarter of 2008 is primarily attributable to several factors. First,
the
Dalian City government gave us a one time subsidy in the amount of $240,000.
This subsidy is due to efforts by the local government to keep the price of
pork
stable in local markets. Second, this is also attributable to a decrease in
interest expenses of approximately $220,000 as we reduced our bank loan
principal amount during the three months ended June 30, 2008 as compared to
the
same period in 2007.
Net
Income.
Our net
income for the three months ended June 30, 2008 was $5,614,968 as compared
to
$2,784,233 for the same period in 2007, an increase of $2,830,735 or 102%.
This
increase in net income is primarily 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 15.03%, which is only
slightly less than the gross profit margin achieved in the second quarter of
2007 of 15.49%.
Comparison
of Six Months Ended June 30, 2008 and June 30, 2007.
The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
|
|
Six
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
June 30,
|
|
% of
|
|
June 30,
|
|
% of
|
|
|
|
2008
|
|
Sales
|
|
2007
|
|
Sales
|
|
Sales
|
|
$
|
86,583,622
|
|
|
100.00
|
%
|
$
|
54,558,315
|
|
|
100.00
|
%
|
Cost
of Sales
|
|
|
73,074,852
|
|
|
84.80
|
%
|
|
45,536,298
|
|
|
83.46
|
%
|
Gross
Profit
|
|
|
13,508,771
|
|
|
15.60
|
%
|
|
9,022,017
|
|
|
16.54
|
%
|
Selling
Expenses
|
|
|
2,585,055
|
|
|
2.99
|
%
|
|
1,799,420
|
|
|
3.30
|
%
|
General
& Administrative Expenses
|
|
|
1,146,161
|
|
|
1.32
|
%
|
|
687,513
|
|
|
1.26
|
%
|
Total
Operating Expense
|
|
|
3,731,216
|
|
|
4.31
|
%
|
|
2,486,933
|
|
|
4.56
|
%
|
Operating
Income / (Loss)
|
|
|
9,777,555
|
|
|
11.29
|
%
|
|
6,535,084
|
|
|
11.98
|
%
|
Other
Income (Expense)
|
|
|
310,998
|
|
|
0.36
|
%
|
|
741,467
|
|
|
1.36
|
%
|
Earnings
Before Tax
|
|
|
10,088,553
|
|
|
11.65
|
%
|
|
5,793,617
|
|
|
10.62
|
%
|
(Income
Tax Expense) / Deferred Tax Benefit
|
|
|
(232,368
|
)
|
|
0.27
|
%
|
|
-
|
|
|
0.00
|
%
|
Net
Income
|
|
$
|
9,856,185
|
|
|
11.38
|
%
|
$
|
5,793,617
|
|
|
10.62
|
%
|
Earnings
Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.57
|
|
|
|
|
|
0.43
|
|
|
|
|
Diluted
|
|
|
0.47
|
|
|
|
|
|
0.34
|
|
|
|
|
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 six months ended June 30, 2008, we had sales of
$86,583,622 as compared to sales of $54,558,315 for the same period of 2007,
an
increase of approximately 59%. Our sales for our various product categories
for
the six month period ended June 30, 2008 are summarized as follows:
Sales
by product
category
|
|
Six Months Ended
June 30,
2008 (amount in
$US)
|
|
% of
Total Sales
|
|
Six Months
Ended June
30,
2007 (amount
in $US)
|
|
% of
Total
Sales
|
|
% of increase
from
2007 to 2008
|
|
Fresh Pork
|
|
$
|
65,635,910
|
|
|
75.81
|
%
|
$
|
42,795,035
|
|
|
78.44
|
%
|
|
53.37
|
%
|
Frozen
Pork
|
|
|
6,425,032
|
|
|
7.42
|
%
|
|
3,843,316
|
|
|
7.04
|
%
|
|
67.17
|
%
|
Processed
Food Products
|
|
|
14,522,680
|
|
|
16.77
|
%
|
|
7,919,964
|
|
|
14.52
|
%
|
|
83.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Sales
|
|
$
|
86,583,622
|
|
|
100
|
%
|
$
|
54,558,315
|
|
|
100
|
%
|
|
58.70
|
%
|
Sales by product category,
by weight of product
(metric tons):
|
|
Six Months
Ended June 30,
2008
(Weight in tons)
|
|
% of
Total
Sales
|
|
Six Months
Ended June 30,
2007
(Weight in tons)
|
|
% of
Total
Sales
|
|
% of change
from
2007 to 2008
|
|
Fresh Pork
|
|
|
29,442
|
|
|
80.54
|
%
|
|
22,674
|
|
|
73.97
|
%
|
|
29.85
