As
filed with the Securities and Exchange Commission on April 29,
2008
Registration
No. 333-149171
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
AMENDMENT
NO. 1
TO
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
ENERGROUP
HOLDINGS CORPORATION
(Exact
name of registrant as specified in its charter)
Nevada
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2011
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87-0420774
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(State
or Other Jurisdiction of
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(Primary
Standard Industrial
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(I.R.S.
Employer
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Incorporation
or Organization)
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Classification
Number)
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Identification
No.)
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No.
9, Xin Yi Street, Ganjingzi District
Dalian
City, Liaoning province, PRC 116039
Telephone:
+86 411 867 166 96
(Address,
Including Zip Code and Telephone Number,
Including
Area Code, of Registrant’s Principal
Executive
Offices)
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The
Corporation Trust Company of Nevada
6100
Neil Road, Suite 800
Reno,
Nevada 89511
(775)
688-3061
(Name,
Address, Including Zip Code and Telephone Number,
Including
Area Code, of Agent for Service)
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With
copies of all correspondence to:
Edgar
D. Park and Kevin K. Leung
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Richardson
& Patel LLP
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10900
Wilshire Blvd. Suite 500
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Los
Angeles, California 90024
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(310)
208-1182
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Approximate
date of commencement of proposed sale to the public:
As soon
as practicable after this Registration Statement becomes effective.
If
any of
the securities being registered on this form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. þ
If
this
Form is filed to register additional securities for an offering pursuant
to Rule
462(b) under the Securities Act, please check the following box and list
the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the
same
offering. ¨
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the
same
offering. ¨
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
definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large
Accelerated Filer o
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Accelerated
Filer o
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Non-Accelerated
Filer o
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Smaller
Reporting Company x
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(do
not check if a smaller reporting company)
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CALCULATION
OF REGISTRATION FEE
Title of Each Class of
Securities to be Registered
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Amount to be
Registered
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Proposed
Maximum Per
Share Offering Price
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Proposed Maximum
Aggregate
Offering Price (1)
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Amount of
Registration Fee
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Common
Stock
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8,140,487
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$
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5.00
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(2)
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$
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40,702,435
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$
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1,599.61
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(3)
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(1)
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Estimated
solely for the purpose of computing the amount of the registration
fee
pursuant to Rule 457(o) under the Securities Act.
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(2)
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Estimated
solely for the purpose of calculating the amount of the registration
fee
pursuant to Rule 457(c) of the Securities Act of 1933, the price
per share
and aggregate offering price are based upon the last reported per
share
price of the common stock of the Registrant on the OTC Bulletin
Board.
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(3)
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The
amount of $2,277.61
was previously
paid.
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The
Registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the Registrant shall file
a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The
information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer
to sell these securities and no offer to buy these securities is being
solicited in any state where the offer or sale is not permitted.
Prospectus
ENERGROUP
HOLDINGS CORPORATION
8,140,487
shares
Common
Stock
This
prospectus covers the resale by selling shareholders of up to 8,140,487 shares
of our common stock, $0.001 par value.
These
securities will be offered for sale from time to time by the selling
shareholders identified in this prospectus in accordance with the terms
described in the section of this prospectus entitled “Plan of Distribution.” We
will not receive any of the proceeds from the sale of the common stock by the
selling shareholders.
Our
securities are not listed on any national securities exchange. Our common
stock
is currently quoted on the OTC Bulletin Board under the symbol “ENHD.OB.” The
last reported per share price for our common stock was $5.00, as quoted on
the
OTC Bulletin Board on March 5, 2008.
INVESTING
IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE “RISK FACTORS” BEGINNING
ON PAGE 31.
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The
date of this prospectus is April 29,
2008
No
offers
to sell are made, nor are offers sought to buy these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information contained in this prospectus is accurate as of the date in
the
front of this prospectus only. Our business, financial condition, results of
operations and prospectus may have changed since that date.
TABLE
OF CONTENTS
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Page
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Prospectus
Summary
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1
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Summary
Consolidated Financial Data
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7
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Supplementary
Financial Information
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8
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Business
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17
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Risk
Factors
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32
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Special
Note Regarding Forward-Looking Statements
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49
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Use
of Proceeds
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Plan
of Distribution
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Selling
Shareholders
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51
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Selected
Consolidated Financial Data
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55
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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56
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Legal
Proceedings
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67
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Management
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67
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Security
Ownership of Certain Beneficial Holders and Management
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75
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Certain
Relationships and Related Party Transactions
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76
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Description
of Securities
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78
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Dividends
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80
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Shares
Eligible for Future Sale
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81
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Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure
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82
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Legal
Matters
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Experts
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Disclosure
of Commission Position on Indemnification
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82
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Additional
Information
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83
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Index
to Consolidated Financial Information
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F-1
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PROSPECTUS
SUMMARY
This
summary contains basic information about us and this offering. You should read
the entire prospectus carefully, especially the risks of investing in our common
stock discussed under “Risk Factors.” Some of the statements contained in this
prospectus, including statements under “Summary” and “Risk Factors” as well as
those noted in the documents incorporated herein by reference, are
forward-looking statements and may involve a number of risks and uncertainties.
We note that our actual results and future events may differ significantly
based
upon a number of factors. You should not put undue reliance on the
forward-looking statements in this document, which speak only as of the date
on
the cover of this prospectus.
References
to “we,” “our,” “us,” the “Company,” or “Energroup” refer to Energroup Holdings
Corporation, a Nevada corporation, and its consolidated
subsidiaries.
ENERGROUP
HOLDINGS CORPORATION
Energroup
Holdings Corporation, through its subsidiaries, is engaged in the business
of
producing, packing, selling, marketing and distributing fresh pork and processed
meat products to clients throughout the People’s Republic of China (“China” or
the “PRC”). We sell our products to consumers in northeastern China, which has a
population of approximately 108 million. In 2007, we had approximately US
$124.7
million in sales and US $11.7 million in net income.
Our
Business
We
produce, pack, sell, market and distribute fresh and processed meat products
to
customers in the People’s Republic of China (“China” or the “PRC”). Our current
corporate structure is shown below. We own three PRC operating subsidiaries
(collectively, the “Chuming Operating Subsidiaries”):
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1.
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Dalian
Chuming Slaughter and Packaging Pork Company Ltd., whose primary
business
activity is acquiring, slaughtering and packaging of pork and
cattle;
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2.
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Dalian
Chuming Processed Foods Company Ltd., whose primary business activity
is
the processing of raw and cooked meat products;
and
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3.
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Dalian
Chuming Sales Company Ltd., which is responsible for our sales,
marketing
and distribution activities.
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Our
three
operating subsidiaries are spun off constituents of a former parent company,
Dalian Chuming Group Co., Ltd. (the “Group”). Our company is separate and
independent from the Group, which operates a different business and has
different operations from ours. We took over ownership and control of the
three
Chuming Operating Subsidiaries from the Group in September 2007 following
our
corporate reorganization (See subsection entitled “Corporate Reorganization” on
page 6 of this report). We are headquartered in the City of Dalian, Liaoning
Province of China. Throughout this report, Energroup Holdings Corporation,
Precious Sheen Investments Limited, Chuming WOFE and the Chuming Operating
Subsidiaries are sometimes collectively referred to as
“Chuming.”
Our
Current Corporate Structure
We
sell
our products to consumers in northeastern China, which has a population of
approximately 108 million. In particular, our current customers are concentrated
in the Liaoning Province (which has a population of approximately 42 million),
and we are the largest pork producer in Dalian City, which has a population
of
approximately 3 million, or 6 million including the greater metropolitan
area.
At present, all of our sales are within China, which is the largest
pork-consuming nation in the world, with a total of 54 million metric tons
consumed in 2006. Due to the rapid development of the Chinese economy,
urbanization and strong income growth, we have observed that pork consumption
patterns are changing and consumption levels are continuing to
increase.
Our
major
products are:
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·
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Fresh
meat - pork that is processed in a controlled environmental chamber
with
closely monitored temperatures to ensure quality and safety standards
during processing right up to the time of delivery to the
consumer.
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·
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Frozen
fresh meat - butchered pigs that are processed and immediately
frozen,
which includes such products as smoked pork, ham and
roasts.
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·
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Frozen
fresh byproducts - pork byproducts including pig’s liver, stomach,
intestine, head and hoof.
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We
are
part of an established pork production cycle that culminates in sales of
fresh and frozen pork. This cycle includes feedstuff production, pig breeding,
slaughtering, processing, packaging and distribution. We are involved in
the slaughtering, processing, packaging and distribution aspects of the pork
production cycle.
We
are
the first pork producer in China to receive “Green Food” certification from
China’s Ministry of Agriculture. Green Food is an innovative certification
program unique to China that is awarded to food processors who produce using
environmentally sustainable methods and meet certain high technical standards
of
quality control, safety, and product quality, and generate low levels of
pollution.
Share
Exchange Transaction
In
December 2007, we completed a reverse take-over transaction in the form of
a
share exchange, which resulted in our current corporate structure. On December
31, 2007, we 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 then-issued
and outstanding common stock (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 Chuming.
Prior
to
the share exchange transaction, Energroup was a public reporting “shell” company
with nominal assets whose sole business was to identify, evaluate and
investigate various companies with the intent that, if such investigation
warrants, a reverse merger transaction be negotiated and completed pursuant
to
which Energroup would acquire a target company with an operating business
with
the intent of continuing the acquired company’s business as a publicly held
entity.
As
a
result of the share exchange transaction, PSI (and its subsidiaries) became
the
100% owned subsidiary of Energroup Holdings Corporation, and we acquired
the
business and operations of Chuming.
$17
Million Financing
On
December 3, 2007, we completed a $17 million private placement in which we
sold
and issued 3,863,635 shares of our common stock to fifteen accredited investors
for $4.40 per share. After giving to the both the Exchange Transaction and
the
Financing, we had a total of approximately 21,136,392 shares of our common
stock
issued and outstanding, and the PSI Shareholders held 16,850,000 of these
shares, constituting approximately 79.7% of our issued and outstanding common
stock. For additional details concerning this financing, please see the section
entitled “Strategic Financing” below in this prospectus.
Financial
Results
Our
consolidated financial statements for the years ended December 31, 2007,
2006,
and 2005 are included in this prospectus. In 2005, 2006 and 2007, we had
approximately $54.1 million, $70.4 million and $124.7 million in sales,
respectively. In 2005, 2006 and 2007, we had approximately $6.0 million,
$8.1
million and $11.7 million in net income, respectively. See “Index
to Consolidated Financial Information”
beginning on page F-1.
RISKS
AFFECTING OUR BUSINESS
We
are
subject to a number of risks, which you should be aware of before deciding
to
purchase the securities in this offering. These risks are discussed in the
summary below and in the section titled “Risk
Factors”
beginning on page 31 of this prospectus.
SUMMARY
OF RISK FACTORS
This
document contains certain statements of a forward-looking nature. Such
forward-looking statements, including but not limited to growth and strategies,
future operating and financial results, financial expectations and current
business indicators are based upon current information and expectations and
are
subject to change based on factors beyond our control. Forward-looking
statements typically are identified by the use of terms such as “look,” “may,”
“will,” “should,” “might,” “believe,” “plan,” “expect,” “anticipate,” “estimate”
and similar words, although some forward-looking statements are expressed
differently. The accuracy of such statements may be impacted by a number of
business risks and uncertainties that could cause actual results to differ
materially from those projected or anticipated, including but not limited
to:
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·
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our
ability to timely and accurately complete orders for our
products;
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·
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our
dependence on a limited number of major
customers;
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·
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political
and economic conditions within the
PRC;
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our
ability to expand and grow our distribution
channels;
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·
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general
economic conditions which affect consumer demand for our
products;
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the
effect of terrorist acts, or the threat thereof, on consumer confidence
and spending;
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acceptance
in the marketplace of our new products and changes in consumer
preferences;
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·
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foreign
currency exchange rate
fluctuations;
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·
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our
ability to identify and successfully execute cost control
initiatives;
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·
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other
risks outlined above and in our other public
filings.
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You
are
cautioned not to place undue reliance on these forward-looking statements,
which
speak only as of the date of this document. We undertake no obligation to update
this forward-looking information.
While
our
management fully intends to make concerted efforts to manage these risks, we
cannot assure you that we will be able to do so successfully. See “Risk Factors”
beginning on page 31 of this prospectus.
STRATEGIC
FINANCING
On
December 31, 2007, we entered into a Securities Purchase Agreement (the
“Purchase Agreement”) pursuant to which we agreed to issue and sell 3,863,635
shares of our common stock to fifteen 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 Exchange
Transaction.
In
connection with the Purchase Agreement, we agreed to set aside $4.25 million
of
the purchase price in a holdback escrow account, $2.0 million of which is to
be
released upon appointment and confirmation of a board of directors comprised
of
a majority of independent directors, $1.5 million of which shall be released
to
us upon appointment of a new Chief Financial Officer meeting certain
qualifications, $500,000 of which is to be released upon selection of a
successor independent accounting firm, and $250,000 of which shall be applied
towards certain investor relations activities. We will owe partial liquidated
damages to the investors equal to 0.5% per month (prorated daily) for each
investor’s investment amount if, among other things, we do not successfully
appoint a new Chief Financial Officer within 90 days after the closing of the
Financing.
Under
the
terms of our arrangement with Hunter Wise Securities, LLC, our placement
agent
for the financing, we paid a commission equal to 7% of the aggregate gross
proceeds of the Financing, plus an a amount equal to 3% of such proceeds
to
reimburse expenses of the placement agent. We also issued a warrant to the
placement agent for the purchase of 386,364 shares of the Company’s common stock
at an exercise price of $4.40 per share. We also paid $75,000 to the lead
investor in the Financing as reimbursement for fees and legal expenses. After
deduction of these payments and our expenses, the resulting net proceeds
to us
was approximately $14.8 million.
Under
the
terms of the Financing, we agreed to a “make good” provision, under which
certain of our founders’ shares were set aside in escrow, and must be released
to the investors in the event that we do not meet specified earnings targets
of
$15.9 million in after-tax net income for 2008, and $20.9 million in after-tax
net income and fully-diluted earnings per share of $0.99 for 2009. If the
2008
after-tax net income target is not met, 1,931,818 shares of common stock
held by
our founders (approximately 9.1% of the issued and outstanding shares) will
be
transferred to the investors pro rata in proportion to their investment in
the
Financing without any further consideration from or action by the investors.
If
both the 2009 after-tax net income and earnings per share targets are not
met,
an additional 1,931,818 shares of common stock (approximately 9.1% of the
issued
and outstanding shares) held by our founders will be transferred to the
investors, also on a pro rata basis. If all of these “make good” shares were to
be released to the investors, the investors would then hold 36.6% of our
issued
and outstanding stock, assuming a total of 21.2 million shares outstanding.
“After-tax net income” is defined in the Purchase Agreement, and is calculated
based upon our audited financial statements prepared by U.S. auditors in
accordance with U.S. generally accepted accounting principles. For purposes
of
determining whether or not “after-tax net income” has been achieved by us, any
direct or indirect tax breaks, tax holidays, tax credits or similar tax
benefits, compensation, grant or any other remuneration or deduction granted
by
any governmental authority or body which benefits us are excluded from the
calculation.
We
agreed
to register for resale the 3,863,635 shares of common stock acquired by the
investors pursuant to a registration statement on Form S-1, of which this
prospectus forms a part. We also agreed to register the 1,931,818 shares
for the
2008 “make good” escrow and the 1,931,818 shares for the 2009 “make good”
escrow, which forms the total number of shares registered under this prospectus
of 8,140,487 shares. In the event that our registration statement is not
declared effective by the Securities and Exchange Commission (“SEC”) within 135
days of the closing of the Financing, we will also owe liquidated damages
to the
investors of 1% of the total financing amount in cash per month after the
135
day period. The liquidated damages payable to the investors in the event
of
non-registration or late effectiveness is subject to a maximum limit of 10%
of
the total financing amount, or $1.7 million. The investor’s registration rights
and our registration obligations are set forth in a registration rights
agreement which we entered into in connection with the
Financing.
Our
Chairman and Chief Executive Officer, who indirectly owns shares of our common
stock through family-owned entities and trusts, agreed that his family-owned
entities will enter into a lockup agreement under which these shareholders
may
not offer or sell their securities for a period of one year following the date
on which the registration statement is declared effective. This lockup agreement
was entered into at the closing of the Financing transaction.
The
investors in the Financing have a right of first refusal on any placement or
offering by us of debt or equity securities for a one year period following
the
date on which the registration statement is declared effective. The investors’
right of first refusal does not apply to options or warrants that we may issue
to employees or consultants, or to non-affiliates as compensation for services,
to securities issued in acquisitions or strategic investments that are not
related to raising capital for the Company, or to securities issued in
underwritten public offerings.
The
Financing was subject to the completion of customary due diligence procedures
conducted by our investors and their advisors, and we made various
representations and warranties in the Purchase Agreement regarding our business,
operations and corporate affairs. The Financing is also subject to rescission
by
the investors in the event that the PRC government challenges or otherwise
adversely affects the Exchange Transaction (and the related corporate
restructuring of Chuming in the PRC as a prelude to the transaction), if we
cannot undo such governmental action or otherwise address the material adverse
effect to the reasonable satisfaction of the investors within sixty (60) days
after the action occurs.
Among
other terms of the Financing, we agreed to reimburse the lead investor for
certain fees and expenses in connection with the Financing, and allocate
$250,000 of the proceeds from the Financing for our investor relations program.
In December 2007, Chuming (our wholly owned subsidiary), agreed to engage Hayden
Communications International, Inc. as our investor relations and public
relations consultant. Under this arrangement, Hayden Communications agreed
to
provide us with consulting services for 13 months in exchange for fees
consisting of $9,500 per month and 30,000 restricted shares of our common
stock.
As
a
result of the closing of the Exchange Transaction and Purchase Agreement,
the
PSI Shareholders now own 79.7%, the investors in the Financing own 18.3%,
and
other shareholders own 2%, respectively, of our presently issued and outstanding
capital stock. The closing of these transactions occurred on December 31,
2007
(the “Closing Date”). At the Closing Date, we had a total of 21,136,391 shares
of its common stock issued and outstanding.
The
securities were offered and sold in the financing to accredited investors in
reliance on an exemption from the registration requirements of the Securities
Act of 1933, as amended (the “Securities Act”), under Regulation D. At the time
of the closing, the offering was not registered under the Securities Act or
any
state securities or “blue sky” laws.
In
connection with the Financing, we increased compensation paid to our CEO,
CFO
and COO from an aggregate of $120,000 to $300,000, engaged Hayden Communications
to provide investor relations services, and allocated $250,000 of proceeds
from
the Financing to our investor relations programs, and we anticipate that
these
additional costs will have an impact on its 2008 financial results. In addition,
please see our risk factor that reads “We will incur increased costs as a public
company which may affect our profitability” on page 37 of this prospectus.
GENERAL
INFORMATION
Our
principal executive offices are located at No. 9, Xin Yi Street, Ganjingzi
District Dalian City, Liaoning Province, PRC 116039 ,
and our
main telephone number is +86 411 867 166 96 .
THE
OFFERING
We
are
registering 8,140,487 shares of our common stock for sale by the selling
shareholders identified in the section of this prospectus entitled “Selling
shareholders.” Information regarding our common stock is included in the section
of this prospectus entitled “Description of Securities.”
SUMMARY CONSOLIDATED
FINANCIAL DATA
The
following tables summarize consolidated financial data regarding our business
and should be read together with “Management’s
Discussion and Analysis of Financial Condition or Plan of
Operations”
and
our
consolidated financial statements and the related notes included in this
prospectus. The summary consolidated financial information as of December
31,
2007, 2006 and 2005 have been derived from our consolidated financial statements
included in this prospectus. All monetary amounts are expressed in U.S. Dollars
unless otherwise indicated.
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(US
dollars in thousands)
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Twelve Months Ended
December 31,
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2007
(audited)
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2006
(audited)
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2005
(audited)
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2004
(audited)
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2003
(unaudited)
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Consolidated
Statements of Operations Data:
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Sales
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124,696
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70,396
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54,119
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654
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-
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Cost
of Sales
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104,379
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57,794
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45,284
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711
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-
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Gross
Profit
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20,317
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12,601
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8,835
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(56
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)
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-
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Operating
Expenses
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6,246
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2,891
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1,647
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|
402
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|
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-
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|
Income
from Operations
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14,071
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|
|
9,709
|
|
|
7,188
|
|
|
(459
|
)
|
|
-
|
|
Other
Income (Expense), net
|
|
|
(1,476
|
)
|
|
(1,583
|
)
|
|
(1,008
|
)
|
|
5,164
|
|
|
-
|
|
Income
Before Taxes
|
|
|
12,620
|
|
|
8,126
|
|
|
6,180
|
|
|
4,705
|
|
|
-
|
|
Income
Taxes
|
|
|
968
|
|
|
1.6
|
|
|
191
|
|
|
66
|
|
|
-
|
|
Net
Income
|
|
|
11,652
|
|
|
8,128
|
|
|
5,988
|
|
|
4,772
|
|
|
-
|
|
Foreign
Currency Translation
|
|
|
2,064
|
|
|
285
|
|
|
0.7
|
|
|
-
|
|
|
-
|
|
Comprehensive
Income
|
|
|
13,716
|
|
|
8,739
|
|
|
5,989
|
|
|
0.7
|
|
|
-
|
|
Basic
Net Income Per Share (in US$)
|
|
|
0.87
|
|
|
0.61
|
|
|
0.45
|
|
|
0.36
|
|
|
-
|
|
Diluted
Net Income Per Share (in US$)
|
|
|
0.67
|
|
|
0.47
|
|
|
0.35
|
|
|
0.28
|
|
|
-
|
|
Basic
Weighted Average Number of Shares Outstanding
|
|
|
13,409,120
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Diluted
Weighted Average Number of Shares Outstanding
|
|
|
17,272,756
|
|
|
17,272,756
|
|
|
17,272,756
|
|
|
17,272,756
|
|
|
-
|
|
|
|
(US
dollars in thousands)
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
|
2007
(audited)
|
|
2006
(audited)
|
|
2005
(audited)
|
|
2004
(audited)
|
|
2003
(unaudited)
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
66,620
|
|
$
|
56,846
|
|
$
|
50,993
|
|
$
|
29,957
|
|
$
|
-
|
|
Current
Liabilities
|
|
|
17,682
|
|
|
16,764
|
|
|
18,979
|
|
|
2,358
|
|
|
-
|
|
Long
Term Liabilities
|
|
|
-
|
|
|
17,909
|
|
|
18,580
|
|
|
19,309
|
|
|
-
|
|
Stockholders
Equity
|
|
|
48,938
|
|
|
22,174
|
|
|
13,434
|
|
|
8,290
|
|
|
-
|
|
SUPPLEMENTARY
FINANCIAL INFORMATION
The
supplementary financial information presented below summarizes certain financial
data which has been derived from and should be read in conjunction with our
consolidated financial statements and footnotes thereto included in the section
beginning on page F-1.
|
|
First
Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
|
2007
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
23,982,066.95
|
|
|
32,220,605.71
|
|
|
35,580,590.37
|
|
|
30,883,403.64
|
|
Gross
Profit
|
|
|
4,265,956.08
|
|
|
5,028,943.44
|
|
|
5,764,282.52
|
|
|
6,789,324.62
|
|
Operating
Income
|
|
|
3,118,267.22
|
|
|
2,873,658.43
|
|
|
3,333,953.73
|
|
|
3,440,550.36
|
|
Diluted
Earnings Per Share
|
|
|
0.17
|
|
|
0.17
|
|
|
0.19
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
16,787,036.43
|
|
|
18,040,208.11
|
|
|
18,847,626.63
|
|
|
21,358,311.35
|
|
Gross
Profit
|
|
|
3,314,857.41
|
|
|
3,627,172.82
|
|
|
3,198,272.10
|
|
|
3,397,394.05
|
|
Operating
Income
|
|
|
2,260,993.58
|
|
|
2,488,608.79
|
|
|
2,250,491.62
|
|
|
2,242,383.74
|
|
Diluted
Earnings Per Share
|
|
|
0.14
|
|
|
0.14
|
|
|
0.14
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
10,392,278.43
|
|
|
12,737,257.81
|
|
|
15,143,452.87
|
|
|
14,397,469.97
|
|
Gross
Profit
|
|
|
2,335,022.88
|
|
|
2,403,571.95
|
|
|
2,473,893.56
|
|
|
2,760,287.27
|
|
Operating
Income
|
|
|
1,685,271.26
|
|
|
1,762,906.88
|
|
|
1,681,057.09
|
|
|
1,729,033.91
|
|
Diluted
Earnings Per Share
|
|
|
0.10
|
|
|
0.10
|
|
|
0.10
|
|
|
0.09
|
|
BUSINESS
Company
Organization
We
produce, pack, sell, market and distribute fresh pork and processed meat
products to customers in the People’s Republic of China (“China” or the
“PRC”).
We
own
three PRC operating subsidiaries (collectively, the “Chuming Operating
Subsidiaries”):
|
1.
|
Dalian
Chuming Slaughter and Packaging Pork Company Ltd. (the “Meat Company”),
whose primary business activity is acquiring, slaughtering and packaging
of pork and cattle;
|
|
2.
|
Dalian
Chuming Processed Foods Company Ltd. (the “Food Company”), whose primary
business activity is the processing of raw and cooked meat products;
and
|
|
3.
|
Dalian
Chuming Sales Company Ltd. (the “Sales Company”), which is responsible for
our sales, marketing and distribution
activities.
|
The
three
operating subsidiaries are spun off constituents of a former parent company,
Dalian Chuming Group Co., Ltd. (the “Group”). Our company is separate and
independent from the Group, which operates a different business and has
different operations from ours. We took over ownership and control of the
three
Chuming Operating Subsidiaries from the Group in September 2007 following
our
corporate reorganization (See subheading entitled “Corporate Reorganization” on
page 1 of this prospectus). We are headquartered in the City of Dalian, Liaoning
Province of China.
Corporate
Reorganization
PRC
law
currently limits foreign ownership of certain companies based in the PRC. In
order for us to raise equity capital from investors outside of China, we
established an offshore holding company by the name of Precious Sheen
Investments Limited (“PSI”) in the British Virgin Islands 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 the 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.
Following
this corporate restructuring, PSI became the 100% owner and parent company
of
Dalian Precious Sheen Investments Consulting Co., Ltd. (“Chuming”), which in
turn owns 100% of the Chuming Operating Subsidiaries: the Meat Company, the
Food
Comapny and the Sales Company.
Throughout
this prospectus, PSI, Chuming and the Chuming Operating Subsidiaries are
sometimes collectively referred to as “Chuming.”
Share
Exchange Transaction
On
December 31, 2007, we 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
then-issued and outstanding common stock (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 Chuming.
Prior
to
the Exchange Transaction, Energroup was a public reporting “shell” company with
nominal assets whose sole business was to identify, evaluate and investigate
various companies with the intent that, if such investigation warrants, a
reverse merger transaction be negotiated and completed pursuant to which
Energroup would acquire a target company with an operating business with the
intent of continuing the acquired company’s business as a publicly held
entity.
As
a
result of the Exchange Transaction, PSI (and its subsidiaries) became the 100%
owned subsidiary of Energroup Holdings Corporation, and we acquired the business
and operations of Chuming.
$17
Million Financing
On
December 3, 2007, we completed a $17 million private placement in which we
sold
and issued 3,863,635 shares of our common stock to fifteen accredited investors
for $4.40 per share. The financing yielded net proceeds of approximately
$14.7
million. See the section in the summary above entitled “Strategic Financing.”
Company
Overview and History
Our
business originated from the founding in 1999 of Dalian Chuming Group
Co., Ltd. the former parent of Chuming. The Group began as a processor and
supplier of fresh and frozen meat and meat products. Among industrialized
farming corporations in northeastern China, the Group pursued distinction
in the
Chinese food industry by maintaining high quality management standards and
international safety certifications.
In
2004,
the Group formed the Chuming Operating Subsidiaries, which now form the core
of
our business, and these companies began producing and supplying fresh and
processed meats under the Chuming brand name. Since then we have rapidly
become
a significant producer and supplier in China’s meat industry, and have achieved
consistent profitability and growth since inception. In the last three years
of
operation, our sales have grown at an average rate of 53.6% per annum, and
our
net income has grown at an average rate of 39.8%. We sell our products to
consumers in northeastern China, which has a population of approximately
108
million. In particular, our current customers are concentrated in the Liaoning
Province (which has a population of approximately 42 million), and we are
the
largest pork producer in Dalian City, which has a population of approximately
3
million, or 6 million including the greater metropolitan area. At present,
all
of our sales are within China, which is the largest pork-consuming nation
in the world, with a total of 54 million metric tons consumed in 2006. Due
to
the rapid development of the Chinese economy, urbanization and strong income
growth, we have observed that pork consumption patterns are changing and
consumption levels are continuing to increase.
Our
major
products are:
|
·
|
Fresh
meat - pork that is processed in a controlled environmental chamber
with
closely monitored temperatures to ensure quality and safety standards
during processing right up to the time of delivery to the
consumer.
|
|
|
|
|
·
|
Frozen
fresh meat - butchered pigs that are processed and immediately frozen,
which includes such products as smoked pork, ham and
roasts.
|
|
|
|
|
·
|
Frozen
fresh byproducts - pork byproducts including pig’s liver, stomach,
intestine, head and hoof.
|
We
are
part of an established pork production cycle that culminates in sales of
fresh and frozen pork. This cycle includes feedstuff production, pig breeding,
slaughtering, processing, packaging and distribution. We are involved in
the slaughtering, processing, packaging and distribution aspects of the pork
production cycle.
We
are
the first pork producer in China to receive “Green Food” certification from
China’s Ministry of Agriculture. Green Food is an innovative certification
program unique to China that is awarded to food processors who produce using
environmentally sustainable methods and meet certain high technical standards
of
quality control, safety, and product quality, and generate low levels of
pollution. Under strict supervision, control and regulation in production,
processing, packing, storage and transportation, Green Food-certified companies
must apply these quality control standards from field to customer and regulate
the application of inputs, including pesticide, fertilizer, veterinary drug
and
additives to minimize environmental pollution and prevent toxic and harmful
substances from entering the food supply chain. The Green Food certification
is
based on standards defined by the Codex Alimentarius Commission (“CAC”), a joint
body of the United Nations Food and Agriculture Organization and the World
Health Organization.
PRC
law
currently limits foreign ownership of certain companies based in the PRC.
In
order for us to raise equity capital from investors outside of China, we
established an offshore holding company by the name of Precious Sheen
Investments Limited (“PSI”) in the British Virgin Islands in May 2007. On
September 26, 2007, In 2007, the Group completed a corporate reorganization
whereby the Chuming Operating Subsidiaries (namely, the Meat Company, the
Food
Comapny and the Sales Company) spun off and separated from the Group. 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.
Following
this corporate restructuring, PSI became the 100% owner and parent company
of
Dalian Precious Sheen Investments Consulting Co., Ltd. (“Chuming WOFE”), which
in turn owns 100% of the Chuming Operating Subsidiaries: the Meat Company,
the
Food Comapny and the Sales Company. The business and operations of the Chuming
Operating Subsidiaries now comprise the principal business and operations
of our
company.
In
December 2007, PSI completed a reverse-takeover transaction with a U.S. publicly
reporting company, which resulted in our current corporate structure. Today,
we
are a U.S. public reporting company incorporated in the State of Nevada,
and we
own the Chuming Operating Subsidiaries that continue to operate in the city
of
Dalian, in the Liaoning Province of China. Our common stock is quoted on
the OTC
Bulletin Board under the symbol “ENHD.OB.”
Concurrently
with the closing of the reverse take-over transaction, on December 31, 2007
we
closed our $17 million private placement financing involving the issuance
of our
common stock to 15 accredited investors. The financing yielded net proceeds
to
us of approximately $14.7 million. For an additional discussion of this
financing, please refer to the section above entitled “Strategic Financing” on
page 3 of this prospectus.
Industry
Overview
The
following overview in certain instances cites to materials that are publicly
available without charge. If no citation is provided with respect to certain
information presented in this “Industry Overview” section, that information is
attributed to our own research regarding the world pork market and China’s pork
industry.
World
Pork Market
According
to a November 2007 report of the United States Department of Agriculture
(USDA),
China is the largest pork producer and consumer in the world. China is the
leading producer among other countries in the world by a wide margin, and
produces and consumes more than half of the world’s pork. Preliminary numbers
for 2007 worldwide production of pork was 94.7 million metric tons (MMT,
carcass
weight equivalent) and consumption was 93.8 MMT. The USDA forecast for 2008
is
that both the production and the consumption in China are expected to expand
by
more than 2% over 2007 levels.
Pork
Production (1,000 Metric Tons, Carcass Weight Equivalent), 2003-2008
(Estimated)
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
November
|
|
China
|
|
|
45,186
|
|
|
47,016
|
|
|
50,106
|
|
|
51,972
|
|
|
47,000
|
|
|
48,000
|
|
EU-27
|
|
|
21,712
|
|
|
21,753
|
|
|
21,676
|
|
|
21,677
|
|
|
22,040
|
|
|
21,910
|
|
United
States
|
|
|
9,056
|
|
|
9,312
|
|
|
9,392
|
|
|
9,559
|
|
|
9,877
|
|
|
10,108
|
|
Brazil
|
|
|
2,560
|
|
|
2,600
|
|
|
2,710
|
|
|
2,830
|
|
|
2,980
|
|
|
3,095
|
|
Russian
Federation
|
|
|
1,710
|
|
|
1,725
|
|
|
1,735
|
|
|
1,805
|
|
|
1,880
|
|
|
2,000
|
|
Canada
|
|
|
1,882
|
|
|
1,936
|
|
|
1,920
|
|
|
1,898
|
|
|
1,850
|
|
|
1,790
|
|
Japan
|
|
|
1,260
|
|
|
1,272
|
|
|
1,245
|
|
|
1,247
|
|
|
1,260
|
|
|
1,255
|
|
Mexico
|
|
|
1,100
|
|
|
1,150
|
|
|
1,195
|
|
|
1,200
|
|
|
1,200
|
|
|
1,250
|
|
Korea,
Republic of
|
|
|
1,149
|
|
|
1,100
|
|
|
1,036
|
|
|
1,000
|
|
|
1,065
|
|
|
1,095
|
|
Taiwan
|
|
|
893
|
|
|
898
|
|
|
911
|
|
|
905
|
|
|
910
|
|
|
910
|
|
Ukraine
|
|
|
630
|
|
|
558
|
|
|
493
|
|
|
485
|
|
|
530
|
|
|
540
|
|
|
|
|
3,350
|
|
|
3,481
|
|
|
3,720
|
|
|
3,926
|
|
|
4,086
|
|
|
1,039
|
|
Total
|
|
|
90,488
|
|
|
92,801
|
|
|
96,136
|
|
|
98,504
|
|
|
94,678
|
|
|
92,992
|
|
Sources:
USDA
report, Livestock
and Poultry: World Markets and Trade,
November
2007.
Note:
2007
data is preliminary and 2008 is forecast.