|
%
|
Frozen
Pork
|
|
|
2,259
|
|
|
6.18
|
%
|
|
1,932
|
|
|
6.30
|
%
|
|
16.93
|
%
|
Processed
Food Products
|
|
|
4,856
|
|
|
13.28
|
%
|
|
6,048
|
|
|
19.73
|
%
|
|
-19.71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Sales
|
|
|
36,557
|
|
|
100
|
%
|
$
|
30,654
|
|
|
100
|
%
|
|
19.26
|
%
|
In
the
six months ended June 30, 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 six months 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 six months of 2008 as compared with the same period
in the prior year. For processed food products, our sales by weight decreased
by
19.17%, but because of higher per-kilogram prices, our sales revenue for this
product category increased by 83.36%. 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 six months ended June 30, 2008, as compared to
the
same quarter last year:
|
|
Average Per-Kilogram Price to Customers (in $US)
|
|
|
|
Six Months
Ended June
30, 2008
|
|
Six Months
Ended June
30, 2007
|
|
% change
|
|
Change in
Price
|
|
Fresh
Pork
|
|
$
|
2.23
|
|
$
|
1.89
|
|
|
17.99
|
%
|
$
|
0.34
|
|
Frozen
Pork
|
|
$
|
2.84
|
|
$
|
1.99
|
|
|
42.71
|
%
|
$
|
0.85
|
|
Processed
Food Products
|
|
$
|
2.99
|
|
$
|
1.31
|
|
|
128.4
|
%
|
$
|
1.68
|
|
In
the
six months ended June 30, 2008, we raised our prices for processed food products
significantly, while we made relatively smaller increases in the prices of
our
fresh pork and frozen pork. We raised our prices for processed food products
due
to several factors. First, we experienced a surge in customer demand for
our pig
viscera products, which is a subcategory within the processed food category.
In
response to this surge in demand, and due to limited supply, we raised our
prices to customers for that subcategory of the processed food products.
Second,
the cost to us for packaging material and food additives increased substantially
during the first half of 2008, and we passed much of these cost increases
on to
customers in the form of higher product prices. These input cost increases
affected processed food products more than other categories. We raised our
prices for fresh pork by only 17.99% because we were not able to pass on
the
entire amount of the live pig price increases to our customers. In management’s
view, more aggressive price increases in the fresh pork category would have
discouraged customers from consuming fresh pork, and would have been out
of line
with our competitors.
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 shows the total increase in our sales, from the first six months
ending on June 30, 2008 as compared to same period of 2007, by product category
and by sales channel.
|
|
Increase in Sales from First Six Months Ended on June 30, 2007 to the same period
of 2008
|
|
|
|
By Product Group and Sales Channel ($)
|
|
Product
Category
|
|
Operators
|
|
Sales
Agents
|
|
Super
Markets
|
|
Restaurants and
Canteens
|
|
Total Increase ($)
|
|
Fresh
Pork
|
|
|
5,805,463
|
|
|
6,604,820
|
|
|
10,430,592
|
|
|
N/A2
|
|
|
22,840,875
|
|
Frozen
Pork
|
|
|
N/A1
|
|
|
335,809
|
|
|
N/A1
|
|
|
2,245,907
|
|
|
2,581,716
|
|
Processed
Food Products
|
|
|
3,232,591
|
|
|
603,509
|
|
|
2,545,421
|
|
|
221,193
|
|
|
6,602,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Increase in Sales
|
|
|
9,038,054
|
|
|
7,544,138
|
|
|
12,976,013
|
|
|
2,467,100
|
|
|
32,025,305
|
|
_____________________________
1
In the
periods presented, we did not sell frozen pork through franchise operators
and
supermarkets.