Pork
Consumption (1,000 Metric Tons, Carcass Weight Equivalent), 2003-2007
(Estimated)
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
November
|
|
China
|
|
|
45,054
|
|
|
46,648
|
|
|
49,703
|
|
|
51,467
|
|
|
46,690
|
|
|
47,700
|
|
EU-27
|
|
|
20,683
|
|
|
20,528
|
|
|
20,632
|
|
|
20,518
|
|
|
20,790
|
|
|
20,800
|
|
United
States
|
|
|
8,816
|
|
|
8,817
|
|
|
8,670
|
|
|
8,640
|
|
|
8,939
|
|
|
9,129
|
|
Russian
Federation
|
|
|
2,417
|
|
|
2,338
|
|
|
2,486
|
|
|
2,639
|
|
|
2,734
|
|
|
2,874
|
|
Japan
|
|
|
2,331
|
|
|
2,529
|
|
|
2,482
|
|
|
2,458
|
|
|
2,500
|
|
|
2,490
|
|
Brazil
|
|
|
1,957
|
|
|
1,979
|
|
|
1,949
|
|
|
2,191
|
|
|
2,265
|
|
|
2,320
|
|
Mexico
|
|
|
1,423
|
|
|
1,556
|
|
|
1,556
|
|
|
1,580
|
|
|
1,565
|
|
|
1,580
|
|
Korea,
Republic of
|
|
|
1,286
|
|
|
1,336
|
|
|
1,311
|
|
|
1,420
|
|
|
1,518
|
|
|
1,550
|
|
Canada
|
|
|
1,003
|
|
|
1,068
|
|
|
967
|
|
|
971
|
|
|
970
|
|
|
930
|
|
Taiwan
|
|
|
934
|
|
|
948
|
|
|
944
|
|
|
928
|
|
|
927
|
|
|
928
|
|
Ukraine
|
|
|
623
|
|
|
606
|
|
|
544
|
|
|
544
|
|
|
609
|
|
|
619
|
|
Others
|
|
|
3,621
|
|
|
3,697
|
|
|
3,906
|
|
|
4,158
|
|
|
4,332
|
|
|
1,249
|
|
|
|
|
90,148
|
|
|
92,050
|
|
|
95,150
|
|
|
97,514
|
|
|
93,839
|
|
|
92,169
|
|
Sources:
USDA
report, Livestock
and Poultry: World Markets and Trade,
November
2007.
Note:
2007
data is preliminary and 2008 is forecast.
China’s
Pork Industry
According
to China’s National Bureau of Statistics, China’s US$176 billion animal
husbandry sector is the second largest in the country’s basket of agricultural
related industries including farming, forestry and fishery. The present size
of
the pork and processed meat market in China is an estimated US$32
billion.
Our
research indicates that China’s per capita meat consumption was just over 55
kilograms by 2000, which is significantly smaller than the consumption level
of
over 100 kg per year by western standards. Based on what is known about Chinese
culinary culture and habits, however, our management believes that the Chinese
population is expected to consume more meat as their disposable income
increases. For example, our research indicates that Hong Kong residents,
who
have a significantly higher per capita income, consumed on average 124 kg
of
meat in 2000.
The
manner in which meat sales are conducted has changed as a result of new hygiene
and food safety regulations that were introduced by the Chinese government
in
1995. Historically, the great majority of meat sales in China had taken place
in
open-air markets or on streets, i.e. in free wet markets. These markets provided
a location through which the consumer could buy live poultry or freshly
slaughtered meat produced direct from local farmers. As a result of the new
regulations however, governmental agencies recently have encouraged the
replacement of open-air markets by supermarkets and convenience stores, and
the
market share of open-air markets has continued to decline. Even with these
new
regulations, however, the open-air markets still currently represent 80%
of the
overall meat-processing sector in China.
The
meat
industry in China is characterized by fragmentation, sanitation and hygiene
issues, as well as social demographic trends. Supply is extremely localized
with
limited distribution capability. China’s vast geography and ‘in-development’
transport infrastructure have made it difficult to create national or even
regional level competition in the industry. Our management believes that the
trend towards greater sales through formal supermarkets and chain stores,
coupled with the expansion of our sales and distribution network, will continue
to favorably impact our business.
Pork
is
China’s most important source of meat and is consumed at a much higher rate than
other categories of meat. The following 2007 USDA Report shows that pork
is
consumed in China with five times greater volume than poultry or “broiler meat”
and almost seven times more than beef:
|
|
Kg Per Person
|
|
Relative %
|
|
Beef
|
|
|
5.6
|
|
|
11
|
%
|
Broiler
Meat
|
|
|
7.9
|
|
|
15
|
%
|
Pork
|
|
|
39.4
|
|
|
74
|
%
|
Total:
|
|
|
52.9
|
|
|
100
|
%
|
Sources:
USDA
report, Livestock
and Poultry: World Markets and Trade,
April
2007.
In
addition to a greater general preference for pork, urbanization and rapid
income
growth are working in parallel to create more demand for pork and processed
pork
products. An emerging middle class of relatively high-income consumers is
forming in certain Chinese cities. As household incomes rise, these high-income
residents consume more of most foods on a per capita basis. According to
the
Urban
Household Survey
conducted in 2000 by China’s National Bureau of Statistics, pork consumption by
low-income residents was 13.4 kg whereas it was 19.6 kg for high-income
residents. These residents not only demand a greater quantity of food, but
also
higher quality (e.g. better cuts of meat, foods that are safer or healthier)
and
convenience (processed foods). Reports of food poisoning and dangerous chemical
residues have given rise to strong demand for “green” foods for which we are
certified. We believe that affluent consumers would be willing to pay premium
prices for foods which have safety-related certifications, foods with purported
health benefits or foods with other desirable attributes. We offer a wide
range
of food products that appeal to demands for safety, convenience, quality
and
health attributes demanded by high-income urban consumers.
Our
management expects China’s meat industry, which includes the meat processing
business, to grow due to key driving forces including food safety concerns
that
we believe will accelerate the transition from the traditional wet market
to the
modern dry market; rising modern retail channels; government mandates and
supports of agricultural and meat processing companies; and consolidating
forces.
|
·
|
Transitioning
from “wet-market” to “dry-market”
|
We
believe that food safety is a top concern of Chinese consumers who purchase
meat
products, and that this will eventually compel modernization of China’s meat
processing industry. Consumer surveys showed that food safety, nutritional
value
and taste are the top three concerns of consumers, while price was ranked
fourth. Furthermore, surveys showed that 60% of the consumers have a low
degree
of confidence in meat products in general. There are a number of food safety
concerns facing the Chinese pork industry, including swine streptococcus
and
Foot and Mouth Disease, the use of antibiotics and illegal feed additives
such
as Clenbutero, pork injected with water and illegal slaughterhouses. China’s
meat industry traditionally has been dominated by small and family-operated
butcher shops that would slaughter the livestock in the open-air marketplaces
and without the necessary safety and sterilized equipment. These unsanitary
operations create what is commonly known as the “wet market,” which currently
represents 80% of the overall meat-processing sector. However, the industry
is
changing rapidly. Along with the prevalent use of refrigerators in urban
households, health conscious consumers are demanding more sanitary quality
meat
products which can only be processed and delivered in a temperature controlled
cold chain environment. This presents significant opportunities to meat
processors with advanced processing plants and refrigerated transportation
capabilities.
|
·
|
Government
quality control
|
Frequent
occurrences of food safety scares have hastened the Chinese government’s effort
in regulating food safety and quality. For example, in 2006 pork containing
Clenbutero were found to be sold in several wet markets in Shanghai that
resulted in over 330 people being poisoned, and an outbreak of swine
Streptococcus in Sichuan Province led to the death of 17 people. A number of
Chinese organizations are involved in an effort to bring the Chinese meat
industry’s safety, hygiene and sanitation standards to an international level,
including the Ministry of Agriculture, Ministry of Health, State Administration
of Quality Supervision, Inspection, and Quarantine, State Food and Drug
Administration, and the Ministry of Commerce. Tougher quality standards set
for
the meat processing industry represent barriers to newcomers while forcing
operationally inadequate and financially unsound companies to shut down. Our
management anticipates that companies such as ours, with quality meat processing
and modern logistics systems, will benefit as they capture market share and
build consumer brand loyalty.
|
·
|
Government’s
strong support of meat processing industry
|
The
main
theme of China’s 11th
Five
Year Plan is the development of China’s rural economy. With the widening wealth
gap between the rich and poor or between urban and rural regions, China’s
central government has shifted its focus from urban industrial growth to
rural
agricultural development aimed at improving the standard of living in the
poorer
regions. Many preferential policies were enacted to help the farming communities
including subsidized livestock insurance and interest free loans. Scaled
meat
processors are considered active agents in galvanizing the rural economies
by
providing jobs, injecting capital, and introducing new technology and management
expertise to the local economies. The Five Year Plans are a series of economic
development initiatives promulgated by the Chinese government, however, they
do
not constitute binding or substantive policies or regulations. The Chinese
economy has been shaped primarily by through the plenary sessions of the
Central
Committee and National Congresses. The Five Year Plan serves, in part, as
a
mapping strategy for economic development, setting growth targets, and launching
reforms. The plan usually includes detailed economic development guidelines
for
all its regions and the nation as a whole. As China has transited from a
centrally-planned economy to market economy, the name for the 11th Five-Year
Plan has been characterized as a “guideline” rather than a strict “plan”. The
11th
Five-Year Plan covers the period from 2006 to
2011.
|
·
|
National
retailers provide platform for growth
|
The
increasingly widespread use of refrigerators in urban Chinese households has
attracted many retailers to carry more frozen food products, making available
a
wide variety of frozen products to consumers. Major domestic retailers,
including LianHua have made an impact in introducing more brands of frozen
food
products in their retail stores. Even more significantly going forward will
be
the rapid expansion of international hypermarkets in China, including France’s
Carrefour, the U.S.’s Wal-mart, and Germany’s Metro. These retailers with
national reach will significantly change the retail industry landscape as they
provide the platform for the large branded food companies to efficiently and
rapidly distribute their products to large and untapped markets. These
international retail chains can also provide excellent export opportunities
to
scaled, quality meat processing companies.
|
·
|
Industry
consolidation benefits scaled players
|
In
the
more mature US meat market, the top three producers represent about 50% of
the
meat industry there. But in China the meat-processing industry is very
fragmented with over 3,000 meat-processors most of which are small operators.
The top three producers represent less than 5% of the overall market. Pig farms
in China are also very fragmented with over 90% of the farms possessing fewer
than 10 pigs. As smaller players experience pressure from margin compression
and
stricter government regulations, we believe scaled meat processors will make
attractive acquisitions in order to capture market share, gain scale, secure
raw
material, and move closer to clients. The combination of stricter hygiene
regulations, increasing competition from well-financed players, struggling
meat
suppliers, and increasing international competition from companies like Hormel
will induce major industry shakeout and consolidation in the coming
years.
Macro
and
Demographic Trends
It
is
widely believed that a middle class is rapidly emerging in China. China’s GDP
has been growing at over 9% per year for the past 10 years and has created
millions of new consumers. Management believes that these trends will translate
into higher demand for pork products.
|
·
|
Incomes
in urban China increased by 10% in the first nine months of 2006.
China’s
middle class - citizens making at least 50,000 Yuan (US$6,250) -
are
expected to double by 2010 to 25% of the country’s population, fueling
domestic consumption.
|
|
|
|
|
·
|
While
overall income grew rapidly, urban per capita disposable income grew
even
faster at 39.6% between 2002 and 2005, compared to 34.7% for per
capita
rural income during the same period. Urban per capita consumption
of meat
is twice that of the national average.
|
|
|
|
|
·
|
Due
to the increasing rural migration to urban cities, China expects
to double
its major cities by 2010 creating new waves of Chinese urban meat
consumers. The number of Chinese cities with over 1 million people
is
projected to reach 125 by 2010 according to the Chinese Academy of
Sciences, and cities with over 2 million people are projected to
reach 300
by 2020.
|
|
|
|
|
·
|
Domestic
demand for meat products in China is expected to grow to a projected
100
million metric tons in 2010 from an actual 72.4 million metric tons
in
2004 according to Access Asia, an independent research firm. Total
production value of meat products are expected to increase to a projected
US$120 billion from an actual US$84 billion and per capita meat
consumption is expected to increase from an actual 49 kg to a projected
75
kg during the same period. Pork represents the bulk of meat products
consumed in China.
|
With
higher standards of living and more a demanding working lifestyle, urban
Chinese
consumers are purchasing more processed meat products and spending more on
dining on meat products outside of the home. Our research indicates that:
|
·
|
Currently
less than an estimated 10% of the meat consumed in China is processed.
Meat consumption out of the home has surpassed in-home meat consumption
in
11 Chinese provinces, especially in more economically developed
regional
markets such as Shanghai, Beijing, and Shenzhen, according to the
National
Bureau of Statistics.
|
|
·
|
Chinese
consumers have become more conscious of food safety and quality,
fueling
demand for branded foods. This has become more evident after the
occurrence of a series of disease outbreaks across Asia including
SARS and
the avian flu. With changing lifestyles and food quality awareness,
Chinese consumers are seeking more name brands to ensure the quality
in
processed meat that they purchase.
|
|
|
|
|
·
|
The
new health-conscious consumer group has become more educated and
concerned
with the freshness and nutritional value of various meat products.
For
example, LTMP (low temperature meat product) pork has become more
popular
recently as urban consumers become aware that LTMP has better nutritional
value and fresher taste than the longer-shelf-life HTMP (high temperature
meat product) pork products.
|
Processing
of Meat Products in China
In
the
PRC, regulations relating to the processing of meat products are set forth
in
the PRC Law of Food Hygiene and the Administrative Measures for the Hygiene
of
Meat and Meat Products. A PRC food processing company is required to obtain
a
hygiene permit from the Hygiene Bureau of the relevant districts before it
is
permitted to apply to the Ministry of Industry and Commerce for a business
license.
A
food
processing company may not purchase or use meat that has not been inspected
and
approved by the Animal Supervision Authority. Even if the meat has been so
inspected, it must still satisfy other hygiene requirements. Each food
processing company must have facilities to conduct regular laboratory testing
of
its products to ensure food safety requirements are met. For instance, sometimes
traceable levels of contaminants and radioactive substances are found in meat
products, and these must not exceed certain established national
standards.
Food
processing companies are required to possess hygienic cold storage facilities,
and proper management of such cold storage facilities must be set out. All
storage equipment and packing materials must also comply with hygienic
standards. All meat products which are packed must be labeled, specifying
requisite information such as name of the product, place of manufacture,
manufacture date, lot number or code, final consumption date and ingredients.
Any meat product to be exported shall be inspected by the Animal and Plant
Quarantine Authority when passing through customs. Only meat products which
have
passed such inspections may be exported.
Business
We
are
principally engaged in the production, processing, sale and distribution of
fresh and prepared meat products in China. Our products are classified as fresh
and frozen pork, and prepared foods, which includes prepared pork, seafood
and
by-products.
Our
production facilities are located in Dalian, a coastal city with a population
of
3 million (6 million including the greater metropolitan area). Referred to
as
the “Boston of China” due to its Northeast proximity and port orientation,
Dalian is the most affluent city in the Liaoning Province, with a population
of
42 million. Dalian serves as a finance and export trade center of Northeast
China, and is also the center of the “Buo Sea Economical Zone” (“BSEZ”).
According to China’s National Bureau of Statistics, the BSEZ covers 12% of the
territory and 20% of the population in China, and is the most important economic
center in Northern China. The National Bureau of Statistics also projects
that
these two areas may generate a more rapid growth rate than the overall GDP
growth of China in next 10 years. Our facilities include 5 production lines
with
the slaughtering capacity of 123,318 metric tons and prepared food capacity
of
16,000 metric tons. Our prepared food facilities are the largest in Liaoning
Province.
Our
production lines are imported from international manufacturing automation
leader
Stork™ of the Netherlands, with the state-of-the-art technology and specialized
for their in-process testing and quality controls. Our production facilities
are
certified under ISO9001 and HACCP. Our pork products are qualified “Green Food”
by the National Green Food Development Center and qualified as one of 14
“National Safe Foods” by the National Slaughtering Authentication
Center.
Our
products are sold under the brand name of “Chuming™.” We target consumers who
desire high quality pork products. We distribute our products through dealers
and agents to more than 100 supermarkets, including Carrefour, Wal-mart,
Metro,
New-mart, Hymall and others. We also distribute our products to over 500
schools, hospitals, factory canteens and restaurants, and more than 500
“Chuming” franchise stores or specialty counters in wet markets. These franchise
stores and specialty counters are resellers of our products with whom we
have
arrangements to sell our product under the Chuming brand name (the principal
difference between franchise stores specialty counters being location within
a
supermarket for the former, and location in a wet market for the latter).
Our
business activities are the slaughter, processing, packing and distribution
of
meat products for sale to clients throughout the PRC. We have a 250,000 square
meter campus which houses an international standards-based meat processing
plant
located in the city of Dalian of the Liaoning Province in the PRC. We have
a
total of five production lines and an aggregate capacity to slaughter
approximately 1.5 million pigs per year. We purchase hogs from more than 3,000
farms in the Liaoning Province and nearby areas, in addition to having an
exclusive contract with farms owned and operated by Dalian Chuming Group Co.,
Ltd., to supply us with 600,000 live hogs in 2007, 750,000 in 2008, 800,000
in
2009, and 800,000 in 2010, at local market prices. Dalian Chuming Group Co.,
Ltd. provides breeding pigs, animal feed, vaccination, veterinary services
and
technology support to our subcontractor pig farmers, resulting in more favorable
relations with these small independent suppliers.
Principal
Products
We
produce, distribute and sell fresh meat and prepared food products under the
brand name “Chuming™,” through our dealership distribution network, our own
sales force and franchise stores in the PRC.
We
produce two main types of Processed Meat Products - High Temperature Meat
Products (HTMPs) and Low Temperature Meat Products (LTMPs).
High
Temperature Meat Products. HTMPs
are
cooked at a temperature of approximately 121°C and at approximately 2.5 times
atmospheric pressure. These meat products can be stored at room temperature
and
have a shelf life of approximately six months from the date of production.
However, the permitted shelf life of these products is 120 days from the
date of
production, even though the actual shelf life of these products is six months.
HTMPs are generally priced lower than LTMP and do not require refrigeration.
Therefore, they are affordable and accessible to the average PRC
consumer.
Low
Temperature Meat Products. LTMPs
are
cooked at lower temperatures ranging from 65 to 85°C, under 1 atmospheric
pressure. These meat products have a shelf life of three months from the
date of
production if they are stored at a temperature of 0°C. In 2003, we introduced
our LTMPs to the PRC market. The Group’s R&D studies have shown that LTMPs
generally taste better than HTMPs because they are cooked at lower temperatures
and thus are able to preserve the taste and nutrients found in the ingredients.
The LTMPs generally cater to the taste of consumers in PRC cities who have
higher purchasing power.
Currently,
we have two main series of products for both HTMP and LTMP: the “Ham” series and
the “Sausage” series. The Ham series has chunkier pieces of meat and thus has a
meatier texture. It also has a corresponding higher percentage of meat content.
The Sausage series has a lower percentage of meat content and has a smoother
texture.
The
range
of products we offer includes more than 300 varieties of hams and sausages.
The
following is a summary of some of the types of Fresh and Processed Meat Products
that we manufacture and how they are categorized:
Fresh
Pork
Chinese
people generally perceive that fresh meat retains a better flavor as compared
with frozen meat. As such, the price of fresh pork meat is approximately 20%
higher than frozen pork meat. The other producers of fresh pork meat in the
PRC
are generally farm-based suppliers, which supply the areas around the farms.
The
key difference between our fresh pork and that of farm-based suppliers is that
our fresh pork is produced and packed in a highly controlled sanitized
environment in our own facilities. Therefore, consumers have added assurance
that our fresh pork meat is safe for consumption.
In
order
for the pork to remain fresh, at our facilities the pigs are slaughtered
and
then processed within 30 minutes. The meat is then cooled but not frozen
at a
temperature between 32° F (0° C) and 39.2° F (4° C) for about 20 hours.
Following this cooling process, fresh pork is cut into various parts in a
sterilized room with the constant temperature of 12° C. This reduces the risk of
exposure to germs and bacterial contamination. Before delivery, the fresh
pork
is kept in our storage room at a controlled temperature of 0 to 4° C. The meat
is stored in airtight sterilizing rooms filled with ozone, which acts as
a
sterilizing agent, killing remaining germs and bacteria in the
meat.
With
our
own temperature-controlled vans and trucks, we deliver the fresh pork to
our
customers including dealers, supermarkets and our franchise specialty stores.
The entire process of cold production, cold storage and cold delivery is
what we
refer to as the “cold chain system.” This cold chain system ensures the
freshness and quality of our product. Our fresh pork products have an average
shelf life of 7 days from the date of production.
Frozen
Pork
In
the
production of our frozen pork, the meat is frozen at -31° F (-35° C) to -40° F
(-40° C) for 48 hours. It is then stored or transported at a constant
temperature of between -0.4° F (-18° C) to -13° F (-25° C). Since frozen pork
can be preserved for longer periods of time, our frozen meat products are
ideal
for distribution across longer distances to the Northeast and North China
as
well as potentially to international markets such as Korea, Russia and Japan.
These products have an average shelf life of 180 days from the date of
production. We also sell our frozen pork to restaurants, supermarkets and
fresh
food markets.
Prepared
Food Products
Our
prepared food products include prepared pork, seafood and pig by-products,
which
accounted for 10% of our 2006 revenues.
Prepared
Pork Products.
Our
prepared pork products are mainly LTMPs, which are cooked at lower temperatures
ranging from 65° C to 85° C and under atmospheric pressure. These meat products
generally have a shelf life of 30 days from the date of production if they
are
stored at a temperature ranging from 0° C to 4° C. For LTMPs, we currently have
four series and more than 300 products. These foods are all made from the
fresh
pork that we produce. The following is a description of the types of prepared
pork products we offer:
Ham
Sausage
Seafood
Products.
Our
prepared seafood products are made from fish, shrimp and other varieties
of
seafood. With our techniques of prepared food production, we prepare seafood
products such as fish sausage and shellfish sausage. Seafood products accounted
for approximately 5% of our revenue in 2007. Due to the abundance of seafood
in
Dalian, located on the Northern coast of China, as well as relatively high
profit margins for these products, we plan to expand our seafood output in
the
future. The following is a description of the varieties of seafood products
we
offer:
Seafood
sausage
|
·
|
Barbequed
Prawn Sausage
|
Pig
By-Products.
In
China, virtually all parts of the pig are valued for consumption and are used
in
local cuisine. Pig “by-products” that are not typically used or sold in other
parts of the world are prepared and sold in the Chinese market. This includes
pig innards, pig skin, pig tails, lard and pig heads. Pig liver, stomach,
intestine, head and hoofs are commonly used in Chinese cuisine and are sold
to a
ready market.
We
produce our products through two of the Chuming Operating Subsidiaries: (i)
Dalian Chuming Slaughter and Packaging Pork Company Ltd. in Wangfangdian, and
(ii) Dalian Chuming Processed Foods Company Ltd. in Dalian.
Our
fresh
and frozen pork is produced by our subsidiary Meat Company. The Meat Company’s
facilities cover 150,000 square meters and utilize state-of-art slaughtering
and
cutting lines imported from Stork Co. of the Netherlands. Meat Company has
a
slaughtering capacity of 250 pigs per hour, which is 1,500,000 pigs per year
at
full capacity. Our cutting line has a capacity of 30,132 metric tons per
year.
Our cold and freezing storage facilities can store up to 6,000 metric tons
of
fresh product. The fresh pork and frozen pork produced by Meat Company are
typically sold either in whole carcass form or in cuts.
The
prepared foods are produced by our subsidiary Food Company, located in the
Ganjingzi District of Dalian. Food Company, which includes a 10,000 square
meter
processing facility. There are three prepared food production lines including
one pork processing line with the capacity of 10,000 metric tons, one seafood
sausage production line with the capacity of 4,500 metric tons and one deli
by-product production line with the capacity of 1,500 metric tons. All of
Food
Company’s production line equipment is imported from Germany and features
state-of-the-art technology. Based on our own market research on our
competitors, Food Company is now the largest prepared food production plant
in
the Liaoning Province.
Supply
of Pigs
We
do not
rear pigs, but instead purchase them from our former parent company, Dalian
Chuming Group Co., Ltd., and from other suppliers who aggregate supply from
local pig farms. We purchase live pigs from Dalian Chuming Group Co., Ltd. and
third party suppliers on a cash-on-delivery basis. While Dalian Chuming
Group Co., Ltd.’s breeding operations are well developed and large scale, most
of the pig farming in the PRC is generally not well commercialized. Our third
party suppliers aggregate supplies from hundreds of small pig farms, which
are
typically operated by independent family-owned farms. One advantage of
decentralized supply is that we obtain competitive market pricing for our
supply
of pigs. Another advantage is that any outbreak of livestock disease is likely
to be confined to a one or more of these farms and would not affect our entire
supply. Potential disadvantages from a decentralized supply of pigs include
variations in quality of stock, and potential variation in quantity and timing
of the supply of hogs to our plant for processing. However, because all pig
famers who supply pigs to us are all located within the greater Dalian City
metropolitan area (within a two hour radius by truck), the logistical issues
have so far not interfered with our ability to secure a steady supply of
hogs.
Since we have around 6,000 local pig farmers who will supply hogs to us,
we
ordinarily are able to obtain a reasonably stable supply of hogs, even when
some
farms cannot meet our requests for any reason. Also, because our former parent
company, the Group, acquires pigs directly from independent farmers then
sell
pigs to us in lots (under our Hog Procurement Agreement), to some extent
we have
minimized the potential disadvantages discussed above.
Our
pig
suppliers supply us with regular quantities of pigs per based on the current
prevailing market price of pigs on the day of delivery. We typically order
a
certain number of pigs per day from each of the farms that supply us pigs.
For
instance, if we expect to order 80,000 pigs per annum from a supplier, that
supplier will supply somewhere between 240 and 260 pigs per day.
In
order
to ensure a consistent supply of fresh pork to our customers, we have made
agreements with approximately 6,000 pig farms in the Dalian, to supplement
our
usual supply of live pigs. These pig farms have agreed to supply us
approximately 400,000 pigs in 2007. Our suppliers have an aggregate capacity
to
supply us with approximately 1,100 pigs per day.
We
normally pay a higher than average price per pig, which is typically RMB
1.25
per kg above the average market price for live pigs, in order to acquire
what we
believe to be a higher quality supply of pigs. Although we pay a premium
for a
higher quality supply of pigs, our management believes that the benefits
of this
strategy outweigh the costs because of the goodwill that results from providing
a consistently high-quality product to our customers.
In
2005,
2006 and 2007, we paid a total of $39.5
million, $59.2
million
and
$110.4
million,
respectively, for our total supply of live pigs.
Under
our
Long-Term Hog Procurement Agreement between Dalian Chuming Group Co., Ltd.
and
Dalian Chuming Slaughter and Packaging Pork Company, Ltd., Dalian Chuming Group
Co., Ltd. agreed to supply no less than 750,000 live hogs to us in 2008, 800,000
in 2009, and 800,000 in 2010, and the price for the hogs is set at the fair
market price at the time of delivery.
Due
to a
severe supply shortage of hogs in 2007 that was unanticipated, we processed
approximately 608,000 pigs through September 30, which is 42,000 short of
our
650,000 third quarter year-to-date target set up earlier this year. According
to
China Livestock and Products Annual Report 2007 dated on September 25, 2007
by
the USDA Foreign Agricultural Service, the severe supply shortage of hogs
in
2007 was because of a series of outbreaks of Porcine
Reproductive and Respiratory Syndrome (PRRS),
also
known as Blue Ear Disease, in China from May 2006. Blue Ear Disease is an
infectious disease that affects swine, characterized by reproductive disorders,
premature delivery, miscarriage, and stillbirth—as well as abnormal breathing in
piglets. According to the report, shortages and a sharp pork price increase
occurred as a result of Blue Ear Disease. The average pork price increased
by 48
percent from January to August 2007 over the same period in 2006, while prices
in July and August 2007 increased by 86 and 87 percent, respectively, from
the
same months in 2006.
We
participate in a breeding program with local farmers - under this program,
after
a careful selection process, every participating breeder must have a pig
farmer
provide a guarantee of supply, who must be responsible for making up any
differences between the agreed amount and actual number of pigs supplied
to us.
This program has been in existence since 1998, and has been very successful
so
far with the farmers. Because our breeding programs increase farmer income,
and
therefore tax revenue in our region, our local government has welcomed
these
programs.
Among
our
suppliers, Zheng Baojiang, Wang Fujie, Zhang Jihuan, Sun Siyuan, and Ge Hongqi
are the most successful pig farmers in our supply chain, and they supplied
an
aggregate of 12,000, 10,000, 8,000, 8,000 and 6,000 hogs respectively through
each of the first six months of 2007, contributing to 4.4% of our total
supply.
In
addition to the quality of our suppliers’ stock, and their health and safety
controls, we have a quality control system of our own to ensure that pigs
supplied to us are healthy and fit for human consumption. We require that pigs
supplied to us be accompanied by required health certificates, and each must
weigh at least between 90kg and 100kg. If the pigs meet the above criteria,
we
are then obligated to accept delivery of the pigs. (A pig that weighs between
90
and 100 kg, has more saleable meat per kilogram. If it is below this weight
range, the ratio of meat to innards would be lower, resulting in less saleable
meat per kilogram).
Customers
and Distribution Methods
Customers
We
have
three primary types of customers for our products, which are (1) city and town
households, (2) canteens and restaurants, and (3) food processing
companies.
Chinese
households prefer fresh pork to frozen pork. Consumers typically buy fresh
pork
in small quantities, in frequent visits to markets where it is sold. Households
usually choose the supermarkets, the wet market, or Chuming™ franchise stores to
buy the fresh pork based on convenience. This type of customer accounted
for 90%
of our revenues in 2007.
Canteens
include the cafeterias of government agencies, schools, factories and hospitals.
These customers, including restaurants, often purchase our pork from Chuming™
franchise stores or directly from agents or wholesalers of the company. This
customer segment accounted for 5% of our revenues in 2007.
In
addition to the above two types of customers, we also provide branded food
processing companies with fresh and frozen pork. However, this customer segment
accounted for less than 5% of our revenue in 2007. Since our sourced pigs
are of
good breed and have strict quality control in the production process, these
food
processors regularly rely on our pork as an ingredient in their products.
Our
clients in this segment include Taiwan Dachan, a feed supplier and food
processor in Taiwan. These food processing companies typically get access
to our
products from Chuming agents or wholesalers.
Our
largest customer accounted for approximately 19%, 26% and 8.8% respectively
of
our total turnover for the years ended December 31, 2005, 2006 and 2007.
Our top
five customers accounted for approximately 61%, 71% and 45% of our total
turnover for the years ended December 31, 2005, 2006 and 2007, respectively.
None of our directors, their associates or any shareholder of the Company
has
any interest in any of our five largest customers.
Distribution
Network
Our
distribution network is organized and divided by geographic markets and sales
regions, including: Dalian Metropolitan, Eastern Liaoning, Western Liaoning,
Jilin, Heilongjiang and Hebei markets. In each market, we have a team led by
a
sales officer whose objective is to expand the Chuming sales network by
developing potential dealers, agents and wholesalers, and maintaining the
existing network by assisting our sellers. Our Sales Company works with dealers,
agents and wholesalers, who then submit orders directly to us.
Sales
by Region for the Year Ended December 31, 2007
Dalian
|
|
|
74
|
%
|
Shenyang
|
|
|
18
|
%
|
East
Liaoning
|
|
|
3
|
%
|
North
Liaoning
|
|
|
2
|
%
|
West
Liaoning
|
|
|
2
|
%
|
Others
|
|
|
1
|
%
|
Retail
Strategy
To
differentiate ourselves, we have a unique retail strategy to complement our
wholesale operations. We sell our product to “showcase stores” which are owned
and operated by independent operators. These specialty boutique-type stores
must
have the same design and physical layout and must follow our operating
methodologies. These storefronts are highly visible with the Chuming™ brand
name. We also set merchandising and pricing policies and all employees must
undergo a mandatory training program. There are currently over 500 such boutique
stores in Liaoning Province, providing high brand recognition and communicating
a message of quality that will benefit all channels. These boutique stores
target the new middle class that desire and can afford high quality goods
and
services. They provide particular convenience to a typical busy two-income,
middle-class family which shops frequently after work. Most of these boutique
shops are located in Dalian and the major cities of Liaoning Province. Each
store has a minimum monthly sales requirement depending on the city and
store.
Dealers,
agents and wholesalers who we work with serve their own diverse distribution
channels. Our affiliated dealers organize their sales to stores and
supermarkets, such as Carrefour, Wal-mart, Hymall, New-mart and Metro. Our
affiliated agents assist in identifying locations and opening Chuming™ franchise
stores in their region, important to the expanding our revenues. Our affiliated
wholesalers typically organize the sales to canteens and restaurants as well
as
food processing companies. In some regions, our affiliated agents will also
directly contact local canteens and restaurants.
Chuming’s
Distribution Network
We
have
our Chuming™ branded counters in large stores and supermarkets, which are the
most important and highly visible locations to enhance our brand and image.
Since large supermarkets such as Carrefour and Wal-mart have strict requirements
to approve any suppliers, having Chuming™ counters in these megaretailers’
flagship stores reinforces the consumer confidence in our products. We have
Chuming™ counters in more than 100 large supermarkets located in Northeast China
and the Hebei Province.
Our
most
popular product, fresh pork, is sold primarily though our Chuming™ franchise
stores. Chuming™ franchise stores are usually located in high-density, urban
residential areas easily accessible by our customers. The Chuming™ franchise
stores also save time compared to long lines sometimes found at large
supermarkets. Chuming™ franchise stores are all equipped with refrigerators to
keep the pork fresh. We have established more than 500 Chuming™ franchise stores
now operating in Dalian and throughout the Liaoning Province. In the next few
years, we aim to increase the number of our Chuming™ branded franchise stores to
more than 1,000 outlets.
We
provide operators of franchise stores and specialty counters with equipment
(refrigerated showcases, signage, uniforms, heating equipment for processed
food
and other equipment), labels and packaging, technical assistance, and permission
to sell our products under the Chuming brand name. These operators pay us
an
equipment deposit (to cover the cost of equipment), a trademark usage guarantee
deposit, a uniform fee (for the cost of employee uniforms), a one-time star-up
fee to cover the costs of certain materials, and an ongoing fee of approximately
0.5% of the total purchase amount of the products these operators purchase
from
us. Operators agree to sell our products exclusively, and may sell other
products only with our consent. Operators are responsible for payment of
their
own taxes and government fees, leasing expenses, and other operating costs.
If
an operator is terminated, we will refund the equipment deposit upon return
of
the equipment, and the trademark deposit if the operator has complied with
the
trademark usage guidelines we provide to them. We generally reward high-volume
operators with discounts and incentives on a case-by-case basis.
Delivery
In
China,
one of the main obstacles to expanding market share and developing national
brands has been logistical management during processing. We address this issue
by equipping our processing plant with modern technologically advanced,
state-of-the art equipment and production lines. Our advanced logistical
infrastructure includes the use of bar coding and electronic interchange to
enhance the speed and accuracy of data flow. Over the years, we have built
an
extensive logistical system that includes 21 contracted refrigerated container
trucks that allow us to better preserve the meat and to expand our market scope
by delivering food to farther retail points. As a result, we have been able
to
make deliveries within a 500km radius of our Dalian processing plant.
Furthermore, our modern information technology system adds additional
competitive advantage as it provides us real time market and production data
which in turn enables us to capitalize on the timely information regarding
market pricing, inventory levels, and changes in demand.
After
orders are gathered and processed at the Sales Company, our products are
delivered utilizing our transportation fleet and through pick-up by certain
accounts at our facilities. The quality of our fresh pork is highly dependent
on
the storage room and delivery vehicles once they leave the chill room. We
currently own 21 temperature-controlled vehicles, which we employ in our
operations to help guarantee the freshness of pork at the point of delivery
to
customer locations in our primary market which is within a two-hour radius
of
Dalian.
Quality
Control
We
maintain all required licenses and certificates from the relevant central
and
local government authorities with regard to our pork production business.
In
2005, we were awarded ISO 9001:2000 certification that covers our production,
research and development and sales activities. ISO 9001 certification indicates
that our abattoirs and pork production operations comply with international
standards of quality assurance established by the International Standards
Organization. All of our production lines have also passed the Hazard Analysis
and Critical Control Point (HACCP) test, which is certified by Moody
International Certification Ltd.
We
currently have 78 Quality Control (QC) personnel who run and refine our quality
assurance system. This system is divided into two sections: Meat Production
Supervision and Processed Meat Supervision. The 78 employees who work in our
quality assurance program consist of 33 quality control engineers, and 45 staff.
All members of the QC team are trained technicians with qualifications and
experience in animal husbandry, quarantines and veterinary medicine. The quality
control laboratory meets and exceeds all standards set by the authorities and
relevant agencies in the PRC.
In
addition, on average 11 government inspectors work in our slaughtering and
packaging plant every shift. They examine animals before slaughter, supervise
sanitation, inspect carcasses and internal organs for diseases during the
slaughtering and processing procedures, and then certify carcasses and packaged
products as to consumer readiness.
As
discussed in the above section regarding our principal products, the pork
products produced from freshly slaughtered pigs at our facilities are chilled
or
frozen after slaughtering to prevent deterioration of the meat caused by
bacteria or chemical changes. The chilled and frozen pork are maintained
within
the requisite temperature ranges, during subsequent handling, transportation
and
distribution to retain freshness and to prevent deterioration of the
meat.
Competition
We
are
currently one of the largest meat producers in the three northeast provinces
of
Jilin, Liaoning and Hei Longjiang. According to management’s estimates, in
Liaoning Province, we are the market leader for both fresh pork with 8.4%
market
share and for meat products with a 2.6% market share. Management estimates
that
in Dalian, we are the market leader for fresh pork with a 50% market share,
and
shares the lead position for meat products with a 20% market share. As we
expand
geographically, we expect to encounter additional regional and local
competitors. Our management believes that all food segments in China compete
on
the basis of price, product quality, brand identification and customer service,
and that we are well positioned in all of these areas.
Major
Domestic Competitors
Currently,
our primary competition comes from the domestic players that operate in a
very
fragmented industry environment. Presently, there is no clearly dominant
producer in the PRC pork industry. The three largest producers in China,
Shuanghui, People’s Food and China Yurun, together capture less than 5% of the
total market. Most of the companies in the industry tend to focus on different
product and market segments. Shuanghui has the largest market share in the
HTMP
pork segment, while Yurun is the leader in the LTMP space. Both companies
have
done well in the top tier markets. People’s Food, on the hand, tends to focus
more of its distribution efforts on smaller cities, where mass distribution
is
more difficult, and typically does not sell through large retail channels.
On
the other hand, about 40% of China Yurun’s sales are through supermarket and
hypermarket chains. In terms of geographical focus, we believe People’s Food has
a strong presence in Northeastern China, and China Yurun has announced plans
to
expand into the Northeast with plans for two new plants in Shenyang and Harbin.
New
International Entrants
After
China joined the WTO, many domestic industries were opened to international
competition, including the meat-processing industry. Foreign companies have
already entered China’s major cities, mainly though the major hypermarkets such
as Carrefour. So far, domestic players have an advantage in the introduction
of
new products based on local tastes and distribution in below Super-tier cities
such as Beijing and Shanghai. Tyson Foods, Inc., U.S.A. has a joint venture
with
Shanghai Ocean Wealth Fish Products Corporation Limited. Hormel Foods
Corporation, U.S.A., has set up representative offices in China in 1995 and
currently operates processing factories in Shanghai and
Beijing.
Dalian
Competitors - Fresh Pork
In
Dalian, our key fresh pork competitors are Bangchui Island with an 18% market
share and Jiuxing (Nine Stars) with a 12% market share.
Name
|
|
Market
share
|
|
Chuming
|
|
|
50
|
%
|
Bangchui
Island
|
|
|
18
|
%
|
Nine
Stars
|
|
|
12
|
%
|
Taifu
|
|
|
8
|
%
|
Tianxin
|
|
|
6
|
%
|
Yurun
|
|
|
6
|
%
|
Dalian
Competitors - Meat Products
In
Dalian, our main meat products competitors are Chengxin with a 20% market share,
Chuhe with a 17% market share, Jin Baiwei with a 15% market share, Shineway
with
a 15% market share and Yurun with an 8% market share.
Name
|
|
Market
share
|
|
Chuming
|
|
|
20
|
%
|
Chengxin
|
|
|
20
|
%
|
Chuhe
|
|
|
17
|
%
|
Jin
Baiwei
|
|
|
15
|
%
|
Shineway
|
|
|
15
|
%
|
Yurun
|
|
|
8
|
%
|
Others
|
|
|
5
|
%
|
Advertising
and Promotional Activities
Approximately
US $75,000, US $100,000, US $150,000 and US $2,659,963 were spent respectively
in the fiscal years ended 2004, 2005 and 2006 and nine months ended September
30, 2007 on advertising and promotional activities.
Advertisements
are principally for Processed Meat Products and Fresh Pork and are targeted
at
consumers in the Northeast PRC. We advertise periodically in the local media
to
create and maintain public awareness of our products and branding. We increase
the frequency of advertisements whenever new products are launched.
Intellectual
Property Rights
Through
our advertising efforts and the consistent quality of its products, our
management believes that consumers in the PRC have come to associate our
“Chuming™” brand name with quality meat products. Thus, our management believes
that the goodwill in the “Chuming™” branding is a valuable asset to us. We have
registered our “Chuming™” trademark in the PRC. We have also applied for
trademark registration for our “Huayu” brand name in the PRC.
We
believe that the protection of our brand names is important to our marketing
efforts and believe that we have taken appropriate steps to protect our brand.
We have not discovered any counterfeiting or any infringements of our Chuming™
or Huayu brand names during the three years prior to the date of this
prospectus.
We
require all resellers who we work with, including specialty counters and
franchise store operators, to comply with our trademark usage policy, and
require them to pay trademark usage guarantee deposits. We also employee
approximately 30 employees who randomly inspect the facilities of the over
500
operators we work with to ensure compliance with our policies and other
guidelines. We will generally terminate our business relationship with operators
found violating our policies.
Research
and Development
We
have
two operations, a Meat Engineering Center and a Sea Products Center, focused
on
the development of new products to the market. In addition to meeting the taste
demands of consumers, these groups focus on quality, nutrition and safety
standards. These groups draw upon a 25-employee research and development staff,
including three professors in the field of animal nutrition and biology,
supporting the safe and rapid introduction to the market of new products,
specifically in the areas of seafood and meat by-products. We currently have
more than 100 products available to consumers, with the average rate of three
new products ready for the market per month. We are also working on
anti-freezing experiments to facilitate preservation of our meats so as to
minimize or eliminate the use of chemical preservatives.
Government
Approval and Regulation of Principal Products
The
Chinese government is actively promulgating a plan for “safe meat” and is
expected to raise the proportion of slaughtering automation to over seventy
percent of all meat and actively enforce authorized slaughtering and quarantine.
Government initiatives take the form of benefits ranging from special grants,
subsidized financing, preferential tax policies, direct government funding
and
other types of subsidies aimed at encouraging the modernization of the meat
industry. In addition, while it is possible that the Chinese central or
provincial governments may enact more stringent regulations that raise standards
for the meat processing industry, we believe that our company is currently
a
leader in meat processing safety standards, and would not be affected by
such
increased standards.
Compliance
with Environmental Laws
We
own
two wastewater treatment plants on premise with a daily treating capacity of
six
hundred tons for each plant. Those plants were designed to comply with the
Integrated Wastewater Discharge Standard of the PRC and the Environmental
Protection Regulation of Dalian City. To the knowledge of our management, we
have not breached any environment protection regulations during any of the
past
three years.
Employees
We
currently have approximately 589 employees, the composition of which is as
follows:
|
|
R&D and
Engineering
|
|
Production
|
|
General and
Administrative
|
|
Sales and
Marketing
|
|
Quality
Control
|
|
Total
|
|
Meat
Company
|
|
|
10
|
|
|
153
|
|
|
25
|
|
|
10
|
|
|
8
|
|
|
206
|
|
Food
Company
|
|
|
15
|
|
|
165
|
|
|
15
|
|
|
18
|
|
|
10
|
|
|
211
|
|
Sales
Company
|
|
|
0
|
|
|
0
|
|
|
25
|
|
|
135
|
|
|
0
|
|
|
160
|
|
Total
|
|
|
25
|
|
|
318
|
|
|
65
|
|
|
163
|
|
|
18
|
|
|
589
|
|
We
and
our predecessor companies have experienced excellent employee retention, which
we believe is a result of our consistently-applied management policies and
proactive employee benefit program participation. The average tenure is four
years for factory workers and twelve years for management staff. All employees
have health insurance, unemployment insurance and retirement benefits that
are
provided by the government. We make regular payments into these
government-sponsored health insurance and retirement programs for each employee.
Additionally, we provide free meals and accommodations to all employees on
shift.
Certain
of our employees are represented by a labor union which is governed by PRC
Company and Labor Laws. There have been no adverse labor incidents or work
stoppages in our history or our predecessor companies. Management believes
that
our relationship with our employees and the union are good.
Corporate
Information
Our
principal executive offices are located at No. 9, Xin Yi Street, Ganjingzi
District, Dalian City, Liaoning province, PRC 116039. Our main telephone number
is +86 411 867 166 96 and our fax number is +86 411 867 166 90.
Description
of Property
Facilities
Our
main
facility and principal executive offices are located at No. 9, Xin Yi Street,
Ganjingzi District, Dalian City, Liaoning Province, PRC 116039, which also
serves as the headquarters for our food subsidiary and sales subsidiary. Our
main facility is located on 95 acres in the industrial area of Dalian, where
we
have developed over 74,000 sq. meters of factory floor. In addition to our
corporate offices, we also own and maintain housing for up to 760 employees,
and
health maintenance facilities. Our slaughtering subsidiary’s principal facility
is located at No.2026, Zhuanshi Street, Wafangdian Town, Dalian City, Liaoning
Province, PRC. We believe that these facilities will be sufficient to house
our
operations for at least the next 3 years, and we have the capacity to
accommodate our projected long-term growth plans.
Land
Lease on Main Facility and Other Company Offices
We
have
acquired the land use certificate for 89 acres of land in Dalian City, which
entitles us to use and dispose of the land and the commercial or residential
buildings located on the land. Our Food Company occupies this piece of land.
We
have
also opened offices in eleven cities outside of Dalian. We have entered leasing
agreements for those office spaces for terms ranging from one and three years.
These offices are mainly sales offices and they are generally very small
in
size. They are located in surrounding cities, mainly in Liao Ning Province.
In
total, we paid approximately $58,000 rent in 2007 for these eleven
offices.
Real
Property Rights
We
have
rights to use and occupy two parcels of state-owned land, which are 106,466
square meters and 48,461 square meters in area, respectively, on which our
operations are located. These land use rights are granted to us under two
certificates dated March 3, 2003, granted by the Government of the Ganjingzi
District of Dalian: (i) Gan Guo Yong [2003] No. 04010 for Site Number 4-17-03-09
(106,466 square meters), and (ii) Gan Guo Yong [2003] No. 04009 for Site
Number
4-17-03-10 (48,461 square meters). These land use rights entitle us to use
of
the land for a period of fifty years (until March 20, 2053) for industrial
purposes. Our Food Company occupies these two pieces of land.
We
pledged our land use rights in the second parcel above (Gan Guo Yong [2003]
No.
04009 for Site Number 4-17-03-10) to the Bank of China, Liaoning Province
Branch, and the pledge has a term from December 14, 2006 to December 13, 2011.
Our plant, warehouse and office building have all been completed, and we are
in
the process of filing the proper documentation with the local PRC government
to
bring these properties into operation.
RISK
FACTORS
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 prospectus 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 WOFE, 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
of
third party suppliers who are independent farmers. Our
third
party suppliers may not continue to be able to supply an adequate number
of live
pigs to satisfy our present and future production needs. The supply of pigs
is
dependent on the output of pig farms, which may be affected by outbreaks
of
diseases or epidemics. Our current suppliers may not be able to provide live
pigs of sufficient quality to meet our stringent quality control requirements.
Any interruptions to or decline in the amount or quality of our live pig
supply
could materially disrupt our production and adversely affect our business.
In
addition to live pigs, we also use additives and packaging in our production,
which we source from third party suppliers. Any interruptions to or decline
in
the amount or quality of our additives or packaging supply, could also disrupt
our production or sales and adversely affect our business.
We
are vulnerable to increases in the price of live pigs and other operating
costs,
and we may not be able to entirely offset these increasing costs by increasing
the prices of our products, particularly our processed meat
products.
We
purchase agricultural products, such as live pigs, for use in our production
process and for resale. The price of such commodities is subject to fluctuations
that are attributable to a number of factors, such as the price of animal
feed,
diseases and infections, and weather conditions. If for example, worldwide
and
local grain prices should increase, this would affect the price of animal
feed,
which may increase the price of live pigs. Higher pig prices may force us
to
raise the prices we charge our customers for our products, however we may
not
always be able to pass on the entire amount of price increases to our customers,
and/or consumers might cut back on consumption of meat products.
During
2007, prices of live pigs rose sharply. If the costs of raw materials or
other
costs of production and distribution of our products increase further, and
we
are unable to entirely offset these increases by raising prices of our products,
our profit margins and financial condition could be adversely affected.
According to China Livestock and Products Annual Report 2007 dated on September
25, 2007 by the USDA Foreign Agricultural Service, the severe supply shortage
of
hogs in 2007 was because of a series of outbreaks of Porcine
Reproductive and Respiratory Syndrome (PRRS),
also
known as Blue Ear Disease, in China from May 2006. Blue Ear Disease is an
infectious disease that affects swine, characterized by reproductive disorders,
premature delivery, miscarriage, and stillbirth—as well as abnormal breathing in
piglets. According to the report, shortages and a sharp pork price increase
occurred as a result of Blue Ear Disease. The average pork price increased
by 48
percent from January to August 2007 over the same period in 2006, while prices
in July and August 2007 increased by 86 and 87 percent, respectively, from
the
same months in 2006.
We
may be unable to anticipate changes in consumer preferences for processed meat
products, which may result in decreased demand for our
products.
Our
continued success in the processed meat products market is in large part
dependent on our ability to anticipate and develop products that appeal to
the
changing tastes, dietary habits and preferences of customers. If we are not
able
to anticipate and identify new consumer trends and develop new products
accordingly, demand for our products may decline and our operating results
may
be adversely affected. In addition, we may incur significant costs relating
to
developing and marketing new products or expanding our existing product
offerings in reaction to what we perceive to be a consumer preference or demand.
Such development or marketing may not result in the level of market acceptance,
volume of sales or profitability anticipated.
If
the chilled and frozen pork market in China does not grow as we expect, our
results of operations and financial conditions may be adversely
affected.
If
the
chilled and frozen pork market in China does not grow as we expect, our business
may be harmed, we may need to adjust our growth strategy and our results
of
operation may be adversely affected.
We
require various licenses and permits to operate our business, and the loss
of or
failure to renew any or all of these licenses and permits could materially
adversely affect our business.
In
accordance with PRC laws and regulations, we are required to maintain various
licenses and permits in order to operate our business, including, without
limitation, a slaughtering permit in respect of each of our chilled and frozen
pork production facilities and a permit for production of industrial products
in
respect of each of our processed meat production facilities. We are required
to
comply with applicable hygiene and food safety standards in relation to our
production processes. Our premises and transportation vehicles are subject
to
regular inspections by the regulatory authorities for compliance with applicable
regulations. Failure to pass these inspections, or the loss of or failure to
renew our licenses and permits, could require us to temporarily or permanently
suspend some or all of our production or distribution operations, which could
disrupt our operations and adversely affect our business.
We
are highly dependent on senior management and key research and development
personnel.
We
are
highly dependent on our senior management to manage our business and operations
and our key research and development personnel for the development of new
processing methods and technologies, food products and the enhancement of our
existing products. In particular, we rely substantially on our chairman and
chief executive officer, Mr. Shi Huashan, to manage our operations. We also
depend on our key research personnel. In addition, we also rely on information
technology and logistics personnel for the production, storage and shipment
of
our products and on marketing and sales personnel, engineers and other personnel
with technical and industry knowledge to transport, market and sell our
products. We do not maintain key man life insurance on any of our senior
management or key personnel. The departure of any one of them, in particular
Mr.
Shi, would have a material adverse effect on our business and operations.
Competition for senior management and research and development personnel is
intense and the pool of suitable candidates is limited. We may be unable to
locate a suitable replacement for any senior management or key research and
development personnel that we lose. In addition, if any member of our senior
management or key research and development personnel joins a competitor or
forms
a competing company, they may compete with us for customers, business partners
and other key professionals and staff members of our company.
We
note
that Mr. Shi Huashan, who is our Chief Executive Officer, is also the Chief
Executive Officer of Dalian Chuming Group Co., Ltd., our former parent
company.
See also, “Certain Relationships and Related Party Transactions” on page 77. Due
to the non-exclusive roles of Mr. Shi as our CEO and the principal executive
officer of Dalian Chuming Group Co., Ltd., with whom we conduct business
from
time to time, potential conflicts of interest may arise. In particular,
situations might arise in which we transact business with Dalian Chuming
Group
Co., Ltd., and certain terms of agreements might be favorable to us, but
conversely unfavorable to Dalian Chuming Group Co., Ltd., and vice versa.
In
order to effectively handle such conflict of interest scenarios, our management
intends to submit all related party transactions to our independent board
of
directors, or appropriate committee of the board, for review and approval.
If
through these mechanisms we are not able to effectively handle such conflicts
of
interest to serve the Company’s best interest, our business could be harmed or
adversely affected.
We
compete for qualified personnel with other food processing companies, food
retailers, logistics companies and research institutions. Intense competition
for these personnel could cause our compensation costs to increase
significantly, which could have a material adverse effect on our results of
operations. Our future success and ability to grow our business will depend
in
part on the continued service of these individuals and our ability to identify,
hire and retain additional qualified personnel. If we are unable to attract
and
retain qualified employees, we may be unable to meet our business and financial
goals.
Our
growth strategy may prove to be disruptive and divert management
resources.
Our
growth strategy may involve large transactions and present financial, managerial
and operational challenges, including diversion of management attention from
existing businesses, difficulty with integrating personnel and financial and
other systems, increased expenses, including compensation expenses resulting
from newly-hired employees, assumption of unknown liabilities and potential
disputes. We could also experience financial or other setbacks if any of our
growth strategies incur problems of which we are not presently aware. We may
require additional financing in the future.
We
may
need to obtain additional debt or equity to fund future capital expenditures.
Additional equity may result in dilution to the holders of our outstanding
shares of capital stock. Additional debt financing may include conditions that
would restrict our freedom to operate our business, such as conditions
that:
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limit
our ability to pay dividends or require us to seek consent for the
payment
of dividends;
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increase
our vulnerability to general adverse economic and industry
conditions;
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require
us to dedicate a portion of our cash flow from operations to payments
on
our debt, thereby reducing the availability of our cash flow to fund
capital expenditures, working capital and other general corporate
purposes; and
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limit
our flexibility in planning for, or reacting to, changes in our business
and our industry.
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We
cannot
guarantee that we will be able to obtain any additional financing on terms
that
are acceptable to us, or at all.
Our
operations are cash intensive and our business could be adversely affected
if we
fail to maintain sufficient levels of working capital.
We
expend
a significant amount of cash in our operations, principally to fund our raw
material procurement. Our suppliers, in particular, third party suppliers of
pigs, typically require payment in full within seven days after delivery,
although some of our suppliers provide us with credit. In turn, we typically
require our customers of chilled and frozen pork to make payment in full on
delivery, although we offer some of our long-standing customers credit terms.
We
generally fund most of our working capital requirements out of cash flow
generated from operations. If we fail to generate sufficient revenues from
our
sales, or if we experience difficulties collecting our accounts receivables,
we
may not have sufficient cash flow to fund our operating costs and our business
could be adversely affected.
We
may be unable to maintain our profitability in the face of a consolidating
retail environment in China.
We
sell
substantial amounts of our products to supermarkets and large retailers. The
supermarket and food retail industry in China has been, and is expected to
continue, undergoing a trend of development and consolidation. As the food
retail trade continues to consolidate and our retail customers grow larger
and
become more sophisticated, they may demand lower pricing and increased
promotional programs. Furthermore, larger customers may be better able to
operate on reduced inventories and potentially develop or increase their focus
on private label products. If we fail to maintain a good relationship with
our
large retail customers, or fail to maintain a wide offering of quality products,
or if we lower our prices or increase promotional support of our products in
response to pressure from our customers and are unable to increase the volume
of
our products sold, our profitability could decline.
Our
operating results may fluctuate from period to period and if we fail to meet
market expectations for a particular period, our share price may
decline.
Our
operating results have fluctuated from period to period and are likely to
continue to fluctuate as a result of a wide range of factors, including seasonal
variations in live pig supply and processed meat products consumption. Our
production and sales of chilled and frozen pork are generally lower in the
summer, due to lower supply of live pigs. Interim reports may not be indicative
of our performance for the year or our future performance, and period-to-period
comparisons may not be meaningful due to a number of reasons beyond our control.
We cannot assure you that our operating results will meet the expectations
of
market analysts or our investors. If we fail to meet their expectations, there
may be a decline in our share price.
We
derive all of our revenues from sales in China and any downturn in the Chinese
economy could have a material adverse effect on our business and financial
condition.
All
of
our current revenues are generated from sales in China. We anticipate that
revenues from sales of our products in China will continue to represent a
substantial proportion of our total revenues in the near future. Any significant
decline in the condition of the PRC economy could, among other things, adversely
affect consumer buying power and discourage consumption of our products, which
in turn would have a material adverse effect on our business and financial
condition.
We
rely on our exclusive network of showcase stores, network stores and supermarket
brand counters for the success of our sales and our brand image, and should
they
perform poorly, our business and brand image could be materially and adversely
affected.
In
addition to our sales to wholesale customers, we sell our products through
showcase stores, network stores and supermarket brand counters. All of these
retail based stores exclusively sell our pork products and display the Chuming
logo on our store facades. For the first half of 2007, these retail outlets
accounted for approximately 43% of our total revenue. If the sales performance
of our retail based stores deteriorates, this could adversely affect the
financial results of the company. In addition, any sanitation, hygiene, or
food
quality problems that might arise from the retail based stores could adversely
affect our brand image and lead to a loss of sales. Chuming does not own any
of
the retail based stores.
We
rely on the performance of our wholesaler, retailer and mass merchant customers
for the success of our sales, and should they perform poorly or give priority
to
our competitors’ products, our business could be materially and adversely
affected.
In
addition to our retail sales channel, we sell our products to supermarkets
and
large retailers, which in turn sell the products to end consumers. If the sales
performance of our wholesale customers deteriorates, this could adversely affect
our sales. Furthermore, our wholesale customers also carry products which
directly compete with our products for retail space and consumer purchases.
There is a risk that our wholesale customers may give higher priority to
products of, or form alliances with, our competitors. If our wholesale customers
do not continue to purchase our products, or provide our products with similar
levels of promotional support, our sales performance and brand imaging could
be
adversely affected.
The
loss of any of our significant customers could have an adverse effect on our
business.
Our
key
customers are principally supermarkets and large retailers in the PRC. We
have
not entered into long-term supply contracts with any of these major customers.
There can be no assurance that we will maintain or improve the relationships
with these customers, or that we will be able to continue to supply these
customers at current levels or at all. If we cannot maintain long-term
relationships with our major customers, the loss of a significant portion
of our
sales to them could have an adverse effect on our business, financial condition
and results of operations. Further, the loss of any one of our top five
customers could cause us to suffer a temporary setback in our sales, which
could
have a short term negative effect on our financial results.
Recent
regulatory enforcement crackdowns on food processing companies in the PRC could
adversely affect our businesses.
Recently,
the PRC government authorities have taken certain measures to maintain the
PRC
food market in good order and to improve the integrity of the PRC food industry,
such as enforcing full compliance with industry standards and closing certain
food processing companies in the PRC that did not meet regulatory standards.
We
cannot assure you that our businesses and operations will not be affected as
a
result of the deteriorating reputation of the food industry in the PRC due
to
recent scandals regarding food products.
Environmental
regulations and related litigation could have a material adverse effect on
our
business and results of operations.
Our
operations and properties are subject to extensive and increasingly stringent
laws and regulations pertaining to, among other things, the discharge of
materials into the environment and the handling and disposition of wastes
(including solid and hazardous wastes) or otherwise relating to protection
of
the environment. Failure to comply with any laws and regulations and future
changes to them may result in significant consequences to us, including civil
and criminal penalties, liability for damages and negative
publicity.
We
have
incurred, and will continue to incur, significant capital and operating
expenditures to comply with these laws and regulations. W e cannot assure you
that additional environmental issues will not require currently unanticipated
investigations, assessments or expenditures, or that requirements applicable
to
us will not be altered in ways that will require us to incur significant
additional costs.
Deterioration
of our perishable products may occur due to delivery delays, malfunctioning
of
freezer facilities or poor handling during transportation, which could adversely
affect our business, results of operations and financial
condition.
The
condition of our food products (being perishable goods) may deteriorate due
to
shipment or delivery delays, malfunctioning of freezer facilities or poor
handling during delivery by shippers or intermediaries. We are not aware of
any
instances whereby we were made to compensate for delivery delays, malfunctioning
of freezer facilities or poor handling during transportation. However, there
is
no assurance that such incidents will not occur in the future. In the event
of
any delivery delays, malfunctioning of freezer facilities or poor handling
during transportation, we may have to make compensation payments and our
reputation, business goodwill and revenue will be adversely
affected.
Unexpected
business interruptions could adversely affect our
business.
Our
operations are vulnerable to interruption by fire, power failure and power
shortages, floods, computer viruses and other events beyond our control. In
particular, China, especially eastern and southern China, is experiencing
frequent electricity shortages. In addition, we do not carry business
interruption insurance to compensate us for losses that may occur as a result
of
these kinds of events and any such losses or damages incurred by us could
disrupt our production and other operations.
If
we fail to develop and maintain an effective system of internal controls, we
may
not be able to accurately report our financial results or prevent fraud; as
a
result, current and potential shareholders could lose confidence in our
financial reports, which could harm our business and the trading price of our
common stock.
Effective
internal controls are necessary for us to provide reliable financial reports
and
effectively prevent fraud. Section 404 of the Sarbanes-Oxley Act of 2002
requires us to evaluate and report on our internal controls over financial
reporting and have our independent registered public accounting firm annually
attest to our evaluation, as well as issue their own opinion on our internal
controls over financial reporting, beginning with our Annual Report on Form
10-K
for the fiscal year ended December 31, 2007. We plan to prepare for compliance
with Section 404 by strengthening, assessing and testing our system of internal
controls to provide the basis for our report. The process of strengthening
our
internal controls and complying with Section 404 is expensive and time
consuming, and requires significant management attention, especially given
that
we have not yet undertaken any efforts to comply with the requirements of
Section 404. We cannot be certain that the measures we will undertake will
ensure that we will maintain adequate controls over our financial processes
and
reporting in the future. Furthermore, if we are able to rapidly grow our
business, the internal controls that we will need will become more complex,
and
significantly more resources will be required to ensure our internal controls
remain effective. Failure to implement required controls, or difficulties
encountered in their implementation, could harm our operating results or cause
us to fail to meet our reporting obligations. If we or our auditors discover
a
material weakness in our internal controls, the disclosure of that fact, even
if
the weakness is quickly remedied, could diminish investors’ confidence in our
financial statements and harm our stock price. In addition, non-compliance
with
Section 404 could subject us to a variety of administrative sanctions, including
the suspension of trading, ineligibility for listing on one of the Nasdaq Stock
Markets or national securities exchanges, and the inability of registered
broker-dealers to make a market in our common stock, which would further reduce
our stock price.
We
will incur increased costs as a public company which may affect our
profitability.
As
a
public company, Chuming will incur significant legal, accounting and other
expenses that it did not incur as a private company. We are now subject to
the
SEC’s rules and regulations relating to public disclosure. SEC disclosures
generally involve a substantial expenditure of financial resources. In addition,
the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented
by
the SEC, have required changes in corporate governance practices of public
companies. We expect that full compliance with these new rules and regulations
will significantly increase our legal and financial compliance costs and
make
some activities more time-consuming and costly. For example, we will be required
to create additional board committees and adopt policies regarding internal
controls and disclosure controls and procedures. In addition, on December
31,
2007, we increased compensation to our senior executive officers, allocated
$250,000 of the proceeds from our recent financing to our investor and public
relations program (and shortly thereafter hired an investor relations firm)
and
expect to increase our financial and accounting staff in order to meet the
demands and requirements of being a public reporting company. Such additional
personnel, public relations, reporting and compliance costs may negatively
impact our financial results.
We
have limited business insurance coverage.
The
insurance industry in China is still at an early stage of development. Insurance
companies in China offer limited business insurance products. We do not have
any
business liability or disruption insurance coverage for our operations in China.
Any business disruption, litigation or natural disaster may result in our
incurring substantial costs and the diversion of our resources. In addition,
since our business operations are based outside of the U.S. (although we
are a Nevada corporation quoted on the OTC Bulletin Board in the U.S.),
directors and officers insurance may not be readily available to us at the
prices and on terms acceptable to us. If we are not able to secure satisfactory
D & O insurance coverage, we may not be able to attract the most qualified
directors and officers, and our business could be indirectly adversely
affected.
Risks
Relating To Our Industry
The
pig slaughtering and processed meat industries in China are subject to extensive
government regulation, which is in the process of change and
development.
The
pig
slaughtering and processed meat industries in China are heavily regulated by
a
number of governmental agencies, including primarily the Ministry of
Agriculture, the Ministry of Commerce, the Ministry of Health, the General
Administration of Quality Supervision, Inspection and Quarantine and the State
Environmental Protection Administration. These regulatory bodies have broad
discretion and authority to regulate many aspects of the pig slaughtering and
processed meat industries in China, including, without limitation, setting
hygiene standards for production and quality standards for processed meat
products. In addition, the pig slaughtering and processed meat products
regulatory framework in China is still in the process of being developed. If
the
relevant regulatory authorities set standards with which we are unable to comply
or which increase our production costs and hence our prices so as to render
our
products non-competitive, our ability to sell products in China may be
limited.
The
pig slaughtering and processed meat industries in China may face increasing
competition from both domestic and foreign companies, as well as increasing
industry consolidation, which may affect our market share and profit
margin.
The
pig
slaughtering and processed meat industries in China are highly competitive.
Our
processed meat products are targeted at mid- to high-end consumers, a market
in
which we face increasing competition, particularly from foreign suppliers.
In
addition, the evolving government regulations in relation to the pig
slaughtering industry have driven a trend of consolidation through the industry,
with smaller operators unable to meet the increasing costs of regulatory
compliance and therefore are at a competitive disadvantage. We believe that
our
ability to maintain our market share and grow our operations within this
landscape of changing and increasing competition is largely dependent upon
our
ability to distinguish our products and services.
In
addition, prior to China’s entry into the World Trade Organization (“WTO”), high
barriers to entry existed for many potential competitors in our business through
the use of tariffs and restrictive import licensing and distribution practices.
China’s admission to WTO has lowered some of the tariffs and other barriers to
entry so we can expect that competition will increase.
We
cannot
assure you that our current or potential competitors will not develop products
of a comparable or superior quality to ours, or adapt more quickly than we
do to
evolving consumer preferences or market trends. In addition, our competitors
in
the raw meat market may merge or form alliances to achieve a scale of operations
or sales network which would make it difficult for us to compete. Increased
competition may also lead to price wars, counterfeit products or negative brand
advertising, all of which may adversely affect our market share and profit
margin. We cannot assure you that we will be able to compete effectively with
our current or potential competitors.
The
outbreak of animal diseases or other epidemics could adversely affect our
operations.
An
occurrence of serious animal diseases, such as foot-and-mouth disease, or any
outbreak of other epidemics in China affecting animals or humans might result
in
material disruptions to our operations, material disruptions to the operations
of our customers or suppliers, a decline in the supermarket or food retail
industry or slowdown in economic growth in China and surrounding regions, any
of
which could have a material adverse effect on our operations and turnover.
There
can be no assurance that our facilities or products will not be affected by
an
outbreak of any disease or outbreak in the future, or that the market for pork
products in the PRC will not decline as a result of fear of disease. In either
case, our business, results of operations and financial condition would be
adversely and materially affected.
Consumer
concerns regarding the safety and quality of food products or health concerns
could adversely affect sales of our products.
Our
sales
performance could be adversely affected if consumers lose confidence in the
safety and quality of our products. Consumers in the PRC are increasingly
conscious of food safety and nutrition. Consumer concerns about, for example,
the safety of pork products, or about the safety of food additives used in
processed meat products, could discourage them from buying certain of our
products and cause our results of operations to suffer.
We
may be subject to substantial liability should the consumption of any of our
products cause personal injury or illness.
The
sale
of food products for human consumption involves an inherent risk of injury
to
consumers. Such injuries may result from tampering by unauthorized third parties
or product contamination or degeneration, including the presence of foreign
contaminants, chemical substances or other agents or residues during the various
stages of the procurement and production process. While we are subject to
governmental inspections and regulations, we cannot assure you that consumption
of our products will not cause a health-related illness in the future, or that
we will not be subject to claims or lawsuits relating to such
matters.
Even
if a
product liability claim is unsuccessful or is not fully pursued, the negative
publicity surrounding any assertions that our products caused personal injury
or
illness could adversely affect our reputation with customers and our corporate
and brand image. Consistent with industry practice in China, we do not maintain
product liability insurance. Furthermore, our products could potentially suffer
from product tampering, contamination or degeneration or be mislabeled or
otherwise damaged. Under certain circumstances, we may be required to recall
products. Even if a situation does not necessitate a product recall, we cannot
assure you that government sanctions or product liability claims will not be
asserted against us as a result. A product liability judgment against us or
a
product recall could have a material adverse effect on our business, financial
condition or results of operations.
Our
product and company name may be subject to counterfeiting and/or imitation,
which could impact upon our reputation and brand image as well as lead to higher
administrative costs.
We
regard
brand positioning as the core of our competitive strategy, and intend to
position our brand, “Chuming™” to create the perception and image of health,
nutrition, freshness and quality in the minds of our customers. There have
been
frequent occurrences of counterfeiting and imitation of products in the PRC
in
the past. We cannot guarantee that counterfeiting or imitation of our products
will not occur in the future or that we will be able to detect it and deal
with
it effectively. Any occurrence of counterfeiting or imitation could impact
negatively upon our corporate and brand image, particularly if the counterfeit
or imitation products cause sickness, injury or death to consumers. In addition,
counterfeit or imitation products could result in a reduction in our market
share, a loss of revenues or an increase in our administrative expenses in
respect of detection or prosecution.
Risks
Relating To Conducting Business in the PRC
Substantially
all of our assets and projects are located in the PRC, and substantially all
of
our revenue is sourced from the PRC. Accordingly, our results of operations
and
financial position are subject to a significant degree to economic, political
and legal developments in the PRC, including the following risks:
Economic,
political and social conditions and government policies in China could have
a
material adverse effect on our business, financial condition and results of
operations.
Economic,
political and social conditions and government policies in China differ in
many
respects from other more fully industrialized nations, and below are examples
of
such differences.
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Structure.
Agriculture still plays an important role in Chinese economy and
employment. Agriculture still represents around 50% of the employment,
which is substantially higher than most developed countries.
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Capital
re-investment.
Compared with more highly developed nations, there may be less
availability to Chinese firms of all types of investment capital
within
China.
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Government
involvement.
China is still transitioning from a centrally planned economic
model to
that of a free market. As a result, the Chinese government has
traditionally had a greater degree of regulatory involvement in
the
economic affairs and conduct of firms in China, as compared with
firms in
more advanced market-based economies.
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Allocation
of resources.
Related to the above point, the Chinese government may have greater
ability to influence the allocation of capital, labor, materials,
and
other resources than governments of other advanced market-based
economies.
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Level
of development.
Although China’s economy has been rapidly growing in recent years, certain
aspects such as public infrastructure, poverty rate, and other
measurements of development still lag behind highly developed nations,
and
this affects how companies must conduct business in China.
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Control
of foreign exchange.
China still maintains strict foreign exchange controls which has
been in
place since 1979, although steps have been taken to increase the
exchangeability of the Chinese renminbi with other currencies.