2
In
the
periods presented, we did not sell fresh pork through restaurants and
canteens.
In
the
first six months of 2008, as compared to the same period 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 six months of 2008, as compared to the same period in 2007, the majority
of our increase in sales came through supermarkets, sales agent and franchise
operators, respectively. The $12.98 million sales increase through supermarkets
is due to our efforts to expand the supermarket sales channel, which
provides us 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 six months of 2008 increased by $27,538,554 or approximately
60%, from $45,536,298 for the six months ended June 30, 2007 to $73,074,852
for
the six months ended June 30, 2008. The increase was attributable to increase
in
sales for the six months ended June 30, 2008 as compared to the same period
in
the prior year. Our cost of sales for our various product categories in the
six
months end 2008 is summarized as follows:
Cost of Sales
by
Production Category:
|
|
Six Months
Ended June 30,
2008
|
|
% of
Overall
Cost of
Sales
|
|
Six Months
Ended June 30,
2007
|
|
% of
Overall
Cost of
Sales
|
|
% of increase
from
2007 to 2008
|
|
Fresh Pork
|
|
$
|
56,350,135
|
|
|
77.1
|
%
|
$
|
36,606,705
|
|
|
80.4
|
%
|
|
53.93
|
%
|
Frozen
Pork
|
|
|
5,397,027
|
|
|
7.4
|
%
|
|
3,266,819
|
|
|
7.2
|
%
|
|
65.21
|
%
|
Processed
Food Products
|
|
|
11,327,690
|
|
|
15.5
|
%
|
|
5,
662,774
|
|
|
12.4
|
%
|
|
100.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Cost of Sales
|
|
$
|
73,074,852
|
|
|
84.80
|
%
|
$
|
45,536,298
|
|
|
83.46
|
%
|
|
60.48
|
%
|
The
following table shows our cost of sales in the six months ended June 30, 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.
Cost of Sales
by Product Category:
|
|
Six Months
Ended June
30,
2008
|
|
% of
Product
Group
Sales
|
|
Six Months
Ended June 30,
2007
|
|
% of Product
Group Sales
|
|
Fresh Pork
|
|
$
|
56,350,135
|
|
|
85.85
|
%
|
$
|
36,606,705
|
|
|
85.53
|
%
|
Frozen
Pork
|
|
|
5,397,027
|
|
|
84.00
|
%
|
|
3,266,819
|
|
|
85.00
|
%
|
Processed
Food Products
|
|
|
11,327,690
|
|
|
78.00
|
%
|
|
5,662,774
|
|
|
71.49
|
%
|
Total
Cost of Sales
|
|
$
|
73,074,852
|
|
|
84.80
|
%
|
$
|
45,536,298
|
|
|
83.46
|
%
|
Our
cost
of sales as a percentage of sales of fresh pork increased slightly in the first
half of 2008, as compared to the same period in 2007, primarily because of
the
increase in the cost of inputs (primarily live pigs), 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. The cost
of sales as a percentage of sales of processed food products increased around
6%. This is primarily because of the price increase of live pigs and the price
increase of packaging material and food additives.
Gross
Profit.