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Growth
rate.
For several years, China’s economy has achieved consistent double digit
growth rates, and this may put strain on infrastructure, availability
on
raw materials, and ability of firms to manage growth.
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Rate
of inflation.
According to the Consumer Price Index (CPI) compiled by the National
Statistics Bureau of China, the overall rate of inflation (CPI)
in August
2007 is 6.5% and the rate of inflation for food in August 2007
was 18.2%,
which are substantially higher than most of the developed countries,
and
these factors affect the local market environment in which Chinese
firms
must operate.
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The
economy of China has been transitioning from a centrally planned economy to
a
more market-oriented economy. Although in recent years the PRC government has
implemented measures emphasizing the utilization of market forces for economic
reform, a substantial portion of productive assets in China is still owned
by
the PRC government. In addition, the PRC government continues to play a
significant role in regulating industries by imposing industrial policies.
It
also exercises significant control over China’s economic growth through
allocation of resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and providing preferential treatment to
particular industries or companies.
Policies
and other measures taken by the PRC government to regulate the economy could
have a significant negative impact on economic conditions in China, with a
resulting negative impact on our business. For example, our financial condition
and results of operations may be materially and adversely affected
by:
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new
laws and regulations and the interpretation of those laws and
regulations;
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the
introduction of measures to control inflation or stimulate
growth;
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changes
in the rate or method of taxation;
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the
imposition of additional restrictions on currency conversion and
remittances abroad; or
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any
actions which limit our ability to develop, produce, import or sell
our
products in China, or to finance and operate our business in
China.
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Uncertainties
with respect to the PRC legal system could adversely affect
us.
We
conduct our business primarily through our Chuming Operating Subsidiaries
which
are located in China, which are governed by PRC laws and regulations. In
addition, because the parent companies that hold these entities, namely PSI
and
Energroup Holdings Corporation, are outside of China, we are generally subject
to laws and regulations applicable to foreign investments in China and, in
particular, laws applicable to wholly foreign-owned enterprises. The PRC
legal
system is based on written statutes. Prior court decisions may be cited for
reference but have limited precedential value.
Since
1979, PRC legislation and regulations have significantly enhanced the
protections afforded to various forms of foreign investments in China. However,
China has not developed a fully integrated legal system and recently enacted
laws and regulations may not sufficiently cover all aspects of economic
activities in China. In particular, because these laws and regulations are
relatively new, and because of the limited volume of published decisions and
their nonbinding nature, the interpretation and enforcement of these laws and
regulations involve uncertainties. In addition, the PRC legal system is based
in
part on government policies and internal rules (some of which are not published
on a timely basis or at all) that may have a retroactive effect. As a result,
we
may not be aware of our violation of these policies and rules until some time
after the violation. In addition, any litigation in China may be protracted
and
result in substantial costs and diversion of resources and management
attention.
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based on United States
or other foreign laws against us, our management or the experts named in this
prospectus.
We
conduct substantially all of our operations in China and substantially all
of
our assets are located in China. In addition, while we are incorporated in
the
State of Nevada, all of our senior executive officers reside within China.
As a
result, it may not be possible to effect service of process within the United
States or elsewhere outside China upon our senior executive officers, including
with respect to matters arising under U.S. federal securities laws or applicable
state securities laws. Moreover, our PRC counsel has advised us that the PRC
does not have treaties with the United States or many other countries providing
for the reciprocal recognition and enforcement of judgment of
courts.
Governmental
control of currency conversion may affect the value of your
investment.
The
PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of China. We receive
substantially all of our revenues in RMB. Under our current structure, our
income is primarily derived from payments from Dalian Precious Sheen Investments
Consulting Co., Ltd. Shortages in the availability of foreign currency may
restrict the ability of our PRC subsidiaries and our affiliated entity to remit
sufficient foreign currency to pay dividends or other payments to us, or
otherwise satisfy their foreign currency denominated obligations. Under existing
PRC foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from trade-related
transactions, can be made in foreign currencies without prior approval from
the
PRC State Administration of Foreign Exchange by complying with certain
procedural requirements. However, approval from appropriate government
authorities is required where RMB is to be converted into foreign currency
and
remitted out of China to pay capital expenses such as the repayment of bank
loans denominated in foreign currencies. The PRC government may also at its
discretion restrict access in the future to foreign currencies for current
account transactions. If the foreign exchange control system prevents us from
obtaining sufficient foreign currency to satisfy our currency demands, we may
not be able to pay dividends in foreign currencies to our
shareholders.
Fluctuation
in the value of RMB may have a material adverse effect on your
investment.
The
value
of RMB against the U.S. dollar and other currencies may fluctuate and is
affected by, among other things, changes in political and economic conditions.
Our revenues and costs are mostly denominated in RMB, while we report our
financial results and position in U.S. dollars. Any significant fluctuation
in
value of RMB may materially and adversely affect our reported cash flows,
revenues, earnings and financial position, and the value of, and any dividends
payable on, our stock in U.S. dollars. For example, an appreciation of RMB
against the U.S. dollar would make any new RMB denominated investments or
expenditures more costly to us, to the extent that we need to convert U.S.
dollars into RMB for such purposes. An appreciation of RMB against the U.S.
dollar would also result in foreign currency translation losses for financial
reporting purposes when we translate our U.S. dollar denominated financial
assets into RMB, as RMB is our reporting currency.
We
face risks related to health epidemics and other
outbreaks.
Our
business could be adversely affected by the effects of SARS or another epidemic
or outbreak. China reported a number of cases of SARS in April 2004. Any
prolonged recurrence of SARS or other adverse public health developments in
China may have a material adverse effect on our business operations. For
instance, health or other government regulations adopted in response may require
temporary closure of our production facilities or of our offices. Such closures
would severely disrupt our business operations and adversely affect our results
of operations. We have not adopted any written preventive measures or
contingency plans to combat any future outbreak of SARS or any other
epidemic.
Risks
Related to Our Corporate Structure
In
order to comply with PRC laws limiting foreign ownership of Chinese companies,
we conduct our business in the PRC through Chuming by means of certain
ownership arrangements. If the PRC government determines that these ownership
arrangements do not comply with applicable regulations, our business could
be
adversely affected and we could be subject to sanctions.
As
a
result of the share exchange transaction disclosed elsewhere in this prospectus,
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 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”). Throughout this
prospectus, PSI, Chuming and the Chuming Operating Subsidiaries are sometimes
collectively referred to as “Chuming.”
The
PRC
government restricts foreign investment in businesses in China. Accordingly,
we
operate our business in China through Chuming. Chuming holds the
licenses and approvals necessary to operate our business in China.
Although
we believe we comply with current PRC regulations, we cannot assure you that
the
PRC government would agree that these operating arrangements comply with PRC
licensing, registration or other regulatory requirements, with existing policies
or with requirements or policies that may be adopted in the future. If in the
future the PRC government determines that we do not comply with applicable
PRC
law, it could impose fines on our PRC shareholders, and in extreme cases, the
PRC government could take steps to revoke our business and operating licenses,
require us to discontinue or restrict our operations, restrict our right to
collect revenues, require us to restructure our operations, impose additional
conditions or requirements with which we may not be able to comply, impose
restrictions on our business operations or on our customers, or take other
regulatory or enforcement actions against us that could be harmful to our
business. Any of these or similar actions could significantly disrupt our
business operations or restrict us from conducting a substantial portion of
our
business operations, which could materially and adversely affect our business,
financial condition and results of operations.
Recent
PRC regulations relating to acquisitions of PRC companies by foreign entities
may limit our ability to acquire PRC companies and adversely affect the
implementation of our strategy as well as our business and
prospects.
The
PRC
State Administration of Foreign Exchange, or SAFE, issued a public notice in
January 2005 concerning foreign exchange regulations on mergers and acquisitions
in China. The public notice states that if an offshore company controlled by
PRC
residents intends to acquire a PRC company, such acquisition will be subject
to
strict examination by the relevant foreign exchange authorities. The public
notice also states that the approval of the relevant foreign exchange
authorities is required for any sale or transfer by the PRC residents of a
PRC
company’s assets or equity interests to foreign entities, such as us, for equity
interests or assets of the foreign entities.
In
April
2005, SAFE issued another public notice further explaining the January notice.
In accordance with the April notice, if an acquisition of a PRC company by
an
offshore company controlled by PRC residents has been confirmed by a Foreign
Investment Enterprise Certificate prior to the promulgation of the January
notice, the PRC residents must each submit a registration form to the local
SAFE
branch with respect to their respective ownership interests in the offshore
company, and must also file an amendment to such registration if the offshore
company experiences material events, such as changes in the share capital,
share
transfer, mergers and acquisitions, spin-off transactions or use of assets
in
China to guarantee offshore obligations.
On
May
31, 2007, SAFE issued another official notice known as “Circular 106,” which
requires the owners of any Chinese company to obtain SAFE’s approval before
establishing any offshore holding company structure for foreign financing as
well as subsequent acquisition matters in China.
If
we
decide to acquire a PRC company, we cannot assure you that we or the owners
of
such company, as the case may be, will be able to complete the necessary
approvals, filings and registrations for the acquisition. This may restrict
our
ability to implement our acquisition strategy and adversely affect our business
and prospects. In addition, if such registration cannot be obtained, our company
will not be able to receive dividends declared and paid by our subsidiaries
in
the PRC and may be forbidden from paying dividends for profit distribution
or
capital reduction purposes.
Chuming
is subject to restrictions on making payments to us.
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 contractual or 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 Securities and Exchange Commission 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 will 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:
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actual
or anticipated fluctuations in our quarterly operating
results;
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changes
in financial estimates by securities research analysts;
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conditions
in agricultural markets;
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changes
in the economic performance or market valuations of other meat processing
companies;
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announcements
by us or our competitors of new products, acquisitions, strategic
partnerships, joint ventures or capital commitments;
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addition
or departure of key personnel;
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fluctuations
of exchange rates between RMB and the U.S. dollar;
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intellectual
property litigation;
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general
economic or political conditions in
China.
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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.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
All
statements contained in this prospectus, other than statements of historical
facts, that address future activities, events or developments, are
forward-looking statements, including, but not limited to, statements containing
the words “believe,” “anticipate,” “expect” and words of similar import. These
statements are based on certain assumptions and analyses made by us in light
of
our experience and our assessment of historical trends, current conditions
and
expected future developments as well as other factors we believe are appropriate
under the circumstances. However, whether actual results will conform to the
expectations and predictions of management is subject to a number of risks
and
uncertainties that may cause actual results to differ materially. Such risks
are
summarized on page 1, in the section entitled “Risk Factors” on page 31, and in
our previous SEC filings.
Consequently,
all of the forward-looking statements made in this prospectus are qualified
by
these cautionary statements and there can be no assurance that the actual
results anticipated by management will be realized or, even if substantially
realized, that they will have the expected consequences to or effects on our
business operations.
USE
OF PROCEEDS
We
will
not receive any proceeds from the sale of the shares by the selling
shareholders. All proceeds from the sale of the shares offered by the selling
shareholders under this prospectus will be for the account of the selling
shareholders, as described below in the sections entitled “Selling shareholders”
and “Plan of Distribution.” With the exception of any brokerage fees and
commissions which are the respective obligations of the selling shareholders,
we
are responsible for the fees, costs and expenses of this offering which includes
our legal and accounting fees, printing costs and filing and other miscellaneous
fees and expenses.
PLAN
OF DISTRIBUTION
We
are
registering the shares of our common stock sold to certain investors in our
December 31, 2007 Financing, to permit the resale of these shares of common
stock by the selling shareholders from time to time after the date of this
prospectus. We are also registering shares of common stock held in escrow under
our Make Good Escrow Agreement, which shares will not be released until
determination of our 2008 and 2009 financial results. We will not receive any
of
the proceeds from the sale by the selling shareholders of the shares of common
stock held by them. We will bear all fees and expenses incident to our
obligation to register these shares of common stock.
The
selling shareholders and any of their pledgees, donees, transferees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or quoted or in private transactions. These sales
may be at fixed or negotiated prices. The selling shareholders may use any
one
or more of the following methods when selling shares:
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ordinary
brokerage transactions and transactions in which the broker-dealer
solicits Investors;
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block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
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purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
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an
exchange distribution in accordance with the rules of the applicable
exchange;
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privately
negotiated transactions;
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to
cover short sales made after the date that this Registration Statement
is
declared effective by the Securities and Exchange
Commission;
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broker-dealers
may agree with the Selling shareholders to sell a specified number
of such
shares at a stipulated price per share;
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a
combination of any such methods of sale; and
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any
other method permitted pursuant to applicable
law.
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The
selling shareholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling shareholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling shareholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling shareholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved.
The
selling shareholders may from time to time pledge or grant a security interest
in some or all of the shares owned by them and, if they default in the
performance of their secured obligations, the pledgees or secured parties may
offer and sell shares of common stock from time to time under this prospectus,
or under an amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act of 1933 amending the list of selling
shareholders to include the pledgee, transferee or other successors in interest
as selling shareholders under this prospectus.
When
we
are notified in writing by a selling shareholder that any material arrangement
has been entered into with a broker-dealer for the sale of common stock through
a block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker or dealer, a supplement to this prospectus will be
filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing
(i) the name of each such selling shareholder and of the participating
broker-dealer(s), (ii) the number of shares involved, (iii) the price at which
such the shares of common stock were sold, (iv)the commissions paid or discounts
or concessions allowed to such broker-dealer(s), where applicable, (v) that
such
broker-dealer(s) did not conduct any investigation to verify the information
set
out or incorporated by reference in this prospectus, and (vi) other facts
material to the transaction. In addition, when we are notified in writing by
a
selling shareholder that a donee or pledgee intends to sell more than 500 shares
of common stock, a supplement to this prospectus will be filed if then required
in accordance with applicable securities law.
The
selling shareholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors
in
interest will be the selling beneficial owners for purposes of this
prospectus.
The
selling shareholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Discounts, concessions, commissions and
similar selling expenses, if any, that can be attributed to the sale of
securities will be paid by the selling shareholder and/or the purchasers. Each
selling shareholder has represented and warranted to us that it acquired the
securities subject to this prospectus and the registration statement of which
it
forms a part, in the ordinary course of such selling shareholder’s business and,
at the time of its purchase of such securities such selling shareholder had
no
agreements or understandings, directly or indirectly, with any person to
distribute any such securities.
We
have
advised each selling shareholder that it may not use shares covered under this
prospectus and the registration statement of which it forms a part, to cover
short sales of common stock made prior to the date on which the registration
statement shall have been declared effective by the Securities and Exchange
Commission. If a selling shareholder uses this prospectus for any sale of the
common stock, it will be subject to the prospectus delivery requirements of
the
Securities Act. The selling shareholders will be responsible to comply with
the
applicable provisions of the Securities Act and Exchange Act, and the rules
and
regulations thereunder promulgated, including, without limitation, Regulation
M,
as applicable to such selling shareholders in connection with resales of their
respective shares under the related registration statement.
We
are
required to pay all fees and expenses incident to the registration of the
shares, but we will not receive any proceeds from the sale of the common stock.
We have agreed to indemnify the selling shareholders against certain losses,
claims, damages and liabilities, including liabilities under the Securities
Act.
SELLING
SHAREHOLDERS
We
are
registering this offering under the terms of securities purchase agreements
between us and the holders of certain of our securities. Such securities were
issued by us in transactions that were exempt from the registration requirements
of the Securities Act to persons reasonably believed by us to be “accredited
investors” as defined in Regulation D under the Securities Act. We are
registering these securities in order to permit the selling shareholders who
purchased them from us to dispose of the shares of common stock, or interests
therein, from time to time. The selling shareholders may sell all, some, or
none
of their shares in this offering. See “Plan of Distribution.”
The
table
below lists the selling shareholders and other information regarding the
beneficial ownership of the shares of common stock by each of the selling
shareholders. The second column lists the number of shares of common stock
beneficially owned by each selling shareholder as of February 11, 2008. The
third column lists the shares of common stock covered by this prospectus that
may be disposed of by each of the selling shareholders. The fourth column lists
the number of shares that will be beneficially owned by the selling shareholders
assuming all of the shares covered by this prospectus are sold.
The
selling shareholders may decide to sell all, some, or none of the shares of
common stock listed below. We cannot provide you with any estimate of the number
of shares of common stock that any of the selling shareholders will hold in
the
future. For purposes of this table, beneficial ownership is determined in
accordance with the rules of the SEC, and includes voting power and investment
power with respect to such shares.
The
inclusion of any securities in the following table does not constitute an
admission of beneficial ownership by the persons named below. Except as
indicated in the footnotes to the table, no selling shareholder has had any
material relationship with us or our predecessors or affiliates during the
last
three years. Except as indicated below, no selling shareholder is the beneficial
owner of any additional shares of common stock or other equity securities issued
by us or any securities convertible into, or exercisable or exchangeable for,
our equity securities. Except as indicated below, no selling shareholder is
a
registered broker-dealer or an affiliate of a broker-dealer.
Selling
Shareholder Table
Name
|
|
Shares Owned
|
|
Shares Offered
|
|
Shares Held
After Offering
|
|
% Ownership
After Offering
|
|
Pinnacle
China Fund, L.P.
4965
Preston Park Blvd, Suite 240
Plano,
TX 75093 (1)
|
|
|
1,022,727
|
|
|
1,022,727
|
|
|
0
|
|
|
0
|
%
|
The
Pinnacle Fund, L.P.
4965
Preston Park Blvd, Suite 240
Plano,
TX 75093 (1)
|
|
|
1,022,727
|
|
|
1,022,727
|
|
|
0
|
|
|
0
|
%
|
Westpark
Capital, L.P.
4965
Preston Park Blvd, Suite 240
Plano,
TX 75093 (2)
|
|
|
409,091
|
|
|
409,091
|
|
|
0
|
|
|
0
|
%
|
Atlas
Allocation Fund, L.P.
100
Crescent Court #880,
Dallas,
TX 75201
c/o
Atlas Capital Management (3)
|
|
|
409,091
|
|
|
409,091
|
|
|
0
|
|
|
0
|
%
|
Southwell
Partners, L.P.
1901
North Akerd Street
Dallas,
TX 75201 (4)
|
|
|
409,091
|
|
|
409,091
|
|
|
0
|
|
|
0
|
%
|
Centaur
Value Fund
1460
Main St., Suite 234
Southlake,
TX 76092 (5)
|
|
|
62,500
|
|
|
62,500
|
|
|
0
|
|
|
0
|
%
|
United
Centaur Master Fund
1460
Main St., Suite 234
Southlake,
TX 76092 (5)
|
|
|
62,500
|
|
|
62,600
|
|
|
0
|
|
|
0
|
%
|
Sandor
Capital Master Fund, L.P.
2828
Routh Street, Suite 500
Dallas,
TX 75201 (6)
|
|
|
113,636
|
|
|
113,636
|
|
|
0
|
|
|
0
|
%
|
Precept
Capital Master Fund, G.P.
200
Crescent Court, Suite 1450
Dallas,
TX 75201 (7)
|
|
|
113,636
|
|
|
113,636
|
|
|
0
|
|
|
0
|
%
|
Roth
Capital Partners, LLC
24
Corporate Plaza
Newport
Beach, CA 92660 (8)
|
|
|
90,910
|
|
|
90,910
|
|
|
0
|
|
|
0
|
%
|
Cooper
Family Trust
24
Corporate Plaza
Newport
Beach, CA 92660
c/o
Roth Capital Partners (9)
|
|
|
11,364
|
|
|
11,364
|
|
|
0
|
|
|
0
|
%
|
Aaron
M. Gurewitz
Trustee
of AMG Trust
30
Twilight Bluff
Newport
Coast, CA 92657 (10)
|
|
|
5,681
|
|
|
5,681
|
|
|
0
|
|
|
0
|
%
|
Gordon
Roth
189
Monarch Bay
Dana
Point, CA 92629
|
|
|
5,681
|
|
|
5,681
|
|
|
0
|
|
|
0
|
%
|
Glacier
Partners, L.P.
812
Anacapa St, Suite B
Santa
Barbara, CA 93101 (11)
|
|
|
90,909
|
|
|
90,909
|
|
|
0
|
|
|
0
|
%
|
Matthew
Hayden
7582
Windermere Ct.
Lake
Worth, FL 33467
|
|
|
34,091
|
|
|
34,091
|
|
|
0
|
|
|
0
|
%
|
Shine
Gold Holdings Limited
Palm
Grove House, P.O. Box 438
Road Town,
Tortola,
British
Virgin Islands (12)
|
|
|
10,690,668
|
|
|
3,863,636
|
|
|
6,827,032
|
|
|
32.3
|
%
|
Halter
Financial Investments, LP
12890
Hill Top Road
Argyle,
TX 76226 (13)
|
|
|
347,827
|
|
|
347,827
|
|
|
0
|
|
|
0
|
%
|
Jenson
Services, Inc.
4685
S. Highland Drive, Suite 202
Salt
Lake City, UT 84117 (14)
|
|
|
65,389
|
|
|
65,389
|
|
|
0
|
|
|
0
|
%
|
TOTAL
|
|
|
14,967,519
|
|
|
8,140,487
|
|
|
6,827,032
|
|
|
32.3
|
%
|
|
(1)
|
Barry
Kitt has dispositive and voting power over the shares and may be
deemed to
be the beneficial owner of the shares of common stock beneficially
owned
by each of Pinnacle China Fund, L.P. and The Pinnacle Fund, L.P. Mr.
Kitt disclaims beneficial ownership of the shares to the extent of
his
direct or indirect pecuniary interest.
|
|
|
|
|
(2)
|
Mr.
Patrick J. Brosnahan has voting and dispositive control over securities
held by Westpark Capital, L.P.
|
|
(3)
|
Mr.
Robert H. Alpert has voting and dispositive control over securities
held
by Atlas Allocation Fund, L.P.
|
|
|
|
|
(4)
|
Mr.
Wilson S. Jaeggli has voting and dispositive control over securities
held
by Southwell Partners, L.P.
|
|
(5)
|
Mr.
Zeke Aston has voting and dispositive control over securities held
by
Centaur Value Fund and United Centaur Master Fund.
|
|
|
|
|
(6)
|
Mr.
John S. Lemak has voting and dispositive control over securities
held by
Sandor Capital Master Fund, L.P.
|
|
|
|
|
(7)
|
Mr.
D. Blair Baker has voting and dispositive control over securities
held by
Precept Capital Master Fund, G.P.
|
|
|
|
|
(8)
|
Mr.
Gordon Roth has voting and dispositive control over securities held
by
Roth Capital Partners, LLC.
|
|
|
|
|
(9)
|
Mr.
Chad Cooper has voting and dispositive control over securities held
by the
Cooper Family Trust.
|
|
|
|
|
(10)
|
Mr.
Aaron M. Gurewitz has voting and dispositive control over securities
held
by the Aaron M. Gurewitz, Trustee of AMG
Trust.
|
|
(11)
|
Mr.
Peter Castellanos has voting and dispositive control over securities
held
by Glacier Partners, L.P.
|
|
|
|
|
(12)
|
Shine
Gold Holdings Limited is a company organized under the laws of the
British
Virgin Islands. The registered address for Shine Gold Holdings
is Palm Grove House, P.O. Box 438, Road Town, Tortola, British
Virgin Islands. Mr. Shi Huashan and certain of his relatives (the
“Shi
Family”) have entered into a trust agreements with a non-PRC individual,
under which the non-PRC individual holds the shares of Shine Gold
Holdings
as a trustee for the benefit of Mr. Shi and his family. The natural
persons with voting power and investment power on behalf of Shine
Gold
Holdings is Chong Shun. As beneficiaries of the trust arrangement,
members of the Shi family have only economic rights with respect to
the shares held by Shine Gold Holdings. Mr. Shi Huashan and the Shi
family
hereby disclaim beneficial ownership except to the extent of their
pecuniary interest in the Energroup shares held by Shine Gold
Holdings.
|
|
(13)
|
Mr.
Timothy Halter has voting and dispositive control over securities
held by
Halter Financial Investments, LP.
|
|
|
|
|
(14)
|
Mr.
Travis Jenson has voting and dispositive control over securities
held by
Jenson Services, Inc.
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
|
(US dollars in thousands)
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
|
2007
(audited)
|
|
2006
(audited)
|
|
2005
(audited)
|
|
2004
(audited)
|
|
2003
(unaudited)
|
|
Consolidated
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
124,696
|
|
|
70,396
|
|
|
54,119
|
|
|
654
|
|
|
-
|
|
Cost
of Sales
|
|
|
104,379
|
|
|
57,794
|
|
|
45,284
|
|
|
711
|
|
|
-
|
|
Gross
Profit
|
|
|
20,317
|
|
|
12,601
|
|
|
8,835
|
|
|
(56
|
)
|
|
-
|
|
Operating
Expenses
|
|
|
6,246
|
|
|
2,891
|
|
|
1,647
|
|
|
402
|
|
|
-
|
|
Income
from Operations
|
|
|
14,071
|
|
|
9,709
|
|
|
7,188
|
|
|
(459
|
)
|
|
-
|
|
Other
Income (Expense), net
|
|
|
(1,476
|
)
|
|
(1,583
|
)
|
|
(1,008
|
)
|
|
5,164
|
|
|
-
|
|
Income
Before Taxes
|
|
|
12,620
|
|
|
8,126
|
|
|
6,180
|
|
|
4,705
|
|
|
-
|
|
Income
Taxes
|
|
|
968
|
|
|
1.6
|
|
|
191
|
|
|
66
|
|
|
-
|
|
Net
Income
|
|
|
11,652
|
|
|
8,128
|
|
|
5,988
|
|
|
4,772
|
|
|
-
|
|
Foreign
Currency Translation
|
|
|
2,064
|
|
|
611
|
|
|
286
|
|
|
-
|
|
|
-
|
|
Comprehensive
Income
|
|
|
13,716
|
|
|
8,739
|
|
|
6,274
|
|
|
0.7
|
|
|
-
|
|
Basic
Net Income Per Share (in US$)
|
|
|
0.87
|
|
|
0.61
|
|
|
0.45
|
|
|
0.36
|
|
|
-
|
|
Diluted
Net Income Per Share (in US$)
|
|
|
0.67
|
|
|
0.47
|
|
|
0.35
|
|
|
0.28
|
|
|
-
|
|
Basic
Weighted Average Number of Shares Outstanding
|
|
|
13,409,120
|
|
|
13,409,120
|
|
|
13,409,120
|
|
|
13,409,120
|
|
|
-
|
|
Diluted
Weighted Average Number of Shares Outstanding
|
|
|
17,272,756
|
|
|
17,272,756
|
|
|
17,272,756
|
|
|
17,272,756
|
|
|
-
|
|
|
|
(US dollars in thousands)
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
|
2007
(audited)
|
|
2006
(audited)
|
|
2005
(audited)
|
|
2004
(audited)
|
|
2003
(unaudited)
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
66,620
|
|
$
|
56,846
|
|
$
|
50,993
|
|
$
|
29,957
|
|
$
|
-
|
|
Current
Liabilities
|
|
|
17,682
|
|
|
16,764
|
|
|
18,979
|
|
|
2,358
|
|
|
-
|
|
Long
Term Liabilities
|
|
|
-
|
|
|
17,909
|
|
|
18,580
|
|
|
19,309
|
|
|
-
|
|
Stockholders
Equity
|
|
|
48,938
|
|
|
22,174
|
|
|
13,434
|
|
|
8,290
|
|
|
-
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of the results of operations and financial
condition of Chuming for the fiscal years ended December 31, 2007, 2006,
and
2005 should be read in conjunction with the Selected Consolidated Financial
Data, the consolidated financial statements, and the notes to those financial
statements that are included elsewhere in this report. Our discussion includes
forward-looking statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations and intentions.
Actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under the Risk Factors, Cautionary Notice
Regarding Forward-Looking Statements and Business sections in this report.
We
use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,”
“ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and
similar expressions to identify forward-looking
statements.
OVERVIEW
We
are a
meat processing company that specializes in pork and pork products. We have
a
unique wholesale and retail distribution model and sell directly to over 7,600
retail outlets, including supermarkets and hypermarkets across Northeast
China.
Dalian
Precious Sheen Investments Consulting Co., Ltd., or Chuming WOFE, is our
holding
company established in the People’s Republic of China (the “PRC” or “China”) as
a holding company for our three PRC operating subsidiaries, referred to
elsewhere in this report as the “Chuming Operating
Subsidiaries”:
|
1.
|
Dalian
Chuming Slaughter and Packaging Pork Company Ltd. (also referred
to in
this report as “Meat Company”), whose primary business activity is
acquiring, slaughtering and packaging of pork and
cattle;
|
|
|
|
|
2.
|
Dalian
Chuming Processed Foods Company Ltd. (also referred to in this
report as
“Food Company”), whose primary business activity is the processing of raw
and cooked meat products; and
|
|
|
|
|
3.
|
Dalian
Chuming Sales Company Ltd. (also referred to in this report as
“Sales
Company”), which is responsible for Chuming’s sales, marketing and
distribution operations.
|
The
Chuming Operating Subsidiaries are spun off constituents of Chuming’s former
parent company, Dalian Chuming Group Co., Ltd., or the “Group.” Our 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. We are headquartered in the City of Dalian,
Liaoning Province of China. Chuming WOFE was incorporated in China as wholly
foreign owned enterprise on in December 2007.
Recent
Events in 2007 - Reverse Acquisition and Financing
Transaction
On
December 31, 2007, Energroup acquired all of the outstanding shares of PSI
in exchange for the issuance by Energroup of 16,850,000 restricted shares
of our common stock to the shareholders of PSI, which represented approximately
97.55% of the then-issued and outstanding common stock of Energroup (excluding
the shares issued in the Financing). As a result of this Exchange Transaction,
PSI became Energroup’s wholly owned subsidiary and Energroup acquired the
business and operations of Chuming WOFE.
Concurrently
with the closing of the Exchange Transaction, on December 31, 2007 we raised
$17,000,000 in a private placement by issuing 3,863,635 shares of our common
stock to investors at $4.40 per share.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
While
our
significant accounting policies are more fully described in Note 2 to our
combined financial statements included in this report, we believe that the
following accounting policies are the most critical to aid you in fully
understanding and evaluating this management discussion and
analysis:
Method
of Accounting
We
maintain our general ledger and journals with the accrual method accounting
for
financial reporting purposes. The financial statements and notes are
representations of management. Accounting policies adopted by us conform to
generally accepted accounting principles in the United States of America and
have been consistently applied in the presentation of financial statements,
which are compiled on the accrual basis of accounting.
Principles
of Consolidation
The
consolidated financial statements, which include the Company and its
subsidiaries, are compiled in accordance with generally accepted accounting
principles in the United States of America. All significant inter-company
accounts and transactions have been eliminated. The consolidated financial
statements include 100% of assets, liabilities, and net income or loss of those
wholly-owned subsidiaries.
Our
three
operating subsidiaries, the Meat Company, Food Company and Sales Company,
were
incorporated and have been in existence since December 2004. As of December
31,
2006, the detailed identities of the consolidating subsidiaries are as
follows:
Name of Company
|
|
Place of
Incorporation
|
|
Attributable
Equity
Interest
|
|
Registered Capital
|
|
Precious
Sheen Investments Limited
|
|
|
BVI
|
|
|
100
|
%
|
|
USD
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Dalian
Chuming Precious Sheen Investment Consulting Co., Ltd.
|
|
|
PRC
|
|
|
100
|
%
|
|
RMB
29,400,682
|
|
|
|
|
|
|
|
|
|
|
|
|
Dalian
Chuming Slaughtering & Pork Packaging Co. Ltd.
|
|
|
PRC
|
|
|
100
|
%
|
|
RMB
10,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Dalian
Chuming Processed Foods Co. Ltd.
|
|
|
PRC
|
|
|
100
|
%
|
|
RMB
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Dalian
Chuming Sales Co. Ltd.
|
|
|
PRC
|
|
|
100
|
%
|
|
RMB
5,000,000
|
|
The
consolidation of these operating subsidiaries into a newly formed holding
company i.e.
the
“Company” is permitted by United States GAAP: ARB51 paragraph 22 and
23.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Management makes these estimates using the best information
available at the time the estimates are made; however, actual results could
differ materially from these estimates.
Accounts
Receivable
We extend
unsecured, non interest bearing credit to our customers;
accordingly, we carry an allowance for doubtful accounts, which is an
estimate, made by management. Management makes its estimate based on prior
experience rates and assessment of specific outstanding customer balances.
Management must approve credit extended to new customers who have met the
criteria of our credit policy. It is typically the case that new customers
must make payments in advance before we sell our products to them. For
our
premier customers such as supermarkets, we do typically extend 30-45 days
of
terms to them.
In
order
for us to minimize bad debt, we exercise control over both the length of
the
receivables, and the quantity of products shipped to our customers to whom
we
have extended credit, such as those who pay on a monthly basis. In exercising
control over order quantities, on a product by product basis, we set maximum
limits that will be shipped to those customers. If in the event, the customer
is
near their maximum and has an outstanding balance, we will request payment
even
if it is outside of the normal payment cycles of our
customers.
Inventory
Carrying Value
Inventory,
consisting of raw materials in the form of livestock, work in progress,
and
finished products, is stated at the lower of cost or market value. Finished
products are comprised of direct materials, direct labor and an appropriate
proportion of overhead. Periodic evaluation is made by management to identify
if
inventory needs to be written down because of damage, or spoilage. Cost
is
computed using the weighted average method.
We
observe and evaluate the value of inventory on a product by product basis.
For
our fresh meat products which are typically sold as carcasses (hogs sliced
in
half), we typically carry zero inventory as these products are sold immediately.
We use a just in time model for fresh meat products. Our customers require
fresh
meat so we do not carry any excess inventory beyond the hogs that we slaughter
each day. Current market conditions have also influenced our inventory
across
the board. For our products that we require additional processing such
as hams
and sausages we typically, carry two days’ worth of inventory. For meat that has
been separated into smaller packaged portion, we typically carry one weeks’
worth of inventory. The PRC is currently facing a pork shortage, so as
a result,
presently we are able to sell all the fresh pork that we slaughter. Accordingly,
we have not been required to write down inventory for spoilage. Also, if
the
hogs do not meet our requirements for quality they are disposed of, and
charged
off immediately to our cost of sales, and they will not enter our
inventory.
Property,
Plant, and Equipment
Property,
plant, and equipment are stated at cost. Repairs and maintenance to these
assets
are charged to expense as incurred; major improvements enhancing the function
and/or useful life are capitalized. When items are sold or retired, the
related
cost and accumulated depreciation are removed from the accounts and any
gains or
losses arising from such transactions are recognized.
Construction
in progress represents the direct costs of design, acquisition, and construction
of buildings, building improvements and land improvements. Capitalization
of
these costs ceases when substantially all activities necessary to prepare
the
assets for their intended use are completed. At such point, construction
in
progress is transferred to its respective asset classification. No depreciation
is provided until it is completed and ready for intended use.
Property
and equipment are depreciated using the straight-line method over their
estimated useful life with a 5% salvage value. Their useful lives are as
follows:
Fixed
Asset Classification
|
|
Useful
Life
|
Land
Improvements
|
|
10
years
|
Buildings
|
|
20
years
|
Building
Improvements
|
|
10
years
|
Manufacturing
Machinery & Equipment
|
|
10
years
|
Office
Equipment
|
|
5
years
|
Furniture
& Fixtures
|
|
5
years
|
Vehicles
|
|
5
years
|
We
believe our estimation of useful life of our fixed assets has significant
bearing on our cost of sales. The related depreciation is a factor of
cost that
cannot be ignored in assessing our profits. We believe we have used a
conservative approach to assessing their useful lives. In our determination
of
useful life and depreciation methodology we coincidentally adhere to
PRC GAAP
standards in addition to U.S. GAAP. PRC GAAP standards provide a valuable
and
reasonable basis for determining useful life because the PRC government
documents and records all forms of manufacturing equipment and provides
guidance
on what is considerable acceptable in terms of depreciation expense.