Gross
profit was $13,508,771 for the six months ended June 30, 2008 as compared to
$9,022,017 for the same period in 2007, representing an increase of $4,486,754,
or approximately 50%. Management attributes the increase in gross profit to
strong increases in sales, driven by strong demand for our products, especially
our fresh pork products. Our gross profit as a percentage of sales was 15.60%
in
the six months ended June 30, 2008 as compared to 16.54% 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 six months ended June 30,
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
by Production Category
|
|
Six Months
Ended June 30,
2008
|
|
% of
Product
Group
Sales
|
|
Six Months
Ended June
30,
2007
|
|
% of
Product
Group
Sales
|
|
% of
increase
from First
Six Months
of 2007 to
First
Six Months
of 2008
|
|
Fresh
Pork
|
|
$
|
9,285,775
|
|
|
14.15
|
%
|
$
|
6,188,330
|
|
|
14.46
|
%
|
|
50.05
|
%
|
Frozen
Pork
|
|
|
1,028,005
|
|
|
16.00
|
%
|
|
576,497
|
|
|
15.00
|
%
|
|
78.32
|
%
|
Processed
Food Products
|
|
|
3,194,991
|
|
|
22
|
%
|
|
2,257,190
|
|
|
28.50
|
%
|
|
41.55
|
%
|
Total
Gross Profit
|
|
$
|
13,508,771
|
|
|
15.60
|
%
|
$
|
9,022,017
|
|
|
16.54
|
%
|
|
49.73
|
%
|
As
shown
in the table above, the fresh pork as a product category delivered the highest
increase in gross profit from the first half of 2008 as compared with the same
period in 2007. This is due to the strong demand for our fresh pork
products.
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.
However, because the price of live pigs, packaging material and food additives
increased substantially during the second quarter of 2008, the gross profit
of
our processed food products decreased from 28.50% to 22.00%.
Selling
Expenses.
Selling
expenses totaled $2,585,055 for the six months ended June 30, 2008, as compared
to $1,799,420 for the same period in 2007, an increase of $785,635 or 44%.
This
increase is primarily due to marketing expenses of approximately $490,000
related to our efforts to place our pork products in new supermarkets. In
addition, the salary of sales employees increased by approximately $80,000
in
the first half of 2008 as compared to the same period in 2007.
Other
Income (Expense).
Our
other income (expense) consisted of interest income, other expenses, and
interest expense. We had a total other income of $310,998 for the six months
ended June 30, 2008 as compared to other expense $741,467 for the same period
in
2007, an increase of $1,052,465 or 142%. The increase in other income in the
first half of 2008 is primarily attributable to a price subsidy in the amount
of
$240,000 received from the Dalian metropolitan government and loan interest
reimbursement in the amount of approximately $550,000 for building a new frozen
pork processing facility, which has been classified by Dalian metropolitan
government as a technology reformation project. This is a policy adopted by
Dalian metropolitan government to accelerate the introduction of new technology
into the city. The Company does not need to fulfill any obligations because
of
this status.
Net
Income.
Our net
income for the six months ended June 30, 2008 was $9,856,185 as compared to
$5,793,617 for the same period in 2007, an increase of $4,062,568 or 70%. This
increase in net income is attributable to the factors described above, but
primarily from the increase in sales for the six months ended June 30, 2008,
as
compared to the same period in 2007.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flows
Six
Months Ended June 30, 2008
As
of
June 30, 2008, we had cash and cash equivalents of $11,270,730, other current
assets of $32,205,596 and current liabilities of $23,803,675. At
June
30, 2007, we had $2.5
million in cash and cash equivalents. We presently finance our
operations primarily with cash flows from our operations, and we anticipate
that
this will continue to be our primary source of funds to finance our short-term
cash needs. If we require additional capital to expand or enhance our existing
facilities, we will consider debt or equity offerings or institutional
borrowings as potential means of financing.
Net
cash
used in operating activities was $1,738,923 for the six months ended on June
30,
2008, while net cash flow sourced from operating activities was $4,661,212
in
the same period in 2007. This is primarily attributable to the fact that, in
order to expand our sales, we began offering payment terms to accommodate our
best customers. Beginning in the first quarter of 2008 and continuing into
the second quarter of 2008, we revised our customer credit policy and began
offering extended payment terms to some of our quality long term clients
with good credit (up to two months), 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.
Net
cash
sourced from investing activities was $1,312,211 for the six months ended June
30, 2008, compared to cash used in investing activities of $4,032,216 in the
same period in 2007. This is primarily due to the following two factors: first,
we paid $3,333,506 to purchase land use rights in the six months ended June
30,
2007. Second, we received additional funds in the amount of $2,019,333 released
from our escrow account in the six months ended June 30, 2008, related to
the 2007 private placement.
Net
cash
used in financing activities was $980,115 for the six months ended on June
30,
2008, as compared to net cash used in financing activities of $1,293,663 in
the
same period in 2007. The cash was used as payment of bank loan interest in
both periods. The decrease of $313,548 was mainly interest savings due to the
repayment of principal to Shanghai Pudong Development Bank.
Capital
Commitments
In
the
first quarter of 2008, as discussed above, we relaxed our credit policy for
certain of our major customers, permitting them up to a two-month grace
period for payment for goods, where previously no such grace period was
provided. Management expects that in the short term, this revised credit
policy
will result in an increase in accounts receivable, and a corresponding reduction
in our cash position. Management does not anticipate that this change in
our
credit policy will result in any deficiency of working capital.
Uses
of Liquidity
Our
cash
requirements through the end of fiscal 2008 will be primarily to fund daily
operations for the growth of our business. Management will consider acquiring
additional manufacturing capacity for processed foods in the future to
strengthen and stabilize our manufacturing base.
Sources
of Liquidity
Our
primary sources of liquidity for our short-term cash needs are expected to
be
from cash flows generated from operations and cash and cash equivalents
currently on hand. We believe that we will be able to borrow additional funds
if
needed.
We
believe our cash flow from operations together with our cash and cash
equivalents currently on hand will be sufficient to meet our needs for working
capital, capital expenditure and other commitments through the end of 2008.
For
our long-term cash needs, we may consider a number of alternative financing
opportunities, which may include debt and equity financing. No assurance
can be
made that such financing will be available to us, and adequate funds may
not be
available on terms acceptable to us. If additional funds are raised through
the
issuance of equity securities, dilution to existing shareholders may result.
If
funding is insufficient at any time in the future, we will develop or enhance
our products or services and expand our business through our own cash flows
from
operations.
As
of
June 30, 2008, we had outstanding borrowings under a loan from Bank of China
$6,402,908, on which we pay interest at a rate of 8.24% per annum. As of
June
30, 2008, we did not have any standby letters of credit or standby repurchase
obligations.
Foreign
Currency Translation Risk
Our
operations are, for the most part, located in the PRC, and we earn our revenue
in Chinese RMB. However, we report our financial results in U.S. Dollars
using
the closing rate method. As a result, fluctuations in the exchange rates
between
Chinese RMB and the U.S. Dollar will affect our reported financial results.
The
balance sheet items are translated into U.S. dollars using the exchange rates
at
the respective balance sheet dates. The capital and various reserves are
translated at historical exchange rates prevailing at the time of the
transactions while income and expenses items are translated at the average
exchange rate for the period. All exchange differences are recorded within
equity. The foreign currency translation adjustment for the six months ended
June 30, 2008 and 2007, which was in each instance a gain, was $1,462,155
and
$247,509, respectively.
During
2003 and 2004 the exchange rate of RMB to the dollar remained constant at
8.26
RMB to the dollar. On July 21, 2005, the Chinese government adjusted the
exchange rate from 8.26 to 8.09 RMB to the dollar. In 2008, the RMB continued
to
appreciate against the U.S. dollar. As of June 30, 2008, the market foreign
exchanges rate was increased to 6.85 RMB to one U.S. dollar. As a result,
the
ongoing appreciation of RMB to U.S. dollar negatively impacted our gross
margins
for the six months and three months ended June 30, 2008.