We do also
believe based on the quality and nature of the maintenance we regularly
perform
on our equipment, it is possible that our equipment could significantly
outlive
their stated estimated useful lives.
Customer
Deposits
Customer
Deposits represents money we have received in advance for purchases of pork
and
pork products. We consider customer deposits as a liability until products
have
been shipped and sales revenue is earned.
Statutory
Reserve
Statutory
reserve refers to the amount appropriated from the net income in accordance
with
laws or regulations, which can be used to recover losses and increase capital,
as approved, and, are to be used to expand production or operations. PRC laws
prescribe that an enterprise operating at a profit, must appropriate, on an
annual basis, from its earnings, an amount to the statutory reserve to be used
for future company development. Such an appropriation is made until the reserve
reaches a maximum equaling 50% of the enterprise’s capital.
Earnings
Per Share
Basic
earnings per share is computed by dividing net income by the weighted average
number of ordinary shares outstanding during the period. Diluted earnings per
share is computed by dividing net income by the sum of the weighted average
number of ordinary shares outstanding and dilutive potential ordinary shares
during the years. During the years ended 2004, 2005, and 2006, no dilutive
potential ordinary shares were issued.
We
compute earnings per share (“EPS”) in accordance with Statement of Financial
Accounting Standards No. 128, “Earnings per share” (“SFAS No. 128”), and SEC
Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires companies
with complex capital structures to present basic and diluted EPS. Basic EPS
is
measured as the income or loss available to common shareholders divided by
the
weighted average common shares outstanding for the period. Diluted EPS is
similar to basic EPS but presents the dilutive effect on a per share basis
of
potential common shares (e.g., convertible securities, options, and warrants)
as
if they had been converted at the beginning of the periods presented, or
issuance date, if later. Potential common shares that have an anti-dilutive
effect (i.e., those that increase income per share or decrease loss per share)
are excluded from the calculation of diluted EPS.
In
connection with our reverse acquisition completed on December 31, 2007,
a total
of 3,863,636 shares of our common stock held by a trust, the beneficiaries
of
which include our CEO Mr. Shi Huashan and his family, were deposited into
a make
good escrow account. See “Strategic Financing” beginning on page 4. We accounted
for this deposit of escrow shares as “contingent shares,” and accordingly
reduced the number of shares deemed outstanding for accounting purposes
from
17,272,756 to 13,409,120. Accordingly, our “basic” weighted average shares
outstanding is 17,272,756, and our “diluted” weighted average shares outstanding
is 17,272,756. If and when the make good escrow shares are released to
their
original owners or to investors, our “basic” weighted average shares outstanding
will be increased accordingly. The effect of this accounting treatment
of the
make good escrow shares, is that our reported basic net income per share
will be
higher than our diluted net income per share, during the period in which
the
make-good shares are held in escrow.
Recent
Accounting Pronouncements
In
July
2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an
Interpretation of FASB Statement No. 109, which clarifies the accounting
for
uncertainty in tax positions. This Interpretation requires that the Company
recognizes in its consolidated financial statements the impact of a tax position
if that position is more likely than not of being sustained on audit, based
on
the technical merits of the position. The provisions of FIN 48 are effective
for
the Company on January 1, 2007, with the cumulative effect of the change
in
accounting principle, if any, recorded as an adjustment to opening retained
earnings.
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements, where fair value is the relevant
measurement attribute. The standard does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
year beginning after November 15, 2007, and interim periods within those fiscal
years.
In
September 2006, the SEC issued SAB No. 108, which provides guidance on the
process of quantifying financial statement misstatements. In SAB No. 108,
the
SEC staff establishes an approach that requires quantification of financial
statement errors, under both the iron-curtain and the roll-over methods,
based
on the effects of the error on each of the Company’s financial statements and
the related financial statement disclosures. SAB No.108 is generally effective
for annual financial statements in the first fiscal year ending after November
15, 2006. The transition provisions of SAB No. 108 permits existing public
companies to record the cumulative effect in the first year ending after
November 15, 2006 by recording correcting adjustments to the carrying values
of
assets and liabilities as of the beginning of that year with the offsetting
adjustment recorded to the opening balance of retained
earnings.
In
February 2007, the Financial Accounting Standards Board issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial Liabilities—Including an
Amendment of SFAS 115 (SFAS No. 159), which allows for the option to measure
financial instruments and certain other items at fair value. Unrealized gains
and losses on items for which the fair value option has been elected are
reported in earnings. The objective of SFAS 159 is to provide opportunities
to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply hedge accounting provisions.
SFAS 159 also establishes presentation and disclosure requirements designed
to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the impact of SFAS
No.
159 on our consolidated financial statements.
In
December 2007, the FASB issued SFAS 141 (revised 2007), Business
Combinations,
(‘‘SFAS
141(R)’’). SFAS 141(R) retains the fundamental requirements of the original
pronouncement requiring that the purchase method be used for all business
combinations, but also provides revised guidance for recognizing and measuring
identifiable assets and goodwill acquired and liabilities assumed arising
from
contingencies, the capitalization of in-process research and development
at fair
value, and the expensing of acquisition-related costs as incurred. SFAS 141(R)
is effective for fiscal years beginning after December 15, 2008. In the event
that the Company completes acquisitions subsequent to its adoption of SFAS
141
(R), the application of its provisions will likely have a material impact
on the
Company’s results of operations, although the Company is not currently able to
estimate that impact.
We
do not
anticipate that the adoption of the above standards will have a material
impact
on our consolidated financial statements.
RESULTS
OF OPERATIONS
Comparison
of Years Ended December 31, 2007 and December 31,
2006.
The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
|
|
Year Ended
|
|
|
|
Year Ended
|
|
|
|
|
|
December 31,
|
|
% of
|
|
December 31,
|
|
% of
|
|
|
|
2007
|
|
Sales
|
|
2006
|
|
Sales
|
|
Sales
|
|
$
|
124,696,035
|
|
|
100.00
|
%
|
$
|
70,396,439
|
|
|
100.00
|
%
|
Cost
of Sales
|
|
|
104,333,172
|
|
|
83.67
|
%
|
|
57,794,853
|
|
|
82.10
|
%
|
Gross
Profit
|
|
|
20,362,863
|
|
|
16.33
|
%
|
|
12,601,586
|
|
|
17.90
|
%
|
Selling
Expenses
|
|
|
4,672,829
|
|
|
3.75
|
%
|
|
1,556,805
|
|
|
2.21
|
%
|
General
& Administrative Expenses
|
|
|
1,572,836
|
|
|
1.26
|
%
|
|
1,334,866
|
|
|
1.90
|
%
|
Total
operating Expense
|
|
|
6,245,665
|
|
|
5.01
|
%
|
|
2,891,671
|
|
|
4.11
|
%
|
Operating
Income / (Loss)
|
|
|
14,117,199
|
|
|
11.32
|
%
|
|
9,709,915
|
|
|
13.79
|
%
|
Other
Income (Expense)
|
|
|
(1,451,742
|
)
|
|
(1.16)
|
%
|
|
(1,583,155
|
)
|
|
(2.25)
|
%
|
Earnings
Before Tax
|
|
|
12,665,457
|
|
|
10.16
|
%
|
|
8,126,760
|
|
|
11.54
|
%
|
(Income
Tax Expense) / Deferred Tax Benefit
|
|
|
(967,539
|
)
|
|
(0.78)
|
%
|
|
(1,609
|
)
|
|
0.00
|
%
|
Net
Income
|
|
$
|
11,697,917
|
|
|
9.38
|
%
|
$
|
8,128,369
|
|
|
11.55
|
%
|
Basic
Net Income Per Share
|
|
|
0.87
|
|
|
|
|
|
0.61
|
|
|
|
|
Diluted
Net Income Per Share |
|
|
0.67
|
|
|
|
|
|
0.47
|
|
|
|
|
Basic
Weighted Average Number of Shares Outstanding
|
|
|
13,409,120
|
|
|
|
|
|
|
|
|
|
|
Diluted Weighted
Average Number of Shares Outstanding
|
|
|
17,272,756
|
|
|
|
|
|
17,272,756
|
|
|
|
|
Sales.
Our
sales include revenues from sales of our Fresh Pork, Frozen Pork, and Processed
Food Products. During the year ended December 31, 2007, we had sales of
$124,696,035 as compared to sales of $70,396,439 for the year ended December
31,
2006, an increase of approximately 82.3%. This increase consisted of an increase
in the sale of Fresh Pork of $51,643,332 or 112.2%, from $46,038,675 in 2006
to
$97,681,997 in 2007, an increase in the sale of Frozen Pork of $1,571,858
or
21.7%, from $7,228,405 to $8,800,263, and an increase in the sale of Processed
Food Products of $1,086,146 or 6.3%, from $17,129,359 to $18,215,505 for
the
years then ended. In 2007, we raised our average per-kilogram sale prices
to our customers, which coincided with an increase in the cost of live pigs
and
other production costs. In addition, despite these consumer price increases,
in
2007 our sales volume of products (by weight) increased, with the largest
increase in volume occurring in our Processed Foods division. In 2007, we
began
selling our products through over 170 new franchise operators. Management
believes that this increase in sales volume, despite raised consumer prices,
resulted from increased consumer demand, and increased consumer awareness
of our
brand and availability of our products.
Cost
of Sales.
Cost of
sales for 2007 increased by $47,361,536 or 81.9%, from $57,794,853 for the
year
ended December 31, 2006 to $104,333,172 for the year ended December 31, 2007.
The increase was attributable to the 82.3% increase in sales for 2007 as
compared to the prior year. Our cost of sales for our various product categories
in 2007 is summarized as follows:
Cost
of Sales:
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
2007
|
|
Sales
|
|
2006
|
|
Sales
|
|
Fresh
Pork
|
|
$
|
84,622,181
|
|
|
81.11
|
%
|
$
|
36,015,632
|
|
|
62.32
|
%
|
Frozen
Pork
|
|
|
7,058,215
|
|
|
6.76
|
%
|
|
4,855,542
|
|
|
8.40
|
%
|
Processed
Food Products
|
|
|
12,652,776
|
|
|
12.13
|
%
|
|
16,923,679
|
|
|
29.28
|
%
|
Total
Cost of Sales
|
|
$
|
104,333,172
|
|
|
100
|
%
|
$
|
57,794,853
|
|
|
100
|
%
|
In
the
second quarter of 2007, and throughout the year, we experienced a sharp increase
in the cost of live pigs. Management estimates that the average cost of live
pigs increased by approximately 60% for 2007, as compared with the prior
year,
which was the most significant factor causing an increase in our cost of
sales.
Secondly, we experienced price increases in electricity, water and coal,
all of
which we use in our production process. Thirdly, wages increased in 2007
by an
estimated 7.5%. Lastly, we experienced slight increases in transportation
and
delivery costs in 2007. Management estimates that we were able to recoup
approximately 90% of these cost increases through increased consumer prices
for
our products. Management also believes that productivity remained steady,
with
no significant changes from 2006 to 2007.
Gross
Profit.
Gross
profit was $20,362,863 for the year ended December 31, 2007 as compared to
$12,601,586 for the year ended December 31, 2006, representing an increase
of
$7,761,277, or approximately 61.6%. Management attributes the increase in
gross
profit to strong increases in sales, driven by strong demand for our products.
In addition, we were able to achieve price increases in order to mitigate
the
impact of higher commodity and input prices in 2007. Our gross profit as
a
percentage of sales was 16.33% in 2007 as compared to 17.90% in 2006. 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 were able to pass
on to
our customers in the form of higher product prices.
Selling
Expenses.
Selling
expenses totaled $4,672,829 for the year ended December 31, 2007, as compared
to
$1,556,805 for the year ended December 31, 2006, an increase of $3,116,024
or
200%. In 2007 we expanded our advertising and marketing expenditures from
$150,000 in 2006, to $3.8 million in 2007, in our efforts to increase brand
awareness and encourage sales. These activities included television commercials,
radio, magazine and newspaper advertisements, and exhibitions.
General
and Administrative Expenses.
General
and Administrative Expenses totaled $1,572,836 for the year ended December
31,
2007 as compared to $1,334,866 for the year ended December 31, 2006, an increase
of $237,970 or 17.8%. This modest increase is primarily attributable to
increased hiring of staff, and slight increases in business expenses related
to
new customer acquisition.
Other
Income (Expense).
Our
other income (expense) consisted of Interest Income, Other Expenses, and
Interest Expense. We had total Other Expenses of $1,451,742 for the year
ended
December 31, 2007 as compared to $1,583,155 for the year ended December 31,
2006, a decrease of $131,413 or 8.3%. The decrease in Other Expenses in 2007
is
primarily attributable to a decrease in Interest Expenses, as we reduced
the
principal amount outstanding under our bank loan obligations by approximately
$17 million.
Net
Income.
Our net
income for the year ended December 31, 2007 was $11,697,917 as compared to
$8,128,369 for the year ended December 31, 2006, an increase of $3,569,548
or
43.9%. This increase in net income is basically attributable to the factors
described above, but primarily from the increase in sales and gross profit.
Net
income as a percentage of sales decreased from 11.55% in 2006 to 9.38% in
2007,
and management attributes this primarily decrease to our expanded advertising
and marketing initiatives in 2007. A secondary contributing factor to the
decrease in net income as a percentage of sales was a $965,930 increase in
tax
expenses in 2007 as compared to 2006. In 2006, we benefitted from a one-time
tax
credit from the Dalian City local government of approximately $440,000. In
2007
we received no such tax credit, and also recognized higher taxable income.
Comparison
of Years Ended December 31, 2006 and December 31,
2005.
The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
|
|
Year Ended
|
|
|
|
Year Ended
|
|
|
|
|
|
December 31,
|
|
% of
|
|
December 31,
|
|
% of
|
|
|
|
2006
|
|
Sales
|
|
2005
|
|
Sales
|
|
Sales
|
|
$
|
70,396,439
|
|
|
100.00
|
%
|
$
|
54,119,895
|
|
|
100.00
|
%
|
Gross
Profit
|
|
|
12,601,586
|
|
|
17.90
|
%
|
|
8,835,709
|
|
|
83.67
|
%
|
Selling
Expenses
|
|
|
1,556,805
|
|
|
2.21
|
%
|
|
711,226
|
|
|
16.33
|
%
|
General
& Administrative Expenses
|
|
|
1,334,866
|
|
|
1.90
|
%
|
|
936,179
|
|
|
1.31
|
%
|
Total
operating Expense
|
|
|
2,891,671
|
|
|
4.11
|
%
|
|
1,647,405
|
|
|
1.73
|
%
|
Operating
Income / (Loss)
|
|
|
9,709,915
|
|
|
13.79
|
%
|
|
7,188,304
|
|
|
3.04
|
%
|
Other
Income (Expense)
|
|
|
(1,583,155
|
)
|
|
-2.25
|
%
|
|
(1,008,248
|
)
|
|
13.28
|
%
|
Earnings
Before Tax
|
|
|
8,126,760
|
|
|
11.54
|
%
|
|
6,180,056
|
|
|
-1.86
|
%
|
(Income
Tax Expense) / Deferred Tax Benefit
|
|
|
(1,609
|
)
|
|
0.00
|
%
|
|
(191,284
|
)
|
|
11.42
|
%
|
Net
Income
|
|
$
|
8,128,369
|
|
|
11.55
|
%
|
$
|
5,988,772
|
|
|
-0.35
|
%
|
Basic
Net Income Per Share
|
|
|
0.61
|
|
|
|
|
|
0.45
|
|
|
|
|
Diluted
Net Income Per Share
|
|
|
0.47
|
|
|
|
|
|
0.35
|
|
|
|
|
Basic
Weighted Average Shares Outstanding
|
|
|
13,409,120
|
|
|
|
|
|
13,409,120
|
|
|
|
|
Diluted
Weighted Average Shares Outstanding
|
|
|
17,272,756
|
|
|
|
|
|
17,272,756
|
|
|
|
|
Sales.
Our
sales include revenues from sales of our Fresh Pork, Frozen Pork, and Processed
Food Products. During the year ended December 31, 2006, we had sales of
$70,396,439 as compared to sales of $54,119,895 for the year ended December
31,
2005, an increase of approximately 30%. This increase is attributable to
an
increase in the sale of Fresh Pork of $9,354,422 or 26%, from $36,684,253
in
2005 to $46,038,675 in 2006, an increase in the sale of Frozen Pork of
$1,918,527 or 37%, from $5,309,877 to $7,228,405, and an increase in the
sale of
Processed Food Products of $5,003,594 or 42%, from $12,125,765 to $17,129,359
for the years then ended. The most notable factor in the increase in our
sales in 2006 from the prior year was the expansion of sales through sales
agents, whose customers are resellers who operated specialty counters. In
2007,
expansion of sale through agents brought an additional $13 million in sales,
compared to sales through agents in 2005. Also in 2007, we added over 300
retailers to our network (from approximately 100 operators in 2005 to 425
operators in 2006), which increased sales by an additional $5 million compared
to the prior year. We also began selling our products in 31 new supermarket
locations, which added $4 million to our sales as compared to the prior year.
We
also added seafood to our product line at the end of 2005, which began
generating sales and contributed an estimated $2.9 million in sales. Overall,
in
2006 management believe the key drivers for our sales results was our ramp-up
of
production capacity from increased availability of live hogs, increased brand
awareness among consumers, increased availability of our product though retain
channels, and the expansion of our product line with the addition of seafood.
Cost
of Sales.
Cost of
sales for 2006 increased $12,510,667 or 28%, from $45,284,186 for the year
ended
December 31, 2005 to $57,794,853 for the year ended December 31, 2006. The
increase in our cost of sales for our various product categories is summarized
as follows:
|
|
|
|
% of
|
|
|
|
% of
|
|
|
|
2006
|
|
Sales
|
|
2005
|
|
Sales
|
|
Fresh
Pork
|
|
$
|
36,015,632
|
|
|
51.16
|
%
|
$
|
29,609,886
|
|
|
54.71
|
%
|
Frozen
Pork
|
|
|
4,855,542
|
|
|
6.90
|
%
|
|
3,779,626
|
|
|
6.98
|
%
|
Processed
Food Products
|
|
|
16,923,679
|
|
|
24.04
|
%
|
|
11,894,674
|
|
|
21.98
|
%
|
Total
Cost of Sales
|
|
$
|
57,794,853
|
|
|
82.10
|
%
|
$
|
45,284,186
|
|
|
83.67
|
%
|
Since
our
fresh pork production line began in late 2004, we began to realize operating
efficiencies, and in 2006, this contributed to a reduction in the cost of
sales
for fresh pork as a percentage of total sales. Our efficiency gains in fresh
pork production was partially offset by the startup costs associated with
launching our new seafood products. In 2005 our production of seafood was
limited, but in 2006 we began producing seafood products in significant volume.
Our operating costs, such as the price of live pigs, utilities (electricity,
water and coal), labor and transportation remained relatively unchanged from
2005 to 2006.
Gross
Profit.
Gross
profit was $12,601,586 for the year ended December 31, 2006 as compared to
$8,835,709 for the year ended December 31, 2005, representing gross margins
of
approximately 17.90% and 16.33% of sales, respectively. As previously discussed,
we achieved operating efficiencies in 2006 in the production of fresh pork,
which also contributed to an increase in our gross profit margin in 2006
as
compared with 2005. These efficiency gains were partially offset by the cost
of
launching our new line of seafood products and ramping up seafood production
in
2005. At the same time, the cost of our operating inputs remained relatively
unchanged from 2005 to 2006, which helped us increase our gross profit margin.
Selling
Expenses.
Selling
expenses totaled $1,556,805 for the year ended December 31, 2006, as compared
to
$711,226 for the year ended December 31, 2005, an increase of $845,579 or
119%.
This increase is primarily attributable to new business development. Management
attributes the increase in selling expenses for 2006 to the roll-out of our
seafood line and hiring new sales personnel to expansion of our sales and
marketing efforts. Selling expenses in 2006 included market research, give-away
of product samples, and some advertising.
General
and Administrative Expenses.
General
and Administrative Expenses totaled $1,334,866 for the year ended December
31,
2006 as compared to $936,179 for the year ended December 31, 2005, an increase
of $398,687 or 43%. This increase is primarily attributable to increases
in
management compensation and hiring of new staff, and increased business expenses
such as business travel.
Other
Income (Expense).
Our
other income (expense) consisted of Interest Income, Other Expenses, and
Interest Expense. We had total Other Expense of $1,583,155 for the year ended
December 31, 2006 as compared to $1,008,248 for the year ended December 31,
2005, an increase of $574,907 or 57%. The increase in other expenses is mainly
due to an increase of Interest Expense of $486,821 or 50.17%, from $970,383
at
the year ended December 31, 2005 to $1,457,204 at the year ended December
31,
2006. In December of 2005, we obtained a $4.4 million working capital loan
from
a local bank in China, which we used in the operations of the Food Company.
As a
result, we incurred increased interest expenses in 2006 as compared to 2005.
Net
Income.
Our net
income for the year ended December 31, 2006 was $8,128,369 as compared to
$5,988,772 for the year ended December 31, 2005, which is an increase of
$2,139,597, or 35.7%. Management attributes this increase in net income to
an
increase in sales and operating efficiencies in the production of fresh pork,
offset by higher interest expenses, higher personnel costs, and increased
selling expenses.
Comparison
of Years Ended December 31, 2005 and December 31,
2004.
The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
|
|
Year Ended
December 31,
2005
|
|
%
of Sales
|
|
Year Ended
December 31,
2004
|
|
% of Sales
|
|
Sales
|
|
|
54,119,895
|
|
|
100.00
|
%
|
|
654,749
|
|
|
100.00
|
%
|
Cost
of Sales
|
|
|
45,284,186
|
|
|
83.67
|
%
|
|
711,473
|
|
|
108.66
|
%
|
Gross
Profit
|
|
|
8,835,709
|
|
|
16.33
|
%
|
|
(56,724
|
)
|
|
-8.66
|
%
|
Selling
Expenses
|
|
|
711,226
|
|
|
1.31
|
%
|
|
14,109
|
|
|
2.15
|
%
|
General
and Administrative Expenses
|
|
|
936,179
|
|
|
1.73
|
%
|
|
388,264
|
|
|
59.30
|
%
|
Total
operating Expense
|
|
|
1,647,405
|
|
|
3.04
|
%
|
|
402,373
|
|
|
61.45
|
%
|
Operating
Income/(Loss)
|
|
|
7,188,304
|
|
|
13.28
|
%
|
|
(459,097
|
)
|
|
-70.12
|
%
|
Other
Income (Expense)
|
|
|
(1,008,248
|
)
|
|
-1.86
|
%
|
|
5,164,941
|
|
|
788.84
|
%
|
Earnings
Before Tax
|
|
|
6,180,056
|
|
|
11.42
|
%
|
|
4,705,844
|
|
|
718.72
|
%
|
(Income
Tax Expense)/Deferred Tax Benefit
|
|
|
(191,284
|
)
|
|
-0.35
|
%
|
|
66,403
|
|
|
10.14
|
%
|
Net
Income
|
|
|
5,988,772
|
|
|
11.07
|
%
|
|
4,772,247
|
|
|
728.87
|
%
|
Basic
Net Income Per Share
|
|
|
0.45
|
|
|
|
|
|
|
|
|
|
|
Diluted
Net Income Per Share |
|
|
0.35
|
|
|
|
|
|
0.28
|
|
|
|
|
Basic
Weighted Average Shares Outstanding
|
|
|
|
|
|
|
|
|
13,409,120
|
|
|
|
|
Diluted Weighted
Average Shares Outstanding
|
|
|
17,272,756
|
|
|
|
|
|
17,272,756
|
|
|
|
|
Sales.
Our
sales include revenues from sales of our Fresh Pork, Frozen Pork, and Processed
Food Products. During the year ended December 31, 2005. We had sales of
$54,119,895 as compared to sales of $654,749 for the year December 31, 2004,
an
increase of $53,465,146. This increase is attributable to an increase in
the
sale of Fresh Pork of $36,099,228 or 6,171% from $585,025 in 2004 to $36,684,253
in 2005, an increase in the sale of Frozen Pork of $5,240,153 or 7,516% from
$69,724 to $5,309,877 and an increase in the sale of Proceed Food Products
of
$12,125,765 from nil to $12,125,765. For most of 2004, we did not generate
income, and began production of fresh frozen pork in December 2004. Accordingly,
we recorded a large increase in sales from 2004 to 2005, due to the fact
that we
began production in the latter part of 2004. In 2005, we generated approximately
$31 million in sales through agents whose customers are specialty counter
resellers. In 2005 we also began selling or products through supermarkets
at 61
new locations which added $14 million to our sales, and worked with operators
to
establish approximately 100 Chuming branded franchise stores, which added
another $2.5 million to our sales in 2005. In addition, in 2005 we began
selling
our product to canteens, restaurants and other customers. Previously in 2004,
we
only generated sales through agents.
Cost
of Sales.
Cost of
sales for 2005 increased $44,572,713, from $711,473 for the year ended December
31, 2004 to $45,284,186 for the year ended December 31, 2005. The increase
in
our cost of revenues for our various product categories is summarized as
follows:
Cost
of Sales:
|
|
2005
|
|
% of Sales
|
|
2004
|
|
% of Sales
|
|
Fresh
Pork
|
|
|
29,609,886
|
|
|
54.71
|
%
|
|
598,253
|
|
|
91.37
|
%
|
Frozen
Pork
|
|
|
3,779,626
|
|
|
6.98
|
%
|
|
113,220
|
|
|
17.29
|
%
|
Processed
Food Products
|
|
|
11,894,674
|
|
|
21.98
|
%
|
|
0
|
|
|
0.00
|
%
|
Total
Cost of Sales
|
|
|
45,284,186
|
|
|
83.67
|
%
|
|
711,473
|
|
|
108.66
|
%
|
Management
attributes the increases in operating costs to the fact that production of
our
products began in the latter part of 2004. In general, management believes
there
was not a significant change in the basic operating inputs (such as live
pigs,
utilities, labor and transportation) from 2004 to 2005.
Gross
Profit.
Gross
profit was $8,835,709 for the year ended December 31, 2005 as compared to
loss
of $56,724 for the year ended December 31, 2004. The increase in our gross
profit was due to the fact that we began production of our products in late
2004.
Selling
Expenses.
Selling
expenses totaled $711,226 for the year ended December 31, 2005, as compared
to
$14,109 for the year ended December 31, 2004, representing an increase of
$697,117. Management attributes these higher selling expenses in 2005 to
the
addition of a new sales force, and various business development expenses
incurred in the process of pursuing relationships with supermarkets, resellers
and other customers.
General
and Administrative Expenses.
General
and Administrative Expenses totaled $936,179 for the year ended December
31,
2005 as compared to $388,264 for the year ended December 31, 2004, an increase
of $547,915. Management attributes these increases expenses in 2005 to the
hiring of management personnel, and business expenses associated with
development of relationships with supermarkets, resellers and other customers.
Other
Income (Expense).
Our
other income (expense) consisted of other income, interest income, other
expenses, and interest expense. We had total net other expenses of $1,008,248
for the year ended December 31, 2005 as compared to total net other income
of
$5,164,941 for the year ended December 31, 2004. The increase in other expenses
in mainly due to an increase in other expenses of $38,905 and interest expense
of $860,023 due to an increase in borrowings. The increase in other income
in
2004 resulted from one-time government grants provided by the Wa Fang Dian
Industrial District Construction Administration.
Net
Income.
Our net
income for the year ended December 31, 2005 was $5,988,772 as compared to
$4,772,247 for the year ended December 31, 2004. In 2004, our income was
mostly
a result of other income, consisting of one-time government grants provided
by
the Wa Fang Dian Industrial District Construction Administration. In contrast,
in 2005 our net income was principally attributable to income from our
operations.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Flows
Twelve
Months Ended December 31, 2007
Net
cash
inflow sourced from operating activities was $23.0 million in fiscal 2007
and
while net cash flow used in operating activities was $7.1 million in fiscal
2006. Prior to 2007, we offered flexible payment terms to agents who purchase
pork products from us for resale to retailers, but in March of 2007, we
eliminated this practice and required agents to pay promptly for products
ordered. In addition, we have worked with our larger customers to make
improvements in the collection process. As a result we believe we have improved
our process of collecting accounts receivable as compared to the prior year.
In
2007, we also used $108.5 million in cash to purchase materials and pay
employees in our efforts to satisfy increased customer demand for our products.
Net
cash
flow used in investing activities was $11.3 million in fiscal 2007, compared
to
cash used in investing activities of $1.9 million in fiscal 2006. The increase
in cash flow used in investing activities from 2006 to 2007 was a result
of an
equity financing, and a one-time payment by us for land use rights. In 2007,
we
completed a $17 million private placement, and agreed to have $4.25 million
of
the net proceeds deposited into an escrow account for release contingent
upon
our satisfaction of certain criteria relating to the structure of the board,
management and appointment of and auditing firm. Also in 2007, we paid
approximately $4.2 million to our local government for land use rights which
we
acquired in 2004.
Net
cash
flow used in financing activities was $2.7 million in fiscal 2007 as compared
to
net cash sourced from financing activities of $1.8 million in fiscal 2006.
This
change was a result of our $17 million private placement financing, $4.25
million of which was held back in an escrow account, and the repayment of
a
construction loan with an original principal amount of $19.3 million, in
addition to other short term loans. Our private placement financing brought
in
approximately $14.7 million in cash proceeds, excluding amounts held back
in
escrow. However, this cash inflow was offset by the payment of $23.2 million
that was used toward to repayment in full of our construction loan from 2004,
and certain short term business loans.
Twelve
Months Ended December 31, 2006
Net
cash
outflow used in operating activities was $7.1 million in fiscal 2006 and
while
net cash inflow provided by operating activities was $18.9 million in
fiscal 2005. In 2006, we used significant cash for the purchase of raw materials
and inputs in order to satisfy customer orders, which totaled approximately
$65
million, as compared to $30 million in 2005. In 2006, however, cash received
from customers was approximately $60 million, which was less than the $70
million in sales we recorded in 2006. Management estimates that approximately
$12 million in receivables generated in 2006 were not collected until after
December 31, 2006, and management believes this is attributable to the longer
collection periods associated with sales to large supermarkets, restaurant
chains and other similar customers with which it does an increasing amount
of
business.
Net
cash
flow used in investing activities was $1,920,586 for fiscal 2006 and compared
to
net cash used in investing activities of $11,453,481 in fiscal 2005. In 2004
we
completed the construction of our plant and equipment used in our fresh pork,
frozen pork, and processed foods business. We used $10.5 million in cash
in 2004
and $11.4 million in cash to pay for this construction. Although we began
operations in December 2004, a large portion of our construction cost was
deferred to 2005 because it was dependent upon completion of a government
permitting process which was completed in 2005. In addition, we acquired
a 50
year land use right from the government in 2004, however, pursuant to an
agreement with the local government, we were permitted to defer a one-time
payment of $4.2 million to 2007. Since the one-time payment secures us land
use
rights for fifty year, management does not presently anticipate that any
additional cash payments will be required of us in connection with land use
rights in the foreseeable future.
Net
cash
flow used in financing activities was $1,753,971 in fiscal 2006 as compared
to
net cash provided by financing activities of $2,496,786 for fiscal 2005.
Net
cash provided by financing activities in both 2005 and 2006 is from bank
borrowings for purposes of financing the purchase of raw materials and inputs
used in our operations.
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 December 31,
2007,
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
|
|
$
|
7,500,000
|
|
$
|
-
|
|
$
|
7,500,000
|
|
$
|
-
|
|
$
|
-
|
|
Other
Indebtedness
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Capital
Lease Obligations
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Operating
Leases
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Purchase
Obligations
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Total
Contractual Obligations:
|
|
$
|
7,500,000
|
|
$
|
-
|
|
$
|
7,500,000
|
|
$
|
-
|
|
|
-
|
|
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.
Related
Party Transactions
For
a
description of our related party transactions, see the section of this
Prospectus entitled “Certain Relationships and Related
Transactions.”
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 September 30, 2007, we had approximately $ 2,457,434 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 signing of sales contracts and
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 $285,352 and
$610,696 in 2005 and 2006, 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 subsidiary 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.
LEGAL
PROCEEDINGS
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.
MANAGEMENT
The
following table includes the names, positions held, and ages of our current
directors, executive officers and significant employees as of March 31,
2008:
Name
|
|
Age
|
|
Position
|
Shi
Huashan *
|
|
49
|
|
President,
Chief Executive Officer and Chairman of the Board
|
Wang
Shu *
|
|
33
|
|
Chief
Financial Officer and Director
|
Chen
Fuyuan *
|
|
43
|
|
Chief
Operating Officer
|
Yan
Jinglu
|
|
42
|
|
Marketing
Director and General Manager of Sales Company
|
Chen
Shujie
|
|
41
|
|
Vice
General Manager - Sales Company
|
Cui
Zhiqiang
|
|
38
|
|
General
Manager - Food Company
|
Ma
Yongjun
|
|
42
|
|
General
Manager - Meat Company
|
Sun
Qiuye
|
|
33
|
|
Vice
General Manager - Meat Company
|
Wang
Suping
|
|
32
|
|
General
Manager - Food Company
|
Song
Deqi
|
|
32
|
|
Vice
General Manager - Food Company
|
Ma
Fengqin
|
|
45
|
|
Vice
President and Director
|
Wang
Shuying
|
|
57
|
|
Director
|
Matthew
Dillon
|
|
47
|
|
Director
|
Nestor
Gounaris
|
|
36
|
|
Director
|
James
Boyle
|
|
47
|
|
Director
|
*
Denotes
an executive officer.
Each
director will hold office until the next annual meeting of stockholders and
until his or her successor has been elected and qualified.
Mr.
Shi Huashan,
age 49,
is a graduate of Beijing Renwen University in Corporate Law, and the founder
of
Chuming. Mr. Shi Huashan has nearly 20 years of experience in the food industry.
He established Dalian Chuming Industry Development Company in 1992, which
started the Dalian Chuming Group Co., Ltd. From 1992 to present he has served
as
President and CEO of Chuming and the Dalian Chuming Group Co., Ltd. companies.
In 2004, he was selected by the China Meats Association as one of the “Ten Most
Influential Entrepreneurs in the China Meat Industry.” Mr. Shi Huashan is the
current President of the Dalian Food Association. He is Chuming’s President,
Chief Executive Officer, and Chairman of the Board of Directors.
Ms.
Wang Shu,
age 33,
is a graduate of Liaoning University, with a major in accounting, Ms. Wang
Shu
has more than 11 years of experience in finance. From 1996 to 2001, she worked
at Dalian Huaqiao House Development Company as its chief accountant. In 2001,
she joined Dalian Chuming Group Co., Ltd., and in her present role serves as
Chuming’s as Chief Financial Officer, and as a member of the Board of
Directors.
Ms.
Ma Fengqin,
age 45,
is a graduate of Dalian Electric Power Economic School, with a major in
accounting. From 1990 to 1993, she worked at Dalian Thermo Engineering Company
as its Chief Accountant. From 1992 to 2001, Ms. Ma served as Vice President
of
Dalian Chuming Industry Development Company. Since 2002 she has served as
Chuming’s Vice President, and a member of the Board of Directors. Ms. Ma is
married to Mr. Shi Huashan, Chairman of the Board of Directors.
Ms.
Shuying Wang,
age 57,
member of the Chuming Board of Directors, served from 1996-2004 as Chief of
the
Dalian Planning Committee’s Agriculture Economy Development Section, and now
works as a consultant to the Section. From 1991-1996 she was Vice Chief of
the Section. A graduate of Dalian Railway College, she was a staff member
of the Dalian Machinery Bureau’s Agriculture Machinery Department from
1977-1984. From 1984-1989 Ms. Wang was Chief of the Dalian Planning
Committee’s Industry Section, before undertaking German language studies at the
Beijing Foreign Trading University. She completed a training program in
Germany at Heidelberg Hiller College from 1989-1991 prior to returning to
Dalian’s Planning Committee.
Mr.
Matthew Dillon,
age 47,
member of the Chuming Board of Directors, has been President of Dalian
Global Link Consultants in Dalian, China since 1998. He was previously a
Senior Engineer with Aeronautical Radio, Inc. in Annapolis, MD and an
Avionics Systems Specialist in the U.S. Air Force. Mr. Dillon speaks
Mandarin, earning a Chinese Language Certificate from Dalian Maritime
University, where he has owned the Dalian I-55 Coffee Stop and Bakery since
2000. A graduate of Southern Illinois University with a BS degree in
Industrial Engineering and Technology, he also earned a Master of Divinity
degree from the Southern Baptist Theological Seminary in Louisville,
KY.
Mr.
Nestor Gounaris,
age 36,
member of the Chuming Board of Directors, has been a principal since 2005 with
China Solutions LLC, a Shanghai- and New York-based advisory firm assisting
its clients with foreign direct investments and operations in China. From 2003
to 2005 he was an associate with Simmons & Simmons in Shanghai, working in
the law firm’s PRC-focused corporate and foreign direct investment practice. Mr.
Gounaris worked for O’Melveny & Myers in Shanghai as an associate from 2001
to 2003. An Honors Paralegal with the U.S. Department of Justice’s Antitrust
Division in Washington, D.C. from 1996-1998, he holds a degree in Foreign
Studies from Georgetown University’s School of Foreign Service, and a juris
doctor degree from the University of Virginia School of Law. Mr. Gounaris has
been a research fellow for the North Atlantic Treaty Organization in Washington,
D.C., and a Boren Fellow for the Academy of Educational Development in
Charlottesville, VA and Shanghai. He is a member of the State Bar of New York,
and is fluent in Mandarin and modern Greek.
Mr.
James Boyle,
age 47,
is Principal and Managing Partner of Expat-CFO Services Ltd. in Shanghai,
and
has held this position since 2001. Expat-CFO serves U.S. and European
multinational companies and private equity firms including Callaway Golf,
Daymon
Worldwide, Louisville Bedding and Kemin Industries, providing interim controller
and CFO services, accounting and treasury outsourcing, and M&A transaction
advisory including due diligence, deal structuring and valuation. From
1996-2001, Mr. Boyle worked for Dura-Line Shanghai Plastics Co., Ltd., as
Business Development and China Start-Up Manager, Deputy General Manager,
CFO,
and Acting Managing Director. Mr. Boyle is fluent in Mandarin, earning a
Bachelor of Science degree from the State University of New York Maritime
College in Economics and Marine Transportation, and an MBA from the Thunderbird
School of Global Management in International Management and Finance. He is
a
member of the Institute of Management Accountants and the American Chamber
of
Commerce in Shanghai, and serves as President of the Shanghai Chapter of
the
Thunderbird Alumni Association.
Mr.
Chen Fuyuan,
age 43,
is a graduate of Dalian University of Technology, with a major in Mechanical
Engineering. Mr. Chen Fuyuan has more than 15 years of experience in the food
industry. From 1986 to 1998, he worked at Dalian Food Company as a vice manager.
In 1998, he joined Dalian Chuming Group Co. Ltd. as vice general manager and
general engineer. He presently serves as Chuming’s Chief Operating
Officer.
Mr.
Yan Jinglu,
age 42,
is a graduate of the Chinese Academy of Social Sciences in Beijing, with a
masters degree in Economics. Mr. Yan Jinglu has more than 12 years of experience
in the food industry. From 1987 to 1992, he worked at Heilongjiang Agriculture
Development Economy College as a lecturer. From 1992 to 1995, he worked at
Heilongjiang Commercial Bureau of the Farm Bureau General as a vice director.
From 1995 to 2002, he worked at Dalian Longguang Foodstuff Co., Ltd. as a
department director. From 2002 to the present he has worked at Dalian Chuming
Group Co., Ltd. as Marketing Director and general manager of Chuming’s sales
subsidiary.
Ms.
Chen Shujie
, age
41, worked at Dalian Grocery Group Company as director of the marketing center
from 1985 to 1998. From 1998 to 2001, she worked at Dalian Mingxing Livestock
Product Company as vice general manager in charge of marketing. In 2001, she
began work at Dalian Chuming Sales Company Ltd. as vice general manager and
has
continued in that position to the present.
Mr.
Cui Zhiqiang,
age 38,
is a graduate of Dongbei University of Finance and Economics, with a major
in
Accounting. Mr. Cui Zhiqiang worked at Hisense Changchun Company as finance
supervisor from 1990 to 2004. From 2004 to 2005, he worked at Hisense Sales
Company Dalian Branch as finance director. In 2005, he began work at Dalian
Chuming Sales Company Ltd. as finance director and has continued in that
position to the present.
Mr.
Ma Yongjun,
age 42,
has more than 15 years of experience in the food industry. From 1981 to 1992,
he
worked at Dalian Power Engineering Company as a manager. From 1992 to 2004,
he
worked at Dalian Chuming Industry Development Company as a vice general manager.
In 2004, he began his current role at Dalian Chuming Slaughter and Packaging
Pork Company Ltd. as general manager.
Mr.
Sun Qiuye,
33, is a
graduate of Dalian University of Technology, with a major in Machinery and
Equipment. Mr. Sun Qiuye worked at Dalian Sanyo Refrigeration Corporation from
1997 to 2003. From 2003 to 2004, he worked at Dalian Chuming Group Co., Ltd.
as
vice manager of the manufacturing department. In 2004, he started work at Dalian
Chuming Meat Products Co., Ltd. as vice general manager.
Ms.
Wang Suping,
age 32,
has more than 12 years of experience in the food industry. From 1995 to 2000,
she worked at Shanxi Datong Tongfeng Group as factory director. From 2000 to
2004, she worked at Dalian Mingxing Livestock Product Company as vice general
manager. In 2004, she began work at Dalian Chuming Food Co., Ltd. as general
manager and has continued in that position to the present.
Mr.
Song Deqi,
age 32,
is a graduate of Shenyang Agriculture University, with a major in Food
Engineering, Mr. Song Deqi has more than 8 years of experience in the food
industry. In 1999, he worked at Dalian Anji Food Company as an engineer. From
1999 to 2004, he worked at Dalian Mingxing Livestock Product Company as vice
director of factory operations. In 2004, he began work at Dalian Chuming Food
Co., Ltd. as vice general manager and has continued in that position to the
present.
There
are
no family relationships, or other arrangements or understandings between or
among any of the directors, executive officers or other person pursuant to
which
such person was selected to serve as a director or officer.
On
February 6, 2008, Wendi Li resigned from our board of directors shortly after
having been appointed. Ms. Li’s resignation was not due to any disagreements
with our policies or management. Our board of directors is presently reviewing
the candidacy of an independent director to fill the vacancy resulting from
Ms.
Li’s departure.
On
February 21, 2008, the board of directors appointed Mr. James Boyle as a
director on the board of directors, effective February 21, 2008. Mr. Boyle
is
one of seven directors presently serving on the board of directors.
Our
directors, executive officers and control persons have not been involved in
any
of the following events during the past five years:
1.
any bankruptcy petition filed by or against any business of which such person
was a general partner or executive officer either at the time of the bankruptcy
or within two years prior to that time;
2.
any conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses);
3.
being subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; or
4.
being found by a court of competent jurisdiction (in a civil action), the SEC
or
the Commodity Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed,
suspended, or vacated.
Audit
Committee of the Board; Audit Committee Financial Expert
Our
board
of directors does not have a separate audit committee, however, we are not
currently required to have such a committee. The functions ordinarily handled
by
an audit committee are currently handled by our entire board of directors.
Our
board of directors intends, however, to review our governance structure and
institute board committees as necessary and advisable in the future, to
facilitate the management of our business.
Our
board
of directors has also determined that it does not have a member of the board
that qualifies as an “audit committee financial expert” as defined in Item
401(e) of Regulation S-B, and is “independent” as the term is used in Item
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as
amended and as defined by Rule 4200(a)(15) of the NASDAQ Marketplace Rules.
We
believe that the members of our board of directors are collectively capable
of
analyzing and evaluating our financial statements and understanding internal
controls and procedures for financial reporting. However, we are considering
appointing an independent qualified financial expert to our board of directors
in order to strengthen and improve its internal disclosure controls and
procedures.
Director
Independence
Our
board
of directors consists of three non-independent directors, Shi Huashan, Wang
Shu
and Ma Fengqin, and four independent directors Wang Shuying, Matthew Dillon,
Nestor Gounaris and James Boyle. Management believes these independent directors
meet the definitions and criteria for independence under the NASDAQ
rules.
Section
16(a) of the Exchange Act
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our executive
officers and directors, and persons who beneficially own more than 10% of
a
registered class of our equity securities to file with the SEC initial
statements of beneficial ownership, reports of changes in ownership and annual
reports concerning their ownership of our common stock and other equity
securities, on Forms 3, 4 and 5 respectively. Executive officers, directors
and
greater than 10% shareholders are required by SEC regulations to furnish
us with
copies of all Section 16(a) reports they file. Based on a review of the copies
of such forms received by us, and to the best of our knowledge, all executive
officers, directors and greater than 10% shareholders filed the required
reports
in a timely manner for the fiscal year ended December 31, 2007,
except
that Form 3s were inadvertently filed late by Chen Fuyuan, Wang Shu, Shi
Huashan
and Shine Gold Holdings Limited on January 16, 2008, and a Form 4 was
inadvertently filed late by Alycia D. Anthony on May 14, 2007.
Compensation
Committee Interlocks and Insider Participation
No
interlocking relationship exists between our board of directors on compensation
committee of any other company, nor has any interlocking relationship existed
in
the past.
Code
of Business Conduct and Ethics
We
have
not adopted a code of business conduct and ethics that applies to our officers,
directors and employees, including our Chief Executive Officer, senior executive
officers, principal accounting officer, controller and other senior financial
officers.
EXECUTIVE
COMPENSATION
Director
Compensation
We
did
not pay any compensation to members of our board of directors for fiscal
year
2007. However, in connection with the Exchange Transaction, we appointed
seven
new directors consisting of four independent directors, Wang Shuying, Matthew
Dillon, Nestor Gounaris and James Boyle, and three non-independent directors,
Shi Huashan, Wang Shu and Ma Fengqin. For our upcoming fiscal year, we have
agreed to pay these independent directors a flat fee of $12,000 per year
as
compensation for their services on the board, with additional compensation
for
service on board committees to be determined by the full board of
directors.
Executive
Compensation
The
following executive compensation disclosure reflects all compensation for
fiscal
year 2007 received by our principal executive officer, principal financial
officer, and three most highly compensated executive officers whose salary
exceeded US$100,000. We refer to these individuals in this prospectus as
“named
executive officers.”
Summary
Compensation
|
|
|
|
Annual
Compensation (2)
|
|
Name
and Principal
Position
|
|
Fiscal
Year
|
|
Salary
(1)
($)
|
|
All Other
Compensation (3)
($)
|
|
Total
($)
|
|
Shi
Huashan
|
|
|
2007
|
|
$
|
40,000
|
|
|
20,000
|
|
|
60,000
|
|
Chief
Executive Officer, President
|
|
|
2006
|
|
|
50,000
|
|
|
-
|
|
|
50,000
|
|
Wang
Shu
|
|
|
2007
|
|
$
|
20,000
|
|
|
10,000
|
|
|
30,000
|
|
Chief
Financial Officer
|
|
|
2006
|
|
|
15,000
|
|
|
5,000
|
|
|
-
|
|
Chen
Fuyuan
|
|
|
2007
|
|
|
20,000
|
|
|
10,000
|
|
|
30,000
|
|
Chief
Operating Officer
|
|
|
2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Wang
Shuying
|
|
|
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Director
|
|
|
2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Matthew
Dillion
|
|
|
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Director
|
|
|
2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Ma
Fengqin
|
|
|
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Director
|
|
|
2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Nestor
Gounaris
|
|
|
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Director
|
|
|
2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
James
Boyle
|
|
|
2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Director
|
|
|
2006
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1)
|
Expressed
in U.S. Dollars based on the interbank exchange rate of 7.61 RMB for
each 1.00 U.S. Dollar for the year ended December 31,
2007.
|
|
|
|
|
(2)
|
In
2007, compensation paid to our officers and directors included
no bonuses,
stock or option awards, non-equity incentive plan awards, or non-qualified
deferred compensation, and accordingly, these columns have been
omitted
from this table.
|
|
|
|
|
(3)
|
All
Other Compensation includes allowances for transportation, housing,
communications, training, personal service perquisites, and utility
expenses. In 2007, “other compensation” to Mr. Shi Huashan included a
transportation allowance ($6,000), housing allowance ($5,000),
mobile
phone and communications allowance ($4,000), training expenses
($4,000),
personal service perquisites ($600), and utility expense reimbursement
($400). For Ms. Wang Shu and Chen Fuyuan “other compensation” in 2007
included a transportation allowance ($3,000), housing allowance
($2,500),
mobile phone and communications allowance ($2,000), training expenses
($2,000), personal service perquisites ($300), and utility expense
reimbursement ($200).
|
None
of
our executive officers received, nor do we have any arrangements to pay out,
any
bonus, stock awards, option awards, non-equity incentive plan compensation,
or
non-qualified deferred compensation.
Grants
of Plan-Based Awards
We
did
not make any grants of plan-based awards to our directors or named executive
officers during our fiscal year-ended December 31, 2007.
Outstanding
Equity Awards
There
are
no unexercised options, stock that has not vested, or equity incentive plan
awards for any of our directors or named executive officers outstanding as
of
December 31, 2007.
Option
Exercises and Stock Vested
There
were no exercises of stock options, SARs or similar instruments, and no vesting
of stock, including restricted stock, restricted stock units and similar
instruments, during the last completed fiscal year for any of our directors
or
named executive officers.
Pension
Benefits
We
currently have no plans that provide for payments or other benefits at,
following, or in connection with retirement of our directors or named executive
officers.
Nonqualified
Defined Contribution and Other Nonqualified Deferred Compensation
Plans
We
currently have no defined contribution or other plans that provide for the
deferral of compensation to our directors or named executive officers on a
basis
that is not tax-qualified.
Potential
Payments Upon Termination or Change-in-Control
Other
than any employment agreements described in this prospectus, we currently have
no contract, agreement, plan or arrangement, whether written or unwritten,
that
provides for payments to a named executive officer at, following, or in
connection with any termination, including without limitation resignation,
severance, retirement or a constructive termination of a named executive
officer, or a change in control of the registrant or a change in the named
executive officer’s responsibilities, with respect to each named executive
officer.
Indemnification
The
Nevada Revised Statutes and our bylaws permit us to indemnify our officers
and
directors for liabilities they may incur, including liabilities under the
Securities Act and Exchange Act. Our bylaws provide that our officers and
directors may be indemnified by us in the event of third party actions, if
the
officer or director acted in good faith and in a manner that he or she
reasonably believed was in or not against the company’s best interests, and with
respect to any criminal action or proceeding, had no reason to believe that
his
or her actions were unlawful. Our bylaws also provide that we may provide
indemnification for our officer and directors for any action by the company
against such directors and officers, if the officer or director acted in good
faith and in a manner that he or she reasonably believed was in or not against
the company’s best interests, except no indemnification may be made for
negligence or misconduct of such director’s or officer’s duties to the company,
unless a court in which the matter is brought determines that in view of all
the
circumstance of the case, the person is fairly and reasonably entitled to
indemnification. This and our bylaws indemnification may, however, be
unenforceable as against public policy.
Employment
Agreements
Effective
at closing of the Exchange Transaction described elsewhere in this prospectus,
we entered into executive employment agreements with each of Mr. Shi Huashan
(President and Chief Executive Officer), Ms. Wang Shu (acting Chief Financial
Officer) and Mr. Chen Fuyuan (Chief Operating Officer). Each agreement provides
for a yearly salary of USD $100,000 payable in monthly installments in
accordance with our standard payroll practices for salaried employees. Each
executive officer’s salary will be subject to adjustment pursuant to our
employee compensation policies in effect from time to time. Under the terms
of
each of the agreements, each executive officer will be entitled to the benefits
that we customarily make available to employees in comparable positions.
Each
officer has the right to terminate his or her employment by giving us prior
notice with or without cause, and we hold an equal right. The Board of Directors
or appropriate committee thereof, may from time to time, in its sole discretion,
adjust the salaries and benefits paid to our executive officers. A copy of
the
employment agreements are included as exhibits to our Form 8-K filed on January
7, 2008. Beginning in 2008, we increased compensation paid to our CEO, CFO
and
COO from an aggregate of $120,000 in 2007 to an expected base compensation
of
$300,000 for 2008, and in addition we anticipate incurring increased costs
as we
hire additional financial and accounting staff as necessary to comply with
accounting and regulatory requirements. We anticipate that these additional
costs will have an impact on its 2008 financial results. In addition, please
see
our risk factor that reads “We will incur increased costs as a public company
which may affect our profitability” on page 37 of this prospectus.
The
following is a summary of the compensation to be paid under these employment
agreements in the upcoming fiscal year ending December 31, 2008 to our named
executive officers:
Summary
of Compensation To Be Paid Under Employment Agreements for
Fiscal
Year Ending December 31, 2008
|
|
Annual
Compensation
|
|
Name
and Principal Position
|
|
Salary
|
|
Bonus
(1)
|
|
Other annual
compensation
|
|
Shi
Huashan
President,
Chief Executive Officer
|
|
$
|
100,000
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Wang
Shu
Chief
Financial Officer
|
|
$
|
100,000
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Chen
Fuyuan
Chief
Operating Officer
|
|
$
|
100,000
|
|
|
—
|
|
|
—
|
|
(1)
We have no arrangements with our executive officers to pay bonuses
or other annual compensation.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information regarding the beneficial ownership of
our
common stock as of February 11, 2008, for each of the following
persons:
|
·
|
each
of our directors and each of the named executive officers in the
“Management” section of this
prospectus;
|
|
·
|
all
directors and named executive officers as a group;
and
|
|
·
|
each
person who is known by us to own beneficially five percent or more
of our
common stock.
|
Beneficial
ownership is determined in accordance with the rules of the SEC. Unless
otherwise indicated in the table, the persons and entities named in the table
have sole voting and sole investment power with respect to the shares set forth
opposite the shareholder’s name. Unless otherwise indicated, the address of each
beneficial owner listed below is c/o Dalian Precious Sheen Investments
Consulting Co., Ltd., No. 9, Xin Yi Street, Ganjingzi District, Dalian City,
Liaoning Province, PRC 116039. The percentage of class beneficially owned set
forth below is based on 21,136,391 shares of our common stock outstanding on
February 11, 2008.
|
|
Common Stock Beneficially Owned
|
|
Named
executive officers and directors:
|
|
Number
of shares beneficially owned
|
|
|
|
Percentage of
class beneficially owned
|
|
Shi
Huashan
|
|
|
14,688,948
|
|
|
(1)
|
|
|
69.5
|
%
|
Wang
Shu
|
|
|
0
|
|
|
|
|
|
0
|
%
|
Chen
Fuyuan
|
|
|
0
|
|
|
|
|
|
0
|
%
|
Ma
Fengqin
|
|
|
0
|
|
|
|
|
|
0
|
%
|
Nestor
Gounaris
|
|
|
0
|
|
|
|
|
|
0
|
%
|
Matthew
Dillon
|
|
|
0
|
|
|
|
|
|
0
|
%
|
Wang
Shuying
|
|
|
0
|
|
|
|
|
|
0
|
%
|
All
directors and executive officers as a group (7 persons)
|
|
|
14,688,948
|
|
|
|
|
|
69.5
|
%
|
5%
Shareholders:
|
|
|
|
|
|
|
|
Shine
Gold Holdings Limited
|
|
|
10,690,668
|
|
|
(1)
|
|
|
50.6
|
%
|
Shiny
Snow Holdings Limited
|
|
|
1,948,890
|
|
|
(1)
|
|
|
9.2
|
%
|
Smart
Beat Limited
|
|
|
2,049,390
|
|
|
(1)
|
|
|
9.7
|
%
|
Barry
Kitt
|
|
|
2,045,455
|
|
|
(2)
|
|
|
9.7
|
%
|
|
(1)
|
Shine
Gold Holdings Limited, Shiny Snow Holding Limited, and Smart Beat
Limited,
are each companies organized under the laws of the British Virgin
Islands
(collectively, the “Shi Family Companies”). The registered address
for the Shi Family Companies is Palm Grove House, P.O. Box 438,
Road Town, Tortola, British Virgin Islands. Mr. Shi Huashan and
certain of his relatives (the “Shi Family”) have entered into trust
agreements with three non-PRC individuals, under which the non-PRC
individuals shall hold the shares of the Shi Family Companies as
trustees for the benefit of the Shi Family. The natural persons with
voting power and investment power on behalf of the Shi Family
Companies are (i) Chong Shun, (ii) Kuo Ching Wan Amy, and (iii) Wey
Meirong, respectively (collectively, the “Trustees”).
As beneficiaries of the trust arrangements, members of the Shi Family
have only economic rights with respect to the shares held by the
Shi Family Companies. Mr. Shi Huashan and the Shi Family hereby
disclaim beneficial ownership except to the extent of their pecuniary
interest in the Company shares held by the Shi Family
Companies.
|
|
|
|
|
(2)
|
Barry
Kitt exercises investment discretion and control over the shares
of common
stock of the Company held by The Pinnacle Fund, L.P., a Texas limited
partnership (“Pinnacle”) and Pinnacle China Fund, L.P., a Texas limited
partnership (“Pinnacle China”). Pinnacle Advisers, L.P. (“Advisers”) is
the general partner of Pinnacle. Pinnacle Fund Management, LLC
(“Management”) is the general partner of Advisers. Mr. Kitt is the sole
member of Management. Pinnacle China Advisers, L.P. (“China Advisers”) is
the general partner of Pinnacle China. Pinnacle China Management,
LLC
(“China Management”) is the general partner of China Advisers. Kitt China
Management, LLC (“China Manager”) is the manager of China Management. Mr.
Kitt is the manager of China Manager. As of December 31, 2007, Pinnacle
and Pinnacle China were the beneficial owners of 2,045,454 shares
of
Common Stock. Mr. Kitt may be deemed to be the beneficial owner of
the shares of Common Stock beneficially owned by Pinnacle and Pinnacle
China. Mr. Kitt expressly disclaims beneficial ownership of all
shares of Common Stock beneficially owned by Pinnacle and Pinnacle
China.
|
Equity
Compensation Plan Information
We
have
not adopted any equity compensation plan as of our most recent fiscal year
ended
December 31, 2007.
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In
addition to the Exchange Transaction, we had the following transactions, since
the beginning of our last fiscal year in which we were or are to be a
participant and the amount involved exceeds the lesser of $120,000 or one
percent of the average of our total assets at year-end for the last three
completed fiscal years, and in which any related person had or will have a
direct or indirect material interest:
Related
Party Transactions of Chuming
Our
current Chief Executive Officer, Mr. Shi Huashan, is also the Chief Executive
Officer and a controlling beneficial shareholder of our former parent company,
Dalian Chuming Group Co., Ltd. Mr. Shi devotes the majority of his time and
effort to his role as our Chief Executive Officer under our employment agreement
with him. A description of the executive employment agreements we have with
our
executives, including the employment agreement between Mr. Shi and the Company,
appears on page 74 of this prospectus. However, some portion of his time
is
spent on the business and affairs of Dalian Chuming Group Co., Ltd., and
in his
capacity as the principal executive officer, he presides over management
and the
day-to-day operations of Dalian Chuming Group Co., Ltd.
In
the
normal course of business, we conduct transactions with the following related
parties, that are not consolidated into the Company or its subsidiaries:
(1)
Dalian Chuming Group Co., Ltd., also referred to this report as the “Group”, and
the Group’s subsidiaries: (2) Dalian Chuming Industrial Development Co., Ltd.,
(3) Dalian Chuming Trading Co., Ltd, (4) Dalian Mingxing Livestock Product
Co.
Ltd., (5) Dalian Chuming Stockbreeding Combo Development Co., Ltd., (6) Dalian
Chuming Fodder Co., Ltd., (7) Dalian Chuming Biological Technology Co., Ltd.,
and (8) 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 WOFE and the Group. All transactions
with related parties are generally performed at arm’s length, and in 2007, all
such transactions were conducted at arm’s length.
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.
The
“Chuming” trademark and rights to the “Huayu” trademark application in the PRC
are owned by Dalian Chuming Industry Development Co., Ltd., a subsidiary
of the
Group. We have been granted a perpetual fully paid up license to use both
of
these trademarks in connection with our business, under two trademark agreements
with Dalian Chuming Industry Development Co., Ltd.
On
December 17, 2007, we entered into a Long-Term Hog Procurement Agreement with
Dalian Chuming Group Company, Ltd., our former parent. This agreement specifies
that Dalian Chuming Group Co., Ltd. should supply no less than 750,000 live
hogs
to Chuming in 2008, 800,000 in 2009, and 800,000 in 2010, and the price for
the
hogs is at the fair market price at the time of acquisition.
Related
Party Transactions Prior to Change in Control
Set
forth
below are the related party transactions that took place since December 31,
2006, but prior to our change in control on December 31, 2007, between our
shareholders, officers and/or directors, and us.
A
shareholder, Jenson Services, paid $3,193 of the Company’s operating expenses
during the three months ended March 31, 2007 resulting in total accrued “loans
from stockholders” of $25,871. The total $25,871 has been paid by Jenson
Services and was payable to Jenson Services as of March 31, 2007.
On
May 3,
2007, Energroup, along with its then-current directors and executive officers,
entered into a stock purchase agreement with Halter Financial Investments,
L.P.,
a Texas limited partnership (“HFI”), pursuant to which Energroup agreed to sell
to HFI 11,200,000 pre-reverse split shares (approximately 1,600,000 post-reverse
split shares) of unregistered, restricted common stock for $350,000 cash. This
transaction closed on May 22, 2007. In conjunction with this stock purchase
agreement, on May 3, 2007, certain of Energroup’s then-principal shareholders,
as a condition of the closing of the stock purchase agreement surrendered and
cancelled 1,350,000 then-issued and outstanding shares of Energroup common
stock. These shares were surrendered as follows: Jenson Services, Inc., which
then owned 2,480,500 pre-reverse split shares (approximately 354,290
post-reverse split shares) (or approximately 68% of our then-outstanding voting
securities) delivered 375,000 of its pre-reverse split shares (approximately
53,572 post-reverse split shares) for cancellation; James P. Doolin, which
then
owned 475,000 pre-reverse split shares (approximately 67,858 post-reverse split
shares) (or approximately 13% of our then-outstanding voting securities)
delivered 475,000 pre-reverse split shares (approximately 67,858 post-reverse
split shares) for cancellation; and his sister, Alycia Anthony, which then
owned
500,000 pre-reverse split shares (approximately 71,429 post-reverse split shares
(or approximately 14% of our then-outstanding voting securities) delivered
500,000 pre-reverse split shares (approximately 71,429 post-reverse split
shares) for cancellation. All of these cancelled shares were returned to the
status of authorized and unissued shares of Energroup. No consideration was
given by Energroup in the cancellation of these shares. The effect of the share
cancellations was to reduce the carrying par value of shares surrendered and
a
corresponding increase to additional paid-in capital.
Under
the
terms of the stock purchase agreement, on May 3, 2007, the board of directors
of
Energroup at the time declared a special cash distribution of $0.1219 per share
to shareholders of record as of May 17, 2007, the record date for the special
cash distribution. Neither HFI or the shares surrendered by Jenson Services
or
James P. Doolin or Alycia Anthony participated in the special cash distribution.
The special cash distribution was paid on May 29, 2007, to shareholders of
record on the record date, subject to the closing of the stock purchase
agreement. The special cash distribution was paid to the holders of an aggregate
2,297,421 pre-reverse split shares of Energroup’s common stock, after giving
effect to the cancellation of 1,350,000 pre-reverse split shares discussed
above, which resulted in a total cash distribution of approximately $280,000.
The special cash distribution was a condition of the closing of the stock
purchase agreement.
Further,
the stock purchase agreement contained covenants that required HFI, in its
capacity as Energroup’s controlling shareholder following closing of the stock
purchase agreement, to agree that it will not approve any reverse splits other
than a one-time reverse split of not greater than 1-for-7 without the prior
consent of Energroup’s former officers as representatives of Energroup’s
continuing shareholders; that it will not authorize the issuance of any
additional shares of common stock or securities convertible into shares of
common stock except in connection with a combination transaction with a
corporation with current business operations (a “Going Public Transaction”); and
that it will not allow Energroup to enter into a Going Public Transaction unless
Energroup, on a combined basis with the operating entity with which it completes
a Going Public Transaction, satisfies the financial conditions for listing
on
the Nasdaq Small-Cap Market (now Nasdaq Capital Market) immediately
following the closing of the Going Public Transaction. These conditions were
deemed satisfied by HFI prior to the Exchange Transaction of December 31, 2007.
The stock purchase agreement also grants demand and “piggy back” registration
rights to HFI and to any continuing holders of Energroup’s common stock that are
deemed to be holding “restricted securities.”
As
at the
date of this prospectus, we do not have any policies in place with respect
to
whether we will enter into agreements with related parties in the
future.
DESCRIPTION
OF SECURITIES
The
following information describes our capital stock and provisions of our articles
of incorporation and our bylaws, all as in effect upon the closing of the
Exchange Transaction. This description is only a summary. You should also refer
to our articles of incorporation, bylaws and articles of amendment which have
been incorporated by reference or filed with the Securities and Exchange
Commission as exhibits to the registration statement on Form S-1 of which this
prospectus forms a part.
General
On
December 14, 2007, we conducted a 4.6 to 1 reverse stock split, which resulted
in the reduction of our outstanding common stock from 1,943,812 to 422,756
shares. In the December 31, 2007 reverse take-over transaction, we issued a
total of 16,850,000 shares in a share exchange transaction, which increased
our
outstanding shares of common stock to 17,272,756. In the concurrent Financing
on
December 31, 2007, we issued an additional 3,863,635 shares of common stock,
bringing our total number of outstanding shares to 21,136,391 shares of common
stock. We currently are authorized to issue up to 21,739,130 shares of common
stock, $0.001 par value per share and 10,000,000 shares of preferred stock,
$0.001 par value per share. As of February 11, 2008, there were 21,136,391
shares of common stock issued and outstanding, and no shares of preferred stock
issued or outstanding.
Common
Stock
Holders
of common stock are entitled to one vote for each share on all matters submitted
to a shareholder vote. Holders of common stock do not have cumulative voting
rights. Subject to preferences that may be applicable to any then-outstanding
preferred stock, holders of common stock are entitled to share in all dividends
that the board of directors, in its discretion, declares from legally available
funds. In the event of our liquidation, dissolution or winding up, subject
to
preferences that may be applicable to any then-outstanding preferred stock,
each
outstanding share entitles its holder to participate in all assets that remain
after payment of liabilities and after providing for each class of stock, if
any, having preference over the common stock.
Holders
of common stock have no conversion, preemptive or other subscription rights,
and
there are no redemption or sinking fund provisions applicable to the common
stock. The rights of the holders of common stock are subject to any rights
that
may be fixed for holders of preferred stock, when and if any preferred stock
is
authorized and issued. All outstanding shares of common stock are duly
authorized, validly issued, fully paid and non-assessable.
Preferred
Stock
Our
board
of directors, without further shareholder approval, may issue preferred stock
in
one or more classes or series as the board may determine from time to time.
Each
such class or series shall be distinctly designated. All shares of any one
class
or series of the preferred stock shall be alike in every particular, except
that
there may be different dates from which dividends thereon, if any, shall be
cumulative, if made cumulative. The voting powers, designations, preferences,
limitations, restrictions and relative rights thereof, if any, may differ from
those of any and all other series outstanding at any time. Our board of
directors has express authority to fix (by resolutions adopted prior to the
issuance of any shares of each particular class or series of preferred stock)
the number of shares, voting powers, designations, preferences, limitations,
restrictions and relative rights of each such class or series. The rights
granted to the holders of any series of preferred stock could adversely affect
the voting power of the holders of common stock and issuance of preferred stock
may delay, defer or prevent a change in our control.
Registration
Rights
We
have
agreed to undertake to file this prospectus and related registration statement
to register the common stock issued to the investors in the Financing. In the
event that the registration statement is not declared effective by the
Securities and Exchange Commission within 135 days of the closing of the
Financing, we will also owe liquidated damages to the investors of 1% of the
total financing amount in cash per month after the 135 day period. The
liquidated damages payable to the investors in the event of non-registration
or
late effectiveness is subject to a cap of 10% of the total financing
amount.
Registration
of these shares of common stock upon exercise of these registration rights
would
result in the holders being able to trade these shares without restriction
under
the Securities Act once the applicable registration statement is declared
effective. We will pay all registration expenses related to any registration.
Non-registration penalties do not apply when the holder can sell all of the
holder’s shares pursuant to Rule 144(k) under the Securities Act.
Market
Price of and Dividends on Common Equity and Related Shareholder
Matters
Our
common stock is not listed on any stock exchange. Our common stock is traded
over-the-counter on the OTC Bulletin Board under the symbol “ENHD.OB”. The
following table sets forth the high and low bid information for our common
stock
for each quarter within our last two fiscal years and subsequent interim
periods, as reported by the OTC Bulletin Board. The bid prices reflect
inter-dealer quotations, do not include retail markups, markdowns or commissions
and do not necessarily reflect actual transactions.
|
|
Low
|
|
High
|
|
2008
(1)
|
|
|
|
|
|
Quarter
ended March 31, 2008 |
|
$ |
0.15 |
|
$ |
6.40 |
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
Quarter
ended
December 31, 2007 |
|
$
|
0 |
|
$
|
1.50 |
|
Quarter
ended September 30, 2007
|
|
$
|
0.31
|
|
$
|
2.00
|
|
Quarter
ended June 30, 2007
|
|
$
|
0.31
|
|
$
|
2.00
|
|
Quarter
ended March 31, 2007
|
|
$
|
0.30
|
|
$
|
0.30
|
|
2006
|
|
|
|
|
|
Quarter
ended December 31, 2006
|
|
$
|
0.30
|
|
$
|
0.30
|
|
Quarter
ended September 30, 2006
|
|
$
|
0.30
|
|
$
|
0.30
|
|
Quarter
ended June 30, 2006
|
|
$
|
0.30
|
|
$
|
1.01
|
|
Quarter
ended March 31, 2006
|
|
$
|
0.30
|
|
$
|
1.01
|
|
2005
|
|
|
|
|
|
Quarter
ended December 31, 2005
|
|
$
|
0.50
|
|
$
|
0.50
|
|
Quarter
ended September 30, 2005
|
|
$
|
0.25
|
|
$
|
0.50
|
|
Quarter
ended June 30, 2005
|
|
$
|
0.05
|
|
$
|
0.025
|
|
Quarter
ended March 31, 2005
|
|
|
n/a
|
|
|
n/a
|
|
(1) Adjusted
for reverse stock split on December 14, 2007.
The
last
reported closing sales price for shares of our common stock was $5.00 per
share
on the Over-The-Counter Bulletin Board on March 5, 2008.
Holders
As
of
February 11, 2008, there were approximately 160 shareholders of record of our
common stock based upon the shareholders’ listing provided by our transfer
agent.
Transfer
Agent
Our
transfer agent is Western States Transfer and Registrar, Inc., and its telephone
number is (801) 523-1547. Our transfer agent's address is 1911 Ryan Park
Avenune, Sandy, Utah 84092.