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 June 30, 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
|
|
$
|
6,402,908
|
|
$
|
6,402,908
|
|
$
|
— |
|
$
|
—
|
|
$
|
— |
|
Other
Indebtedness
|
|
$
|
— |
|
$
|
—
|
|
$ |
— |
|
$
|
—
|
|
$
|
— |
|
Capital
Lease Obligations
|
|
$
|
— |
|
$
|
—
|
|
$ |
— |
|
$
|
—
|
|
$
|
— |
|
Operating
Leases
|
|
$
|
— |
|
$
|
—
|
|
$ |
— |
|
$
|
—
|
|
$
|
— |
|
Purchase
Obligations
|
|
$
|
447,092,700
|
|
$
|
56,972,700
|
|
$
|
390,120,000
|
|
$
|
— |
|
$
|
—
|
|
Total
Contractual Obligations:
|
|
$
|
453,495,608
|
|
$
|
63,375,608
|
|
$
|
390,120,000 |
|
|
—
|
|
|
— |
|
As
indicated in the table, as of June 30, 2008 we had $447,092,700 in purchase
obligations, which relates to our agreement for the purchase and sale of
hogs.
On December 19, 2007, we entered into a hog purchase agreement whereby the
Group
will provide, at fair market prices, a minimum number of hogs to us.
At
June
30, 2008, management projected minimum quantities of hogs as detailed in
the
following table:
Year
|
|
Hogs
|
|
Price
Per Hog
|
|
Amount
|
|
2008
|
|
|
270,000
|
|
$
|
211.01
|
|
$
|
56,972,700
|
|
2009
|
|
|
800,000
|
|
$
|
232.21
|
|
$
|
185,768,000
|
|
2010
|
|
|
800,000
|
|
$
|
255.44
|
|
$
|
204,352,000
|
|
|
|
|
|
|
|
|
|
$
|
447,092,700
|
|
For
purposes of estimating future payments, we project that the fair market price
of
the hogs will increase by 10% each year. The assumption of 10% reflects our
expectations with regard to inflation and the rising costs of inputs in breeding
livestock.
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 June 30, 2008, we had approximately $11,270,730 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 $1,307,671 and
$3,097,786 in the second 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.
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
June 30, 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 June 30, 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.
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 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 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:
|
·
|
limit
our ability to pay dividends or require us to seek consent for the
payment
of dividends;
|
|
·
|
increase
our vulnerability to general adverse economic and industry
conditions;
|
|
·
|
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
|
|
·
|
limit
our flexibility in planning for, or reacting to, changes in our business
and our industry.
|
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 2008, 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.
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.
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.
|
|
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.
|
|
·
|
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.
|
|
·
|
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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|
·
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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.
|
|
·
|
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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·
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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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|
·
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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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·
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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.
|
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.
|
·
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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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·
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the
imposition of additional restrictions on currency conversion and
remittances abroad; or
|
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·
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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.
|
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.
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.
ITEM
5.
OTHER
INFORMATION
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)
(4)
|
|
|
|
10.12
|
|
Short-term
Loan Agreement between Bank of China Liao Ning Branch and Dalian
Chuming
Food Co. (English summary translation) (4)
|
|
|
|
10.13
|
|
Short-term
Loan Agreement between Bank of China Liao Ning Branch and Dalian
Chuming
Meat Co. (English summary translation) (4)
|
|
|
|
10.14
|
|
Guarantee
Agreement between Dalian Chuming Food Co. and Bank of China Liaoning
Branch. (English summary translation) (4)
|
|
|
|
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.*
|
*
|
Filed
herewith.
|
(1)
|
|
(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.
|
(4)
|
Previously
filed with our Quarter Report on Form 10-Q on May 20, 2008 and
incorporated herein by
reference.
|
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: September 2, 2008
|
By:
|
/s/
Shi Huashan
|
|
|
Shi
Huashan
|
|
|
President and Chief Executive Officer
|
|
|
(Principal Executive Officer)
|
|
|
|
Dated: September 2, 2008
|
By:
|
/s/
Wang Shu
|
|
|
Wang
Shu
|
|
|
Chief Financial Officer
|
|
|
(Principal Financial and Accounting Officer)
|