DIVIDENDS
On
May 3,
2007, prior to the Exchange Transaction, Energroup, along with its then-current
directors and executive officers, entered into a stock purchase agreement with
Halter Financial Investments, L.P., a Texas limited partnership (“HFI”),
pursuant to which we agreed to sell to HFI 11,200,000 pre-reverse split shares
(approximately 1,600,000 post-reverse split shares) of unregistered, restricted
common stock for $350,000 cash. This transaction closed on May 22, 2007. In
conjunction with this stock purchase agreement, on May 3, 2007, certain of
our
then-principal shareholders, as a condition of the closing of the stock purchase
agreement surrendered and cancelled 1,350,000 then-issued and outstanding shares
of our common stock. These shares were surrendered as follows: Jenson Services,
Inc., which then owned 2,480,500 pre-reverse split shares (approximately 354,290
post-reverse split shares) (or approximately 68% of our then-outstanding voting
securities) delivered 375,000 of its pre-reverse split shares (approximately
53,572 post-reverse split shares) for cancellation; James P. Doolin, which
then
owned 475,000 pre-reverse split shares (approximately 67,858 post-reverse split
shares) (or approximately 13% of our then-outstanding voting securities)
delivered 475,000 pre-reverse split shares (approximately 67,858 post-reverse
split shares) for cancellation; and his sister, Alycia Anthony, which then
owned
500,000 pre-reverse split shares (approximately 71,429 post-reverse split shares
(or approximately 14% of our then-outstanding voting securities) delivered
500,000 pre-reverse split shares (approximately 71,429 post-reverse split
shares) for cancellation. All of these cancelled shares were returned to the
status of authorized and unissued shares. No consideration was given by us
in
the cancellation of these shares. The effect of the share cancellations was
to
reduce the carrying par value of shares surrendered and a corresponding increase
to additional paid-in capital.
Under
the
terms of the stock purchase agreement, on May 3, 2007, the then-current board
of
directors of Energroup declared a special cash distribution of $0.1219 per
share
to its shareholders of record as of May 17, 2007, the record date for the
special cash distribution. Neither HFI or the shares surrendered by Jenson
Services or James P. Doolin or Alycia Anthony participated in the special cash
distribution. The special cash distribution was paid on May 29, 2007, to
shareholders of record on the record date, subject to the closing of the stock
purchase agreement. The special cash distribution was paid to the holders of
an
aggregate 2,297,421 pre-reverse split shares of our common stock, after giving
effect to the cancellation of 1,350,000 pre-reverse split shares discussed
above, which resulted in a total cash distribution of approximately $280,000.
The special cash distribution was a condition of the closing of the stock
purchase agreement.
Except
for the special cash distribution described above, we have never paid cash
dividends on our common stock. Since the reverse take-over transaction on
December 31, 2007, we have not declared or paid any dividends.
We
intend
to keep future earnings, if any, to finance the expansion of our business,
and
we do not anticipate that any cash dividends will be paid in the foreseeable
future. Our future payment of dividends will depend on our earnings, capital
requirements, expansion plans, financial condition and other relevant factors
that our board of directors may deem relevant. Our retained earnings deficit
currently limits our ability to pay dividends.
SHARES
ELIGIBLE FOR FUTURE SALE
Prior
to
this offering, there has been little or no active market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. Furthermore, because the trading
volume of our shares is relatively low, sales of substantial amounts of our
common stock in the public market after the restrictions lapse could adversely
affect the prevailing market price or our shares, and may limit our ability
to
raise equity capital in the future. When a registration statement is declared
effective by the SEC (referred to as the “effective date”) covering the
underlying shares of common stock, these shares, when issued, will be freely
tradable without restriction under the Securities Act, unless purchased by
our
“affiliates” as that term is defined in Rule 144 under the Securities Act
(generally, officers, directors or 10% stockholders). See “ Description
of Securities - Registration Rights”
for
additional information.
Assuming
full registration of the shares covered by this prospectus, management estimates
that approximately 13.4 million shares (or approximately 64%) of our common
stock outstanding will be “restricted securities” within the meaning of Rule 144
under the Securities Act. Restricted securities may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Sales of the restricted securities in the public market,
or
the availability of such shares for sale, could adversely affect the market
price of the common stock.
In
general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned restricted shares of our
Company for at least six months would be entitled to sell such shares without
regard to volume limitations, manner of sale restrictions or Form 144 notice
requirements, so long as current public information about us is available.
Under
Rule 144(k), a person who is not deemed to have been an affiliate of us at
any
time during the three months preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least one year, is entitled to sell such
shares even if current public information about us is not available. Any person
who is deemed to be an affiliate of us can begin selling restricted shares
of
our Company after six months, subject to volume limitations, manner of sale
restrictions and current public information requirements. Our affiliates will
not have to file a Form 144 unless the transaction is for at least 5,000 shares
or $50,000.
Beginning
90 days after the effective date of our registration statement for the shares
in
this prospectus, any employee, officer or director of or consultant to us who
purchases shares pursuant to a written compensatory plan or contract may be
entitled to rely on the resale provisions of Rule 701 (if such plans are
instituted and any plan shares are outstanding at that time). Rule 701 permits
affiliates to sell their Rule 701 shares under Rule 144 without complying with
the holding period requirements of Rule 144. Rule 701 further provides that
non-affiliates may sell such shares in reliance on Rule 144 without having
to
comply with the holding period, public information, volume limitation or notice
provisions of Rule 144. In addition, we may in the future, file registration
statements under the Securities Act to register shares to be issued pursuant
to
employee benefit plans. As a result, any options exercised under any benefit
plans after the effectiveness of such registration statement will also be freely
tradable in the public market, except that shares held by affiliates will still
be subject to the volume limitation, manner of sale, notice and public
information requirements of Rule 144 unless otherwise resalable under Rule
701.
As of September 30, 2007, we had no outstanding options.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
AND FINANCIAL DISCLOSURE
Prior
to
our reverse take-over transaction and $17 million financing, when we were a
pubic reporting shell company, MantylaMCREYNOLDS LLC (“McReynolds”)
served as our auditor of record. McReynolds resigned as the independent auditor
of Energroup effective February 6, 2008. McReynolds served as Energroup’s
independent auditors for the fiscal years ended December 31, 1999 thru December
31, 2006, and the interim periods during 2007.
McReynolds’
report on our financial statements for the two most recent fiscal years did
not
contain any adverse opinions or disclaimers of opinion, and were not qualified
or modified as to uncertainty, audit scope, or accounting principles, except
for
a going concern opinion expressing substantial doubt about the ability of
Energroup to continue as a going concern with respect to Energroup in 2006,
during which time Energroup was a “shell company” under Rule 12b-2 of the
Exchange Act.
During
our two most recent fiscal years and the interim periods through February 6,
2008, there were no disagreements with McReynolds on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of McReynolds
would have caused them to make reference to this subject matter of the
disagreements in connection with their report, nor were there any “reportable
events” as such term is described in Item 304(a)(1)(iv) of Regulation
S-B.
Also
on
February 6, 2008, we engaged Samuel H. Wong & Co., LLP (“Wong & Co.”) as
our outside independent accounting firm. This action has also been approved
by
our board of directors. During our two most recent fiscal years and any
subsequent interim period prior to the engagement of Wong & Co., neither we
nor anyone on our behalf consulted with Wong & Co., regarding either (i) the
application of accounting principles to a specified transaction, either
contemplated or proposed, or the type of audit opinion that might be rendered
on
our financial statements, or (ii) any matter that was either the subject of
a
“disagreement” or a “reportable event.”
LEGAL
MATTERS
Richardson
& Patel LLP has rendered an opinion regarding the legality of the issuance
of the shares of common stock being registered in this prospectus.
EXPERTS
Our
consolidated financial statements for each of the twelve month periods ending
December 31, 2006, 2005 and 2004 have been audited by our independent auditor,
Samuel H. Wong & Co., LLP, certified public accountants registered with the
Public Company Accounting Oversight Board, which firm also reviewed our interim
consolidated financial statements for the nine months ending September 30,
2007,
as set forth in their report. We have included our consolidated financial
statements in this prospectus in reliance on the report of the above-named
independent auditor, given upon their authority as experts in accounting and
auditing.
FOR
SECURITIES ACT LIABILITIES
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted for our directors, officers and controlling persons pursuant to the
foregoing provisions or otherwise, we have been advised that in the opinion
of
the SEC, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
ADDITIONAL
INFORMATION
Energroup
Holdings Corporation is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the “ Exchange
Act”).
Reports filed with the SEC pursuant to the Exchange Act, including proxy
statements, annual and quarterly reports, and other reports filed by the Company
can be inspected and copied at the public reference facilities maintained by
the
SEC at the Headquarters Office, 100 F. Street N.E., Room 1580, Washington,
D.C.
20549. You may obtain information on the operation of the public reference
room
by calling the SEC at 1-800-SEC-0330. You can request copies of these documents
upon payment of a duplicating fee by writing to the SEC. The Company’s filings
are also available on the SEC’s internet site ( http://www.sec.gov
).
Consolidated
Balance Sheets as of December 31, 2007, 2006 and 2005
|
|
|
2-3 |
|
Consolidated
Statements of Operations for the Years Ended December 31, 2007,
2006 and
2005
|
|
|
4 |
|
Consolidated
Statements of Changes in Stockholders’ Equity for the years Ended December
31, 2007, 2006 and 2005
|
|
|
5-6 |
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007,
2006 and
2005
|
|
|
7-8 |
|
Notes
to Consolidated Financial Statements
|
|
|
9-29 |
|
Board
of
Directors and Stockholders
Energroup
Holdings Corporation
Report
of Registered Independent Public Accounting Firm
We
have
audited the accompanying consolidated balance sheets of Energroup Holdings
Corporation as of December 31, 2007, 2006, and 2005 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows
for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on
these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An
audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the
accounting principles used and significant estimates made by management,
as well
as evaluating the overall financial statement presentation. We believe
that our
audits provide a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Energroup Holdings
Corporation as of December 31, 2007, 2006, and 2005, and the results of
its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.
South
San Francisco, California
|
Samuel
H. Wong & Co., LLP
|
March
8, 2008
|
Certified
Public Accountants
|
Energroup
Holdings Corporation
Consolidated
Balance Sheets
At
December 31, 2007, 2006, and 2005
(Stated
in US Dollars)
|
|
Note
|
|
2007
|
|
2006
|
|
2005
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
2(D)
|
|
$
|
14,031,851
|
|
$
|
3,075,787
|
|
$
|
10,179,414
|
|
Restricted
Cash
|
|
|
3
|
|
|
4,250,000
|
|
|
-
|
|
|
-
|
|
Accounts
Receivable
|
|
|
2(E),4
|
|
|
622,433
|
|
|
1,798,397
|
|
|
3,247,304
|
|
Other
Receivable
|
|
|
|
|
|
1,068,939
|
|
|
679,019
|
|
|
1,006,541
|
|
Related
Party Receivable
|
|
|
6
|
|
|
3,964,357
|
|
|
13,148,788
|
|
|
-
|
|
Inventory
|
|
|
2(F),5
|
|
|
2,916,016
|
|
|
2,385,447
|
|
|
2,850,213
|
|
Advance
to Suppliers
|
|
|
2(G)
|
|
|
267,807
|
|
|
1,110,449
|
|
|
704,706
|
|
Prepaid
Expenses
|
|
|
|
|
|
46,401
|
|
|
90,913
|
|
|
48,191
|
|
Prepaid
Taxes
|
|
|
|
|
|
185,319
|
|
|
-
|
|
|
-
|
|
Deferred
Tax Asset
|
|
|
2(Q)
|
|
|
613,844
|
|
|
574,316
|
|
|
158,992
|
|
Total
Current Assets
|
|
|
|
|
|
27,966,967
|
|
|
22,863,116
|
|
|
18,195,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Current
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant & Equipment, net
|
|
|
2(H),7
|
|
|
24,836,496
|
|
|
20,875,462
|
|
|
21,093,489
|
|
Land
Use Rights, net
|
|
|
2(I),8
|
|
|
12,855,980
|
|
|
8,911,119
|
|
|
8,525,125
|
|
Construction
in Progress
|
|
|
2(J)
|
|
|
927,866
|
|
|
4,165,407
|
|
|
3,149,690
|
|
Other
Assets
|
|
|
|
|
|
32,619
|
|
|
30,519
|
|
|
29,553
|
|
Total
Assets
|
|
|
|
|
$
|
66,619,928
|
|
$
|
56,845,623
|
|
$
|
50,993,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
& STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
Loans
|
|
|
9(A)
|
|
$
|
7,383,095
|
|
$
|
6,971,538
|
|
$
|
3,777,838
|
|
Accounts
Payable
|
|
|
|
|
|
3,779,274
|
|
|
4,207,992
|
|
|
7,645,595
|
|
Taxes
Payable
|
|
|
|
|
|
1,677,194
|
|
|
2,259,465
|
|
|
831,699
|
|
Other
Payable
|
|
|
|
|
|
1,471,381
|
|
|
1,362,607
|
|
|
842,806
|
|
Accrued
Liabilities
|
|
|
|
|
|
3,347,013
|
|
|
912,707
|
|
|
988,851
|
|
Customer
Deposits
|
|
|
2(L)
|
|
|
24,161
|
|
|
1,049,212
|
|
|
437,472
|
|
Related
Party Payable
|
|
|
|
|
|
-
|
|
|
-
|
|
|
4,454,927
|
|
Total
Current Liabilities
|
|
|
|
|
|
17,682,118
|
|
|
16,763,521
|
|
|
18,979,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
Term Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
Loans
|
|
|
9(B)
|
|
|
-
|
|
|
17,908,539
|
|
|
18,579,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
|
|
$
|
17,682,118
|
|
$
|
34,672,060
|
|
$
|
37,558,721
|
|
See
Accompanying Notes to Financial Statements
Energroup
Holdings Corporation
Consolidated
Balance Sheets
At
December 31, 2007, 2006, and 2005
(Stated
in US Dollars)
|
|
Note
|
|
2007
|
|
2006
|
|
2005
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock - $0.001 Par Value 10,000,000
Shares Authorized; 0
Shares Issued & Outstanding at December 31, 2007, 2006, and 2005,
respectively.
|
|
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Common
Stock - $0.001 Par Value 21,739,130 Shares Authorized; 21,136,392
Shares Issued & Outstanding at December 31, 2007, and 17,273,756
Shares Issued & Outstanding at December 31, 2006, and
2005.
|
|
|
|
|
|
21,137
|
|
|
17,273
|
|
|
17,273
|
|
Additional
Paid in Capital
|
|
|
|
|
|
15,440,043
|
|
|
2,396,079
|
|
|
2,396,079
|
|
Statutory
Reserve
|
|
|
2(M),10
|
|
|
751,444
|
|
|
751,444
|
|
|
72,508
|
|
Retained
Earnings
|
|
|
|
|
|
29,764,236
|
|
|
18,112,089
|
|
|
10,662,654
|
|
Accumulated
Other Comprehensive Income
|
|
|
2(N)
|
|
|
2,960,951
|
|
|
896,679
|
|
|
285,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Stockholders' Equity
|
|
|
|
|
|
48,937,811
|
|
|
22,173,564
|
|
|
13,434,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities & Stockholders' Equity
|
|
|
|
|
$
|
66,619,928
|
|
$
|
56,845,623
|
|
$
|
50,993,218
|
|
See
Accompanying Notes to Financial Statements
Energroup
Holdings Corporation
Consolidated
Statements of Operations
For
the years ended December 31, 2007, 2006, and 2005
(Stated
in US Dollars)
|
|
Note
|
|
2007
|
|
2006
|
|
2005
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
2(O)
|
|
$
|
124,696,036
|
|
$
|
70,396,439
|
|
$
|
54,119,895
|
|
Cost
of Sales
|
|
|
2(P)
|
|
|
104,378,909
|
|
|
57,794,853
|
|
|
45,284,186
|
|
Gross
Profit
|
|
|
|
|
|
20,317,127
|
|
|
12,601,586
|
|
|
8,835,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
Expenses
|
|
|
2(Q)
|
|
|
4,672,862
|
|
|
1,556,805
|
|
|
711,226
|
|
General
& Administrative Expenses
|
|
|
2(R)
|
|
|
1,572,836
|
|
|
1,334,866
|
|
|
936,179
|
|
Total
Operating Expense
|
|
|
|
|
|
6,245,698
|
|
|
2,891,671
|
|
|
1,647,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income/(Loss)
|
|
|
|
|
|
14,071,429
|
|
|
9,709,915
|
|
|
7,188,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income
|
|
|
|
|
|
114,496
|
|
|
-
|
|
|
-
|
|
Interest
Income
|
|
|
|
|
|
-
|
|
|
147
|
|
|
1,040
|
|
Other
Expenses
|
|
|
|
|
|
(90,508
|
)
|
|
(126,098
|
)
|
|
(38,905
|
)
|
Interest
Expense
|
|
|
|
|
|
(1,475,730
|
)
|
|
(1,457,204
|
)
|
|
(970,383
|
)
|
Total
Other Income (Loss) and Expense
|
|
|
|
|
|
(1,451,742
|
)
|
|
(1,583,155
|
)
|
|
(1,008,248
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
before Tax
|
|
|
|
|
|
12,619,687
|
|
|
8,126,760
|
|
|
6,180,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income
Tax Expense)/Deferred Tax Benefit
|
|
|
2(V),13
|
|
|
(967,540
|
)
|
|
1,611
|
|
|
(191,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
$
|
11,652,147
|
|
$
|
8,128,371
|
|
$
|
5,988,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share
|
|
|
2(Z),16
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
|
|
$
|
0.87
|
|
$
|
0.61
|
|
$
|
0.45
|
|
- Diluted
|
|
|
|
|
$
|
0.67
|
|
$
|
0.47
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
|
|
|
13,409,120
|
|
|
|
|
|
|
|
- Diluted
|
|
|
|
|
|
17,272,756
|
|
|
17,272,756
|
|
|
17,272,756
|
|
See
Accompanying Notes to Financial Statements
Energroup
Holdings Corporation
Consolidated
Statements of Changes in Stockholders’ Equity
For
the years ended December 31, 2007, 2006, and 2005
(Stated
in US Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Common
|
|
Additional
|
|
|
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
|
Paid
in
|
|
Statutory
|
|
Retained
|
|
Other
|
|
|
|
|
|
Outstanding
|
|
Amount
|
|
Capital
|
|
Reserve
|
|
Earnings
|
|
Income
|
|
Total
|
|
Balance,
January 1, 2005
|
|
|
17,272,756
|
|
$
|
17,273
|
|
$
|
2,396,079
|
|
$
|
-
|
|
$
|
4,746,390
|
|
$
|
631
|
|
$
|
7,160,373
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,988,772
|
|
|
|
|
|
5,988,772
|
|
Appropriations
of Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
72,508
|
|
|
(72,508
|
)
|
|
|
|
|
-
|
|
Foreign
Currency Translation Adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
285,352
|
|
|
285,352
|
|
Balance,
December 31, 2005
|
|
|
17,272,756
|
|
$
|
17,273
|
|
$
|
2,396,079
|
|
$
|
72,508
|
|
$
|
10,662,654
|
|
$
|
285,983
|
|
$
|
13,434,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2006
|
|
|
17,272,756
|
|
$
|
17,273
|
|
$
|
2,396,079
|
|
$
|
72,508
|
|
$
|
10,662,654
|
|
$
|
285,983
|
|
$
|
13,434,497
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,128,371
|
|
|
|
|
|
8,128,371
|
|
Appropriations
of Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
678,936
|
|
|
(678,936
|
)
|
|
|
|
|
-
|
|
Foreign
Currency Translation Adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
610,696
|
|
|
610,696
|
|
Balance,
December 31, 2006
|
|
|
17,272,756
|
|
$
|
17,273
|
|
$
|
2,396,079
|
|
$
|
751,444
|
|
$
|
18,112,089
|
|
$
|
896,679
|
|
$
|
22,173,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2007
|
|
|
17,272,756
|
|
$
|
17,273
|
|
$
|
2,396,079
|
|
$
|
751,444
|
|
$
|
18,112,089
|
|
$
|
896,679
|
|
$
|
22,173,564
|
|
Issuance
of Common Stock & Warrants
|
|
|
3,863,636
|
|
|
3,864
|
|
|
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
|
|
$
|
21,137
|
|
$
|
15,440,043
|
|
$
|
751,444
|
|
$
|
29,764,236
|
|
$
|
2,960,951
|
|
$
|
48,937,811
|
|
|
|
Comprehensive
Income 2005
|
|
Comprehensive
Income 2006
|
|
Comprehensive
Income 2007
|
|
Accumulated
Totals
|
|
Prior
Period Adjustment
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
5,988,772
|
|
$
|
8,128,371
|
|
$
|
11,652,147
|
|
$
|
25,769,290
|
|
Foreign
Currency Translation Adjustment
|
|
|
285,352
|
|
|
610,696
|
|
|
2,064,272
|
|
|
2,960,320
|
|
|
|
$
|
6,274,124
|
|
$
|
8,739,067
|
|
$
|
13,716,419
|
|
$
|
28,729,610
|
|
See
Accompanying Notes to Financial Statements
Energroup
Holdings Corporation
Consolidated
Statements of Cash Flows
For
the years ended December 31, 2007, 2006, and 2005
(Stated
in US Dollars)
|
|
2007
|
|
2006
|
|
2005
|
|
Cash
Flow from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Received from Customers
|
|
$
|
133,746,774
|
|
$
|
59,979,793
|
|
$
|
50,354,793
|
|
Cash
Paid to Suppliers & Employees
|
|
|
(108,527,656
|
)
|
|
(65,116,627
|
)
|
|
(30,159,011
|
)
|
Interest
Received
|
|
|
-
|
|
|
147
|
|
|
1,040
|
|
Interest
Paid (net of amount capitalized)
|
|
|
(1,247,575
|
)
|
|
(1,580,310
|
)
|
|
(987,223
|
)
|
Income
Tax Paid
|
|
|
(1,007,067
|
)
|
|
(400,065
|
)
|
|
(280,676
|
)
|
Miscellaneous
Receipts
|
|
|
9,182
|
|
|
-
|
|
|
-
|
|
Cash
Sourced/(Used) in Operating Activities
|
|
|
22,973,657
|
|
|
(7,117,062
|
)
|
|
18,928,923
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Escrowed
Funds from Private Placement Placed in Restricted Cash
|
|
|
(4,250,000
|
)
|
|
-
|
|
|
-
|
|
Payments
for Purchases of Equipment & Construction of Plant
|
|
|
(2,882,433
|
)
|
|
(1,655,077
|
)
|
|
(11,430,320
|
)
|
Payments
for Purchases of Land Use Rights
|
|
|
(4,198,178
|
)
|
|
(265,509
|
)
|
|
(23,161
|
)
|
Payments
for Deposits
|
|
|
(2,100
|
)
|
|
-
|
|
|
-
|
|
Cash
Sourced/(Used) in Investing Activities
|
|
|
(11,333,712
|
)
|
|
(1,920,586
|
)
|
|
(11,453,481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
Transaction - Proceeds Allocated to Accrued Liabilities
for Liquidated
Damages
|
|
|
1,700,000
|
|
|
-
|
|
|
-
|
|
Financing
Transaction - Proceeds of Issuance of Common Stock &
Warrants
|
|
|
13,047,828
|
|
|
-
|
|
|
-
|
|
Proceeds
from Borrowings from Bank & Shareholder
|
|
|
5,725,377
|
|
|
1,753,971
|
|
|
2,496,786
|
|
Repayment
of Bank Loans
|
|
|
(23,222,359
|
)
|
|
-
|
|
|
-
|
|
Cash
Sourced/(Used) in Financing Activities
|
|
|
(2,749,154
|
)
|
|
1,753,971
|
|
|
2,496,786
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Increase/(Decrease) in Cash & Cash Equivalents for
the Year
|
|
|
8,891,791
|
|
|
(7,283,677
|
)
|
|
9,972,228
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Currency Translation
|
|
|
2,064,273
|
|
|
180,050
|
|
|
161,641
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
& Cash Equivalents at Beginning of Year
|
|
|
3,075,787
|
|
|
10,179,414
|
|
|
45,545
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
& Cash Equivalents at End of Year
|
|
$
|
14,031,851
|
|
$
|
3,075,787
|
|
$
|
10,179,414
|
|
See
Accompanying Notes to Financial Statements
Energroup
Holdings Corporation
Reconciliation
of Net Income to Cash Provided/(Used) in Operating
Activities
For
the years ended December 31, 2007, 2006, and 2005
(Stated
in US Dollars)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
11,652,147
|
|
$
|
8,128,371
|
|
$
|
5,988,772
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
to Reconcile Net Income to Net Cash Provided by Cash
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidated
Damages Included in Accrued Liabilities
|
|
|
(1,700,000
|
)
|
|
-
|
|
|
-
|
|
Amortization
|
|
|
253,317
|
|
|
160,782
|
|
|
156,442
|
|
Depreciation
|
|
|
2,158,940
|
|
|
1,651,055
|
|
|
1,059,292
|
|
Provision
for Bad Debt on Note Receivable
|
|
|
5,456
|
|
|
-
|
|
|
75,539
|
|
Decrease/(Increase)
in Accounts Receivable
|
|
|
1,170,508
|
|
|
1,523,176
|
|
|
(3,195,887
|
)
|
Decrease/(Increase)
in Other Receivable
|
|
|
(389,920
|
)
|
|
353,046
|
|
|
(990,603
|
)
|
Decrease/(Increase)
in Related Party Receivable
|
|
|
9,184,432
|
|
|
(12,877,984
|
)
|
|
-
|
|
Decrease/(Increase)
in Inventory
|
|
|
(530,569
|
)
|
|
546,573
|
|
|
(2,400,613
|
)
|
Decrease/(Increase)
in Advance to Suppliers
|
|
|
842,641
|
|
|
(374,793
|
)
|
|
5,756,820
|
|
Decrease/(Increase)
in Prepaid VAT Taxes
|
|
|
(185,317
|
)
|
|
-
|
|
|
110,180
|
|
Decrease/(Increase)
in Prepaid Expenses
|
|
|
44,512
|
|
|
(40,297
|
)
|
|
(47,352
|
)
|
Decrease/(Increase)
in Deferred Tax Benefit
|
|
|
(39,528
|
)
|
|
(401,674
|
)
|
|
(89,392
|
)
|
Increase/(Decrease)
in Accounts Payable
|
|
|
(428,718
|
)
|
|
(3,611,921
|
)
|
|
6,360,359
|
|
Increase/(Decrease)
in Taxes Payable
|
|
|
(582,271
|
)
|
|
1,371,696
|
|
|
818,340
|
|
Increase/(Decrease)
in Other Payable
|
|
|
108,773
|
|
|
482,075
|
|
|
729,493
|
|
Increase/(Decrease)
in Related Party Payable
|
|
|
-
|
|
|
(4,506,002
|
)
|
|
3,933,551
|
|
Increase/(Decrease)
in Accrued Liabilities
|
|
|
(767,589
|
)
|
|
(106,278
|
)
|
|
318,134
|
|
Increase/(Decrease)
in Customer Advances
|
|
|
(1,025,051
|
)
|
|
585,113
|
|
|
421,387
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
of all adjustments
|
|
|
11,321,510
|
|
|
(15,245,431
|
)
|
|
12,940,151
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by/(Used in) Operating Activities
|
|
$
|
22,973,657
|
|
$
|
(7,117,062
|
)
|
$
|
18,928,923
|
|
See
Accompanying Notes to Financial Statements
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2007, 2006, and
2005
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 “Food 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 WOFE”), a wholly foreign owned enterprise incorporated in the
PRC.
Chuming
WOFE 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.
Corporate
Reorganization
PRC
law
currently has limits on foreign ownership of certain companies. To
enable
Chuming WOFE 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 WOFE 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 WOFE. On October 23, 2007,
Chuming WOFE 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 WOFE to PSI, and upon this
transfer, Chuming WOFE became a wholly foreign owned enterprise, with
PSI as the
100% owner of Chuming WOFE (including its subsidiaries). On December
13, 2007,
the PRC government authorities issued Chuming WOFE 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
As
of and for the years ended December 31, 2007, 2006, and
2005
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 the Company’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
As
of and for the years ended December 31, 2007, 2006, and
2005
(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 December 31, 2006,
the
detailed identities of the consolidating subsidiaries are as follows:
-
Name
of Company
|
|
Place
of Incorporation
|
|
Attributable
Equity Interest
|
|
Registered
Capital
|
|
|
|
|
|
|
|
|
|
Precious
Sheen Investments Limited
|
|
|
BVI
|
|
|
100
|
%
|
USD |
10,000
|
|
Dalian
Chuming Precious Sheen Investment Consulting Co., Ltd.
|
|
|
PRC
|
|
|
100
|
%
|
RMB |
29,400,682
|
|
Dalian
Chuming Slaughtering & Pork Packaging Co. Ltd.
|
|
|
PRC
|
|
|
100
|
%
|
RMB
|
10,000,000
|
|
Dalian
Chuming Processed Foods Co. Ltd.
|
|
|
PRC
|
|
|
100
|
%
|
RMB
|
5,000,000
|
|
Dalian
Chuming Sales Co. Ltd.
|
|
|
PRC
|
|
|
100
|
%
|
RMB
|
5,000,000
|
|
The
consolidation of these operating subsidiaries into a newly formed holding
company i.e. “the Company” is permitted by United States GAAP: ARB51 paragraph
22 and 23.
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
As
of and for the years ended December 31, 2007, 2006, and
2005
The
Company extends unsecured, non-interest bearing credit to its customers;
accordingly, the Company carries an allowance for doubtful accounts, which
is an
estimate, made by management. Management makes its estimate based on prior
experience rates and assessment of specific outstanding customer balances.
Management may extend credit to new customers who have met the criteria
of the
Company’s credit policy.
(F)
|
Inventory
Carrying Value
|
Inventory,
consisting of raw materials in the form of livestock, work in progress,
and
finished products, is stated at the lower of cost or market value. Finished
products are comprised of direct materials, direct labor and an appropriate
proportion of overhead. Periodic
evaluation is made by management to identify if inventory needs to be written
down because of damage, or spoilage. Cost is computed using the weighted
average
method.
(G)
|
Advances
to Suppliers
|
Advances
to suppliers represent the cash paid in advance for purchasing raw materials.
The advances to suppliers are interest free and unsecured.
(H)
|
Property,
Plant, and Equipment
|
Property,
Plant, and Equipment are stated at cost. Repairs and maintenance to these
assets
are charged to expense as incurred; major improvements enhancing the function
and/or useful life are capitalized. When items are sold or retired, the
related
cost and accumulated depreciation are removed from the accounts and any
gains or
losses arising from such transactions are recognized.
Construction
in progress represents the direct costs of design, acquisition, and construction
of buildings, building improvements and land improvements. Capitalization
of
these costs ceases when substantially all activities necessary to prepare
the
assets for their intended use are completed. At such point, construction
in
progress is transferred to its respective asset classification. No depreciation
is provided until it is completed and ready for intended
use.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2007, 2006, and
2005
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.
(K) |
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
As
of and for the years ended December 31, 2007, 2006, and
2005
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.
(N)
|
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.
(O)
|
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.
(R)
|
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
As
of and for the years ended December 31, 2007, 2006, and
2005
(S)
|
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.
(W)
|
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.
(X)
|
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
As
of and for the years ended December 31, 2007, 2006, and
2005
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
|
|
2007
|
|
2006
|
|
2005
|
|
Year
end RMB : US$ exchange rate
|
|
|
7.31
|
|
|
7.82
|
|
|
8.07
|
|
Average
yearly RMB : US$ exchange rate
|
|
|
7.61
|
|
|
7.98
|
|
|
8.20
|
|
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 uses the “management approach” in determining reportable operating
segments. The management approach considers the internal organization
and
reporting used by the Company’s chief operating decision maker for making
operating decisions and assessing performance as the source for determining
the
Company’s reportable segments.
Basic
earnings per share is computed by dividing net income by the weighted average
number of ordinary shares outstanding during the period. Diluted earnings
per
share is computed by dividing net income by the sum of the weighted average
number of ordinary shares outstanding and dilutive potential ordinary shares
during the years. During the years ended 2004, 2005, and 2006, no dilutive
potential ordinary shares were issued.
The
Company computes earnings per share (“EPS”) in accordance with Statement of
Financial Accounting Standards No. 128, “Earnings per share” (“SFAS No. 128”),
and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires
companies with complex capital structures to present basic and diluted
EPS.
Basic EPS is measured as the income or loss available to common shareholders
divided by the weighted average common shares outstanding for the period.
Diluted EPS is similar to basic EPS but presents the dilutive effect on
a per
share basis of potential common shares (e.g., convertible securities, options,
and warrants) as if they had been converted at the beginning of the periods
presented, or issuance date, if later. Potential common shares that have
an
anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted
EPS.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2007, 2006, and
2005
(AA)
|
Recent
Accounting
Pronouncements
|
In
July
2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an
Interpretation of FASB Statement No. 109, which clarifies the accounting
for
uncertainty in tax positions. This Interpretation requires that the Company
recognizes in its consolidated financial statements the impact of a tax
position
if that position is more likely than not of being sustained on audit, based
on
the technical merits of the position. The provisions of FIN 48 are effective
for
the Company on January 1, 2007, with the cumulative effect of the change
in
accounting principle, if any, recorded as an adjustment to opening retained
earnings.
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, which
defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements, where fair value is the relevant
measurement attribute. The standard does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for
fiscal
year beginning after November 15, 2007, and interim periods within those
fiscal
years.
In
September 2006, the SEC issued SAB No. 108, which provides guidance on
the
process of quantifying financial statement misstatements. In SAB No. 108,
the
SEC staff establishes an approach that requires quantification of financial
statement errors, under both the iron-curtain and the roll-over methods,
based
on the effects of the error on each of the Company’s financial statements and
the related financial statement disclosures. SAB No.108 is generally effective
for annual financial statements in the first fiscal year ending after November
15, 2006. The transition provisions of SAB No. 108 permits existing public
companies to record the cumulative effect in the first year ending after
November 15, 2006 by recording correcting adjustments to the carrying values
of
assets and liabilities as of the beginning of that year with the offsetting
adjustment recorded to the opening balance of retained
earnings.
In
February 2007, the Financial Accounting Standards Board issued SFAS No.
159, The
Fair Value Option for Financial Assets and Financial Liabilities—Including an
Amendment of SFAS 115 (SFAS No. 159), which allows for the option to measure
financial instruments and certain other items at fair value. Unrealized
gains
and losses on items for which the fair value option has been elected are
reported in earnings. The objective of SFAS 159 is to provide opportunities
to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply hedge accounting provisions.
SFAS 159 also establishes presentation and disclosure requirements designed
to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. This statement
is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the impact of SFAS
No.
159 on our consolidated financial statements.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2007, 2006, and
2005
In
December 2007, the FASB issued SFAS 141 (revised 2007), Business
Combinations,
(‘‘SFAS
141(R)’’). SFAS 141(R) retains the fundamental requirements of the original
pronouncement requiring that the purchase method be used for all business
combinations, but also provides revised guidance for recognizing and measuring
identifiable assets and goodwill acquired and liabilities assumed arising
from
contingencies, the capitalization of in-process research and development
at fair
value, and the expensing of acquisition-related costs as incurred. SFAS
141(R)
is effective for fiscal years beginning after December 15, 2008. In the
event
that the Company completes acquisitions subsequent to its adoption of SFAS
141
(R), the application of its provisions will likely have a material impact
on the
Company’s results of operations, although the Company is not currently able to
estimate that impact.
In
December 2007, the FASB issued SFAS 160, Noncontrolling
Interests in Consolidated Financial Statements − an amendment of ARB No.
51.
SFAS
160 requires that ownership interests in subsidiaries held by parties other
than
the parent (previously referred to as minority interests), and the amount
of
consolidated net income, be clearly identified, labeled and presented in
the
consolidated financial statements. It also requires once a subsidiary is
deconsolidated, any retained noncontrolling equity investment in the former
subsidiary be initially measured at fair value. Sufficient disclosures
are
required to clearly identify and distinguish between the interests of the
parent
and the interests of the noncontrolling owners as components of equity.
It is
effective for fiscal years beginning after December 15, 2008, and requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. All other requirements are applied prospectively.
The Company does not expect the adoption of SFAS 160 to have a material
impact
on its financial condition or results of operations.
The
Company does not anticipate that the adoption of the above standards will
have a
material impact on these consolidated financial statements.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2007, 2006, and
2005
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 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.
Accounts
Receivable at December 31, consisted of the following: -
|
|
2007
|
|
2006
|
|
2005
|
|
Accounts
Receivable – Trade
|
|
$
|
707,156
|
|
$
|
1,877,664
|
|
$
|
3,324,058
|
|
Less:
Allowance for Doubtful Accounts
|
|
|
(84,723
|
)
|
|
(79,267
|
)
|
|
(76,754
|
)
|
Net
Accounts Receivable
|
|
$
|
622,433
|
|
$
|
1,798,397
|
|
$
|
3,247,304
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Allowance
for Doubtful Accounts
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
|
79,267
|
|
|
76,754
|
|
|
-
|
|
Allowance
Provided
|
|
|
5,456
|
|
|
2,513
|
|
|
76,754
|
|
Charged
Against Allowance
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Ending
Balance
|
|
|
84,723
|
|
|
79,267
|
|
|
76,754
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Raw
Materials
|
|
|
1,039,440
|
|
|
875,223
|
|
|
719,804
|
|
Work
in Progress
|
|
|
547,889
|
|
|
365,961
|
|
|
101,932
|
|
Finished
Goods
|
|
|
1,328,688
|
|
|
1,144,263
|
|
|
2,028,477
|
|
|
|
$
|
2,916,016
|
|
$
|
2,385,447
|
|
$
|
2,850,213
|
|
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2007, 2006, and
2005
6.
|
Related
Party Receivable
|
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 2007, 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 net 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
netted balance that can be found on the Company’s Balance Sheet at December 31,
2007.
Subsidiary
Due to:
|
Nature
of Balance
|
Related
Party
|
Balance
|
Chuming
(WOFE)
|
Loan
Receivable from
|
Dalian
Chuming Group Co., Ltd.
|
80,987
|
Food
|
Loan
Receivable from
|
Dalian
Chuming Fodder Co., Ltd.
|
82,033
|
Food
|
Loan
Receivable from
|
Dalian
Chuming Group Co., Ltd.
|
9,830,328
|
Food
|
Loan
Receivable from
|
Dalian
Chuming Industrial Development Co., Ltd.
|
5,653,658
|
Food
|
Loan
Receivable from
|
Dalian
Mingxing Livestock Product Co. Ltd.
|
2,076,955
|
Food
|
Sale
of Products resulting in Receivable from
|
Dalian
Mingxing Livestock Product Co. Ltd.
|
401,102
|
Meat
|
Loan
Receivable from
|
Dalian
Chuming Group Co., Ltd.
|
1,315
|
Meat
|
Loan
Receivable from
|
Dalian
Chuming Stockbreeding Combo Development Co., Ltd.
|
60,642
|
Meat
|
Sale
of Products resulting in Receivable from
|
Dalian
Mingxing Livestock Product Co. Ltd.
|
2,244,351
|
Sales
|
Loan
Receivable from
|
Dalian
Chuming Fodder Co., Ltd.
|
2,978,044
|
Sales
|
Loan
Receivable from
|
Dalian
Chuming Group Co., Ltd.
|
13,945,873
|
Sales
|
Loan
Receivable from
|
Dalian
Chuming Industrial Development Co., Ltd.
|
474,669
|
Sales
|
Loan
Receivable from
|
Dalian
Huayu Seafood Food Co., Ltd
|
2,214,194
|
|
|
Subtotal
|
40,044,153
|
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2007, 2006, and
2005
Subsidiary
Due from:
|
Nature
of Balance
|
Related
Party
|
Balance
|
Food
|
Loan
Payable to
|
Dalian
Chuming Group Co., Ltd.
|
9,891,178
|
Food
|
Loan
Payable to
|
Dalian
Chuming Group Co., Ltd.
|
697,283
|
Food
|
Purchase
of Raw Materials resulting in Payables to
|
Dalian
Chuming Trading Co., Ltd
|
4,102
|
Food
|
Loan
Payable to
|
Dalian
City Breeding Center
|
88,869
|
Food
|
Loan
Payable to
|
Dalian
Huayu Seafood Food Co., Ltd
|
142,298
|
Food
|
Purchase
of Raw Materials resulting in Payables to
|
Dalian
Huayu Seafood Food Co., Ltd
|
120,554
|
Food
|
Purchase
of Raw Materials resulting in Payables to
|
Dalian
Huayu Seafood Food Co., Ltd
|
13,783
|
Food
|
Purchase
of Raw Materials resulting in Payables to
|
Dalian
Huayu Seafood Food Co., Ltd
|
3,415,148
|
Food
|
Purchase
of Raw Materials resulting in Payables to
|
Dalian
Mingxing Livestock Product Co. Ltd.
|
149,141
|
Meat
|
Loan
Payable to
|
Dalian
Chuming Fodder Co., Ltd.
|
722,493
|
Meat
|
Loan
Payable to
|
Dalian
Chuming Group Co., Ltd.
|
29,028
|
Meat
|
Loan
Payable to
|
Dalian
Chuming Group Co., Ltd.
|
1,394,567
|
Meat
|
Purchase
of Raw Materials resulting in Payables to
|
Dalian
Chuming Group Co., Ltd.
|
5,576,407
|
Meat
|
Purchase
of Raw Materials resulting in Payables to
|
Dalian
Chuming Group Co., Ltd.
|
2,116,005
|
Meat
|
Loan
Payable to
|
Dalian
Chuming Industrial Development Co., Ltd.
|
6,070
|
Meat
|
Purchase
of Raw Materials resulting in Payables to
|
Dalian
Chuming Stockbreeding Combo Development Co., Ltd.
|
6,741,829
|
Meat
|
Loan
Payable to
|
Dalian
Chuming Trading Co., Ltd
|
69,079
|
Meat
|
Loan
Payable to
|
Dalian
Huayu Seafood Food Co., Ltd
|
2,411,780
|
Sales
|
Loan
Payable to
|
Dalian
Chuming Group Co., Ltd.
|
697,283
|
Sales
|
Purchase
of Raw Materials resulting in Payables to
|
Dalian
Mingxing Livestock Product Co. Ltd.,
|
1,792,898
|
|
|
Subtotal
|
36,079,796
|
|
|
|
|
Net
Related Party Receivable
(Receivables have been netted against payables)
|
$
3,964,357
|
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2007, 2006, and
2005
|
Property,
Plant &
Equipment
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Cost
|
|
Depreciation
|
|
Net
|
|
December
31, 2007
|
|
|
|
|
|
|
|
Land
Improvements
|
|
|
491,071
|
|
|
82,031
|
|
|
409,040
|
|
Building
Improvements
|
|
|
76,859
|
|
|
15,811
|
|
|
61,048
|
|
Buildings
|
|
|
19,342,461
|
|
|
2,424,415
|
|
|
16,918,046
|
|
Manufacturing
Equipment
|
|
|
9,066,948
|
|
|
2,041,694
|
|
|
7,025,254
|
|
Office
Equipment
|
|
|
122,124
|
|
|
60,298
|
|
|
61,826
|
|
Vehicles
|
|
|
652,231
|
|
|
321,138
|
|
|
331,093
|
|
Furniture
& Fixture
|
|
|
49,204
|
|
|
19,015
|
|
|
30,189
|
|
|
|
|
29,800,898
|
|
|
4,964,402
|
|
|
24,836,496
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Cost
|
|
Depreciation
|
|
Net
|
|
December
31, 2006
|
|
|
|
|
|
|
|
Land
Improvements
|
|
|
441,484
|
|
|
59,789
|
|
|
381,695
|
|
Building
Improvements
|
|
|
54,291
|
|
|
9,406
|
|
|
44,885
|
|
Buildings
|
|
|
14,167,331
|
|
|
1,104,854
|
|
|
13,062,477
|
|
Manufacturing
Equipment
|
|
|
8,346,776
|
|
|
1,403,176
|
|
|
6,943,600
|
|
Office
Equipment
|
|
|
68,198
|
|
|
14,165
|
|
|
54,033
|
|
Vehicles
|
|
|
572,290
|
|
|
203,600
|
|
|
368,690
|
|
Furniture
& Fixture
|
|
|
30,550
|
|
|
10,468
|
|
|
20,081
|
|
|
|
$
|
23,680,920
|
|
$
|
2,805,458
|
|
$
|
20,875,462
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Cost
|
|
Depreciation
|
|
Net
|
|
December
31, 2005
|
|
|
|
|
|
|
|
Land
Improvements
|
|
|
316,013
|
|
|
20,672
|
|
|
295,341
|
|
Building
Improvements
|
|
|
52,570
|
|
|
4,114
|
|
|
48,456
|
|
Buildings
|
|
|
13,580,630
|
|
|
399,299
|
|
|
13,181,331
|
|
Manufacturing
Equipment
|
|
|
7,630,412
|
|
|
554,540
|
|
|
7,075,872
|
|
Office
Equipment
|
|
|
60,367
|
|
|
10,757
|
|
|
49,610
|
|
Vehicles
|
|
|
523,854
|
|
|
93,269
|
|
|
430,585
|
|
Furniture
& Fixture
|
|
|
13,838
|
|
|
1,544
|
|
|
12,294
|
|
|
|
$
|
22,177,684
|
|
$
|
1,084,195
|
|
$
|
21,093,489
|
|
The
Company had the following intangible assets outstanding at December
31:
|
|
2007
|
|
2006
|
|
2005
|
|
Land
Use Rights, at Cost
|
|
|
13,501,580
|
|
|
9,303,402
|
|
|
8,746,015
|
|
Less:
Accumulated Amortization
|
|
|
(645,600
|
)
|
|
(392,283
|
)
|
|
(220,890
|
)
|
|
|
$
|
12,855,980
|
|
$
|
8,911,119
|
|
$
|
8,525,125
|
|
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2007, 2006, and
2005
(A)
|
Short
Term Bank Loans
|
At
December 31, 2007 the Company had the following short term loans outstanding:
-
|
Bank
|
|
Interest
Rate
|
|
Due
Date
|
|
Amount
|
|
i.) |
Bank
of China
|
|
|
8.02
|
%
|
|
11/17/2008
|
|
$
|
1,914,111
|
|
ii.) |
Shanghai
Pudong Development Bank
|
|
|
7.65
|
%
|
|
7/1/2008
|
|
|
5,468,984
|
|
|
|
|
|
|
|
|
|
|
$
|
7,383,095
|
|
The
loan
provided by the Bank of China is secured by the Meat Company’s land use rights,
which have been appraised at a fair market value of $5,605,611 (RMB 41,000,000).
Also, the Shanghai Pudong Development Bank loan has been guaranteed by
the
Dalian Chuming Group Co., Ltd.
(B)
|
Bank
Loan through Group
|
The
Company obtained a loan of $20,466,901 (RMB 160,000,000) from Dalian Chuming
Group Co., Ltd; which in turn, obtained these funds in a joint loan commitment
from both China Development Bank and Shenzhen Development Bank (“Banks”) via a
collateralized loan. Dalian Chuming Group Co., Ltd. (“Group”) collateralized the
loan by purchasing a bond from China Export and Credit Insurance Corporation
(“Bond Issuer”). The bond guarantees to the Banks the entire principal and
accrued interest of the loan. The cost of the bond is RMB 1,000,000 annually,
or
in USD: $120,668, 121,902, and 125,284 for the years 2004, 2005, and 2006,
respectively, which was paid by the Company. The loan carries a fixed interest
of 5.76% per annum. The Company pledged both land use rights and buildings
to
the Bond Issuer. The Company pursued a loan from Dalian Chuming Group Co.,
Ltd
as the financing solution of choice because the Company’s tangible assets, at
the time of origination, were insufficient to collateralize the loan.
Additionally, the Company lacked the favorable credit history to directly
establish credit facility with the bank.
At
December 31, 2007, the debt had been repaid in its entirety to Dalian Chuming
Group Co. Ltd. The Company repaid the balance by extinguishing receivables
owed
by the Group to the Company. The Company repaid the loan in order to meet
the
requirements of the equity financing transaction detailed in Note 18. The
balances are now owed by Dalian Chuming Group Co. Ltd to the Banks, and
liability for paying the bonding insurance annually lies with the Group.
The
pledged collateral of land use rights and buildings made to the Bond Issuer
still 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
As
of and for the years ended December 31, 2007, 2006, and
2005
As
a
result of a reverse-merger on December 31, 2007 that was consummated via
a share
exchange, and a concurrent equity financing, in the form of a private placement
by issuing common stock to ten accredited investors, the Company’s
capitalization is now reflected by the table shown below: -
Name
of Shareholder
|
|
Number
of
Shares
|
|
Common
Stock
Capital
|
|
Additional
Paid
in
Capital
|
|
Equity
%
|
|
Operating
Companies Founders
|
|
|
14,688,948
|
|
$
|
14,689
|
|
$
|
2,396,079
|
|
|
69.50
|
%
|
PRE-RTO
Shell Shareholders
|
|
|
422,756
|
|
|
423
|
|
|
-
|
|
|
2.00
|
%
|
Advisors
& Consultants
|
|
|
2,161,052
|
|
|
2,161
|
|
|
-
|
|
|
10.22
|
%
|
Private
Investors
|
|
|
3,863,636
|
|
|
3,864
|
|
|
13,043,964
|
|
|
18.28
|
%
|
|
|
|
21,136,392
|
|
$
|
21,137
|
|
$
|
15,440,043
|
|
|
100.00
|
%
|
10. |
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.
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
PRC
Registered Capital
|
|
|
3,642,866
|
|
|
2,413,352
|
|
|
2,413,352
|
|
|
|
|
|
|
|
|
|
|
|
|
-
Statutory Reserve Ceiling based on 50% of Registered
Capital
|
|
|
1,821,433
|
|
|
1,206,676
|
|
|
1,206,676
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
- Retained Earnings appropriated to Statutory Reserve
|
|
|
751,444
|
|
|
751,444
|
|
|
72,508
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve
Commitment Outstanding
|
|
$
|
1,069,989
|
|
$
|
455,232
|
|
$
|
1,134,168
|
|
Advertising
expenses were $3,611,666, $869, and $268 for the years ended December 31,
2007,
2006, and 2005 respectively.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2007, 2006, and
2005
The
Company’s different operating subsidiaries are subject to different income tax
regulations under PRC law.
The
operating subsidiary, Meat Company, has been given special tax-free status
by
the PRC government because of the Company standing as leader in its industry
in
Dalian; therefore, no provision for income tax in the PRC was made for
years
2007, 2006, and 2005.
The
Company’s operating subsidiary, Food Company, has made provisions for income
taxes in years 2007, 2006, and 2005 of $967,539, $400,605,
and $338,214,
respectively.
The
Company’s operating subsidiary, Sales Company, has not made provisions for
income taxes in years 2007, 2006, and 2005 as it has incurred operating
losses
for those respective years.
After
adjusting for special tax-free status and net operating loss, the consolidated
taxable earnings were determined, and the results were as follows:
-
i.
|
|
|
2007
|
|
|
Tax
benefit
|
|
|
(967,540
|
)
|
ii.
|
|
|
2006
|
|
|
Tax
expense
|
|
|
1,611
|
|
iii.
|
|
|
2005
|
|
|
Tax
benefit
|
|
|
(191,284
|
)
|
Beginning
December 31, 2007, the Company’s foreign subsidiaries became subject to U.S.
income tax liability; however, the tax is deferred until foreign source
income
is repatriated to the Company. Accordingly, the company has not made any
provisions for U.S. income tax liability.
On
March
16, 2007, the PRC government passed new tax legislation that repealed
preferential tax treatment for foreign investment enterprises in the PRC
and
enacted new tax regulations. Under such regulations, with certain exceptions,
both domestic and foreign enterprises will be taxed at a standard enterprise
income tax rate of 25%. The Company’s two operating subsidiaries, Food Company,
and Sales Company are subject to the 25%
income
tax rate beginning January 1, 2008. Based on current PRC legislation, Meat
Company should be expected to continue benefiting from a tax
holiday.
It
is
company policy to develop plant facilities based on availability of cash
resources without incurring capital commitments. Therefore, the Company
did not
have any capital commitments outstanding at December 31, 2007.
There
were no severance packages to any key management personnel that have resigned
from their positions. The Company has the right to terminate employment
for
cause at any time.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2007, 2006, and
2005
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 year ended, December 31, 2007. The
Company has also provided reconciling adjustments with the Company and
its
intermediate holding companies Chuming WOFE and PSI.
|
|
Meat Company
|
|
Food
Company
|
|
Sales Company
|
|
WOFE,
BVI,
& Eliminations
|
|
Total
|
|
Sales
|
|
$
|
113,777,514
|
|
$
|
18,224,294
|
|
$
|
26,110,284
|
|
$
|
(33,416,057
|
)
|
$
|
124,696,035
|
|
Cost
of Sales
|
|
|
99,779,158
|
|
|
12,672,576
|
|
|
25,343,231
|
|
|
(33,416,057
|
)
|
|
104,378,908
|
|
Gross
Profit
|
|
|
13,998,356
|
|
|
5,551,718
|
|
|
767,053
|
|
|
-
|
|
|
20,317,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(Loss)/Profit
|
|
|
10,842,549
|
|
|
3,624,143
|
|
|
(368,002
|
)
|
|
(27,261
|
)
|
|
14,071,429
|
|
Other
Income (Expenses)
|
|
|
(691,006
|
)
|
|
(712,807
|
)
|
|
(47,929
|
)
|
|
-
|
|
|
(1,451,742
|
)
|
Earnings
before Tax
|
|
|
10,151,543
|
|
|
2,911,336
|
|
|
(415,931
|
)
|
|
(27,261
|
)
|
|
12,619,687
|
|
Tax
|
|
|
-
|
|
|
967,539
|
|
|
-
|
|
|
-
|
|
|
967,539
|
|
Net
Income
|
|
$
|
10,151,543
|
|
$
|
1,943,797
|
|
$
|
(415,931
|
)
|
$
|
(27,261
|
)
|
$
|
11,652,147
|
|
|
|
Meat
Company
|
|
Food
Company
|
|
Sales
Company
|
|
WOFE,
BVI,
& Eliminations
|
|
Total
|
|
Current
Assets
|
|
$
|
36,387,010
|
|
$
|
19,361,784
|
|
$
|
24,500,857
|
|
$
|
(52,282,684
|
)
|
$
|
27,966,967
|
|
Non
Current Assets
|
|
|
22,256,798
|
|
|
16,228,202
|
|
|
167,961
|
|
|
-
|
|
|
38,652,961
|
|
Total
Assets
|
|
$
|
58,643,808
|
|
$
|
35,589,986
|
|
$
|
24,668,818
|
|
$
|
(52,282,684
|
)
|
$
|
66,619,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
$
|
25,289,655
|
|
$
|
31,425,683
|
|
$
|
25,664,664
|
|
$
|
(64,697,884
|
)
|
$
|
17,682,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
25,289,655
|
|
|
31,425,683
|
|
|
25,664,664
|
|
|
(64,697,884
|
)
|
|
17,682,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Assets
|
|
|
33,354,152
|
|
|
4,164,303
|
|
|
(995,846
|
)
|
|
12,415,200
|
|
|
48,937,810
|
|
Total
Liabilities &
Net Assets
|
|
$
|
58,643,808
|
|
$
|
35,589,986
|
|
$
|
24,668,818
|
|
$
|
(52,282,684
|
)
|
$
|
66,619,928
|
|
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2007, 2006, and
2005
Components
of basic and diluted earnings per share were as follows: -
|
|
12
months ended December 31, 2007
|
|
12
months ended December 31, 2006
|
|
12
months ended December 31, 2005
|
|
Net
Income (A)
|
|
$
|
11,652,147
|
|
$
|
8,128,371
|
|
$
|
5,988,772
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Weighted Average Shares Outstanding (B)
|
|
|
13,409,120
|
|
|
13,409,120
|
|
|
13,409,120
|
|
Dilutive
Shares:
|
|
|
|
|
|
|
|
|
|
|
- Addition
to Common Stock from Exercise of Placement Warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
- Addition
to Common Stock from Contingent Shares Held in Escrow (Please
refer to
Note 18)
|
|
|
3,863,636
|
|
|
3,863,636
|
|
|
3,863,636
|
|
Diluted
Weighted Average Shares Outstanding: (C)
|
|
|
17,272,756
|
|
|
17,272,756
|
|
|
17,272,756
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share
|
|
|
|
|
|
|
|
|
|
|
- Basic
(A)/(B)
|
|
$
|
0.87
|
|
$
|
0.61
|
|
$
|
0.45
|
|
- Diluted
(A)/(C)
|
|
$
|
0.67
|
|
$
|
0.47
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
- Basic
|
|
|
13,409,120
|
|
|
13,409,120
|
|
|
13,409,120
|
|
- Diluted
|
|
|
17,272,756
|
|
|
17,272,756
|
|
|
17,272,756
|
|
16. |
Concentration
of Risk
|
The
Company had concentrations of risk in demand for its products because its
sales
were made to a small number of customers.
The
Company is subject to concentration of supply shortage risk because it
purchases
its materials for resale from a few select vendors. The Company’s availability
of supply is correlated with the few select vendors’ ability to meet the market
demand. In 2007, the entire industry in the PRC faced a shortage in the
supply
of hogs.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2007, 2006, and
2005
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 Chuming WOFE. Chuming WOFE is a holding company for the following
three operating subsidiaries: (i) Meat Company, (ii) Food Company, and
(iii)
Sales Company, each of which is a limited liability company headquartered
in,
and organized under the laws of, China (also referred to elsewhere as 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 WOFE and the
Chuming
Operating Subsidiaries.
Under
the
Exchange Agreement, Energroup completed the acquisition of all of the issued
and
outstanding shares of PSI through the issuance of 16,850,000 restricted
shares
of common stock of Energroup to PSI’s Shareholders. Immediately prior to the
Exchange Agreement transaction, the Company had 422,756 shares of common
stock
issued and outstanding. Immediately after the issuance of the shares to
PSI’s
Shareholders, the Company had 17,272,756 shares of common stock issued
and
outstanding. The 422,756 shares of PSI were cancelled and 17,272,756 shares
of
Energroup were issued to reflect this reverse take-over
transaction.
Concurrently
with the Exchange Agreement, Energroup also entered into a Securities Purchase
Agreement (the “Purchase Agreement”) pursuant to which Energroup agreed to issue
and sell 3,863,635 shares of its common stock to ten accredited investors
for an
aggregate purchase price of $17,000,000
or
$4.40
per share (the “Financing”). The closing of the Financing coincided with the
Closing of the reverse take-over transaction.
In
connection with the sales of securities to accredited investors under the
securities purchase agreement, Hunter Wise Financial Group, LLC (the “Placement
Agent”), was compensated with a commission of $1,190,000 which is equal to 7.00%
of the aggregate purchase price and a warrant to purchase the 386,364
shares
of
the Company’s common stock at an exercise price of $4.40 per share. At
December 31, 2007, the Company had adequate authorized capital to issue
common
shares upon the exercise of the warrant.
Energroup
Holdings Corporation
Notes
to Consolidated Financial Statements
As
of and for the years ended December 31, 2007, 2006, and
2005
At
December 31, 2007, the total number of shares outstanding, on a fully diluted
basis, is shown in the following table: -
i.
|
|
|
Common
shares outstanding prior to offering of securities
|
|
|
17,272,756
|
|
ii.
|
|
|
Common
shares issued under securities purchase agreement
|
|
|
3,863,636
|
|
iii.
|
|
|
Common
shares issuable upon exercise of placement agent warrants
|
|
|
386,364
|
|
|
|
|
|
|
|
21,522,756
|
|
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
back 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.
Prospectus
dated ______ __, 2008
ENERGROUP
HOLDINGS CORPORATION
8,140,487
Shares
Common
Stock
Until
,
2008, all dealers that buy, sell or trade shares of our common stock, whether
or
not participating in this offering, may be required to deliver a
prospectus.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The
following table sets forth the costs and expenses, payable by the registrant
in
connection with the sale of common stock being registered. All amounts are
estimates except the SEC registration fee.
|
|
$
|
2,278
|
|
Printing
and engraving expenses
|
|
$
|
3,000
|
|
Blue
Sky fees and expenses
|
|
$
|
5,000
|
|
Legal
fees and expenses
|
|
$
|
45,000
|
|
Accounting
fees and expenses
|
|
$
|
30,000
|
|
Miscellaneous
|
|
$
|
10,000
|
|
|
|
|
|
|
Total
|
|
$
|
95,278
|
|
ITEM
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Indemnification
Under Nevada Law
Nevada
law generally permits us to indemnify our directors, officers and employees.
Pursuant to the provisions of Nevada Revised Statutes 78.7502, a corporation
may
indemnify its directors, officers and employees as follows:
(a)
A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any action, except an action by or in the
right
of the corporation, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the
corporation, against expenses, actually and reasonably incurred by him in
connection with the action, suit or proceeding if he: (a) is not liable for
breach of his fiduciary duties as a director or officer pursuant to Nevada
Revised Statutes 78.138; or (b) acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
(b)
A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any action by or in the right of the
corporation to procure a judgment in its favor, by reason of the fact that
he is
or was a director, officer, employee or agent of the corporation, or is or
was
serving at the request of the corporation against expenses actually and
reasonably incurred by him in connection with the defense or settlement of
the
action or suit if he: (a) is not liable for breach of his fiduciary duties
pursuant to Nevada Revised Statutes 78.138; or (b) acted in good faith and
in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation. Indemnification may not be made for any claim,
issue or matter as to which such a person has been adjudged by a court of
competent jurisdiction, after exhaustion of all appeals therefrom, to be liable
to the corporation or for amounts paid in settlement to the corporation, unless
and only to the extent that the court in which the action or suit was brought
or
other court of competent jurisdiction determines upon application that in view
of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper.
(c) To
the extent that a director, officer, employee or agent of a corporation has
been
successful on the merits or otherwise in defense of any action, suit or
proceeding, or in defense of any claim, issue or matter therein, the corporation
shall indemnify him against expenses, including attorneys’ fees, actually and
reasonably incurred by him in connection with the defense.
Charter
Provisions and Other Arrangements of the Registrant
Article
VII of our articles of incorporation provides for the indemnification of any
and
all persons who serve as our director or officer to the fullest extent permitted
under Nevada law. We do not currently carry directors’ and officers’ liability
insurance covering our directors and officers, however, we are considering
obtaining such insurance coverage from an internationally recognized underwriter
with terms of coverage appropriate for a company of our size and
nature.
Insofar
as indemnification for liabilities under the Securities Act may be permitted
to
directors, officers, or persons controlling the Company pursuant to the
foregoing provisions, the Company has been informed that, in the opinion of
the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
ITEM
15. RECENT SALES OF UNREGISTERED SECURITIES
The
following is a summary of our transactions during the last three years involving
sales of our securities that were not registered under the Securities
Act:
On
December 31, 2007, we entered into a Share Exchange Agreement (the “Exchange
Agreement”) with Precious Sheen Investments Limited, a British Virgin Islands
company (“PSI”) and all of the shareholders of PSI’s issued and outstanding
share capital (the “PSI Shareholders”). Pursuant to the Exchange Agreement, we
agreed to issue 16,850,000 shares of our common stock to the PSI
Shareholders in exchange for 100% of the capital stock of PSI. The issuance
of
the common stock to the PSI Shareholders pursuant to the Exchange Agreement
was
exempt from registration under the Securities Act pursuant to Section 4(2)
and
Regulation D thereof. We made this determination based on the representations
of
the PSI Shareholders which included, in pertinent part, that such shareholders
were “accredited investors” within the meaning of Rule 501 of Regulation D
promulgated under the Securities Act, and that such shareholders were acquiring
our common stock, for investment purposes for their own respective accounts
and
not as nominees or agents, and not with a view to the resale or distribution
thereof, and that each member understood that the shares of our common stock
may
not be sold or otherwise disposed of without registration under the Securities
Act or an applicable exemption therefrom.
On
December 31, 2007, in connection with the Exchange Agreement, we entered
into a
Securities Purchase Agreement (the “Purchase Agreement”) pursuant to which we
agreed to issue and sell 3,863,635 shares of our common stock to fifteen
accredited investors for an aggregate purchase price of $17,000,000, or $4.40
per share (the “Financing”). The issuance of the common stock to the fifteen
investors pursuant to the Purchase Agreement was exempt from registration
under
the Securities Act pursuant to Section 4(2) and Regulation D thereof. We
made
this determination based on the representations of the fifteen investors
which
included, in pertinent part, that such investors were “accredited investors”
within the meaning of Rule 501 of Regulation D promulgated under the Securities
Act, and that such investors were acquiring our common stock, for investment
purposes for their own respective accounts and not as nominees or agents,
and
not with a view to the resale or distribution thereof, and that each member
understood that the shares of our common stock may not be sold or otherwise
disposed of without registration under the Securities Act or an applicable
exemption. We also issued a warrant to the placement agent for the purchase
of
386,364 shares of the Company’s common stock at an exercise price of $4.40 per
share.
On
May 3,
2007, prior to the reverse take-over transaction, Energroup, along with its
then-current directors and executive officers, entered into a stock purchase
agreement with Halter Financial Investments, L.P., a Texas limited partnership
(“HFI”), pursuant to which Energroup agreed to sell to HFI 11,200,000
pre-reverse split shares (approximately 1,600,000 post-reverse split shares)
of
unregistered, restricted common stock for $350,000 cash. This transaction closed
on May 22, 2007. The issuance of the common stock to HFI pursuant to the stock
purchase agreement was exempt from registration under the Securities Act
pursuant to Section 4(2) and/or Regulation D thereof. Energroup made this
determination based on the representations of the HFI in the stock purchase
agreement which included, in pertinent part, that such HFI was an “accredited
investor” within the meaning of Rule 501 of Regulation D promulgated under the
Securities Act, and that such shareholder was acquiring our common stock, for
investment purposes for their own respective accounts and not as nominees or
agents, and not with a view to the resale or distribution thereof, and that
each
member understood that the shares of our common stock may not be sold or
otherwise disposed of without registration under the Securities Act or an
applicable exemption therefrom.
On
or
about March 12, 2007, Energroup authorized the issuance of 5,462 shares of
common stock in reconciliation of transfer records. Energroup received a General
Release in conjunction with the issuance. Energroup completed the issuance
because it believed the acquirer may be defined as a “Protected Purchaser” under
Section 70A-8-303 of the Utah Code Annotated and Article 8 of the Uniform
Commercial Code.
Except
as
stated above, we have had no recent sales of unregistered securities within
the
past three fiscal years. There were no underwritten offerings employed in
connection with any of the transactions described above.
ITEM
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
Exhibits
ITEM
17. UNDERTAKINGS
(a)
The undersigned registrant hereby undertakes:
I.
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(a)
Include any prospectus required by section 10(a)(3) of the Securities Act
of 1933;
(b)
Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement; and
(c)
Include any additional or changed material information on the plan of
distribution.
II.
For the purposes of determining liability under the Securities Act of
1933, treat each post-effective amendment as a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
III.
File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of offering.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission
indemnification is against public policy as expressed in the Securities Act,
and
is, therefore, unenforceable. In the event that a claim for indemnification
against liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
a
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether indemnification by it is against public policy
as expressed in the Securities Act and will be governed by the final
adjudication of this issue.
In
addition, the undersigned registrant hereby undertakes that:
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1. |
For
purposes of determining any liability under the Securities Act,
the
information omitted from the form of prospectus filed as part
of this
registration statement in reliance upon Rule 430A and contained
in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or
497(h) under the Securities Act shall be deemed to be part of
this
registration statement as of the time it was declared effective,
and
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2. |
For
the purpose of determining any liability under the Securities Act,
each
post-effective amendment that contains a form of prospectus shall
be
deemed to be a new registration statement relating to the securities
offered therein, and this offering of these securities at that
time shall
be deemed to be the initial bona fide offering
thereof.
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SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, on April 25, 2008.
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ENERGROUP
HOLDINGS CORPORATION |
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By: |
/s/
Shi
Huashan |
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Shi Huashan
Chairman and Chief Executive Officer
(Principal
Executive Officer)
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By: |
/s/
Wang
Shu |
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Wang Shu
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
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POWER
OF ATTORNEY
KNOW
ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Shi Huashan, as his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and
in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
or any related registration statement filed pursuant to Rule 462(b) under the
Securities Act of 1933, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission and any other regulatory authority, granting unto said
attorney-in-fact and agent, and each of them, full power and authority to do
and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as such person might
or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully
do or
cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed below by the following persons in the capacities
and
on the dates indicated:
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Title
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Date
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/s/ Shi Huashan
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President,
Chief Executive Officer,
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April
25, 2008
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Shi
Huashan
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and
Chairman of the Board
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(Principal
Executive Officer)
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/s/ Wang Shu
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Chief
Financial Officer and Director
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Wang
Shu
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(Principal
Financial Officer)
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/s/ Chen Fuyuan
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Chief
Operating Officer
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Chen
Fuyuan
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/s/ Ma Fengqin
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Vice
President and Director
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Ma
Fengqin
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/s/ Wang Shuying
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Director
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Wang
Shuying
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Director
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Matthew
Dillon
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Director
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Director
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James
Boyle
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Exhibit
Number
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Description
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2.1
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Share
Exchange Agreement by and among the Company, PSI and PSI Shareholders
dated December 2007 (1)
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2.2
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Articles
and Plan of Merger (change in domicile from Utah to Nevada)
(2)
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3.1
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Articles
of Incorporation of Energroup Holdings Corporation
(4)
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3.2
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Bylaws
of Energroup Holdings Corporation (4)
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3.3
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Articles
of Amendment to Articles of Incorporation of Energroup Holdings
Corporation (4)
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3.4
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Articles
of Amendment to Articles of Incorporation of Energroup Technologies,
Inc.
(Reverse Split) (2)
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3.5
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Articles
of Incorporation of Energroup Holdings Corporation (2)
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3.6
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Certificate
of Amendment to Articles of Incorporation of Energroup Holdings
Corporation (Reverse Split) (3)
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4.1
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Registration
Rights Agreement dated December 2007 among Energroup and the investors
signatory thereto (1)
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4.2
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Form
of Common Stock Purchase Warrant issued to Placement Agent (December
2007)
(1)
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5.1
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Opinion
of Richardson & Patel LLP
(4)
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10.1
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Lockup
Agreement dated December 2007 among Energroup and the Shareholders
signatory thereto (1)
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10.2
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Executive
Employment Agreement dated December 2007 between Energroup and Mr.
Shi
Huashan (1)
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10.3
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Executive
Employment Agreement dated December 2007 between Energroup and Ms.
Wang
Shu (1)
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10.4
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Executive
Employment Agreement dated December 2007 between Energroup and Mr.
Chen
Fuyuan (1)
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10.5
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Long-Term
Hog Procurement Agreement dated December 17,2007 between Dalian Chuming
Group Co., Ltd. and Dalian Chuming Slaughter and Packaging Pork Company,
Ltd. (1)
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10.6
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Trademark
License Contract (Chuming) dated December 2007 (English translation)
(1)
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10.7
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Trademark
License Contract (Huayu) dated December 2007 (English translation)
(1)
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10.8
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Securities
Purchase Agreement dated December 2007 among Energroup, PSI, Chuming,
and
the investors signatory thereto (1)
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10.9
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Make
Good Escrow Agreement dated December 2007 among Energroup, Make Good
Pledgor, Escrow Agent and the investors signatory thereto
(1)
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10.10
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Holdback
Escrow Agreement dated December 2007 among Energroup, Escrow Agent
and the
investors signatory thereto (1)
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17.1
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Letter
of Resignation from Mr. Timothy Halter to the board of directors
(1)
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21.1
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List
of Subsidiaries (4)
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23.1
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Consent
of Samuel H. Wong & Co., LLP, Certified Public Accountants
*
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24.1
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Power
of Attorney (included as part of the signature pages to this registration
statement)
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*
Filed
herewith.
(1)
Previously filed with our Current Report on Form 8-K on January 7, 2008 and
incorporated herein by reference
(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 Registration Statement on Form S-1 filed on February
11, 2008, and incorporated herein by reference.